Plexus Corp (PLXS) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Plexus Corporation conference call regarding its fourth fiscal quarter 2007 earnings announcement. At this time, all participants in a listen-only mode. After a brief discussion by management, we will open the call for questions. The conference call is scheduled to last approximately one hour. I would now like to turn the call over to Mr. Kristian Talvitie, Plexus's Vice President of marketing and Corporate Communications. Kristian?

Hello and thank you for joining us this morning. Before we begin, I would like to establish that statements made during this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results. Actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those projected, please refer to the company's periodic SEC filings. The company provides non-GAAP supplemental information, typically earnings and EPS including restructuring costs, charges for the impairment of good will and other long-lived assets and adjustments to the valuation allowance on deferred tax assets.

Many comments concerning earnings comparisons on this call will refer to non-GAAP earnings. For a full reconciliation of non-GAAP earnings to GAAP results, please refer to yesterday's press release and our periodic SEC filings. Joining me this morning are Dean Foate, President and CEO and Ginger Jones, Vice President and CFO. Today's call will cover some of our major accomplishments during fiscal 2007, some color on our Q4 results and our guidance for Q1 of fiscal 2008 and some expectations for the full year. Let me now turn the call over to Dean Foate.

Thank you, Kristian. Good morning, everyone. While our overall revenue growth for fiscal 2007 was disappointing versus our goal, we ended the year with a record quarter that propelled us to record revenues for the fiscal year. While delivering full-year financial results in line with our long-term 2010 five model. A return on invested capital for fiscal 2007 was 17.6%. Our gross margin was 10.6% and our operating margin was 5.1%. For the year, we general generated cash from operations of $38 million while our capital expenditures totaled $48 million.

Importantly, we made significant progress on a number of key initiatives during the year. Let me highlight a few. We expanded the concept of a market sector team to enhance the focus, accountability and agility of teams that sell Plexus solutions. We have four focus sector teams that are effectively executing our deeper and wider account penetration strategies while intelligently and diligently targeting new accounts that can benefit from our differentiated value proposition. We invested in additional brick and mortar manufacturing capacity expansions in Penang, Malaysia and Xiamen, China. Both of these investments are tracking to our financial goals. To support a growing demand for engineering services, we invested in capacity expansions in Raleigh, North Carolina, Boulder, Colorado, Livingston, Scotland, and in Penang, Malaysia. The technology center currently under construction in Penang will serve as a Plexus headquarters for our Asian leadership team.

We continued on our journey to become a Lean Sigma enterprise to drive productivity and agility throughout Plexus including our administrative functions. The program includes investments in leadership, aggressive goals for training and disciplined selection, measurement of initiatives. This program is contributing to our key financial metrics and is a significant contributor to our customer value proposition for flexible, agile services. While we made progress on a number of initiatives to enhance the supply chain management capabilities including the expansion of our sourcing team in China, further deployment of our proprietary supply chain service-level modeling tools and further deployment of poll-based inventory programs at our manufacturing sites, just this week, we completed the roll-out of our common IT platform to all of our manufacturing sites around the globe. This is a big win.

We made progress on a long list of regulatory compliance programs. Many of which are required for product design and manufacturing of medical, defense and aerospace products. We invested in leadership development programs, revitalized our leadership team and we have become a magnet for talent in the EMS industry. Ultimately, we believe maintaining our return on invested capital above our weighted average cost to capitol and continuing to consistently drive organic growth demonstrates the strength of our sector-based go to market strategy and our differentiated value proposition to deliver long-term profitable growth and shareholder value.

With that, I'll turn the call over to Ginger to discuss Q4 numbers in further detail. Ginger?

Thank you, Dean. Good morning, everyone. Our fourth quarter guidance was for EPS of $0.45 to $0.50 . We came in at $0.53 including a $900,000 or $0.02 restructuring charge.

There were several factors that led to this improvement over the midpoint of our guidance. On the positive side, our engineering services group performed better than we expected. With higher operating earnings from better utilization of resources. The group achieved critical milestones for several new and existing customers resulting in a benefit of the quarter of approximately $0.03. We recognize three unusual items in the quarter, which are covered in detail in the press release. With a total positive impact to the quarter of $0.01. We recognize cash and we received cash and recognized revenue in the U.S. on shipments of a financially distressed customers written down inventory with a total positive pretax impact of $2.9 million in the fourth quarter.

We accrued approximately $1.3 million pretax dollars for warranty related costs in the fourth quarter. This was for a program that we were ramping for a significant customer. Unfortunately, due to a rapid production ramp and evolving infection criteria for the program, it led to a situation where some product needed to be reworked. We also took a $900,000 pretax restructuring charge as we eliminated the positions of approximately 120 employees at or Juarez, Mexico, facility at the end of September, 2007. This was done to better align the cost structure of the site to the current revenue levels. Finally, the favorable mix of customer programs improved labor and operating efficiencies which, together contributed about $0.07 to higher EPS in the fourth quarter.

Offsetting these positive items, our tax rate for the year was 22%, 2% higher than our estimate as we entered the fourth quarter. This was based on the regional mix of production during the quarter and resulted in an effective tax rate for the fourth quarter of 25%, reducing our EPS for the quarter by $0.04. We continue to experience losses in our Mexican facility with a loss for the quarter of $3.9 million and $11.6 million at the operated earnings line for fiscal 2007. This does not include the restructuring charge of $900,000 in the fourth quarter. Our expectations are that we'll narrow the loss in fiscal 2008 to the $3 million to $4 million range with a goal of reaching break even by the end of fiscal 2008.

Moving on to the balance sheet and cash flow, we're encouraged by our balance sheet performance in the fourth quarter. As you saw in the press release, days and receivables increased by one day. Days in inventory were flat at 68 days. Two factors continue to influence our inventory levels. First, having inventories in place for a strong first quarter of fiscal 2008 and secondly, maintaining increased finished goods inventory for some customers to enhance their flexibility and to support direct order fulfillment programs. Accounts payable days improved by five days. This is a result of both timing of purchases which are weighted towards the end of the fourth quarter to support the first quarter fiscal 2008 forecast, and improve terms with some suppliers. As a result, the cash conversion cycle improved by four days from the third quarter of fiscal '07. For the quarter, cash generated from operations was $23 million and capital expenditures totaled $10 million.

I will now turn the call back over to Dean to discuss revenues and outlook by market

Turning now to a few details about our revenues by market sector in the fourth quarter and our outlook for the first quarter of fiscal 2008. Our wire line networking sector was up sequentially in our fiscal fourth quarter in line with our expectations. The growth was primarily a result of production ramps for newer accounts. We currently expect low single digit percentage growth in our wireline sector in the first quarter, driven by a combination of continuing new program ramps and end market strength for a few customers. Our wireless infrastructure sector was up this quarter in line with the strong performance we anticipated. The first quarter outlook currently indicates mid single digit percentage growth. While the overall medical sector revenues were down in the quarter, the decline was not as sharp as anticipated as eight of our top ten medical accounts exceeded earlier forecasts. A combination of improved end market demand and new customer program ramps accounted for the better performance.

Looking to Q1, we expect the strength in the medical sector to continue as we currently anticipate mid to high single digit growth. We expected strong performance in our industrial commercial sector in Q4 and it did not disappoint as 12 of our 15 accounts were up in the quarter -- of our top 15 accounts were up in the quarter and we recognized revenue for a new customer program. We currently expect Q1 revenues to improve in the mid single digit percentage range as end market strength and new program ramps continue to drive growth.

While up dramatically in the fourth quarter, revenues in our defense carrier and aerospace sector became in below expectations as we experienced a production schedule pushout of approximately $15 million in revenue for our largest customer in the sector as we adjusted an overly optimistic plan. We currently expect revenues in the sector to be up sharply in Q1 as all of our top five customers in this sector are up. The growth will be led by our largest customer in this sector as the current production schedule indicates shipments of approximately $54 million in revenue in Q1. While our policy is not to guide specific revenues for specific customer programs, we acknowledge the episodic nature that these defense orders can have a material impact on our results. We currently anticipate that revenues for this customer will be approximately $26 million in Q2.

We recognize that there are a number of competing products in the market and other suppliers of this type of technology have recently won significant orders for their products. We believe this is an indication of ongoing demand for this technology in the marketplace and we have received notice of a potential additional order that, if confirmed, could further enhance revenues in fiscal 2008, although we're not willing to speculate on the certainty, size or timing of this potential order and therefore, we would advise you to model our business without it. Beyond this unconfirmed order, we have little visibility into any future potential orders.

Turning now to new business wins, we won seven significant new manufacturing programs during the quarter which in aggregate will add approximately $105 million in annualized incremental revenue. The majority of these program wins were with current customers and about one-third of the revenue will be in our medical sector. Our funnel of opportunities is at an all-time high at just under $2 billion of qualified new business. Our medical sector funnel has developed nicely over the past couple of quarters and represents one-third of the total. On the engineering services front, we won approximately $16 million in new product development business during the quarter with about three-quarters of the total in our medical sector. We're executing on a fairly aggressive engineering head count plan in order to meet the growing demand for engineering services.

Addressing capacity utilization, our added tool utilization was approximately 74% overall for the fourth quarter, up from about 69% last quarter. We currently anticipate that our capacity utilization will approach 80% in Q1, suggesting the need for further investment in equipment and people. I'll now turn the call back to Ginger to discuss our guidance for Q1. Ginger?

Moving on to the guidance for the first quarter of fiscal 2008, we're expecting revenues in the range of $460 to -- $440 million to $460 million with EPS in the range of $0.58 to $0.63. This is a very strong quarter which includes approximately $54 million in revenue from our large defense program. As we've discussed on previous calls, quarters with a long concentration of orders with this major defense program have a positive impact on gross margins.

Some further comments on our financial model for the first quarter of fiscal 2008. Gross margins are expected to be flat to down slightly from the fourth quarter of fiscal 2007. While the customer mix will be similar, included in cost of goods sold are additional costs for stock option expense, accruals for our 2008 variable and incentive plan and annual compensation increases. For the balance of the year, we expect to return to more sustainable gross profit margins in the 10% range. Depreciation expense is expected to be approximately $7.5 million in Q1. Up from approximately $7 million in Q4. It should be in the $8 to $8.5 million range for the remainder of fiscal 2008, reflecting our higher level of capital investments in fiscal 2007.

SG&A costs will be approximately 24.5 to $25 million per quarter in fiscal 2008. The increase from '07 reflects continued investments in our market sector based business development engine and includes a majority of our additional stock option expense, accruals for variable incentive compensation and annual compensation increases. Our other income and expense items on the P&L are expected to tick up slightly from last year but remember, these net out to a relatively small amount, a little over a million dollars of income per quarter.

The tax rate for fiscal 2008 is projected at 15%. With a reminder that this may vary during the year based on the mix of revenue between tax in jurisdictions. Our expectations for the balance sheet are for cash cycle days to remain consistent with recent levels at approximately 60 to 63 days. Capital spending for fiscal 2008 is projected at $45 to $50 million. This includes approximately $15 million of capital spending delayed from fiscal 2007 which we waited until the first half of the year. We expect to generate positive cash flow from operations in fiscal '08 with levels higher than those generated in fiscal 2007.

With that, I'll turn the call back to Dean for closing comments.

Thank you, Ginger. As we look ahead to fiscal 2008 and beyond, our goal is to double revenues in the four to five year time horizon while delivering on our 2010 five model. To realize the longer term goal, we set an objective to grow revenues in the 15% to 18% range during fiscal 2008. Our primary growth driver will continue to be organic, driven by our sector based go to market teams. Supporting the growth will require further investments in capacity, primarily in lower cost regions of the world, including improving the performance of our Mexico operations.

We believe certain European-based OEMs represent a market opportunity for our value proposition so we continue to evaluate alternative strategies for exploiting that growth opportunity. Our strategic intent is to be the best EMS company in the world at serving customers with products in the mid to low volume, higher mix segment of the market. The characteristics of this market are well understood. Many of the products are complex and have stringent requirements for quality, reliability and regulatory compliance, requiring the EMS provider to have a deep understanding of the capabilities to support the requirements unique to each vertical sector within the segment. The program sizes are generally smaller. The ramp to volume characteristics can be slower and the total outsourcing spend of the customers may be limited.

Customers continue to move in the direction of outsourcing design, full system assembly, configuration, direct order fulfillment and aftermarket services. Customers require exceptional flexibility, agility, predictable performance of optimized supply chain and manufacturing solutions across an integrated global platform. We believe our manufacturing operations are uniquely engineered to provide service excellence to this market segment. This high performance manufacturing capability, coupled with our industry-leading engineering services capability forms a powerful lowest total cost value proposition.

When we get up in the morning, we're not conflicted. We understand what we're good at and where we fit in the MS base. We believe that we have aligned our go to market strategy, our operations and value-added services model and our financial model to provide the service excellence at competitive prices to customers in our segment of the market. We believe that customers served by the EMS industry are beginning to recognize that the best of breed approach to outsourcing approach is the correct strategy for achieving competitive advantage in their markets. With that, I'll turn it over to Kristian. Kristian?

Thank you, Dean. As we open the call up for questions, we ask that you please limit yourselves to one question and one follow-up. We'll now open the call for questions.

(OPERATOR INSTRUCTIONS). We'll pause for a moment to compile the Q&A roster. Our first question is coming from Shawn Harrison from Longbow Research. Please go ahead.

Hi, good morning. First question just deals with the full year kind of 15% to 18% revenue guidance. I was hoping you could maybe bridge the gap between this -- the end of this year and into 2008 in terms of what end markets will be a driver. It looks like you'll get increasing contribution from your medical business as well as some incremental growth in defense and aerospace but where else should we target cap growth for 2008?

Shawn, that's a very good question. I think the key to our market strategy is to try to achieve relatively balanced growth across all of our end markets. But we are putting, of course, great emphasis on what is referred to as non-traditional markets. So, on a percentage basis, you should look to our medical industrial and defense security and aerospace to be the strongest percentage performers for Plexus overall. Yet, as we look at the wire line networking sector, it is a large sector. Even conservative growth and percentages are going to achieve fairly good results in dollar terms.

Ok. And then my follow-up question just has to do with your commentary on targeting European OEMs. Does that mean you'll also be targeting Greenfield expansion or an acquisition in Europe to satisfy low-cost needs in that region or will your existing facilities in Malaysia be able to satisfy the demand you see coming out of the region?

Shawn, we've got a team studying that very question right now. Our sense is that the Malaysian operations operation and China operations will serve as a very strong board assembly and perhaps subassembly engine for the European marketplace. It is not clear to us at this point whether it is going to satisfy final assembly or configuration, service and repair and MPI services that are required by some of these European OEMs. If it turns out that we need to service those capabilities kind of closer to home in the European market, that would motivate us to try to make a conservative investment of manufacturing capacities somewhere in eastern Europe to provide those services. But you shouldn't necessarily look to us to make an aggressive acquisition with facilities all over Europe. It would be more of a tuck-in style of acquisition or perhaps a green field of conservative size.

It sounds like from your commentary then that the growth related to some of the European OEMs may be not as strong this year. More in the 2009 story? As you just ramp up your capabilities, kind of serving that region.

That's correct.

Ok. Just a quick follow-up. Malaysia, the new site, was it break even for the September quarter?

Yes, Shawn, it was. So, it is actually -- was a positive income contributor in the fourth quarter of '07.

Ok. Thank you very much.

Thank you.

Thank you. Our next question is coming from Steven Fox with Merrill Lynch. Please go ahead.

Hi, good morning. Can you hear me?

Yes, we can.

Ok. First of all, obviously you have very strong operating margins this past quarter. And into next quarter. I was curious if you exclude the defense business, where are you relative to that 5% operating margin target last quarter and this quarter?

Yes, we believe we've delivered results consistent with our 5% operating margin target, exclusive of that defense business.

And as that business declines, even excluding the potential other orders, do you think that 5% on a quarterly basis this year is still achievable? Do Is there anything that would hold you back from doing that?

As we said earlier, we believe that's achievable in the outquarters as well.

Ok. Then it sounded like you said you had about $0.07 of benefits from pure operating efficiencies. I was curious, can you just talk about that a little bit more. Was there anything, any specific projects that are not repeatable or what can we look for in terms of just operating efficiencies going forward? You mentioned Juarez but I'm curious how that should play out the rest of the year.

Focusing on the operating efficiencies, we also had good results in our third quarter as well. So our operating facilities have done a very nice job of converting additional revenue and doing it very profitably. That's a variety of projects and initiatives across a variety of sites. Speaking more specifically to Juarez, I laid out where we hope that will go in '08 with our objective of break even by the end of '08. Clearly, as we achieve that, that will contribute to our bottom line.

Is that $0.07 that you achieved this past quarter, can you -- if you put it on a per share basis, is there any way to quantify what's achievable this year?

There is an additional operating efficiencies on top of our 5% model. Is that what you're --

Just breaking out. Obviously volume is contributing but you just called out about $0.07 per share in the last quarter so what type of sort of cushion do you have in sort of projects planned to improve efficiencies in fiscal '08 and what would be the EPS impact?

Well, I think -- here, I think Ginger did a pretty nice job laying out what the very strong contributors were to that extra operating efficiency. Most small part of it was our engineering services organization that was just had a ton of work. And even though you look at labor as sort of a variable cost in general, the reality is in the engineering services business, it is almost like a fixed cost. So they had a very strong quarter. Engineers are putting in a lot of extra hours and quite frankly, we're on the edge of running ragged in terms of capacity. That's not -- their exceptional contribution in the quarter is not necessarily sustainable going forward.

We have ongoing kind of Lean Sigma initiatives that are there to drive productivity throughout Plexus in the engineering and administrative functions. The payback on those Lean initiatives typically are delivered in some respects back to the customers as the customers are every quarter looking for ongoing cost reductions. So, we're reluctant to try to forecast the productivity improvements into the bottom line as we feel those are going to get absorbed on a go-forward basis. So, it is clear that we've had a little difficult here accurately forecasting operating leverage and that we've done better than expected the last couple of quarters. But I don't think you should try to build in -- into that overly conservative -- you know that we're overly conservative in our forecasting.

Ok. That's helpful. Thank you very much.

You're welcome.

Thank you. Our next question is coming from Jim Suva with Citigroup. Please go ahead.

It is Jim Suva. Congratulations. For the revenue outlook, I want to be clear for the full year, are you only including the major defense project for your Q1 revenues and the rest of the year it is stripped out or is there some type of embedded rampdown?

We have included in our 15% to 18% growth target for '08, the known business with the defense customer so that's the $54 million in the first quarter and the $26 million in the second quarter.

Ok, great. Then for EPS growth, given your profitability, what should we expect for fiscal '08? It could easily be significantly above sales growth, easily in the neighborhood of 1.5 times sales. What should we expect for a flow through for EPS growth?

The way I like to approach that is to share with you the components of our forecast that we think are important. We've done that pretty clearly today. I don't know that we want to comment on EPS growth.

I don't think we're ready to guide EPS for the year.

Ok. So maybe just a quick clarification. Tax rate, 15.15.

That's correct.

Because it has been awhile since you had that 15%. Any color around that?

Well, Jim, the other thing I would remind you is we do see variation in our tax rate as we saw in the fourth quarter. We entered the fourth quarter thinking it was 20 and based on stronger sales in the U.S. ended up at 22. We currently believe lower than 20 is appropriate and we would suggest that 15 is correct at this point. But knowing that that will change quarter to quarter.

CapEx for '07?

For '07? We ended at $48 million.

I'm sorry. For '08.

We expect a similar amount in '08. $45 million to $50 million.

Congratulations for a great quarter and outlook.

thank you. Our next question is coming from Kevin Kessel with Bear Stearns. Please go ahead.

Hi, guys, how are you doing?

Good.

Hi, Kevin.

I'm just trying to understand, I guess, the leverage that you got out of the ramps this quarter and I think, the biggest ramp is the defense ramp. What do you think contributed to that? Because it looks like it was quite a bit better than it was the last time you were ramping it to this level in June of '06. I don't know if it is because the learning curve is behind you or the yields are that much better. How do you describe that leverage?

Well, Kevin, first off, I are mind you that Q4 was not just about our defense customer. We had strong performance in other sectors. We're bringing on new customers all the time and performing well for them. And our engineering group did as well. So, I would caution you that you cannot look at all of that benefit and attribute that to one customer.

I agree. But it seems like it was at least 3/4 of it in terms of your --

Substantial part of it, you're right but also we had anticipated medical to be down in the double digit range and it was in fact down only about 4% for the quarter. So we had quite an improvement there. Based on some existing customers that improved their overall forecast during the quarter. We had a number of things working in our favor throughout the quarter that really contributed to the improved performance.

Then just on that, Dean, can you update us in terms of the medical, the FDA issues that were causing a little bit of a headwind at the beginning of the year. Where does that stand today? Does it look like it is behind your customers and therefore behind you guys or is it still a little bit of an issue?

Our understanding at this point, it is kind of being borne out in the numbers here is that there is an anticipation that the issue is going to be cleared. We are -- my understanding is we're cleared to ship products. So, we're -- again, it was related to a single facility of one of our customers and affected did not affect the broad -- a broad number of products that shipped from that facility. It is our sense that that should be cleared up here in Q1 and we're shipping product now. So, we think that's going to be behind us. We think that the low water mark for medical sector is also behind us and we're back to growth in the medical sector.

Last housekeeping on the tax question again. Ginger, I'm assuming the reason the tax rate might have jumped up in September is because you had higher portion of profits in the U.S. as a result of the defense program. If that is, in fact, true, I would expect, wouldn't the tax rate still remain at a relatively high level for at least the next two quarters before dropping back down? Because it sounds like it is not. It sounds like with 15%, it is almost like you have a step down in December.

The tax rate is based on estimated revenue for the full year. So, it will not vary by quarter based on revenue in the quarter. The new FIN 48 requirement says unusual discretionary items they will do according to quarter, but otherwise, we look at our estimate for the full year. So, we don't believe that will be an impact. We believe that's our best estimate of the tax rate for the first quarter.

Just to give you a little color on where we're going from a regional growth standpoint, it is clear that our strongest growth performance is going to be in Asia. Where we have tax holidays. So, we're seeing a pretty dramatic shift. We could -- between the combination of Asia and Mexico, we'll probably have in excess of 40% of our revenues in low cost countries as we exit for the full year fiscal 2008. So, we're seeing stronger growth in that part of the world and more flat performance to slight growth in the higher cost regions. Thank you very much.

You're welcome.

thank you. Our next question is coming from Brian White with Jefferies.

Good morning. I'm wondering if we could talk a little bit about the engineering business and where we are in terms of a number of engineers, utilization and sales in the quarter.

Yes, I think the engineering -- the story on the engineering services is quite a good one in that we had -- our enhanced market sector approach here, we have a team-based and solutions selling approach has resulted in some dramatic improvement in terms of demand for the services and our ability to get better alignment between customers that were manufacturing products and who we were engineering products for. It has been quite a success story. Internally, we don't necessarily track a true utilization rate. We kind of look more at a longer term forecast kind of thing. We're clearly in excess of capacity as we had a tremendous amount of overtime for the engineers over the last couple of months. And it has put a lot of strain quite frankly on the organization. We've got a head count plan here to increase in excess of 20% of head count this year. We're roughly in the 450 area for the folks that are committed to the design services so these are folks outside of manufacturing so not the manufacturing engineers, just people that are focused on designing, developing products and test equipment. It will go from probably the $3.50 to $4.25 or in excess of that if we continue to execute to the growth plan we have in place.

Ok. And just where are we on sales in that business?

Well, from a sales standpoint, it represents a pretty small percentage of our overall sales, usually about 3.5% or so of the total.

Ok. And when we look at the medical business versus the defense business, what actually has a better margin for Plexus?

Well, clearly overall, the defense business right now does although I would say that all programs are not created equal within the defense sector just as they aren't in other sectors. So, at this at this point, it is clear the defense sector is stronger. The medical sector, there is a sense that it is, in general, much, much higher than our other sectors. Some of our medical customers are quite large and are -- they understand the market place for services quite well. So, they get very competitive pricing in the market place.

Ok. Just finally, on the defense potential follow-up program, can you quantify the size of that program?

All we know is that there is again talk of additional order but , our experience here is that these things are quite squishy in terms of being able to quantify and they're even more troubling in terms of timing. So, we thought it prudent to say look, we haven't gotten notice that it is over. But we've gotten notices that there is a potential for a fallen order. That's about all we know at this point. As we said, you should look at Plexus, model our business at this point and we'll let you know as soon as we get any definitive order for

Ok. Thank you.

If, in fact, it ever comes.

Great, thanks.

You're welcome.

thank you. Our next question is coming from Reik Read from Robert Baird and Company.

Can you talk about the European OEM and explain a little bit of the opportunities you see there and given that that's something that you talk about generating revenue in '09, what is the process that you need to go through or what are the milestone events that you need to go through to make decisions?

Well, yes, I characterize the European OEMs. There are a number of European OEMs that are multinationals that we engage with today and service in some cases in the U.S. out of the U.K. and in our facilities over in Asia. We think that there is opportunity to further those relationships. In Europe, we also recognize that there are a number of tier two, tier three competitors that are having some success and are growing in that market place. But we think that we offer a better global solution. So, we think that there's indications in the market that we could be successful there. In fact, we've lost out on a few pieces of business that we competed for out of our U.K. facility in combination with the Asia facilities. So, we clearly don't have the right recipe for success with many European OEMs who take full advantage of that market.

So, we're going through a process just like you would expect. We're trying to understand the competitive landscape there. We're taking a look at doing a deeper dive into the end markets and trying to understand how kind of our component of the market place really is. And we're talking to customers and potential customers there to find out what might be a better solution. And like I said, we have assembled a team of people. They have an objective and a time line to go through and study that landscape and help us make a decision about what we're going to do and when we're going to do it.

Can you just talk about, know, with losing out to these other guys, they're having success, what's the gap between what you offer and what they offer at this point?

Typically, the gap is a commitment to physical capacity in the region. And that physical capacity is usually exploited in combination with what services in Asia and China. But not having any physical presence in Europe other than in the U.K. which isn't viewed necessarily by European OEMs as in Europe, puts us as a disadvantage.

One quick follow-up on the engineering side of things. You talk about having to bring up that head count. Pretty quickly. How stretched are you at this point or are there some points of fragility? And how difficult will it to be get those types of folks over the course of the year?

Well, the engineers that are in technology will tell you they've been pretty stretched. I mean, the great thing is that engineers like to be busy and they like good, strong, technical challenges. So, there are two sides to this thing but it will take us time. It is very competitive market place for engineers. We, of course, are staffing up in other parts of the world to help support it as well. But still we see very strong demand in the United States for engineering capabilities and unfortunately, the supply has gone down as the enrollments in many of the U.S. engineering schools have been declining over the last couple years. So, it makes a competitive market place even more challenging. But we have a pretty good strong brand and a very good recruiting engine. We've been able to compete for top caliber talent and we would expect to do that throughout the year.

Thank you very much.

You're welcome.

thank you. Our next question is coming from Jeff Walkenhorst with Banc of America Securities.

Hi, good morning. Thank you.

Good morning, Jeff.

Hey, guys. I'm wondering if you can talk about your defense security aerospace segment excluding this indefinite quantity timing delivery program. It looks like if you back it out, it adds around $16 million which looks to be flattish on a year on year basis. Actually, the guidance talking about 25%, greater than 25% sequential improvement for the first quarter would imply in $54 million for the special program would imply the balance of that segment would be about $20, $21 million that you would see a nice convention sequential improvement there. Am I thinking about that correctly and have you seen that mix of business change at all or are there more opportunities?

Yes, I guess I'm not quick enough to check all of your arithmetic there but it sounds like you're directionally correct. The key point I was trying to make is that yes, we expect to have a very strong quarter here with this large defense program but we also have a number of other customers kind of in our top five list here that are also showing growth in Q1. And so we're working to aggressively expand those relationships and go after the other business in the sector.

We've also recently have stood up another go to market team here, our sector-based team to focus on defense security in aerospace so that we can continue to capitalize on the growing list of kind of who's who customers that we have in the sector but the sector is challenged for growth in the sense that the program sizes are not unlike they are in medical where most of them are smaller, come incrementally, takes some time to ramp up. I would consider this very large defense program that we have as a little bit of an anomaly in terms of its characteristics. It is large, we'll make a lot of money on it but we don't get a lot of visibility on it going forward and the rest of the space is a little more -- at least consistent where we're focusing our attention.

Ok. So, the balance of that segment which, again, looks to be flattish on a year over year basis, given your pipeline, that could improve somewhat in fiscal '08. If that's the case, what sort of growth -- what sort of organic growth, I know visibility is limited but is it sort of a mid single digit type growth for the balance of that segment?

Yes. That's probably fair. I mean we're going to go after it aggressively. But it is a relatively new sector for us so we're not able to consider it real predictable at this point.

Ok. That's helpful. Thanks, Dean. One follow-up question for Ginger. The gross margin. You talked about the level being kind of flattish in fiscal first quarter, mid 12.5% range I suppose and I think you implied that it would return to your more targeted range of 10% beyond that so in the fiscal second quarter?

Yes, that's that's correct. We believe flat to down from the fourth quarter of '07 for the first quarter of '08 recognizing that there are additional costs that we incur that I laid out. So, incentives, stock options and salary increases. And then which continue to be layered on in the outgoing quarters which is why we're guiding you down to the 10% range in quarters two and beyond.

Even in the second quarter where you're going to have an estimated $26 million from the special military program, you're still thinking -- given the favorable mix, I guess it is the balance of the business might be lower so therefore you get to 10% rather than say 11% to 12%?

Yes, and Jeff we layer on additional costs in this, our fiscal second quarter of January so we have additional salary increases that are effective then. So, we have additional burden from that. And also the mix of our business. So, yes, we would say the 10% range for that second quarter.

Ok then one last, for those incremental costs, how much might that take out of the gross margin? Is it 50 basis points or can you size that for us?

For -- I can't really for basis points. I think I would go with that gross margin guidance.

Ok. Maybe in absolute dollars, can you give us direction there?

Yes, I sure can. So, SG&A from Q4 of '07 to Q1 of '08, Q1 of '08 I guided around 24.5 to $25 million.

Right.

The bulk of that are the three items I laid out. Stock options, bonus, salary increases.

Ok. I was talking about the fiscal second quarter where you talked about the gross margin being down to the 10% range. Was there incremental cost beyond what we're expecting in the first quarter?

Yes, Jeff, we do not guide EPS beyond the next coming quarter so we wouldn't want to go any further than that.

Ok. Well, ok. Thanks very much, guys. Good luck with everything.

Thank you.

thank you. Our next question is coming from Rich Kugele with Needham.

Two quick questions. First on capacity. Beyond your European opportunities that you're discussing for 2008, where else do you think you'll need to expand capacity to hit the 15% to 18% growth?

Well, as you know, we just stood up another very large facility in Penang, Malaysia. That should take care of us, we believe, in Penang for now. At least for the foreseeable future. We feel our concentration capacity there is about right.

Is there any land there where you could expand?

We could but again from an overall kind of availability of resources to a business risk standpoint, we think -- I think we're at 700,000 square feet in Penang. We think that's probably sufficient. Also, during the year, you know that we expanded our doubled the size of our facility in Xiamen, China. Our current thinking today is that we would take advantage of the very strong team and capabilities that we have developed there and expand again in Xiamen with a second facility. We're studying the viability of that. And then further out, we believe that an additional location in China is likely to be appropriate and we're studying where the appropriate -- where that appropriate location might be.

Ok. That's helpful. And then just -- in terms of the military business and particularly this large order, traditionally, you've had your supply chain and they've had theirs but I guess you could say unfortunately it looks like we're going to need a lot more of these devices. Is there any opportunity as this gets to be of a critical size where there's second sourcing potential?

Well, there's always that potential but I tell you the devices is -- very complex to build and the supply chain to support it is also -- is quite complex. So, I don't know that it necessarily would make a lot of sense necessarily to have -- for the customer to source it with another EMS provider. More likely they would ask us to build it at more than one location. But again, we're not inside their heads and but just looking at it from a business standpoint and what makes sense. I would also remind you that there is a lot of competing technologies out there and there's nothing to say that the technology that we're building is going to ultimately be the long-term winning technology. Our customers are competing with others. So, it is important to keep that in mind as well.

Ok. Thank you very much. Good job.

You're welcome.

thank you. Our next question is coming from Yuri Krapivin from Lehman Brothers.

Good morning.

Hi, Yuri.

Question about the capital expenditure. Should we expect it to be front-end loaded given that you already facing capacity constraints or do you expect it to be more evenly spread throughout the year?

Yuri, yes, I would expect it to be a little front-end loaded. Part of it was some of the spending was carried over from fiscal 2007, it has already been approved but hasn't been spent. I would weight it toward the front half.

Ok, be then with respect to your sales growth target of 15% to 18%, does it include a possibility of an acquisition or can you grow at that rate organically in fiscal '08?

That's a very good question, Yuri. No, we -- we believe that we can grow in that range organically.

Ok. And I guess finally, with respect to Mexico, is it still, mostly a volume issue in Mexico or do you have some execution issues there?

No. We believe that the team now is executing very well. Customers' sat has been quite strong. For us, we have to win more customer programs and bring them into that location.

Ok, great. Thank you for comments.

Thank you, sir.

thank you. Our next question is coming from Tom Dinges from JPMorgan.

Good morning, guys. Most of my questions has been answered. Dean, I'll throw a higher level question at you. As you guys have really put some focus on the sales efforts, obviously the pipeline and the funnel as you describe of it opportunity continues to grow and just -- wondering if you could provide some greater context here around whether you think the opportunity is solely related to you guys just simply finding more opportunities than you had before, meaning the CRM systems are just in the sales force is simply going after even a larger number of opportunities that perhaps the way the alignment of the sales force was previously didn't lead you to have that. Or do you see something happening in the market place as some of the big guys are getting that much bigger that that is creating even more opportunities for you guys there? Just a little bit of color there would be great.

That's a very good question. I think it is really components of all of the things that you mentioned. I think we began on this journey to get ourselves aligned by market sector a few years ago. And the talent level, the tools, our understanding of the market and where we can provide value has continued to evolve over the last couple of years and continues to evolve yet. So, I think a couple of years ago, I talked about it as we were in junior high in our approach. Where at least in high school or higher level education at this point in terms of taking full advantage of our go to market strategy. And those individual sector teams are now beginning to have much greater influence on our global platform and the capabilities that we have to support each one of those verticals around the world. So, we've really moved from being more of an operations, if we build it, they will come company, to being much more customer market sector focused in terms of our capabilities and capacity around the globe.

Secondly, I think it is embedded a little bit in what I said in my comments in that I think that the customers continue to get more intelligent about their outsourcing strategy. I think that many of them used to have the strategy of well, I'm going to do business with the big five and that's my strategy. And they're finding out that's not in fact the strategy at all. And they have begun to align their product technologies more along a vast approach. I think that's benefited Plexus and our brand to build these kind of medium-low volume higher mix complex devices is starting to get traction in the market place. I think that that's benefiting us greatly on top of some competitors that have been challenged to deliver great performance on those kinds of products.

Ok. That's a great answer. And then on -- Ginger, just a real clarification on the gross margin because the question has been gone over a number of times already. You did get some benefit obviously from the written down inventory that flowed through so when you're talking about kind of a flattish to down, is that off of the reported number or is that off of a number if I exclude the inventory benefit?

That's off the reported number.

Ok. Thank you.

thank you. Our final question is coming from John Emerich from Iron Works Capital. Please go ahead.

The last question may have been at the heart of my first question of clarification which is your opening comments talked about a gross margin percentage in the quarter that was 10 or something percent. I calculate 12.5%. I want to make sure I've got the definition that you're using in gross margin the same.

Sure. So, my guidance for Q1 of '08 was related to our reported gross margin for Q4 of '07 --

Which you're saying is what?

In that 12.5% range.

It is, ok. Ok.

12.6%.

Ok.

Then what I was guiding was the outquarter. So, Q4 of F '08 and beyond will return to a more normal level in the 10% range.

And the other thing was the 15% to 18% revenue growth excludes the potential for the unconfirmed defense order that's out there.

That's correct.

Correct. And the 15% tax rate is for the entire next fiscal year.

Correct.

Great. Thank you very much.

Thank you.

there are no more questions at this time. I would now like to turn the call back over to management for any further remarks.

Ok. Well, we feel we had kind of a mixed year here in '07. We're quite happy with our overall performance in spite of what was a difficult year on the top line. We're quite encouraged by our developing brand in the market place and value proposition and we think it will hold great promise for Plexus in fiscal 2008. I want to thank all of our investors and analysts for the support that they have given us in '07 and for the great questions today on the call and we look forward to getting back to very strong growth in '08. Thank you very much.