Plexus Corp (PLXS) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corporation conference call regarding its first fiscal quarter 2008 earnings announcement.

At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions. The conference is scheduled to last approximately one hour.

I would now like to turn the call over to Mr. Angelo Ninivaggi, Plexus' Vice President, General Counsel and Secretary. Angelo?

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 and 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. These non-GAAP income statements exclude transactions that are not expected to have an effect on future operations. Such transactions include restructuring costs as well as the establishment or reduction of the valuation allowance for deferred tax assets.

These non-GAAP financial data are provided to facilitate meaningful period-to-period comparisons of underlying operational performance by eliminating infrequent or unusual charges. Similar non-GAAP financial measures including ROIC are used for internal management assessments because such pressures provide additional insight into ongoing financial performance.

Some comments concerning earnings comparisons on this call may 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 is Dean Foate, President and Chief Executive Officer, and Ginger Jones, Vice President and Chief Financial Officer. Today's call will cover discussion of Q1 results, guidance for Q2 '08 and some expectations for the full-year.

Let me now turn the call over to Dean Foate. Dean?

Thank you, Angelo, and good morning to everyone.

Last night we reported results for our first fiscal quarter of 2008. Revenues were at $458 million with GAAP earnings per share of $0.58. Revenue was at the higher end of our guidance range, while earnings came in at the lower end of guidance for the quarter.

The first quarter overall revenue performance was largely as expected, although we did achieve stronger performance in the U.S. than earlier forecasts indicated. Currently we expect the improved outlook in the U.S. to continue through the fiscal year, necessitating the increase to our overall tax rate.

Ginger will provide some further details on the tax rate and other items following my comments. Let me continue by providing a few details about our revenues by market sector in the first quarter and our outlook by sector in the second quarter.

Our wireline networking sector experienced a modest 2% sequential decline in our first quarter, coming in slightly below our expectations for modest growth. The miss was largely attributable to a single newer account that experienced unanticipated end market softness. We currently expect low double-digit growth in our wireline sector in the second quarter, driven largely by the ramp of recent program wins.

Our wireless infrastructure sector was up 17% sequentially during the quarter, performing better than expected as a couple of leading accounts in this sector beat earlier forecasts. Our second quarter outlook currently indicates that revenues in this sector will be flat.

Customer accounts in our medical sector performed largely as expected in Q1, driving an 8% sequential improvement in revenues. Looking ahead to Q2, we currently expect flat to modest sequential growth in new program ramps, offset the seasonal sequential decline of a leading medical account.

Our industrial commercial sector was up 8% sequentially in Q1, in line with our expectations. Our current forecasts indicate continued sequential growth for this sector in Q2, primarily driven by the continuing ramp of recent program wins.

We expected revenues in the defense, security and aerospace sector to increase sharply in Q1. Overall this sector's revenues were up 30% over last quarter, primarily driven by the shipment of approximately $56 million of product for our largest unnamed defense account.

As we look forward to Q2, we expect revenues to decline sharply as we complete the remaining $28 million in backlog for this large account. Looking beyond Q2, we have no additional production orders in our forecast for this episodic program.

We have received notice of a potential additional demand that, if confirmed very soon, could potentially further enhance revenues very late in fiscal 2008 or early fiscal 2009. But given the continuing uncertainty of order confirmation, size or timing, we are modeling our business without it and we would advise you to do the same. Beyond this unconfirmed demand, we have little visible into any future potential orders.

Setting this large unnamed defense account aside, it is important to note that we are enjoying other successes in the defense, security and aerospace sector. Without this large program, revenues grew 6% from fiscal 2006 to fiscal 2007 and increased 38% sequentially from Q1 fiscal 2007, excuse me, Q4 fiscal 2007 to Q1 fiscal 2008.

While we are still in the early stages of building a team, capabilities and brand to gain share in this sector, we are encouraged by the early underlying successes.

Turning now to new business wins. We won 14 significant new manufacturing programs, which in the aggregate, will add approximately $156 million in annualized incremental revenue as they ramp during fiscal 2008 and fiscal 2009. Eleven of the programs increased share with current customers. The balance of the wins were with targeted accounts.

The breakdown of the revenue associated with the new wins by sector is as follows: About 45% is in our wireline sector, about 30% in our medical sector, about 15% in our industrial commercial sector with the remainder in our wireless sector.

Our overall funnel of manufacturing opportunities is strong at just under $1.9 billion of qualified new business. Our medical sector funnel has developed nicely over the last couple of quarters and represents one-third of the total.

On the engineering services front we won approximately $11 million in new product development business during the quarter, with about 60% of the total in our medical sector. As we entered fiscal 2008, we had a fairly aggressive engineering head count plan in order to meet the anticipated growth and demand for engineering services.

Although our funnel of opportunities remains healthy, and demand for these services has not significantly deteriorated as a result of the current economic turbulence, we are proceeding with caution as demand could decline rapidly if customers elect to cancel, delay or pull projects back in house.

Addressing our overall revenue concentration, our first quarter revenue from our top ten customers represented 63% of total revenues this quarter, down from 65% last quarter. Juniper networks was 19% of revenues in Q1. Our unnamed large defense customer was 12% of revenues. These were the only customers representing 10% or more of total revenues for the quarter.

Addressing capacity utilization, global growth, as expected, our as-tooled capacity utilization was at a healthy level in Q1, approximately 79% overall, up from 74% last quarter. As we look forward, we continue to anticipate further investments in equipment, people and physical capacity to support longer-term global growth.

Our previously announced capacity additions in Penang, Malaysia, and in Xiamen, China, are tracking according to plans and we are evaluating further capacity investment in China. Additionally, we are continuing our assessment of a market entry strategy alternatives in central and/or eastern Europe.

Turning now to our guidance. We currently expect our fiscal 2008 second quarter revenues to be in the range of 440 to $460 million, with EPS, excluding any restructuring charges, in the range of $0.46 to $0.51, which includes approximately $0.04 per share of stock option expense. In summary, our revenue guidance range for Q1 is the same as our guidance range last quarter, while the midpoint of our EPS guidance for the second quarter is $0.095 lower than our Q1 EPS results.

The three primary drivers for the lower earnings guidance on the implied flat overall revenues are, one, lower revenues from our large defense customer, down $28 million sequentially, offset by revenues from new programs priced closer to our target model. Two, higher spending and SG&A to support continued investments in our market sector based business development engine, and three, compensation increases in our Asian operations that went into effect January 2008.

With that, I would like to turn the call over to Ginger to discuss the numbers in further detail. Ginger?

Thank you, Dean. Good morning, everyone.

I'll begin with a discussion of the first quarter results. Our first quarter guidance was for EPS of $0.58 to $0.63 and we came in at $0.58. The change in our tax rate estimate for 2008 was a major factor that led to this variation from the midpoint of our guidance.

Our anticipated income in the United States for '08 is now higher than when we established our Q1 guidance. This shift is a result of increased revenue forecasts for the remaining quarters of fiscal 2008 from existing and new customers for programs produced in the United States.

The quarterly tax rate is based on our estimated pretax earnings by taxing jurisdiction for the full-year, so this change in forecasted earnings impacts our tax rate for the first quarter. As a result, EPS was $0.02 lower than anticipated.

In addition, we estimated our stock-based compensation expense to be $0.03 per share when we created our Q1 guidance. Actual stock-based compensation was $0.04 per share for the quarter. Both factors, the tax rate and the stock-based compensation lowered EPS by $0.03 compared to our original guidance.

Gross margin was 12.1% in the first quarter, consistent with our Q1 expectations. This was a decrease from the 12.6% recognized in the fourth quarter of '07, the results of the following.

First, our engineering services group had a good first quarter in 2008 but was down from the very strong results in the fourth quarter of 2007. Second, including cost of goods sold in the first quarter are additional compensation costs including accruals for the 2008 variable incentive plans, stock-based compensation expense and annual compensation increases.

These negative pressures were offset by the improved customer mix in the first quarter, including the positive impact of the additional revenue from our large unnamed defense program. As we had expected, we were able to reduce the losses in our Mexican facility in the first quarter to an operating loss of $395,000.

This significant improvement from prior quarter losses is a result of our focused efforts to improve site operations, our previously announced restructuring efforts and approximately $1 million of income from the shipment of previously written down inventories. We remain committed to narrow the loss in fiscal 2008 to the 3 to $4 million range, with a goal of exiting the fiscal year with this facility at a breakeven run rate.

Moving on to the balance sheet and cash flow, the balance sheet is comparable to the previous quarter. As you saw in the press release, days in receivables increased by one day, days in inventory were down one day to 67 days.

Two factors continue to influence our inventory levels. First, having inventories in place for our very strong first half of fiscal 2008, and second, continued increased finished goods inventory for some customers to enhance their flexibility and to support direct order fulfillment programs. And then lastly, accounts payable days decreased by two days.

As a result, the cash conversion cycle decreased by two days from the fourth quarter of fiscal 2007. For the quarter, cash generated from operations was $16.6 million and capital expenditures totaled $13.6 million.

As our guidance implies, the second quarter is another strong quarter including approximately $28 million in revenue from our large unnamed defense program. As we have discussed on previous calls, (inaudible) to the large concentration of orders with this major defense program have a positive impact on gross margins.

I'll now have some further comments on our financial model for the second quarter of fiscal 2008. Gross margins are expected to be better than our 10% gross margin target but down from the 12.1% in Q1 F '08.

This reduction from the first quarter is primarily the result of changes in customer mix. For the second half of 2008 we expect a return to more sustainable gross profit margins in the 10% range.

Depreciation expense is expected to be approximately $7.5 million in Q2, up from approximately $7 million in Q1. We expect depreciation to be in the 8 to $8.5 million range for the remainder of fiscal 2008.

SG&A costs are expected to be approximately 24.5 to $25 million per quarter in the remainder of fiscal 2008. The increase from the first quarter of 2008 reflects continued investments in our market sector based business development engine and annual compensation increases employees at our Asian locations effective in January 2008.

The tax rate for fiscal '08 is currently projected at 18%, up from the 15% estimated at the beginning of the year. I will remind everyone that this will likely vary during the year based on the mix of forecasted earnings between taxing jurisdictions.

Our expectations for the balance sheet are for cash cycle days to remain consistent with recent levels of approximately 60 to 64 days. The capital spending projection for fiscal '08 is unchanged at 45 to $50 million. We expect to generate positive cash flow from operations in fiscal '08 with levels higher than cash from operations generated in fiscal 2007.

With that, I will turn the call back to Angelo.

Thank you, Ginger. As we open the call for questions, we ask that you please limit yourselves to one question and one follow-up. Nia, we will now take some questions.

(OPERATOR INSTRUCTIONS) Your first question is coming from William Stein of Credit Suisse.

Thanks, guys. Good morning.

Just wondering if you can comment on a couple of specific customer issues. First, I think we saw a sequential decline in the Juniper sales. I'm wondering if -- they've been somewhat vocal about shifting their supply chain strategy a bit. I'm wondering if this is normal seasonality or if there's a share loss there and if that's something we should expect to continue?

And then the other is an update on GE. It's a customer we haven't heard you guys talk about in a while and I'm wondering if we can get an update there? Thank you.

Certainly. First, address Juniper and I want to be careful I don't want to imply any guidance for Juniper because, as you know, they have a couple of different EMS providers that provide services to them.

Related to our revenues for Juniper, I would say that the quarter-to-quarter sequential movement in revenues for Juniper from Q4 to Q1 is not the result of any share shift. It's all a result of just the timing of quarters and the specific demand from Juniper during the quarter and that there's nothing to be concerned about there. Our relationship continues to be quite positive and we continue to gain additional new program wins with Juniper networks.

GE, of course, GE is made up of several components including, of course, the largest is GE healthcare. But we also are beginning to develop a significant position with GE industrial systems as well as some other divisions of GE.

I would say that GE continues to remain a very significant customer for us. It has been displaced as our second largest customer by the large defense program.

When that program comes to its end, if it ever does, as episodic as it is, GE will be back to being our number two largest customer by overall revenues. So we don't, you know, there's nothing, I think, underlying in the GE message other than probably the rest of the business is probably growing a little bit faster than revenues with GE.

Thanks, Dean. I just have one follow-up, if I could.

I'm wondering if you can talk a little bit about the visibility that you have with customers? I mean, you provided solid guidance. I'm wondering if you can talk about when you give that guidance and you look at backlog, how much visibility do you have today? How far in the future does true backlog go relative to just forecasts from customers for which they have no liability?

That's a great question. I mean, in reality, we, other than with the defense program where we get kind of hard, fixed purchase orders for specific quantities, in general we say that we don't have backlog and, in fact, what we really have is an agreement on business terms and beyond that, we get a forecast from our customers, most of them for planning purposes and we utilize that forecast, of course, to plan material supply and capacity, et cetera, and we essentially deliver on increasingly to customers' demand signals.

So it's really moved to more of a pull based environment and we really have very little forecasts, now, or excuse me, backlog. In reality, there is a bit of a kind of a as part of the agreements with many customers, a bit of a fixed window in terms of how much they can vary a forecast within a specific period of time.

But overall, I think the model of the business is that as long as we are managing materials and capacity to the customers' forecasts, the customers have the liability for the materials and for the work in process and final assemblies if in fact we are staying within the agreement within the windows associated with the overall forecast kind of business plan that we put together with them when we strike an agreement.

So, you know, beyond that, I mean, longer-term visibility, what we strive to do and I think it's one of the benefits of the market sector approach is we roll our forecast in great detail with our customers every month and we try to extend that forecast out to a rolling six quarters and that's the way we try to plan our business. And, of course, beyond a couple of quarters, it gets increasingly subjective based on what the customers are telling us but also what the market analysts are telling us about the customers' position in the markets.

So we try to triangulate a number of different ways to try to plan where we believe the products that we manufacture are going to go. So we've got, I'd say we have decent visibility at this point and, of course, there seems to be a significant disconnect in terms of forecasted demand from our customers versus what we're seeing in equities, you know, in Wall Street.

Yes. It's helpful.

So when I was selling components, I think that window was on the order of two weeks. Is that, you know, the hard window for where customers are essentially completely liable for orders? Is that still think about that as two weeks of kind of more solid backlog and then the liability rolls down from there?

Yes, but it varies greatly customer to customer based on the nature and the complexity of the program and the number of assemblies that we have.

Okay, Dean. Thank very much.

You're welcome.

Thank you. Your next question is coming from Alex Blanton of Ingalls & Snyder.

Well I have a very similar question so just let me take up the subject of that you were talking about before. When you're looking at business for the next few months, can you separate out what's coming from new programs and what is basically coming from existing programs and tell us what's the demand picture for the existing programs?

I'm trying to get a sense of, we know the overall market is growing because of increased outsourcing, but I'm trying to get a sense of what your customers are indicating about the end market, because, of course, as you mentioned, everybody on Wall Street is now, or not everybody, but most people are starting to price in a recession. We're trying to get a sense of whether -- how realistic that is and are customers actually acting on such a belief by reducing their order rates?

That's a great question and let me just first give you kind of like a comparison to what we saw last year this quarter. When we came into the January conference call for our first quarter results last year, we described a very significant pull back in forecasted end market demand across our customer base, almost regardless of sector.

This was when?

This was last year this, you know, quarter.

At this time?

Yes. So you'll see, if you look at our last year's results, you'll see a sequential decline from Q1 to Q2 that was fairly dramatic. We have not seen a similar pullback in forecasts from our customers at this point this year and so it's quite perplexing.

So you know, as you point out, one of your questions was how much are we relying on kind of current programs, end market demand from existing programs. Well, the further we get into the fiscal year, of course, the more we're relying on programs already won, programs already transitioned to the manufacturing in order to hit our numbers for the full-year, and at this point, things have tilted significantly toward programs already won, already in manufacturing and the end market demand holding up associated with those programs in order for Plexus to come into the overall 15 to 18% range that we have suggested was our target for the year.

You know, it becomes very difficult, especially as you get into the second half of the year, to win new programs and have them impact the fiscal year in which you won them. They really -- takes you --

Yes. Okay.

So what -- by the end of the year, you're actually -- the new programs are actually by then existing programs is what you're saying. Well, that's very interesting, because is there any seasonality in your business, any purpose in looking at sell-through in the December quarter?

The only seasonality was what I referred to when I was talking about our medical sector performance. We typically see very strong performance from GE healthcare in the first quarter of our fiscal year, the December quarter, and as a consequence of that we see a pullback of their overall revenues in the second quarter and then we see growth again beyond that.

So that's the real -- the only real seasonality I think of significance among our customer makeup in sectors that we participate in.

So you haven't seen an inventory build-up that could affect you?

Not at this point.

Okay. Well, there is a disconnect, isn't there? Okay. Thank you.

Yes.

Thank you. Your next question is coming from Yuri Krapivin of Lehman Brothers.

Good morning, everyone.

Good morning.

Dean, question regarding potential follow-on order for this large military program. I know that you cannot really comment on the size of the, you know, size of that yet another follow-on order, but maybe you can give us your best estimate should that new follow-on order materialize. Do you thing it will be still similar size to the most recent one that you received?

We had quite a debate about whether to even talk about the possibility that there was a follow-on order just because it's so uncertain but I also recognize that some of the analysts do a pretty good job of ferreting out this sort of information and it was out in the public domain that there is this potential so we felt it was appropriate to mention it. But at this point, there is a great deal of uncertainty, I would say, even more uncertainty surrounding the potential and the size than there was on previous orders and so I think it's just at this point, the probability are so uncertain about when and how big that we really feel the best thing to do is just to continue to drive the business and act as if it's not going to happen.

And as I said in the script there, that even if it did, we'd have to actually have a hard order in-hand now almost, in order to affect revenues in fiscal 2008. So we're really running out of time here for it to really have any impact on the current fiscal year and my gut feel is I'm not betting on that it occurs at this point.

Okay. Great.

And then with respect to potential acquisitions, do you continue evaluate potential acquisition targets in Europe and do you think that you can actually announce some kind of a transaction in calendar '08 in Europe?

Well, whether or not we can announce anything or not, I mean, there's just not enough certainty at this point. What we are in is in this surveying of the landscape and collecting -- developing our list of opportunities and that's really the stage that we're in.

It's an active project. We have a team of folks working on it and as anybody that's done these sort of -- these kind of opportunities or chase these sort of opportunities knows they're not deterministic and so it's possible that we could potentially get something done yet this year. That's what we're striving to do but I couldn't give you any kind of sense of certainty at this point. We're just too early in the process.

Okay. Thank you.

Thank you.

Thank you. Your next question is coming from Steve Fox of Merrill Lynch.

Hi. Good morning.

On the new wins you mentioned 45% was coming from wireline. Is that all with one customer or can you give us a little more color around that one?

Yes, it's not all with one customer. Let me just see if I can give you a little sense of -- a little bit of data on it here.

Let's see. The new wins in wireline, we actually had four of them, and one of them was in our kind of the real sweet spot of 20 to $50 million the others were in, two of them were the 10 to $20 million and one was smaller at $10 million.

Great.

And then just looking at the business, excluding the defense program, is it -- it looks like without that defense business you still -- you would have been in the 10, 5, 5 model. Is that correct?

And then secondly, excluding defense, can you talk about any other mix effects either in the quarter just completed or in your outlook?

Steve, this is Ginger.

So yes, we believe that without the defense program we would have been consistent with our 20, 10, 5, model which is why we're guiding you in the second half of the year to go back to that model. And I don't know that we have any other significant customers that we talk about from a mix perspective.

Well just end market, any other end markets that affected the mix either way or not really?

In the current quarter I would say there wasn't any significant impact from end market sectors that affected mix dramatically.

Okay. Thank you.

You're welcome.

Thank you. Your next question is coming from Brian White of Jefferies.

Good morning.

If we don't get any more defense wins, is it fair to assume that profits in the second half of the year will be lower than the first half?

Yes.

Yes.

But first I want to clarify that when we say defense, we talk primarily about this large account. Now, we have one other defense business as well, which of course, is (inaudible) business. But It's clear that the contribution associated with this very large program is going to be, you know, will not be replaced with other new business wins, it's going to run closer to our model.

Okay.

And Dean, the defense program, the newer ones that you've been ramping, IED related over the past couple of years here, are we still focused on the Humvee part of it or are we also in the new MRAP vehicles?

Okay.

So the recent defense programs for this large unnamed defense contractor, some of them were for the MRAP vehicles as I understand it. But I keep referring to other wins in that sector and those are non-IED related technologies. So they're with other companies that have other technologies.

Okay.

And just finally on Juniper, it does seem a little surprising that Juniper's down. Now, do you think this is because, you know, Juniper, the forecasts are for pretty good sequential growth in the December quarter and actually the next two quarters are supposed to grow sequentially.

Do you think it may be due to the, you know, a mix of products you're involved in or potentially inventory that you had built? I'm just wondering why it would be a disconnect because it went down fairly meaningfully and yet everyone is modeling a pretty decent uptick with the Company?

I'd just say we would expect to grow revenues with Juniper in fiscal 2008.

Okay. Fair enough. Thank you.

Thank you. Your next question is coming from Jim Suva of Citigroup.

Great. Thank you very much.

A quick clarification. I thought there was a mention about some inventory previously written down that came through and if so, it seems like that would be a benefit of about, if I do my tax right, about close to $0.02. So can you help me triangulate it?

It seems like not only did sales be better than expected but EPS was lower. Why was that the case, especially with an inventory boost which would make it so, to be blunt here, it looks like you may have missed if you exclude that flow through on EPS from the inventory reversal. And then I have a follow-up.

Sure, Jim. So we had expected that inventory reversal in the first quarter so that was included in our original guidance.

And any expectations of inventory reversals going forward?

We certainly hope the customer will continue to need the product and will continue to have the ability to pay for it. So if that would happen, there may be benefit in the future quarters.

Or the reserve that you have there?

Us recognizing the reserve is all dependent on us being able to ship inventory that we had produced for this customer and they were not able to take. So it's under the control of the customer if they have the demand for the product and the ability to pay for it.

So the main reason why EPS was softer relative to the great strength in sales was because of taxes. Is that right?

That's right. So the increase in the tax rate to 18% had a 2% EPS impact.

Okay. Then my follow-up. Can you talk about --

Jim, Can I just clarify that? I'm sorry, that was $0.02 of EPS, not 2%.

Yes, exactly.

And then can you talk about capacity, maybe calendar, either calendar or fiscal, say, '06 to '07 and '08? I know you've been expanding things, maybe talk to us with your utilization up so high, I guess, the concern is are you going to have enough capacity to be able to continue to grow the business. Maybe what type of square footage, 100,000, 200,000-type square footage have we looked at from '06 to '07 and into '08?

Boy, Jim, you're taking me back into history here. I would -- if my numbers in my head are right, I think we're at about 1.4 million square feet in '06 and we're looking at 1.8 million square feet of physical capacity today.

Now, when we give capacity utilization numbers we always put this disclaimer on it, if you will, or clarification on it that says as-tooled. In other words, when we look at our capacity we find that the most significant drivers of cost associated with capacity are equipment and people and so not necessarily empty square footage.

So where we're at right now is about 79% utilization of the as-tooled capacity. We, clearly, with 1.8 million square feet and the additions of physical capacity recently in Malaysia and in China have room to grow the business, probably exceeding $2 billion with the physical capacity.

Now, of course, the question is where is the demand for the capacity going to occur, what are the nature of the programs, particularly as we move to higher level assembly and full system build, we use more floor space and so it becomes a little bit squishy on exactly how much physical capacity you need. But, clearly, we're looking out to '09 and '10 and we're saying we will likely run out of physical capacity and we need to begin to be putting that in place and so we're looking at an additional facility, potentially in China, yet to begin that project into fiscal '08 and, of course, we're looking at the new market entry opportunity in Europe in order to gain essentially some business share there.

That's great. Do you need like an additional 500,000 square feet or 1 million or how should we think about what you really need to support your continued growth?

Well, I think what we probably would look at, again, we just doubled the size in the China facility that we have now. I would say we probably into '09 would like to see another facility with capacity somewhere in the 150, 200,000 square feet in order to enable growth, '09, '010, that's the way we see it.

Thank you very much and congratulations.

Thank you.

Thank you. Your next question is coming from Kevin Kessel of Bear Stearns.

Hi, guys. Good morning.

Good morning, Kevin.

Just Dean, going back to the announcement of the new, I guess, the new wins in the quarter, you said I think 11 of the 15 were for existing customers?

Yes.

So --

11 of 14.

I'm sorry, 11 of the 14. So would those be additive? In other words, you know, is it a situation where you've got the customer program going end of life and now you've won the follow-on or are these additive products to what you're currently doing that don't have end of life schedules in front of them?

Typically they represent new programs, so additional share gain. Now, of course, you know, you have to balance that against the short product life cycles that many of these customers have. So even when they launch a new product, right, they have other products that overlap those products for a period of time may go away, they may be a completely new product line and a new direction.

And that's why I always caution against taking the annualized revenue number and just stacking it right on top of our current performance. Because the reality is that we probably lose 4 to 7% of the business every year based on end of life, average selling prices coming down, all those kinds of things.

So I think we try, we struggle to find the best way to try to give you some sense, consistent sense of the health of the new business wins. And we find that the best way to do it is just announce the programs that we see, it's not like there's a change in demand for an existing product, it's always new products that we had to go out and compete with to win and we try to give you our best estimate of what the annualized revenue would be associated with those programs when they're fully ramped.

Right. I understand. But, I guess, at the same time what you seem to be saying is that in the case of the majority of these wins, or most if not all of the 11 with existing, at this point at least it's not like on a road map that the customer's given you saying here, this program you won is generation two of generation one that will, you know, disappear when you ramp up the next one.

Correct.

Okay.

And then also, so the overall amount of it seems pretty healthy. It's, I think, the highest you've booked when I look, actually, in the last three years or more in terms of on a quarterly, I mean on an annual contribution basis of a little over 150, and it brings your last five quarters to $600 million in terms of what you've announced.

I understand what you're saying, you can't stack it on top. But even if you look at half that amount, which would be I think pretty conservative potentially, that's still indicates, like, 20% growth off of last year's revenue base, full-year revenue base. Is that a fair way to think about it or is that not?

That's not a bad way to look at it but you have to also keep in mind that we're trying to replace a very big chunk of business with that -- associated with the defense program that's going to go away, in our view.

Right. In the second half.

Yes.

But the contribution in the first half was pretty healthy at 70 million-ish.

Right.

So I mean I'm just thinking '08 versus '07 comps relative to company targets of 15 to 18. That's why you guys remain confident it sounds because of the booking, sounds like.

And then the other question I have here is on Mexico, the, I guess, backing out that reserve, it was about a little over $1 million loss. Still, I guess, Ginger, you're saying by the end of the year you expect to be, hopefully, to be breakeven by the fourth fiscal quarter?

That is correct.

And in terms of what would have to happen, I think you guys -- maybe in a prior call had discussed the run rates of that facility. I think it was at $15 million, if I'm not mistaken, per quarter and I think in order to breakeven you felt you needed to be at 25. That is still the case?

So we ended the year at a run rate of about $60 million of revenue for that facility and we think to get where we need to be they need to be closer to $100 million. So that's about a $40 million gap of revenue for the year and that's certainly one of the key issues we're trying to address as we get that site back to profitability.

Where did it end the quarter, December? Mexico?

I don't have the revenue with me, in front of me, Kevin, but I can certainly get that for you.

Okay.

And then just lastly, I think in the past you guys have discussed the potential to do a stock buyback and the fact that right now the focus is still remaining on acquisitions and organic growth. But given the market's severe correction and where the stock's been recently, have you guys given any more thought to that or just in general to even looking at leverage, because by my calculation, you know, a buyback at these levels would be pretty significant in terms of accretion.

We're certainly looking at all of our options. Obviously we want to drive organic growth so a strategic acquisition is important to us but we're certainly looking at other opportunities as well.

Thank you.

Thank you.

Thank you. Your next question is coming from Shawn Harrison of Longbow Research.

Hi. Good morning.

Good morning, Shawn.

Just a few quick follow-ups.

Looking at the program wins and kind of putting that up against Mexico, you know, how many of those wins are targeted for Mexico and do those wins get you most of the way toward bridging that revenue gap that you've had, say, over the past two quarters in terms of program wins?

Yes, we did not, in this particular period we did not win any new business from Mexico. The prior period, however, we did, and so that program is transitioning and beginning to ramp up in Mexico during this quarter which is, of course, is good news but that one single program is not going to be enough to get it done overall.

So we're working with a great deal of focus and intensity to try to improve that outlook and we're also looking at the value proposition for some of our current customers moving certain programs down to that facility.

Is that the changing value proposition, is that in some way just brought about by the increased demand for your U.S. facilities, just having to move capacity around?

Some of it is. Some of it is just the natural progression with customer relationships where many of them are most comfortable particularly with high technology products to start them in a U.S. facility and as the products become a little bit more mature and the relationship becomes more mature that building certain subassemblies or even completed products in a lower cost geography makes sense for them so there is.

And, of course, with the proximity of that facility and its agility to provide -- to flow product back into the U.S., it's a pretty strong and compelling opportunity for some of these customers to take out cost but still maintain their agility to service customers in the North American end markets.

Okay. And then two quick final questions.

On operating expenses, you expect it to tick up this quarter. Should we expect them to hold steady on a dollar basis through the remainder of the fiscal year?

And then secondly on a buyback, I think right now it's about $25 million that you would be allowed to buy back in terms of stock. If you were going to look at a buyback, would you consider increasing that before coming to market?

So Shawn, on the SG&A, yes, we believe that our current forecasts are that they'll be pretty flat through the balance of the year so that's Qs 2, 3 and 4 on SG&A.

On a buyback, we're currently under discussion about all of those options, including utilizing our existing repurchase authorization or requesting a larger one. So I really can't speak in any more detail about it at this point.

Thank you very much.

And I'm also going to go back before the next question, Operator, and answer that question about Mexico revenue.

Mexican revenue was $16 million in the first quarter. So up from our fourth quarter of '07 but still shy from our target rate. The new customer addition that Dean talked about is just beginning to ramp into that facility and we'll see more benefit from that in the second half of '08.

So we're ready for the next question.

Your next question is coming from Amit Daryanani of RBC Capital Markets.

Thanks.

I just had a few quick questions one on the SG&A increase. Could you just talk about how much of it is because of compensation increase in Asia versus increase investments in general?

It's split about 50/50.

All right. And then speaking of this inventory reversal, is this from the same customers that we actually took a $5 million hit, I think, back in fiscal Q2 of '07?

Amit, we don't like to disclose that level of granularity about our customers, but certainly, that was, we have had inventory write-offs in the past. There were several of them in fiscal 2007.

And the reason I'm asking is because I think you guys reversed about $1 million back in fiscal Q3 of '07 and it looks like, sorry, 1.5 at that point and a $1 million this time. So it looks like you still have about $2.5 million that you could potentially reverse further down in the next few quarters. Is that right?

That's in the neighborhood of what we would have if that customer has the ability to take the product and to pay for it.

And is there anything, I think you said this $1 million was built into your guidance for the December quarter. Is anything that's built into the March quarter guidance at this point?

I don't really want to get into that level of specificity, given that it's unclear at this point if the customer would have the ability to pay for it.

All right. But the $1 million was built into your guidance for December when you guys provided it, right?

Yes it was for the December quarter.

All right. Thanks.

Thank you.

Thank you. Your next question is coming from Reik Read of Robert Baird & Company.

Hey, good morning.

I just, Dean, I wanted to broaden up the European question and I know it's still early and the revenues probably wouldn't be until next year, but can you give us a sense for what you think that opportunity is and the planned investments that you might have to make this year and where those investments might be?

I wish we were a little further along so I could give you at least some sense of the range of the opportunities, but at this point we really just are way too early in the process. I mean we're developing the target list, trying to identify which ones -- which opportunities might make sense, and, of course, as I said earlier, it's very undeterministic that you can actually even consummate a deal based on the willingness of the target.

So I'm afraid I just can't give you any sense of how this thing might shake out. I mean, clearly, we're not looking to go and conquer Europe. I mean, we look at it as we've taken a conservative approach to entering that marketplace.

We're not doing it just to buy revenues. We're really, what we're trying to do is get an opportunity that allows us to gain access to the marketplace and to gain access to that marketplace and then leverage not only the facility that we might acquire, but also as importantly, develop the relationships to accelerate the flow of product from the European market into our facilities in Asia and essentially provide more of the order fulfillment than back end of the processes closer to the European end market which is where feel we're most hampered in order to adequately service that marketplace.

So there's just too many variables associated with any potential at this point to give you any sort of clarity on what it might look like.

But it doesn't sound like investments would be coming in all that great a degree in the next couple of quarters.

I think that's fair to say. It would happen in the later part of '08 if it happens this year.

Okay.

And then just going back to the strength in the U.S., I just want to make sure I understand correctly, can you talk a little bit about where you're seeing that additional strength come from and to the extent that you can, what's drive it?

Yes, I think the strength regionally is -- it's really -- it's more broad-based than you might expect. We just saw just some better expected end market demand from current customers as well as some new customer ramps. We also saw some customers a little less enthusiastic to move product over to Asia than what we had originally put into our plan when we came into the year.

I don't know that there's much to take away from it other than that the new business development engine is driving some of it with the new business wins and that the flow of product over to low cost jurisdictions has got a little more sanity and is a little more planful rather than just push everything to Asia.

And then just on your comment with respect to being a little bit more cautious on hiring new engineering talent, is that, because it sounds like you're seeing reasonably good demand. Is that just a function of just the uncertainty that's out there and you're trying to be cautious or is there something more?

This is the challenge. I mean, clearly, there is a significant disconnect and of course we have a fairly broad view, I guess, of the electronics marketplace here with our end market exposure. And there's quite a big disconnect between what's going on in Wall Street and the demand that we're seeing from our customers.

So at this point, you know, for both manufacturing and engineering services the demand picture hasn't really changed. We've seen a little bit more turbulence in forecasts, perhaps, but we really haven't seen any significant demand change so. But we recognize, we can't defy gravity.

I mean, if the customers' end markets start to come apart the, of course, our demand is going to come down dramatically and, of course, that's going to be painful. We need to plan accordingly. But I would say the one thing, and this is just an editorial comment, is I think that as a company in the EMS marketplace, I think we're in a pretty darn good position to weather the storm versus perhaps some of the competition out there.

So you know, we don't want to say bring it on here at all, but at this point I think we're just trying to be prudent in terms of communicating what we see as potential risks and probably one of the earlier risks is that we would see some of the engineering services business start to soften up potentially.

Great. Thanks.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question is coming from John Emrich of Iron Works Capital.

Hello?

Hello.

Got you. Okay. Just had to pick up the phone.

What is the organic growth rate without the one big defense contract both in the quarter just reported and kind of generally implied for the March quarter for the Company? Like if you pulled that out, what's your organic growth rate looking like?

Ginger, do you have that number?

I have it for the sector, John. I have not broken it out for the Company as a whole. So the organic for the defense, security and aerospace sector was up 38% sequentially from Q4 F '06 to Q1 F '08.

How about year-over-year? Do you have that?

Well, I have it. If we look back from '06, if you take that program out of our numbers completely and you go back '05 to '06, I believe we grew about 13% '06 to '07 I believe we grew about 6.8%.

You just don't know what it is --

We know what it is in '08 but we haven't, we're just giving you a range for '08 of 15 to 18% overall. So we haven't communicated any precision beyond that.

Yes, I can back out the contract.

And then I know it's already been mentioned twice but I just make the observation on the cash and the share repurchase that I know you're inquisitive. I know you're very focused on economic value added and you've got cash that's $210 million earning 3 or 4% going lower every day and you can pay 10 times earnings for a business generating 20% plus returns on capital.

My guess is that you couldn't do anything close to that in the acquisition market in terms of quality to value ratio. So I'll be anxious to hear the Company come forward and clarify their views on share repurchases as soon as you know.

Okay. Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Your next question is coming from Rich Kugele of Needham & Company.

Thank you. Good morning. I have just one last question.

There's been some changes within the law of, labor laws in China, I think they increased both, or decreased the hours plus increasing overtime and there's been some environmental changes. How does this factor into your thinking for your China facilities? I know you mentioned you thought about expanding them, but any comments there on some of these significant Chinese changes?

Yes, you're absolutely right. These are factors that, of course, come into our decision processes when we're looking to expand. I would just say that if you look at Plexus overall, we've got a significant concentration of our capacity today in Asia, in Penang, Malaysia, and we feel that we've probably made about as big a bet in Penang, Malaysia as is appropriate from an overall risk management standpoint for the Company and from an access to the talent that we need to drive the business.

So you go to China right now. We do enjoy a tax holiday in China. We've recently just doubled the size of footprint in Xiamen, China but even with that doubling of the footprint, we're looking at, I think, about 120,000 square feet.

So we look at that versus the 700,000 square feet we have in Penang, Malaysia, and we think the most appropriate thing for us to do, even with the economic impacts associated with some of the changes in labor laws, et cetera, in China, that it still is compelling for us to consider further investment there. And our investment probably would be a sister kind of a facility to the current one in Xiamen so to take advantage of that team there, but essentially facilitate putting up a building adjacent to it of similar size, if maybe not a little bit larger.

And a second location in China closer to Shanghai, but not in the fray so in a proximity there that makes it easy for customers that have decision making in Shanghai to gain access to a Plexus facility. But we don't want to be right on top of everybody else and compete in the same labor market as everyone else.

So that's the way we see it but we don't see it, you know, the current changes, you know, they are not insignificant, but we don't view them as impediments to us to invest further.

Okay. Great. Thank you very much.

Thank you. It appears we have no further questions.

Okay.

I want to thank everyone for the great questions that they brought forward to us today. Clearly, we just came off of what we believe was a pretty decent quarter in light of all the economic turbulence that's going out there.

There is clearly a strong quarter in front of us, as we see it today, with the current forecast that we have. But as I said earlier, we recognize that we cannot defy gravity, so if our customers' forecast start to come apart and start to come into alignment with what's happening in the equity markets or what the view of the equity markets is, then bets are off.

But at this point, the business seems to be holding up and we're feeling pretty good about at least our prospects out a quarter and our ability to really overcome the decrease of our large defense program being offset by growth with current customers as well as new business wins with new targeted customers looking forward.

So thanks again for your continuing interest in Plexus. Have a good day, everyone.

Thank you. This concludes today's teleconference. You may now disconnect.