Plexus Corp (PLXS) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp conference call regarding its fourth 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 call is scheduled to last approximately one hour.

I would like to turn the call over to Mr. Angelo Ninivaggi, Plexus Vice-President, General Council, and Secretary. Angelo, you may again.

Thank you. Hello, and thank you for joining us this morning. Before we begin I would like to establish that certain 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 to the projected, please refer to the Company's periodic SEC filings, particularly the risk factors, in our most recent 10-Q filing. The Company provides non-GAAP supplemental information such as earnings or earnings per share excluding restructuring costs and adjustments to the values allowance on deferred tax assets. These non-GAAP financial data are provided to facilitate meaningful period comparisons of underlying operational performance by eliminating infrequent or unusual charges. Similar non-GAAP financial measures including return on invested capital, or ROI C are used for internal management assessment because such measures provide additional insight into ongoing financial performance. For a full reconciliation, of non-GAAP supplemental information please refer to yesterday's press release and our periodic SEC filings.

Joining me this morning are Dean Foate, President and Chief Executive Officer and Ginger Jones, Vice President and Chief Financial Officer. We will begin today's call with Dean providing fourth quarter commentary about our market sector performance and outlook, our new business winds and opportunity funnel and capacity utilization. Ginger will follow up with details about about fourth quarter and full year financial performance, discuss some risk mitigation initiatives, in light of the current environment, and provide our guidance for the first quart of fiscal 2009. Dean will then return to review some high lights for fiscal 2008, and his thoughts about fiscal 2009. We will then open the call up for questions.

Please limit your questions to one question and one follow up. Let me now turn the time over Dean Foate. Dean.

Thank you,Angelo and good morning, everyone. Last night we reported results for our fourth fiscal quarter of 2008. Revenues were at $476 million, with GAAP EPS of $0.43. Both revenue and earnings were within our guidance range. Overall fourth quarter returns grew about 4% sequentially from our third fiscal quarter.

Our medical sector was the only sector that did not grow during the quarter although it performed better than earlier expectation. Our wireline networking sector was softer than expected in the fourth quarter, ending up just 1%, as 4 of our top 10 accounts performed below earlier expectations. We currently expect flat to down performance in our wireline networking sector in the first quarter, while our top three accounts are currently expected to grow in this quarter. The strength will be offset by anticipated weakness in the remaining 7 of our top 10 accounts. While our wireless infrastructure sector was up strong this quarter, although slightly below earlier expectations, we currently expect a low single-digit decline in Q1, as end market demand softens for the majority of our limited portfolio customers in this sector.

Our medical sector was down about 2% in Q4, performing a little better then the mid single-digit decline expected, that is 10 of our top 10 accounts or as 8 of our top 10 accounts beat earlier forecast. We currently anticipate that our medical sector will be up strong, with mid-teens growth in Q1, as 6 of our top 10 accounts indicate improved demands. The overall performance of our industrial commercial sector was stronger than expected, up about 4% in the fourth quarter, looking ahead to Q1, we currently expect a soft quarter, with a mid-single -- with a mid-teens percentage decline, as 14 of our 15 leading accounts are forecasting weak demand. Revenues in our defense and aerospace sector were up about 25% in Q4, in line with expectations as 4 of our top 5 accounts all delivered growth.

Looking ahead to Q1, we currently anticipate another strong quarter for this sector, with revenues currently expected to be up about 33%, as 3 of our top 5 accounts are forecasting growth. Included in the projected growth is about $12 million of production and service for our episodic defense account. Beyond the $12 million forecasted in Q1, we currently have about $12 million of additional production service forecasted for this account through the remainder of fiscal 2009.

Turning now to new business wins. We enjoyed an exceptional quarter of new manufacturing business wins in Q4. We won 19 significant new programs, which we currently estimate will deliver approximately $200 million in annualized revenue when programs are are fully ramped with production over the coming quarters, subject of course to risk around timing and ultimate realization of the forecasted revenues.

In addition to these manufacturing wins, we have also won a new confidential customer program in an industrial commercial sector to produce a complex mechatronics product. This program is currently forecast to delivery $30 million of revenue, largely in the second half of fiscal 2009. Depending upon market acceptance, economic factors, and the general uncertainty and risk of new to market products, this program could result in a new top 5 customer for Plexus. This program represents the second significant mechatronic win for Plexus since we made the strategic decision this past year to pursue opportunities in this case space. Our overall manufacturing opportunities continues to be strong at just over $1.8 billion of qualified new business.

On the engineering services front, we won $16 million in new programs during the fourth quarter. Overall demand for engineering services has continued to hold up over the last few quarters. We believe customers are closely watching their R&D spend as a result of the current economic up certainty, and we have seen some delays in decision-making, but in most cases customers that have committed to invest in new development programs have followed through with purchase orders.

Adjusting capacity utilization and global growth, as expected, our (inaudible) utilization was healthy in Q4, at approximately 79% overall. In the coming quarters we currently expect our capacity utilization to come down little as we include our new site in Hangzhou, China, and the anticipated additional capacity in North America to support our large mechatronic's program. Ginger.

Thank you, Dean and good morning everyone. I'll start with our fourth quarter results, as Dean mentioned earlier in the call, revenue and diluted earnings per share were within our guidance range, and were constant with 20/10/5 financial model, which is a 20% ROIC target, 10% gross margin target and 5% operating margin target. Digging a little deeper into these results gross margins was 10.5% for the fiscal fourth quarter.

I'm sorry to interrupt. The call. But I can't hear. I mean, what --? hello?

Do we have the operator? Okay. I'm going to proceed. Drilling a lith deeper into these results, gross margin was 10.5% for the fiscal fourth quarter, slightly lower than our fiscal third quarter results of 10.7%, and in line with our expectations. This declining gross margin from the prior quarter was a result of two major items during the quarter.

First, changes in the mix of customers and programs decreased our gross margin slightly. Second, during the quarter we recorded inventory reserves of approximately 2 million for obsolete and inactive inventory. Modestly higher than in normal quarters. I will discuss how we are approaching inventory risks with our customer in more detail, shortly. SG&A cost increase slightly from th prior quarter of 26.8 million and was in line with our expectation for the quarter. SG&A costs as a percentage of revenue decrease from 5.8% in the third quarter to 5.6% in the fourth quarter. SG&A expense was consistent with our guidance, and reflects investments in our market sector case business development engine, variable incentive compensation program and continued investments to support our planned revenue growth. For the full year, we are pleased to report our excellent results which meet our 20/10/5 model. ROIC was 20.1%, gross margin was 11.2% and operating margin before restructuring charges was 5.7%. These results reflect excellent execution in all areas of business. In addition to the strength in our underline business the full year was positively impacted by large orders from our unnamed defense customer in the first half of fiscal 2008. Which generates results higher than our traditional model.

Beginning with the the second half of 2008, we returned to our more normal 20/10/5 financial model. Moving onto the balance sheet and cash flow. The cash conversion cycle increased during the quarter, up 4 days compared to the third fiscal quarter cash cycle days of 68 days and 4 days higher than our expectation's. As you saw in the press release, days in receivables increased by 1 day to 49 days. This increase was based on normal variation of customer payment term. Days in inventory decreased 4 days to 73 days. There were two major factors that drove the reductions in inventory levels. First, we saw reductions in inventory levels to support a major customer, and second there was good discipline in conjunction with out customers and internal customer teams related to disposition of obsolete and inactive inventory. Accounts payable days decreased by 7 days to 50 days. This was the result of the timing of purchases during the quarter, which were weighted to the front end another quarter to meet customer demand. We are mindful of these significant investments in working capital, and are trying to optimize and improve them but we also recognize that without the right inventory were not able to grow with our customers, support new business models, like agile direct order performance or ramp up new programs. Including investments and working capital, ROIC for the quarter and fiscal year was 20.1%, above our targeted 20% from our 20/10/5 model and well above our weighted average costs of capital.

We continue to believe that the ability to grow revenue and deliver ROI C above our WAC are the two most important measures of our business, as they reflect our execution, strong financial and investments on the balance sheet. Free cash flow from the quarter was approximately 17 million negative with year-to-date positive cash flow of 9 million. We spent 16.5 million in capital for the fiscal fourth quarter for a total of 54 million in capital expenditures for fiscal 2008. During the fourth quarter, these capital expenditures included approximately 7 million in investments to support our continued growth, including modest expanses in two North American sites, and work to complete the fit out of our third facility in Penang, Malaysia.

I would like to spend a few minutes talking about the current economic environment and how we've been responding. First we have increased the frequency of our reviews of customer risks related to both collectability of the accounts and inventory. One of the benefits of our sector-based go-to-market strategy is that we have customer managers who are close to our customers and understand the financial issues for each of their sectors. Through this input from our customer management teams and in term monitoring we are making judices decisions about risk and recording reserves as appropriate. During this quarter we record approximately 200,000 in reserves related to collectability of accounts receivable and 2 million in inventory reserves. This is modestly higher than the amount we would record in a a more normal economic environment. We are also monitoring the health of our supply chain partners. We have increased the auditing of our suppliers financial condition to insure continuity of supply. In addition to our normal auditing processes we have increase the frequency of audits for our top matrix suppliers and customer directed suppliers.

In addition to customer risks, we've also been paying attention to treasury risks. We currently have approximately 166 million in cash, the majority of which is held in the United States. We have reviewed all of our cash investments for potential exposure to be troubled institutions and have moved cash into three general types of investments, Government funds, fixed-time deposits, and money market funds. All of these investments are with financial institutions that we believe are stable and appear well positioned for continued financial strength. We have also seen a decrease in interest rates for these investments both from lower market interest rates, and from moving to investments with lower risk to pay a slightly lower interest rate. As a result we are including slightly lower interest income in our forecast for the coming fiscal year..

Related to credit and our ability to borrow, I'll remind that we have generated cash in fiscal 2008 and currently expect to do so in fiscal 2009 as well. Accordingly, we do not expect to borrow to meet our cash need force coming year. In the event that we would need to borrow, we have a $100 million line of credit that is available immediately. This facility is lead by the Bank of Montreal and includes a group of 16 banks. This facility is expandable to an additional 100 million under the same terms, but this accordion facility requires bank approval.

Last, we entered into interest rate swaps in late June to fix the interest rate on our new long-term debt. The counter parties to these swaps all appear stable and we see no significant risk around these swaps. I'll few turn to the guidance for the first quarter of fiscal 2009. If you already looking at our earnings on a year-over-year basis, I'll remind you that while comparing earnings from the e first quarter of fiscal 2008 to the first quarter of fiscal of 2009, you should consider impact of our unnamed defense program. The first half of fiscal 2008 included approximately 83 million in revenue for this program, and as we have discussed before, appears that a large concentration in these orders have earnings in excess of our normal operating model.

Beginning with the second half of 2008, we have returned to a more normal operating model, the 20/10/5 financial model. Shifting to our traditional sequential discussion of earnings our guidance for the first quarter of fiscal 2009 will be consistent with that model as well. Gross margins are expected to be lower then gross margins in the fourth quarter based on our forecasted customer mix, but still at a level slightly above our 10% gross margin target. Depreciation expense is expected to approximately 8 to $8.5 million in Q1, up from $7.8 million in Q4.

SG&A for the first quarter of 2009 will be in the range of 26.5 to 27 million, consistent with the fourth fiscal quarter. The tax rate for fiscal 2009 is projected to be approximately 15%, which we will use for the first fiscal quarter as well, but I will remind everyone that we've seen variation in this rate based on the mix of forecasted earnings between taxing jurisdictions. Earnings in our Asian location benefit growth negotiated tax holidays in both Malaysia and China while US earnings are taxed at the full 38% Federal and State Tax rate. This variation in tax rate means that relatively minor changes in our earnings can result in large swings in the tax rate. Are expectations for the balance are for cash cycle days to be in the range of 68 to 70 days, down from our current 72 days.

I will now turn to some additional comments on the full fiscal year. The capital spending projection for fiscal 2009 is estimated to be in the range of 70 to $75 million. This increase from fiscal 2008 is a result of continued investment to support growth, and includes completing the fit out of our newly announced leased facility in Hangzhou, China, and modest investments in North America to support our new business wins in mechatronics. We expect to generate free cash flow in fiscal 2009 in the range of 30 to 40 million.

And with that, I have some final comments as you think about the 20/10/5 financial model going forward. As we have discussed in the prior to call and in our investor day in June, we belive the best way to create value for shareholders is through continued revenue growth and by consistently delivering our 20/10/5 model. We are carefully managing our portfolio of existing business, new programs, and investments to support growth while delivering that model. First, as I mentioned, gross margin will trend back to the 10% in our financial model. Second, SG&A is currently above the 5% target in our financial model. We are mildly making investment in people, processes, and tools to support our growth targets. We are already seeing the benefits of this focus as SG&A as a percent of revenue decreased in the fourth quarter. Our objective is to continue to leverage these investments, and return SG&A spending closer to our 5% target in the second half of fiscal '09. With that, I'll turn the call back to Dean for a review of fiscal 2008, and some commentary on fiscal 2009.

Thank you, Ginger. Fiscal 2008 was an excellent year for Plexus. We delivered organic revenue growth of 19.1%, ending the year at a record $1.84 billion Our brand in the market continues to strengthen, and our (Inaudible) focus development teams delivered growth in all five of our end market sectors. Our five year compounded annual growth rate now stands at 18%. Our commitment to profitable organic revenue growth delivered returns on invested capital of 20.1%, well above our weighted cost of capital.

Importantly, we made significant progress on a number of key initiatives during the year, let me highlight a few. First, in Asia Pacific, we completed the expansion of our facility in Xiamen, China, doubling our footprint in that location. We leased facility in Hangzhou, China to service customers that require closer proximity to the Shanghai region of China. We continued to equip our newest and largest manufacturing facility in Penang, Malaysia to support growth with key customers. We began a pilot to expand our first manufacturing facility in Penang, to support growth with medical and aerospace accounts. We increase engineering capabilities in our Asia technology center, we added industry leadership talent to our APAC go to market team and furthered our relationships with decision makers in the region.

Second in Europe, we made significant progress in defining our market entry strategy and timeline for low cost Europe so we can exploit growing demand for services in this important region. We added significant industry talent to our UK operations team, and our broader European go-to-market team in anticipation of our low cost market entry. To support our strategic decision to pursue mechatronics assembly, and a recent success in the UK, we leased a modest facility in proximity to our facility in Kelso, Scotland. Third, in North America, we greatly improved the execution and financial performance of our manufacturing operation in Juarez, Mexico, added a significant new account and improved the opportunity funnel. We now expect break-even performance in the first half of fiscal 2009.

While our overall revenues continue to grow in the US we made a proactive decision to exit our Boston area manufacturing site to optimize the competitive of our North American footprint. We invested in additional -- in an additional facility adjacent to our Chicago facility to promote growth with key medical accounts. We moved our San Jose operation into a larger facility to better service Silicon Valley customers.

And finally a few globally initiatives. We substantially improved our business intelligence tools, standardized globally, and integrating with our global CRM and ERP systems. We continue to enhance our differentiated global supply chain solutions meeting our customers' needs for forecast and service agility while optimizing working capital investments. We continued our journey to become a leading SIGNA enterprise, focusing on continuance improvement projects to drive productivity, quality, and customer service. We substantially increased our focus on organizational performance, accountability, and the processes required to develop our people to insure that our organization is scalable, and that we are developing our talent into a competitive weapon. Our market sector teams embarked upon an integrated solutions selling approach for Engineering Services business, The strategy yields strong growth, and improvement in average program sizes, and we believe better leverage into manufacturing. Following the strategic decision to increase our focus on defense and aerospace we completed a buildout of a focused go to market team. At our 2008 investor day held this past June, we clarified or market position, opportunities for growth, sector focus go-to-market engine, value added differentiators, and financial models to support our strategy, to become the Best-in-the-World at serving the mid-to-low volume higher mix segment of the EMS market. We accomplished a lot this past year, and perhaps most importantly, our strong organic growth rate and economic profit performance was an excellent achievement and a credit to the nearly 8,000 Plexus people around the world.

Turning now to some thoughts on fiscal 2009. In the past several years, we have consistently set our target revenue growth range of 15 to 18%, our fiscal first quarter guidance, in combination with our exceptional new business win performance this past quarter suggest we are off to ale to solid start for fiscal 2009, but when looking at Q1, it is clear that our medical and defense care and aerospace sectors will [void] the quarter. As we examine our current fiscal 2009 forecast, in combination with opportunity funnel and recent wins and the numbers to our position first year at this time the numbers suggest that we a decent opportunity for growth, but given the current macroeconomic environment and our uncertainty in longer-range customer forecast, we are retraining from providing full year 2009 revenue targets until forecast stabilize and visibility improves.

Further, when we consider the position of Plexus in the light of the current macroeconomic challenges, we are approaching the year with seasoned pragmatism, yet we cannot avoid a sangria longer-term outlook. We believe that OEMs will be under increasing pressure to improve financial flexibility and lower costs, resulting in the secular trend toward outsourcing to accelerate, particularly in the underserved industry sectors where we are focused. We also believe that in tough situations, the strong get stronger and the weak get weaker. Contrasting our situation today, versus the prior economic meltdown, we believe we are are well positioned to weather the storm and ultimately prosper. A few contrasting point to consider. First, today, most customers recognize that the EMS providers are not homogenous. Customers are increasingly adopting a Best-of-Breed strategy to outsourcing as the best approach for achieving competitive advantage in their markets.

Our brand as the Best-of-Breed in the EMS company focusing on mid to low volume, higher mix segment as the EMS market has never been stronger as demonstrated by a 5-year, 18% organic CAGR and strong ROIC performance. Second, today our foot print is global and competitive. We do not have a glut of capacity in noncompetitive locations as a result of an ill-fated strategy of OEM plant acquisitions. Third, we are among the leaders in ROI C performance, we are focused on discipline working capital management and particular inventory management that supports the needs of customers in this segment, we have a solid balance sheet and access to capital. Fourth, we have a unique business intelligence -- set of business intelligence tools built on top of our global-- common IT platform. These tools, in combination with a discipline responsive system management facilitate agile and accurate decision making. Fifth, our reputation for flawless execution, customer service, and valued add is second-to-none in this industry. Our customer retention rate is at an all-time high. We have substantially increased our customer's stickiness metrics, including penetration of our value added services, and gaining a significant or dominate share of customers outsourcing spent. Sixth, we have become a magnet for talent and experienced industry veterans who have learned how to manage through difficulties while maintaining a passion for creating opportunities, and finally, as I have stated before, when we get up in the morning, we are not conflicted, we understand where we provide value in the EMS space. We believe we have uniquely aligned our go-to-market strategy, manufacturing operations, supply chain solutions, value added services, and our financial model to provide service excellence at the lowest total cost value proposition to customers in the mid to low volume, higher mix segment of the EMS market. Back to you Angelo. We are now ready for questions, again, please limit your questions to one question and on follow-up.

(OPERATOR INSTRUCTIONS) . Your first question comes from Shawn Harrison with

Good morning, and congrats on the quarter. Just a quick clarification. What was the forecast for the medical, as well as the defense and aerospace business here for the first quarter? Hello?

Sorry, Shawn, we're just shuffling papers.

If you could comment with the $200 million programs wins, maybe break that out between new and existing customers, the end markets, and how you expect that business to ramp in 2009.

Yes, and your first question was medical and industrial?

Medical and defense and aerospace.

Yes, we set the outlook for Q1 for medical was going to be up. I think I said the mid-teens strength, and then defense care and aerospace I said was going to be up in Q1, at about 33%.

Okay.

And then in terms of new business wins, we had, I think I characterized, 19 of them. The vast majority of those wins, I think 17, 18% of them, were actually increased share with existing customers. In terms of quantity -- in terms of quantity, we did manage to get wins in all of our sectors. The largest numbers of them, 8 were in the industrial sector, and then 4 in defense care and aerospace, 3 medical, 2 in wireless, and 2 in our wireline sector. But I'm not going to break out the revenues individually at this point.

But maybe how you would expect that 200 million in aggregate to ramp throughout the year. Seems like it's really back-end loaded and nothing in the first half of the year, if that's safe to assume.

Yes, it is safe to assume. Anytime we announce wins, there is quite a bit of variability as to when the wins ramp up, but we do expect to see a fairly decent a mount of it at this points, currently, in '09, but as I said, the uncertainty is I don't know that we can anticipate normal performance out of new business wins, given the current environment. In other words, will that 200 million hold up in terms of revenue volume, given -- given just end market demand. If we're seeing end market demand challenges, it's like end market demand programs as well with new program wins. But if you kind of dissect this, there is probably right now about 50% of that 200 million or so that we would expect to see in fiscal 2009.

Okay. And then I guess Ginger for you, on the operating expense profile, ticking up only marginally here in the first quarter. It sounds from your commentary that maybe we should expect that to hold relatively firm on a collar basis through without the year, maybe not have some of the variable compensation upticks that we've had in prior years past.

Yes, I think that's a fair assumption for '09 at this point, so I'm guessing if we look at SG&A, it should be in that 26.5 to 27 to 27.5% range for '09.

Okay. Thank you very much.

Thank you.

Thank you. Your next question comes from Jim Suva with Citigroup.

It's actually Jason Garcia calling in for Jim Suva.

Hi Jason.

Good morning, everyone. Congrats on the new wins. Just a quick follow-up to that. Any reason to think that ramp costs for these programs would be any different than historic ramps, as far as the costs are concerned? And then secondly is the 30 million mechatronic win included if the 200 million?

First on the 200 -- well, let me address whether the 30 is included. The 30 is . It of that. Ask we took it outside the 200 million, because at 30 million, it was pretty significant in the quarter, but we think that program could a top 5 program for Plexus as we move through fiscal 2010, so it could be a significant program for us so we broke that one out. Secondly, the ramp costs with that program will be a little more burdensome as we need to have physical capacity to support the program in North America. The remainder of the 200 million are, as I said to Shawn earlier, that they are mostly incremental business wins with existing customers, so we would expect those programs to ramp up with pretty decent returns, nothing unusual in terms of the challenges associate with bringing on

Okay. Great. And then obviously in order to get to SG&A at 5% of revenues, you're going to have to see some revenue come in at the top, to be able to drive the leverage. I'm just wonder, how realistic do you think that is in this type of macroenvironment, and at what point do you start making plans to engage in cost cutting, or is this going to be a question of continuing to invest and waiting for the revenue to catch up?

I think a couple of comments on that Jason. First first, we made some investments in our customer spacing market sector teams in '08, and we feel like most of that -- those teams for place now, and were going to be able to leverage those teams looking forward into '09. Clearly, we also hope we will have some revenue growth at the top line so we can leverage those investments and get SG&A closer to our 5% margin. So it is obviously a combination of both both of those for us. I would also say we are thinking about what to do in a worsening economic environment, and we've done some what-if's, and thought about a number of options. I think none of which we would be willing to talk about on the call but I think we -- investors should know we're taking that seriously, and want to make sure we have plans in place should our forecasts look like they're going to get worse.

Okay. Great. Thank you.

Thank you.

Thank you. Your next question comes from Kevin Kessel with JPMorgan.

Hi, guys, good morning. I just wanted to, I guess, further clarify the mechatronics, when you spoke about the quarter, the $30 million for the second half of the year, is this the same win that you had alluded to a couple of quarters ago that you said at some point would likely ramp up in Mexico?

I don't know that we alluded to this one before. We did win a new program for Mexico separate from this piece of -- pass of business, that is going to contribute mightily to the Mexico situation in '09. The 30 million of this program is not likely to have any impact at all on Mexico, although we believe as the program gets larger, fits successful in the end market, that our Mexico facility will be a part of the solution as we look out into '10.

I guess when you refer to that one program, I don't remember, a couple of quarters ago, thought you said could be 10 million or so roughly per quarter, and would maybe, just on its own, be big enough to tilt the lever towards profitability, that's separate entirely from this?

That is correct.

Okay. That's -- I appreciate that. And then the other question I have is when you look at the overall balance sheet Ginger for the customer deposits line that you guys break out, it looks like it's up 2.5 types from where it was a year ago. Is that a function of you guys -- of, you becoming more careful around the customers that your engaging with that might be less financially able or is it guess the question is, are you dealing with more customers that are in a weakened financial state, and therefore you're seeing higher customer deposits, or have you changed your overall terms, in terms of taking customer deposits from folks?

Yes. First, I don't see any change in the mix of customers, and customers that we're taking on, and their financial stability. I think we have a pretty good process of managing that, and so I don't think it's a reflex of our customer base. I think it is a reflex of our discipline internally, and generally as inventory ages or becomes obsolete, we have a process in working with customers to make sure they either take that inventory, and we actually sell it to them and move it off our balance sheet, or if they don't want to do that, then we like to have a customer got, so, in essence, that's reserving against potential inventory issues in the future, and that's just a very practical and disciplined way of managing our inventory risks. So actually thing that's a good reflect of our discipline around managing inventory.

And did any of the other reserves that you had taken out of Mexico, think is where they mainly were, did any of them reverse in the quarter?

I think there were very small reversals in Mexico, nothing significant.

Nothing significant. And can you update us I guess on where it was relative continue to break-even in the quarter?

In the Mexico facility lost $500,000. That's about of the loss in the third quarter, which it was 1.1 million. For the full year the loss was $2.6 million and as Dean said, we have good visibility to breaking-even in the first half of '09.

Great.

Thank you. Your next question comes from Amit Daryanani with RBC Capital Markets.

Thanks a lot. Good morning, guys. Ginger, just want to make sure I got this right. You talked about CapEx being in the 70 to $75 million range for fiscal '09?

I did.

I guess in looking at that. This is looking at about 36% increase in CapEx year-over-year, despite, I think you guys talking about you are not provided '09 guidance because visibility is bad, and markets relatively unstable. Can you help me understand why we have such a big CapEx when we're unsure about what end markets are doing right now?

If you look back, we've had 18% revenue growth over the last 5 year, be and that growth has to go somewhere, and so as we look forward, although we're not willing to give guidance for '09 yet, we still feel like we have a decent shot at growth in '09. I -- there is a significant portion of that capital that is related to new facilities to support that growth, and we're obviously manage that prudently. If we see forecasts change significantly, we will adjust our capital spending appropriately, given our outlook now. We think that's a reasonable guidance for you to start from.

All right. And then just kind of going back to the comment on inability to provide for fiscal '09 guidance. Can you talk about what the linearity saw in fiscal Q4? Are you essential seeing audit cuts in OEMs, or being more cautious than they have in the past?

Let me characterize Q4 a couple of of ways, one, is that we did see certain customers start pushing -- we called it pole signals toward the back end of the quarter. So we saw-- from the way we started the quarter, we assumed a certain level of linearity, and it became more back-end loaded as we moved through the quarter. Second, I would say that when we entered the quarter, we took a different bias in our guidance, so we biased our guidance more pessimistically, I would say, than our usual conservative guidance, which turned identity be to a good decision, so we did see a degradation of demand abroad swath of customers as the quarter unfolded. So I, took the same approach here in our fiscal Q1, when we rolled up our forecast, we took a different approach again in our guidance, and we biased it pessimistically off of our forecast with the assumption that we would see further degradation in demand. Just to give you a little sense of color on how we're do viewing the world at this point, we have not seen a mass [capitulation] of customer forecast at the point. Looking forward right now, our forecasts appear, reasonably, healthy and normal, and as Ginger said she is signaling on the CapEx, forecasts would suggest we're going to grow this coming year, but when you look that what's happening on Wall Street and how the stocks are trading for our customers, it's -- there's quite a bit of uncertainty, which causes us some pause in terms of what we're willing to go out on a limb for here in terms of revenue growth range for the year.

Got it. It essentially sounds like had you guys are reading Wall Street Journal, you would feel better about your business?

Yes, if would turn off the TV, stop reading the papers and watching the ticker, we would be all right.

Thanks, guys.

Your next question comes from William Stein with Credit Suisse.

Thank you. Thanks for taking my question. Just want to make sure I heard correctly, the wireline networking sector, you're expecting that to be down, I think if I put in all of your guidance for the other segments in my model, it looks like down 10% at the mid-point? is that kind of a fair assumption?

You said a wireline, or wireless, I'm sorry.

Wireline.

Wireline, we're projecting right now to be flat to down slightly. So not quite the severity of the decline that you're looking for. We're talking about Q1.

Okay. I guess normal, if there is a normal seasonal pattern here, I think it's up a little more than that, can you talk about -- and of course the similar little bit of weakness, I guess, in the last quarter, and you mentioned that and of the top customers were weak there, is there any outsized weakness at your number one , and any update on the relationship there? I know that there has been some move of some of the business that you -- that wasn't really well suited for Plexus, lower end product that shipped it to another contract manufacturer. Any extension of

Yes, let me just be color on Q1 and wire line. I did say that we expected our top three customers to be up in Q1, so there is strength there, and -- but we are going to end up flat to down slightly, because the rest of our top 10 customers, 7 of them, are all down in the quarter, so it's quite a mixed bag here of performance so we're seeing the strength of the top 3. Relative to our top customer, what would say is in fiscal 2007, we grew revenues 15%, in fiscal 2008, we grew revenues 15%, in fiscal 2009, we would expect to grow revenues again. And so we feel good about our position with that customer and with the portfolio of products that we supplied for them. The relationship continues to develop at a strategic level. I talked about the investments that we've been making at our largest facility in Penang, Malaysia, and of course part of those investments are to support our growing relationship with Juniper Networks.

Great. I appreciate that. Just one follow-up. Can you talk about the competitive environment as it relates to pricing. Are you seeing any undisciplined competitors come in and offer pricing that doesn't make sense?

We're hearing a lot of that chatter in the marketplace. I don't know that we have experienced anything significant at this point. I would say that it is one of the situations where we recognize that we have a number of competitors that are in a weak position. One might immediately assume that they're going to become irrational in terms of pricing to gain additional business, but on the said I'd of that, I'm not sure they can afford to take on additional programs where they tonight make money, because they're not making any money now. So I don't -- these going to be some, no question, I think that we're going to see probably an increase of some desperation pricing in the marketplace, but I think that it's going to be easier for the stronger competitors to go hunting else where than it is to go hunting against the Plexus customers.

Great. Thank you.

Thank you.

Thank you. Your next question comes from Reik Reed with Robert Baird and Company.

Hey, good morning. Can you guys just talk a little bit about, as you look at your forecast, the level of volatility that you're seeing, and are there any discertainable trends that you're uncovering, and by segment to the extent you can talk about it?

Well, I would say that, it's not a fire sale, so we haven't seen what I would call just exceptional volatility. I would say when we do see volatility , it intends to be more biased down than it is up. I think that the wireline kind of networking sector probably is probably moves the most, but it's not surprising, given that the demand fulfillment model, in terms of how lean the supply chain is, and how we deliver completed producing to the customer -- our customers end customers, causes quite a bit of volatility as we move through the quarter, and it's a little bit more difficult to have a kind of a level forecast there. So I'm not surprised by that volatility. I also see right now that we have some of our strongest competitors in this market place seem to be doing -- and biggest customers tend to be doing okay, at least the way we look at it going forward at this point. Wireless for us is always a little bit volatile. We don't have a very large portfolio of customers, so we don't get the smoothing effect you would get when you get a larger portfolio. But those customers tend to be, at this point, most of our customers in that market tend to be, I think, in a position where they're going to be able to grow in the current marketplace, unless there's, like I say, a complete meltdown.

Medical, I think, is going to hang in there pretty decently. We're currently projecting medical to be up through the fiscal year, and I think that's just the nature of that segment tends to be a little bit more immune to the current economic pressures, although it's not as immune as it used to be, because the buying decisions of the large medical providers are approaching -- starting to head more in the direction of what you would call more commercial business practices, but in general, I think it to be more immune to volatility in the economy. Industrial commercial is where we have the largest portfolio of customer and that one tends to be at least I think indicating to us today to be a more similar reflex to what you see happening in the economy, where we're seeing quite a bit of trim back of forecast, and of course that's where our capital--- semiconductor capital equipment customers are. And they have been down for some time, and appear to be continuing their struggle probably as -- through all of '09. And I just recently read somewhere that suggested that they did not believe there's going to be a turn for some time, at best at the back-end of '09 if '10, so a bit of a struggle.

Defense care and aerospace is a sector that I think offers some opportunities for us. I think that the kind of business that we have there, aside from the one big episodic program, tends to be healthy at this point. We also have our avionics business in there, and now that the Boeing strike appears to be abated, we believe that that offers some opportunity for us for growth in the coming years, as well. So, when you separate out the big, large episodic program. So we're feeling, at this point like the customer forecast -- like I said, tend to be -- tend to trend down when there are changes, but as I said earlier, we haven't seen a whole sale

Great, thank you, Dean.

Thank you. Your next question comes from Sean Hannan with Needham & Company.

Yes, thank you. Good morning.

Good morning.

If could just follow up on the mechatronics program, if you could elaborate on the nature of these programs in general, how you would view the stickiness of these types of programs or customers, in terms of fall on revenues say versus your other industrial customers? and then also as part of that, how do we think about those types of margin profiles for your business?

Well, I'll let Ginger talk about the margin profiles, but in general, the programs are different in their nature, in that they tend to take up quite a bit more floor space in our facilities, although the floor space needs tend to be more expense on a per square foot basis, and the term of mechatronics applies to devices that have a lot of mechanical components, but some fluid or motion mechanisms in them, as a greater percentage of the assembly than than typical electronic product, which it would some electronics with a plaster or metal wrapper or both around it. In terms of the stickiness of the business, I think that the business can be sticky because the supply chain challenges of establishing these programs is pretty significant. You've got a lot of materials moving a at fairly high velocity. You do need to have, like I said, quite a bit of floor space available in order to bring these programs up, and so I think there's -- from the standpoint of the way we look ate it, and the standpoint of our engineering solutions capability to-out customers design kind of products and make improvements and also to make evolutionary changes to the product to go after additional markets, I think is quite good. So we feel quite strong about the possibility of Plexus growing our business substantially in thus market. We think it's one that's quite underserved by the EMS industry, and we think we are uniquely positioned to be able to have success here. Ginger, did you want to comment about the margin, or perhaps the ROIC component of these programs, probably useful information.

Yes, I would say that at this point we don't see any significance variance from our kind of normal programs. This is still a product that would fit our sweet spot of lower volume, higher complexity. I think the one differentiation is going to be on the working capital side as done alluded to. These are going to have a number of components, and there will be investments on the balance sheet for that, but I also thing they're going to turn much more quickly. I think as we look at the combination of all of that, we would expect a similar ROI profile to the business we have today.

Great, thank you. That it very helpful. Thank you. If I can also just follow up on your guidance for next quarter, specifically, medical, I think that there's been a lot of commentary out there, and correct me if I'm wrong, that there has been a lot of pull back, and Dean I think you had alluded to this earlier, in that some of the purchasing decisions are becoming a little bit more in line with other types of verticals, there's been an inventory, I guess, correction in the marketplace in the imaging space overall, medical over the last year or two. So just was curious in terms of what specifically is going to be driving the growth for next quarter, and this outlook.

Well. Yes. It's a number of things, I think. One is I think just in general, we've done a better job of increasing our share of business in this space. We've won a number of over the last year that are going to help us in the medical sector. Also, when you look at '08, '08 suffered from the kind of reset in demand in imaging with the reimbursement changes of the Federal Government, and also in our largest customer there, GE, had these difficulties with the FDA at one of their facilities, which hampered growth in medical for us in 2008. So ultimately in 2008, we're up about 4% in medical, it's not at all where we would have liked to have been, but when you look inside that number, if you set aside the FDA-related issues and reimbursement challenges, we actually had a pretty decent year in medical where we gained a couple of very significant new accounts, had a new program that kind came through our engineering organization, and is now moving into manufacturing. So when you peel it back, it was actually quite a good year. As we look into '09, we expect to carry that momentum, so the prior programs, the ones out of engineering, the gain share that we've had during the course of the year, would expect a drive topline as'09 unfolds.

That's terrific. Thanks very much.

Thank you.

Thank you. Your next question comes from Kevin Kessel with JPMorgan.

Yes, hi there, just a follow-up. Ginger, just wanted to clarify on the free cash flow number you gave earlier, I think you said 30 to 35 million

Yes, I said 30 to 40 million.

Okay 30 to 40 million for free cash flow?

Yes.

So we're talking essentially like 110 million or so for cash flow from operations, give or take, for this year?

Yes. Hold on. Just getting there. Yes, exactly.

Okay. And then, also, can you say of the CapEx, is any -- is there a component of that 70 to 75 million that right now is being Incorporated into an eastern European expansion effort, or expectation of one happening?

No. At this point, this capital does not anticipate any invest in eastern Europe, although as we've talked about, we are getting further down the path of making a decision about both the right location, and how we would make that investment.

Ask that something at this point that could very well happen in fiscal '09, or is it still too hard to say?

No, I think we'll have a decision in fiscal '08.

A decision would happen, and you think something would from the perspective of investment also happen?

It's one of those investments, Kevin, that if things go bad, we could defer until later, but at this point, we're moving ahead and trying to get to our chosen location, and the specific opportunity for entry, and then we'll look at how we feel about our forecast and the economic situation looking forward and we'll make the call, but we're very close, I think, to deciding what we want to do, it's just to whether or not we're going to pull the drugger is yet uncertain, and we'll be talking about that here in a couple of weeks when we have a board meeting.

And Dean, when you said earlier on the new wins question, did you say 17 to 18 of the wins were from existing, or percent of the wins were from exist?

That was a quantity. So we said 19 wins, separate from this one large program, and I said 17 or 18, depending upon how you slice and dice it, is what the customers additional share.

Existing share was existing, okay and then just lastly housekeeping. On the stock can you give us a break down on cost of goods sold and SG&A?

For the fourth quarter

Yes.

So for the fourth quarter of '08 the total dollar of stock based compensation was 2.4 million and of that, 1.7 million was in SG&A.

Okay. And then for next year, do you guys have any sort of an expectation for roughly where stock compensation will run?

Can you tell us where our stock is going to trade, Kevin? (laughter)

Yes, I'll help you out a little bit there. I think it's going to be roughly in line with that for the first quarter, so for the first quarter we think it's about $0.06 of EPS, about 3.1 in total, and 2.4 million on the SG&A line.

Thanks so much.

Thank you. Your next question comes from Sherri Scribner with Deutsche Bank.

Hi, thank you. I wanted to ask a little bit about the restructuring charges you took for the Boston facility. Are we done now with those restructuring charges? And I think in the press release, you mentioned that you expected to see cost savings of 4 to 5 million from that -- from closing that facility, but you suggested SG&A would be similar to what we've seen now. So should we expect to see that savings in COGS, and when should we start to see that?

I'll starting with your restructuring charges first. There's going to be a modest amount of restructuring still to come as we wrap up the facility and transition out of that facility over the first and second quarter, and I would characterize that in the range of kind of $400,000 to $500,000, and most of that may happen in the second quarter as we actually shut town the facility. We do still expect savings in the range of $4 million to $5 million. I think that is going to be obviously weighted to the second half of the year, after we close the facility. And I think you'll see we haven't really split out how that is going to be between cost of goods sold and SG&A. I think we'll see a model impact on SG&A, and most of it in cost of goods sold.

Okay. That's helpful. And then in terms of your cost base. In the COGS component of your income statement, how much of that would you characterizes a fixed versus variable related to your program?

Yes, I think kind of -- I don't have the specific information in front of me, Sherry. I think the general rule of thumb is it's about 80% variable and about 20% fixed, but I happy to get you some more detail on that off line.

Thank you.

Thank you, and we have a follow-up question from Shawn Harrison with Longbow Research.

Hi, just two quick follow-ups. Kevin's question on the expansion in eastern Europe, have you decide whether Europe looking Greenfield, or in turns of maybe an acquisition, I guess? has that been decided?

Our significant preamp at this point, and most likely would to be Greenfield.

Okay. And then just second question. I know Ginger you mentioned lower interest income assumption, but could you remind me what is the interest rate any the debt now, and kind of what are you using for an interest income assumption?

Sure. The interest on the new long-term debt is 5.7%, and that's fixed, and that was fully reflected in our fourth quarter, we had a that debt outstanding for the full quarter, so that's probably not a bad measurement as you look at the fourth quarter. The -- it's harder to give you an estimate on the interest income. I would say kind of the fourth quarter rate maybe down a little bit as we've moved into more conservative investments over the fourth quarter. Some of our -- we have cash all over the world earning different interest rates, so I would just ask you to take a look at I that fourth quarter and maybe move that down slightly.

Okay. Thank you.

Thank you.

Thank you, and at this time, there are no further questions.

All right. Well, with that, I want to thank everyone for joining us today. Again, once again, we're really pleased with the way our year unfolded, and I want to thank once again all of the employees who might be listening in, because they really did an outstanding job for Plexus this past year, hopefully '09 unfolds to be a similar year, but at this point I just willing to be an oracle and predict what will happen in the macroeconomic environment, but we are realistic in terms of you, and we're willing to do what we need to do to maintain the financial health of the Company, but at the same time we're optimistic about the year, and I think as you could kind of sense from us, we feel that not all things are bleak, and that there's a good opportunity here for Plexus, and we think longer-term we think we're really well positioned to capitalize on market opportunities, given the strength of the business and the strength of then brand. So thank you once again for joining us, and have a good day. Thank you.

This concludes today's conference.