Plexus Corp (PLXS) 2009 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Plexus Corp conference call regarding this first fiscal quarter 2009 earnings announcement. At this time, all participants are in a listen-only mode. After a brief discussion by manage we'll open the conference call for questions. The conference call 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.

Thank you, Latricia. Hello everyone 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 as 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 files, particularly the risk factors in our most recent Form 10-K file.

The Company provides non-GAAP supplemental information such as earnings per share, earnings or earnings per share excluding restructuring costs. These non-GAAP financial data are provided to facilitate meaningful period to period comparisons of underlying operational performance by illuminating infrequent or unusual charges. Similar non-GAAP financial measures including ROIC 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, Ginger Jones, Vice President and Chief Financial Officer, and Todd Kelsey, Senior Vice President of Global Customer Services. We'll begin today's call with Dean providing first quarter commentary about market sector performance and outlook. Our new business wins and opportunities (Inaudible) and capacity utilization. Ginger will follow up with details about first quarter financial performance, discuss our guidance for the second quarter of fiscal 2009 and discuss our risk mitigation approach in light of the current environment. Dean will then make some closing comments.

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

Thank you, Angelo. Good morning everyone. Last night we reported results for our first fiscal quarter of 2009. Revenues were $456 million with GAAP earnings per share of $0.43. Our first quarter 2009 guidance range was conservative as we had anticipated continuing degradation of demand in our customers' end market. Experiencing a challenging quarter we managed to achieve revenues at the low end of the guidance range and diluted EPS at the higher end of the range. Overall revenues declined 4% sequentially from the prior quarter and were flat when compared to the prior year first quarter. Sector performance was mixed compared to our expectations at the beginning of the quarter.

First, I will comment on the sectors that managed to grow sequentially during the quarter. Medical, Defense Security , and Aerospace. Our Medical sector is up 12% in Q1, performing slightly below our expectations for mid teens growth as three new program ramps supported a typically stronger seasonal quarter for medical. Our current outlook for Q2 is for the Medical sector revenues to decline in the low teens percentage range as a leading account experiences a seasonal decline and the economic climate subdues end market demand for customers in this sector.

Revenues in our Defense Security Aerospace sector were up about 18% in Q1, below our expectations for 33% growth as four of our top five accounts missed the earlier forecast. Looking ahead to Q2, we currently anticipate a low single-digit percentage decline in revenue for this sector as the ramp of new program is offset by softer forecasts from four of our leading account in the sector. Our wireless infrastructure sector performed in line with expectations declining about 5% in the quarter. We currently expect a low teens percentage decline in Q2 as four of our top five accounts are forecasting weaker demand and the larger account works to reduce channel inventory.

We had anticipated that our first quarter would be soft for both Wireline Networking and Industrial Commercial sectors. Both decline significantly more than earlier expectations. Our Wireline Networking sector was down 8% as four of our top ten accounts reduced their forecast during the quarter. We currently expect mid teens percentage decline in revenues in our Wireline Networking sector in the second quarter as seven of our top ten accounts are forecasting weaker demand. Offsetting some of the weakness is the ramp of a new program win. Our Industrial Commercial sector declined 24% as seven of our top ten accounts missed their earlier forecasts to.

To highlight a positive in the quarter we began ramping a couple new programs including the early stage production of the Mechatronics program we announced last quarter. Q2 looks to be another difficult quarter for the sector with revenues currently expected to decline in the mid-single-digit percentage range. We will continue to build early stage production units for our Mechatronics program although fiscal 2009 revenues for this program have been trimmed from the $30 million announced in fiscal 2008 Q4 press release down to $11 million as the current economic climate compelled this customers to slow down their production launch. Depending upon market acceptance, economic factors and the general uncertainty and risk of new to market products we still anticipate that this could be a significant program for the customer in fiscal 2010.

Turning now to new business wins we again enjoyed a strong quarter of new business wins an encouraging trend established last quarter and further confirmation that our value proposition and brand are alive and well in the EMS market. During Q1, we won 14 significant manufacturing programs which we currently estimate will deliver approximately $134 million in annualized revenue when the programs are fully ramped in production in the coming quarters. Subject, of course, to the risks around the timing and ultimate realization of the forecasted revenues.

Also encouraging, our overall funnel of manufacturing opportunities continues to be strong with $2.1 billion of qualified new business. On the engineering services front, we won approximately $12.5 million in new programs during the quarter. Overall demand for Engineering services is mixed. The Engineering Group working on test equipment development to support new product -- new manufacturing programs is very busy. The engineers focused on new product development programs are busy at the moment but the backlog is soft as customers are carefully controlling their R&D spend.

Addressing capacity utilization in global growth, our projected as to capacity utilization fell to approximately 72% overall as our forecast is softened and we now include two new sites in the calculation while removing our Boston area facility as we complete the closure of that site in Q2. New capacity includes our Appleton 2 site here in northeast Wisconsin to support the Mechatronics program and our Hangzhou, China site which is proximity to our to the Shanghai region. Both sites started production in fiscal Q1 and will begin shipping product in Q 2.

Turning now to our guidance, we are establishing second quarter fiscal 2009 revenue guidance of 375 to $405 million with EPS in the range of $0.17 to $0.24. Excluding any restructuring charges and including approximately $0.05 per share of stock-based compensation expense. As I commented in my review of sectors, while we are ramping a number of new programs that we won in recent quarters this incremental business is not sufficient to overcome the significant softness in our customers' end markets, channel inventory reduction, and a seasonal decline driven largely by a significant medical account. The second fiscal quarter will be challenging, and while we currently anticipate it will be the trough fourth quarter for the year, the reduced outlook for the entire year prompts us to take immediate action on further cost reduction initiatives. I will now turn the call over to Ginger for her detailed review of the numbers and our cost reduction

Thank you, Dean and good morning everyone. As Dean mentioned earlier in the call revenue and diluted earnings per share were within our guidance range. Growth margin was 10.2% for the first fiscal quarter slightly lower than our fiscal fourth quarter results, of 10.5%, and in line with our expectations.

During the quarter we recorded inventory reserves of approximately $2 million for obsolete and inactive inventory. This number is consistent with reserves recorded in fourth quarter of fiscal 2008 and modestly higher than in normal quarters. I will discuss how we are approaching inventory risk with our customers in more detail shortly. Selling and administrative costs decreased from the prior quarter to $25.3 million before restructuring charges and was below our expectations for the quarter. This reduction was the result of actions taken to reduce spending including reduced hiring and reduced discretionary spending such as consulting and travel. It was also impacted by lower levels of incentive compensation recorded in the first quarter compared to what was recorded in the fiscal fourth quarter of 2008.

These reductions were enough to align SG&A spending with the reduced level of revenue in the quarter, with SG&A costs as a percentage of revenue decreasing from 5.6% in the fourth quarter to 5.5% in the first quarter. We recorded approximately $550,000 in restructuring charges in the first fiscal quarter related to a reduction in workforce at our facility in Juarez, Mexico. This action was taken as productivity improvements and leaner manufacturing processes at the site have reduced the need for some of the staffing at the site. This site has done a excellent job of improving performance including these productivity improvements, a strong manage team, new customer wins, excellent execution, and improved customer satisfaction. We would consider ourselves well on the way to profitability at this site were it not for the troubled global economy.

Lower forecasted revenue from existing customers has reduced revenue for this site and new customers transitioning in were not enough to return revenue to the needed 25 million of revenue per quarter for this site to break-even. Current forecasts show that we will be at this 25 million quarterly run rate in the second half of fiscal 2009 which is when we currently expect to break-even. This expectation is tied directly to revenue and may change based on customer forecasts and the timing of transitions for new customers. We believe this site has turned the corner to achieve the level of profitability that we require and we're continuing to invest to provide the lower cost footprint with proximity to North America that our customers want. The reduction in headcount in our facility in Juarez, Mexico along with headcount reductions in other North American manufacturing operations totaled approximately 15% of North American operations headcount.

We have also completed modest headcount reductions in our Engineering Services operation which total approximately 6% of our global engineering services staff. These adjustments in headcount will have a financial impact beginning in the fiscal second quarter of 2008. Moving on to the balance sheet and cash flow, the cash conversion cycle decreased during the quarter to 68 days. Down four days compared to the fourth fiscal quarter cash cycle days of 72 days and consistent with our expectations. Days in receivables decreased by four days to 45 days. This decrease was based on concentrated efforts to collect receivables more quickly and the benefit in this quarter of our fiscal quarter ending on January 3rd, three days after the calendar quarter. Days in inventory increased four days to 77 days.

There were two major factors that drove the increases in inventory levels. First, increases in inventory levels to support new customer transition and buffer inventory to support transfers from the facility we are closing in Boston, Massachusetts to other Plexus locations. Second, increased inventory with customers who are experiencing softening in their end markets, and as a result our inventory position with some customers has increased. In some cases we have mitigated this risk with the payment of cash deposits. We are closely working with these customers to resolve the excess inventory issues in accordance with their contractual obligations.

Account payable days increased by four days to 54 days. This was result of concentrated effort in conjunction with our major suppliers to extend payables terms and reduce our investment in accounts payable. Free cash flow for the quarter was approximately 26 million. We spent 23.5 million in capital expenditures for the first fiscal quarter. During the quarter these capital expenditures included approximately 17.5 million in investments to support our continued growth including work to complete the fit-out of our final day in the third facility in Penang, Malaysia, our new facility in Hangzhou, China, and the purchase of a building in Appleton, Wisconsin to support the unnamed Mechatronics customer announced in our October press release.

I will now turn to the guidance for second quarter of fiscal 2009. If you are looking at our earnings on a year-over-year basis I will remind you that while comparing earnings from first half of fiscal 2008 to the first half of fiscal 2009 you should consider the impact of our unnamed defense program. The first half fiscal 2008 included approximately $83 million in revenue for this program and as we have discussed before those periods with the large concentration of orders for this customer had earnings in excess of our normal operating model.

Shifting to our traditional sequential discussion of earnings our guidance for the second quarter of fiscal 2009 will be lower than our 20-10-5 model. Gross margins are expected to be lower than the gross margin in the first quarter based on our forecast of customer mix and the lower levels of revenue. We currently expect gross margins to be between 9 and 9.5%. Depreciation expense is expected to be 8 to $8.5 million in Q2 up slightly from the $8.1 million in Q1.

SG&A for second quarter 2009 will be in the range of 24.5 to 25 million. This is a further reduction from our spending in the first quarter. The result of continued restraint in spending and a modest headcount reduction in staff planned for the second fiscal quarter. This will result in a one-time charge of approximately $500,000 in the second fiscal quarter. Our second quarter guidance reflect a modest benefit as a result of this reduction. The fiscal -- the full year fiscal 2009 benefit is currently estimated at 2 to 2.5 million. The tax rate for fiscal 2009 is projected to be approximately 10%, which is the rate used for the fiscal first quarter as well. I will remind everyone that we've seen variation in this rate which is based on the mix of forecasted earnings between taxing jurisdiction.

Earnings in our Asian locations benefit from 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 earnings can result in large swings in the tax rate. Our expectations for the balance sheet are for the key balance sheet account, inventory, account receivable and account payable to decline in dollar terms for the second quarter. Based on the forecast in decline in revenues these declines will not be enough to keep cash cycle days flat. We currently expect cash cycle days for second quarter to be in the range of 72 to 74 days up from our current 68 days. Over the longer term expectations for fiscal 2009 are for cash cycle days to trend back to 68 days.

I will now turn to a few brief 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 is consistent with the guidance I gave last quarter and an increase from fiscal 2008. This spending includes continued modest investment to support growth and includes completing the fit-out of our newly announced leased facility in Hangzhou, China and investments in North America to support our new business wins in Mechatronics.

Our capital expenditures are being carefully managed and we will slow the spending down if we become less confident about our revenue forecast for the second half of fiscal 2009. We are taking what we believe are prudent steps to manage spending, capital expenditures and working capital investment. To balance continued growth and current results to our shareholders. Because of the strong new program wins in the last two quarters we need to continue to invest prudently while we continue to make those investments we are aggressively managing our SG&A spending and investments in working capital.

I would now like to spend a few minutes reminding you of how we're responding to the current economic environment. I covered many of these comments in my comments last quarter so I will be brief. First we have increased frequency of our reviews of customer risk related to both collectability of accounts receivable and inventory. We are making judicious decisions about risk and recording reserves as appropriate. We are also monitoring the health of our supply chain partners. We have increased the auditing of our suppliers financial condition to ensure continuity of supply. In addition to our normal auditing process we have increased the frequency of audits for our top matrix suppliers and customer direct suppliers. We have also been paying attention to treasury risk.

We currently have approximately $178 million in cash, the majority of which is held in the United States. All of these institu -- all of these investments are with financial institutions that we believe are stable and appear well positioned for continued financial strength. Related to credit and our ability to borrow I will remind you that we have generated positive free cash flow 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 needs for the coming year. In the event that we would need to borrow we have a $100 million line of credit that is accessible immediately.

With that I will turn the call back to Dean for a few closing comments.

All right, thanks, Ginger. Just a couple of quick comments before we take questions. Despite the significant challenges in our customers' end market largely as a consequence of the troubled global economy we remain optimistic about our future.

Through fiscal 2008 our five-year organic compounded annual growth rate is 18%. Our new program wins over the last two years -- over the last two quarters are exceptionally strong demonstrating the strength of our go-to-market strategy and the value of the Plexus brand. Our execution metrics, customer satisfaction and retention remain high. Our balance sheet is solid. While we are not immune from the challenges and uncertainties affecting the economy as a whole and our customers' end markets, we believe we are well positioned to manage through this difficult economic cycle and to prosper when the recovery ensues. In the meantime, we continue to make prudent -- take prudent actions to adjust our cost structure appropriately and protect our balance sheet while continuing to make selective strategic investments to enable longer-term growth.

Angelo.

Thank you, Dean. As we open the call for questions, please limit yourself to one question and one follow-up. We will now take questions.

(Operator Instructions). Your first question comes from Reik Read with Robert W. Baird.

Ginger, you kept the CapEx plans flat as you indicated, yet you guys are seeing a reasonable number of deferrals. And I'm assuming that a good portion of that CapEx is really new equipment. So why not try to delay that new equipment a little bit and reduce that CapEx number in what is clearly an uncertain and weakening environment?

Thanks, Reik. I think the first part of the answer is that we have modest additions to our footprint that we are making and that were made in the first quarter, and that was $23.5 million of capital spending, so about a third of that capital for the year is already spent and committed for those modest investments of grow. What is ahead of us in the forecast we are going to manage carefully. It is currently appears to be needed for programs that are transitioning in. To the extent that those are delayed further or that we have less confidence in the forecast we will reduce some of that capital spending.

Okay. And then, Dean, you kind of touched on in this your comments, but do you have a sense for the customer inventory issues that are out there, and are they still in a mode where they are -- their customers are telling them that they want to reduce inventory or do you think things have gotten pretty lean so you've got better visibility?

It's a great question and one that we've been trying to drill into. In fact, that's part of the reason why I asked Todd Kelsey, who runs our customer management organization on a global basis to really try to understand whether or not we're really going to see a trough quarter here in Q2. So I'm going to let Todd comment on maybe a couple of the sectors and what we're seeing relative to inventory.

Sure, thank you, Dean. And thanks, Reik. With respect to our various market sectors, in our wireline sector we have several key customers that have substantial inventory positions right now, on the order of five or six major customers within that sector. So the expectation is that they will utilize that inventory during the course of our fiscal second quarter and return to more normal demand patterns in fiscal Q3 and Q4, which is the indication that they are giving us right now. We also have a few customers within our industrial commercial sector that have a similar situation, particularly in the semi conductor capital equipment area. So those are the two primary areas. The remainder of our customer base, particularly if you look at our Medical sector and our Defense Security Aerospace sector, we believe those customers are in good inventory situations as a whole.

Great. Thank you, guys.

Thank you.

Your next question comes from William Stein with Credit Suisse.

Thank you. Regarding the large military customer that provides periodic revenue did we see anything from that in that the quarter? I seem to recall we were expecting, I think 12 million this quarter, and a few million per quarter for the rest of the year. Do I have that right, and can I update us on that?

You do have it right. We saw a little north of $12 million in Q1 and we are going to see that trail off with another somewhere in the neighborhood of $12 million spread across Q2 and Q3, and after that we have honestly no visibility to any additional orders, and our current expectation is that the program is end of life.

Is that based on intelligence from the customer, or is that just a conservative assumption?

It is based on both. I would say it has shifted more towards intelligence from the customer what we're hearing about the future of the technology.

Okay. Regarding the new wins that you talk about every quarter, always helpful color. I'm just trying to understand how you think about that flowing into the income statement over time. I'm sure it's different quarter by quarter, customer by customer, but can you help us think about how long it typically takes these new wins to ramp?

That's a very good question, and, of course, we've had a great pace of new wins here over the last several quarters, and actually when you look at Q4, or, excuse me, fiscal 2008 in total it was just a phenomenal year of new business wins, and, of course, as you win those, when you are winning them in the second, third, fourth quarter, that revenue starts to shift out to the end of the fiscal year in which it is won, and in many cases it's almost all the next fiscal year. So we're actually seeing the benefit of the new wins in the back half of '08 starting to flow now into '09, although you would not know it by looking at our Q2 revenues because the down draft of revenues from our current customer base in their end market is just been unprecedented, at least in my long tenure here at Plexus.

So, as you said, as a rule of thumb, I think you've got to think about most of these wins, particularly if they're with new customers, and usually I tend to separate them out but the new customer wins tend to take some time and usually can be, from the point of announcement to the time we start seeing revenue can be a couple quarters out into the future. New program wins with existing customers can happen a little bit quicker. But there is no question that there is a delay from announcement from when we actually see the revenues.

You say a couple quarters?

A couple quarters in general.

That's the start, and what about to fully ramp? Like another couple? Is that the right way to think about it?

Yes, but I hate to throw down a rule of thumb, because it so variable, but that's a good way to think about.

That's helpful. Thank you.

I just look at the '08 revenues. A lot of that, when you look at it, was won in the back half of '08, and we should see -- we're starting to see those ramps now, and I think the primary impact of them should be in the back half of '09 and on into '010 but I would caution that new program wins, they're subject to the same market risk as the existing programs. So what we do is we try to give you very consistent methodology and try to calibrate the revenue size of those based on the information, best information we have at the time we announce them, but end market demand can cause a problem with new program wins and I would even say there's additional uncertainty from programs potential getting canceled or just failing in the end markets. And one of them that we talked about last quarter was this very large Mechatronics program. Originally we had a pretty confident $30 million plugged in to '09 for the early production for that product, with the bulk of that revenue which could be substantial in '010 we've just trimmed that $30 million back to $11 million now because that customer is concerned about the current economic situation and has slowed down the production ramp. So it's a challenging environment right now.

Are there any similar, what I think of as lumpy programs in the pipeline that you think are close to closing?

Lumpy as in -- I guess when I hear that, you are drawing an analogy maybe to the Defense program that we had that was extraordinarily lumpy. We don't have anything, to my knowledge, I'm looking over at Todd right now, that would be anything near like that program was.

Or similar to the Mechatronics one that deserves to be highlighted on the call?

The Mechatronics one, we highlighted only because it's a new area of focus for us and because it's significant, what we believe could be in terms of significant size, so we want to separate it out and make sure you are aware of it, but there's nothing else that stands out.

Thanks, Dean.

Thank you.

Your next question comes from Sherri Scribner from Deutsche Bank.

Hi, thank you. I just wanted to try to figure how to think about the SG&A going forward, Ginger you gave a lot of detail for March. But, sounds like we have more costs that will come out. Thinking about June number, should I think about in terms of the $24 million number? What is kind of the run rate going forward for that?

Yes, Sherri, I think SG&A for Q3 and Q4 will trend down modestly from what we expect in Q2.

Okay. In terms of the gross margin as it trends through the year, obviously the mix it sounds like we're not going to see great mix, and obviously we're dealing with a slowdown. Do you expect to be able to return to your 10% gross margin model as we exit the year or as we move into the second half of the fiscal year, or what is your thinking there?

Yes, right now our visibility for gross margin for the balance of the year would have it in that range of 9 to 9.5%.

Okay. So resetting that?

Yes.

Okay. Then I just have a quick question on the balance sheet. Looks like the deferred income taxes went up in the quarter, $8 million, and I'm just wondering, was there a change in the way that you do your taxes, or why did that happen?

No, I don't think there was anything in particular there. We booked our year end tax entries at the end of the December quarter, so I don't think there was anything of interest there.

Okay. Thanks.

Next question comes from Shawn Harrison with Longbow Research.

Hi. Morning. Wanted to get into a statement that was made in the earnings release about the second quarter being the potential bottom. Just the thought behind that statement. Is it because you think these inventory builds will essentially stop here, exiting the March quarter you are going to have some new programs rolling on and its restructuring cost? Is that kind of the primary thought behind that?

Yes, I think just in general we look at the -- we're trying to do the best we can, of course, customer by customer, sector by sector here, and there's no question that this has been a tremendous down draft in revenues for us that really, I think, accelerated as we did our November forecast roll. And so we really do a detailed roll every month, and we started to see it coming down dramatically. Of course, we try to do the best we can on a six quarter rolling basis, so we're looking out quite a bit in time. As we look at Q2 right now, there are enough customers in Q2 that have an inventory position that we believe and, of course, working with them, believe that they're going to work down that inventory position. So we are going to start to see the pull-through, admittedly, a lower revenue level, than they have been running at historically, but a revenue level that's up from the -- in Q3 versus the Q2 revenue. Additionally, we do have -- we had a very strong pattern of new business wins in the back half of '08 and early '09 here, and we're starting to ramp some of those programs. We believe we're going to get the effect of that.

Now, having said all this, there is no certainty at this point. This is our -- we do the best we can here with the numbers that we have. We drilled in and have done a lot of diligence with our customers. At this point we believe it looks like the trough -- I got it tell you, just from a macro perspective if the rate of decline on a monthly basis with each one of our customers continued at the pace it had been continuing at over the last couple months, we'd have a substantial number of our 150 customers out of business in the next couple quarters. So there's got to be -- it's getting to be there's got to be a bottom somewhere, and for us, our best judgment at this point is that it looks like that's going to occur in the second quarter for us.

Okay. I guess the follow-up to that is given some of these monthly revisions, has that slowed in January and what you are seeing into February?

Well, we're trying to -- it's slowing in certain quarters, but, of course, it came down hard in Q2. So our expectation here again is that the down draft was into Q2 is largely for someone to try to correct inventory.

Okay. Then just following up on the gross margins and restructuring, I think there was supposed to be something like 4 to 5 million in annual savings from the Boston closure in the back half of the year, along with maybe some of the other moves that you have been implementing here over the past 120 days. I'm guessing what is the offset to that? Is it new program ramps? Or other initiatives going on out there that are going to keep the gross margins in this 9 to 9.5% range instead of seeing an uptick in the back half of the year from restructuring savings?

Yes, Shawn, we definitely are seeing some benefit in the back half of the year from our decision last summer to shut our Boston facility. I think offsetting that are a couple of things. So, first, we are bringing some new capacity on line. We've talked about that in the script this morning in Hangzhou, China, and in Appleton, to support that Mechatronics's customer. The new footprint, which although not outrageously expensive does cause a down draft in margins in the second half of the year. I think secondly, Mexico is recovering a little slower than we had expected, given the challenge I talked about to their top line. Then lastly, we have seen reduced revenues in our North American operations, and so that's causing some negative leverage around some of those operating sites that is dampening gross margins in the back half of the year.

Okay. Quick point of clarification. Dean, you said 2.1 billion pipeline. That's up 300 million from last quarter?

Correct.

Okay. Thanks.

Thank you.

Your next question comes from Steven Fox with Bank of America.

Hi. Good morning.

Good morning.

Not to beat up too much on that trough statement, but I understand that business has been bleak for a lot of your customers. Inventories are going to get worked off, but when you look at some of the longer lifecycle products, how much impact do you expect, or are your customers expecting them to have on the last nine months of the year, and what kind of true demand levels could we be looking at, say versus a year ago? In other words, what kind of slope do you imagine after March?

Boy, I don't know. That's a great question, one I don't know that I can give you any sort of accurate answer to. There's no question that in general when you look at, on a program by program basis that we're going to see revenue levels in the back half of the year in '09 that are lower than the back half of '08. So for us, it's really the issues we're going to have. Let me just make this statement. We're doing a great job from a standpoint of customer retention and program retention so we're not seeing programs walk away from us, because of the competitive situation in the marketplace. We're really just seeing the impact of end market demand on our customers in the pull-through of the end market demand to us. In our growth here, if it comes, which we believe it will start to, again, happen in the third and fourth quarter, but again, I can't sit here and say this is absolute by any stretch, is going to come from the newer program ramps that are sitting on top of this, additional share that we have won with these customers. That's about the best I can characterize it for you at this point.

Okay. No, that's helpful. Just one clarification. The inventory comments about discussions, inventory discussions going on with your customers, are we to read that as just sort of more full disclosure on your part, or is there a concern that part -- some of the inventory risk during this downturn is transferring back to the EMS provider from the OEM customer?

Steve, I think it's just an acknowledgement on our part that whenever we have a slowing economy inventory issues come up with our customer. And so we want everyone to know he that we are managing that aggressively. We are working through those issues with our customers, and where appropriate, we are booking reserves, which we did in the December quarter and we did in the September quarter. So I don't think there's cause for alarm but it is certainly an issue that we're managing closely and we wanted to make sure we communicated that.

Great. Thank you very much.

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

Good morning. Thank you. So just getting back, actually, to the funnel, that was actually a decent growth quarter-over-quarter, and what I wanted to see if I could get some color on is, does this number, the 2.1 billion, does that reflect some of the downward adjustments that you would have in some of your business outlook? Is that effectively modified? I would look to an example such as the Mechatronics program, albeit it's a pretty small number versus the 2.1, but just trying to get a sense of how that ties to the wins that you have communicated over the last couple quarters.

I'll let Todd take a shot at that then I'll fill in if I feel it is necessary.

Sure, thanks, Sean. With respect to the funnel, Dean talked about our forecasting process that really month by month we're making our best, most accurate assessments to the forecast. The same holds true of the funnel. So any -- and we're working very closely with our customers and with the key contact within our customers to provide the most accurate information, so that we have it for our internal planning and that we can provide it to all of you as well, too. So those are numbers that are updated on a monthly basis and would indicate any down drafts that our customers are projecting or any delays that our customers are currently projecting. Now, that obviously is subject to change as we win those programs and they transition into manufacturing. But that is our best estimate of the size of those programs as of the time of this call.

Yes, let me just add a little bit of, I think, color to the situation, too. I think it's important to understand that we shifted our go-to-market strategy here a number of years ago to the sector based alignment, and we have been building that team with some really exceptional people, and we really turned our go-to-market strategy on our business development team into what I view as a very strong execution engine so I feel very good about the breakdown in each sector and the accountability to go out win business and bring in new business. I would also say the EMS marketplace in general is a pretty troubled industry, and that is becoming readily apparent to customers in this industry. And the companies here that after strategy and a value proposition that is strong and makes sense, have a strong balance sheet, are becoming more and more favored with customers. They are very concerned about the financial stability and, quite frankly, the footprint stability of some of our competitors. So we are starting to see and win business, essentially, as a consequence of our strong performance of our financial strength and of an execution model that really makes sense for these customers. So, you never want to wish for a recession, but in some respects, I think this recession is going to be -- end up being quite favorable to us as we start to move through it.

That's helpful. Thank you. Then if I could just quickly follow up, more administratively, typically will you break out the segmentation of your wins in the quarter, then also what Medical representatives percentage of your Engineering wins.

Yes, I did not do that, you are correct, this time around, and I am trying to see if I got a little -- here, I do have a little piece of paper in here. I don't have the complete percent -- oh, well, I do after fairly decent break down here. In terms of the manufacturing business, I will just give you the count. We announced 14 of them. There was four of the wins in our Wireline sector, two of them were in Wireless, four of them were in Medical, two in Industrial, two in Defense and Aerospace so we had a pretty good spread of the wins. Engineering wins, 68% of the total was in the Medical marketplace.

That's very helpful. Thanks, Dean.

You are welcome.

Our next question comes from Amit Daryanani with RBC.

Thanks. Good morning, guys. Just a question on the inventory, left at the end of the quarter. What was that as a dollar amount in finished goods at the end of the quarter?

I'm sorry, Amit, you broke up. Were you asking for inventory at the end of the quarter?

You guys were talking about how you were left with a little bit more inventory as demand from customers degraded towards the end of the quarter. Could you talk about how much was that increase?

Inventory in total, in dollar terms, increased by about $6 million during the quarter. Days of inventory went up by four days. About half of those -- half of that, two days, was for transition , both new programs coming into Plexus and as we built buffer stock to support transfers within Plexus. The other two days was from slowing, so customers who have lower revenue demands in the future and so as a consequence we have more inventory than we

Got it.

Does that help?

That helps. I guess, Ginger, you guys have announced headcount reductions, curtailing the Mexican facility. I assume all these cuts are probably done to attain or get back to the 20-10-5 model. Can you get back to that model on a 400 million run rate or what's the revenue number you had in your mind when you announced these reductions?

Well, we certainly had the Q2 number in our sights as we were making those reductions, although we certainly don't hope to stay at that revenue level. We are -- we're not going to call the full year yet from a revenue perspective. We are trying to size the business to what we see ahead of us, and we'll make decisions going forward if the business either grows or decreases from that.

Maybe if you could help me reconcile these things. I think earlier in the call you made a comment, you expect margins to be sub-10% through the end of the year but now I think you're telling us the reductions are done in mind to get this 20-10-5 model. Essential you assume that the revenue rate stays at these levels for the next two quarters?

No, I don't think you can make that assumption. We have sized the business to the revenue run rate we see, and our best case, given what we're seeing with the investments I walked through earlier, we have a positive impact from Boston coming out, but we have invested in new sites that are a modest drag on gross margins, the two new sites, Hangzhou, China and our site in Appleton, and with some of the reductions in revenue, particularly in North America, those sites are seeing lower performance than we would like to see based on the amount of revenue they have, and that gets our gross margins to that 9 to 9.5% range.

Got it. Thanks a lot.

Your next question comes from Jim Suva with Citi.

Thanks. Dean, you had mentioned that your guidance last quarter was pretty conservative. Can you tell us about for your March quarter, are you taking the exact same approach, meaning rolling up your customers and taking it down by a similar percent, or are you just rolling up your customers, and is your conservatism, if any, more or less than what you gave for December?

That's a good question, Jim. What we did is we used the same methodology. So we have a method that we've typically used during periods of growth when we started to see the economy start to soften, in anticipation of that, we started to apply a more conservative bias to the way that we provide guidance, and we've continued that bias here into the coming quarter.

And has that magnitude of that bias remained stable, meaning if you adjust it down by 5 or 10%, is it the same amount, or compared to last quarter did you increase that bias to be even more conservative?

I'd say it's a similar conservative bias.

Okay, great. As a quick follow-up, when we think about your new ramps that are in the pipeline, and based upon your long history there, when we go through an economic downturn, do those ramps become more at risk than the existing product as end-to-end customers may be a little more cautious on receiving goods because they get in freeze or shock mode for spending, or does the new pipeline of wins have a little bit more protection than the existing products already out there?

I think it's -- it really is a customer and program by program specific issue. I think some of these ramps are product that replace other technology, and new and improved higher performance technology. And so particularly with existing customers, there's a fairly, I would say, high level of confidence that those programs will ramp up and be successful. In other cases, there are new to the market technology, the market is maybe being developed for that technology and perhaps that adds incremental risk. So I would say, you have to look at it and say, hey with some of these, certainly there is an incremental risk, but I don't know that you could generalize too much about it.

Okay. Last housekeeping question. In pastimes you have talked about plants to consider to expanding into Europe with the global recession are we looking at postponing or delaying that? It just didn't come up during the conference call so far.

It did not come up during the conference call. I'd kind of like to -- that's a good opportunity for me to talk about the global footprint in general, and I'll get to your question on eastern Europe. I want to remind everybody that we have been talking about further expansion in China. Part of that expansion was in Xiamen, where we already have an existing facility. That existing facility was doubled in size last year and we had talked about putting up a second building in Xiamen, China, right adjacent to the existing facility. We have delayed that investment at this point. Hangzhou, we, of course talked about investing there, we did invest in Hangzhou, China. We feel it's important for us to be in closer proximity to decision makers in the Shanghai region of China. That plant started operations in our first fiscal quarter here this year, and as I said in my script that would begin shipping product here in the second quarter. So we have that investment up and running. Certainly it is a drag on earnings and it is an opportunity for us to essentially pull back, if we had to, although we don't think it's the rate thing to do right now based upon the pipeline of opportunities that we have in front of us and the commitments we've made to customers.

Now, moving on to Europe, we still believe that the investment into eastern Europe is an important part of our global footprint. During the last economic implosion we were bold and made an investment in Penang, Malaysia and China and that turned out to be a very wise decision. We believe that the eastern European decision is also very important. We have a number of customers we have been talking to here over the last couple of quarters about seating a new facility there. So we're working very hard to try to get the facility identified and get started up. Now, we would see it as a purchase or a lease, I would say, is more accurate, a lease of what we'll call an existing building, and that we would be able to very carefully control our costs's as we bring that facility up. So we still see that even in the current economic climate, with what we see out in front of us as an important investment to make. Again, it's one that if everything starts to come unraveled here further in the back half of the year, one that we could defer capital investment, that sort of thing, and the hiring of people into the facility.

Great. Thank you very much.

Thank you.

Your next question is from Brian White with Collins Stewart.

Hi, good morning. Just on the Engineering front, I think this is the first quarter you have talked about some softening in Engineering, and I think you focused on product development. If you could just give us a little more color on what's going on there. Is it market share? In sourcing, is it not putting out as many new product by your customers?

What I commented on, there's really a couple of groups within -- or several groups within our Engineering Services business, and, of course, one of the groups is test equipment development. So these are the folks that work carefully with either our product development organization or our customers product development organization's to put in place test solutions that go into our manufacturing operations to support new program ramps. That group is very busy, which shouldn't be a surprise considering we've been winning new programs at a fairly rapid clip. The new product development people, however, although they're currently busy, it's a little bit more hand to mouth.

So the visibility to new programs has come down. There's a little bit of let's protect our internal engineers here in the short run going on in our customers' organization so we're seeing a bit of a pull back, and we did do some trimming of headcount in that organization. Now, at this point, we think that we're fine and that we believe that as the economy continues to stay soft here we'll actually see an acceleration of outsourcing of product development which is not inconsistent with what we've seen in prior difficult economic cycles.

I thought in the last downturn, actually, the Engineering business, as I remember, came under significant pressure on customers did in source.

We had a very different organization at that point. So when you look at the -- part of that organization, we had a very large PCB Design organization that was really kind of a merchant operation. So we took that organization, just basically illuminated it from the portfolio. So if you look inside of what really happened here with outsourcing product development, as we moved through that recession we saw customers have headcount freezes in their own engineering organizations, or reductions in headcount, but they still needed to get their product development efforts done that they were going to move forward. So we started seeing more outsourcing as we started to move through the recession.

Okay. So you are not concerned about the Engineering business here in the downturn?

Here I'm concerned. We've got a lot of focus on making sure we bring new programs in, but it's not something that's keeping me awake at night, and, of course, the Engineers are -- we can deploy them, the product development people to help with test equipment. We can also have them work on productivity initiatives and other things within manufacturing, so he we've got some extraordinarily talented people in that part of the organization. The size of that is not something that's going to keep me awake at night in terms of negative leverage from that organization.

On the Medical account if you could give us more color here Dean, the decline, significant decline in the March quarter. What is it driven by?

Well, let Todd answer that. That's what I brought him in the room for.

Sure. Hello, Brian. So if we talk about our significant Medical account, there's a few different factors that are occurring with that account. One is they typically are seasonally soft in our Q2, and seasonably very strong in our Q1. So we tend to typically see a pretty significant difference between Q1 and Q2. This is not atypical at this point. On the -- on other fronts, though, there's definitely a reduction in health care capital expenditures that are going on that's impacting certain portions of their business of, call it higher end imaging equipment. The deficit reduction act is also still playing a role in the procurement of new equipment in most spaces. There's also still a bit of an impact from the previous FDA shut down where that product line has not fully recovered. So while it's certainly out in the marketplace and there are no issues from a regulatory standpoint there, the end market demand for that product line has not recovered to levels previously projected.

And just in the Medical area, I mean, Medical in general is not as cyclical as the rest of the portfolio, but if you looked at your Medical portfolio, what percentage of it do you think is going to capital sensitive and therefore somewhat cyclical?

It's certainly -- first of all, I'd say very much a reducing portion of our portfolio, and that's been one of the big impact of our Medical sector team, is developing a more diverse customer base, and we're starting to see really the fruits of that effort, the last several quarters. So it's on the order of, say, maybe a third to less than a half of our business, right in that range. And an increasingly smaller piece of the business.

Okay. Thank you.

Next question comes from Dale [Worthington] with Dale [War] Capital.

Yes, quick question as it relates to inventory buildup, for this, in terms of your relationship with these guys in terms of you mentioned that you are talking to them about the buildup of the inventory.

Thank you, Dale. So our contractual arrangements with our customers, if we purchase to their requirements they are ultimately responsible for the inventory. So although we would purchase it and hold it on our balance sheet, contractually, they are responsible for taking it either as finished goods, when we build it for them, or if we are not able to build it based on other issues or lack of demand they would need to pay us tore that inventory and take delivery or pay us a deposit in many cases in which we hold their inventory for a period of time but we also have cash on our balance sheet to offset. That we record those cash deposits on our balance sheet, in a liability, and that increased during the quarter ended in December by about $5 million, and so we are actively managing those account that have inventory that might be in excess of would they need right away to make sure they live up to their contractual obligations and that we manage the risk on our balance sheet.

One last question. Given the change in landscape, what would your revenue run rate be in terms of breaking point of view? At what run rate would you break-even?

At what run rate would we break-even?

Yes, revenue.

If you look at our March quarter, we've given the range of $3.75 to $4.05. At that rate we are well in excess of break-even we have earnings below what we would like to see but certainly good earnings in comparison to the industry. So I think at this point we're not ready to disclose what a break-even revenue rate would be. It would be obvious significantly below what we're seeing for the second quarter.

Thanks.

Thank you.

There are no further questions at this time. Are there any closing remarks?

Yes, I'd just like to make a few closing remarks. We're definitely in a very difficult period of time, and as said, we still remain optimistic. I think that Plexus has a very strong brand in this industry, and we're doing a great job winning new business. I think as we're trying to telegraph, we are not retrenching. We're making sure that we prudently manage our costs because there is a fair amount of uncertainty here in front of us. But at the same time, we feel quite good about our longer term prospects, and so, therefore, we have not gotten to the point where we have taken sort of meat axe, I would say, to our cost structure. We still feel it's important to make certain investments to enable longer-term growth, they are investments that we can slow down and trim if need be if things get worse but at this point we still feel pretty good about the long-term prospect of Plexus and, of course, our ability here to manage through what's going to be a difficult quarter and hopefully get back to some growth in the back half of the year, then hopefully enjoy a decent fiscal 2010 as we are all hopeful the economy begins to recover. So I want to thank all of you for the support, the great questions today, and I want to thank Plexus folks around the world for working through what's really been tough but doing the right things here on behalf of our customers and shareholders. Thank you.

Thank you for participating in today's conference call. You may now disconnect.