Plexus Corp (PLXS) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp conference call regarding third fiscal quarter 2009 earnings announcement. (Operator Instructions)

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

Thank you, Phyllis. Hello. 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, such as statements in future tense and statements including believe, expect, intend, plan, anticipate and similar terms and concepts are forward-looking statements. Forward-looking statements are not guarantees concerning 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 SEC filings, particularly the risk factors in our most recent 10-Q filing and Safe Harbor and fair disclosure statement in yesterday's press release.

The company provides non-GAAP supplemental information. For example, our call today may refer to earnings or EPS excluding restructuring cost, goodwill impairment or discrete tax adjustments. Non-GAAP financial data is provided to facilitate meaningful period to period comparisons of underlying operational performance by eliminating infrequent or unusual charges. Similar non-GAAP financial measures, including ROIC, or return on invested capital, are used for internal management assessments because such measures provide additional insight in to ongoing financial performance. For 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 third quarter commentary about our market sector performance and outlook, our new business wins and opportunity funnel, capacity utilization, and he'll provide guidance for the fourth quarter. Ginger will follow up with details about third quarter financial performance and make some additional comments about fourth quarter of fiscal 2009. Let me now turn the call over to Dean Foate. Dean.

Thank you, Mr. Ninivaggi. Last night we reported results for our third fiscal quarter 2009. Revenues were $379 million with GAAP EPS of $0.23, both results were in line with our prior guidance. Our fiscal third quarter unfolded generally in line with our expectations with overall revenues declining approximately 3% sequentially. Relative to our earlier expectations, end market strength in our wire line networking sector offset greater end market weakness in our medical sector. Generally speaking, we noted a reduction in demand volatility during the quarter, perhaps a signal that our customers' end markets may be stabilizing.

Turning now to some additional comments on our sector performance in the third quarter and our current expectations for Q4. As I mentioned, our wire line networking sector performed better than our earlier expectations for a flat to down quarter as stronger end market demand drove the sector revenues up about 4% sequentially. Notably, seven of our top ten accounts beat their earlier forecasts.

Looking ahead to Q4, we currently expect another growth quarter in the low single-digit percentage range for our wire line networking sector as six of our top ten customers are forecasting a growth quarter. Our wireless infrastructure sector performed slightly better than our expectations during Q3, declining about 7% quarter-over-quarter versus the 10% decline projected earlier. Three of our top five accounts experienced improved demand during the quarter. We currently anticipate that our wireless infrastructure sector will perform very well in Q4, with revenues expected to be up approximately 20% sequentially as a consequence of recent program wins and improved end market demand for legacy programs.

Our medical sector was down 14% sequentially in Q3, performing below our projected decline of 8%. Seven of our top ten accounts were down during the quarter and seven of ten missed their earlier forecasts. Many of our medical sector customers are enduring unprecedented end market challenges as a confluence of issues pressure their customers and create longer term market uncertainty. The health care providers themselves are perhaps in need of resuscitation. According to our medical sector's team's research, over 60% of US hospitals are expected to be unprofitable in 2009. The Government Deficit Reduction Act has reduced reimbursement for certain procedures, particularly imaging. The continuing rise in unemployment results in a loss of patient health insurance causing reduction in care and an increase in no-pays.

The economic situation is causing reduction higher margin elective procedures. The financial market decline has resulted in reduction in endowment income and the uncertainty of government provided health insurance legislation is likely making it difficult to plan capacity investments which are largely on hold. It is not a good end market for some medical equipment providers. Our medical sector outlook for our fiscal fourth quarter indicates that we will see another decline of revenues which we currently anticipate will be in the mid single-digit percentage range. Six of our top ten accounts are forecasting weaker demand. Longer term, we are optimistic that we can return this sector to growth as we continue to win new programs and new customers that are diversifying our medical sector portfolio, reducing our dependency on big ticket imaging technologies.

Our industrial commercial sector declined 4% quarter-over-quarter, performing slightly better than the 7% decline anticipated by earlier forecasts as seven of our top ten accounts experienced improved demand during the quarter. We currently anticipate that our fiscal Q4 will be a strong quarter for industrial commercial sector. Revenues are projected to be up approximately 20%, as seven of our top ten accounts enjoy stronger demand and we continue to ramp a couple of newer programs. Revenues in our defense security and aerospace sector weaker during Q3 than earlier expectations. Demand continues to be fairly lumpy in this sector and we currently expect high teens to 20% growth during our fiscal Q4 in part due to the first production quantities of recent program wins.

Turning now to new business wins. We again enjoyed an exception quarter of new business wins and encouraging trends established three quarters ago and further evidenced that our disciplined sector base go-to-market strategy coupled with our strengthening brand delivers a powerful value proposition to customers looking for the security of flawless execution and a coherent strategy to provide them with a competitive and enduring service offering. During Q3 we won 15 significant manufacturing programs which we currently estimate will deliver approximately $188 million in annualized revenue when the programs are fully ramped in production over the coming quarters, subject of course to the risks around the timing and the ultimate realization of the forecasted revenues. The majority of the wins are with our current customers resulting in share improvements in our core customer portfolio. We won new programs in all of our sectors. Our overall funnel of manufacturing opportunities continues to be strong with $1.9 billion of qualified new business. The breakdown of the opportunities, per sector, is reasonably balanced and healthy.

On the engineering front, we won approximately $14 million of new programs during the third quarter, our overall outlook for engineering services is improving. Some programs that were put on hold during the worst of the economic downturn have been reactivated and we continue to benefit from improved execution, engineering services business development function that is now aligned with our sector base go-to-market strategy.

Addressing capacity utilization and global growth. Our [as-tools] capacity utilization in Q3 was was approximately 72% overall for the corporation. Utilization rate for our North American operations was below the corporate average due in part to the inclusion of our newer Appleton [II Mectronic] site here in Wisconsin and the low utilization rate at our site in Juarez, Mexico. Our utilization rate in Europe is consistent with the overall corporate number but is expected to come down when we activate our new facility in Aradia, Romania. Utilization rates in Asia remain higher than the corporate average and our new facility in Hangzhou, China has just been awarded its second significant customer program.

Turning now to our guidance. We are establishing fiscal fourth quarter 2009 revenue guidance of $380 million to $405 million with EPS of $0.27 to $0.32 excluding any restructuring charges and including approximately $0.04 per share of stock-based compensation expense. Our guidance suggests that we are finally going to see modest revenue growth in our fourth quarter after enduring three quarters of declining revenues. The growth is largely driven by new program wins and end market pull-through from legacy programs as a consequence of channel inventories that are, in many cases, depleted. While certain end markets are indicating signs of life, I would characterize our visibility as limited and the demand environment lumpy as customers struggle to forecast longer term demand. This environment creates a load and chase reality where some production orders are received with short notice and we then proceed to chase the material to meet the ordered delivery requirements, thereby minimizing component material liability. This reality drives some inefficiencies in the production environment that will be forced to endure until our customers' confidence in their end markets returns.

In our press release yesterday I cautioned that relative to margin performance in Q4, our margin performance in the first half of fiscal 2010 will be pressured due in part to mix shift compensation-related cost increases and capacity investments that support new program ramps. Longer term we remain optimistic about our business as we continue our strong pace of new business wins with new and existing customers. While we cannot predict when our customers' end markets will fully recover, we believe we are well positioned to benefit as recovery picks up steam, as improved demand across enhanced portfolio programs drives utilization rates higher and delivers the leverage in our model. I would now turn the call over to Ginger for her detailed review of the numbers. Ginger.

Thank you, Dean, and good morning, everyone. Revenue and earnings per share were near the top end of our guidance range for the fiscal third quarter. Gross margin was 9.1% for the fiscal third quarter, in line with our expectations and slightly lower than the fiscal second quarter results of 9.2%. Selling and administrative costs were $22.5 million, in line with expectations for the quarter, and consistent with spending in the fiscal second quarter. The cost cutting measures that we initiated in the fiscal second quarter delivered the savings anticipated during the fiscal third quarter. Also as expected, we did not have any further restructuring charges during the current quarter. SG&A costs as a percentage of revenue increased slightly from 5.7% in the second quarter to 5.9% in the third quarter. As a reminder, we reduced approximately 10% of our corporate staff and approximately 17% of North American operating head count in the fiscal second quarter. The full fiscal year 2009 benefit of those reductions is estimated at $2.5 million to $3 million. These reductions in head count, along with continued controls over discretionary spending, contributed to achieving our gross margin expectations for the quarter and delivering SG&A spending at the forecasted level.

The last item for discussion on the income statement relates to our tax rate. As discussed in the press release, our effective tax rate for the full fiscal year is estimated to be 8%. This resulted in a 10% tax rate for the third quarter as we adjusted the full year to the new 8% tax rate. The full year rate of 8% is a slight increase from the 7% we estimated last quarter due to higher forecasted earnings and higher tax jurisdictions. This is primarily the result of a strong earnings forecast for our North American sites in the fiscal fourth quarter driven by customer and product mix.

Moving on to the balance sheet and cash flow, the cash conversion cycle decreased during the quarter to 77 days, one day lower than the second quarter cash cycle days of 78 and one day lower than our expectations. Days in receivables increased by two days to 49 days based on variation in the timing of payment from our customers. Days in inventory decreased four days to 83 days. The absolute dollar value of inventory decreased by approximately $23 million, or about 7%. This was a good result in the quarter that was challenged from a revenue perspective.

A few other points to note about inventory during the fiscal third quarter. First, we have a total of $25 million of cash deposits on our balance sheet for about seven days of inventory which helps to mitigate our inventory risk. Second, we have a few customers who have had large inventory positions as a result of reduced demand in their end market. We have been working closely with these customers to resolve the excess inventory issues in accordance with their contractual obligations and we are making good progress towards successful resolution aided in some cases by increase demand.

Accounts payable days increased by one day to 55 days, sustaining accounts payable at this level was the result of continued effort in conjunction with our major suppliers to extend payable terms and/or cash cycle. We have made significant improvement in the last two quarters in accounts payable days, increasing five days from the 50 days at the end of our fiscal fourth quarter of 2008. Free cash flow for the quarter was again very healthy at $14.8 million, attributable roughly equally to earnings and working capital improvements. We spent $11.9 million in capital expenditures for the fiscal third quarter. Year-to-date we generated free cash flow of approximately $65 million.

I'll now turn to some comments in the fourth quarter fiscal 2009. All of these comments are before any potential restructuring charges. Our internal financial expectations for the quarter will again be lower than our targeted 2010-5 model based primarily on the lower level of revenue. Our current forecast for the fourth quarter shows a relatively strong earnings quarter, primarily the result of a favorable mix of customer demand during this particular quarter. Gross margins should be slightly higher than our results in the last two quarters between 9.5% and 9.8%, based on our forecasted customer mix and the forecasted level of revenue.

Depreciation expense is expected to be approximately $8.7 million to $9 million dollars in Q4, up slightly from the $8.7 million in Q3. SG&A should be in the range offer $22 million to $22.5 million. This is consistent with spending in the second and third fiscal quarters, the result of continued restraint and discretionary spending and restructuring completed in the second fiscal quarter. The revised tax rate for fiscal 2009 is projected to be approximately 8%, which is the rate used for the third fiscal quarter as well. I will remind everyone that we have seen variation in this rate based on the mix in forecasted earnings between taxing jurisdictions. Earnings in our Asian locations benefit from negotiated tax holidays in both Malaysia and China while US earnings are taxed the full 38% federal and state tax rate. This increase in tax rate was primarily the result of a strong earnings forecast for our North American sites in the fiscal fourth quarter driven by customer and product mix.

Our expectations for the balance sheet are for the key balance sheet accounts of inventory, accounts receivable and accounts payable to increase slightly in dollar terms for the fourth quarter. Based on the forecasted levels of revenue, though, we expect these increases will result in reduced cash cycle days. We currently expect cash cycle days of 74 to 76 days for the fiscal fourth quarter, another sequential decrease. There are a number of moving pieces in our working capital for the fourth quarter, including inventory for new program transitions and bringing on board new suppliers to support these programs. These suppliers may have different payment terms than our standard supplier mix. Over time we plan to improve AP days on these programs as they come in line with our standard supplier terms.

With one quarter to go, the capital spending projection for fiscal 2009 is estimated to be in the range of $55 million to $60 million. This is a reduction of $5 million from the estimate I gave last quarter, the result of continued scrutiny of our capital spending plan for the year. Based on this level of capital spending, we expect to generate very healthy free cash flow for the year of approximately $65 million to $70 million. We are taking what we believe are prudent steps to manage spending, capital expenditures and working capital investments to balance continued growth and current results to our shareholders. Because of our strong and new program wins in the recent quarter, we need to continue to invest and we will do so cautiously. While we continue to make those investments, we have also demonstrated our ability to aggressively manage our SG&A spending and our investments in working capital. Before we take questions, I wanted to thank everyone that participated in our Investor Day on June 11. It was a very positive event and a pleasure to share our strategy with many of you in person. With that, I will open the call for questions. We ask that you please limit yourself to one question and one followup.

(Operator Instructions) Your first question comes from the line of Reik Read with Robert Baird and Company.

Good morning. Can you guys just talk a little bit more about the inventory levels. I guess in two ways, one, the inventory that you have on your books and the inventory levels that your customers may have, what the status is, and to the extent that that inventory is on your books, what impact that had on production?

Well, I think -- I'll start this, Reik, and then I'll maybe turn it to Ginger. Generally, in terms of what our customers have for inventory, I would say generally speaking, and we just went through a fairly strong analysis of this with the sector teams, generally speaking the customers' inventory of finished product that is shippable to their customers is at a quite low level and I think that that is in many cases completely depleted, as I said in the script. So that is causing any demand that happens in the end market to flow quickly back through us which is causing what I talked about as a slow chase mentality. Ginger, if you want to take it a little bit further in term of what's on the books.

Reik, as I said in the script, inventory is actually down for us dollar wise and days of inventory from Q2 to Q3. Did that answer your question?

You guys mentioned it was an issue last quarter, I guess I'm wondering how much kind of went through and what are the actions that you're taking to try to reduce that? How much longer does that take?

Well, I think that there is a mix of inventory issues. So obviously we need inventory on the balance sheet and some of the inventory we're bringing on is for new programs. As you know, we have a new level of high new program wins. We are adding inventory for those. We have a handful of customers, as I said, we would consider their inventory levels to be larger than we would like, primarily related on a mismatch between when we purchased the inventory and their end market demand. We've worked with those customers. We're actually making improvement on those inventory, balances and those were down from the second quarter to third quarter. So I think we are working through all of those issues appropriately and I don't know that we see any--anything else significant that we can discuss about the inventory.

Just to add to that, I would say that Ginger also talked about that we pursue cash deposits with customers as well for inventory at risk or slow moving inventory, so there is a fairly substantial offset for the inventory position with the cash deposits.

Okay. And just on the medical side of things, Dean, you talked a lot about the issues that your imaging customers had faced there and you guys have been working on trying to offset that and it seems like the engineering side of things has been reasonable and improving. So it suggests that the pipeline there is starting to build. But how long does that take to kind of convert that into revenue to really offset what you're seeing in that core imaging area?

Yes, I think there's a couple of things. You're right. The engineering organization is -- has quite a number of active programs in the medical area and typically it is 50%, 60% of the revenues, and they are bringing some of those technologies into the market and into manufacturing. So we're seeing some success of that strategy now. It's just that the revenues associated with those programs are pressured for the litany of reasons that I went through in the script. So we're not seeing as strong a demand for the technologies that are going to diversify us away from imaging and the collapse of imaging in that marketplace has just been dramatic.

Now, what can we do about that? We're driving hard to diversify that business. We moved more toward implantable support devices, towards some drug delivery kind of technologies or, well, I'll say dispensing technologies that are used in hospitals, you might imagine those technologies are under pressure, some equipment that's used in the laboratory settings, in some cases some other hospital equipment, and patient monitoring devices. And we're also moving more toward what I would say lower cost imaging technologies, more portable imaging technologies where there is strong demand not only perhaps North America but, in particular, in other parts of the world. So those technologies I think are going to be good for us on a longer-term growth basis, but it is just very difficult to overcome what had been a very high concentration for us in diagnostic imaging with what I call kind of more expensive equipment, more big ticket equipment that is really under extraordinary pressure.

Great. Thank you, guys.

You're welcome .

Your next question comes from the line of William Stein with Credit Suisse.

Great, thanks, good morning.

Good morning, Will.

I'm wondering if you can comment on Coca-Cola, we hadn't heard them mentioned on this call. Obviously the big customer ramping, big high-profile customer. I think you talked about $11 million for this year's revenue and big growth for next year. Can you update us on that?

I didn't mention it and the reason is because we talked about it as a win some time ago and we talked that it could be top five, top ten customer here as the program unfolds. I think the update on that is that the program is continuing along in earnest and fast. We also have confirmed purchase orders for the assembly of the technology for fiscal 2010, and so we're continuing to build early production units now and we expect the ramp-up of that program as we move into 2010, and probably the way to think about it is the excitement from that would probably begin to show itself more toward the back half of the fiscal year.

Great. And then regarding fiscal 2010 overall, you had a slide in your analyst day as well noted as not guidance but it did show internal plan for I think over 20% growth in fiscal 2010 versus fiscal 2009. Is that what you're still driving for internally or is that no longer achievable?

As I said at the thing, that was the sales guides. I was not going to stand behind that number. They were setting their goals very high. I think it is way too early to make commitments on 2010, although we fully expect to see some strong revenue growth in the fiscal year. But we'll have a better feel for that when we got into our fiscal year-ending conference call and we get a better sense of how the end markets are going to fare. Clearly the pace of new business wins would suggest that we should be able to achieve some good growth numbers in 2010. The 20% numbers is a pretty lofty goal that was established by the sales folks. Which is great, they drive hard. But in terms of creating a plan or a model that you might -- guys might put together, I wouldn't go anywhere near that number yet.

Thank you.

You're welcome.

Your next question comes from the line of Sherri Scribner with Deutsche Bank.

Hi. Thank you. Dean, you made a comment about the gross margins being under pressure in the first half of fiscal 2010. I was hoping you would elaborate on that a little bit. Is that related to mix, is it related to weakness in medical? I was hoping you could give some more detail.

Let me comment on medical and I'll let Ginger take it from there. Actually, at this point in Q1, we're currently expecting medical to be up a little bit. We'll see if that holds up. But we typically see a little bit of seasonal pull on medical in what is our first fiscal quarter of the calendar year-end for many of our customers, fiscal year end for many of our customers. And it is also important, and we keep trying to drive this home, is that medical overall doesn't necessarily have better margins than any of our other sectors. There seems to be a general thought process that that's the case. It is true in some of our sectors we have some higher margin business and lower margin business, but by and large overall the medical sector does not drive higher margins at least down to the operating line because of some of the higher regulatory costs required to support it. I wanted to make that point. From there I'll give it to Ginger.

Thanks. Just a couple of comments about first half. We wouldn't normally make any comment about the first half as we report our third quarter earnings, but felt like it was appropriate to do so because Q4 guidance looks like a relatively strong earnings quarter compared to the level of revenue. And as I said -- as we said, that's based on particular mix situation that we have in the fourth quarter. As we look forward to the first half, there will be some pressure on the margins. We don't expect at this point to be at the levels that we're expecting for the fourth quarter. Some of that is mix. Another portion of that is we do have -- that is the beginning of our fiscal year, and so we do have cost increases that come into our modeling then, primarily a return to accruing variable incentive compensation. So, as you know, it was a difficult year for us in F 2009. We don't have any incentive compensation of any significant amount of accrued for F 2009. As we move into F 2010, we hope that situation will be better. So beginning in the first quarter of F 2010 we will begin accruing incentive compensation. And then the last piece is we have added new footprints over the last year including new sites in China and Aradia that are coming up to speed. As we add new customers we generally have a couple of quarters of drag and so we'll see some of that in the first half as well.

Okay. Just as a follow-up to that, I'm curious, it sounds like the gross margins, the guidance you gave was a little bit below your targeted model and it sounds like it will be lower than that in the first half of the year. I'm just wondering, what kind of revenue levels or mix really do we need to get back to the targeted margin levels and do you think that happens in the second half of 2010 or what are you thinking there?

We've talked about this before. I think that revenue somewhere in -- near the $450 million a quarter level, that was the last time we were back at our target 2010-5 model. I think something like that is going to be the revenue level we're going to need to see before we get back to our model. And when we do that, we're not quite ready to comment on that. I don't think it's the first half of F 2010.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Morning, everyone.

Morning.

Just as a follow-up to Sherri's question, maybe if you could in a dollar amount quantify some of the headwinds. Are we talking maybe $1 million extra from the incentive comp and thinking about the new facilities coming on line, is it something like a penny a quarter per facility? I don't think you mentioned Mexico in there, but it was in the prepared remarks, what is the drag we're seeing on a dollar basis still from Mexico?

Yes, Shawn, I'll take the three of those in order. First, beginning in the fiscal Q1 of F 2010 we begin accruing incentive compensation again. That program for us is somewhere between $12 million to $14 million of spending in a year. So that could be $2.5 million to $3 million a quarter. So that is part of the drag that we'll see in the first fiscal quarter. The second one was related to underperforming sites, and we talked about this on the last quarter. I think the drag in total from the new sites is about $0.02 to $0.03 in total. And then, as you said, we do continue to have an underperforming site in Juarez, Mexico, that has been dragged. We expect -- we lost about $2.7 million in Mexico last year. I think it will be a similar amount in fiscal 2009. That site continues to be challenged in the first half of F 2010. All three of those factors will still be in play in the first couple quarters of F 2010.

Okay. Second, in terms of usage of the cash balance right now, which is over $200 million, I'm assuming some of that will be required to support growth in the early 2010, particularly if the sales forecasts by your sales team is 20% for the full year is correct. But is there any other uses of cash that we should be thinking about over the next 6 to 12 months?

Let me just remind everybody, that's the sale's lofty goal.

You're right, Shawn, we certainly will need some of that cash to support new program wins and we see a little bit of that in the fourth quarter as we begin investing in working capital again on a dollar basis. I think other than that, we do not have any plans for other uses of cash. We do not have a current share purchase authorization approved by our Board nor do I expect we would ask for one in the short term. Our view is that we want to conserve that cash over the next year as we ramp these new customer programs and that any decision about uses of cash would not be a fiscal F 2010 decision.

Okay. So maybe just a quick follow on, doesn't sound like with new capacity coming on line and any of the ramps happening in the first half that you'll need to deploy money toward new PP&E by a significant amount in terms of just the footprint either?

Yes, I think our footprint decisions are done, at least for the near term. There will be equipment that goes into those sites as new customers come on line. As you know, we bring on the equipment and the people as we see the customer programs committed in one. That's generally not a big commitment, so we'll bring those on incrementally. So I think that it will still be -- we are obviously generating a lot of cash this year. I expect that we will generate cash in F 2010 as well and, at this point, we don't have any other plans for utilizing it.

Okay. Thanks a lot.

You're welcome .

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

Yes, good morning, thank you. Just a follow-up -- sorry, once more -- on the margin pressures that we'll see in the beginning of 2010. Is that purely as a consequence of the mix makeup or is there also an element of new program wins within that mix where there may be some initial inefficiencies that are going to create the drag?

That's a very good question. Let me just start by saying that we try not to use ramping of new programs as an excuse for underperforming end margins because you are always, if you're growing you're always ramping new programs. So it kind of says that you're never going to get to your model if you always have new program margin pressures. But, having said that, we're in an environment right now where the existing programs, our legacy programs, are not showing a lot of demand. So the efficiencies that you would typically get from programs that you have fully ramped and are legacy in nature normally would cover -- offset the inefficiencies of the new programs that you're bringing on board. Now we're in a situation where current market demand for existing programs is, in some cases we're seeing some improvement, but generally it's kind of sluggish or flat and we have all of the new programs coming on board which, of course, come with the inefficiencies as you start them up. So at the moment we're using it somewhat as an excuse for underperforming and it is, in fact, part of the issue, we're just not getting the economies to scale that we normally would get to offset those ramps.

That's helpful.

I would add one more comment. Don't forget the guidance -- the commentary we're giving you about the first half of F 2010 is in comparison to a relatively strong Q4. So we said we see modest sequential growth in the first half of F 2010 but a little pressure on margins, and our commentary here is we don't want people to assume, A, that we can maintain the strong performance in Q4 or, B, we don't want people to overestimate how soon we get back to our 2010-5 model. So I don't see a worsening picture for the first half, but I want to caution people that it won't be -- we won't that quickly get back to our 2010-5 model.

I just also want to comment that we're not trying to have you over react to this and we certainly don't want to give the impression that the longer term that the model is in jeopardy. At this point we are not walking away from the model. We believe it is achievable. It is just that we are, when we're coming up through the turn here where we have been managing down now for some time while at the same time we're making investments to support longer-term growth and we're continuing to bring in new programs, coming through the turn is going to be a little bit, I don't want to call it messy, but it's going to be a little bit challenging as we come through the turn and get back to growth and we start getting some get economies of scale. So that is really the issue and I fully expect that we're going to find that model within reach as we start moving through 2010. It's just a little bit early to give you too specific a sense of how 2010 is going to unfold yet given the overall economic uncertainty.

That's helpful. I follow. Quick separate question. Is there a way for you -- can you elaborate on the mix of some of the wins that you've had in the quarter and then the percent medical on the engineering side?

Yes, the percent on the engineering side last quarter we had about 50% of the wins were in the medical space. So the engineering side continues to see an out-sized win rate in medical and the other higher percentages were in what we call defense gear and aerospace market was the next largest for engineering. In terms of the overall manufacturing wins I had talked about, there were 15 of them. As I said, we ended up with wins in all of our sector. It turned out that this -- in all sectors, it turned out this past quarter that the larger wins were in wire line and in industrial commercial sector, and we had some smaller wins in medical and wireless, and I'll probably leave it at that at this point.

That's very helpful, thanks very much.

You're welcome.

Your next question comes from the line of of Amit Daryanani with RBC Capital Markets.

Thanks, good morning, guys.

Good morning Amit.

I have a question just to follow up on the ramp of the new businesses that we won the last few quarters maybe. What it appears yesterday was talking about how some of the past wins are running about 50% of the initial expectations they had when they initially won those programs. Are you seeing revenue impediments to the past wins?

As you might expect there is a tremendous amount of variability here to those numbers given the current market. Some of them definitely have seen a dramatic hair cut in terms of the run rate or they have been delayed a quarter or so in terms of the start-up. So we are, in effect it is having a near-term effect on revenues. But there are others that are coming out of the gate pretty much as advertised, so it's a -- it is just a very kind of mixed bag, I would say, in terms of what we're seeing. But it certainly isn't as strong as what you would expect in a stronger economic marketplace.

Got it. And then now this -- the new sites that you've got online, I think you said China and Romania, how much of a head wind do you think was on the EPS line in the June quarter and how much do you think is going to be a head wind in September quarter for us?

Yes, I think for the June quarter kind of $0.02 to $0.03 of EPS head winds. We were just starting up in Aradia so costs there were fairly modest, I think for the fourth quarter I'd say probably a penny above that, $0.03 to $0.04. There is the situation as we win new customers as we did in Hangzhou, we added our second customer, it is a little harder because we are going to add costs when those customers arrive and build revenue. I would say $0.03 to $0.04 for the September quarter.

Got it. Finally, do you think there is a desire to probably do more restructuring or cost cutting to achieve some of your historical margins or is the desire, given all the customers [worry] I guess is just wait for the sales to ramp back up into the model?

I'll start that, Amit, and let Dean add commentary. I think the results we delivered in the second and third quarter, although not up to our financial model, were still good results and so we feel like we've struck the right balance between restructuring and cost cutting and delivering results. One of the challenges we have is we cannot cut so much that we can't deliver to these new programs that we're winning because that is our future growth and we need to be sure we can support that. At this point we don't have visibility to additional restructuring but, of course, we could do that if the situation changes or if the revenue picture changes from what we see now.

Ginger, there is probably not a lot more to say because I think you hit the nail right on the head. If we were not winning a lot of new business clearly we would have to take some action here to take costs out in order to get ourselves back. But with the new business wins it is extremely important we give preference to our customers and to execution, and that's ultimately what's going to continue to help us drive market share gains and that is what we're focussed on doing. That said, if all of a sudden we would see another leg down in the economy and things would get dramatically worse, we do have a series of actions that we have already identified that we have sitting on the shelf that we could execute on if we absolutely had to. But at this point we don't anticipate having to execute on that plan and we feel like we are, we got visibility here now to what we think is going to be some growth starting up and some improvement overall as we start to move through 2010. So we -- I feel like this is -- I'm pretty optimistic at this point. I feel like things are unfolding pretty decently for Plexus at this point in what I would view as a fairly troubled EMS marketplace.

Got it. Thanks a lot.

Thank you .

Your next question comes from the line of Brian with Raymond James.

This is [Brian Peterson] in for Brian Alexander. You mentioned Mexico as a head wind this quarter. I know in the past you mentioned a $25 million quarterly run rate to break even. Is that still the case? And when do you guys think you'll get back to that level?

Well, I feel like we're starting to run out of credibility on our story in Mexico because this has been a challenge for us for a long time. And I just want to re-emphasize now that our difficulties in the past had been around execution and around getting the right equipment set and getting off to our kind of standard operating model. We have done those things. We love the team that we have down there. They're doing an excellent job. The customer numbers are very high. So our issue there, and I want to emphasize, remains revenue.

Before the economic collapse here, we had won several new programs into that site. Those programs appeared to be more than enough to get us up to where we needed to be to get the leverage to get it to break even, and then of course the economy went into the tank and the revenues associated with those programs came down pretty dramatically. Now, looking ahead into 2010, we have another large opportunity. We already won, already executing on some of the manufacturing in another -- in a US site. Some of that production is going to go to Mexico, that has been part of the plan all along and that will help the Mexico site as we come through 2010. Ginger, you can talk about where we're at from a break-even point, I'm guessing it is probably not far from where we were before.

Yes, Brian, I think it is in the range of $25 million of revenue a quarter, and we're below $20 million a quarter in revenue right now. So there is our problem.

Okay. Appreciate the color. And just on the two customers that have excess inventory levels, can you maybe break that out by end market?

I'd rather not. It is across a variety of sectors. It is a handful of customers and we're working with them to resolve that issue, and that serves us and also support their business needs, and that will be through a combination of customer deposits and in some cases they give us customer deposits to mitigate our risks. In some cases their end market demand is picking up. We have seen some of that in the June quarter and in other cases we'll have them take possession of the inventory and remove it from our balance sheet.

Thank you.

Thank you.

Your next question comes from the line of Jason Gursky with Citigroup.

Hi, Jason.

Couple of quick questions. Have the end of life dynamics changed at all during this recession? That is, you typically have, say, 8% to 10% of your revenues go away, each year's products go into life or transition out, is that level still the same at this point?

Yes, I don't know that I could tell you that it's changed materially, although you would think that generally it is going to trend toward the higher end of that as customers look to sort of focus on the best product technologies that are going to take them forward and reduce kind of underperforming product lines. But we built so many different products and so many different subassemblies it is hard to get a real, I would say, precise figure out on that but I would say it would be reasonable to assume that it is trending toward the higher end.

Great. And then the competitive environment , has it changed at all? Are you seeing any new entrants or anybody going away at this point as you're going out and quoting on

I'd say the competitive environment in terms of new entrants, we have haven't seen any any new competition that we have recognized as substantial at all. The competitive environment in terms of who is at the table from a quoting standpoint new pieces of businesses, like it's always been on any given day it can be number of the actors in our industry that everybody knows about. I would say that we have seen a little bit more what I would call irrational pricing in the last quarter. That's a little bit new. I felt that the pricing place was pretty disciplined. But we did see some indication of competitors putting forth what I view as not economically viable in unsustainable in economic pricing to try to gain some share in some sub sectors. But overall I would say it is not a lot a big difference right now in the competitive marketplace.

Just a follow-up to that statement. The irrational pricing that you saw, was it coming from people that have similar business models to yours, that is, horizontally integrated versus vertically integrated, were you it coming more from the vertically integrated guys.

It is coming more from the vertically integrated guys.

Yes. Okay. One last one. On the Coca-Cola project, you talked about $80 million to $100 million eventually and I can't remember if that was in fiscal 2010, and maybe just kind of update us on the longer-term expectations are there for that program.

Yes, I don't know that we actually gave a number. I think the marketplace -- I mean, we talked about what we thought we were going to be executing in 2009 in terms of a number. But the number that has been floating around , the $80 million to $100 million has been derived by folks on your side. We still view it again as a customer that could very likely be a top five customer for us. And we would likely see that begin to unfold as we move through 2010, moving up to a top ten customer in the year and perhaps top five customer in

Okay. And then how about this this, your top ten customer has how much in revenues and your top five customer has how much in revenues?

It takes about -- it takes somewhere in that $80 million to $100 million range to become a top five customer for Plexus. So I think the point Dean is trying to make is, whether that unfolds for F 2010 or for the second half of F 2010, the ramp with Coca-Cola is still in flux as they determine how they're going to deploy. And so we're not willing to commit yet to an F 2010 number for them.

Thanks, guys.

Your next question comes from the line of Steven Fox with CLSA.

Hi, good morning. Dean, I was wondering if you could go back. The comment that you made about the load and chase mentality in the supply chain is quite interesting. How do you think that plays out over whether you see a meaningful uptick or maybe even a meaningful downtick. Could there be more inefficiencies created when we sort out where real demand it, or are you taking the burden as bad as it sort of gets for you guys?

I think right now we're taking the burden of it right now. Truthfully, I think it plays well to our strength in that we really work to make ourselves a very agile performing company in terms of being able to respond to customer demand. So, and we have a number of very sophisticated supply chain strategies to help support customers that typically need a lot of variability or performance to variable demand within a quarter. So of course taking those sort of programs or tools to them to help them execute on, with more variable demand and still meet their customers end market desires. I don't -- I think we're just seeing the inefficiencies. I think that some of those inefficiencies will work themselves out again as I think the customers start to get a better sense of how their longer-term demand is going to play out. It is just that right now everybody is cautious about not wanting to have too much finished goods inventory or drive us to have too much raw material or work in process in the plants. So they're giving you variable levels of forecast and then dropping what I call enhanced orders or bigger orders on top of that and hoping like heck that we can pull it off for them. So it is a challenging environment, but it also is with some of our customers it's kind of standard operating procedure as well.

Okay. Fair enough. And then just a quickie. Can you just sort of give us an idea of what kind of new program you won in China that you've referenced a couple of times? What kind of industry it was.

Boy, I think we said that it's a little early. Actually I know what it is and I'm just reluctant to disclose it at this point because I don't off hand know what our relationship is with the customer and what they have asked us to say or not say in terms of disclosure. So I'm just going to set that aside.

Okay. Fair enough, thanks.

At this time there are no further questions.

All right. I want to thank everybody for fort great questions that we had today. I just want to reiterate that although we cautioned on the first half of the year, I don't want anybody to get overly nervous about it in terms of the model. Again, we're quite optimistic about the business. We just wanted to make sure that we -- that everyone understood that there is going to be some discontinuity in terms of operating leverage as we come through the turn here and face some of the what we call some of the typical seasonal cost increases that we see, our fiscal seasonal cost increases that we typically see when we start coming into a new year. And to emphasize that the demand marketplace is somewhat lumpy, in some cases that drives quite a bit of variability in terms of programs and customers who enjoy maybe a little bit higher margins and in other cases customer where we have somewhat lower margins. So it's a bit kind of a challenging environment here as we come through the growth turn, but we fully expect that we are on a path of growth here in 2010 at this point with what we see in front of us. So we're feeling pretty good about the business. We're, of course, very excited about our ability to win new programs into the business and expand our share with our existing customer base and we feel like we're really in a good spot here from a strategic standpoint , as we come through and continue to gain share in the markets. So thanks again for the great questions and all of you go off and have a good day.

This concludes today's Plexus Corp conference call regarding its third fiscal quarter 2009 earnings announcement. You may now disconnect.