Plexus Corp (PLXS) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp conference call regarding its fourth fiscal quarter 2009 earnings announcement. At this time all participants are in a listen-only mode. After a brief discussion by management we will open the conference call for questions. The conference call is scheduled to last approximately one hour.

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

Hello and thank you for joining us this morning. Before we begin, I would like to establish that statements made during this conference call that are not historical in nature, such as statements in the 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 since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those projected, please refer to the Company's periodic SEC filings, particularly the risk factors in our most recent form 10-Q filing and the 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 costs, 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 return on invested capital are used for internal management assessments, 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 Mike Buseman, Senior Vice President of Global Manufacturing Operations.

We will begin today's call with Dean providing fourth quarter commentary about our market sector performance and outlook, our new business wins and opportunity funnel, capacity utilization and guidance for the first quarter of fiscal 2010. Ginger will follow-up with details about the fourth quarter financial performance and make some additional comments about the first quarter of fiscal 2010. Dean will then conclude with some closing remarks. Let me now turn the call over to Dean Foate. Dean.

Thank you, Angelo, and good morning to you all. Last night reported results for our fourth fiscal quarter of 2009, revenues were $393 million with GAAP EPS of $0.38. Revenue was in line with our guidance range, while EPS exceeded our guidance range due to an $0.08 benefit from a lower than anticipated full year tax rate. We are pleased to deliver a growth quarter after enduring three quarters of declining revenues. Adjusting for the tax benefit, the quarter delivered overall results that were largely consistent with our guidance.

However, the quarter was not without challenges as we experienced significant demand volatility as customers continued to struggle with forecasts in this uncertain economic environment. While expectation is that the choppy demand environment will continue in the near-term, customer confidence in longer range forecasts should improve as the economic recovery gains strength and uncertainty diminishes.

Turning now to comments on our sector performance in our fiscal fourth quarter and our current expectations for our first quarter of fiscal 2010. Our wireline networking sector did not meet our expectations for modest growth, as five of our top ten accounts missed earlier forecasts, contributing to an 8% decline. Looking ahead to Q1, we currently anticipate a fairly strong quarter for our wireline networking sector. Our top five accounts are forecasting stronger demand that we expect will deliver mid-teens percentage growth for the sector. We expected strong performance in our fourth fiscal quarter from our wireless infrastructure sector and it did not disappoint. Five of our larger accounts all enjoyed improved end market demand, while we benefited from the ramp of a newer customer program in this sector, all contributing to 44% quarter over quarter growth.

Looking ahead to Q1, we currently anticipate that our wireless infrastructure sector will continue to grow, with revenues expected to be up in the mid-single digit percentage range, largely due to the continuing new program ramp. Our medical sector was down 12% sequentially in Q4, performing below our forecasted decline of 5%. While a disappointment overall, it was encouraging that our top three medical accounts all beat their earlier forecasts. Looking ahead to our fiscal first quarter, I am pleased to report that we are finally anticipating a growth quarter for our medical sector. Eight of our top ten accounts are forecasting improved demand during Q1, contributing to our expectations for a mid-teens percentage growth during the quarter. We expected our industrial/- commercial sector to deliver growth during the quarter. The results were better than anticipated as nine of the top ten accounts beat their earlier forecasts, contributing to 34% quarter over quarter growth.

We currently anticipate a modest sequential decline in revenues for industrial/commercial sector during our first quarter, as eight of our top ten accounts are forecasting weaker demand. Our defense, security and aerospace sector grew during our fourth quarter, although slightly below our expectations. We currently anticipate a modest quarter over quarter decline in Q1 for our defense, security and aerospace sector.

New business wins in the funnel. New business wins continue at a healthy level. During Q4 we won 13 significant manufacturing programs, which we currently estimate will deliver approximately $122 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 ultimate realization of the forecasted revenues. The majority of the wins were with current customers, resulting in share improvements in our core customer portfolio.

Our overall funnel of manufacturing opportunities continues to be very strong with $2 billion of qualified new business. On the engineering services front, we won approximately $20 million of new programs during the fourth quarter, very strong and a record result. Our overall outlook for engineering services is solid. Our strategy of aligning our engineering services business development resources into our market sector teams is paying dividends.

Additionally, the improving economic outlook appears to have emboldened our customers' decision processes addressing capacity utilization and global growth. Our [as tool] capacity utilization in Q4 was approximately 73% overall for the corporation. The utilization rate for our North American operations was below the corporate average due in part to the inclusion of our newer Appleton Two mechatronics site here in Wisconsin and the lower utilization rate at our site in Juarez, Mexico.

Our utilization rate in Europe was below the corporate average due to the inclusion of our new facility in Oradea, Romania. Overall utilization rates in Asia remain higher than the corporate average while including our newer facility in Hangzhou, China, an indication that further capacity expansion in Asia may be required to meet longer term customer requirements.

Turning now to our guidance. We are establishing first quarter fiscal 2010 revenue guidance of $405 million to $430 million with EPS of $0.31 to $0.36, excluding any restructuring charges and including approximately $0.05 per share of stock based compensation expense. Our guidance suggests our fiscal first quarter revenue will be up approximately 6% at the midpoint. Excluding the $0.08 tax benefit from Q4 results, our guidance implies Q1 EPS will be up about 12% at the midpoint. I will now turn the call over to Ginger for a detailed review of the numbers. Following Ginger's comments I will provide a few summary comments about fiscal 2009. Ginger.

Thank you, Dean. Good morning, everyone. As mentioned by Dean earlier, revenue was as the midpoint of our guidance, while EPS exceeded our guidance range due to an $0.08 benefit from the lower than anticipated full year tax rate. Gross margin was 9.6% for the fiscal quarter, in-line with our expectations and higher than the fiscal third quarter results of 9.1%. EBITDA increased by 15% from Q3 to Q4, better performance than the 4% increase in revenue for the same period. This demonstrates the leverage in our model as we increase revenue and as we work our way closer to the 2010-5 model.

Selling and administrative costs were $23 million, slightly higher than our expectations for the quarter and higher than spending in the fiscal third quarter. The increase in selling and administrative costs was the result of a few adjustments at year-end related to deferred compensation and accruals for healthcare expenses. As expected, we did not have any further restructuring charges during the current quarter.

SG&A costs as a percentage of revenue remained flat at 5.9%, consistent with the third fiscal quarter. 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 fiscal 2009 was lower than expected when we set the original guidance near zero. This resulted in a benefit to tax expense for the fourth quarter as we adjusted the full year to the new tax rate. This is primarily the result of changes in revenue and product mix that resulted in a shift of earnings between taxing jurisdictions. In our third quarter earnings release we had estimated an increase in earnings for our North American sites in the fiscal fourth quarter driven by customer and product mix. As the quarter progressed, this turned into much lower North American revenue and earnings than anticipated, resulting in the lower tax rate for the full year.

As I have said before, variations in mix of forecasted earnings between taxing jurisdictions can have a significant impact quarter to quarter on our estimated tax rate. 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 stark contrast in rates and the volatility we have seen in our customer forecasts this year led to the variations in tax rate that we have seen in fiscal 2009. Despite the volatility of the tax rate, the low tax rate in fiscal 2009 is a good outcome for our shareholders.

Moving on to the balance sheet and cash flow, the cash conversion cycle decreased during the quarter to 68 days, a significant improvement over the prior quarter and an excellent result. This is nine days lower than the third quarter cash cycle days of 77 and better than our expectations for the quarter.

Days in receivables decreased by four days to 49 days based on significant efforts by our finance and customer management teams to collect receivables at year-end. Days in inventory remained flat at 83 days. The absolute dollar value of inventory increased by approximately $9 million or about 3%. This was a good result in a quarter that saw variation in customer forecast during the quarter and where we are building inventory for customers for a stronger first fiscal quarter of 2010.

A few other points to note about inventory during the fiscal fourth quarter. First, we have a total of $26 million of cash deposits on our balance sheet, equivalent to seven days of inventory, which helps to mitigate our inventory risk. Second, we have been managing inventory levels with a few customers who had large inventory positions as a result of reduced demand in their end markets.

We have made progress with each of these customers, reducing inventory balances and risk associated with this inventory. Accounts payable days increased by five days to 60 days. This significant improvement was the result of our continued efforts in conjunction with major suppliers to extend payables days and our cash cycle. We have made significant improvement in fiscal 2009 in accounts payables days, increasing 10 days from the 50 days at the end of our fiscal fourth quarter.

Free cash flow for the quarter was again very strong at $45.8 million, largely driven by the improvements in working capital during the quarter. Year-to-date we have generated free cash flow of approximately $113 million. We spent $15.2 million in capital expenditures for the fiscal fourth quarter and $57.4 million for the full fiscal year. This was in-line with our expectations of capital spending for the year of $55 million to $60 million.

I'll now turn to some comments on the first quarter of fiscal 2010. Our internal financial expectations for the quarter will again be lower than our targeted 20-10-5 model, based primarily on the lower level of revenue. Our current forecast for the first quarter shows a relatively strong earnings quarter, primarily the result of a favorable mix of customer demand during the quarter. Gross margin should be consistent with our results in the fiscal fourth quarter, between 9.5% and 9.8%, based on our forecasted customer mix and the forecasted levels of revenue.

Depreciation expense is expected to be approximately $9.0 million to $9.3 million in Q1, up slightly from the $9 million in Q4. SG&A for the first quarter of 2010 should be in the range of $24.5 million to $25 million. As expected, this is an increase in spending from fiscal 2009. This is primarily the result of variable incentive compensation accruals as we enter our new fiscal year.

In the first quarter we will begin accruing for variable incentive compensation for full year fiscal 2010. This is estimated to increase SG&A by approximately $2.1 million in the first fiscal quarter, with a similar amount of spending in the remaining quarters of the year. This is only an accrual, which may be adjusted up or down based on how the fiscal year progresses.

Second, as we are anticipating modest increases in headcount and discretionary spending as we see higher revenue place additional demands on the organization, we are continuing to be very cautious about adding back headcount or spending after our strong cost control actions in fiscal 2009 and in the short-term are expecting to keep increases in SG&A modest, excluding the impact of incentive compensation that I just discussed. We have made some changes to the timing of our annual merit adjustments for employees, which in past years was in the first fiscal quarter.

Beginning with fiscal 2010, these adjustments will be in the second fiscal quarter aligned with the calendar year. This will impact both our gross margin and SG&A expense in the fiscal second quarter. In addition, we expect to see modest increases in headcount and other spending in the second fiscal quarter of 2010.

The estimated effective tax rate for fiscal 2010 is projected to be approximately 5%. As was demonstrated in fiscal 2009, this tax rate can vary significantly during the year based on the mix of forecasted earnings between taxing jurisdictions. Given the volatility of the customer forecast, this is our best estimate of the tax rate for fiscal 2010.

Our expectations for the balance sheet are for the key balance sheets accounts of inventory, accounts receivable and accounts payable to increase in dollar terms for the first quarter. Based on the forecasted levels of revenue, we expect these increases will result in increased cash cycle days. We currently expect cash cycle days of 74 to 76 days for the fiscal first quarter, a sequential increase from the fiscal fourth quarter. This increase is largely a result of additional inventory for new program transitions, a slight increase in days of receivable and a slight decrease in days of payable from the strong results at year-end.

Our initial capital spending projection for fiscal 2010 is estimated to be in the range of $60 million to $70 million. This estimate does not include any additional manufacturing buildings, but does include equipment needs to support new customers in our existing locations and continued investment in equipment for our new manufacturing locations. This forecast also includes approximately $15 million for a new global headquarters building that is under construction in Neenah, Wisconsin.

This projection may vary during the year, as we assess our current customer forecasts and capacity needs. As always, we are balancing our spending, capital expenditures and working capital investments to support continued growth and current results for our shareholders. Because of strong new program wins in the recent quarters, we need to continue to invest and 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 investments in working capital. I'll now turn the call back to Dean for a few summary comments about 2009.

Thanks, Ginger. In light of the challenges inflicted on peoples around the world as a consequence of the economic collapse, it might seem insensitive to characterize the challenges we faced this past year as significant. However you choose to characterize the difficulties faced by our industry and by Plexus during fiscal 2009, I consider the outcome a relative victory for Plexus. With many of our -- in our industry facing revenue declines in excess of 20%, triggering significant and long-term restructuring projects, Plexus' revenues declined just 12%.

Our team has responded swiftly and decisively to adjust our cost structure to the lower revenue level, completing a conservative level of restructuring in just two quarters. While our financial metrics were below our goals, we continued to be an industry leader in profitability and generated strong cash flows, while we invested prudently on key initiatives and capacity investments to support anticipated longer-term growth. Let me highlight a few.

First in Asia-Pacific, we added our first customers into our new manufacturing site in Hangzhou, China, a site we opened at the end of last year to service customers that require closer proximity to the Shanghai region of China. We enjoyed significant growth in our newest and largest manufacturing facility in Penang, Malaysia. We further developed our engineering capabilities in our Asia Technology Center located in Penang, Malaysia.

Second, in Europe, we added significant talent to our European go to market team to further our strategy to increase our penetration of customers in this very important region. As part of our broader European strategy, we opened a new manufacturing site in Oradea, Romania to provide customers a lower cost manufacturing solution. We opened additional capacity in the UK in proximity to our Kelso, Scotland site to facilitate growth and higher level assembly and, in particular, mechatronics.

Third, in North America, we opened a new facility in Appleton, Wisconsin to support our mechatronics strategy and, in particular, a significant new customer for Plexus. We formed a North American regional manufacturing operations team to enhance regional accountability and to create bandwidth for the global team as we scale the business. We started construction of a new global headquarters facility in Neenah, Wisconsin, that when complete will allow us to consolidate several smaller office facilities, thereby improving productivity of our teams. Additionally, completion of the global headquarters building will free up much needed square footage in our Neenah technology center. That space will be repurposed for increased engineering capacity, improvement of our IT data center and the creation of an employee professional development center.

A few of our global initiatives. We expanded our organizational performance processes to include our key leadership resources globally. These processes are designed to ensure that we are developing our structure to support our global growth strategies and that we are developing the leadership talent to execute these strategies. We further developed our framework and accountability for enterprise risk management. We continued to enhance our differentiated global supply chain solutions, meeting our customers' needs for forecast and service agility while optimizing working capital investments. We continued our journey to become a leading SIGMA enterprise, focusing on continuous improvement projects, including our cost centers to drive productivity, quality and customer service.

At our 2009 investor day held this past June, we further clarified our market position, opportunities for growth, sector-focused go to market engine, differentiators and financial model to support our vision to become the best in the world at providing product realization services to customers in the mid low volume, higher mix segment of the MS market. One very satisfying development in fiscal 2009 was the record pace of new business wins, in particular share gains with our existing customer base and the high retention level of our customers. During this difficult economic period, a few of our differentiating factors were highlighted by customers as contributing to the strong pace of new business wins. One, our strong ongoing financial performance and solid balance sheet. Two, the stability of our footprint and the notable lack of perpetual restructuring.

Three, our competitive pricing models that focus on total landed cost of fulfillment, including working capital, with a demonstrated flexibility to create customized service models to support our customers' demand variability challenges. Four, the capabilities and scale of our global engineering services capability. Five, customers are embracing our coherent strategy to provide them with best in the world global services for their products in the mid to low volume, higher mix space. Customers note that the entire Plexus global footprint and supply chain organization is focused and optimized for a targeted segment of the EMS marketplace. And six, our reputation for customer service excellence and flawless execution, a hallmark of Plexus and a credit to the passion and commitment of approximately 7000 Plexus people around the world, many thanks to all of them. I believe our relative victory in 2009 demonstrates the increasing strength of the Plexus brand and confirms that we are executing a winning strategy.

But now it's time to put fiscal 2009 in the rearview mirror. We accomplished a great deal in a challenging environment. While we cannot predict when our customers' end markets will fully recover, I believe that we are well positioned to benefit as the recovery picks up steam, as improved demand across enhanced portfolio of programs drives utilization rates higher, delivering the leverage in our model. The stage is set for a better year in fiscal 2010, a year that I am optimistic will be more than just a relative victory. Angelo.

With that I will open the call for questions. We ask that you please limit yourself to one question and one follow-up. Operator?

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

Hi, good morning. Could you guys maybe comment on the availability of components and what you're seeing with lead times and if there's some difficulties out there, how you maybe are managing through that?

Reik, I'm so glad you asked because we teed that up for Mr. Buseman to answer .

Reik, good morning. Thanks for asking, again. We are certainly seeing some tightening up on availability of parts. I think the indicator we see is increased amount of expediting activity. It varies a lot by commodity. Certain commodities are holding up real well, but again we are certainly seeing some indications of lead times stretching out. I think the other thing that we see contributing now just as prevalent as the lead times or the material moving out is we see a fair amount of kind of load and chase behavior going on with some of our customers right now and that's making things a little bit challenging also.

I think it's key, though, and I would highlight this, to date we didn't have any impacts to our quarter 4 results that we just went through and we don't really think that we have significant risk right now for our first quarter forecast. We worked real diligently with our supply chain partners to mitigate the risk and in some cases I think this actually plays to some of the strengths of our supply chain model. We've got some tools that we believe are very agile. As Dean just mentioned, a lot of our solutions are around agility. So the short answer is, yes, we are certainly seeing some stretching out right now, but don't really think that we have got significant risk to the numbers we just talked about.

Is that -- is the volatility that you're talking about cost any -- does that result in any cost increases and do you see any reason to pick up inventory as a result?

Well, yes, so maybe a couple of comments. First off, our model and our solutions with our customers -- most of the component pricing increases, should they be out there, are typically passed back onto our customers. And I think the other thing is a lot of our solutions are already designed for volatility, a lot of our solutions, a lot of our parts programs. So for the most part I don't really think there's going to be marked changes to our inventory levels. We have already designed that in.

I think the challenge is as this starts to recover now, more about the supply chain being able to respond to this, maybe in some cases upside on top of upside. And I don't think that's really unusual right now as we kind of come out of this turn, it's a little bit of a messy situation. You guys know very well a lot of the supply chain partners have done a lot of the same things that we did, which is took capacity off-line, slowed down over the last year and they are having to react and respond right now.

Okay. Great. Appreciate that. And then just quickly on the outsize engineering bookings that you guys posted, can you just talk a little bit about what's creating that upside? Historically it's medical, is that an extension there or is there something else that's starting to boost that up?

Yes, I think there's a few things that contributed. First let me get to the medical part of it, is the bulk of the wins certainly were in medical. In fact it was in the mid-70 high percentage range of the dollar amount was in the medical space, so very strong performance in medical, where we have a very strong reputation among customers.

Secondly, I just, and I want to emphasize this, that we made a significant change in our strategy for how we sell engineering services. We used to approach it kind of with its own team. We have been working over the last two years now to get the resources in the engineering services group and in fact add some resources to the business development part of it and we have aligned them into the market sector teams that were already built up over the last few years. That strategy was in place primarily to sell manufacturing capabilities. So we have that strong alignment and those teams go off and sell in a team environment the full solution set of Plexus and that is resulting in a much better pipeline of opportunities and much better execution at bringing the opportunities across the finish line.

Great. Thank you, guys.

Thank you.

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

Great, good morning.

Good morning, Will.

I'm wondering if you can talk a bit more about the mechatronics customer. We all know it's Coke, so we can talk about it, I guess. Can you give us an idea for what your outlook is for fiscal '10? I think in the past you said it would be a top ten customer. Is that still the case?

I think, yes, we have been talking about this as a very significant win for Plexus. We have characterized it as a top ten customer and our current view is that they will still be a top ten customer, although we have consistently said that the revenue is in the back end of the year, so it's quite back-end loaded and that, of course, implies some additional risk to the full year results, and -- not that we are -- have any concern at all about the commitment to the program over the long run. So, Mike has got -- you came out of a conference call yesterday while I was preparing the press release, et cetera, and it's got some more up-to-date information. So, Michael, go ahead.

Yes, Will, a couple other comments just to follow onto Dean. Again, we're in regular conversations with this customer, we had an exec meeting with them yesterday, which is just kind of the rhythm of conversation we are in. The field testing of this unit is ongoing, the market acceptance is extremely strong. They are delighted, we are delighted with what they are seeing. They have got somewhere north of 50 systems that are out there, infield, in beta, about 13 different customers, if I recall correctly, a couple different test markets. So -- so again, they are absolutely continuing to focus on fine-tuning the design, delighted with what they are seeing for end market demand out there. And, yes, they are clearly committed to successfully launching this. And as Dean said, we see a view that still says they are a top ten customer for fiscal '10, but clearly towards the back-end of the year.

If there's any hiccup with adoption or the technology, you guys have, I believe, committed some capital in the form of some facilities. Who bears that risk if this doesn't work out?

Yes, that's a very good question. We have -- we have committed some capacity. The facility itself is -- can be utilized for other purposes and the intent when we purchased it was that we would continue to pursue the mechatronics market space and win other customers into that facility. But there is a relative, I would say, conservative amount of capital that is specific to Coca-Cola and we have in the model in relationship with them, we have some level of downside protection on the cost of that infrastructure, because it is a very significant program, obviously, and it's a new technology that's quite complex that's coming into the market and from the get-go there was always some possibility that the revenues might push around a little bit. So there's some protection for us there.

Thanks, Dean.

You're welcome.

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

Good morning, can you hear me?

Yes.

Okay, great. Dean, you mentioned that you may need to expand in Asia at some point. Do you have a sense of timing on when that might happen and kind of related to that, can you maybe just give us a sense of how much revenue you think you can do on an annual basis with the facilities that you have in place now?

Yes. I did want to signal that on Asia, and I'm glad you picked up on it. First, we have had a lot of success in Asia. We believe fiscal 2010 will be the year that our pie chart, if you will, of revenues will shift to dominance in Asia. So historically we have been more of a North American dominant in terms of revenue. It will likely shift over to Asia during this coming year. We are having a lot of success with our footprint there and so we are in the process, I would say, of evaluating opportunities for expansion. There's a number of things that are on the table out in front of us, including some additional capacity in Penang, where customers are delighted about the execution and the quality of the resources that we have there, as well as the agility of logistics getting product in and out.

We are also looking at over a longer period of time, and I would say the Penang opportunity is probably a little bit more near-term, meaning perhaps sometime in the later part of this coming fiscal year, although we haven't gotten through our diligence on it yet and we also have to get a better read on how the economy is going to unfold. Longer term we continue to see Hangzhou, China as very important for us, so that we stood that facility up there last year and we are going to continue to look at a more permanent solution there. That facility is leased. We are going need a larger facility on a piece of property where we can expand, so we will be working on that during the course of the year. And then beyond that, we feel that we may need to enter another country in the region and Thailand is on our radar screen as a possibility for expansion. But I would put that out a little bit further on the time horizon, maybe two, three years out.

Okay. And then just as a follow-up, one of your more horizontally interrogated competitors this week announced it's going to begin offering precision tooling and some machine, which kind of represents their first foray into a more vertical model. Can you just give us a sense of where your thinking is and what the competitive environment is like right now and just confirm that a more vertical approach is not on the horizon for you?

Yes, when we sit around in our strategy discussions, the idea of becoming vertically integrated never comes up. It's just not one of these things that we think is important for our customers. We don't think it's a -- it would create any competitive advantage for us at all and so we don't see heading in that direction.

Perfect. Thanks, guys.

You're welcome.

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

Hi, thank you. Ginger, I was hoping to go through a couple of the comments you made on the income statement. In terms of the SG&A, you commented that as revenue improves, you will probably see that number tick up. Is there a specific revenue number that we should think about when the SG&A starts to move higher?

No. I think there will be modest increases as we move through F '10, so -- and I think that's very modest. I think that the major impact you're going to see on SG&A in F '10 is what you're going -- what we see in the first quarter, which is the variable incentive compensation, and then in the second quarter as we add the cost of the merit adjustments for our sal -- for our staff. I think other than that, I don't see significant increases in SG&A, but I do feel like there will be -- we took some pretty significant headcount reductions in F '09, so I did want to signal that there would be modest increases in SG&A as that -- as revenue comes back.

I think over the longer term our expectations are still and we are committed to getting back to an SG&A at -- to 5% of revenue. So I think what I'd look for is as revenue comes up, at what point in time are we able to get back to 5% of SG&A and I would guess that that's -- it's clearly north of where we are now, probably north of 450 million. But I think that would be the longer term trend I would expect for SG&A.

Okay. And then in terms of the gross margin, it was a little bit better than I had expected this quarter and you mentioned mix, although you said that gross margin is going to be relatively flat in the December quarter. Can you help us understand how gross margin moves through fiscal 2010? I think in the past you have commented that it improves in the second half of the year. And do we start to approach the 10% that we are used to seeing in the 2010 model?

Yes, that is continuing to be a challenge for us with volatile customer forecasts and volatility between regions. I would say that Q1 is better than we had expected when we talked on this call back in July, so as customers' forecasts have firmed up we saw some benefit to gross margin in the first quarter.

Our longer term thesis is that we expect gross margin to be better in the second half as revenues come back up and we are not sure exactly where we expect gross margins to be for the fiscal second quarter. It's clearly above 9%, right, so we have not had a quarter where we saw below that, but how it moves between kind of the lows we saw in the third fiscal quarter and what we are seeing for the fourth and first quarter, we are not sure where it's going to be in that range yet.

So is --

Yes, I'd just like to comment. Some of that just -- it just -- it involves as revenue comes up, where it comes up, and so different facilities are at different leverage points. And so we are not -- I don't want anyone to -- to get the sense that we are -- we have any sort of uncertainty around our ability in terms of how we are pricing business and how the business is growing to get back there. There's no structural long-term impediment to it at this point from a competitive standpoint.

Okay, that helps. Just to clarify, Ginger, it sounded like it's a little bit better in December in the first quarter but then it potentially goes down a little bit in the second quarter. Is that what you're thinking about right now?

I'm just saying we have less visibility. We are really not guiding the second quarter today except for some kind of macro issues around SG&A, but other than that, we are just telling you there is less visibility about that and we are not quite ready to guide to second quarter yet.

Okay. And it will depend on mix, it sounds like?

It will. And as customers finalize their forecasts, get more comfortable with what they are seeing and lock into those forecasts for the second quarter.

Okay. Great, thank you.

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

Hi, good morning, everyone.

Hi, Shawn.

Just following up on Sherri's question in terms of the SG&A increase for the second quarter, the merit increases, how much of a dollar amount should we expect?

I think there is probably somewhere in the range of $800,000 of an increase to SG&A and there is some impact on gross margin, which is hard for us to quantify now until the forecasts firm up. So I think there is modest impact on SG&A and modest impact on gross margin.

Okay. And then a few brief follow-ups. More looking at the revenue profile, with medical coming back, is that in the high end of the business and is that what's helped driving mix? And then second, if you could just talk about Juniper was down this quarter but we know it ebbs and flows, maybe just some insights there and also in terms of the new program dollar win rate was down. I don't know if that's temporary, as it's been very strong for the past four quarters and we should expect it to ramp in the back -- or in the next few quarters.

Well, let's talk about medical first because again, we keep trying to clarify that. Medical doesn't not necessarily carry with it higher -- higher margins than other parts of our business. It really depends customer to customer from a revenue profile and program to program. The uptick in revenue in medical in Q1 -- I mean, it's no secret that we have had seasonality experience in the past from GE Healthcare and of course we are seeing some of that seasonality again play out in Q1, so we are anticipating a fairly strong, strong quarter. But we also have some other customers that I would define their end markets for medical equipment to be different than the GE Healthcare business that are also anticipating stronger performance in Q1 as that marketplace appears to starting to thaw out some and the customers seem to be doing a little bit better job selling into those markets.

So a pretty decent and fairly broad improvement across the top ten customers, I would say, for Q1 in medical. And very welcome for sure. On the new wins rates, you asked about the quantity. Yes, we have -- we have enjoyed a very strong pace of new wins through most of all 2009 and of course even the $122 million that we just announced is a pretty good number. Certainly not the lofty number that we have had over the last couple of quarters, but still a very strong number. I don't think there's anything necessarily to take away from that. It's just a question of how these opportunities play out. We have a really nice funnel of opportunities here and of course the hope is that we will do a good job converting here as we move through this quarter.

And correct me if I'm wrong, but the pipeline for you did grow sequentially, correct?

It did, yes, yes.

Okay.

Yes.

And then just that -- the final question on Juniper, maybe it's just lumpiness here more than anything else is my question.

Yes, I'm glad you asked about Juniper as well because -- in fact if you weren't going to, I was tempted to talk about it a little bit because it's -- and Juniper is one of these accounts where if it gets too big, everybody gets nervous and if it goes down too much, everybody gets nervous, but -- but perhaps rightfully so. We had expected Juniper to be down in the quarter and of course they were, although they were down a little bit more than what we had anticipated.

I would also say that with Juniper our kind of mix of our business with Juniper, our share of our business tends to be concentrated a little bit more toward the carrier space than the enterprise space and of course, as I understand, Juniper did a little bit better on the enterprise side of the business. Looking to Q1, we do -- and for that matter, for the rest of the year at this point, our anticipation is that we are going to see growth with Juniper.

I also want to make a very important point in that embedded in the $122 million win is two new programs with Juniper, guess what, on the enterprise side. So we feel real good about where the direction of the business is going to unfold with Juniper as we come through fiscal 2010, although some of that revenue with the new programs we won't really see much of it until the later part of '10. Some will come pretty soon, probably as early as Q2, the rest of it will unfold later in the year.

Right. Thanks a lot

You're welcome.

And congratulations on those wins.

Thank you.

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

Yes, good morning. Thank you.

Hi, Sean.

If I could just follow-up on some questions earlier on in engineering. This is certainly something that you've commented on as increasing in attention from some of your OEMs. You've had some success with this through the year. One of your competitors echoed some comments that their engineering services seem to be getting a little bit more attention.

Can you share with us, outside of changing your model, whether the interest has actually grown in proportion with the general return in demand this year? Or do you believe perhaps there's a renewed interest and the higher intensity focus from OEMs on leveraging these types of capabilities from the EMS space?

Excellent question. Yes, I would say it's a -- it's a number of factors. I think embedded in this is just what you're suggesting there, and we did -- I've been in this business for a long time and of course I started out in the engineering part of the business and it's clear that as we have come through past economic cycles, we have seen an improvement in our engineering services demand as the OEMs begin to consider ways to get more done with less. And so the outsourcing model continues to kind of, for engineering services, continues to get incrementally better as you step out of those economic cycles and the customers, essentially ones that maybe haven't outsourced engineering, experiment with the model and get increasingly comfortable with using engineering services as a variable component to launching new programs.

So I think there is a bit of a secular shift here that's going on and I think a further acceptance of engineering services. I think also that ours is fairly uniquely positioned in that we have five centers around the world. These centers have been in place for a long time. Engineering services has been a part of our business since the day the Company was founded and I think that we have a lot of credibility in terms of our processes and procedures and regulatory compliance in engineering. And when customers go around and take a look under the hood at the competitive environment and then come to visit the engineering centers at Plexus, they are -- they are pleasantly surprised and really excited about the opportunity for engagement.

So we really feel that this is a competitive weapon for us that not only delivers new programs and technology into our manufacturing facilities, but also creates a significant sticky relationship with the customers and we get a much better visibility into the customers' strategy for what they are going to launch into the marketplace over the long-term. You're communicating with a whole different audience of customers when you're developing new products, so we think it's a really important part of our visibility kind of to customer strategy.

That's very helpful. Thanks, Dean.

Thank you.

And then separately, on Juarez, we haven't really talked much about that today. Is there a way if we can get an update on the performance in Juarez and then also as we look to the -- or for -- sorry -- for fiscal 2010, the mix of products as you intend to fill that facility, how should we be thinking about what goes in there and what type of attention is that facility receiving tied to some of these program wins that you have with your customers?

Was the last part of your question related to Juarez or did you bring up -- shift to Oradea on the last part of the question?

Sean, was that-- .

It is specific to Juarez.

Okay.

All on Juarez. For some reason I thought I heard Oradea in there. Okay, you want -- you just want to comment a little bit on Juarez, Mike, and then I'll -- .

Sure, sure. Yes, so Sean, this is Mike. Yes, so the first part of the year, and you guys know this, Mexico has been a challenge, I'll say, from a contribution perspective for a long time. In the early part of the year it's still, I'll say, challenged for the first part of the year. With that said, I would clarify that it's kind of underperforming from a revenue load perspective in the shorter term here. It's executing extremely well, though, from performance/customer satisfaction. And maybe this is a little bit of a repeat from a couple of calls ago, but we have -- we've got a superb leadership team down there now. We have got some very good customers. We have gone through some kind of refresh on capital over the past 18 to 24 months. So the issue right now -- it is, continues to be the revenue growth in there. With that said, we successfully ramped up a real good customer and a significant customer over the last nine months.

That's kind of taken the place of a couple wins that we had about 14 months ago that we were very optimistic about. We landed them, ramped them, and then those two customers got kind of caught up in the -- in the last year and just their end demand went away. So we are optimistic we have ramped up this new customer, we are poised and we know exactly who this next significant customer to ramp up in there is going to be in the second half of the year. And I think we are extremely confident now that as we get into this kind of recovery of the end market demand and ramp in this next customer, that by the second half of the year we are going to be in pretty good shape.

Yes. I think maybe just to add a little more color, perhaps, at the risk of talking about Mexico too much. Mexico is another one of these relative victories in '09. If you look at their overall revenue for the year, while Plexus was down about 12% and, of course, the broader industry was down dramatically, our revenue in Mexico was about flat to maybe down 1%. So at least an indication that we brought in some new customers, that they executed well and did a pretty darn good job with that book of business. Just to add a little bit more precision to -- to what -- to the pipeline there, we do have a number of opportunities teed up for Mexico, and in particular one of them is related to this large mechatronics program where we will build some of the electronics for that program down in Juarez. And that will unfold later in the year as the -- that product begins to launch in larger volumes into the marketplace.

Thank you.

You're welcome.

Next question comes from the line of Brian Alexander with Raymond James.

Just wanted to clarify some of the margin questions. I think in the past we have talked about roughly $450 million in revenue a quarter as being the threshold for getting back to roughly a 10% gross margin as part of your long-term model. So I'm just wondering if that holds or if the growing mix of sales in Asia that you anticipate might change that. And just bigger picture, does the shift to Asia have any effect either in terms of timing or just overall changing your long-term view on the 20-10-5 model?

Brian, this is Ginger. I don't think it does. I would say that what we have said, and we are consistent with that, is that revenues need to be north of $450 million. We haven't exactly committed when and I guess because there are a couple of factors that weigh into that, one of which is, as you know, we have made investments in new footprints. That does create a bit of a drag for us and so as we move into F '10, the sites in Hung, China and in Romania do play into that model and about when we are going to get back to our 20-10-5 model.

We are committed to it. We believe the business supports it. We believe the pricing of the programs we are winning supports it and we don't, frankly, see much of a difference between how the revenue is won between region. So our shift in F '10 to having Asia-Pacific region be more than 50% we do not think will have an impact on when we get back to the 20-10-5 model. It's going to be more related to how the revenue comes, how it comes by site, because as you know the sites have different leverage points, and how we manage the overall business.

Great, thanks for that. And then just a follow-up on just the revenue outlook and I know you're not providing guidance, but just thinking about this conceptually, with end markets stabilizing pretty much across the board, your new wins in fiscal '09 were very impressive at about 700 million plus another 120 this quarter. And then you also have Coca-Cola coming in, which could be roughly $100 million in FY '10. So when you add all that and even if you haircut that quite a bit, it would -- it would suggest that your revenue should increase hundreds of millions of dollars, whereas I think consensus implies about a $100 million increase in FY '10 versus FY '09. So just wonder if there's anything in there that I'm missing or might the estimates be potentially conservative.

I don't know how to comment on it without turning it into guidance for the whole year. Clearly, we are trying to be cautious at this point. We just came through a quarter here that was, once again, volatile and maybe not surprising, given it was kind of the quarter where the turn happened for us from a -- what was going down to flat to then turning up. As you point out, the pace of new business wins, kind of our internal optimism, would suggest that we could have a pretty decent year.

We are just -- feel that we need to get through another quarter or so before we are going to have confidence that the revenue associated with those new wins over this past year are -- is actually going to fold -- unfold kind of the volume levels that we have been talking about and that the timing of the -- that recovery and when those programs really get launched and start to ramp-up really unfolds. And that's where there's just a lot of uncertainty is these programs that our customers still feel strongly about them, they still feel they are going to ultimately have run rates that are consistent with what we have -- had said in the past, but it's really a question of the -- the timing of those and kind of the slope of the ramp associated with them, which through this economic period has been slow to delayed.

Thanks and nice job.

Thank you.

(Operator Instructions) Your next question comes from the line of Brian White with Ticonderoga Securities.

Hey, Brian (multiple speakers).

Tough to say. Good morning. When we think about some of the trends in the networking market, networking kind of converging with storage and computing, Dean, how is Plexus positioned to make sure that you don't lose market share? I know in the -- historically Plexus' participation with storage and server has been pretty minor, but obviously a great participation in networking.

Yes, that's an insightful question that probably would be better answered by our folks who drive that part of the market segment, but we are very aware of some of the acquisitions and of course relationships that are unfolding in the marketplace and the convergence that's taking place. So at this point we think that it's more opportunity in upside or an expanded kind of market for us than it is a threat to us. And so we feel that our model here, the focus of our model and the agility of our model plays well into some of these technologies and, of course, specifically I think when you look to the Juniper relationship that they have struck, we think that that's going to add some oppor -- or give us some opportunity as well.

Okay. And just to be clear on your biggest customer will grow in the next quarter, I just want to be clear, in fiscal '10 that business will grow for you?

Well, again, I want to be careful about what I guide. We are expecting quarter over quarter growth all year long at this point, although again, it's very, very early. How that ends up at the end of the fiscal year in '10 for the full year versus the full year of '09 is -- I'm hesitant to tell you where the end point is going to be at this point because there's as much uncertainty there as there is anywhere else with our customer set and of course some of the growth that we are depending upon with that customer is associated with the launch of some newer technologies in the marketplace.

Okay. So you would expect sequential growth throughout the year? That's what it sounds like.

Yes, that's correct, that correct.

And Dean, just on the sequential decline was so significant with your biggest customer, greater than what they saw in their infrastructure routing business. Was there some sort of an inventory flush out going on in the quarter?

Yes, it was down -- again, we had anticipated it to be down. It was down a little bit more than we had expected. It's also important to understand I think their quarter ended a couple of days before our quarter, so there's a little bit of an alignment issue there on the quarter end dates. II don't know that there's a whole lot to read into it other than it's just associated with a particular product set that we manufacture for them and the relative success of those products in the marketplace versus other products.

Okay. Just finally, Cisco announced they are acquiring Starent. You work with Starent.

Yes, we do.

Cisco works with certain suppliers. They have pulled business from Plexus in the past, I think it was Aeropoint years ago. Just how do we think about that?

Yes, I don't know there's a lot of correlation between what happened in the past and what happened today. Back when we had some Cisco business, as you point out, that was a time when we had no global footprint to service Cisco. So we were one of their best executing suppliers, we hung onto that business quite some time and then of course the economic collapse happened and they decided to consolidate into a couple of EMS providers that had a complete solution set for them and we just did not. So I think it's a completely different game at this point.

Cisco has been on our radar screen as a Company that we thought we could gain some opportunities with and we have some allies within Cisco that we think might help us do that, but I think more specific to the Starent acquisition, I mean, this is a fairly hot technology that has done very, very well for Starent and has done well for us as a consequence of that. Any sort of risk to that business would be quite some time out into the future before anything could really kind of happen with it. So it's a little bit early until that whole thing is done, but of course we are having some dialogue already and view it as an opportunity to get a new entree perhaps to get on top of what has already been some activity that we have been undertaking to try to expand our portfolio of customers in that space.

Okay. And you're sole sourced on that business?

That's correct.

Okay. Thank you.

At this time I'm showing there are no further questions.

All right. It looks like we are at the end of our allotted time. That went pretty quickly this morning and I want to thank all the analysts for their really wonderful questions that they have posed to us. Some of them were really insightful. Generally speaking, I think we look at '09 and say it wasn't a lot of fun because we didn't kind of -- we didn't hit the kind of numbers that we are used to and, quite frankly, we are used to growth. But at the same time we enjoyed a year where we are able to play offense probably 90% of the time, really be -- and we were really looking forward and I think that we had an excellent year of winning new business. I think the morale in the Company is really strong.

We feel like we are in a really good position going forward and we are excited about finally getting '09 behind us and watching '10 unfold, which as I said before, I'm optimistic is going to be much better than just a relative victory. And we will give you more, a little bit more as we get through Q1 and we will see what -- kind of what we can say about the full year, perhaps, as we get to our Q1 conference call in January and hopefully we will have a lot better insight into how things are going to unfold for us. So thank you very much.

This concludes today's conference call. You may now disconnect.