Plexus Corp (PLXS) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp. conference call regarding its third fiscal quarter regarding 2010 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 Ms. Ginger Jones, Plexus' Vice President and Chief Financial Officer. Miss Jones?

Good morning, and thank you for joining us this morning. Normally Angelo would open the conference call and present the Safe Harbor information, but he is still on assignment in Penang assisting our team with the many initiatives we have in that region. I'll take his portion of the call for this quarter.

Before I begin would like to establish that statements made during this conference call that are not historical in nature should such a statement in the future tense and statements including believe, expect, intend, plan, anticipate and similar turns and concepts are similar terms and concepts are forward-looking statement. 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 Form 10-K filing for the fiscal year ended October 3, 2009, 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 or other unusual items. 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 filing.

Joining me this morning are Dean Foate, President and CEO, Todd Kelsey, Senior Vice President of Global Customer Services, and Mike Buseman, Senior Vice President of Global Manufacturing Operations. We will begin today's call with Dean providing third fiscal quarter commentary about our market sector performance and outlook, our new business wins, capacity utilization, and guidance for the fourth fiscal quarter of 2010. I will follow up with details about the third fiscal quarter commentary about our market sector performance and outlook, our new business wins, capacity utilization and guidance for the fourth fiscal quarter 2010. I will follow up with details about the third fiscal quarter financial performance and make some additional comments about the fourth quarter of fiscal 2010. Let me now turn the call over to Dean Foate. Dean?

Thank you, Ginger, and good morning, everyone. Last night we reported results for our third fiscal quarter of 2010. Revenues were $536 million with EPS at $0.59. Revenue was in line with the mid-point of our guidance range, while EPS approached a higher end of the range due to strong operating leverage. Our third fiscal quarter marked the first time we've exceeded $500 million in revenues, establishing an important milestone for the Company. We anticipate that a strong quarter will establish guidance. Revenues were up 9% sequentially while EPS grew 16%. Return on invested capital improved to 19%, closing in on our target of 20%. Ginger will provide additional insight on our financial performance and model during her comments in a few minutes.

While our third-quarter performance was strong overall and concluded with results in our guidance range, it's important to consider that we guided conservatively relative to an even stronger internal forecast. The quarter was challenging with several customers adjusting forecasts lower during the period. For a few weeks in June, it appeared that we might conclude the third quarter near the bottom end of our guidance range. European demand reductions in our wire line networking sector played a role in the forecast reductions, although the recent in our customer's European regional demand appears stable at this point. While a few customers did improve their forecasts during the quarter, the constrained supply chain environment continued to limit our ability to service near-term increases in demand.

Customer forecast reductions also impacted our fourth fiscal quarter as our guidance suggests a pause in revenue growth. The inventory on our balance sheet bears witness to some forecast pushouts with the anticipation of sequential revenue growth resuming as we enter fiscal 2011.

Turning now to comments on our sector performance and our third fiscal quarter and our current expectations for our fourth quarter of fiscal 2010. Our wire line networking sector was up about 6% in Q3, slightly better than expectations when was we established guidance as we benefited from some late quarter demand that offset weakness in European end markets. Looking ahead to Q4, we currently expect our wireline networking sector to be flat to slightly down as the majority of our top 10 customers in this sector have trimmed their forecasts. Our wireless infrastructure sector declined approximately 13% in Q3, declining more than our earlier expectations. While we have enjoyed some success diversifying our customer portfolio in this sector, our customer list is still relatively short, and some customers are currently prone to lumpy demand. In Q4, our wireless infrastructure revenues are currently forecasted to grow approximately 10%, driven primarily by strong demand with a larger account and by newer business ramps.

Our medical sector revenues grew approximately 19% sequentially in Q3, consistent with our expectations. This is the third quarter in a row where we enjoyed mid-to high teens growth for our medical sector. While we are benefiting from an improved demand environment for several medical devices, our growth is also the consequence of our successful strategies to increase our share with key customer accounts, diversify our portfolio customers, and diversify the medical technologies we manufacture. We currently anticipate that our fourth fiscal quarter will be flat to up slightly, as a few of our calls are adjusting forecasts down after a couple of exceptional quarters of growth. Revenue in our industrial commercial sector was up approximately 21% in Q3. We had anticipated an even stronger result. Sequential growth was broad based across our customer portfolio. As we expect Q3 to be another sequential growth quarter for our industrial commercial sector, we are forecasting growth in the mid-teens percentage range, although the growth profile is not as healthy when compared to the previous two quarters. While a few customers are anticipating growth including the continuing ramp of the Coca-Cola program, the majority of our customers are forecasting weaker demand. We experienced robust growth in our defense secure and aerospace sector in our third quarter, program ramps delivered the majority of this growth. The outlook for Q4 is flat to slightly up.

Turning now to new business wins. During Q4, we won 22 significant manufacturing programs, which we currently estimate will deliver $141 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. Our funnel of opportunities remains healthy at $1.8 billion with approximately 50 opportunities in the $10 million to $50 million range where we compete very successfully. Our engineering business continues to win a sufficient amount of business to support healthy growth. In Q3 we won $16 million in engineering programs. Addressing capacity utilization and global growth. Our as tooled capacity utilization in Q3 was approximately 84% overall for the Company. A level that will limit our growth opportunities without further investment. Our utilization rates at our current facilities in Penang, Malaysia are very high and our value proposition continues to be very attractive to customers. Therefore, we have committed to build an additional facility in Penang that we anticipate will be operational in early fiscal 2012.

We are now refining our fiscal 2011 and longer range plan. As we complete our work and gain confidence in the recovery, we will continue to evaluate the timing and scale of additional investments that will be required to support our global growth strategy. On the manufacturing capacity short list are China, where utilization rates are rising quickly, and Romania, where we ultimately need to move out of the entry-level lease facilities where we operate today into a more appropriate facility that can support longer term growth. We also remain committed to our product services strategy in Continental Europe and continue to explore alternatives to extend our engineering services capabilities to this important marketplace.

Turning now to our guidance. Our current view is that our fourth fiscal quarter will show modest sequential revenue growth. We are establishing fourth fiscal quarter revenue guidance of $530 million to $555 million of EPS of $0.58 to $0.63 excluding any restructuring charges and including approximately $0.06 per share of stock-based compensation expense. While Q4 represents a pause from the exceptional growth we experienced over the past few quarters, overall fiscal 2010 is on track to be an excellent year for Plexus with year-over-year organic revenue growth likely to exceed 20%, bringing full-year revenues near $2 billion with industry-leading return on invested capital performance of approximately 19%. With that, I will turn the call over to Ginger.

Thank you, Dean. As dean mentioned earlier, revenue and earnings were near the top end of the guidance range. The quarter ended largely as we expected. But as Dean pointed out, it was an interesting ride. Gross profit was 10.4% for the third fiscal quarter, this in line with our expectations and slightly above the second fiscal quarter. Selling and administrative costs were $28.5 million. Higher than our expectations for the quarter and our spending in the second fiscal quarter. Approximately $500,000 I would consider not likely to carry over to Q4 F'10 spending. And related to hiring and relocation of employees and costs to support planned growth. In addition we've begun making investments in staff and costs to support the high level of growth we are experiencing in fiscal 2010 and to support continued growth if fiscal 2011.

SG&A cost as a percentage of revenue decreased again this quarter to 5.3%. An expected result as we obtain better leverage from the increased revenue during the third quarter. The last item for discussion on the income statement relates to our tax rate. The full-year tax rate recorded in the third quarter was 2%. Consistent with what was recorded in the second fiscal quarter. As a reminder, variations in mix of forecasted earnings between jurisdictions can have a significant quarter-to-quarter impact on our estimated tax rates. 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.

Moving on to the balance sheet and cash flow. Working capital management was more challenged in the fiscal first -- fiscal third quarter. The cash conversion cycle increased by nine days during the quarter to 75 days, higher than our expectations of 68 to 72 days. Some of this increase was the result of demand variability from our customers, and the challenges of a constrained supply chain environment. I'll now get into the details by balance sheet line item.

Days in receivables increased by 2 days to 47 days. This is a more normal level of AR for us based on negotiated terms with our commerces. Days in inventory were 89 days. Consistent with both the first and second fiscal quarters of this year. The dollar value of inventory increased by approximately $38 million or about 9%. This increase in inventory dollars was largely based on our customers' demand variability and the lengthening lead time for many components. We entered the third fiscal quarter with customer forecasts that drove higher inventory investments. Not all of which materialized into revenue. And we are constrained in some cases by parts availability which particularly limits our ability to respond to demand upside.

Although the inventory build is an issue we take seriously, part of our value proposition and our pricing model with our customers is built on higher inventory levels. Those higher inventory levels can benefit both us and our customer with greater flexibility to ship product and recognize revenue at the end of the quarter, which we definitely saw in the last few weeks of this quarter. We manage this inventory risk prudently, as demonstrated by the approximately $28 million of cash deposits on our balance sheet. Equivalent to about five days of inventory, which helps to mitigate our inventory risk.

Accounts payable days decreased by 7 days to 61 days. The volatile supply chain environment has made managing accounts payable more difficult, and we expect to improve from this in future quarters. Free cash flow for the quarter was negative, in the amount of $48 million. We utilized $32 million of cash in our operations, largely for the working capital investments described above. During the quarter, we spent $16 million in capital expenditures, primarily for equipment to support new programs and increase customer demand. All of our investments in working capital are managed to ensure that we maintain an appropriate amount of cash to support ongoing operations and to deliver a strong ROIC to investors, both of which we believe we accomplished.

I'll now turn to some comments on the fourth quarter fiscal 2010. We are happy that our third quarter results continued to demonstrate our ability to return to our long-term 20-10-5 financial model. For those new to the Plexus story, our financial model targets a 20% ROIC, 10% growth margin, and 5% operating margin. The 20% ROIC target is based on a spread of 500 basis points above our estimated weighted average cost of capital of 15%. Gross margin should be consistent with our model and slightly above 10% in the fourth quarter. This will likely be lower than the 10.4% that we saw in the third quarter, and reflect the investments we've been talking about in people, information systems, and equipment. To support the strong revenue growth that we EPA. SG&A for the fourth quarter of 2010 is expected to decrease slightly, and is expected to be in the range of $28 million to $28.5 million. This is a small decrease from the spending in the third quarter of fiscal 2010. Modest increases in headcount and discretionary spending will be offset by nonrecurring costs from the third quarter. Depreciation expense is expected to be approximately -- $11 million to $11.3 million in Q4, up from $10.4 million in Q3. We continue to estimate that the effective tax rate for fiscal 2010 will be in the low single digits. Most likely at the 2% rate that we've recorded in the fiscal third quarter. As demonstrated in recent quarters, the tax rate can vary during the year based on the mix of forecasted earnings between taxing jurisdictions.

Our expectations for the balance sheet are for inventory to be relatively flat, and for accounts receivable and accounts payable to increase in dollar terms for the fourth quarter. Based on the forecasted levels of revenue, we expect these increases will result in slightly lower cash cycle days. We currently expect cash cycle days at 72 to 74 days for the fourth fiscal quarter. This increase is primarily the result of an expected increase in days of payables based on the timing of inventory purchases during the quarter and payments to our suppliers. Year to date we have spent $47.3 million in capital and expect a significant capital spend in the fiscal fourth quarter. Our capital spending forecast for fiscal 2010 remains at $80 million to $90 million, as we discussed in the April conference call. As Dean said, as total capacity remains high at 84%, which is not sustainable to support new programs and retain white space to show to potential new customers. As a result we are making plans to expand our footprint in close proximity to our existing locations, including the fourth manufacturing site in Penang, Malaysia, that was announced yesterday. We expect to spend $9 million in capital for this site in the fourth fiscal quarter for the acquisition of land. The balance of the capital and initial equipment for that new facility will be spent over fiscal 2011.

Beyond the new site in Penang, we are also actively reviewing potential expansion in close proximity to our existing locations in Xiamen, China and Oradea, Romania. The timing and size of these expansions will be dependant on how we see customer demand in these regions evolve. Although investment in both locations is likely to begin sometime in fiscal 2011. Our financial model and targeted ROIC is designed to generate enough cash to support 15% to 18% revenue growth. In a year like fiscal 2010 in which we will likely exceed that revenue growth rate, we would expect to use some of our excess cash to fund growth. We expect to be negative in free cash flow during fiscal 2010, to fund working capital and capital expenditures. We calculate free cash flow as cash provided by operations less capital expenditures. As a reminder, we generate $113 million of free cash in F'09 and believe the ebbs and flows of cash are a normal part of the EMS business. We expect to fund these investments with our existing cash and have no plans at this time for additional borrowing. As a reminder, we do have a committed $100 million line of credit with our existing bank group that could be utilized if we have short term cash needs. This period of strong revenue growth is an exciting time for Plexus and we are managing with our usual care and discipline. As a management team we are committed to making the right investment to support growth while delivering our financial model and results for our shareholders. With that I will open the call for questions. We ask that you limit yourself to one question and one follow up. Operator, please leave the line open for follow up questions.

Yes, ma'am. (Operator Instructions) One moment for our first quarter. Our first question comes from Reik Read of Robert Baird.

Hey, good morning. Dean, you talked about this pause. Can you give us little bit of color on some of the delays that you're seeing. Is it consistent across the various segments, and you seem to suggest that it will resume as you get into the December quarter. Can you give us your confidence interval there and why that may be.

Yes, I think it's been an interesting couple of months here. As we came into Q3, Reik, and we looked forward to our Q4 forecast. I mean, at one point, we had a Q4 forecast that was in excess of $600 million. So we saw that forecast, I would say, come down in a fairly broad-based way as customers started to perhaps adjust to a different reality in terms of overall economic growth and demand. And perhaps it's not so surprising coming off the bottom when things start to get better, perhaps the pendulum swung a little bit too far. But clearly there's -- there was quite a bit of adjustment that took place. In anticipation of that and as we started to see that happen, that's why we really guided our Q3 -- we took a quite conservative bias off of what was really a much stronger internal forecast. Now, of course, the customers are trying to drive you toward higher numbers as they try to close opportunities, which tend to -- for many intend to happen later in the quarter. We saw some of the benefit of that as we came out of the end of Q3, with a few of our customers in that communications space.

At this point, what has happened is that the Q1 forecast over the last month or so has improved quite a bit. And so we're feeling pretty good about the resumption of growth as we come into the new fiscal year, although we're kind of loathe at this point to give guidance on it because of what's been happening here with gyrations and more negative vibes I guess generally speaking to customer forecasts. But I'd like to just say that none of the decrease in the growth has come from, in any significant way at all, from any share loss or anything like that. It's all been just customers, generally speaking, I would say, in a fairly broad sense, adjusting forecasts down from what they had in terms of their early anticipation for what they're going to accomplish as they came through the year.

Okay. And then just a quick followup on the wireline side of things. Can you give us an update maybe on the status of Starent and Avascent. The ability to maintain business with those guys. And is there any progress in working with those parent companies to maybe secure additional business?

I've asked Todd to come in here today specifically address a couple of issues and that's one of them. I'll let him speak to that.

Very good. Good morning, Reik.

Good morning.

So with respect to certainly the Starent relationship and the Avascent relationship are a bit different. And the way we're treating them is a bit different although we're taking a conservative approach internally on both. When we look at Starent, again our expectations and the way we're planning it is as if the business will exit Plexus. So as we plan growth projections and other things, we're planning that it will leave. We're aggressively working with the Cisco people to develop a long-term relationship with Cisco. That if it comes to fruition, it may or may not include the Starent product. There are other areas of interest that Cisco has with Plexus. We continue to pursue that. We have high-level relationships developed. We're hopeful that we can pull that across the finish line. But at this point we're planning as if it will not.

Now the Avascent-Emerson relationship is a bit different. We certainly have the ability to keep that business should we so choose. The challenge there is coming up with an acceptable business model for both Plexus and Emerson. Highly competitive business, and again, we're -- we continue to work it internally to see if we can come up with some interesting solutions, but right now, our longer term plans are that the business will exit. At least that's what we're -- what we are planning in a conservative way, although that still is not by any means a done deal.

Todd, why don't you just mention what -- what our anticipated timing is, particularly for Starent since that one probably has more certainty to it.

Yes. The Starent, what our expectations are is we have it forecast pretty healthy in Q4 and Q1, and then it starts to ramp down from there. And I would say if anything, that's conservative in a negative way toward Plexus. That's likely to stretch out further.

Okay. Great, guys. Thank you very much.

Thank you.

Thank you. Our next question comes from William Stein of Credit Suisse.

Hey, guys, this is (inaudible) on behalf of William. First question is, could you actually provide a little more detailed update on demand trends by geography, particularly in Europe where the -- as you said earlier that demand had weakened, at the analyst day. A little more detail around that.

I think -- Todd can chime in here, I would say generally speaking I think demand in Europe was really just reset around perhaps lofty expectations by our wireline infrastructure networking folks. And that -- that adjustment has been made. Beyond that I don't know that there's any significant changes to our other sectors that you can really point out. We're still seeing good demand. Todd, do you want to--?

Sure. Just to maybe give you a little bit of color around what happened in Q3. Roughly mid-quarter we saw four significant customers in the wireline wireless sector show significantly lower demand in Europe. Of those four customers, the European demand did not recover within the quarter, and three of the four actually ended up considerably down on the quarter based on that European demand. Now we haven't seen any long-term or lingering effects. Now what happened, as many of you have observed already, our wireline sector in particular was strong during the course of the quarter. And what we saw was a offsetting increase from a number of our major DOF, direct order fulfillment, customers. So at this point we're not seeing any further demand decreases in Europe. It had been limited to that single sector. And our expectations is this was a bit of a pause or reset, and things are back on track in Europe.

Thanks. And then in the Company's traditional niche market of high mix, low volume manufacturing, are you guys seeing increased competition from larger EMS companies like Flex or Solestica, Jabil in this market, and is there any threat to the traditionally better position in that market?

I don't think that's the competitive landscape. Certainly the rhetoric has changed out of our competition, relative to their -- their focus on this -- on this part of the marketplace. But the reality is that the dynamics of competition, I don't know, have markedly changed much other than I think our competitors are starting to get a little bit more disciplined around pricing. And so to me that just improves our situation quite a bit because we-- this is the sole focus of our Company, and we think that our model is more finely tuned to execute on this kind of business. And to price it more accurately. So I think our competitive situation has actually improved some, even though there's a lot of attention on this marketplace. And I think it's also really important to understand that the market has very low levels of penetration. And that -- additional attention on the market, I think, in some respects maybe benefits us all as the OEMs move more aggressively toward an EMS outsource model.

Okay, great. One last one. Could you provide an update on the planned ramp-up off the Coca-Cola freestyle machines. Where is it that you guys are tracking?

Yes.

Sure. So this is Todd. I'll take this one again, as well. Right now Coca-Cola is ramping per our previous guidance I guess is the way our previous messaging that we provided. It's having a -- an impact to Q4. Certainly ramping toward the top 10 customer in Q4. We see more substantial ramps in F2011. Right now we believe that's on track. I think it's important that the freestyle machine is out in four different markets right now, and it's being accepted very well. Coca-Cola is really excited about it, and we're very excited about it, as well.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Jim Suva of Citi.

This is [Samuel Mann] on behalf of Jim Suva. First, congratulations on the quarter. You've shown great success in medical, higher margin category. Could you speak a little bit on the competitive landscape and the sustainability of pricing and margins?

Yes. I think we have had quite a bit of success in medical, and I think that it's been a consequence of several things that I pointed out in the script. Part of which, of course, is an improving end market and perhaps an expansion of the market for the medical technology companies. It's now, at least now in the US going to have a lot more customers with the health care bill that's in place. But also because we've really worked hard to diversify our business. We're seeing a resurgence of imaging technologies that's fairly broad based. But I would say it's not necessarily strong other than I think some strength in the ultrasound part of imaging. But some of the other imaging is picking up, as well. I think that you made a statement about margin. I think this is one of the misnomers, I think, that seems to continue to live on in our industry as somehow the medical technology space has got these kind of excessively sweet margins, and it's why many of our competitors try to pursue that kind of business. In reality, the margins for most medical technologies are not unlike the margins that you would get for any of the other technologies they're building other space because medical business, particularly in manufacturing and operations, carries with it additional costs in order to manage the regulatory processes, manage component tracking, et cetera, et cetera. So by -- when you get down to it, the fact that medical grows for Plexus or grows for any of our competitors doesn't have what I believe to be a material impact to the overall financial model of EMS companies.

So I think that for us it's really a question of our competitiveness here is -- is around a couple things. One is around having the processes and technology of regulatory controls in place at multiple facilities around the world including Asia where we're unique there in terms of class III capabilities and also the strength of our engineering services engine, which is a huge benefit to medical product companies as they look to bring technologies into the marketplace. And so I think we have very strong competitive advantage here, and I think that's evidenced in the growth that we've seen here over the last several quarters.

Thank you. And one more. Do the issues that you outlined last quarter have any impact on the longer term plans that you outlined in the investor day that expanded to in to Europe?

You're saying relative to the pullback we saw in the quarter?

Yes.

No, not really. We view that as just customers that forecasted one thing, and turned out to be wrong. And so they backed down from those forecasts. And so to me, it doesn't say anything really generally speaking about the broad attractiveness of that marketplace to Plexus. We think it's an underserved market from the standpoint of somebody in the mid- to low volume higher mix space. There are some very good regional competitors there that we have to have a lot of respect for on a competitive basis. In terms of EMS companies with global reach, global scale, they have not had a tremendous focus in our view, at least, on the European marketplace. And we think with our combination of engineering services and our focus on this market and space that we can be very successful there. We're going to -- we're going to go full steam ahead here with continuing to aggressively go after relationships in that market.

Do they delay thoughts on timing at all?

Does not. We already opened up a facility there in Oradea. We are bringing new customers into that facility in Oradea. We need to replace it, as I said, because it's not a long-term solution for us. You can expect us to do that as we get confidence in our F'11 forecast and our ability to take on another project considering we committed to an expansion in Penang. The Oradea one is right behind it, as well. And we're continuing to look at a way to enter with engineering services which could -- in our view most likely be a greenfield startup of an engineering center in Europe. Something that we've done successfully multiple times and one that we think a strategy we can replicate unless we happen to find a really nice, small, engineering entity that we can bring into the Plexus fold and get them into our service model.

Thank you, that's very helpful. Again, congratulations on the quarter.

Thank you.

Thank you. Our next question comes from Sherri Scribner of Deutsche Bank.

Thank you. I was hoping to get a little more detail on the industrial segment. I think you had mentioned in the comments, Dean, flat to slightly up, you're seeing -- actually mid-teens growth. But it was a bit lower than you thought. That's a pretty diverse segment. I was hoping to get a little more detail on, is that primarily exposed to the US, which is what I would assume? What are you seeing from your different customers there? Obviously Coke is probably a nice piece of that business. But wanted to get a little more detail.

Yes. I think what I was trying to do is give a sense of over the last couple of quarters, Sherri, we saw a very good broad-based pickup on demand in that sector. So when you look at the customer list, things are all lit up green, a lot of growth going on. And that's really what happened in Q3, where we were up about 21% sequentially. We expected it actually to be a little bit stronger than that, but still very, very good results in industrial and commercial. Now when you look at Q4, we do have a couple of customers that were once new business that are ramping up in the quarter. So that's contributing to some of that mid-teens growth. But generally speaking, we're seeing a weaker set of forecasts coming out of a broad set of customers in industrial commercial into Q4, and so a lot of the growth obviously is then going to be attributed to the sequential increase in the Coca-Cola technology. So it's up, it's up mid-teens. From the outside looking in that looks like a pretty good number. In reality when you look at the customer's forecasts, it's really driven by Coke and a couple of early ramps of new products that we've won. And the rest of them have all kind of paused again here. In their forecasts. And we're expecting then an improvement again as we come into Q1. So I think there's just a bit of a -- in our view generally speaking, I'm going to probably sound like I'm repeating myself. But I think there's a bit of a general reset going on here in terms of forecasts within the customer bases.

Okay. So there's a pause in 4Q and then it starts to look like we maybe see a bit more growth in fiscal 1Q. Is that fair to say from what you're seeing?

That's currently what we're anticipating. That's what the numbers tell us. But as I say, I'm trying to be careful not to start guiding next year.

Sure.

That's the reality of what we're seeing at this point.

Okay. And that's primarily in the US I would assume?

Well, these customers -- we execute revenue for them, both the US, Europe, -- and Asia. So we're seeing this, in terms of where we execute the revenue. Now it's a little more difficult in this sector for us to really get a grip on where all the products flow ultimately, where the customers consume the products because there's just lots of different mix and assemblies that flow all over the world. We could kind of take a rough guesstimate and try to get at those numbers, but it's a little difficult for us. We understand it more by industry sector than we do by regional and market.

Okay. So it sounds like generally globally the US, Europe, and Asia is -- you're seeing a bit of a pause in the industrial segment?

I would say that's a fair statement.

Okay. Then I was hoping to get a little more detail on the component constraints. Clearly this is not something that's new. Have you seen any change in sort of the rate of -- has it improved, has not there their been a change in the rate of improvement or is it still sort of about the same as where we were. Just want to get a little more detail.

I'm going to let Mr. Buseman take that one since he runs the global operations and the supply chain organization reports in to him. He gets the day-to-day misery associated with that. Let him take that one on.

Okay.

Thanks, Dean. Good morning.

Hi, Mike.

Short answer would probably be that pretty similar to what we've seen over the last couple of quarters. So as Dean said, the misery's probably not much different. I think we're encouraged. We see the investments going on in the extended supply chain. The -- I think our are good indicators that things will progressively get better. But I'd say we enter right now right about where we were at last quarter.

I'd just add to that, we're really in that cycle now where some of the bigger OEMs and, therefore, the bigger consumer-oriented EMS guys are going to be chasing parts hard for the Christmas rush on consumer products. So I think that's going to put some real stress on certain component technologies, certainly in the marketplace and the component paths. And I don't think that we're going to clear that kind of hurdle until after we get through that build cycle. And then we'll get a sense of how things are shaking out. But I think anecdotally like Mike said, we're seeing the investments. Obviously we directly benefit from some of them, with the semiconductor capital equipment guys who were seeing some pretty dramatic improvement in their outlook as we're starting to ship systems and fabrication test systems and things to the -- to those customers.

Okay. So even though you don't have the exposure to consumer, the fact that the fabs will be shifting focus to those, you think will impact you in the next couple quarters?

Well, I think it's not going to help us. One of the things -- we enjoy really good relationships with our supply chain partners. The fact that we are an engineering services engine, as well, and get to decide which parts get designed in the technologies gives us a lot of leverage that's probably disproportionate perhaps to our scale. So we generally speaking do a good job getting materials. And because we're a very high mix organization by focus, one single component short, while it can impact the customer and make the customer unhappy, generally it's not going to take us off the rails in terms of the overall outlook for the Company and generally speaking in any significant way. So I think we're -- it's a lot of hard work, but I don't think it's hurting our ability to deliver on our commitments. It really just hurts our ability to try to respond to customers who want more product because it's really hard to get more in a short timeframe.

Okay. That's helpful. Thank you very much, guys.

Thank you.

Thank you. Our next question comes from [Joe Whitten] of Longbow Research.

Hi, Joe Whitten calling in for Sean. First off, congrats to getting off to a 0.5 billion for the quarter. My first question is on the new wins. Just curious how they are weighted by sector. I know in recent quarters it's been heavily weighted towards the medical sector. How are the new wins weighted by market, and were there any new customers in there, and what percentage of those wins are kind of truly new projects versus replacing existing programs which I know is probably the majority of it?

Yes. Let me give you a little color on the breakdown. Just starting off with were they existing customers or were they new targets -- 19 of the 22 were with existing customers. And generally speaking, these are additional product lines with these customers so it's a share gain. So the existing technologies that we manufacture are still in place, and these would be additional share of new products. Now in some cases you could argue, well, some of these other products are going to go end of life eventually and this replaces that revenue. Generally speaking, we don't announce a new win for a purchase order for something we already manufacture. These are new product technologies.

From a market sector breakdown standpoints, when you look on a revenue basis, a little bit better than 50% of the revenue is in the industrial commercial space. One of the programs was actually in excess of $50 million, so it was a decent win in that industrial commercial space. A couple different product lines. Another 20%, 18%, 20% or so was in medical. And then the balance of it was split reasonably, evenly between wireline, wireless and the defense space. So really it was heavily weighted this quarter toward industrial, commercial, and medical.

Got you, thanks for that. And then just as a follow up, I was hoping to get some more details on Penang, now that it's officially announced as the fourth facility there I guess. How many -- approximately how many square feet are you looking at, if you're willing to disclose that? How -- how does this track I guess along with your existing plan I think to get a little bit over half of the global footprint in Asia? Does this fourth facility in Penang, does it put you a third of the way there, half of the way there, et cetera? Maybe one last thing on top of that for Ginger. Does this change the outlook on the tax rate at all? I know it's very low to begin with. But does more business in Penang, I guess lower the outlook further?

Joe, this is Mike. I'll take the first part of that and then maybe let Ginger follow up on the tax rate dialogue. So, yes, the fourth facility in Penang, Malaysia. First off, we chose that location because we are very comfortable, very confident there, we have three locations already. The fourth location will be in close proximity to the other three sites. We get a lot of operational leverage from that approach. Maybe some kind of attributes that we envision there. The facility we envision is going to be about 350,000 square feet. We think incrementally that would give us about another $400 million of annual revenue capacity. And that probably puts us in the place to the other part of your question, puts us in the space where we're getting close to what we need within Penang, to support that half of our revenue coming out of that region as we go forward, okay? And that's -- I'll pause there and let Ginger talk about the tax implications.

Thanks, Mike. Yes, Joe, I would say that we, as you know, enjoy tax holidays in Malaysia, which is definitely one of the impacts on our tax rate. But the other impact we're going to see next year is that as we continue to ramp the Coca-Cola program, that will be executed primarily in North America. Our view is we'll continue to grow in Asia. That's going to continue to keep our tax rate, we believe, fairly low. And we believe the best estimate for F'11 and forward is somewhere in the mid single digits for our tax rate.

Great, thanks, everyone.

You're welcome.

Thank you. Our next question comes from Sean Hannan of Needham & Company.

Thank you. I just wanted to see if I could follow up and clarify the comments, Dean, that you had made a little bit earlier around pausing from an environment perspective. Are you necessarily calling this out explicitly for industrial and not as much for other segments? And so I want to see if we can get a view in terms of the environment and then separately, and to distinguish your business, it seems that the pause currently appears to be more specific to the September quarter based on the ramp profile of new programs and your business then has an opportunity where you start moving forward. If you can provide a little bit of color that would be helpful.

Yes. I don't think I'm trying to blame it all on industrial commercial. I think that generally speaking, forecasts over the -- several months now have been adjusted downward from customers from a very strong level that they were at before. Or earlier in the year. Let me just say that. And so that has come down, and as a consequence, it took down Q4, as well. We also saw as part of that process is that the Q1 forecast improved, and so some of that -- that revenue essentially or resumption of growth started to push out in time. Part of that obviously, there is going to be some adjusting of inventories, adjusting of expectations, among our customers generally speaking. Although many of them -- some of the communications space ones really don't carry much inventory. Generally speaking in the broad sense, there's been an adjustment here that's going on. A sense that perhaps the customers are getting ahead of themselves, they're getting ahead of the market a little bit.

And so it's not just a industrial-commercial impact, as -- when I guided the medical space, that was after several quarters of very strong growth in the 19% range. We're seeing, maybe up 1% or so in Q4. Again, Q4 is our September-ending quarter. So now what we're seeing is that the growth starts to resume as we start to come into Q1. Again, we don't want to guide it yet. And then, of course, we've also got the beginning of the acceleration, specific to the industrial space of the Coca-Cola programs that also start to -- to occur in Q1. And of course unfold as we come all the way through F'11.

I don't want to paint a picture here where we're at all getting cautious or concerned or uncertain about F'11. In fact, we're really working through our planning cycle right now for our big event with our Board here at the end of August. And we actually feel really good about how the F'11 plan and forecasts are coming together even in spite of some of the headwinds that we have with a couple of customers that got acquired. We feel quite confident that we're going to overcome the hole that that created in our forecast and be just fine for growing in our targeted growth range. It's just a little bit early here given -- given the pause that if all of a sudden this whole thing starts to unwind and get worse, then all bets are off from a -- from a kind of global economic perspective. But at this point it really looks like just the pendulum maybe swung too far with the customers. They brought it back. Making some adjustment in expectations and inventory levels, and our sense right at this point, the numbers would suggest that the growth starts to resume as we come into the -- into the early -- the first quarter of the fiscal year. New fiscal year.

That's great, Dean. And then -- thank you for that. On the component side, the environment's obviously been pretty constrained for a while. I don't know if there might be any color perhaps that you can provide around missed opportunity or upside that that may have limited in the quarter. And then separately, you folks have talked I think around -- instead of pinning down, hey, there are specific -- these are the specific components that were at issue during the quarter, you have indicated that there's been really a lot of volatility in terms of jumping around from one type -- one set of components to another set as you get some of those issues resolved. Can you provide a little bit of an update around the volatility of that component environment, or are the issues now being rooted much more so in -- in specific instances?

Boy, I don't know really how to give you too much more than what Mike gave you earlier. I'll try. One is I think that the component issues at least as far as we're concerned -- I mean, there are definitely commodities that are tight. Mike can comment on that a little bit. But generally speaking, the components that we end up chasing are really the components that are specifically associated with customer demand, either new programs or increases in demand within a short lead time. And so the customers will say, gee, I need more of this product, and all of a sudden that will create a bit of a crisis where we will find a component or two or more that are in short supply, that we really got to go, get on airplanes and go talk to the suppliers of the components and try to get more -- more product. So that creates a bit of a challenge. It also creates a bit of a balance sheet, some float on the balance sheet for inventory because what occurs is you tend to get all the parts that you can and then chase the stragglers that are in short supply with the hopes that you can secure those parts and still build product and deliver it within the quarter.

I don't know that I necessarily want to quantify the revenue opportunities that are missed, but certainly we did not, there are revenue opportunities that we refused to commit to. And that creates some stress with the customers. I know I've spent more time on the phone and been in more conference rooms with customers just trying to make sure everybody has cool heads because there's a lot of frustration when you can't support all the demand that they'd like you to support within a short window. But the reality is that's what happens in a constrained component environment. And then we work hard to try to get the customers to move toward a -- what we call programs, where we put their parts in certain programs so that they're available to them when they need them. In some cases we have an offset on the balance sheet for some components that we're carrying on the balance sheet for customers. And so there's -- it just creates more stress on the supply chain folks, more stress on the customer relationships when we're in this tight environment because we can't be as responsive as we'd like to be generally speaking.

Okay. Thanks, Dean. That's actually -- that's very helpful.

You're welcome.

Thank you. Our next question comes from Brian Alexander of Raymond James.

Thank you. Just back to Coke, it doesn't sound like they're affecting your outlook for September, yet I thought you were expecting about $25 million to $30 million in Q4 revenue from that customer. They made comments yesterday that they plan to have a couple thousand units installed by the end of the year. Which would imply no more than maybe $10 million to $15 million in revenue from that customer if my ASP assumptions are correct. And even if all the quarter over quarter growth in industrial in the fourth quarter comes from that customer it would cap at around $15 million. I'm trying to reconcile some of the previous comments with what you've said today and figure out if that program really is on track.

Well, I think it's delayed somewhat from what earlier expectations were. No question. Part of the revenue also has to come from the crew serve unit which is still going to get introduced, as I understand it, in the first quarter, our first quarter, fiscal quarter or the fourth quarter of the calendar year. But I don't know that for a product of this level of complexity and for -- and in association with that, the level of complexity in the Coca-Cola supply chain for the concentrates and in the Coca-Cola kind of reverse supply chain, for support of the units out in the field, that I'm at all troubled by it. In fact, I think this is, this is a very complex opportunity, it's a complex technology, I don't -- we don't see that there's any specific gape from our perspective at this point. The manufacturing readiness is there. The supply chain is supportive of the production ramp. It's just a matter of Coca-Cola I think taking a little bit more paced strategy in terms of what -- how they're going to bring this thing up and how they're going to deploy it into the field. And so we still are very enthusiastic about the program, extremely high expectations for how this thing could -- where this could end up, and of course we also like the fact that it really becomes a marquee program for us in complex electrical and mechanical assembly that we are expecting to leverage now and expect to leverage in the long run for similar kind of opportunities. So I'm not -- I don't think that there's anything that I would be concerned about relative to the -- the ultimate view of this program.

Yes Brian, I would just want to clarify, we've talked over the last quarter or two of Coca-Cola in our fiscal year of being $25 million to $35 million. That is absolutely still on track between what we saw in the third quarter and what we expect to see in the fourth quarter. And we have no change to our expectations for those programs for F'11, to Dean's point. We say no significant change and we feel very strong about our opportunities with this customer, both for what we expect for F '10 and for F'11.

That's good to hear. Just a follow up on 2011, I know we don't want to get ahead of ourselves, but realizing your growth target is 15%, your new wins were impressive again at $141 million. Is that win rate sustainable here in the intermedia term? And if so, it would suggest new wins alone could get your growth rate closer to 20% next year, assuming just modest end demand, normal attrition from end-of-life programs and the loss of some of the acquired A customers that you touched on. Again, I know we don't want to get ahead of ourselves, but am I missing anything in thinking about how good next year can be for Plexus?

I don't think you're missing anything. I just wouldn't put down a number like 20%, thanks.

Understood. And last follow up, Ginger. The margin profile, specifically 10% gross margins, 5% operating, you think you can hold that as you're ramping up capacity aggressively? I just wanted to make sure that's something you think you could achieve over the next several quarters?

We do feel confident about that because I like to remind people that we are always managing ramping of new facilities and the fluctuations of various customers who are ramping. So for example, we are -- although these sites have been around for three or four quarters, we are still managing bringing up to speed our two most recent sites in Hangzhou, China and Romania. So those create a bit of a drag. And we also have other sites that are coming up to Plexus profitability like our site in Juarez. So as we bring those sites profitability, it creates the ability for us to invest in new sites. That's part of the Plexus model that we manage to try to in the long term consistently deliver that, that financial model for our investors.

Great. Thank you very much.

Thank you. Our next question comes from Brian White of -- excuse if I pronounce this wrong -- Ticonderoga.

Okay. Ticonderoga.

Good morning, Brian.

Good morning. I am wondering if you can talk a little bit about the pricing environment. Sounds like the mood has changed a little bit in customers. Has that resulted in any increased pricing pressure in the industry?

Todd, I'll let you since you're the guy who ultimately makes the decisions on where we price, I'll let you take that.

Sure. So Brian, I guess what I would say is that it's probably a better pricing environment than it was a year ago. I would say a year ago we saw more signs of irrational pricing for certain pieces of business, and within certain of our market sectors, I would say that we're seeing much less of that right now. So it's always a competitive environment here. And you always need to be competitive to win new business, but we're seeing less evidence of people coming in, attempting to maybe buy their way into markets or into customers than we had, say, a year ago.

Okay. And in the networking markets, you're primarily focused on service provider. Could you talk about the opportunity and enterprise networking for Plexus.

Yes. This has been a -- we've talked a lot about our efforts to diversify medical. We've also had a -- quite an effort to diversify networking space, as well. So we have a fairly decent exposure today now to the enterprise side of the opportunity here with a couple of our customers. So it's still early for us, but we're seeing some of the growth that we've actually experienced recently is associated with some of our customers' success on that enterprise side.

Okay. Thank you.

Thank you.

Thank you, I'm showing no further questions at this time.

All right. Well, I want to thank everyone for joining us today. I know we've been at a torrid pace of growth here over the last several quarters and it's been extraordinarily exciting. Wouldn't have been long ago, guiding up just even a percent or two in growth would have been considered sequential. Would have been considered exciting. We're talking about it as a pause. But the reality is this is going to be a really excellent year here fiscal 2010 for Plexus, and we think that it -- by all, all of our data at this point says it is in fact a bit of a -- maybe a near-term reset in expectations for customers. And that we would -- we're anticipating now that we're going to be back to the resumption of growth in the coming year, and I think as evidence of our confidence of that, we've gone out and started up the opportunity here with a new facility or in Penang, Malaysia to support longer term growth and we have not backed away from our longer term strategy for growth in other regions both in Asia and in Europe, as well. Although we haven't put a shovel in the ground yet in some of those locations, I would anticipate that we're going to make those decisions as we move through F'11 and get more confident in the whole economic recovery. So we're still quite bullish. We feel great about our market position, and our opportunity for long-term growth and delivering the shareholder value. Thanks, everyone, for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.