Plexus Corp (PLXS) 2010 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 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. This conference call is scheduled to last approximately one hour. I would now like to turn the call over toMr. Angelo Ninivaggi, Plexus Vice President, General Counsel and Secretary . Angelo, you may now begin your

Thank you, Devon. Good morning all 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, intends, plan, anticipate and similar terms an concepts are forward-looking statements.

Forward-looking statements are not guaranteed since they are in terms difficult to predict in 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 result to differ materially from those projected, please refer to the Company's periodic SEC filings particularly the Risk Factors in on Form 10-K filing for the fiscal year ended October 3, 2009 and the Safe Harbor disclosure statement in yesterday's press release.

The Company provides non-GAAP supplemental information. For example, our call today may refer to earnings or earnings-per-share 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 frequent or unusual charges.

Similar non-GAAP financial measures including return on investment capital are used for internal management assess 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, Todd Kelsey, Senior Vice President of Global Customer Services and Mike Buseman, Senior Vice President of Global Manufacturing Operations . Let me now turn the call over to Dean

Thank you, Angelo, and good morning, everyone. Last night we reported results for our fourth fiscal quarter of 2010. Revenues from $556 million, up 3.6% sequentially with EPS of $0.65. Both revenue and earnings exceeded the higher end of our guidance range. We are pleased to deliver a strong quarter bring a close to a really wonderful year.

Fiscal 2010 was an excellent year for Plexus with organic revenue growth of 25% driving full year revenue above $2 billion, a significant and exciting milestone for the Company. We grew revenues in all regions, the Americas, Amia and Asia Pacific the impact region experienced exceptional growth in a combination with our facility in Mexico, shifted the Company's revenue mix in favor of low cost regions for the first time.

Our engineering solutions group contributed meaningfully to our financial performance while delivering highly valued solutions to our customers an exciting new products into manufacturing. Importantly, our teams are disciplined and consistently focused, not us just on growth, but on delivering profitable revenue growth.

As a consequence we delivered full year EPS of $2.19 and 87% improvement over the prior year. While improving our return on vested capital performance to 19.5%. We have incubated through our ROIC as a variable conversation metric for the Company.

One of our enduring financial goals is to deliver ROIC at least 500 basis points above our weighted average cost of capital, a fundamental delivering economic profit on shareholder value. Turning now to some additional insight into our second performance by market sector and our current expectations for early fiscal 2011.

Our Wireline/Networking sector was down 1% in Q4, in line with our expectations when we established guidance for the quarter. While we experienced growth in -- with a majority of our significant customers in this sector and market challenges with a couple of customers held the sector to overall lackluster performance.

Our Wireline/Networking sector, our biggest sector, grew a robust 18% in fiscal 2010. Looking ahead to Q1 we currently expect our Wireline/Networking sector to grow in the mid single digit percentage range, although the performance among the top ten customers us a mixed bag of ups and downs.

Our Wireless Infrastructure sector grew approximately 5% in Q4, a weaker performance than the 10% growth we had anticipated as a couple of customers experienced weaker than anticipated end market demands. Knoller and volatile sector in our overall portfolio our Wireless Infrastructure sector grew 43% in fiscal 2010. In Q1 our Wireless Infrastructure revenues are expected to decline about 10% as we wind down production of the Cisco [Star] program.

As previously disclosed, Cisco acquired Star earlier in the calendar year and informed us early on that they intend to consolidate the star program into one of their preferred EMS partners. As we communicated earlier, we had model and a aggressive of ramp down the Star business in our fiscal 2011 forecast. The latest plan is even more aggressive as we currently anticipate largely completing the Star transition during fiscal Q1. While we are disappointed that we lost the program, it is not new news and we have been planning for this eventual outcome.

Partially offsetting the lost revenue in this sector to new programs, one in recent quarters that will continue to ramp in Q1. Our medical sector revenues grew approximately 4% sequentially in Q4, better than our earlier expectations as we continue to see strength across a broad range ever medical technologies that we manufacture.

Our medical sector was a real success story in fiscal 2010 after a challenging fiscal 2009. Revenues in medical sector grew 15% for the full year. We currently anticipate that our first quarter will be flat for a medical sector, the underlying performance of most of our medical customers is positive during the quarter but we continue to ramp new program to our customers.

However, two significant accounts currently expected to be down sharply during the quarter using overall sector performance. Revenue in our Industrial/Commercial sector was up approximately 18% in Q4, slightly stronger than anticipated when we established guidance as several customers outperformed their earlier forecast. Fiscal 2010, was a robust year for our Industrial/Commercial sector as revenues grew a whopping 65% over the prior year as we successfully increased share over the number of key accounts while engaging in some exciting relationships with new customers.

Our current view is that Q1 will be flat for Industrial/Commercial sector in part due to the push out to later in fiscal of 2011, of some of the revenues of the Coca-Cola programs as our customer continues to refine the market launch plan and ready to supply chain for the Freestyle and increase technologies. I want to make clear that our customer continues to be enthusiastic and committed to the overall program as are we.

Our customer wisely, in my opinion, is carefully managing the market launch to ensure a success oriented program. The net effect of the push out does not change our full year expectations for the programs, though we are clearly more back end loaded with the current view. Our Defense/Security/Aerospace sector was down 10% in Q4 as four of the top five accounts upped performed at earlier forecasts.

Our Defense/Security/Aerospace sector was the only sector that did not grow in fiscal 2010, with revenues declining approximately 2% for the full year. You might recall that in fiscal 2009 we were winding down production of the IED jamming technologies that were deployed by the US Marines in the Gulf War effort. Episodic nature of that program makes year-over-year comparisons a bit more challenging on for the Defense/Security/Aerospace sector.

Looking ahead to the first fiscal quarter of 2011, we currently expect revenues in the Defense/Security/Aerospace sector to grow in the low mid-teens percentage range largely due to the strength in aerospace. Turning now to new business winds.

During the first quarter we won 24 new manufacturing programs that we anticipate will generate approximately $115 million in annualized revenue. During fiscal 2010, we won approximately $501 million in annualized revenue for our manufacturing solutions group, a strong result. Our funnel of manufacturing opportunities remains very healthy at $1.8 billion with 56 opportunities in the $10 million to $50 million range, a program range where we have demonstrated that we can be very competitive.

Additionally, about one third of the funnel is in medical while another third is in industrial commercial. Two sectors that we have built momentum over the course of the prior year. Our engineering solutions group enjoyed a record $21 million in new program wins during our fourth quarter demonstrating the growing acceptance of are comprehensive product realization value stream solutions, particular customers in our medical and Industrial/Commercial sectors.

Our go-to-market success with engineering solutions gives us further confidence in our strategy to expand the capacity and footprint of this important differentiator. Addressing capacity, utilization and global growth our at tool capacity utilization in Q4 was approximately 85% overall for the Company, a level that will limit our growth opportunities without further investment.

As we discussed previously, we have commenced -- we have commenced construction of an additional facility in Penang Malaysia. We expect the new facility to be operational in early fiscal 2012. Additionally, as we move through fiscal 2011, we anticipate announcing further capacity investments in China to enable longer term growth. We recently announced that Steven Frisch, a long tenured Plexus executive, has accepted a new leadership position in Plexus.

Steve is relocating to Germany and will lead our European teams as regional President Plexus EMEA. Steve has been working to refine our broader strategic plan for the region and will likely announce the timing and scale of both manufacturing solutions expansion in Romania to replace the leased facilities there as well as our plans to bring engineering solutions to Continental Europe. Turning now to our guidance.

While we delivered a strong finish to fiscal 2010, we currently anticipate that the first half of fiscal 2011, will presents some headwinds before returning to stronger growth and operating performance in the second half. Our current view is that our fiscal 2011, first fiscal quarter will be flat to modestly higher than fiscal fourth quarter of 2010. We are estimating fiscal first quarter 2011 revenue guidance of $510 million to $580 million with EPS of $0,56 to $0.62 excluding any restructuring charges and including approximately $0.06 per share of stock-based compensation.

Looking ahead to the first -- let me see. Looking ahead to the fiscal second quarter, we currently anticipate a somewhat challenging quarter as he we ramp down production for two customers including completing the Star program, while we absorb structural seasonal operating cost increases including salary adjustments during the quarter.

Looking to the second half of 2011, we currently anticipate returning to strong growth as we continue to ramp a number of new programs won in recent quarters including the Coke Cola program. We currently expect operating performance in the second half to be consistent with a long term financial model.

Before I turn the call over to Ginger, I want to thank the Plexus folks around the world for delivering a terrific year your focus on customers service excellence let will us do an important $2 billion mile stone. You should take great pride in your accomplishment. Best to you all. Ginger.

Thank you, Dean. As Dean mentioned earlier, revenues exceeded our high range of our guidance range. The growth profits performance for the quarter ended largely as expected at 10.1% for the fourth fiscal quarter. This was in line with our expectations and slightly below the third fiscal quarter.

Selling and administrative costs were $27.4 million, lower than our expectations for the quarter and our spending in the third fiscal quarter. The reduction in spending was the result of slightly lower incentive compensation as expected and restraints in hiring and managing discretionary spending.

SG&A cost of percentage of revenue decreased again this quarter to 4.9% and expected results as we obtain better leverage from increase revenue during the fourth quarter. Last item for discussion on the income statement relates to our tax rate. Our tax rate for fiscal 2010 was 1%.

This is lower than the 2% tax rate used when we established our guidance for this quarter, due to the regional mix of earnings in the fourth quarter. Consequently, the diluted EPS for the fourth quarter was $0.2 higher than we would have anticipated. As a reminder, variations in mix of forecast earnings between 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 Chain too while US earnings are taxed at the full 38%, federal and states tax rate. For the full year we are very pleased to report that we delivered results on line with our financial model of 20% ROIC, 10% gross margin and 5% operating margins.

Results for the year as we disclosed where ROIC of 19.5%, gross profit of 10.3% and 4.9% operating profit. Moving on to the balance sheet of cash flow. Working capital was largely as we expected the fiscal fourth quarter.

The cash conversion cycle remains flat during the quarter at 75 days, slightly higher than our expectations of 72 to 74 days. Some of this increase was a result of demand variable from our customers and the challenges of a continue to ramp strained supply chain environment. I will now get into the details by balance sheet items. Days in receivable increase by four days to 51 days.

This was impacted by both the timing of shipments during the quarter and fewer pre- payments from some of our customers. Days in inventory were 90 days, up one day from our results in both the second and third fiscal quarters of this year. The dollar value inventory increase by approximately $24 million or about 5%. This increase in inventory dollars was largely based on our customers demand variability and lengthening lead times for certain components. We

continue to monitor our inventory levels and are working diligently with the assistance of our customers to insure we have the right levels of inventory to meet their needs and to manage our balance sheet. We managed this inventory risk prudently as demonstrated by the approximately $26 million of cash deposits on our balance sheet equivalent to five days of inventory which helps to mitigate our inventory risk.

Accounts payable days increased by five days to 66 days. We are pleased with this result in the fourth quarter which was achieved despite the volatile supply chain environment which makes managing accounts payable difficult. Free cash flow for the quarter was positive in the amount of $1.5 million.

We generated $28.7 million of cash in our operations largely from earnings. During the quarter we spent $27.3 million in capital expenditures, primarily for equipment to support new programs and increase customer demand. This included approximately $9 million during the quarter for the land for our new facility in Penang, Malaysia.

All of our investments and working capital and capital expenditures or 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 accomplished. For the full year free cash flow was negative in the amounts of $73 million with approximately $2 million generated from operations and capital expenditures of $75 million.

Cash generated from operations was offset by the significant increase in working capital of our fiscal 2010. We have been supportive of our customers during the past year, making investments in inventory to support their demand volatility and the challenge of this constrained supply change, we are executing a discipline plan to get back to a more normal level of working capital over the course of the coming fiscal year.

I will turn to some comments on the first quarter of fiscal quarter 2011. The first quarter looks in line with our financial model of 5% operating earnings. Gross margin is expected to be slightly below our targeted 10% in the range of 9.7% to 9.9%. This is lower than the 10.1% that we achieved in the fourth quarter and reflects changes in our revenue mix.

As Dean outlined, over the next two quarters a couple of significant programs that are mature and therefore inherently move profitable are beginning to be replace by new programs that are inherently less profitable as they ramp up. We will work to offset this projected near term gross margin pressure with aggressive management of other costs including SG&A, in effort to deliver our operating profit target of 5% in the quarter.

SG&A for the fiscal first quarters of 2011, is expected to be in the range of $27 million to $27.5 million. This is in line with spending notice fourth quarter of fiscal 2010. Deprecation expense is expected to be approximately $11.6 million to $11.9 million in Q1, up from $10.9 million in Q4.

We are estimating the effective tax rate for fiscal 2011will be in the low single-digits, most likely free 3% and 5%. This is an increase from fiscal 2010, based on the expected income from the Coca-Cola program which is taxed at US rates. As demonstrated in recent quarters the tax rate can vary during the year based on the mix of forecast the earnings between taxing jurisdictions.

Our expectations for the balance sheet are for inventory and accounts receivable to be relatively flat and for accounts payable to decrease in dollar terms for the first quarter. Based on the forecasted levels of revenue, we expect these increases will result under higher cash cycle days.

We currently expect cash cycle days of 78 to 80 days for the first fiscal quarter. This increase is primarily the result of expected decreases in days of payables based on the timing of inventory purchases during the quarter and payments to our suppliers. Our capital spending forecast for fiscal 2011 is expected to be approximately $100 million.

As to capacity remains high at 85%, which is not sustainable to support new programs and retain light space to share 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 Dean discussed earlier.

We spent approximately $9 million in capital for this site in the fourth fiscal quarter for the acquisition of land. The balance of the capital for the building initial equipment will be spent in fiscal 2011. This project is on schedule to be operational in early fiscal 2012.

We have also signed and agreement with municipality of Oradea, Romania for the development of a new manufacturing facility that will replace our existing leased buildings. We plan to develop a manufacturing facility between 160,000 to 215,000 square feet. Construction of the facility is expected to begin in the second half of fiscal 2011.

Our financial model and targeted ROIC is designed to generate enough cash to support 15% to 18% revenue growth. With our expected improvements in working capital in fiscal 2011 we expect that we can funds these capital expenditures and generate free cash flow. As a reminder, we generated $113 million of pre-cash flow in F '09 and utilized $73 million in fiscal '10.

We believe that these areas flows of cash are a normal part of the E&S business. We expect to fund these investments in F '11 with our existing cash and have no plans at this time for additional borrowing. As a reminder we have a committed $100 million line of credit with our existing bank group that could be utilized if we have short term cash needs.

Looking ahead, we have completed our annual review of our weighted average cost of capital and have reduced our internal estimates of lack from 15% to 13.5%. As a result, we will rebrand our financial model with a new ROIC target as our target is based on a spread of 500 basis point above our estimated weighted average cost of capital. Effected in fiscal 2011, we will target a five ten five model. ROIC, 500 basis points above our weighted average cost of capital. For fiscal 2011, this would be 18.5%.

We believe this 500 basis point spread is enough to absorb any volatility in the weighted average cost of capital and provide a compelling investment for the shareholders. A 10% gross margin target unchanged, and an unchanged 5% operating margin target.

As demonstrated in our first quarter F '11 guidance, we will try to protect the operating margin whenever possible, by managing volatility and gross profit through spending discipline. This 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 investments to support growth while delivering our financial model and results to our shareholders. With that I will open the call for questions. We ask that you please limit yourself to one question and one follow-up. Operator, please leave the line open for follow-up questions.

(Operator Instructions). Our first question comes from Reik Read of Robert W. Baird.

I just wanted to ask a broad question first. If you look at the bookings in the last two years they've kind of been out sized relative to what we've seen historically probably $50 million or so more a quarter. It seems like a lot of the share gains that -- that occurred during the disruption were really the key contributor to that so I guess the question is, is there a reason that you would expect those to continue and this is the -- kind of the sustainable level of bookings or should they start to come back down as they -- as they indicated this quarter?

Well, I think to be clear we certainly -- we benefited because we were financially strong EMS provider through a difficult time and so we certainly benefited to some extent with some programs coming out of maybe tier 3s or even out some of our larger competitors that were consolidating footprint and that was a benefit at this time to us, but I would also say that we have been working very hard on really refining our go-to-market strategy over the last several years or on this sector orientation and really adding some exceptional talent to go out and develop those markets, understand those markets longer term and how we could provide value and in addition to that the -- the processes that sit behind the teams which, Todd is a leader of part of this so the customers management organization, he's in the room today and Mike Buseman the other part, we call the hunters, the gathers approach. But essentially that is very much more a mature organization, much better process and much better understand of the market and how we're going to add share. So the summary of all that is we in the that engine to consistently deliver strong revenue growth, new programs with existing customers as well as new targeted accounts and I would expect that we're going to continue to -- to perform at this level and, in facts, you know, even though it was a nice number this quarter really the engine is designed to -- to deliver more than that on a quarterly basis.

Okay. And then, Dean, maybe you could give is a comment on the wireline side. You talk about that being a little bit mixed. It sounds like in the marketplace there is some evidence of some slowing and maybe you could talk a little bit about that enterprise versus Teleco and what you're seeing out there.

Yes. I think what we're seeing it as -- we are seeing some strong performance with some of the newer technologies around enterprise. We're also seeing, some of the infrastructure build-out going on with the -- the providers. I think what we're just seeing is a bit of a mixed performance as a result or a consequence of specific customers and their product cycles and in particular we have one customer who got -- got caught behind the curve a little bit on a product cycle and has lost some share to a competitor and so we're seeing the impact of that. So that's hurting us and then also in that sector is the Advocent program and we talked about Star quite extensively in the script here but the Advocent program is also starting to have a little bit of volatility as we begin to manage down that elements of that relationship here in the coming quarters.

Great. Thank you.

You're welcome.

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

this is (inaudible) on behalf of Will. So can you -- keeping on the same track starting Advocent, could you give us an update of the ramp down plans now? Because my impression is that earlier the Advocent program was -- looks like it was going to ramp down starting with June quarter. Could you just give us the progression of the ramp down for both an the magnitude as well?

Yes. Well, I will just repeat what I said on Star and just to be clear that we -- we really believe that the star program now -- the way they've laid it out for us, our customer -- the new customer, Cisco, is they want that program ramped down within this quarter. So our fiscal first quarter, December quarter, and so we're aggressively working with them, frankly at this point it's in our interest to get that behind us. So we're working aggressively to ramp that down. We'll see how it comes out but that's the goal right now is to get it completely ramped down through the quarter and of course that creates a bits of a revenue hole going into Q2, which is why we are cautious a little bit on the linear of Q2. Now, Todd can give you a little more insight into Advocent, which is -- it's certainly going to wind down in part, but -- but has a little uncertain path.

Sure. So thanks, Dean. So with respect to Advocent and Emerson as of today we've been unable to reach a mutually agreeable business model with them so we are expecting that this business will eventually exit and the way we're projecting it out we don't expect it to be an overly aggressively exit, but we are projecting a ramp down throughout fiscal 2011. We expect the program could be completely out either at the very end of fiscal '11 or maybe early fiscal '12. So that's in essence the way we project the ramp down for the Advocent business..

Okay. And just so I understand this completely, Star, the December quarter will exit at a completely ramp down run rate and Advocent, when does it start ramping down? I mean when do they exactly start ramping down?

In essence the -- the Advocent revenue starts to ramp down in quarter two, but it's a very gradual ramp is the way I would characterize it.

Okay. And also if you guys could provide us an update on Coke-Cola? What does the ramp up progression look like and could you actually remind us of the -- the size of the program as pertaining to fiscal '11?

Yes. I would be happy to start. We have talked about this program being win fully ramped $100 million for each of the components. First the Freestyle and second behind the counter crew serviceness. We have generally seen that we've modeled that at between $150 million to $175 million revenue for F '11 and I would say that is unchanged, but we see it more back end loaded than we would have thought about a quarter ago. So it will be modest in the December quarter and then ramp pretty deeply beginning in the fiscal second quarter.

Okay. Thanks. Appreciate it.

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

Hi. Thank you. You reiterated your revenue growth contaminations of 15% to 18%. I'm trying to understand, you know we've got a flattish quarter in December an there's some headwinds in the March quarters. Are you still comfortable with that 15%, 18% growth for fiscal '11?

Yes.

Okay. That was a short answer. And then for fiscal 2Q. I'm just trying to get a sense of what type of seasonality you expect with the addition of the ramp downs and the impact of the changes in the programs? It also sound like we are we'll start to see the Coke deal ramp in you commented that you thought that Q2, so I don't know if that offsets it, but in the press release and on the call you commented that you thought that Q2 would see some headwinds. Trying to get a sense how much you think that might be down?

Yes. This is the challenge because it's just a lot of moving pieces going on and we just want to be a little bit cautious here. I think the way we see it at this point is probably the -- the most likely outcome is -- is a sequential any flattish do maybe down just slightly quarter in Q2. No we've got quiet a bit of time to work on that and actually try to level it a little bit, more in particular the Coke-Cola program and pull some of that back into the quarter but right now as we see it it's flat to down sequentially and then as I indicated we also then have some of these structural cost increases, seasonal cost increases, that are going to pressure margins in that quarter. So as Ginger said, we're going to work hard to the extent that we can to try to protect the operating line and mitigate the pressure that we're going to see on gross margins through that transition quarter, but we wanted to caution that the linear for Q1 to Q2 might be a little bit problematic before we start to see a returning to the model as we get into Q3 start to see revenue so it.

Okay. It sounds like revenue is slightly down but we're going to see an impact to margins and is that primarily in the gross margin side because of the transitions or is that -- are is will also some head on the SG&A side?

Hi, Sherrie. Is this Ginger. I think there are impacts on both and we are not guiding the second quarter yet because we're still working through that, but we would expect challenges on the gross margin line based on the mix changes, right, so mature revenue that is exiting and newer revenue that is inherently less profitable ramping up and then we do have structural costs in our March quarter, our second fiscal quarter, including merit adjustments and other kind of structural costs that typically lead to an increase in SG&A in that quarter. So if you look back on fiscal '10 or '09 you can see that there is traditionally a step up in SG&A in cost in that quarter. So I think for both of those reasons we are thinking there will be bit more on the model in fiscal second quarter. Okay. I just wanted to clarify -- I don't know if I misheard but it sounded like, Dean like you said guidance for fiscal first quarter was $510 million. I think until the press release you said $550 million to $580 million. Yes, It's $550 million too $580 million.

Great. Thank you.

I apologize if I misspoke on that.

Thanks.

You're welcome.

Thank you. Our next question comes from Joe Wittine of Longbow Research.

Joe calling in for Sean Harrison. You spoke about trends in wireline in the follow-up question. I was just wondering if you could give any more detail on exactly what happened?I think just to clarify you said a couple of customers softened disappointments an then maybe one of those got caught behind a product cycle. Any more detail you can provide onto exactly what the issue was? Was it an issue they changed their schedule and you weren't able to get product out or any more detail I guess would help? Thanks.

Well, I don't think it's any secret that people know that Arris is one of our customers and I think the print on Arris is pretty clear as to what some of the challenges are that they are seeing in their end markets at this point. Competitive pressure. So we're seeing that effect. And then also like I said we started to see some of the -- as some of the Advocent business is starting to transition. We also have the -- the customer now who is, as they set up the sales channels for the Advocent product, is causing some volatility as well in the forecast. So I think the bigger of those two effects really is the Arris and that's where I would focus the attention.

Okay. Thanks. And then a quick follow-up on defense an aerospace. Granted it's a small segment for you, but you saw it down year and some of that was maybe G detail going away in the prior fiscal year. What do your customers see as you look out in the next year as austerity measures get more and more into the head lines. Relative to your customer base,do you have pretty wide mix of big defense contractors?So any commentary you can provide on there on customer discussions?

Yes. I think it's kind of -- there's two stories here. Primarily, I think we're seeing the shift for the dominance of revenue in that sector being through aerospace and there is a lot of exciting things happening in aerospace with the launch of some of the new airline platforms that are coming into the marketplace and -- and of course we starting to see airlines getting more profitable so the -- the refresh on those technologies an the fuel efficiency and range of some of the new aircraft is pretty compelling so we have worked hard to build our relationship with Honeywell as well as quite a long list of other companies that provide set assemblies into those -- those new air frames. We're certainly seeing some weakness in the -- the defense piece of it although, the -- the down pressure on those companies may further accelerate a move toward lower cost solution for them. There is still a substantial amount of revenue. I would say wildly substantial amount of revenue that still is internally manufactured within the defense contractors. So it -- over the long run might actually create some better opportunities as they work to try to -- to take down their cost structuring and create a little bit more flexible, a little bit more lean manufacturing solution set. So we still see opportunities there. It's just that they come slow and generally come in smaller -- smaller chunks, I would say than what we see in a lot of other sectors. Todd, do you want to add anything to that.

Sure. So basically I would say internally we see Defense/Security/Aerospace much like we did medical a few years back where we really needed to rebuild the customer base or build the customer base and the team has done a great job as you mentioned, we have a great customer base within this sector. We're positioned well. We're expecting strong growth out of the sector as we move forward. So we think F '11 could be a real nice year for this sector. Very helpful. Thanks everyone.

Thank you.

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

Good morning.

Morning.

So I have really possibly one question but kind of multi part. I was looking to see if we can gets a little bit more color around the wins you had in the quarter. Both on the actual wins and then the engineering. The degree to which these are existing versus new customers and also business that you're taking away from competitors and -- and the segments that we're really talking about here?

Okay. Well, let me start with kind of the -- the breakdown by sector and I will give you maybe the -- I guess the percentages by sector. I can break it down for you that way. If you look at the combined -- you break down that total number the combined percentage for wireline and wireless together was about a third of the -- the revenue. Another third of the revenue was in the Industrial/Commercial sector and then the other -- the remaining was split pretty equally between medical and defense security and aerospace so a reasonably balanced performance I would say for the wins. As we look at it from a customers versus targets categorization, in terms of win quantities now, I think we said 24 wins. 21 were with existing customers. So this was all increasing the share that we have with those customers capturing new product launch he is with those customers and then that remain -- the remaining then were three were with new targeted accounts that we think we can grow nicely into the future. I don't really have any specific data in front of me on take away from competitors at this point unless, Todd sitting right next to me here he's looking down of this and knows of anything obvious here, but I think most of this was bid out competitively in the marketplace so we just won it versus competitors winning it. So I don't think it was an extraction.

I would say there was one significant extraction that came in the wireline sector and then of the -- the new wins or the target wins there was one very substance win in the wireless so that's positioned to ramp relatively quickly and one very significant win in Industrial/Commercial. That will be a much slower ramp.

Terrific. And then on the engineering side, I'm summing that roughly what 70% is medical focused?

Boy, could you have had the numbers right in front of you, it's actually 74% this quarter was medical and of course always very strong and then another 18% to 20% or so was Industrial/Commercial.

Great. Thanks so much.

Thank you.

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

Yes. Just how confidence are you that you will get back to the ten five margin model in the second half? Seems like you will be below it in the first half and I know you've got facilities ramping over in Asia and I believe in Europe , which will introduce more costs. You're aggressively ramping the Coke business which could have some pressure on margins in the early stage of that and you're going to have a higher up ex structure given some of the comp increases. So just your confidence level that in the second half you should be able to achieve that

Yes. I don't think we see anything in the marketplace in terms of how we were pricing business or how we run the business just from a fundamental standpoint that would suggest that -- that we have to walk away from that -- that model, which is why Ginger reiterated and rebranded it some extent today. So we're quite confident. In fact, we try to say that we don't use as an excuse the ramping of new business with customers or adding facilities as an excuse for margin pressure. And I think in a normal case that -- that's true and we have proven that we can absorb those costs as we grow the business and deliver on the margin. Now, where we are having excuse, quite frankly, is that we have an unusual situation here where we have a couple of customers that are leaving Plexus, leaving Plexus pretty quickly in the case of Star. And that's a bit of an unusual event for us in that we haven't lost a significant customer account in -- in quite a number of years. quite frankly. So this is an unusual situation for us that is causing a bit of none linearity here in the next couple quarters in particular in quarter two that we just have to work through and so just to put that in perspective, the Star business was anywhere from $25 million or $35 million in a given quarter. You know it was up and down as they moved through the year. So that is pretty big chunk of revenue to just kind of evaporate from all out of one -- out of a quarter and we are replacing quite a bit of that so if we can keep that quarter sequentially flat from the prior quarter that will be a pretty good victory and I think some evidence that we are in fact bringing in some new programs to replace it. It's just that as we saying, the new programs take a little bit of time to come up to full margin and we're losing something that was quite a mature program that delivered nicely for us.

Okay. And, Dean, just you commented you had -- I think you said 56 programs in the funnel at a range of $10 million to $50 million. I realize averages can be misleading, but if I assume the average size of those programs is somewhere around $20 million, that would imply over half your funnel consists of programs in that range of $10 million to $50 million. Is that a typical funnel composition or are you seeing the funnel skewed towards larger programs? Because I notice your wins have been much smaller. I think they've been trending to $5 million or $6 million and how does your win rate on programs in that kind of dollar range compare to your average win rate?

Yes. Let me just clear up. I guess I may have misspoke here to, but Sherrie corrected me on something else. But I tried to say 55 programs in that -- in that range, the $10 million to $50 million range, which this is -- is this where we really go out and we compete really well. There's three of them that are greater than $50 million at this point in that funnel. Todd, I guess you could comment on the success rate, I suppose, and -- but there's obviously a lot of variability in terms of how long these programs sit in the funnel and actually when you convert them to actual business.

Yes. I mean I would say that our success rate in this $10 million to $50 million range is solid and in line with, I would call it the entire funnel. So that's an area we -- we try to target.

We think it's a good space for us. As you pointed out and as Dean mentioned our wins are probably a bit lower than we would like them right now, but our teams are working hard to get that back up to be in that $50 million range that we displayed over the last few years.

So the fact that the wins that you have been achieving have trended lower, they used to be closer to $10 million now they are $5 million. Is there any interpretation of that or anything we should draw conclusions about that? Is the pricing on someof the large deals getting more competitive or is it just the nature of the end markets where you're winning where just the program sizes are smaller?

Yes. One of the it is a bit on the end markets. I mean we're clearly winning more business right now in the Defense/Security/Aerospace sector an those tend to be small and it's very rare to get something that even approaches $10 million in the DSA sector on an individual opportunity.

Okay.

Yes. I think I just want to add one point of clarification is that even though these program wins will be relatively small, but the total revenue opportunity with these customers is quite large and so we don't try -- we don't typically make a point of going out and engaging when a customer, when we think we can get $10 million or $15 million of total available revenue. We look at companies where we can actually accumulate a significant amount of revenue over a period of time and so we will engage with a small program and then build that piece of business and that's why you see this fairly high win count with the existing customer basin in our normal communications that we provide every quarter.

Okay. That's very help.

Welcome.

Our next question comes from Ryan Jones of RBC Capital Markets.

I was just wondering how much pricing was an issue if at all in the Advocent and Star business moving away and then just to clarify on the outlook for the March quarter next year. The losses for these customers were already baked into your internal plan, I thought for 2011. Just could you remind on that?And then so if we look at the target for 15% to 18% growth next year. Can you give us detail on what the business what these losses would have done year-on-year?

Let me just, I will just comment first on pricing. I mean the state program it really had nothing to do with pricing. It really came down to Cisco did not have a relationship with Plexus, they were not interested in having yet another contract manufacturer in their portfolio of contract manufacturers and so they -- as soon as the deal was done they announced that this was -- this was what their intent was. Now, I will let Todd comment on Advocent, which is clearly a pricing thingand I just want to make sure I come back to one point here which is kind of your lead in. We absolutely had this baked into our fiscal 2011 plan and we've communicating now for several quarters that this was an inevitable outcome.

So with respect to the Advocent, I mean pricing is definitely an issue with Advocent, so we have had a lot of dialogue with Emerson, with regards to pricing on the Advocent business and pricing as well as other business terms. I mean the entire suite of business terms there and we have yet to reach an agreement that we both feel good about, so that's where we're projecting it's going to leave.

And just a last piece I would add, I would say that we certainly were expecting these accounts to transition out over F '11, but star is moving out more quickly than we had anticipated. So when we talked to people a quarter ago we thought both programs ramp down over the course of four quarters and star is moving much more quickly and so that was different than I would say our expectation a quarter or two ago.

Okay. That's really helpful. And then I think you also talked a little bit about in the prior quarter about some temporary weakness in Europe both from a direct standpoint and from an indirect standpoint. So I was wondering if could you comment on European linearity during the September quarter as well?

Yes. I don't -- the Europe issue that we saw back in kind of late May, early June has I think -- I think it was just a little bit more excitement about end market strength there and I -- I think that it reset itself to a more realistic level and I don't know that it's turned back up or getting any worse. I mean Todd is looking at me he's saying there's really no change so it's reset to a different level and that's the way we see it going forward.

All right. Thank you. Very helpful. Appreciate it.

Thank you.

(Operator Instructions). Our next question comes from Lou Miscioscia of Collin Stewart.

Thank you. The Coke-Cola program actually was very interesting.

Just wondering if you all have been successful in targeting any of the other, I guess major kiosks, that we see out there, anything specific that you have had success is or at least are going after that. Well we're certainly targeting the kiosks marketplace. I would say that Coca-Cola is the biggest success to date.

I think this is -- this is -- that was Todd commenting there and I think this is clearly -- I would say kind of a sub strategy within each of our market sectors is to identify similar like technologies and of course the kiosks markets is a growing market and -- and some see that it there's -- I think a significant long term opportunities there for us. We just haven't pulled any across the finish line yet at this point.

Okay. And then just a quick follow-up on pricing. You mentioned how full you are 85% capacity even though some things are moving out. Does it give you the ability to price a little bit richer as you bring some new programs on or is it really just trying to maintain a comparable at this level with the markets are really even though you're pretty tight on space you can't really price up that much higher?

Yes. I think pricing is an interesting thing in the MS industry. Generally speaking is pricing power and it's really kind of a market based pricing. So for us we just have to be competitive in pricing and really the way that we succeed in -- in winning relationships and winning the customers is by selling the value of Plexus which is really more edgeable an flexible manufacturing solutions. You know, solutions for direct order fulfillment and then of course the front end of the business which is really helping customers innovate through and exciting product technologies and it's a significant differentiator for us. And really plays well to customers that have this complex high tech technology in these medium to lower volume space an the customers can -- can see and we can demonstrate that this is not a side show for Plexus. This is what we do, is this what we are a all about. They can go visits all of our factories around the world and see like technologies that are -- that are challenging in our manufacturing. So that's really the key differentiator for us. And pricing really is -- is something that we really don't have a lot of power over in the equation and quite frankly, there's still a lot of capacity available generally speaking notice overall MS industry that puts pressure on the pricing models.

Okay. That's help. Thank you.

You're welcome.

Our next question comes from Jim Suva of City.

Congratulations to you and your team. A quick question about the new business wins. When we kind of look at them on a year-over-year basis, they have been down on a year-over-year basis for about the past five quarters. Can you discuss kind of the new business wins and the ability to add incremental revenues? I think your targeted 15% sales. Is there a good you will for of thumb that 10% of the business kind of matures and rolls off each year, therefore, you kind of need at the current rate, you know, a little bit higher new business programs to be able to beat that 15% rate? Because it looks look you're kind of just tacking along to maybe15% for the year. Is that the right way to think about it or just address the new business wins issue overall?

Yes. I think, Jim, I think you're going to see some flow quarter by quarter in terms of how successful you are bringing in new revenues. I look back at the third quarter I think we had a 141, the second quarter we had 137, now this quarter we had 115. So it's up and down a little bit, but overall in fiscal '10 we had about $500 million in annualized revenue that we won. That represents about obviously 25% of the full year revenues in F '10 and of course that $500 million in new revenue largely executes or begins to ramp up in late in the fiscal year that you win it or in the following year. So you always are kind of push you can out ahead in terms of new -- new revenue wins. I think we look at and say we would like to see certainly 25% to 35% of our annualized revenue in the -- in the -- in the win category on a go-forward basis and of course that implies that we have to continue to ramp up that quarterly win rate. I think right now we're on a good track. I think we did really well in fiscal '10, frankly, if you go back to fiscal '09, which was a exceptional year, some of that revenue is still actually ramping up today. So you have to kind of level it out over a longer -- a longer period of time, but right now the pace that we're on with new revenue wins is certainly sufficient to drive 15% or better. 15% is our stated enduring goal for top line growth. The pace we're on right now is a little bit stronger than that as you would typically see maybe 7% or so of revenues roll off as a consequence of end of life of programs.

Great. Thank you very much.

You're welcome.

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

Okay. Well, once again, I appreciate the great questions that you folks always ask every quarter. It was an absolutely good year for Plexus. We're looking forward to a fiscal '11 that we expect to be a very good year for the Company as well. Unfortunately, business isn't always perfectly linear and I think we're going to -- you have maybe a little bit of a pothole here that we're going to step into Q2 although we're work to go -- to certainly mitigate that effect and as you know we tends to be a bit of a conservative bunch, but we just want to let you know and be clear that -- that things don't look perfect as we quarter to quarter as we come through F '11, but we certainly are excited about the full year and are quite confidence in the new program wins that we already have in the business and the ability to -- to ramp those up throughout the year and deliver them for the full year. So thanks very much for the questions and enjoy the rest of your day an the weekends. Bye.

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