Plexus Earnings Call Insights: Operating Margins and Cost Cuts

Plexus Corp. (NASDAQ:PLXS) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Operating Margins

Shawn Harrison – Longbow Research: Just to that last point there, Ginger, the 4.5% operating margin in the fiscal third quarter, could you maybe I guess discuss a little more the factors behind that. I think that’s a little better than what you talked about at the conference in December. Is that a pull-forward or restructuring plus the Juniper business getting out earlier? Are there any additional savings that’s pushing that a little bit higher? Then also with Juniper, what is the anticipated fiscal ’13 revenue contribution from them?

Ginger Jones – SVP and CFO: I’ll take the first part of that question and then let Todd talk about the Juniper revenue. We have been very focused on improving margin and I talked about some of these actions we’ve taken from headcount reductions to operational efficiencies and we’re seeing the benefits of that in the second half of the year. I’ll say we have also moderated our thoughts about some of the others costs related to the Juniper disengagement, so we believe the equipment write-off will be more modest and we may have less severance than we initially thought. So all of that, our internal work on improving productivity and better visibility to the Juniper disengagement leads us to the view of improved margins. Todd, maybe you want to comment on Juniper.

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Todd Kelsey – EVP, Global Customer Services: Sure. So Shawn, with regard to the fiscal ’13 Ginger had communicated previously in the order of $230 million. We view it as about $230 million to $26 million right now within fiscal ’13. And one of the things just to clarify as well too, we didn’t disclose Juniper as a 10% customer this quarter. What we had decided to do was not disclose customers on a quarterly basis as we’re not required to do so, but they were in fact at 12% customer, just so everyone is aware of that situation.

Shawn Harrison – Longbow Research: And then as a follow-up, in the press release I think it was – the statement was (affording) to see moderate growth in fiscal ’14. Is that commentary more just surrounding the earlier timing of Juniper’s disengagement? Is it more just cautiousness on the current business that you have? I would have expected maybe a little bit more bullishness given the funnel increasing the potential for some large deals out there and a good quarterly win total?

Dean A. Foate – President and CEO, Director: I think we’re just trying to be cautious given that what just happened this past quarter was there was quite a bit of weakness across all of the customer set, and so if that weakness would continue, then the growth rate that we would see over the longer run in the kind of rest of the business, sans the Juniper piece, would be moderate. So, we are trying to be cautious. I think a way to think about this is that when you think about F’12 to F’13 for growth, we are managing through somewhere in the neighborhood of $100 million headwind with Juniper. The revenue from ‘12 to ‘13 as they came down, as Todd said, we’re going to have to manage through $230, $260 headwind looking into fiscal ’14 and so we’ve got a pretty good chunk of revenue to overcome there, but on the back of that, we’ve done a really good job accelerating or doing nice job winning new business over and above kind of our target levels. So, we’ve got plenty I think of new work coming in that in theory if it all holds up and end markets don’t crater on us that we should be able to hover through that disengagement and the headwind.

Cost Cuts

Steven Fox – Cross Research: Just a couple of follow-ups off of the last comments. First of all, just trying to understand putting the operating margin from 4% to 4.5%, how much of that would be related to improving just as-tooled capacity versus maybe other cost cuts that have been in place? And then secondly, moderate growth for fiscal 2014 with a $230 million headwind sounds pretty good actually. It would be — would imply about 10% growth from your remaining business. So given that type of number, how do you characterize where it is coming from and what we should be looking for as the best served markets or best product opportunities for Plexus going forward?

Dean A. Foate – President and CEO, Director: Well, do I have Ginger to help with the first part of that which is our margin?

Ginger Jones – SVP and CFO: Yeah. Steve, I think it’s a combination, obviously, we’ve done a lot of things here to improve productivity managing headcount, managing costs, and I think that’s probably the largest driver. And we are also seeing the benefit of other new programs that are ramping and getting closer to their target margin, getting past the first transitional period where we have less profitability. So, I’d say, it’s a combination of all of that. The 4.5% is really where we were for most of F’12. So, we see that as a return to realistic margins in the current end markets where we have low end market growth, but a lot of new program rampings, and that’s really how we’re looking at the second half of F’13.

Dean A. Foate – President and CEO, Director: I’m going to come just a little bit on regional growth trends at least for the moment, and then Todd is going to make a few comments on kind of the sectors that we think we’re going to see growth. I did make the commentary in the new wins performance this past quarter was that 78% of the revenue total that we just announced 78% of $193 million was for the Americas region. So, we think that’s a really positive outcome, part of our strategy here is to get more balance in our revenue growth across the regions and in this particular quarter, we did a really nice job of doing that. So, that was a really good outcome. Secondly, for this fiscal year, the year that we’re in fiscal ’13, of course, part of our strategy has been to get a foothold here in EMEA and start to accelerate growth in that marketplace. Right now, we’re on track to have as much as a 50% revenue increase in our EMEA region overall at ’13 versus at ’14. So, we did a nice job getting traction in that marketplace. A lot of that is the consequence of our new operation there in Oradea, Romania, which of course you know we’re going to have a new facility come online here in the spring, but also some improvement in how we target new business for our facilities in the U.K. So, we’ve seen a good strong outcome here with the (indiscernible) on the expat assignment in the EMEA region, putting up a new design center in Darmstadt, Germany, starting to get some brand recognition in that marketplace, so we’re starting to get some nice traction. So, obviously a smaller region for us overall, but still some nice progress. So, Todd, if you want to make some commentary on sectors?

Todd Kelsey – EVP, Global Customer Services: Sure. So, Steve, I think what I’ll do is start out by discussing wins just a bit and then really how the forecasts or end-market shape up. So, from a win standpoint, if you look at the six quarters of, call it, outsized wins that we’ve had, it’s pretty well balanced across our sectors. We feel really good about the win data in each of our market sectors there. Now, if you look at the current quarter though, as Dean mentioned, it was really dominated by networking/communications, where we have I’d call it two quite significant wins within that sector. One was a major share gain with what we call a communications customer. The other was a continued growth of a major networking customer. So, that was about $135 million of our $193 million worth of wins within that sector. Now, if you look at end markets, I would say that networking/communications and industrial commercial in particular are challenging the end markets right now. So, I would characterize most of the growth as coming out of medical and defense security, aerospace particularly as we look forward into F’13 and F’14 because of the end market headwinds with networking/communication and industrial commercial although there is – if the markets change, there is the wins, they’ll be able to show growth within those sectors as well too.