捷普科技 (JBL) 2002 Q1 法說會逐字稿

Good morning. My name is Rose and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Jabil circuit first quarter 2002 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the number 1 on your telephone keypad and questions will be taken in the order that they are received. If you would like to withdraw your question, press the pound key. Thank you. I would now like to introduce Ms. Beth Walters, Vice President of Corporate Communication and Investor Relations of Jabil circuit. Ms. Walters you may begin your conference.

Thank you. Welcome to Jabil circuit Q1 2002 conference call. With me today, are Tim Main, our President and CEO, Chris Lewis, our Chief Financial officer, and Forbes Alexander, our Treasurer. During the course of the call, we will make projections and other forward-looking statements regarding future events and the future financial performance of the company. We caution you that such statements are predictions and the actual events and results may differ materially. Please refer to the documents that we filed at the SEC, specifically our most recent 10-K filed on November 28, 2001. These documents do contain and identify important factors that could cause the actual results to differ materially from those contained in our projections and forward-looking statements. Our results for Q1, 2002 cash operating earnings for the quarter, excluding non-recurring costs were 30.1 million. Cash earnings per share were $0.11 on revenue of $885 million. Revenues for the first quarter declined by 6% from the prior quarter. The communications sector increased by 7% in the current quarter principally as a result of the increased production with Marconi. We saw flat production levels with the remaining communications customers. The consumer and other product sector increased by 14% in the quarter due to the ramp of set top box assemblies. Production levels in the automotive sector were 9% above the prior quarter [production] from seasonally low summer level.

The PC sector declined by 54% from the fourth quarter as we completed end of live production with motherboard assemblies. The peripheral sector decreased by 28% in the current quarter reflecting a soft market and significant inventory [corrections] from our customers. We have recently reorganized our customers sectors into seven categories and plan to get actual results and guidance based on these new categories. We feel that these sectors were given best of the better overall picture of the continuing diversification of the products we are producing as we continued to win new business in all of these categories. Certain customers have been reclassified into new customer sectors to more closely reflect the assembly; we are producing for those particular customers. The new sector classifications will be automotive, computing and storage, consumer, instrumentation and medical, peripheral networking, telecommunications, and others. We will provide now a break out of the Q4 revenues by these sectors and also, I will give you the Q1 for the fiscal 2002 so that you can properly adjust your model. In the automotive sector we went from 6%-7%, computing and storage for Q4 was 20%, in Q1 2002 it was 12%. Consumer was 5% moving to 9%, instrumentation and medical was 4% for Q4 fiscal 2001 and it was flat in Q1 at 4%. Peripheral was 11% in Q4 to 8% in Q1 of 2002, networking was 29% in Q4 and 30% in Q1 of 2002, telecom was 21% increased to 26% in Q1 of 2002 and others were flat at 4% for both periods. Gross margins increased to 9.2% of revenue compared to 8.9 in the fourth quarter. SG&A increased to 5.6% of sales compared to 5% in Q4 and absolute dollars SG&A was up by 2.5 million to 49.4 million.

R&D was slightly above the prior quarter at 1.9 million, intangibles amortization for the quarter was 2.8 million and this principally relates to intangible assets associated with Marconi acquisition and also reflects the adoption and implementation of recent accounting [pronouncement] has 141 and 142. Cash operating income decreased from 35 million to 30.1 or 3.4% of revenue, excluding non-recurring charges compared to 3.7 in the previous quarter. We have recorded 60 million in integration cost and other non-recurring charges relating to our recent Marconi transaction in the current quarter and ongoing cost reduction activities. These charges were approximately 9 million higher than our previous guidance principally due to non-cash provisions for excess lease costs. Interest expense for the quarter was 612,000 compared to 300,000 in interest expense in the [fourth] quarter. Income tax was 25% of income excluding non-recurring charges. On a gap basis net income after taxes was 8.4 million or 0.9% of revenue as compared to 1.8% in the prior sequential quarter. This resulted in EPS of $0.04 on an average 199 million 515,000 shares during the period fully diluted. Excluding the non-recurring charges and amortization of intangibles, our net income was 22.1 million or $0.11 EPS on a cash basis. Although, production levels were slightly lower than we anticipated, we are pleased by the operating performance and the improvement of our gross margins sequentially from the fourth quarter. We are also pleased to have improved the sales cycle by 7 days in the quarter generating approximately 150 million in positive cash flow from operations during the quarter. Forbes will now take us through the balance sheet.

Thank you Beth. Good morning. Cash receivables decreased by $68 million to $460 million in the first quarter as compared to $528 million in the fourth quarter. Calculated day sales outstanding were 47 days and our collection experience was 40 days. This compares to 50 days sales outstanding in the previous quarter and collection experience of 40 days. Inventories decreased by 26 million in the quarter, 406 million compared to 431 million at the end of August. Inventory returns were 8 consistent with the previous quarter. Fixed assets increased by [30] million to 758 million reflecting 53 million in capital expenditures offset by 40 million in depreciation. Approximately 25 million of those expenditures were related to our [Intel] acquisition. Cash balances were 493 million compared to 430 million at the end of the first quarter. During the quarter, we generated 150 million in positive cash flow from operations on improving our sales cycle by seven days. We are pleased by the continued good performance of our balance sheet management and expect continued positive cash flow from operations in our second quarter. Reviewing our volumes and [capital] positions, our committed credit facilities and cash balances are now approximately 1.3 billion. We plan to use these facilities to take advantage of the numerous opportunities that are available with acquisitions and continued [OEM] plant divestitures. The company's debt to capitalization ratio was 20.6% at the end of the quarter. For the quarter, our average return on assets was 3.6% and an average return on equity was 6% excluding the effects of non-recurring charges. Now, I would like to hand you over the Tim who will review our acquisitions. Tim?

Thank you Forbes. Our Marconi acquired [site] Q1 operating performance was consistent with expectations. Integration process is preceded exclusively adding the best of Texas site during our fiscal quarter. We continued to expect modest levels of overall increase in our fiscal 2002. This offers an optical infrastructure demand is well documented and I have no additional color to add in this regard. However, we are pleased to have added truly unique capabilities to our technology portfolio and share Marconi's enthusiasm for long-term future of the business. Particularly, leading products from [metro goods] applications. We are closed on the [Intel] acquisition in the light of [portion] of our first quarter with some limited level of productions. We expect full production levels to occur in this plant during our February quarter, delighted to expand our technology portfolio on our excess products and to broaden our solid relationship with [Intel]. We expect [Intel] will be our top 10 customer in our fiscal 2002. In other areas, we are currently reviewing numerous acquisition opportunities and there are negotiations in several cases. The timing of these transactions is difficult to determine as well as the likelihood at reaching acceptable terms. Given the continuing increase in the [OEM] divestiture opportunities, we continue to be confident that there are a number of transactions and we will [set] our long-term strategies regarding acquisitions. We believe that these opportunities along with our current business plan for increased organic growth in the second half of our fiscal year will give the company good opportunity for this significant growth above current levels. Now for business uptake, Chris?

Thanks Tim. Our current forecast indicates production to be lower in our second quarter of fiscal 2002. This reduction is principally due to planned end of life production with certain PC assemblies along with lower production levels in our telecom and networking sectors. We are guiding to an overall range of 800-850 million for our second quarter. Based on our review of our forecast, we believe this decrease is due to inventory repositioning by our customer base along with continued soft and market demand. Our cash operating income is expected to be approximately 2.5-3% of revenue depending on levels of production. We expect gross margins will be slightly lower to near equal through our last quarter as we continue to realize cost savings from our reduction and workforce and capacity realignment along with the generally higher proportion of manufacturing base revenue. SG&A expense is expected to be flat to slightly higher. We estimated interest expense for Q2 to be $1.5 million and consistent tax rate of 25%. By our recent forecast, we anticipate a rebound in our overall production levels in our May quarter approximately 90-120 days longer than our previous estimates which assumed to recovery in our February quarter. Continuing weak in market demand and inventory repositioning have elongated our recovery into the second half of calendar 2002. As a result, we have elected to reduce our overall cost structure to ensure incremental operating income as we move beyond the first half of our fiscal 2002. Resultingly, we expect to incur $10-50 million in non-recurring charges relating to a reduction in workforce and certain plant realignment cost. These reductions will allow continuing improvement in our gross margin as well as our overall SG&A cost as we move into our May and August quarters.

We expect these reductions will occur during the course of our quarter ending in February. Although our overall production levels will be down in February quarter, we are commencing our new program production with existing and new customers in our third and fourth quarters allowing for growth from the February quarter. Reviewing revenue by sectors, again Q2 production levels are anticipated to be 800-850 million. The automotive segment is anticipated to be down 15% in our second quarter as a result of lower seasonal levels in December and certain product changeovers. We anticipate growth in this segment in fiscal 2002 and expect this sector to be 6% of our overall business. The computing and storage sector is expected to have a 19% decrease in production in our second fiscal quarter due to end of life production of certain [notebook] assemblies. For fiscal 2002, we anticipate that this sector will account for approximately 10% of our revenue. The consumer sector is expected to increase by over 10% in our second quarter recognizing some seasonality in the products beyond the December timeframe. This sector is estimated to show significant growth in fiscal 2002 and is estimated to be 10-11% of our 2002 revenue. The instrumentation and medical segment is estimated to grow 7% sequentially as we are commencing with new programs and customers in this area. This segment is estimated to be 45% of our fiscal 2002 business. This segment has previously been a somewhat smaller portion of our overall revenue historically. We look forward to good growth in this segment over the next several years as these industries began to open up more fully to an outsource model. The peripheral sector is estimated to increase by 13% in our second quarter due to increases in [RF] access products, offset somewhat by continued inventory corrections along with weakened market demand.

The peripheral sector is anticipated to represent approximately 10-11% of our revenue in fiscal 2002. Networking products are expected to have sequentially lower levels of production in our second quarter by approximately 10%. This reduction appears to be due to some inventory corrections along with some movement of new product introduction into our May quarter. The sector is expected to account for between 29 and 30% of our fiscal 2002 revenue. The telecom sector is estimated to decline by 11% in our second quarter and is estimated to represent approximately 25% of our overall business in fiscal 2002. Although our overall production levels will be down in February quarter, we are commencing our new program production with existing and new customers in our third and fourth quarter allowing for growth from the February quarter. Given the lower demand profile from the first half of our fiscal year and recovery occurring somewhat beyond our previous estimates, we currently expect revenues to be from $3.5-4 billion on EPS estimate of $0.50-0.60 for our fiscal year ending in August 2002. Tim?

Thanks Chris. Unfortunately, we are finding it necessary to reduce our expectations for the fiscal year as the recessionary environment worsened during the quarter. The reasons are fairly simple. During the quarter near term forecast are of in the 10-50% overall. Reductions in demand were concentrated in the telecom, networking, and peripheral sectors and are due to an overall economic environment that has deteriorated since September, continued carrier-spending cutbacks, and some very aggressive inventory reduction actions taken by our customer.

At the same time, revenue levels have been vendor consolidation and new business levels have been lower than originally anticipated in our transitioning at a slower rate. The impact will be elongated bottom cycle, have a lower level of revenue pushing out resumption of sequential growth for the full quarter. This quarter, we are providing you with a new look at Jabil segment diversity in parts to simply to give you a better understanding of our business, but it is also indicative of our commitment to drive our continued diversity across the broader range of customers in segments. The expanded visibility will also provide us the opportunity to track our success in this regard. I would like to provide some color by segments. The consumer segment continued to grow this year, we expect significant growth in this sector over the next two years as consumer electronics continued to move to an outsource model. This is a big market that is primarily vertical today and we feel good about our ability to land new business and customers in this sector. A new segment, medical and instrumentation, is also indicative of expected focus on this attractive growth sector. Products in this sector need high quality processes and flexible manufacturing, which we [_____] around the world. Our telecom sector is comprised of core of network telecom products including wireline, IP, and optical technologies. We have done very well in the past year landing new customers in the major technology areas. However, a recovery in carrier capital spending is not expected until later in 2002. Carriers will need to invest in their networks as traffic rates continued to increase, network costs fired, and bottlenecks have developed. We expect edge of the network and [metro loop] product investment spending during the year. Although this sector is [strong] of our year, we have a very broad, mature industry leading capabilities and expect telecom will be our major contributor to our bottom line results for years to come.

The networking sectors, primarily enterprise data management and networking. Our customers in this sector have been consolidating vendors and that has helped us to maintain revenue levels, but this will not result in net growth until the latter part of our fiscal year. In the telecom and networking sectors our customers are taking inventory levels to extremely low levels. This will mean that our customers' reported revenue growth might not track directly to [receivables] for the next quarter or two. The peripheral sector is generally weak. The inclusion of our research [Intel] acquisition is offsetting reduced demand from existing business due to end market weakness. The PC computing sector is showing an anticipated sequential decline with the [windup] of [local] assembly production. The sector was stabilized and will grow again later in the year as server production commences along with a continuation of [_____] PC related businesses. The automotive sector is still expected to be a growth opportunity as electronics penetrate vehicles and as vertically integrated system providers move to an outsource model. Although 2002 revenues are expected to be flat with the previous year, we think our unique expertise in this area provide the credible differentiator as opportunities arise. Geographically, most of our low cost locations are doing reasonably well. Jabil has a complete global footprint including a relatively high percentage of low cost capacity, positioning us well as to serve our customers' needs whenever they need us. Our US Western European sites which are focussed on high-end telecom and networking products continue to feel the impact of the communications spending recession. Given the deferred recovery and lower levels of production, we will need to make some additional headcount and cost reductions, although we do not plan on closing any facilities at this time. In summary, we are disappointed that the sequential revenue and earnings improvement we expected to commence in Q2 will be delayed an additional quarter. However, the overall trend is that we are outsourcing new business wins, vendor consolidation, and the potential for large-scale transactions remain very positive for Jabil. We are running a tight operating model that will deliver excellent financial results as revenue levels recover in the second half of our fiscal year.

Operator, we are ready for the question and answer period.

Yes ma'am, Ms. Walter. Again I would like to remind everyone, in order to ask a question press the number 1 on your telephone keypad. Your first question comes from Shelby Fleck of Morgan Stanley.

Thanks. Tim, could you just talk a little bit more about why you think it is taking longer with the present consolidation to benefit Jabil and also when you look to the growth in the second half of the year? Are you really expecting the market to come back that much or is most of the growth based on programs that you have already won and [see] the forecast for.

Sure, Shelby. So try and imagine an OEM that has 40 suppliers and they want to consolidate down to three or four. There is a revenue level that is associated with that and each supplier has x hours of business. Within the OEM business [clears] by 50 to 60%, by natural attrition 28 suppliers have been eliminated because this is not enough to go around and as the business declines, it creates packets of inventory and issues associated with actually pulling business from other suppliers. So you know the downturn in the deepness of the recession is really, kind of, complicated the transitions. All of the consolidation moves are happening, if you know, it is really happening now and it is actually supporting our revenue basis as we go forward as I indicated in some of the comments. That momentum will pick up over the next couple of quarters, you know, as the inventory issues that are out there with various suppliers and result in the [OEMs] are actually able to move the programs. So, you know, I think the market will be covered somewhat in the back half of our year, but with the $3.5-4 billion revenue expectation, clearly we are not counting on a very strong recovery.

Okay. Thank you.

Your next question comes from David Parrish of RBC Capital Markets.

Yeah, good morning, could you just give us an update on the ramp schedule for the new server business as well as Agilent and then give us sense as to what the incremental revenue contribution will be from Marconi in the February quarter?

Chris will answer the Marconi question, but in terms of IBM and Agilent, both relationships are good relationships. We do not expect them to contribute materially until very later in our fiscal year.

Okay, so that is not late in the fiscal year. So we will see them ramp up in the August quarter?

Right. That is, you know, again looking at one of those as a very strong vendor consolidation movement and again the process of trying to move things under a shifting demand profile, you know, made that a shadow of a ramp a little bit later than we originally thought.

David, this is Chris. With regards to Marconi the execution of our plan in our first quarter was pretty much right on target where we have talked before where essentially we were doubling the production in our first quarter. So we ramped to fourth quarter of production in Q1. With regards to the business going forward, as we have mentioned, we have broken out our sectors into seven sectors. The telecom sector in aggregate is expected to go down by 10 or 11% in the second quarter and I really cannot give you any more details other than that. Obviously, the telecom sectors, a portion of our business that is not exhibiting growth right now, but it does represent only about 25% of our business and that balance of our businesses is actually looking pretty healthy in going forward. With regards to the overall communication sector in our first quarter, we also are ahead of our plan in that I believe sequentially we increased it by about 7%, which was the high-end of the guidance that we gave back in September.

Okay, but we will see incremental revenue tied to Marconi in the February quarter?

David, as far as the overall revenue with regards to Marconi as I mentioned, when we look at the telecom sector, which has a number of other customers that we are guiding to 10% down.

Okay and then with respect to the [Intel] relationship can you give us a sense for what the revenue contribution was in the November quarter?

It was pretty small. Like we have mentioned, we closed on that acquisition, lot of portion was just a few million dollars. With regards to [Intel], we have mentioned and this is going to be in a couple sector categories. That is expected to be a meaningful customer, you know, a customer could easily be a 5% customer or above.

Over what time would you see that happening?

Over this fiscal year, over the next couple of quarters.

Okay, great. Thank you.

Your next question comes from Tony Boase of A. G. Edwards.

Thank you. Just a question on SG&A. What was the reason for the increase on an absolute basis?

Tony this is Chris. The biggest portion of it was again we had a full quarter of production and SG&A related to the Marconi plants that we have taken over. So that is the largest portion of why our SG&A increased and what we have guided too for the remainder of the year is actually more flat less SG&A levels as we look into Q2 and through the balance of fiscal 2002.

And I guess given what your forecasting now, and kind of, what management you have said, even in the detail in November, would you say that your expectations have just changed in the past couple of weeks or, you know I guess I am trying to get a feel for why September 11 maybe has shown up now as opposed to really revealing itself earlier?

We do a forecasting process on a yearly basis every quarter. The forecasting for the year outlook for us had been in the first few days in December. When we looked at those forecasts, you know, that is what changed our business plan. That is the principle change that has occurred. You know our update that again occurred realistically in the first six or seven days of December.

So, this is something that you don't look at on a weekly basis, is that what you are telling me?

We actually look at a rolling six month forecast, Tony, every month and we had solid indications in August, September, October, our November indications for the six months forward. We are a little bit softer, but again it appears with inventory corrections in overall soft-end market demand with our December forecast, you know, they were quite a bit lower then what we had previously with our six-month rolling forecast.

My last question is, you know, you said at the low-end of your guidance revenue of 3.5 billion in cash EPS are $0.50. In your estimation what is the likelihood of you hitting the low end?

Well, that is our plan, I mean, our plan is to execute between those two numbers. You know what we have done, I think, that will help us is we are reducing our overall cost structures as we look into the second half of fiscal 2002. We expect to save approximately $4-6 million or approximately two pennies a quarter in the back half of the year with our cost reduction exercise and you know that is our estimate for the fiscal year right now and we feel that we can execute between those two numbers.

Great. Thank you very much.

Your next question comes from Herve Francois of Credit Suisse First Boston.

Yeah. Hi guys. Can you talk about just again little bit on the first quarter that just ended here? The things, kind of, this business really started to taper off coming towards the end of the November quarter and is continuing like that here in December?

We got, you know, really it is looking at the quarter itself. You know the [Intel] deal closed very late in the quarter. We actually had some products in our consumer segment [gated] by components of issues. You know, so really if we look at the quarter end and if we are not for those two things, we would have hit it. Now, everything else was relatively soft. So we won't get any upsides during the quarter and you know frankly as Chris indicated September and October looked okay. This is certainly not getting upsides or directionally the business was still flat which is really what we expected and then November and December again, we saw the impact of what I indicated is 10-15% existing business forecast decline combined with disappointing results from vendor consolidations in terms of the rate of transition in the levels when they did transitions levels of production that we are associated with the business. So it is a very substantial reset for the year. Now you can argue that on September 19, we probably should have stuck our neck out and put the numbers that we did out, but that is the way it looked at the time and at this point I think we have got four bonus points for what has happened in the last quarter, the recession steadily gotten worse.

We didn't have any whole-time deals moving in where revenues streaming and so we are trying to get here a reset is to what it looks like quarter to quarter. If you really look at it the way it rolls out losing one quarter of recovery is where most of this adjustments takes place because you know why we had a weak first quarter with investor off revenue, but we have taken $200-300 million out of Q2 and then you got to look at what the ramp looks like in the back half. So we are essentially losing a very robust in our over $0.20 quarter out of this fiscal year. And I think that is simply losing, kind of, serial fashion into Q1 of 2003 or the last quarter of our calendar year. So I think, we will see the type of sequential growth that we originally anticipated which is going to shift it out 90 days and you know, I think that is full bonus points for that sort of a lousy economy that we have had in the last quarter.

Yeah, it makes sense. Tim, can you just lastly talk about, let's say if the recovery, hopefully it does not, but get shifted out from the February quarter, let us say, you know into the May or even May until August. Would that delay the ramping of some of those new programs that you are talking about that are going to positively help you guys out in your May quarter?

You know the programs are not so much being delayed as, but some of them are definitely being delayed, but you know the revenue levels associated with them again - the opening question Shelby had was, you know, what is going out with the vendor consolidation what do you mean by, well, a lot of suppliers we have just [eliminated] by the fact that there is 40-50% less business to go around. So now I got to reorganize all the thought process associated with this and there is a bunch of packets of the inventory that comes out of the closets in the woodwork when suppliers get eliminated. And you know they hang on to business a little bit longer than they should and it becomes little bit more complex bit of element and frankly given the fact that the economy is so flat down and the OEM is not under great, great pressure to move it. So they can be a little bit more methodical about it and so a little bit of delay, lower revenue levels associated with them, but the way it looks today that May quarter, we will start to get some pretty positive benefit out of it.

So just lastly, when you talk about the inventory correction that you are seeing and some of your customers just moving things on [either] side. What is going to go up the door?

Well I think they decided, you know, again it is a matter of executing it. This is not a decision for all of us, you know because they decided. You know, it is actually executing the moves and having some business to produce. At the same time, OEMs are consolidating product lines, you know, and some products are being canceled. So in some cases we are waiting for new product cycles as opposed to existing product cycles.

Okay. Thanks a lot.

You have a question from Jerry Labowitz of Merrill Lynch.

Yes. Tim to elaborate on this last point. Has OEMs [are] cancelling certain products? How much of that your capacity needs.

It definitely affects us to the extent we are holding one of the products to cancel. That is not a huge issue for our revenue profile today other than programs that we are supposed to transition into us that are being canceled. You know we are being asked to wait for a new product cycle.

Is there a lot that you are working on that you think you will be telling us about in the next conference call?

Yeah. We are working on so much stuff and God love you man, I hope I have a lot of stuff to talk about in the conference call. There is a lot happening out there on the new business front, on new programs, on large-scale transactions, you know and we are involved in several occasions in each category and I hope that it has some flows in the next quarter.

What closing delay, and closes, is it something in general?

I do not think there is anything that I could generalize there. You know I do not think you can underestimate what 40-50% reductions in forward-looking business profiles for our customers does to what they decide to do with factories, the decision making process, their ability to predict their own cost reductions to their management teams, the valuation that in electronic manufacturing service provider will place on the assets in the business itself, the contingencies that need to be put into the contracts to protect [or] acquire as well as the seller. These are fairly complex issues that need to be negotiated through and no, it is happening, I mean, those are getting done and I think they will continue to get done and I think we will get our fair share. But, you know, we are going to do it [over] again. It is a stable Jabil story. We have a great balance sheet. We are creating positive cash flow. We are not going to be behaving in any desperate fashion in order to create some good news for the next quarter. We want the best customers, the best products, and we want to do deals that make us money and build the business long-term. You know otherwise we just build low-cost capacity and go shoot arrows at people who did bad deals. So we are going to continue with kind of our top process and I think that is going to work. And I think again we will get our fair share of opportunity out of this.

Okay thanks.

Your next question comes from Shawn Severson of Raymond James.

Good morning. Tim, could you just, kind of, elaborate on the inventory situation. I know you had mentioned that there were, kind of, pockets of inventory that were merging. It is not, you might have not expected to come in through the consolidation or whatever, but does it appear in your opinion that OEMs are pushing inventories too low and kind of playing a game to see how low they can go and that is not even reflective of their end market demand or do you think that their end market have just dropped even more and that they having to take the inventories down again.

I definitely think that some of the customers we are counting on the calendar Q4 to be the bottom. I mean that is what they were telling us with forecast, they were telling us, you know, with the forward-looking demand and that type of things. So I think there is some reset associated with which is the adjusting level, inventory levels down. Having said that we have a couple of customers that have gone beyond that adjustment process and are really taking the inventories down to essentially a net zero level and, you know, maybe they are banking on adjusting our balance sheets per year end, looking at a weak quarter, maybe they are working off some pockets of inventory they got up there in the fields, but it certainly looks to us like a couple of customers are taking very substantial reductions in the amount of inventory that they are willing to carry. So you know, demand comes back, I think, they will replenish that. We will get a little bit of an upside to production schedules, but I would not count on that near-term.

And then how do you feel about your current inventory levels as far as raw materials? Do you expect yourself that Jabil will need to pass on more inventory components back to customers or are we pretty much done with that as well as a big customer writeoff, so finished good as well as inventory that you maybe holding our raw materials to transfer its [own].

Shawn this is Chris. We are pretty much done with that, what we would like to see is our inventory days improve two, three days a quarter over the next three quarters. I would still like to see it move up to 9 churns to 10 churns over the next several quarters, but with regards to part sales, things like that, we are pretty much done.

So revenue is the key to further improvements?

Yes.

And then just lastly, I know you kind of touched down a little bit, but just on the pipeline of deals, I mean, based on your model which you like to see in divestitures, are these things out there that you find attractive that are, you know, things that you are close to or want to be close to, as you saw throughout the divestiture opportunities available?

We are close to virtually all of them and I am sure there will be a couple of [years] in that they would not hear about what involved them, but we are seeing all the transactions, we feel good about our ability to execute 90% of them and there is something we would really like. That still means that you have to be able to negotiate terms and conditions that are good for both parties and some EMS providers have different perceptions of what mutually satisfactory terms and conditions are and for the most part EMS sector has behaved very responsibly in the deals. I think the transaction values of the deals are rationalizing the current economic conditions, but you never know they may be a rogue or somebody that is just a little bit more desperate than the other guys that maybe compromised beyond what we think is reasonable and you know again we are sitting here with a pretty decent business and we are not going to go there. So with the exception of the occasional, you know, desperation deal, I think for the most part the bulk curve looks like some pretty rationale behavior on both the OEMs and EMS side and that we are in a good position to benefit from it.

Right thank you.

Your next question comes from Louis Miscioscia of Lehman Brothers.

Okay, thank you. Tim I guess if you can take a look at a year on the whole and I guess when we started 2001, people were thinking that we were going to get lot more, I guess, deals to come out and obviously, the deal structure changed and that slowed things down. I mean what would you give us as a prediction for 2002? I mean do you think we are going to start in first and second quarter where the flurry, when do you think Japan might kick in, I mean, just try to give us some kind of level settings for what you would expect from a macro standpoint for the industry, I guess, as we are looking out to next year.

So, you know I think I wonder there were some pretty good-sized transactions that we have done. It [is] less good at loosened deals and flexed to do a couple of deals, you know, the [Xerox] deal and couple of others [Erickson]. So billions of dollars of stuff that was done. We did Marconi and few of the regional, second, third, and fourth EMS providers were vacuumed up, but I think 2002 you will see a continuation of the trend in 2001 in directionally. I think you will see more deals done in 2002 than 2001 and I think you will see some of those other sectors that you have been waiting for, you know, expected to see in 2001 like Japan and maybe some other technology sectors start to open up. You will probably see that pretty close to the 2002 starting about in January. I think first quarter you will probably see a couple of decent sized transactions done. I am not trying to push out anything for Jabil I am truthfully not, but you know again we get, we have visibility into what is happening out there and it looks really good.

Okay, can you talk about your positioning in China? You know, you obviously had the facilities from [GET] manufacturing and then you are, I guess, slowly starting now build a [home] other facility. Just how well do you think your position is, mostly continuing that that is becoming such a key region for expansion and are you close to capacity there and you really need this new facility or are customers asking for it? I just guess, what your strategy is.

Well the strategy is that we want to support the best customers and best products and be wherever on the world they need us to be. China is one of the largest growth markets particularly for telecommunications and networking space. So our customer base is increasing their revenue sales there and we are going to reflect that in our businesses as in the next couple of years on full. I think we are, in terms of capability and footprint, we are well positioned. The new facility gives us an opportunity to do a state of the art campus style facility with lots of space in the Singapore building, you know in Jabil style and we will be able to include a lot of products that gets exported from China consumer level products as well as some of the communications products that we already manufactured there. So, we have a growing customer base in China, the revenue levels are increasing so we think we need the facility for capacity reasons. Then I think sometime in 2002 you will hear something in Central or Northern China as well you know, as we open up our footprint in some of the more telecom in domestic China areas.

Okay great. Final question, as you mentioned IBM is a unique server customer. Is this a one off relationship or would you expect IBM to be a top 10 customer you know to grow I guess the same magnitude, maybe your comments were as per [Intel].

No, Louis, we never [win] off. We never went off company, you know, we don't do anything that easy. You know we expect to grow our IBM relationship, any of these things that is organic in nature, we have to prove yourself, I mean build the business gradually as the trust develops between the two companies and you know, we do a good job in the first two programs that we have been awarded that you know we will get more business and it is really from being a big customer that moves the sector and really moves the need what is really a kind of an 2003 relationship even though you know we will see these things start to ramp in 2002. You know, we intend to make difference with IBM.

Good luck. They are tough and moody customer at times.

They are.

Your next question comes from Todd Coupland of CIBC World Market.

Great. Can you hear me okay?

Yeah.

Hi. Good morning everyone. A couple of questions. Just going back to the program when in the May quarter. Could you just give us a sense on what kind of percentage sequential increase you are expecting in the May quarter with your annual guidance and then just summarize for us, either by sector or by customer the largest new program ramps going into the next couple of quarters. Thanks.

In terms of sequential revenue growth, if you look at from the February quarter and again this is taking into account the range of 3.5 - 4 billion would be along the lines of 10-15% sequential growth in the third quarter and much larger sequential growth in the fourth quarter. With regards to new program, when a large portion of the new program [wins] relate to our networking sector, which will allow for growth in that regard. We are also seeing in some of these smaller sectors such as the instrumentation and medical were being awarded some meaningful levels of business, but again, I think a lot of that will impact us more in the latter portion of the fiscal year, diluted to probably of the larger amounts. And then as Tim mentioned, some the new programs that we are working on or starting on, and there is a computing sector for example as the IBM business. It is across the board, where we will see these new programs take place, but I would say more so in the fourth quarter as compared to the third quarter.

Great. Secondly, there is obviously some concern on Jabil's relative scaler size with the various mergers this year and I am just wondering if you could talk about that in the context of, let's say your top ten customers and whether or not their consolidation processes are finished, and if they haven't been completed, what your sense is with respect to Jabil and the ones that have yet to play out. Thank you.

Sure, we are not finding scale to be a differentiator or an issue with the Jabil's ability to compete for transactions or particularly for new business of the vendor consolidation there or the organics. Particularly in the area where you are talking about organic growth, that really wants to go to the vendors that are doing the best job and have the best performance in execution model and we feel very good about our ability to compete there, and on the deal side, sure, there is going to be some transactions that we are just not going to do because it will be [records] for company of our size to do them, but I have said this before, and it is still true. The bulk curve of our transactions, we can satisfy the need of that bulk curve. Most deals have annual revenue range that is okay with us. You know, it is really not coming up in discussions as we work through these transactions.

Sorry, I was not really very clear in my question. What I meant to ask is in terms of the vendor consolidation amongst your top ten customers, so we have seen a couple of high profile ones like HP and Cisco, and I am just wondering, is there any more of that to play out and if so, what your sense on where you guys sit on that.

Yeah there is more to play out. Where we sit and when it happens and if it happens, we will talk about it. It does not have anything to do with scale.

Okay, thank you.

Your next question comes from Roger Norberg of JP Morgan. Go ahead, Mr. Norberg.

Good morning. Thanks for releasing your press release at 7 a.m. instead of 4 a.m. First question, you have mentioned that your low costs plants are doing better than your high cost plants. Could you give us a sense for what that spread is in terms of the relative utilization between the high cost and low cost right now?

Well, Roger, this is Chris. In terms of capacity utilization, I would say, just broadly expect for the United States, we are in the range of 60-70%. Our low cost locations are actually not over utilized. We have a good operating path to have more production in those locations, but they are not 80-90% loaded. So, generally except in United States w are at 60-70% at capacity and I would say that the US ... that is where our lowest levels of utilization is that, but it is around 50% right now.

Okay, and second question, if you could give us a little more color on, I guess, on what is going on, on the selling side right now, given that, there have been a lot of comments made on this, this morning already, but given that few of your very large competitors are in the midst of very big, somewhat messy mergers and their execution performance based on things like inventory turns is not as good yours, and the second point you have got a lot of competitors that are smaller than you. In the aggregate they are probably doing $2-3 billion worth of total business that are in relatively serious financial distress or some level of financial distress. What are your customers talking about right now in terms of what is important to them. How has that changed? And where do you fit in with the bigger guys versus the little guys right now?

I think we fit in pretty well relative to the smaller guys. I mean, truthfully customers right now ... some of them are just talking about surviving the current economy. It is really hard for them to grapple with the issues that they have. We are the Statue of Liberty. We are here to save them from all of the problems that are transpiring in this economy and the mistakes that the sourcing areas have made in the past. To go with regional Q2 and Q3 players, with kind of capacity stopgaps, maybe that was necessary a year ago, it is certainly not necessary today. So, I think that is goodness for us and I think we will see some benefit as this economy continues to put the stress on the capabilities of lower tier players.

And just a final question, regarding Europe, there is a lot of stuff over there that looks like good opportunity to us with several OEMs, but those OEMs all have pretty large plant infrastructure and most of it is not in locations that we would think as particularly attractive long term. At the end of the day, the capture of most of that opportunity is that going to have to come with plant infrastructure that may not be all that valuable for the long term, or how do you see that playing out?

I think that that is going to be a fairly dynamic negotiation process and it will be handled case by case and I am sorry I cannot be more specific for you, but you know there will be deals done that have no capacity and there will be deals done that do come with some capacity.

Okay thanks guys.

Your next question comes from Alexander Blanton of Ingalls & Snyder.

Okay just housekeeping a question. First Beth, are we going to get this new breakdown for the other quarters ... let's say for all quarters of last year for example? The new breakdown you gave at the beginning.

Yeah, I can provide that to you for last fiscal year the several breakouts ...

So, you will fax it out to us. Okay great. You have mentioned earlier that you expected telecom end markets to have some recovery and I believe that was the second half of the calendar year, is that right?

Yeah.

Second half of the calendar year, but there are some people who watch the industry who are not looking for it to recover until 2003. So could you ... or may be even longer I do not necessarily agree with that, but I would like to hear your thinking on this matter of the telecom end markets and when they might show some strength.

No, the end markets I mean are clearly bad and I guess the way we would look at it Alex is the incremental share of production that we can take on in the telecom sector would allow us to grow not withstanding the fact that if this might be even longer recovery in that particular sector and the other thing that is again interesting in our model is as we look forward ... our telecom the piece of the telecom business is in the 20-25 % ...

Yes.

For our overall business. We do have 75% of our business where we have lots and lots of good prospects for growth.

Right.

So there is some pretty good risk mitigation if we just look at the lower levels of telecom that we have, but I think most of our growth will likely come from new out sourcing wins.

So what you are saying is that you did not mean a recovery in end market ... you meant new outsourcing from telecom companies. Well that is what you meant?

It is a probably combination of both I mean obviously both of those would help, but to extend there is not recovery there is obviously opportunity for us in new outsourcing agreements in the telecom sector.

So, there really is not too much clarity in your mind about when they might have to start spending more money to upgrade their networks and so on do to higher capacity utilization ... you really have not got any data on that?

Not any hard data.

Okay.

I mean there is data that suggest that they will have to spend money. What that will mean in terms of sequential changes in capital spending ... there are a lot of guesses out there, a lot of people making guesses, and you know really there is no hard data to indicate that will happen by exudate, you know, what percentage in terms of sequential growth. They will need to spend some money on their networks I mean there is traffic issue generating out there ... transpiring out there. The traffic is increasing 50% a year. They basically spent nothing on the networks for the last 18 months. You know there are spending virtually zero on this quarter. So there will be some expenditure made in the fiscal year.

So that is traffic going 50% a year they do need some equipment.

Exactly, sooner or later.

Alex, as far us how we are playing the business though is we do not expect a recovery. Again it is the latter portion of 2002 ... so you know may be the September quarter of 2002 something along those lines, and that is essentially how we are planning our business.

Okay Thank you.

Our next question comes from Michael Morris of Salomon Smith Barney.

Good day everyone. I guess for Chris may be you could help us with the relative leverage in the model with the new cost cutting initiatives that you are undertaking. What levels of production or sales could we expect your operating margin to return to more historical norms of say 4.5%?

Michael again we are looking at savings $4-6 million this quarter that will take place in our third and fourth quarter. With regards to operating leverage, we would expect in our third quarter to see at least a percent or percent and a half of operating leverage and if we have another percent in our fourth quarter such is the business in the aggregate and be in excess of 5% operating by the end of our fiscal year. The other thing that has happened in our revenues stream is and this kind of goes back to a mischief that is happening is we have a lot more manufacturing-based revenues. It is kind of similar to what we had two or three years ago. So while it is not an overlay gigantic topline business model, it is producing very good return as we have any type of leverage going forward again into our third and fourth quarter. And you know, I guess, the other thing I am looking to as far the returns we are seeing at this top level in terms of even on our EBITDA at our top level we are still producing about $250 million in EBITDA, continuing positive cash flow, and we are doing that in an aggregate investment of our capital excluding cash of only about $1.2-1.3. So there is really, really good leverage in terms of what our ROIC would be and obviously very good returns from an operating standpoint as we look into Q3 and Q4.

So it just generally just to followup on that point. It is fair to say is it not your mix is richening due to certain programs, the nature of the programs that are reaching the end of life and conversively the nature of the programs that you are ramping, is that fair to say?

Yeah, and if you just look at our PC segment as an example which is a higher material content ... that is cut in half for our fiscal 2002 business plan and again that is a business mix has improved to a much more manufacturing-based revenue that will help us a lot as we move forward into kind of half of this tough quarter in Q2 into Q3 and Q4.

Okay and I guess secondly I am sorry to come back to it. I think we have probably repeated the debt already, but there is a lot of interest in the end markets obviously and a lot of pundits and markets observers would like to say that end markets are stable. We have heard the word stabilized a number of times throughout the quarter from different quarters in the supply chain. Excluding and I am sorry this may not even be a fair question because, I know, there are a lot of moving parts, but excluding the inventory corrections and the other things that are going on is it your sense that your customers call for their products has stabilized relative to let us say three months ago?

I do not think that will be accurate relative to three months ago. The economy worsened during the quarter significantly and we talked about a 10-15% softening in our forward-looking schedules as the quarter enfolded and some of that was exacerbated by the inventory rules. It depends on what you call stable. It is a 10%, 5% with a 15% of 5-10% is that stable. That is a matter that can turn out to be [_____]. So is it 880 going to 820, is that relatively stable? It is certainly bottoming of the business, but it softened during the quarter ... there is no doubt about that.

Okay that is real helpful and then just finally may be some comments about the merits of the medical segment. You have commented on your enthusiasm for this sector and could you tell if us if Jabil intends to seek some of the FDA qualifications to produce certain very specialized types of products.

We will seek certifications based on the class of medical devices we manufacture. We are not going to make that quarter stone of the campaign at this point. We will probably stick to products that GNP and FDA requirements are fairly straightforward. We have manufactured medical products before. We have done production of patient monitoring in critical care types of stuff before so we have FDA and GNP certifications already. We are manufacturing medical products today in China and a couple other places. So we feel like we are in pretty good shape to go after the sector and if we go after any specialized areas, we will able to get certifications for that.

Okay that is great. Thanks very much.

Your next question comes from Michael Schneider of Robert W. Baird.

Good morning. Could you describe the performance of the Jabil technology group during the quarter and may be what is the pipeline looks like there on the R&D side?

That is not something that we break out. We are not currently intending to break it out. The activity was very low in the beginning of the quarter and it increased just as the quarter unfolded. I do not know if that portends a grand recovery in new products that we have designed in Q3 or Q4. The activity has picked up in the last couple of months.

Okay, and does that equally imply on the NPI side of the business?

NPI for Jabil has spread out throughout the company. You have got to realize that. We do thousands and thousands of NPI activity for our customers around the world and sometimes that has done within the business unit that manufactures the product sometimes, that is done in a fortified new customer development facility like California. So I will give you a crisp answer on that. It is happening around the world.

Do you sense just generally though that your customers have after doing a rash of cost cutting on their own businesses ... they have pulled back on their new product budgets or R&D budgets?

Something has to happen. There is a still a big need out there. There is still a big market. We are doing new product reductions in order to help your customers ... others have really proven your product lines back and taken that opportunity to cut back on their own development resources. If look at PC customers we have had a couple that basically eliminated all of their internal design. If you look at telecommunications customers and networking customers, were they are still a big need there for them to create value. Some of them are deciding to use us to a greater extent as they try and leverage the capabilities of their partners and suppliers to have us absorb some of those, but shoulder some of the burden of level load and design resources as they move through what is a very unpredictable design cycle.

And has your engineering organization felt proportional cut backs as you have reduced your work force and capacity?

That is not something that we break out.

Okay. Chris may be final question on the Marconi transaction. Could you let us know how much incrementally this quarter was contributed by Marconi versus last quarter?

Well again we talked that Marconi has doubled in production and the guidance we gave in Q4 was a range of 50-70 ... so it is doubled from that range.

Okay thank you.

Our next question comes from John J. McManus of Needham & Company.

Yes. Cisco has been your largest customer and appears to be expanding in all theaters. Could you talk about whether Cisco has grown for you in the quarter and whether in effect you expected to grow for the year or you somewhat [maxed] out with Cisco because of your revenue levels.

I do not think we are [maxed] out John, I mean there are lots of opportunities for us to grow outside of Cisco. And Cisco has historically been a 20% customer for us and for fiscal 2002 we would expect them to be in that range as well.

And you indicated that you had booked some new customers in the telecom sector, could you talk about any of those?

I think the new customers in the telecom sector relate more to a new customer development in standard available. There are a couple of smaller accounts that we are excited about, but in terms of overall revenue we are not material at this point.

In your guidance for the year, what kind of assumptions are you making there as far as acquisitions or this is all coming there from basically the core growth and customers that you have today?

We do not include unannounced or unknown acquisition in our guidance.

And lastly when you look at the deals that you are negotiating that are out there, are you seeing a higher percentage of higher volume less complex work that you are being forced to bid on compared to say may be six months ago or year ago.

John could you repeat that question. I am not sure I really understood it.

When you look at the amount of business out there which you are trying to access are you forced there to look at more higher volume less complex assembly work today then you might have had say six months or year ago?

I think there is adequate returns to be made in high volume low mix applications as well as higher mix higher technology applications. Our goal as a company is to provide very rich diversified segment participation with the best customers. Some of those will be customers that have high volume low mix requirements and I would not characterize that as being forced to built the product because we really do not build any thing if we cannot earn adequate returns on invested capital and so it is not about being forced out or compelled to do it. We are looking for diversity in our business. We have done PC business. We are doing consumer business. We have talked about that being a gross factor and I think from a company standpoint we are looking for increasing diversity in terms of our segment participation and the customers within those segments. And some of those will be high volume low mix applications.

My point actually was the amount of the complex business as great proportionally as it has been in the past six months or year or what happened?

John, I mean, the telecommunication sector is in a complete depression ... off 50-60%. So there is a lot less of that stuff to go around. There is plenty of complex work out there that we can do the medical instrumentation area there are complex in electronics in other sectors including networking we have talked about that sector being okay. So there is good complex work, but that is not an issue for us. There is a huge market for EMS market that you address. Some of that is going to be high volume, low mix, less complex product, and some of it is very complex. And is there a lot less, you know, in the sectors that the EMS industry supports today there is less this quarter. It is pretty clear. If there is a less long term ... if there is going to be some parodyne shift change in margin structure or return structure ... I do not think so. Our margins are going to be pretty decent this year and in all cases our returns on invested capital are very consistent across those industries.

See John that is, you know, we talked about. I mean what we look for is good operating income growth prospects and we have focussed more on the operating income that has derived in the growth prospects and then we do look at our level of investment and for low mix applications that is typically more of a working capital type of investment unless capital intensive or people intensive and there are some applications where the returns on that can be quite good. We are a little bit in different and I think what Tim is talking about is we do want to continue to, to diversify our revenues stream with products and customers where we see a very good growth prospects and a little bit in different whether it is complex or less complex as you termed it. We look at the overall returns.

Okay, fair enough thank you.

Operator we have time for one more question please.

Yes madam. Your last question comes from Jeff Rosenberg of William Blair.

Hi. Let me just ask about the consumer segment. Can you talk a little bit about such a varied area if you are seeing opportunities are you are pursing opportunities that are more sort of with lower margin OEM high material content like the PC segment or if it is in other areas ... just a little bit color on where you see the opportunities there?

It can be varied. We have some high mix applications in consumers that in fact seem quite complicated and we have some applications that are more material related which are volume and are related to inventories such as debt capital expenditure. So I think it is across the board. We see good opportunities in consumer that are relatively small, but again we have higher mix or higher manufacturing applications. I think what we are seeing in that sector is there is tremendous growth prospects in that sector in that is ... I do not know may be it is 5% outsource compared to the world being 20% outsource. So there is just tremendous growth prospect in that sector over the next several years.

And is your increased interest as you are articulating it related to what you are seeing there in terms of just a new wave of growth coming there or how much of it is proactive move on your part to increase your diversification of your revenue mix?

It is a little bit more of both to be honest with you. The OEMs in that sector ... as OEMs are in many sectors now given that the recession has really touched everybody and EMF model is so well validated and we can actually manufacture these products faster and cheaper than the OEMs can themselves, so there is much more interest on the OEM side. Then from our side, yes we do want more diversity in the segments that we serve. There are great growth opportunities. The secular trend of outsourcing has and will continue to be the most powerful driver of growth for the Jabil and for the rest of the top OEMs players and that is going to include participation in new segments and that is exciting to us.

Okay thanks a lot.

Thank you for joining us for the conference call today. We will all be around all day if you will have further follow-up questions and again thanks for your participation. That concludes our conference you may now disconnect.