捷普科技 (JBL) 2002 Q2 法說會逐字稿

Good afternoon. My name is

, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Jabil Circuit second 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 star, then the number one on your telephone key pad, and questions will be taken in the order 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 Communications and Investor Relations of Jabil Circuit. Ms. Walters, you may begin your conference.

Thank you.

Welcome to the Jabil Circuit Q2 '02 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 this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company.

Such forward-looking statements are just predictions, and we caution you that actual events or results may differ materially.

Please refer to the documents that Jabil filed with the SEC; specifically, our most recent 10K filed November 28, 2001.

These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. Jabil disclaims any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

So our results for Q2 of fiscal year '02, on revenue of $822 million, operating earnings, excluding amortization of intangibles and non-recurring charges for the quarter were $21.9 million. Cash earnings per share were $0.08.

We are pleased by the operating performance, executing to the high range of our EPS guidance during the quarter. We are also pleased to have improved our inventory

to nine, and improved our sales cycle by eight days during the quarter, generating approximately $140 million in positive cash flow from operations during the quarter.

We'll now provide some segment data for our Q2. The networking sector decreased by 11 percent in the current quarter due to inventory repositioning with our customer base in a relatively flat demand environment.

The consumer products sector increased by one percent in the quarter. We had consistent levels of set-top box assemblies and increasing production with blue

related modules.

Production levels in the automotive sector were nine percent below the previous quarter due to seasonally lower production levels. The computing and storage sector declined by 10 percent from the first quarter, reflecting the end of life production with motherboard assemblies from our prior quarter.

The peripheral sector increased by 19 percent in the current quarter, which reflected a full quarter of production of RF products. And generally flat production levels with additional peripheral products.

The telecommunications sector decreased by 14 percent sequentially reflecting continuing decline in demand for these products. And the instrumentation and medical sector increased 16 percent sequentially due to new program ramps with existing customers.

I'll now let Forbes take you through the balance sheet review.

Thank you, Beth. The cash receivable decreased by 60 million to 400 million in the second quarter, as compared to 460 million in the first quarter.

days sales out standing was 44 days of collection experience with 39 days, an improvement of three days and one day respectively over the previous quarter.

Inventories decreased by 58 million in the quarter to 348 million. Inventory turns were nine compared to eight turns in the previous quarter.

Fixed assets decreased by 38 million to 720 million reflecting four million in capital expenditures offset by 42 million in depreciation.

Cash balances were 643 million compared to 492 million as of the end of the first quarter.

During the quarter, we generated 144 million in positive cash flow from operations, while improving our sales cycle by eight days to 42 days. We are pleased by the continued good performance of our balance sheet management and expect continued positive cash flow from operations in our third quarter.

Reviewing our borrowings and capital position, our committed credit facilities and cash balances are approximately $1.5 billion. We plan to use these facilities to take advantage of the numerous of opportunities that are available with acquisitions and continued OEM plant divestitures.

The company's debt to capitalization ratio was 20 percent at the end of the quarter. And for the quarter, average return on assets was 2.6 percent with an average return on equity of 4.2 excluding the effects of the non reoccurring charges.

During the past three quarters, we have generated over $500 million in positive cash flow from operations. We look forward to re-deploying this capital as we're beginning to move to higher production levels in our third fiscal quarter.

Our cash and existing credit facilities give us ample capital to fund our recently announced acquisitions on the increasing levels of productions on an organic basis.

I'd now like to hand you over to Tim Main who will review our recent acquisitions.

Thank you, Forbes.

During the quarter, we were delighted to announce transactions with Compaq and Alcatel. The Compaq transaction is exciting as it represents an important new customer in a targeted industry segment. It also includes some very talented people operating an advanced manufacturing process fitting in well with our high end product capabilities.

The transaction is exciting in its own right but we are most enthusiastic about being designated a strategic supplier to Compaq and the opportunity for long term growth in the server area.

The

transaction is important that it expands and solidifies an existing customer relationship in an industry and a geography that's rapidly adopting an outsource model.

My recent public attention has been devoted to Japan and

. European OEMs continue to

down their vertical integration investment underpinning strong secular growth in the market.

The

operation is also engaged in some very advanced manufacturing processes and services and immediately creates a virtual solution for

communication and server product group. We expect to close on the transactions during our fourth fiscal quarter.

We expect to incur from four to $6 million in integration expenses, two to three of which we will incur in our fiscal Q3. The transactions will be neutral to slightly diluted during our fiscal Q4 and will be accretive as we move into the first two quarters of fiscal 2003.

We have also enjoyed a number of organic new business wins, a couple of which I'd like to highlight for you today. First, we have been awarded a significant new server platform from Hewlett Packard.

HP is a core strategic relationship for Jabil and this represents a healthy expansion of our relationship to a targeted segment of HP's business.

Server production will commence in our fourth fiscal quarter with volume ramp in the first two quarters of fiscal 2003.

We have also expanded our HP relationship in the services area including both design development as well as repair and warranty work for other HP business groups.

Second, we have been awarded new business with

, the leading electricity distributor in Italy and a subsidiary of

, one of the largest utility companies in the world.

The award is for the production of electronic meters for the Italian market. We will commence production in our fourth fiscal quarter with volume ramping in our first fiscal quarter of fiscal 2003.

Production will take place at our Italy and Hungary operations. In addition to these two larger wins, we've also landed seven or eight new customers through our

and

operations.

Overall, activity levels on the divestiture and organic front are improving casting a positive light on the stabilizing and market environment. The prospects are good for a sequentially improving fiscal 2002 and a strong fiscal 2003.

.

Thanks

. Our current forecast indicating increasing production levels in our third quarter of fiscal '02.

This increase in production levels is due to growth in our automotive, instrumentation and networking sectors. Offsetting some of this growth is lower levels of production in our telecom and computing and storage sectors.

While our revenue is expected to increase modestly by two to five percent. We expect significant increases in our operating income sequentially, by 30 to 50 percent. This increase in operating income reflects a savings associated with our recent cost reduction activities, along with the higher portion of manufacturing base revenue.

We are guiding through an overall range of 825 to 855 million in revenue for our third quarter.

Our cash operating income is expected to be approximately three and-a-half to four percent, depending on levels of production. We expect the gross margin to increase to nine and-a-half to ten percent, as we see the benefits of our cost reduction activities, and increase proportionally the amount of manufacturing base revenue from the previous quarter.

We estimate interest expense for Q-3 to be $1 and-a-half million, and a slightly lower tax rate to 23 percent, compared to 25 percent in the previous quarter.

We have completed our cost reduction activities throughout our February quarter, reducing overall manufacturing costs, along with making some reductions in our SG&A costs.

The overall charges relating to these reductions was approximately $10 million. This activity has been completed, and we do not anticipate any non-recurring charges relating to cost reductions in our May quarter.

These reductions have resulted in quarterly savings in excess of $6 million a quarter, or about two pennies per share a quarter.

Excluding costs to integrate our recently announced acquisitions, we estimate cash earnings per share to 11 to 13 cents in our May quarter.

Reviewing revenue by sector, again, overall production levels are anticipated to be 825 to 855 million. The consumer sector is expected to be flat in our third quarter, reflecting seasonality of set top box production.

Growth is anticipated to resume in our fourth quarter. The instrumentation and medical segment is estimated to grow 13 to 15 percent sequentially, as we are adding new programs in this area.

This sector is expected to have significant growth in our last fiscal quarter, with additional production of new assemblies planned.

The peripheral sector is estimated to increase slightly in our third quarter, as we begin to see less inventory corrections in this area, along with the more stable demand environment.

Growth is expected to be near targeted rates, as we move into our fourth quarter. The automotive sector is anticipated to be up 16 percent in our third quarter, as a result of a rebound from lower seasonal levels in December, and certain product changeovers

This sector is planned to have lower production in the fourth quarter, due to typical model year changeover.

The computing and storage sector is expected to have an eight percent decrease in production in the third fiscal quarter, due to end-of-life production of certain notebook assemblies, along with lower plan production in certain storage products.

This sector is expected to ramp significantly higher in our fourth quarter, as we begin production with multiple server assemblies, including our recently announced Compaq acquisition.

Networking products are expected to have sequentially higher levels of production in our third quarter by approximately four to six percent, as we begin to produce new assemblies.

This sector is expected to grow sequentially in our fourth quarter. The telecom sector is estimated to decline by five to seven percent in our third quarter, with incremental growth in our fourth quarter due to the recently announced new Alcatel relationship.

We look forward to the resumption of growth in our third quarter, with significant growth in operating income and the resumption of revenue growth. We expect significant incremental growth in revenue as we move to the last quarter of our fiscal year, and we would expect revenue to be in the lower range of our previous guidance, or approximately 3.5 to 3.6 billion for the year.

We also expect incremental operating income in our fourth quarter from our May quarter.

Due to a somewhat more shallow recovery in our May quarter and continuing flat overall demand profile, we are providing a more conservative yearly EPS estimate of approximately $0.45 to $0.50 for the fiscal year, or consistent with the current range of estimates.

This estimate includes continued flat and market demand and startup costs associated with the numerous acquisitions we expect to close in the fourth quarter -- Tim.

Thanks, Chris.

For the past year, we have been navigating through a very challenging and turbulent recession. And although on balance, the environment is improving, it is still too early to proclaim broad-based

market recovery.

In some sectors, business has stabilized, but in others, such as the telecommunications sector, business continues to be difficult. On balance, we do expect our overall business levels will begin to exhibit a slow, but sustainable positive trend in our third fiscal quarter.

Strong businesses capitalize in weak markets to strengthen their competitive position. I think we've done that.

We've closed our fiscal Q2 with $643 million in cash, inventory turns of nine and a sales cycle performance of 42 days. Not bad for a trough quarter.

We proactively reduced our cost base, and yet have continued to invest in our capabilities and our value proposition.

As a result, we have an efficient operating model that will generate strong earnings growth on relatively modest incremental revenue.

Our competitive position has also been enhanced to new business wins in the divestiture and organic front. In addition to our continued focus and our performance and execution for our existing

of customers, the new wins give us added confidence, regarding the resumption of top-line growth over the next two to three quarters.

We intend to build on this momentum through more organic and divestiture-based wins, with targeted customers and targeted industry segments. We are in excellent financial condition and have an efficient operating model.

Fiscal 2002 is stabilized and our new business momentum positions as well for an outstanding fiscal 2003. Beth.

Operator, we are ready to take -- begin the Q&A session and take questions. We'd like to ask that the folks asking questions could just limit it to one so we can get to as many people at least on the first go around as possible and start a second round if possible.

We'd like to conclude this phone call in 45 minutes at approximately 5:30 eastern. Thank you.

At this time, I would like to remind everyone, in order to ask a question please press start then the number one on your telephone keypad.

If you are using a speakerphone please pickup the handset before asking your question. Please hold for your first question.

Your first question comes from

of Kauffman Brothers.

Hi, guys. Good quarter.

Thanks.

How is capacity utilization? Has that flattened out?

And are you expecting that to see -- to start trending up for the rest of the fiscal year?

Well, again we typically look at our business more on a business unit level or work sale level.

But to try to answer your question, I mean broadly we've been outside the United States is 60 to 70 percent capacity utilization. And obviously that will go up in the next couple of quarters as our business moves up.

And the United States probably closer to a 50 to 60 percent range. That's where we're at right now.

Oh, OK. Great. Thanks.

Sure.

Your next question comes from

of Bank of America Securities.

Can you hear me, OK?

Yes, we can

.

Can you talk about how many 10 percent customers you have in the quarter? And then just cap ex going forward as well? Thanks.

Sure. Two 10 percent customers I think for this fiscal year which would be Cisco and

. And as far as cap ex we expect cap ex to be around $100 million around the year and depreciation around $160 million.

And I think the amortization will be another 10 or $12 million for intangibles.

Thanks.

Sure.

Your next question comes from

of Buckingham Research.

Hi, just a follow up on your 10 percent customer. The Cisco revenues from them up sequentially or down this quarter?

And do you categorize them in the networking or telco or both?

We categorize Cisco in networking.

And unfortunately I can't give you the details revenue for Cisco. But Cisco has generally been about a 20 percent customer per table over

networking and unfortunately I can't give you the detailed revenue for

but

has generally been about a 20 percent customer for Jabil over the last several years.

OK. Great.

Your next question comes from

of

.

Yes. Good afternoon.

my compliments as well. Good quarter. I'm wondering if you could talk a little bit about pricing and with everybody running at

capacity utilization what are you seeing in terms of pricing trends for the end markets?

Well, pricing is always in our industry is very competitive. The real fear has been that the top tier players would resort to pricing their way into better levels of capacity utilization. And that's a game that doesn't have a good end for the customer or for the tier one EMS provider. So, we've seen some rational behavior.

You know the return on invested capital for all the major players in our business are down seriously as capacity utilization has gone down. So, I think pricing -- you know to answer your question, you know pricing has been very very competitive but rational which is the best we can hope for.

And I think our gross margins you know if you look at our gross margin performance you know you can see that changes with business mix and everything else but based on relatively consistent mix of business, our gross margins have held up pretty well in a lousy market.

Great. Thanks very much.

Your next question comes from

of

.

Yes. Good evening. Congratulations on a nice quarter.

Can you just talk a bit about the general business trends over the last few weeks relative to what you saw in January and the first part of February?

Well, I wouldn't -- you know I don't want to give you specificity on the last few weeks because I don't want to misguide you.

I think relative to January though there's definitely some strong stabilizing impact in the business. You know we're looking at a quarter where after four consecutive quarters of declining revenue we're looking at a flat to up quarter which is encouraging.

And beyond that we see you know see our way into to continued and sustained organic growth, so -- I mean sequential growth. So, I think it's -- I think it's positive.

You know I still need to be somewhat cautionary because it's very early in the process. But you know we're getting pretty decent demand signals now and I think the market's stabilized pretty well for us.

So you wouldn't say that there's been any meaningful changes in business I guess over the last month versus what you saw in January?

No, not really. It's still a pretty lousy market, you know, if you really had to peel it back, it's not a great market at this point.

You know, if the market were turning in a V shape, we'd probably guide you into higher revenue levels in Q-3, to be honest with you.

OK.

So I think we're being relatively conservative in our guidance.

I think that's prudent in this environment, but again, looking at a quarter that's flat to potentially sequentially up, you know, that's good news to us. You know, we think that's a definite positive trend.

And with the new business wins we've had, and the divestiture wins we've had, we'll be able to throw some wood on the fire in Q-4 and Q-1.

Great, nice job.

Your next question comes from

of Salomon Smith Barney.

Yes, thank you. Good afternoon. It's certainly a topical thing to discuss, which is the Hewlett/Compac merger. And obviously, you've had Hewlett as a strategic customer for a while, and now you're doing additional work with Compac.

Can you talk about how you look at that process if the merger goes through? And what assurances you may have, or what you've discussed with these customers in terms of the work that you're performing for each respective company going forward? Thanks.

Well, they have a lot of people. I mean, it's public information they've got -- jointly, they have 900 people working on the integration process.

Some of those people are people that we know very well, and have a lot of respect for from both sides. You know, our historic relationship has been very strong with HP, so we know more people from the HP side, to be sure.

You know, we can't give you much insight into that, other than from a suppliers' standpoint, we're just going to do the best job we can to support schedules, and manage inventory.

And you know, I think we've had good business wins on Compac's server business. We've recently won some HP server business.

There's no conflict in the printing area that we're engaged in, so I feel pretty good that our ice cream cone's not going to hit the street. And that it's going to be very difficult for these two companies to integrate their businesses, and we just hope they are very successful doing it.

They've got some of the smartest people on the planet working on it. And I think we positioned Jabil to be a critical, long term, strategic supplier to both parties.

And so, I would expect that to continue. To the extent that they boot the integration process, that could affect our business. If they really well with the integration process, that could be really good for our business.

And I don't think anybody will know that until they get into the heavy lifting part of it.

Thanks.

OK.

Your next questions comes from

of Needham & Company.

Yes, could you give us some idea how, as you go into the fourth quarter

Your next question comes from

of

.

Yes, could you give us some idea how as you go into the fourth quarter where you're going to get the -- the large increases

, which could be sequentially 15 percent or more?

Well,

,

a good portion of that.

Tim talked about it. We still see the organics growing outside the two acquisitions we talked about, but we expect to close on the Alcatel acquisition and Compaq acquisition during our fourth quarter.

That will drive a good portion of the revenue. But we also expect from the organic side of our business to go up as well.

So it's a combination of those two.

I would say, you know, there is a big revenue driver with the two transactions we talked about that -- you know, from a timing standpoint, we expect to close in the June, July time frame.

Some time in our fourth quarter.

And don't forget, we talked about vendor consolidation being good for our business and -- and some new customer wins over the last year that really haven't resulted in a heck of a lot of revenue to our business.

Because the ground has been shifting under -- under our customers' feet. But, you know, in the end, if you -- if you are the -- you benefit from better consolidation and you get your business wins, eventually that turns into real revenue.

And, you know, some of that -- some of that fruit is being harvested in, you know, Q4, Q1, Q2, as we move into '03.

Could you just give us a quick idea of what the gross margins could look like in the fourth quarter? Bearing in mind you're starting up there two major programs.

Well as far as gross margins, we really haven't guided to our fourth quarter. We talked about our overall EPS range of $0.45 to $0.50 for the year,

.

But in terms of our business mix, we'll have more material pass through in our revenue stream. So we -- you know, we wouldn't expect the gross margins to be -be at the high range of our guidance for Q2, where we had guided nine and a half to 10.

So -- or excuse me, for Q3. So, you know, somewhere in the nines, but not at the high range of what we had guided to for Q3.

Thank you very much.

Sure.

Your next question comes from

of

.

Yeah, this is a follow up.

I was just wondering if, at this point, given the fact it sounds like your Q3 forecast sounds a bit more optimistic, if you're seeing this coming from the combination of the

market pickup?

Or if it's more of sort of pickup from the new programs, at this point, that are ramping or expected to ramp in the next couple of quarters?

Well,

, our Q3 we talked about revenue growth at two to five percent.

So that's not, you know, huge growth within certain segments, with new assemblies we're taking on in the smaller segments there's very good growth in our third quarter.

And overall business mix is improving. But in terms of revenue growth in the third quarter, we're not suggesting, you know, a big jump up from our second quarter.

And with the recent ramps from some of the recent customers, are you expecting that to also have a little bit better contribution than perhaps the end markets would suggest?

Well again, what we talked about is our operating profits will improve due to the cost reduction activities that occurred in the second quarter.

Along with a relative amount of more manufacturing base revenue that we have in the third quarter relative to the second quarter. Those are the two big drivers.

But I would say that the first reason, the cost reduction which we talked about is over $6 million is a big pat of it.

OK. Thanks.

Sure.

Your next question comes from

of

.

Good afternoon, guys.

Hi.

Clearly telecom remains weak. Could we get a sense for how much longer you think we have to go with respect to inventory clean up in that end market?

Well I wish we could tell you to be honest with you. You know, I think you guys are -- read all of the same things that we do.

Capital, cap ex budgets for the major telecom careers around the world have -- they continue to shave their cap ex budgets. And that's pushed out strong recovery in that market until probably calendar 2003?

You know, it's not -- certainly not in our model to expect a near term improvement there. You know they've got hot spots developing in the market, and we hear some positive things.

But I think best case for the next few quarters is going to be flat.

OK. Thanks.

Your next question comes from

of Goldman Sachs.

Yes, good afternoon. Nice job.

I wanted to just touch on the inventory levels. Where would you expect inventories to finish the end of the year given that you're back into sort of a growth mode?

And I guess including the effect of the acquisitions?

Well we're at nine turns right now, Mike. So we, you know, we expect to stay at the nine turns through our fourth quarter on that side of it.

And in terms of the turns, the acquisitions, they're probably four or five times right now. So maybe eight turns in the aggregate for the company.

And our challenge with those acquisition is obviously improving those turns over the next several quarters if we take that business on.

OK. Great. Thank you.

Your next question comes from

of

.

Mr.

, your line is open.

Hi. On the telecom sector I want to try to understand a little bit more what's going on in that area.

With

is -- was

a 10 percent customer in this quarter and how do you see that unfolding? And do you think generally speaking your outperforming the market in telecom or under performing given that

such a significant customer?

Well,

is basically a 10 percent customer

second quarter and

sequentially our telecom business

down five to seven percent in our third quarter. I don't know how that

the market.

Thanks very much.

Your next question comes from

of Lehman Brothers.

OK. Thank you. I guess first is we start to climb the wall of worry here you know a lot more focus will probably come in

quarter and there's only two more quarters left that you gave up you know obviously for your guidance you know it's pretty easy to do the numbers.

Could you actually comment I guess you know when the

pull revenue from that. And then with the other revenue I guess that's obviously increasing

from a you know the

markets, organic

markets

could you highlight maybe which of the programs might be bigger and which ones comparatively?

I really can't give you precise dates unfortunately,

I mean we expect to close on both those acquisitions we talked about a June/July time frame. And I really can't give you precise dates but that will add revenue to our fourth quarter.

And as far as new wins, across various segments

the networking side

going on

. It's those elements that will allow

going forward.

OK. Just one other follow up question. It seems like your gross margins are starting to bounce back real nice and I guess we look back to '99 and '98 you know you were in the 11th to almost 13 percent level. You know since you did take some restructuring, could you just maybe comment you know where maybe a normalized you know 12 months out do you think that you might be at?

And then also some other companies that have done a lot of restructuring really haven't seen any benefit of it. So, what are you guys doing different here?

As far as the mix,

, our mix in gross margin is kind of similar to where we were a couple years ago in a fiscal 2000 around a 10 percent gross margin.

With that

due to the fact that we've got a higher amount of

.

complex mix of products

disk drives and personal computer motherboards to complex communications products, as well as complete system integration.

So it's a very advanced manufacturing site. In China, we currently have an operation in

, China that builds everything from DSL modems to printed circuit board assemblies for printers, and that type of thing.

And a couple of weeks ago, we broke ground on a brand new facility in

, in the

area, which we're very excited about. Construction of that facility will be complete later this year.

Actually very late this year. And that'll be a significant addition to our Southern China capacity.

Sometime over the next 12 months we would hope to have a presence as well in Central China, mainly the Shanghai area.

And longer term, depending on market demand and logistics and infrastructure development within China, a Northern China location in the Beijing area. But we feel good about our

...depending on market demand and logistics and infrastructure development within China -- our northern China location in the Beijing area.

But we feel good about our Asia presence. It's growing.

It's very competent, which, you know, having stuff doesn't mean you're competent at running it. And we don't have as much stuff as some of the other players, but I think we're very competent at what we operate.

And we're going to take a very aggressive -- I think we're -- aggressive orientation to building our capacity and running production. But we're definitely going to keep the wheels on the performance level as well.

Nice job this quarter.

Thanks.

Your next question comes from

of

.

Again, great execution in a difficult environment.

One of the things that seems to be occurring is that there has been a strategic shift in your focus, while you're still adding telecom customers and while you have -- I guess you're at end of life now with some of the Dell stuff. You seem to be moving more toward the enterprise.

Can you give us some idea as to the long-term impact in terms of margin structure and return on capital of doing more servers and storage and networking equipment for the enterprise than you've done historically?

In terms of margin impacts to our current business -- you know, from a gross margin standpoint, as Chris said before, we're not gross margin obsessed.

We're primarily return on invested capital and operating income growth obsessed. And those market segments offer attractive opportunities for us.

You know we're -- we're strategically moving to a richer diversity. And by richer diversity, I mean a more stable, sustainable level of diversity in our business.

We changed our segment analysis to give you better visibility, and we're looking for high growth sectors, you know, to grow our company. And server -- the server segment has been underrepresented in our business mix.

We think it's going to be very positive in fiscal 2003.

The storage area is a big growth opportunity for the entire industry, not just for Jabil.

But we have a pretty decent

already, and we think we can build -- build on that presence. And there are other segments that we are very interested in: automotive, medical instrumentation.

And

, I think just to kind of, you know, sum all of that up, there are opportunities in many industry segments. And the secular growth to an outsourced model is what underpins the growth for the entire industry.

Still looks very, very positive for us. You know, in '98,'99, 2000 it was hard to keep up with demand on the communications area.

We were just so busy doing that, you know, maybe some of these other sectors were -- we were under performing in our pursuit of those sectors and getting them to an outsource model.

And growth has slowed down in that sector. And that's given an opportunity to really do good job of approaching OEMs in some other very attractive growth sectors.

So I think over the next couple of years, if you can, if you can put on glasses that look out that long, I think you see Jabil will continue to gain diversity, contraction in some of these other sectors. And I think that's good for our business.

From a margin standpoint, you know, it -- I think we have a sustainable business model. At 10 percent we have a sustainable business model at any percent gross margin.

It really kind of depends on the return on invested capital is. And we are we realizing operating income growth commensurate with the risk we're taking in our business?

And so far we're very encouraged that all of that comes together nicely.

OK. Tim, do you expect to be actively involved in trying to participate not only -- in Japan not only for some of the higher end products but also for the high volume consumer market as that gets outsourced?

In Japan, Jim?

Yeah.

Yes,. absolutely. The difficulty is that some the product is built in Japan today and doesn't want to be.

So, you know, now you're looking at a situation where the OEM needs to outsource. And would like to use a virtual model and he has the production in the wrong location.

So that will -- that creates a set of complexity for the EMS provider and the OEM that will be more difficult to work through than it is for higher end products that can be manufactured in Japan. And can be manufactured in the United States and Western Europe.

Because the mix of the product and the

.

So, you know, 30 percent, something like 30 to 35 percent

.

.

What that means for capacity is

.

OK. Thanks.

Your next question comes from

of Deutsche Bank.

Thank you very much. I had a couple of questions regarding back to the cost savings and the restructuring charge.

Can you talk about what the charges are for? Did you write down

headcount reductions?

And then how does that translate,

more clarity how that translates into six million per quarter

?

Thanks a lot.

And how does that translate

more clarity on how that translates

six million quarterly savings. Thanks so much.

I think about six percent of it is cost related to head count productions. So, about six

the rest of it was

and some other smaller items.

Now, how that translates to the cost production would be to

overall cost profile

$6 million

.

How many heads did you take out?

I don't have an exact figure but again from an overall standpoint

.

OK. And one other question on the -- on both the Compaq and

transactions. You suggested both would be slightly diluted to the fourth quarter -- are we talking a penny or two per share? Is that -- how much do you think about that?

Something along the

we have

we have a fourth quarter

.

So, to understand the guidance correctly, we're at -- organically, it's good in these two transactions. You anticipate another significant profit improvement in Q4 and somewhere in the same order of

30 to 50 percent or something or something close to that -- 30 percent?

We expect to have incremental EPS

fourth quarter

.

Now, is that coming through further cost savings and you know higher -- do you put on existing fixed assets?

Where is that incremental margin coming from?

It's -- again, from overall revenue growth from an organic standpoint is the largest portion of it and I would assume

as well.

So, is there kind of mid single digits sequential organic revenue growth, is that what you're assuming for Q4?

Well,

really given guidance for Q4 I think

overall EPS for our fiscal year

45 to 50 and the overall revenue of 2.5

.

Unfortunately, I just can't give you any more clarity on the fourth quarter.

OK. Thanks a bunch.

Sure.

Your next question comes from

of Bear Stearns.

Yes. Good afternoon and congratulations again on a tough

.

, I think your operating margin was probably 70 basis points higher than what I have in my model and

two cents better. But, I want to make sure I heard I guess

right.

Did he say you're looking for the operating margin to be three-and-a-half to four percent next quarter?

That's right,

.

So, that will be about 100 basis points higher than what you just did?

That's right.

OK. And then obviously you'll get to some of the Q-4 numbers as we just discussed. You have to have operating margin increase again in Q-4?

Right, right.

OK. I don't think most people think that you would be able to get this kind of operating margin recovery so soon. And we spend so much time talking about revenue in the EMS industry, but this is just so much more important to EPS.

Is there anything you're doing to get that kind of operating margin approved, then, quarter-to-quarter, that your competitors could not do? Or maybe some of your competitors could even do better than that?

Again, our

revenue is anticipated to go up from

during the fourth quarter.

And the relative manufacturers base revenue, this change is favorable. But it's also -- you know, we've dialed in our

as I mentioned several times on the call.

something we worked pretty hard to

quarter, and I fully expect that we would execute the numbers we've talked about in the third quarter.

And grow our operating income in the

.

But is this blocking and tackling it? It is just as you said, head count reduction, leases. I mean, is this something that your competitors in the MS industry should be able to duplicate?

Or is this something you guys have just done a really much better job than maybe the industry in general. What I'm trying to ascertain is are these trends that we should be able to see in EMS? Or is this something that Jabil is doing a really good job at?

Well, I'm sure they

. But we can't speak to their business model, or what their models look like. You know, there's all kinds of other moving parts

demand

You know, all kinds of changes

. We started with a pretty tight ship, and we've adjusted our

down with the declines in revenue. You know, it doesn't take much additional revenue to create outstanding growth in this

. Throw a little bit of revenue on top of that model, it's just really

. We're not talking about huge increases throughout of new money

.

And that's why we went through the cost reductions for the last

. That's why we did it.

And I guess another thing, you know, if you look at the last couple of years, we've talked about not requiring lots and lots of

.

Number of

.

meaningful

It was about 240

contracts?

Yes.

.

.

Oh, OK. Over 100 million?

.

Compaq is somewhere between 100 to 200 million?

Yeah, I think that's

.

And a similar question on the two pieces you just talked about on the call earlier.

.

I don't think I'd make a big deal out of

program. And you know I can't tell you exactly

.

And we're still excited about it because

.

And finally what was the name of the company in Europe you mentioned

?

It's

TNEL.

T N E L.

Yeah.

OK. The size of your

facility is

you talked about, how many square feet is that?

It's going to end up being about

.

And that will give you how much over there in total?

It will give us about half a million square feet between

and

facility.

I mean on an overall basis

about 1.3 million square feet or about 20 percent of our

.

OK. Thank you.

Your next question comes from

, Bank of America Securities.

Hi.

.

What do you think for the tax rate in the fourth quarter and into next year?

I really have not

our guidance

percent. We fully expect that to be something like that in the fourth quarter.

I appreciate it.

Sure.

Our next question comes from

of

.

Good afternoon. You guys had a really good improvement in DSO's this quarter. Do you think you can maintain that level as you go into the next quarter and

end of the year?

The

picked up two or three days, but I wouldn't

.

The

three days but I

but you know along

look at the overall sales

and that's what we concentrate most on in the

day -- that's a pretty good number

you know in terms of inventory

transactions it might go up a little bit but this

day

.

.

The DSO we don't expect it to change significantly one way or the other

for a few days. But

days

.

Just going back to the Compaq HP merger, is there any concern that you might see it scaling down

Compaq server with the integration of HP? I was wondering if

when you

Compaq acquisition

?

pretty flexible with the bottom line

.

And did you factor in now say that

typically model in when you bid on a program? Kind of what's

in terms of

?

typically

shut down or termination of

. So, I feel pretty good about

.

And, yes

downsizing you know

modeling that type of thing. And we took all that into consideration and

could change

.

You now it's relatively modest steps

.

Great. Thank you.

Your next question comes from

.

Great. Good evening everyone.

Going down to Asia for a second, could you just talk about the types of products you're going to be moving into your new facility, and what kind of timing you expect to put those over?

We've typically heard about

of PCs and some end-routers being manufactured over in China. Could you just give us a sense on what you plan to do over there?

Well, it'd be primarily high volume

products. And consumer electronics, which I define a handset as a consumer electronic product

also includes those

communications products

a low end router is a very simple thing to build

.

So it'll be relatively broadbased in terms of the industry segments that we serve it in. And then another very important point is the domestic consumption within China in their communications

are selling very sophisticated infrastructure

.

So that would be an

. I think you'll see a

.

Great. Just turning to the question a little towards Europe. When you talked about the OEM divestiture environment, from your perspective it seems like you were emphasizing Europe from a Jabil perspective.

Is that with respect to the two deals that you have done? Or, are you signaling something in terms of likely future deals for Jabil? Just characterize the types of things you're looking at.

That would make strategic sense for you.

Sure. We're not signaling anything concrete, so I'll take that off the table. But we are signaling that the European community, and the major electronic OEMs in Europe, are adopting an outsourced model at an accelerating rate. And that's good for all of the major players in our industry.

So I think you'll see more transactions. We don't want to load up lots of capacity in high cost areas, including Western Europe. There are situations where we can make modest investments in Western European manufacturing capacity, particularly if the types of products that are manufactured within the facilities can support the cost structure.

And the consumers of those products require proximity and sophisticated order fulfillment capabilities.

But the OEMs are divesting, and looking for opportunities to get to an outsource model. And it's a significant market, and a significant amount of business for the entire sector. So we're going to continue to keep a pretty keen eye on Europe.

Great, thank you.

OK.

It looks like we are at 5:30, so we're going to conclude the call for today. We are all certainly available for follow-up

It looks like we're at 5:30, so we're going to conclude the conference call for today.

We are all certainly available for follow up today, tomorrow and whenever you have questions about the company. So thank you for joining us today.

Thank you for participating in today's conference. You may now disconnect.

END