捷普科技 (JBL) 0 Q0 法說會逐字稿

Good afternoon.

My name is Adrian.

I am your conference facilitator today.

At this time I would like to welcome everyone to the Jabil Circuit’s first quarter 2003 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 and then the number one on your telephone key pad.

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.

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 may make projections or other forward-looking statements regarding future events or the future performance of Jabil.

We wish to caution you that such statements are just predictions and that actual events or results may differ materially.

We refer you to the documents we filed with the SEC specifically our most recent 10-K filed November 25, 2002.

These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projection or other forward-looking statements.

Our results for Q1 '03 on revenue of $1,068,000,000 operating earnings excluding amortization of intangibles, acquisition related and structuring charges and other incomes for the quarter were $39.1m.

Cash earnings per share were 15 cents.

On a year over year basis this represents 21% growth in revenue and 30% growth in operating profit.

Results for the quarter, revenues increased 8 % sequentially from our fourth quarter.

Production levels in automotive sector were 60 % above the previous quarter due to seasonally higher levels of production, along with increasing production levels from our Ballyhoo (ph) acquisition.

The computing and storage sector decreased 9% from the fourth quarter.

The consumer products sector increased by over 100% in the quarter reflecting in part our initial production for Phillips Consumer Electronics and higher than previously estimated production of set top boxes.

The instrumentation and medical sector has consistent levels of production compared to the previous quarter.

The networking sector decreased by 3% in the current quarter representing slight slightly lower production levels than originally anticipated.

The personal sector decreased by 10% in the current quarter reflecting production levels that were consistent with previous expectations.

The telecommunications sector decreased by 6% sequentially which slightly exceeded our estimates for this sector.

Gross margin was 9.1% of revenue compared to 9.4% in the third quarter.

This is lower than our previous expectations as we transfer production from higher cost to lower cost locations, and we begin initial start up production of the sixth Phillips’ plant.

SG&A decreased to 5.2% of sales compared to 5.6% in Q4.

In absolute dollars, SG&A was up $700,000 to $55.8m.

R&D was $2.6m for the quarter, intangibles amortization was $6.2m for the quarter.

Cash operating income increased from $38.5m to $39.1m or 3.7% of revenue, excluding nonrecurring charges, compared to $3.9 in our previous quarter.

Nonrecurring charges.

We recorded $3.7m in integration and acquisition related costs in the quarter and $26.4m in restructuring charges relating to our cost reduction activity.

Net interest expense for the quarter was $1.8m compared to $500,000 in interest expense in the fourth quarter.

Income taxes were 18% of income, excluding non nonrecurring charges.

And net income after taxes excluding amortization of intangibles, acquisition related charges, restructuring charges and other income was $30.6m or 15% EPS.

We are pleased by the operating performance of the November quarter.

Our third consecutive quarter of increasing revenue of operating income.

We are also pleased to have generated the eighth consecutive quarter of continued, positive cash flow from operations.

Forbes, I'll turn it over to you for the balance sheet.

Good afternoon.

The cash receivables increased by $137m to $584m in the first quarter, which compared to $447m in the fourth quarter.

Calculated day sales outstanding were 49, while collection experience was 47 days.

This compares to 41 days sales outstanding in the previous quarter and collection experience of 37 days.

The increase in receivables days corresponds with the relative shift in European based revenue during the quarter.

This increase has been offset by corresponding increase in our accounts payable days, increasing from 44 days in the fourth quarter fourth quarter or $431m to 55 days or $589m for the first quarter.

Inventories increased by $48m in the quarter to $444m.

Compared to $396m at the end of August.

Calculated inventory turns were 9 and were consistent with the previous quarter.

As a result, our sales cycle improved 36 days compared to 37 days in the previous quarter.

Fixed assets increased by $53m to $794m.

Reflecting $98m in net capital expenditures offset by $45m in depreciation.

Approximately $95m of these capital expenditures relate to the acquisitions completed during the quarter.

Cash and cash equivalent balances were $576m compared with $640m at the end of August.

The return on invested capital was approximately 10%, consistent with the previous quarter.

Reviewing our Borrowings and capital.

During the quarter we completed a new $600m revolving credit facility with the our bank syndicate, this being split equally between a 364 day and three year term.

We are very pleased by the continued support from our banks as we continue to grow.

This process went very well as we continued to display strong investment grade characteristics both from capital foundation and operational basis.

A portion of this credit facility, $150m , was drawn as we funded the Phillips acquisition in the November quarter.

As a result, company debt capitalization ratio was 25% at the end of this quarter.

For the quarter, our average return on assets was 5%, with an average return on equity of 8%.

Over the past five quarters, we have now generated over $800m in positive cash flow from operations.

With cash balances and existing committed credit facilities of over $1 billion, we have ample capital to continue to grow our business.

Now I would like to hand you over to Chris Lewis who will give you a business update

Thanks, Forbes.

Our current forecasts indicate increasing production levels in our February quarter by an estimated five to 12%.

We are guiding to overall range of $1.1b to $1.2b for the second quarter.

The cash operating income is expected to be approximately 3.6% to 3.9% of revenue, depending on levels of production.

We expect gross margin will be 9% to 9.4% reflecting our current mix of business and taking into account impacts from our acquisitions.

We expect higher SG&A costs in the second quarter, but a comparable amount as a percentage of sales as we expect higher production in our February quarter.

We estimate interest expense for Q2 to be $4m in second quarter and consistent tax rate of 18%.

Regarding the Phillips acquisition, as previously announced, we completed a significant portion of our Phillips acquisition in our November quarter adding six plants.

We expect the remaining the remaining three plants will be added in January.

Current production in the new sites represents 60% of the overall business.

Full production, both on an acquired and organic basis is scheduled to be in place by the by the end of our fiscal year.

This is estimated to be neutral to slightly accretive in the February quarter.

With increasing contribution of the remaining fiscal year as we ramp to higher production levels over the next several quarters.

Integration activities are proceeding very well.

We are working closely with the management group within our plants and look forward to increasing opportunities within Phillips and with other customers as we add to these operations.

Production levels are consistent with our previous estimates.

For the February quarter we expect Phillips to represent approximately 13 to 15% of our overall business.

The revenue mix added by the Phillips acquisition is more material intensive than the current company mix.

Correspondingly, this will have the impact of lowering our gross margin percentage, as a percentage of revenue of the company, but will also decrease the overall SG&A percentage.

In sum, we expect there will be operating leverage of our SG&A costs while the overall company's gross margin is estimated to approximate 9% of revenue on a prospective basis, based on our overall business mix.

While this acquisition near term will have lower operating aspect as we absorb added manufacturing costs and site level SG&A, we are confident that this business will produce returns above the weighted average cost of capital by the end of our fiscal year.

Regarding other acquisitions, during the quarter we completed the Lucent Shanghai acquisition and a small acquisition with Jabil Global Services and [Remosa] Mexico.

We are excited to rapidly be in a position to provide a low cost manufacturing site for our customers in Northern China.

With the services acquisition, we are pleased to be able to offer our existing and new service customers a low cost site in North America.

Regarding our cost reduction activities, we have made good progress regarding aligning our capacity in the first quarter.

Overall charges relating to this activity were $26m , $9m of this was cash.

Including the closing of our site in Boise Boise, Idaho.

We plan continuing to align our capacity throughout this fiscal year and continue to estimate the overall nonrecurring charges of $60m to $80m.

We estimate the cash costs associated with these charges will be 15 to $25m .

The impact from these reductions is expected to save 4 to $6m quarterly, the full impact of these reductions occurring by the end of our fiscal '03.

Although full savings are not expected to occur until the latter portion of our fiscal year, we are seeing good impact in reducing and leveraging the overall SG&A costs as we move into our February quarter.

We expect that these cost reductions will complete our restructuring.

As we are seeing increasing utilization and most of the geographies throughout the world.

Our increasing utilization is being driven by a combination of plant rationalization, new assemblies from customer awards, along with the significant portion of our acquisitions adding organic production.

We expect incremental operating leverage as we move beyond our February quarter.

The operating leverage is estimated to be modest throughout the year, but we are encouraged to be in a position to increase our returns throughout this fiscal year based on our current business profile.

Regarding integration costs, we incurred $3.7m in acquisition and integration charges regarding the Phillips and Shanghai acquisition, in our November quarter consistent with our previous expectations.

We plan to further incur rationalization or integration costs of approximately 2 to $3m in our next quarter, and we expect to see these costs decrease significantly as we complete most of the integration in our second quarter.

Excluding amortization of intangibles, acquisition related and restructuring charges, we estimate cash earnings per share to be 15 to 17 cents in our February quarter.

Again, on an overall revenue basis, production levels are anticipated to grow by 5 to 12% or 1.1 to $1.2 billion.

Reviewing sectors, our automotive sector is estimated to decline 9 to 10%, reflecting seasonal lower levels of production, offset somewhat to stable to increasing levels of production from our recent Bally (ph) acquisition.

Computing and storage sector is estimated to increase 5 to 7% as we begin to produce multiple programs in the server area, along with increasing production for new storage assembly.

The consumer sector is estimated to be up over 35% in the second quarter, reflecting increasing levels of Phillips products.

The instrument and medical sector is anticipated to increase by over 20% as we add new assemblies and customers in this area.

We are very pleased to announce a new relationship with Abbott laboratories adding to our overall medical business.

We are also pleased to announce a new relationship in simple technologies, a global provider of wireless networking and information systems as well as a new relationship with Emerson.

Although this sector is relatively small, growth in this area was over 80% over a year ago.

This sector is positioned at significant growth in fiscal '03 as well.

The networking sector is estimated to increase by 2 to 4% as we add new assemblies in this area against a relatively stable demand environment.

The peripheral sector is estimated to decrease by 10 to 15% in the second quarter due to seasonal demand patterns.

The telecom sector is expected to decline 5or 6% in the second quarter, representing continuing difficult end market demand in this portion of the business offset by new assemblies added in the current quarter.

We are very pleased with our first quarter executing to our third successive quarter of increasing operating profits and revenue while maintaining solid balance sheet metrics.

We are very pleased to have added our new Phillips site and look forward to adding the remaining sites in our upcoming quarter.

Our recent acquisitions in new organic wins have given the company solid platform for growth as we execute through the remainder of the fiscal year.

We look forward to improving on our operating performance through the remainder of the fiscal year with the business base in various new industries that should allow for increasing successive growth opportunities.

Tim?

Thanks Chris.

I will make some brief comments on how our business is tracking relative to our plan for the year and I will also comment on our overall business environment.

Our business plan for the year is fairly straightforward.

Important elements are to reduce costs, to diversify through inquisitive (ph) and organic methods and to consistently improve our financial results.

We are making significant progress to reduce our cost structure and to rationalize the global capacity.

As expected our output continues to shift to low cost locations we expect our US revenues will decline to 20% or less of total revenue for the full fiscal year.

We see similar trends from our western European operation as business shifts to lower cost locations in Europe and Asia.

Concurrently we are encouraged by our progress assimilating divestiture transactions.

The acquired capacity is principally in low cost locations.

Furthermore our existing plant infrastructure will benefit during the year as approximately 15% of the total revenue we expect in these transactions will flow into current are Jabil operations.

Sector diversification is rapidly improving and we continue to expect our telecom and networking sectors to decline to 35% of our revenue in fiscal 2003, down from 50% in 2002.

We anticipate that sectors unrelated to communications in IT infrastructure will increase to approximately 50% of our revenue in fiscal 2003.

These are sectors are consumer, automotive, peripherals, [inaudible] instrumentation and other, which is largely our services area.

In summary, we are reducing costs concurrent with the addition of growth opportunities , the result of which we expect to be continuously improving financial results through the year.

As Chris mentioned earlier, the acquisition integration efforts are running with plan if not ahead of plan.

We find challenges and opportunities for improvement.

On balance we are pleased with the progress our teams are making.

We have found no reason to modify our outlook, and, in fact, are quite gratified with early results.

Our people, including those new to us from the transitioning operations have been fabulous.

I applaud you and thank you for successful efforts to date.

The largest of these efforts is associated with our Phillips transactions.

This is proceeding smoothly so far.

We anticipate closing on the three remaining plants later in our second fiscal quarter and we will be transitioning business throughout the balance of the fiscal year.

We now have a more detailed expectation on the transaction’s impact on the overall margin and return metrics.

Based on detailed internal review, our experience to date, and assuming a flat end market environment for the balance of our business, we expect improving operating margins throughout the fiscal year.

As expected, the higher material intensiveness of consumer electronics will have the effect of diluting gross margins to approximately 9% Concurrently, however, we are reducing costs, controlling SG&A expenses and are experiencing solid new business flow in new existing facilities of our organic and acquisitive activities.

Therefore we expect operating margins to improve through the year along with return metrics such as return on investment capital.

With regard to the general business environment, end markets rely on capital spending continue to be lethargic, showing no credible signs of business capital spending energy.

However, with the exception of telecom, end markets are exhibiting relative stability and for the most part we feel we are on solid ground.

We expect our telecom sector will decline through the year, but at a slower pace than 2002.

The competitive environment is tough but manageable.

Many of you are very concerned about the pricing environment.

I believe a good deal of this fear emanates from component level suppliers, or stand alone suppliers and those vertically integrated within EMS providers such as PCB fabrication.

The core EMS based pricing environment is very competitive but we think manageable.

Our financial condition is strong and we will protect it along with franchise with customers.

Our growth outlook is based upon holding our own or growing share in traditional segments while we capitalize on opportunities in emerging sectors.

A robust end-market recovery during the course of our fiscal year is not presently part of our planning process.

Overall, a respectable first quarter with business trends and operations on track to meet the full year expectations.

Operator, we would like to open it up now for a Q&A session.

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

If you are using a speaker phone, please pick up your handset before asking your question.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Ellen Chae of Prudential Volpe Technology Group.

Good afternoon, everybody.

Could I ask a few questions?

First, could you go through what you expect the incremental revenue contribution from new programs will be in the next quarter?

Or, give us a sense of what the organic part of your business is going to do on a sequential basis for the quarter?

Ellen, we haven't compiled separate organic versus acquisitive metrics.

It is not something that we are really intending to track.

As Chris mentioned in his comments, the significant portion somewhere around 10 to 15% of most of the divestiture acquisitions that we made include business for our existing facilities.

That's difficult to separate from natural organic wins with people like Symbol (ph) and Abbott.

Those programs are really kind of in the very early stages.

So we wouldn't expect a lot of revenue contribution.

We have had some decent organic business wins, but the telecom segment continues to struggle.

If you really wanted to take a look, apples to apples, we have a pretty flat organic business profile.

The new business wins and market share gains are really offsetting retrenchment telecommunications and some of the other areas that are communications IT structure related matters that customers are struggling with.

So, apples to apples it is a flat end market environment.

We are just really happy with the opportunity to, in spite of them, of a flat down market to be able to put up growth, revenue and earnings for the rest of the year.

Do you have any targets for margins and return metrics we can look at for the year?

We don't really have a target for returns, but what we are indicating, Ellen, is that we expect our return on vested (ph) capital through the course of the year to improve.

Right now our return on invested capital is 10%.

As we grow our operating income against a relatively stable capital base, we expect the returns to obviously move up to our weighted average cost of capital or higher as we go through the quarters.

We don't really have a specific target.

What about the targets around the cash conversion cycle?

Cash conversion cycle right now, I would say we are planned on ranging 35 to 40 days, something along those lines.

Again it depends on what business we would add and what type of cash conversion days we would have.

But that would be a decent estimate of where we would expect to be.

Okay, great.

Thank you.

Sure.

Your next question comes from the line of Michael Walker of CSFB.

Couple of end-market questions.

Telecom it looks like out performed a little bit, relative to expectations.

I was wondering if that was a result of new programs or if that was more better strength with organic customers?

Then on the flip side, computing and storage was down a little more than we were looking for.

I'm wondering if that's end market demand or something else.

Computing and storage looked to be demand.

In Telecom we look to be a little bit conservative.

There's little glimmers of some higher levels, but again it did decline by 5 or 6%.

I think it was 2 or 3% better than what we thought.

Great.

Just going forward on your guidance for the telecom break out, do you have that still, you know, declining overall from an end-market standpoint?

I'm wondering to what degree lower contribution from Marconi (ph) is part of your lower expectation for telecom?

Or are you saying that you expect the end market, in general, to be still down during ’03?

We expect the end market to be down.

We have some new wins in that particular segment that’s allowing us to guide where we are guiding.

There's probably, you know, a shifting as far as concentration.

But again, the end market demand is difficult right now.

The final question.

Overall capacity load factors during the quarter?

We look at our business, again I'm sure people familiar with Jabil know that on a work [inaudible] basis know that, but to give you some idea across the world, Europe, Asia, Mexico, Latin America, it is on the 60 to 70% range or so but trending up.

The United States has been more difficult capacity or utilization environment.

We are probably more around the 50% range.

That's one of the reasons we had to take the action of closing up the Boise Idaho plant.

But generally throughout the world, we talked about it, we are seeing the capacity move up.

It's not dramatic, but we are moving in the right direction in most of the parts of the world.

Great.

Thank you very much.

Your next question comes from the line of Thomas Hopkins of Bear Stearns.

Yes, afternoon, Tim, Chris, Beth.

Tim or Chris, I joined the call late.

Can you tell me who you have above 10% this quarter?

Our 10% customers this year are expected to be HP, Sisco and Phillips and above 10% customers for the quarter are HP and Sisco.

Anyone above 20%?

We don't really break out the quarters.

We did break out, when we filed the K, Sysco with 23, 24% of our business last year.

We haven't given the break out of the quarters.

The overall pop tent (ph) is around 70, 72%, pretty much where we thought we would be.

Okay.

Can you -- I know Philips is closing stages, but there was Vallejo, a few other computer and server companies in there.

Is there any dollar amount you can give us on any of those that was a stand out in this quarter?

Not asking for guidance next, but in terms of the quarter you just finished, did Vallejo add -- how much?

We don't have that, but that sector did a little bit better.

It was up 60% sequentially.

We said up to 50%.

That sector did a little bit better.

Primarily because of Vallejo of.

That was a significant part of the growth, considering that was a full quarter of production.

And, on the margins, obviously this is very important.

The SG&A, you seem to be saying that “yeah, gross is going to come in, but we will keep working on SG&A.” You obviously feel pretty confident about that at this point, guiding for margin improvement for the rest of the year.

Is that operating -- how achievable is that?

At the same time that you're trying to digest Phillips.

As you said, it all has to come out of SG&A.

Tom, there's a lot of moving parts, but we are really encouraged by what we are seeing with all our organic business and the rationalization plans and what we can do through the course of the year.

I think you know we wouldn't talk about it unless we thought it was achievable.

And you know, we --SG&A was an area we didn't cut back as heavily as maybe we should have.

There is plenty of infrastructure to support higher revenue levels in the company.

So, you are going to see margined operating leverage.

You know, compression of SG&A as a percentage of overall business.

That is really achievable.

As we bring in Phillips, I think Chris mentioned this before, Phillips is by nature and in reality a much lower SG&A business.

We are not consolidating a business that has a 5% SG&A level.

You can tell, this is a business that has a much lower SG&A level which will have the effect of actually reducing that percentage.

So we feel pretty good about it.

You know, how much -- were not providing guidance about how much those margins will improve, but we think it's important that people understand this is, Phillips is not a catastrophic event for margins.

If anything, it has given us an opportunity to really address the positioning of the company and gain diversification and we will be dropping more money to the bottom line throughout the year.

Okay.

Without getting into specifics on the quarters, when you look out towards the end of calendar 2003, what, or even fiscal 2003, where do you think you can end the year in terms of the SG&A line?

We haven't looked at a percentage goal for SG&A at the end of calendar '03.

For us, I guess with a we are saying, we are in a position to grow our operating income through the course of the year with the business profile we have.

With that, the operating percentage will increase.

But as far as a target SG&A, we don't have that.

We are again in a position where we feel that our business profile allows good operating income growth and leverage.

We clearly have some internal objectives , but you know, we don't want to provide any guidance to -- we don't want you backing into that based on what we said about gross margins as well.

So, you know, as the year unfolds, there's a lot of moving parts.

We have some aggressive internal objectives.

And as we get more and more confident we will be able to provide you more concrete answers.

Basically as the revenue drops, you think you will be able to leverage that?

That's what we are working [inaudible].

Thanks.

Your next question comes from the line of Michael Morris with Salomon Smith Barney.

Thank you.

Good afternoon, everybody.

I know we are not talking about the full fiscal year financial guidance, but maybe I would like to ask you about some of your balance sheet metrics.

If we were to look at your inventory velocity, your asset turns, would you expect them to be higher, lower, or about the same at the end of fiscal '03 versus fiscal '02?

We expect the inventory terms can be to be higher.

Right now we're at nine, Mike.

That's an area that for my mind, that's obviously one of the best places to look at an EMS provider and operating efficiency.

You know, we are not happy with nine.

We think there's a lot of room for continued improvement.

We would like to obviously see it go up to ten in Phillips business itself has good inventory terms.

So that is something that through the course of '03 we will continue to work on.

The other two metrics are more of a lending function, or a lending function back to Jabil.

But inventory terms we expect to improve through the course of the year.

Then we have seen obviously some assets acquired and Boise has been closed.

Do you have a number, kind of all in square footage, what Jabil has today?

And an estimate of the kind of revenue run rate you can put through your footprint?

If you can give me the utilization assumption on the figure, if you have that?

The manufacturing square footage right now, which is what we look at, is over 6 million square feet.

The organic footprint in the Phillips plant we added obviously allowed for a lot higher run rate.

And as you look at Jabil through the next couple years, that's what we plan to do, is continue to have organic wins, have the acquisitions, and have some organic characteristics.

We are real comfortable with our footprint.

I know we need to make some minor changes, but the overall revenue within our organic footprint, we are comfortable we will be able to significantly increase over the next couple years.

You are not going to see a lot of building activity.

We are set up as a company that has the plants in the right locations and will grow from there.

Obviously there's great operating leverage aspects to our footprint as we look forward in the next couple years.

My last question has to do with your financial leverage which we feel is still very comfortable at 25%.

Is that about the right level for Jabil?

Do you feel that your plate is full enough in terms of the activities that you've undertaken that you're done for awhile?

Might we see additional activity in fiscal '03 if you have a sense of that?

From a financial leverage standpoint we plan to be 25 to 30% debt to capital, in that range.

You also have to look from a net, net debt perspective, we are pretty close to zero with our cash.

As far as acquisitions, there's been a lot of activity.

That's something we continue to look at.

There's no doubt our plate is full right now with the Phillips acquisition over the next couple quarters.

Mike, I think we'll take a time out from big deals and get digested what we have on our plate.

If we do something, it would be smaller than Phillips.

And manageable in terms of our bandwidth.

You know, a couple of quarters will be ample time for us to get a lot of the transition work done.

And the assimilation of cultures and how to be an EMS provider, that type of thing.

That will take a long time, it will take an extended period of time.

But the bulk of the bandwidth drain (ph) in transitioning the facilities, and getting servers installed, and ERP systems, that type of thing.

The bulk of that will be done in 6 to 9 months.

Very helpful.

Thank you all.

The next call comes from the line of Todd Coupland of CIBC World Markets.

Going back to the Phillips acquisition for a moment, could you remind us about what revenue level you expect from Phillips in fiscal '03?

We expect the revenue to increase through Q2, Q3 and Q4.

Our guidance, Todd, on the second quarter is that Phillips will represent 13 to 15% of our overall revenue.

The sites that we closed on in our November quarter represent 60% of the overall revenue stream.

In some cases it's going to take us two or three quarters with the organic portion of the business now full revenue levels for Phillips.

We expect increasing revenue through the course of the year.

It would be tough for us to remind you, because I don’t think we ever told you what we did for '03.

It's about $4b deal over four years.

I think that's about the extent of it.

Chris is being really helpful in terms of the near term outlook, but we haven't provided a fiscal '03 number.

Practically speaking that's tough for us to do because of the timing of the plants and the transition of the organic business, which is significant in this deal.

Going back to the telecom end market question from a little while ago.

You know, a stable to slightly down outlook or a down outlook in the telecom market, but less than double digit for the February/March quarter on the surface appears to be somewhat encouraging.

I'm wondering what your thoughts are on that and if you think that the equipment guys are starting to get a handle on what the real business is.

Thanks.

I wouldn't read too much into it.

I guess, again we have been through a lot of quarters where it has been difficult and it continues to decrease.

But in terms of the overall percentage drop, it is less.

If you want to consider that encouraging, you know, that's one way to look at it.

The sector itself for Jabil specific is obviously not the level of concentration we had a year and a half ago.

So it becomes less of a material event when we are talking in terms of 5 or 6%, one quarter or the other.

From a demand perspective with the telecom I don't know that I can give you a whole lot more input than that on what we are seeing.

It's gaining some stability.

If you're in the long haul, or the ultra long haul business, you're pretty much dead in the water and the carriers are making maintenance type of CAPEX.

If you're more to the edge of the network, you have a little bit more hope.

What we need to have happen, we need the regulation to allow local bells to get a return on their investment for allowing other carriers to run over their network.

And there's a big, there's a sense, I think it is based in reality, that a lot of CAPEX has been constrained from the healthier companies.

For every WorldCom, there's a couple guys out there that are doing okay.

And they really constrain their CAPEX because people can free load on their capacity.

Yet there's a lot of demand out there for high bandwidth access and better data management.

So, I think if that got cleaned up that would alleviate a lot of concern.

Thanks.

One last question.

You talked about how you were managing the pricing environment.

Could you just give us your philosophy here a little bit?

Are you for the customers that you have basically going to go to the floor for the margin in order to keep the business?

Or are you seeing some business float away from you because you are not willing to bid at some competitive levels?

Just give us a little more color on that.

Thanks.

So we seldom lose incumbent positions due to price.

That's extremely unusual.

And I caution anybody who believes that -- I think this is true for most of the tier one guys, not talking about just Jabil.

That pricing is done at a week to week, month to month spot basis.

These are large scale relationships that need a lot of stability.

Broad based service oriented businesses.

The disentanglement to move from one provider to another isn't as simple as getting a better price over the Internet and switching.

Having said that it's very competitive.

The first line of defense is to design the product better and execute and perform and then if the product fits, move into a lower cost location and really work on productivity and that type of thing.

Philosophically we are in business just to make money.

Our experience, we have been in this business a long time.

Our experience is in previous environments where pricing has become very competitive, is you stick to your [inaudible], you stick to the return metrics, and do everything possibly you can with the customer and if you can't make money on the business on a sustained basis, you ought not to be in it.

That experience has said to us that pricing without profit is not a sustainable business strategy.

I think if you look at some of the tier two players and tier three players and some of the more off the beaten path types of EMS providers and the type of financial condition they are in today, I think you could make, come to the conclusion that pricing without profit is not a sustainable business strategy.

We have the wherewithal, the capability to give our customers great service and a great value.

And fight off people that have excess capacity and are using desperation pricing.

Great.

Thanks a lot.

Your next question comes from the line of Keith Dunne of RBC Capital.

A couple thing I didn't hear, the cash flow from the operations and the CAPEX from the quarter, please?

Cash flow was $90m.

Is that nine-oh?

Yes.

And CAPEX was $98m.

A lot of that was from the acquisitions, Keith.

And if we were to look -- did I hear also that the expectations is margins and returns are at the trough and the second quarter it should improve from second quarter levels?

We expect our operating income percentages and returns to improve, that's correct.

And can you talk a little bit about how much incremental inventory you picked up from all the acquisitions?

Can you give us a ballpark number of what that added in the quarter?

I really, I don't have that.

You know, on an overall basis inventory increased by $48m.

But I don't have a break out, Keith.

If we look at Phillips as you roll in the new business, the slope of the increase --obviously it is going to get better because you are at 60% of the business, not at 100%.

Is the step function pretty much the same from 2Q to 3Q and from 3Q to 4Q and or is it more back end loaded?

No, I think it would be along those lines we are talking about 100% of production by the end of the fiscal year.

And a straight line between the two?

Right.

Also from an amortization and R & D, are those pretty much at the run rate that we saw in the second quarter, or in the first quarter that you use in the second quarter?

R & D is a decent number.

Amortization is subjective, we are still going through some appraisals on the intangibles for the acquisitions.

So we will have to get back to everybody once that's completed.

My last question for now.

I think Tim mentioned that U.S. sales were going to drop to 20% of the total for the year.

Can you give us a color of where the sales are by the geographies?

Europe, U.S., Asia, Latin America?

Where they are now?

And some of the trends you see going geographically?

I don't have the current revenue but we expect U.S. for the fiscal year to be 20%, Latin America, 20-25%, Asia in the low 20s and Europe 33, 35%.

Does anything stick out from how the trends have been going?

No, there's really no big change from where we thought a quarter ago.

Okay, thanks very much.

Your next question comes from the line of Mr. John McManus from Needham & Company.

Good afternoon.

Could you comment on functions you might have received from the Phillips plants?

Whether they be vertical functions or whether they be other functions that you don't have already at the Jabil Circuit.

We didn't acquire any vertical functions.

It was primarily PCB assembly with some box build and system integration associated with the facilities as well.

Really core EMS operations.

One of the nifty features in our opinion was 100 or so design engineers around the world that can focus on consumer electronic design.

Other than that, no vertical integration activities.

Could you tell me what the book value was there of the assets bought?

The acquisition price, John, was $210m .

The net asset.

And is there -- are you building in a currency fluctuation risk as you build up your non-U.S. businesses?

Yes.

Everything we do that's non-U.S. denominated, John, in our operating plan, we look at both the transaction and the translation impact on what that would be to our business.

That's something we addressed with Phillips with the whole rest of Jabil.

We kind of take currency out of the picture when we go to execute each of the quarters.

That's something we would look at.

Are you going to hedge then, these currencies?

Yes, we hedge a lot of currencies.

Those are the transactional currencies for the local costs that we do with various businesses such as payroll.

That's something we would do with Phillips as well, as far as Euros to dollars.

Last question on depreciation.

Depreciation you indicated was $45m ?

Right.

What does that trend upward say toward the end of the year?

Our estimate is probably about level, $180m for depreciation.

And that excludes the amortization of intangibles, but $180m for depreciation.

Thank you very much.

Your next question comes from the line of Jerry Labowitz of Merrill Lynch.

It's Brian White for Jerry Labowitz.

Would you talk a little bit--you are getting more involved in the consumer sector now and some of your competitors are talking about ODM related services.

Have you taken a look at that?

What do you think you might do in the future?

Our strategy is not to become an ODM.

We competed against the ODM providers or, you know, a dozen years.

They have been around a long time in the PC and Notebook area.

We believe that we provide a superior solution in that we have ODM level competencies to design complete products and take them to market.

Yet we believe we have a superior global footprint manufacturing capability and we are not in a position to compete with customers generally.

Some customers who really don't generate IP for the Market itself, doesn't value IP.

For instance in the PC industry.

We are not in conflict.

We feel free to provide complete product solutions to customers.

I don't want you to read into that that it's a target market for us, but that would be an example of a market that the OEMs that sell the products generally don't have a strong position or belief system around the IP.

In other areas, for instance, Ink Jet printing or some other areas, there is some customers that have a significant belief system about their intellectual property and really would prefer a CDM contract design manufacturing or that ODM competency but with relationship that has high fidelity and very good protection of their IP

.

So our strategy in dealing with business linkage to ODMs and that thread is to be very strong in the design area, to selectively choose the battles that we can win in the design area, to have a very competitive Asia and Asia supply chain management capability, such that we are not handicapped from a cost standpoint.

We don't believe we are today.

And then really to exploit our key strengths, which is in the ability to generate collaborative designs, CDM designs, and operate a truly global supply chain using sophistication IT systems and that type of thing.

Ok, thank you all.

The next call is from the line of Roger Norberg JP Morgan.

Good afternoon.

Just a couple of questions.

I may have missed this, but did you give any color on your computing segment business for this quarter that was down 9%?

We just indicated there was demand related, Roger.

Anything in the life related that affected that number?

No.

Second question, I have been hearing a lot lately about more business being shopped around that may be coming out of some of the OEMs that sold a lot of factories in 1999 where three-year contracts are coming end of life here.

And despite certain of your competitors having bought a lot of facilities from them, they may still be shopping some of that business that is coming off contract.

Could you comment at all on that?

Sure.

I'm not sure if you are trying to tease something out from me or you are generally interested.

Not setting any traps.

Be careful what you here hear on the street.

The street is ripe with rumors today about where business is going and big chunks of business moving back and forth.

We are going to benefit from it and some of somebody else is going to benefit from it.

When the contract is up, the OEM is free to go, close the business.

I'm sure some of that is happening.

I would will tell you, though, that the value of being the incumbent is powerful..

It would take a lack of performance or a lack of ability, a lack of aggressiveness on the cost side to motivate the OEM to pull significant parts of the business relationship from someone that they acquired a set of capacity from.

So the value of that incumbent is strong.

Some business will definitely proliferate out there, but I would expect that for most of the competent, aggressive EMS providers that are paying attention to detail, they will be able to hang on to most of their business.

This is our Hewlett-Packard business today is free market.

We maintained the significant market share there.

And in fact, moved into low cost locations.

And I would expect that same scenario generally to play out.

Unless somebody really tripped and lost on the recipe on the performance side

Could you comment on China, as far as down the road this year?

I think you are completing some new facilities and some moving.

Is there any significant incremental cost to be associated with that that we should be thinking about?

Could you comment a little bit about China in general and your customers' attitudes?

There is obviously a lot of fear about the whole world moving to China from a production standpoint.

Could you give us a little color on what you actually see with your customers?

Thank you.

Chris can comment on anything on the cost side if he would like.

But generally anything associated with the final construction of our Juan Poo (ph) site, which should be opened in the February/March time frame in the consolidation of the Southern China operations is incorporated into any guidance that we provided.

You know, it's expensive to transition product from high cost to low cost locations and consolidate operations.

And all that doesn't get into the restructuring charges.

So that does cost us money.

But again, I don't think you need to worry about that popping up in terms of something we didn't anticipate.

That is incorporated in our outlook.

In terms of what is happening in China, there is a lot of capacity in China, huge amount of capacity.

And our view is that some products really do want to be manufactured in China.

That's pretty obvious.

High volume, low mix, commodity products for export.

China is perfect for it.

Communication infrastructure products that want to be consumed in Japan, other parts of Asia or within China, absolutely.

Everything in China, I don't think so.

High mix businesses, businesses that have significant technology to produce the product, products where the end customer values high configuration and brevity in terms of the lead times and the final delivery of the product, you can't do that in China in all cases.

So we are not going to the church of moving 80% of our production to China.

I don't think that is going to happen.

And I think long-term those that follow that postulation to a point where they generated the manufacturing infrastructure on that hypothesis will short themselves competitively in other markets.

So, I think we will continue to have a diversified global footprint.

We are expanding our China operations.

That can get to as high as 25 to 30%, maybe more of our business over the next couple of years

Where will it settle out?

I think it could set settle out between 30 and 40%, but I don't think 70 or 80% of the world's electronics are going to be produced in China.

That's not going to happen, I don't think

Thank you.

Your next question comes from the line of Joseph Wolf of UBS Warburg.

Thank you.

Good afternoon.

I have a question with regard to the Phillips business.

Could you comment on whether the actual business that was done in the November quarter will be up or down in February?

And then with regard to where the facilities that you acquired are located, are there any restrictions over time or what would be those restrictions for Phillips in terms of keeping business in specific locations or is everything in the right place right now?

The overall.

The overall revenue for Phillips is up significantly in the February quarter.

As far as --

I didn't mean for you.

I meant the business itself.

The business itself is at expectations of where we thought it would be as far as the overall business profile.

The restrictions as far as plants and sites that we are taking on, the business plan we are taking on is appropriate for the level of business that we have with Phillips.

Over the last couple years there has been various changes to their capacity, restructuring, things like that.

What we are taking on, we talked about -- four of the plants are actually loaded pretty well, probably 80% of capacity.

That doesn't mean we can't do more with the plants, but there's some of those plants are the best order (ph) plants in we have in this company

From an end market standpoint, Phillips is doing okay in this quarter.

It would be natural for consumer electronics to sag after the Christmas period.

Our [inaudible] [basis is that Phillips post Christmas isn't Dwight as pronounced].

Doesn't seem to happen the same way in Europe as it does in the U.S.

Today most of the business is still in Europe.

So apples to apples, tracking the plant as Chris said, they are actually doing pretty well.

Great, thank you.

Operator, that's all the time we have for questions today.

Okay.

So I guess at this point we will conclude our call here.

As always, we are available for any investor calls and Chris and Forbes and I will be in the office throughout the rest of the day today and tomorrow for anyone who has questions and would like to talk to us.

Thank you for joining us today.

Ladies and gentlemen, this concludes today’s Jabil conference call.

Thank you for participating and you may disconnect.

ACTUAL END TIME 4.31 p.m.