捷普科技 (JBL) 2003 Q2 法說會逐字稿

Good afternoon.

At this time I would like to welcome everyone to the Jabil Circuit second 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, press star then 1 on your telephone.

To withdraw your question, press the pound key.

Thank you.

I would now like to introduce Ms. Beth Walters, VP of Corporate Communications and Investor Relations of Jabil Circuit.

You may begin.

Welcome everyone to our Fiscal second quarter of 2003 earnings conference call.

With me today are Tim Main, our President and CEO, Chris Lewis, our CFO, and Forbes Alexander, our Treasurer.

During the course of the conference call, we will be making projections and other forward looking statements regarding future events and the future financial performance of the Company.

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

And we refer you to the SEC documents that the Company files, specifically our most recent 10-K, which was filed November 25, 2002.

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

Turning to results for Q2 of 2003.

On revenue of $1.146b, our core operating earnings, excluding amortization of intangibles, acquisition related and restructuring charges for the quarter, were $42.1m.

Core earnings per share were $.16.

On a year-over-year basis, this represents a 39% growth in revenue, and 92% growth in operating profits.

On a sequential basis, revenue increased 7%, and core operating income increased 7.7%.

Turning to sector results for the quarter.

Production levels in the automotive sector were 10% below the previous quarter, due to the seasonably lower levels of production.

Computing and storage sector increased by 17% from the first quarter, due to increasing production in new storage and server assemblies.

The consumer product sector increased by 45% during the quarter, reflecting increasing production silicon consumer electronics.

The instrumentation and medical sector declined by 8% sequentially, production levels were actually lower than previous expectations due to certain program ramps that have moved into our third fiscal quarter.

The networking sector was flat in the current quarter.

The peripheral sector decreased by 17% in the current quarter, reflecting seasonally lower levels of production, consistent with our previous expectations.

We completed end-of-life production with certain [PT] related assemblies during the quarter in this sector.

The telecommunications sector decreased by 6% sequentially.

And now, something I think all of you will appreciate, we are going to provide sector information for the quarter in terms of percentages for this quarter.

So the automotive sector during the quarter was 8% of revenues.

Computing and storage accounted of 16% of revenues.

The consumer sector accounted for 21%.

Instrumentation and medical represented 4% of all revenues.

The networking sector accounted for 25% of revenues, the peripheral sector was 8%.

Telecom was 14% in the current quarter.

And our other sector made up 4% of overall revenues.

I’ll turn it over to Forbes and he’ll balance sheet and other items.

Thank you Beth, good afternoon.

I’d just like to review some sequential highlights with you.

Our revenue increased sequentially by 7% for the November quarter.

With our core operating income increasing sequentially by almost 8%.

The Company’s sales cycle increased sequentially from 36 days to 42 days.

Inventory turns were approximately 8, compared to 9 turns in the previous quarter.

Approximately $40m in incremental inventory accounted for [4 days] increase in the sales cycle, related to our recent acquisitions.

We expect to return to 9 turns in our upcoming quarter as we begin to match production requirements with inventory levels.

Our return of invested capital was 10%, consistent with the February quarter.

Cash flow from operations was approximately $50m, our ninth consecutive quarter of positive cash flow from operations.

Excluding acquisitions, our capital expenditures were approximately $30m, with depreciation for the quarter being approximately $48 million.

EBITDA was approximately $90m.

During the quarter, we also paid off $50m of our revolving credit facility.

Cash balances were approximately $500m, as of the end of the quarter.

The Company’s debt to capitalization ratio decreased from 25% in the first quarter to 23% in the February quarter.

Now reviewing our cost reduction and integration activity.

We incurred $3.9m of integration and acquisition charges relating to Shanghai Philips acquisition in the February quarter, consistent with previous expectations.

We continue to make good progress regarding [aligning] our capacity.

Overall charges relating to this activity were $17m, including the consolidation of our UK plant into remaining sites in Europe.

We except this consolidation will be completed by the end of the fiscal year.

We plan on continuing to align our capacity throughout this fiscal year, and continue to estimate overall non-recurring charges of $80m, consistent with our previous expectations.

I would like to hand over to Chris Lewis, to review Philips acquisition.

Thanks.

We completed our Philips acquisition in our February quarter, and the three remaining operations in January.

Production in the new sites represents approximately 80% of the overall business on a prospective basis.

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

This acquisition was slightly accretive in our February quarter, or the high end of our previous expectations.

We estimate increasing contribution from this acquisition through out this fiscal year as we ramp to higher production levels over the next several quarters.

Integration activities are proceeding very well.

We are working very closely with the management group within our plants, and look forward to increasing opportunities within Philips and with other customers as we complete the integration of these new sites.

Production levels were at the high end of our previous estimates.

We estimate that the Philips production levels will continue to increase throughout the remainder of our fiscal year.

A large portion of this increase is planned to occur with existing [inaudible] plants in our third and fourth fiscal quarter.

We estimate that this business will produce returns above our weighted average cost of capital by the end of our fiscal year.

I’ll now have Tim review our recently announced relationship with NEC.

Thanks Chris.

We accomplished a primary objective during the quarter, entering into a long-term supply agreement with NEC to produce broadcast video equipment from an operation we will acquire in Japan.

This agreement renews a dormant long-term relationship with NEC, provides us a modest manufacturing presence within Japan and further diversifies our product in the sector portfolio.

The product complexity and mix is very high and includes transmission and studio equipment as well as advanced studio caption and editing products.

Japan has a national mandate, similar to the US and many other industrialized nations, to convert from analog to digital broadcasting.

NEC enjoys the number one market share position in Japan, and is a global leader in High Definition Television and broadcast equipment.

This is a great opportunity for us to enter Japan, a low-risk product set, a blue-ship customer, and an operation and custom to high complexity products and [NPI] services.

Services we regard as sustainable in a higher class market.

This acquisition is expected to close sometime in the August quarter.

The acquisition price is estimated to be approximately $40m, consisting of machinery, inventory, [inaudible] supply agreement.

We currently do not expect this acquisition to have a material impact on earnings in the fourth quarter.

We estimate the acquisition will be accretive to our earnings in Fiscal ’04.

Now, Chris will provide an update for the business.

Thanks, Tim.

Our forecast indicates increasing production levels in the May quarter by an estimated 5-8%.

We’re guiding to an overall range of $1.2-1.24b revenue for our third quarter.

Our core operating income is expected to increase sequentially by 7-12% in our third quarter.

We expect gross margin would be 9%, reflecting our current mix of business, while taking into account impact from our acquisitions.

We expect SG&A expenses to decrease percentage of sales in the third quarter to approximately 4.9% of revenues, compared to 5.3% in the previous quarter.

In overall expense, we expect a consistent level of SG&A costs in our third quarter.

As percentage of revenue, we estimate a slightly higher operating margin, approximately 3.8-4% of revenue, compared to 3.7% in our most recent quarter.

We estimate net interest expense for Q3 to be $3-4m, and a slightly lower tax rate to 16%, reflecting a proportionate increase in income in lower tax areas.

Excluding amortization of intangibles, acquisition related and restructuring charges, we estimate cash earnings per share to be 17 to 19 cents in our May quarter.

Again, reviewing overall revenue growth, Q3 production levels are anticipated to grow by 5-8%, or approximately $1.2b to $1.24b for the May quarter.

Reviewing the sectors, the automotive sector is estimated to increase by 12-14%, reflecting a seasonal higher levels of production.

Computing storage sectors are estimated to increase as well by 8-10%, as we continue to ramp new server programs along with increasing production from new storage assembly.

During the quarter we added a new storage customer in one of the recently acquired Philips sites.

The consumer sector is expected to be up by over 13-15% in the third quarter, principally as result of increasing levels of Philips products.

Our instrumentation and medical sector is anticipated to increase by 70-75%, as we ramp meter-related assemblies and continue to grow with new customers in this area.

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

This sector is positioned to have significant growth in fiscal '03, as well.

Our networking, peripheral and telecom sectors are expected to be down 4-6%, against a weak demand environment in our May period.

While these segments appear to be suffering due to slower than expected demand profiles, we are encouraged by numerous opportunities available with new and existing customers in these segments, as we work through the remainder of this fiscal year.

Tim?

Thanks, Chris.

Just to provide a brief business summary, our fiscal Q2 went to plan with no major surprises or issues during the quarter.

It was, however, a busy quarter for us.

We completed transition of Philips operation to Jabil, completed the bulk of our internal restructuring, and transferred and ramped a variety of new programs around the world.

Although there is always room for improvement, our execution on multiple fronts was sound and the results were inline with ourexpectations.

Given recent developments regarding Iraq, I am sure you are most interested in our outlook for the business as we operate in an environment of grave uncertainty.

I’ll address this in two parts.

First, our view regarding the overall geopolitical environment and its influence in our business.

And secondly, how our business is tracking relative to the course we outlined in September of last year.

First, let’s talk about the impact the overhang of war has had on our near-term demand trends.

Sectors relying on capital spending, for instance networking and telecommunications, have experienced a sag in demand.

As Chris indicated, we will see decline in telecom and networking sectors as a result of this sag.

We do not perceive substantial inventory issues are developing as customers have been swift to adjust their schedules to changes in that market.

Our computing and storage sector will be contrary to the sag as we fold in additional storage business and continue to ramp new programs with customers in the server area.

We indicate the automotive sector will be up, but our fiscal Q3 follows a particularly poor seasonal quarter, exacerbated by OEMs reducing or eliminating incentives with a result on vehicle sales.

Although we indicate the peripheral sector will be down sequentially, this is due primarily to end of life production on certain PC card programs.

The larger drivers in this sector, printing and access products, will be flat sequentially, which is more consistent with end market behavior we perceive in the market sector.

Our remaining sectors will exhibit growth as we continue to grow through new business additions in an environment of sluggish end markets.

Incorporating what you do not know and what you cannot control into a business plan is by definition difficult.

However, we believe we are providing realistic outlook for our fiscal Q3, unshaded by any optimism regarding the ultimate speed or outcome of a military conflict with Iraq or its impact on the health of the global economy.

Like most of you, we hope for swift conclusion to the conflict with minimum loss of life.

We are at a loss to incorporate this hope in anything other than the realistically tempered outlook we have provided for fiscal Q3.

In spite of these external challenges, we are tracking well to the business plan we outlined in September of last year and that we updated during the last quarterly call.

In simplistic terms, we set out to reduce cost to diversify and grow our business and improve financial returns throughout the year.

Since our [trough] quarter one year ago, we have delivered consistent growth in improving financial results.

Over the past four quarters we have produced over $4b in revenue and $151m in cash operating income.

Our operating margin over the past four quarters has been 3.7%.

Quarter to quarter, EBITDA margins consistently have been around 8%.

We have substantially restructured operations, such that over 70% of our productive capacity is now in low-cost locations.

We have absorbed some fairly complex OEM divestitures, controlled our operating expenses, and have restrained consumption of capital to free cash flow produced from operations.

At this point in time, with much of our heavy restructuring and acquisition lifting behind us, we are focused on the future and our growth prospects than ever before and we are encouraged by what we see.

We expect to continue growth in revenue, operating income and margins and to enjoy reduced risk and improved competitive profile going forward.

Step by step, we will continue to focus on execution and expansion of our business to new customers, industry sectors, services and global locations.

Operator, we are ready to take questions now.

We shortened up the introductory portion of the call to take more questions from those of you on the call today.

We will conclude the call around 5:30 EST.

Operator, you can line up the first question.

At this time, I would like to remind everyone in order to ask a question, press star and the number 1 on your telephone keypad.

If you are using speakerphone, please pick up the handset before asking the question.

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

Your first question comes from the line of Steven Fox (ph) with Merrill Lynch.

Good afternoon.

First of all, since you mentioned the war, have any of your customers made any contingency plans in case there is supply disruptions ahead of this conflict?

There are contingency plans in place and we have some plans of our own.

They primarily consist of alternate logistics routes and how to get product from one location to another.

We analyzed the ease of moving production from one location to another should there be an interruption of supply lines or an inability to operate our factories.

It is a very unpredictable environment, though.

We don't perceive risk of not being able to run a factory or significantly sustain interruption to logistics as being a high likelihood.

Some customers sell products which are potentially crucial to national security and if the conflict were to escalate or become sustained they could direct us to prioritize their production over other products and we will react to that as quickly as we can.

It actually happened after the terrorist attacks in September of 2001 for a period of time.

Okay.

Second quick question would be, it looks like gross margins improved slightly from the prior quarter.

Can you go over the puts and takes that got you to a slightly higher gross margin?

We are at the midpoint of guidance.

We guided from 9-9.4.

Part of what we are doing through the second quarter and the entire fiscal year is creating more and more manufacturing efficiencies, reducing cost and while taking on a large portion of business with Philips.

That allowed us to marginally increase our gross margin by the 10 basis points.

Thank you very much.

Your next question comes from the line of John McManus with Needham & Co.

Good afternoon.

You indicate that you are now 70% in low cost areas.

Do you anticipate closing additional plants this year?

This is Chris.

There is more activity we are trying to do as far as some exit cost with buildings.

There is movement.

There will be some step downs into low cost, but as far as any more plant closures, we don't expect that to occur.

Our activity now is more moving out of certain facilities, that type of thing and some reductions, but not a lot of change in the footprint.

We talked about it before, we are happy with the footprint we have and capacity utilization is improving in most of the parts of the world.

So, we really don't expect any big changes from that.

And what is happening in the gross margin mix there which offsets the ramping Philips business?

The overall gross margin of our business is again expected to be 9%, and if you look at Jabil historically, I think we were mid-9s to upper 9s without the Philips business.

The Philips business, which is more materially intensive or has a lower gross margin, the combination of the two allows Jabil to be at about 9% gross margin, that’s actually lower than we have been, John.

But, that is where we expect the business to fall in aggregate.

That’s what I am saying, what other areas there are boosting that margin to offset Philips ramp-up?

You might be too conservative in whatever estimate you are using or the impact it might have to our gross margins, John.

Remember that not only are we ramping revenue, but a significant amount of the revenue associated with these acquisitions is flowing into existing Jabil operations.

So, we are getting better utilization of assets and people.

The $160-180m in restructuring we have taken over the last two years have taken cost out of the system.

I think we have been fairly consistent in the message that the Philips acquisition will be somewhat dilutive to gross margin.

As Chris said, the 9% is a little lower than we’ve run historically, when we were a [fully loaded] company.

But that with the additional absorption of capacity and the fact that significant amount of revenue that we are getting in these acquisitions with Jabil operations means we ought to be able to run at a 9% gross margin.

What is the potential of the tax rate floating below 16%?

I think 16% is a good number for the foreseeable future, John.

I think that takes into account the transfer to lower cost areas.

The Philips acquisition is lower taxed, as well, considering a lot of the operations are in low-cost, low-tax areas.

That is a decent rate for a while.

Thank you.

Your next question comes from Roger Norberg with J.P. Morgan.

Good afternoon, just one question, Tim.

You mentioned seasonal factors in the automotive business and are predicting up there.

The big three have all cut their production forecasts in the last two weeks, can you walk me through how you square that up?

This is Chris.

Part of the seasonality is in the last couple weeks of December, we bring our production levels down.

That happened this year.

It was a little bit more of a reduction than in previous years.

But, if you look at the sequential increase, it brings us up a little bit past the level of where we were in the first quarter.

We have new businesses that are coming on with Valeo.

We have other smaller pieces of business in the automotive segment.

We feel comfortable with our guidance, that it makes sense.

Roger, remember in these acquisitions a significant amount of revenue is flowing into existing Jabil plants and that is organic business and we are transitioning some of the business that didn’t come in acquired facilities with Valeo into our plants over the course of the quarter.

Okay.

One other quick question.

Philips, I believe, you were booking that in Euros, was there a positive translation aspect in the quarter from Philips revenue?

Revenue and cost, Roger, obviously offset one another.

Our bill of material costs are in Euros, the revenue is in euros, as well.

It may be a slight change to our overall revenue, but did not have a material impact to our profits for the quarter.

Thanks very much.

Nice quarter.

Your next question comes from the line of Todd Coupland with CIBC World Markets.

Good evening, everyone.

Just below the gross margin line in the upcoming quarter, what needs to happen in order to hold SG&A constant and meet your operating goals?

Walk us through the milestones on restructuring program.

We were in a position where we want to run our SG&A more efficiently.

It’s something that we started on several months ago.

We need to execute to the plan that we have for SG&A with the Jabil plant, as well as the SG&A with the Philips plant.

We are very comfortable that we are in a position with our restructuring but also increased emphasis we had on SG&A that we will be in a position to have our SG&A levels flat.

If you look at it, we are obviously bringing on SG&A related to the Philips plants, which we need to.

But under that, we are in a position where we are quarter on quarter, lowering our overall SG&A separate from the Philips acquisition.

It is just part of us running a more efficient business in order to bring our operating margins up to higher levels as we move into the third and fourth quarter. [Indecipherable] -- it is just something you will continue to see better improvement similar to what we have been able to produce from a manufacturing standpoint.

We would like to do the same with SG&A over the next year or two.

Great.

One other question.

On the telecom networking side, where you are calling out the war is slowing down demand.

Can you peel back the top there and talk about trends beyond a war, if there are any?

And in networking in particular?

Thank you.

I wouldn't even know how to predict post-war activity in networking sector.

Going into this period of uncertainty and overhang, things are pretty stable.

There was upward bias, a very modest upward bias, certainly wasn't a robust recovery underway.

But, a modestly upward bias to the business.

People put on the brakes late last year and early this year.

That is clearly what is being incorporated into our guidance.

I think the telecommunication area is interesting in that it is hard to separate everything out because we gained new business in that area.

That feels like it is bottoming out and that might have a faster snap back than the other segments in a post-war environment.

Assuming that post-war environment is a positive one.

Then, one housekeeping item.

What was utilization rate in the quarter?

Thanks.

Our utilization rate, with the exception of the United States, in the range of 60-70%, although directly moving up and the US is around 50%.

Great.

Your next question comes from the line of Alex Blanton with Ingalls & Snyder.

Good afternoon, gentlemen.

I congratulate you for giving us the percentage breakdown of sales for the quarter.

That is useful.

I was wondering if we will be able to get that for past quarters, as well?

Will you put out a memo on so that we have comparables?

Is that the question?

It is one of them.

We don't have it prepared tonight.

We will see if we can accommodate.

Perhaps you could pass it out in April at the analyst meeting for the prior year and first quarter.

We will start history from now.

That is in the right direction.

It is.

Did I miss what you are expecting in Q3 for the peripheral group?

I might have missed that.

That is part of the telecom networking and peripherals, the overall guidance for all three was down 4-6%.

Those three combined.

I don't think you mentioned new customers, but how is the flow of new business to you?

New opportunities and so on, could you characterize that?

I think new business activity is pretty high, quoting a lot of business and there is a lot of same sources as we have had for the past three or four quarters.

We have business to flow into top tier providers, for second and third tiers there is a lot of nervousness about the financial condition of some of the more regional players.

There are substantial opportunities with currently vertically integrated OEMs.

It is our position that for the most part, those will either need to be converted to [inaudible] manufacturing model with a hybrid deal or in a pure outsourcing deal.

Much of the capacity is located in the wrong locations.

That creates the same barriers we had for the last few years and the same types of issues.

The pressure building behind the damn is pretty intense.

And in the new business activity aside from that, is pretty good.

So, I don't think the lack of new customer announcements should indicate that it is quiet.

It is active, more active than the last 4 to 6 quarters.

Okay.

Good.

Finally, one final question.

Do you have plans to develop ODM capability as some other companies have been talking about and doing?

Well, I think our strategy -- yes and no.

If you were to characterize the ODM capability as an answer to what exists today, probably not.

If you were to characterize it as the ability to independently produce products for OEM customers with which you have a long-term relationship, certainly.

In some senses, that is what we do today with some of our customers.

Now, we are thinking 5 or 6 or 7 years, there will no longer be a distinction between ODM and EMS providers.

There will be a class of company that provides outsourcing services to electronic OEMs and as a part of that solution set, we will be able to provide completed products.

And we have the building blocks for that capability today.

There is some resistance, which is largely perceptual.

One misconception out there is that OEMs cost more.

OEM costs are actually higher.

We can produce products for lower cost than most OEMs can.

That is a common misperception.

What they do better in many circumstances, particularly in PC markets and notebook markets is independently produce and take the risk of design, inventory, product liability and those types of things.

Working through those issues and mirroring that with our internal design capability, which again, I assert is always been there and been strong.

We will create, I think, a solution that is more compelling than the two choices available to OEMs today, which is essentially EMS or ODM model.

I would say the distinction is the ODM owns intellectual property, not his customer.

Both kinds of companies design, but only the ODM that owns by definition intellectual property, the design itself.

Are you thinking about getting into that business of doing your own proprietary designs?

I disagree with the characterization simply because what intellectual property exists today in the PC market is owned by Microsoft or Intel.

Yeah, they have come up with nifty designs on a battery circuit here and there and a special LCD circuit they do here and there.

Essentially the IP is owned by Microsoft and Intel in the PC market.

We will probably bend more toward the CDM contract design manufacturing and look for customers that generally create some of their own IP.

Generally, companies that create their own IP and trade on brand equity and that type of thing, they are more interested in strategic long-term supply relationships with their supply partners.

We will focus more on that type of customer as opposed to customers that operate with end markets where it doesn't pay for the OEM to have any IP whatsoever.

And PCs are absolutely the best example of that type of market.

I think the point though is, five years from now, there will not be, I don't think, my opinion, there will not be a hard line distinction between ODM and EMS providers.

There will be external solution providers, of which part of that solution set will be the ability to manifest complete products.

Thank you.

Your next question comes from the line of Louis Miscioscia with Lehman Brothers.

Great.

Hoping you could get into some more detail on DSO and inventory.

Both were up more than what I would have expected and I am looking for thoughts you might have there.

DSO was 53 days and I think we are in the range.

We have a big concentration, European based receivables and I think we will stay there.

Inventory days were 45.

There is 4 or 5 days that relate to acquisitions.

That will normalize in the third quarter.

We know what we need to do with that and we will go execute and normalize inventories back up to what we are accustomed to which is 9 turns.

That is where we are with that.

The accounts payable days in the quarter were 56 days versus 54 before and we probably have a little scope for that to actually be up higher than AP days.

Great.

The results from the quarter look pretty good and the guidance looks pretty good, too.

I know most companies only give one quarter of guidance.

Can you give us some thoughts on August?

It is normally seasonally softer quarter.

Do you expect drastic changes in gross margin, operating margin, revenue levels?

I think one of Tim's comments, you had hoped things would improve sequentially throughout the year, that would suggest we have to hit these levels or higher in August?

We are not guiding to August, but continue to increase operating income through the course of the fiscal year.

We are not guiding to specific percentages or revenue in August.

We are in a position to continue to increase revenue and operating.

We have the base of business to do that.

Great.

Final question, your storage customer, was moving their product into a Philips site, could you give us is that because of experience or regional thing?

Experience and we developed a product with the customer and it is just a good relationship and it is a nice piece of business in one of our new Philips sites.

Which region is it going to?

Western Europe.

Thank you.

Your next question comes from Derrick Winger (ph) with Jeffries & Company.

What was depreciation and amortization for the quarter?

Also, capital expenditures and the capital expenditures outlook for this year, 8/03.

Depreciation was $48m for the quarter.

Amortization for the quarter was $9.7m.

Capital expenditures in the quarter were around $30m.

We expect capital expenditures for the full year to be $90-95m.

We expect depreciation for the full year to be around $180m.

Derrick Winger Thank you.

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

Thanks very much.

Good afternoon, everybody.

Chris, I think you talked about Philips being roughly 80% of the anticipated volume.

I want to verify that was as of the end of the February quarter?

End of the May quarter, Mike.

What I said was on prospective basis, if you look at May, we will be about 80% of the overall Philips business.

Again, simplistically, looking by end of the year, we will be 100% of the deal between Philips plants and the Jabil organic plants.

Is there any way or would you be willing to take a swag at what percentage of anticipated volumes came in the February quarter?

That is where we started off with about 60% of production requirements and have been moving up.

Okay.

I wondered about the restructuring.

It sounds like it is on track, the $80m at end of the fiscal year is still a good number.

Maybe could you help us out with how long after the fiscal year you expect the full benefit of the cost cutting to really show effect in the Jabil model?

We will see some in the third quarter.

The full impact will be starting toward the end of the third quarter and fourth quarter.

We have not changed as far as overall, we expect that to save us $4-6m.

Again, a lot of moving parts to it.

The overall cash cost associated with these charges we haven't changed either, which is about $20-25m.

We are starting to see some benefit of it.

We are bringing more business to the Jabil plant.

We are doing a good job with reducing cost and creating more efficient operating plans.

But, it is kind of toward the latter portion of Q3 and Q4 we will see the full benefit.

Okay.

Then, if I understand Forbes correctly, it sounded like Philips had added $40m in inventory in the quarter of the $83m your inventory rose $40m.

There was Philips and Quantum, where we were taking on some systems assembly work for Quantum.

In Asia is was a combination of those two.

We didn't have full production ramping with that particular inventory, but we will in third quarter.

So, I guess some observers are looking at some of the upstream guys in the supply chain and noting they seem to be doing slightly better than their customers.

Inventories seem lean throughout the supply chain.

I wonder if you have seen any change behavior whether related to war or otherwise or greater inclination on the part of customers to carry additional inventories.

Being tight with inventory and wanting more inventory?

Yes.

Not a lot.

That is something we will watch.

As far as our overall production requirements in the quarter, we haven't seen a lot of that impact.

Inventories will seem lean because one thing people are better at managing them.

The other thing, frankly we have been in two years of either down or flat demand environment and it is easier to plan inventory procurement and production levels in a flat to stable environment.

People are scared to death to get stuck with inventory.

When they see demand softening, they start whacking schedules pretty quick.

Thanks so much.

Your next question comes from Michael Walker with First Boston.

Thanks a lot.

Just a question on Philips again.

You had expected three months ago that Philips would make up about 14% of revs in February and you said it was ahead of that, can I assume 15 or 16% of revenue?

Right.

Our guidance was 13-15 and they’re at the high range.

Could you offer the same range for May quarter?

We are not giving percentages.

Obviously they are a big part of consumer segment as far as the overall sequential increase, if that helps you.

Right.

When I do the math on that, looks like the core non-Philips consumer business was down substantially sequentially, is that correct?

I assume that was seasonality.

There is seasonality, where with some of the production there you would expect it to be down somewhat.

Okay.

Then, did I hear earlier, the Valeo is still contributing on an accelerated basis this quarter and next or is it maxed out?

We really haven't valued it as an acquisition –

I did say we would ramp additional value during the quarter.

Great.

Lastly, on the networking business it came in lighter than people have been looking for.

Are you benefiting from share gains in that vertical?

Which vertical?

Networking.

We added new customers and I think we continue to add market share.

There is not huge market share shifts going on there, though.

Thank you very much.

Your next question comes from Ellen Chae with Prudential Securities.

Good afternoon, everyone.

I want to find out what kind of linearity you are expecting in the quarter and how the months will roll out?

Pretty linear, good March April and May.

And so far, March has met your expectations?

Yes.

On a fully diluted share count, do you expect share count to be down next quarter?

Ellen, I expect it does relate to share price.

I expect it to be about the same.

It’s not going to move a whole lot.

Thanks a lot.

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

Good afternoon.

Good quarter and outlook.

Couple of follow-ups.

Last quarter you had about 20 basis points of margin hit, if you will, and relocating related to restructuring and getting products moved to lower cost areas.

Can you give us an update on where that might have been in the third quarter and what you expect in the fourth quarter?

I don't know if we have broken that out.

That is a good question as far as moving product around and if we were in a position where we were closing a lot of plants and we are not, that could be pretty material to us.

It is just not that material to us in our overall operating plan.

We don't have a lot of plant closures.

I don't remember talking about 20 basis points with movement.

We will see improvement in that area as we move and kind of stabilize in our third and fourth quarter, where the business needs to go.

There is not a huge amount of movement occurring right now.

It has been gradual and there is still some to go.

But, it is not having a big negative impact on our overall margins.

One last question.

Can you guys give color of what your target P&L might look like when you are fully integrated, current mix you are seeing now?

Not one quarter, but maybe for full year once you get Philips done and NEC up, is it kind of very much different from the 4.9 SG&A etc. you are looking at in the third quarter?

Depends on the type of business we bring on.

Once your plans are done with restructuring and plans done assuming the mix stays where it is?

It is not something we can provide to you.

We think as we continue to grow top line, get costs under control, control our SG&A costs really well, we will continue to provide growth and operating earnings and margins.

Thanks very much.

Your next question comes from the line of Shawn Severson with Raymond James.

Can you give color on the idea of push-outs versus cancellations.

I know you talking about networking and telecom being down.

Are you getting the sense these are things that are projects that are being completely scrapped or are they things that are just being slowed down and pushed out two months or a month to three months or whatever?

We are not seeing a lot of program cancellations, no.

Keep in mind we don't have visibility into specific sales order activity.

It relates to specific installation of product and that type of thing.

We would see whole product lines being cancelled and put on the shelf.

We are not seeing that.

On the Philips upside, you talked about the revenue side.

What about the margin side and integration cost savings, where is that relative to expectations now?

As far as operating performance with the higher revenue and production we had higher operating performance in the second quarter than we expected.

We talked about it before where we went into the quarter where we are estimating neutral to slightly accretive and it ended up being slightly accretive.

Due to revenue upside as opposed to cost savings than you initially anticipated?

We are just getting started and we will work on that over the next several quarters to improve operating efficiency of the plants and bringing in the other portion of the business into Jabil plants.

Great.

Thank you.

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

Thanks.

Two quick questions.

One, you talked about the turns rates of Philips last quarter, about 13 times.

Is that holding steady, or going up or down?

It is higher turning business but it’s probably more along the lines of 10 or 11 turns.

Okay.

We should be in a position with Philips business and normalizing the acquisitions that 9 turns should be very doable for the company.

Obviously, we want to continue to improve on that metric.

Also, at the facility tour in Guadalajara last week, it was described as 100% utilized from a capacity standpoint and almost from a shift standpoint as well.

Could you review for us, you gave number 60 to 70 and 50 for the US.

Could you review for us what you are thinking about when you give that number?

And also what the optimal utilization ratio for your company is at a specific facility, do you try to keep it 80 upside or is 100% what you’re shooting for?

Depends on the type of product.

It depends on the type of business that we have and the type of product, whether it is optimally 80%, two ships loaded five days per week, or where we have seven days per week, 24 hours per day type of loading.

What I am trying to do with capacity is give people a picture that we are in a 60 to 70% range, which is reasonable.

We like to be -- on an overall basis, more the 80% range as a company.

It really depends on the work sell and type of product the customer relationships specifically on how much loading you want.

You are right.

Our Guadalajara plant, that is loaded up to 90% type capacity right now.

One last question on Philips.

We heard on their conference call them talking about driving to a zero cash cycle for themselves.

Can you relate that into your own, is that related to payable terms with your customers, you talked about extended that out.

Do you have leverage with customers Europe based on that from Philips or does that impact you?

Not Philips.

This is matching receivables whether it is Philips or any customer with our payables to match the terms there.

Not specifically related to Philips.

Great.

Scott Craig with Morgan Stanley.

Tim, can you outline with regard to Valeo, you said with Philips we were 80% complete bringing revenue over.

How far are you on Valeo.

And secondly, Chris, with regard to the credit facility, do you see paying that down further or what is the trend over the next few quarters?

Thanks.

We will be fully complete with the transition of the Valeo business by end of Q3.

How much were you complete at end of Q2?

Most of it.

I don't have percents, but most of it.

There’s a little bit more.

Okay.

The credit facility we will keep at $100m.

Thanks.

Your next question comes from the line of Chris Lippincott with McDonald Investment.

Quick question.

As far as the 10% customers and also the percentage of the top 10, just wonder if you could break that out?

[Inaudible] HP, Cisco Philips are expected to be over 10% customers for our fiscal year.

As far as the top 10 customers they are in range of 70 to 72% what we expect for the year.

Okay.

Just getting back to NEC.

Since that is you talked about this in the past, Japanese plants, any thoughts about filling that out with additional customers and in addition, what kind of expense structure cost structure you would have with that geography?

Thanks.

Structure is highest like in the United States.

The product I tried to outline for people is very complex.

Large scale equipment that wants to be manufactured inside of Japan, we have a long-term supply agreement giving us plenty of time to diversify the facility with new high-mix product launch, MPI-type businesses.

So, in 3 to 4 years we would hope we would have 6 or 7 Japanese customers in the facility and would do primarily product launch and product development types of business services with most of the mass production being in low-cost locations.

Not a big plant. 100,000 to 130,000 square feet.

Not a lot of people.

Great capability.

Very interesting product set with a strong market rational behind it in terms of transition from analog to digital broadcasting.

It is a sweet deal.

Also, I was wondering if you could break out incremental revenue from the total wins or ramps during the quarter?

Not even sure how to address that.

Thanks.

Your final question comes from Steve Savas with Goldman Sachs.

Not much left to ask.

I will ask first on the charges, Chris, what portion was cash for the quarter?

About $8m was cash.

The rest non-cash.

Okay.

And then, the on the segment guidance where I think you talked about networking and telecom and peripherals is down 6%, is that combined all three or each?

Each.

Could be both.

Yeah, but it could also be combined and not -- that is great, helpful.

Thank you very much.

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

Thank you for participating.

You may now disconnect.