捷普科技 (JBL) 2003 Q3 法說會逐字稿

Good afternoon, my name is Molly, I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Jabil Circuit Third 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 the Number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I would 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. And welcome to everyone. Thank you for joining us today for our fiscal third quarter of fiscal 2003 conference call. With me today are Tim Main, our President and CEO, Chris Lewis, our Chief Financial Officer, and Forbes Alexander, our Treasurer.

During the course of this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just predictions and that actual events or results may differ materially.

We refer you to the documents we file with the SEC specifically our most recent 10-K 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 or forward-looking statements. We'd like to let participants on this call know the press release and a slide presentation on the third quarter results are posted on the Jabil website at jabil.com. This information is complementary, not incremental to the information which we will discuss here today.

Results for the third quarter. On revenue of 1,219,000,000, GAAP operating earnings were $2.5 million. Core operating earnings excluding amortization of intangibles, acquisition-related and restructuring charges for the quarter were $47.8 million. Core earnings per share were 19 cents. On a year-over-year basis, this represents 43% growth in revenue and 48% growth in core operating profits. On a sequential basis, revenue and core operating income increased 6% and 13% respectively.

Looking at the revenues for the quarter by segment, production levels in the automotive sector were 19% above the prior quarter due to increasing assemblies in that sector. The commuting and storage sector increased by 10% from the second quarter due to, again, increasing production levels in new storage and server assemblies. The consumer products sector increased by 7% in the quarter, reflecting increasing production of the fingertips consumer electronics products. Instrumentation and medical sector increased by 65% sequentially, reflecting ramping and programs with numerous customers. The networking sector was down 3% in the current quarter, slightly better than our previous expectations. The peripheral sector was flat in the current quarter reflecting consistent levels of productions. The telecommunications sector decreased by 2% sequentially, again, reflecting better than expected demand in our May quarter.

So for the current quarter or the fiscal third quarter our segment information in each of these segments is as follows: Automotive, 9%; computing and storage, 160%; consumer, 22% ask instrumentation and medical, 6%; networking 22%; peripherals, 7%; telecommunications, 13%; and the other sector, 5% of revenues.

I'll turn the call over now to Forbes who will review our sales cycle and balance sheet during the quarter.

Thank you, Beth, good afternoon. Our inventory turns improved to nine compared to eight turns in the prior quarter. Inventory was reduced by approximately $40 million or 8% as compared to a 6% increase in production levels. The company's sales cycle improved by one day to 41 days.

Cash flow from operations was approximately $40 million our tenth consecutive quarter of positive cash flow. Our capital expenditures were approximately $15 million, approximate depreciation for the quarter being approximately $48 million, and EBITDA was approximately $96 million. Cash balances at the end of the quarter were 514 million. The company's debt to capitalization ratio decreased from 23% in the February quarter to 22% in the May quarter. With our return on invested capital increasing to 11%, compared to 10% last quarter.

I'd like to now quickly review our cost reduction and integration activity. We incurred $3.9 million of integration and acquisition-related charges relating to the Phillips acquisition in our May quarter consistent with our previous expectations. We have continued to make good progress regarding aligning our capacity. Overall charges relating to this activity were $33 million in the third quarter. $3 million of this charge was cash, the remaining costs related to building exit costs and charges associated with impairment of fixed assets. We estimate overall restructuring charges of $88 million for the fiscal year. This includes $12 million of additional charges in our last quarter.

I'd like to turn the call over to Chris.

Thanks, Forbes.

I'm going to take everybody through the acquisitions we've had and also give everyone a business update. Our Phillips acquisition is proceeding according to our previous schedule. Current production in the new sites represent approximately 90% of the overall business. Full production, both on an acquired and organic basis is scheduled to be in place by the end of our fiscal year.

This acquisition was accretive in our May quarter; we estimate increasing contributions and production levels from this acquisition in our August quarter and into our first quarter of fiscal '04 as we ramp to seasonally higher levels.

Integration activities are proceeding very well. We are working closely with the management group within our plant, and look forward to increasing opportunities within Phillips and with other customers as we complete the integration of the new site. We estimate that this business will produce returns above our weighted average cost of capital by the end of our fiscal year.

Regarding our NEC acquisition, this acquisition closed in June. We expect this acquisition to modestly contribute to earnings by the end of the first quarter of production. We estimate this acquisition will be accretive to our earnings in fiscal '04.

Now, taking a look at the business update, our current forecast indicates increasing production levels in our August quarter by an estimated 3 to 7%. We're guiding to an overall range of revenue of 1.25 billion to 1.3 billion for our fourth quarter. Our core operating income is expected to increase sequentially by 5 to 10% in our fourth quarter. We expect gross margin will be 9.1 to 9.2% reflecting our current mix of business while taking into account impact from our acquisitions.

We expect SG&A expenses to decrease as a percentage of sales in the fourth quarter to approximately 5%, compared to 5.1% in the previous quarter. In over all expense, we estimate a slightly higher expense principally due to the added staffing in Japan for our NEC acquisition.

As a percentage of revenue, we estimate an equal to slightly higher operating margin, approximately 3.9% to 4% of revenue, compared to 3.9% in our most recent quarter. We also estimate interest expense for Q4 to be approximately $3 million, and it consistent tax rate of 16%. We estimate an additional two to $3 million in integration costs for our fourth quarter, additionally, we estimate as Forbes mentioned, a $12 million in additional restructuring charges in our August quarter.

Excluding amortization of intangibles, acquisition-related and restructuring charges, we estimate core earnings per share to be 19 to 21 cents in our August quarter.

Take a look at the sectors now, again, overall production levels anticipated to grow by 3 to 7%, approximately 1.25 billion to 1.3 billion.

The automotive sector is estimated to decrease by 7 to 8%, reflecting seasonally lower levels of production.

The computing and storage sector is estimated to have consistent production levels. This reflects expanding server production, offset by lower levels of production on notebook-related assemblies.

Our consumer sector is expected to be up over 8 to 10% in our fourth quarter, principally as a result of increasing levels of Phillips products.

Our instrumentation and medical sector is anticipated to increase sequentially by 30 to 35% as we ramp meter-related assemblies and continue to grow with new customers in this area. This sector is positioned to grow 75% this fiscal year.

Our networking sector is estimated to increase sequentially by 10 to 12%. This estimate reflects initial production of the NEC business in Japan, along with a relatively stable level of production in our remaining network sector.

The peripheral sector is estimated to have consistent levels of production in the August quarter, and our telecom sector is estimated to be down by 7 to 8%.

Tim will now give us a business summary.

Thank you, Chris.

We are satisfied that third quarter results were consistent with expectations. Our people executed well, in spite of a profoundly distracting and unsettling external environment. We ended the quarter fearful of the war in Iraq, endured the SARS scare, and operated in a gloomy economic environment for most of the period.

Internally, the quarter represented a high-water mark for our work in acquisition integration and rationalization efforts. We also started several new business ramps and transition production from high cost to low cost geographies. We exited the quarter with many of these challenges largely behind us, the timing and strength of an economic recovery being a notable exception. All in all, an arduous quarter that ended well and laid a solid platform for the remainder of fiscal '03 and the commencement of fiscal '04. I would like to thank all of our people and customers for their patience in perseverance during a pivotal quarter.

A few brief comments about the prospects for our business. Regarding overall demand trends, our business plan is premised by a continuation of stable but flat end markets. Sector by sector, business looks firmer than in the recent past, but establishing a trend requires multiple data points so we're cautionary regarding any market recovery. That said, we feel very good about our position under these economic conditions.

Fiscal Q3 was our fifth consecutive quarter of growth in revenue and operating income. We expect our multidata point trend to continue into our fourth fiscal quarter. Our consumer, automotive and medical instrumentation sectors are all up at least 80% from year ago levels. Operating income is up 50% in the past four quarters and operating margins and returns have improved as well. We will continue to focus on diversity, execution, and income growth in a flattish end market environment. Should a strong economic recovery fill our sails at the same time, our business will enjoy the additional leverage strong demand imparts.

Over the next several quarters, we intend to improve our return on invested capital to provide real economic return to shareholders. We need to improve inventory turnover from current levels and believe we will. Our rationalization efforts and transition in business to lower cost locations are nearing completion and we will soon enjoy the full benefit from these activities. Business is flowing into low-cost locations with available floor space and adequate SG&A infrastructure leveraging our operating expenses.

We also expect our top line growth will continue as we fold in new business wins with new and existing customers, and as we broaden the services we provide to those customers. We expect to under near our cost of capital in fiscal Q4 and well above our cost of capital over the course of fiscal 2004. The EMS model is alive and well and will again produce real economic returns for shareholders. With an expanding portfolio of opportunity, improving asset management, operating income growth, and a stable demand, we are positively biased toward the prospects for our business.

Beth?

Thanks, Tim.

Operator, we're now ready to begin the question-and-answer session. I'd like to ask the participants on the call limit themselves to one question, with one quick follow-up so we can meet as many questions as possible. We have approximately 45 minutes for Q&A.

Operator?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the Number 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before asking your question. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Steve Fox of Merrill Lynch.

Good afternoon. Two questions on your serve markets. Could you refresh us on the medical and instrumentation, who you're winning business with, if you could highlight some programs?

And then secondly, on the telecom business serve market, it looks like it's been going down about four quarters in a row now. Is that market-related, or is this something Jabil-specific there?

In the medical instrumentation area, we haven't detailed all of the customers in that segment, but some of them would include companies like Agilent, Abbot, Symbol (phonetic), and several other companies in that segment.

In the new business wins are kind of across the board. It's a fairly rich sector now in turns of a number of customers.

In the telecom area, that segment held up a little better than we expected this quarter. The next quarter is estimated to decline, but, you know, you have to keep in mind that that segment has companies like Redback Network, Sycamore, (phonetic) used to have some companies like Telion (phonetic) and that type of account in there, as well as better known accounts like Lucent.

At the same time, we're transitioning business from higher cost to lower cost locations, so on a revenue basis, that cost reduction is being passed along, so even though unit volume is consistent, on a revenue basis it will be a little bit lower, even though profitability will still be very good.

So on the customer side, you know, we're weaning ourselves away from some of the smaller accounts in order to focus on the larger players in the space. And we've also transitioned quite a bit of production to low-cost locations. So on a unit volume basis, and in terms of the customers that we're really focusing on, the segment is doing better than it had in the previous six to seven quarters.

Thank you very much.

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

Hi, Tim. Could you clarify what you said about ROIC? You said it would be above your cost of capital in fiscal '04, but well above it?

Alex, this is Chris, what we were talking about, you can see we're making improvements in our ROIC, in that we've been at 10 for three-quarters, we've now moved to 11. We're in position to be near our weighted average cost of capital as we close out this fiscal year. What we're talking about for fiscal '04 is moving past those levels in fiscal '04.

Through the year?

In terms of overall capital as a company, we're using about $1.5 billion of capital. So as we would ramp our overall operating income as a company, 10 to 15%, we can move up to 11, 12, 13% in ROIC. So we're not that far away from being at that weighted average cost of capital.

Which is what?

13%.

13%.

Yes.

So you would expect to be, you said, well above that by the end of the coming fiscal year?

We're not --

What I said, Alex, is over the course of fiscal 2004, so, I think that's, if you looked at that in an annual bucket, our expectation is to be substantially above our cost of capital.

Okay.

I have a question for Beth. Have you put out the historical data on quarterly breakdown of sales by segment, or are we still waiting, are we just going to get that going forward?

We've been getting that going forward, I think you have it for the last full fiscal year.

For the year and for the last two quarters, but are we going to get any past data on that?

I think we've got some slides on that, Alex, but we can provide that.

Okay. All right, thank you.

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

Okay, great. Thank you. Obviously, it looks like this fiscal year is shaping up quite well, numbers right now for first call on fiscal '04 are 94 cents, it'd be about 32% increase in EPS bottom line. Any comment, any which way, whether it's a reasonable number, or would you quantify it as aggressive at this point?

Our guidance, obviously, is for the next quarter, for the next 90 days, but as far as where we are positioned as we move into fiscal '04, I think we feel good that we're -- as we move into the first quarter of fiscal '04, to be able to continue revenue operating growth, and as we mentioned, improvement on return on invested capital. As far as giving guidance on all of fiscal '04, I don't think we're positioned to do that.

Okay. Only looking for one word. But that's okay.

I know you were.

Could you throw out a comment, I guess, where the industry is in the way of acquisitions? Obviously, Phillips was, you know, a big one that really helped in diversifying your revenue stream, and is there a lot more of them or any more of them like that? Where would you, I guess, see the late '03 into '04 market being for -- not even just mega deals, but just reasonable-sized deals?

Louis, this is Tim. I think we're really focusing more of our attention on the integration of the acquisitions that we've made, and getting additional traction on the organic side. We're actually, you know, see some really good things happening on the organic side. That's always our first choice when it comes to growth strategies. And we think we can move into '04 with growth without the necessity to make any additional acquisitions.

I think there's probably some opportunities out there, Lou, but generally speaking, I think most of the major players in the space are full of factories, and we don't feel like we need to do anything more strategic with our segmentation or global footprint. And we have a better roster of customers than we've ever had as a company.

As a matter of fact, in Q4, our top 10 customers will fall below 70% concentration for the first time since I've been here, probably for the first time in the company's history. We're feeling good about diversification in segments, customers, our global footprint. We don't feel compelled to do any acquisitions. There may be an opportunity out there as we go into '04, but right now the organic front looks pretty good, so I think we'll stick to the current business plan.

Okay. Great. One last follow-up: Sales cycle dipped down one day, which is nice to see the 41 days, I guess, Chris, where would we expect this to go over the next couple quarters? The same kind of trend, one day per quarter?

Not necessarily one day per quarter, Lou. But our key focus now is inventory turns. Our inventory days went from 45 days down to 40 from Q2 to Q3, and that's where we want to focus on is, that's the key metric in driving our overall sales cycle down from 41 to lower levels as we go into fiscal '04.

We don't necessarily -- where we're at right now is in that 40, 41-day sales cycle, but where we'll get improvement, I think, over the next several quarters is by improving our inventory turns or the date in inventory.

Okay. Great. Thank you.

Your next question comes from the line of Steve Savas of Goldman Sachs.

Good afternoon, thanks. I guess one question on your mix of business. The consumer line this quarter, I think you said was up 7%, and expectations on the last conference call were up 13 to 15%. Was that slower ramps with Phillips, was it demand, was it foreign exchange? What was behind that?

It really wasn't foreign exchange or that type of thing. I think it's pretty well known that Phillips came out about two months ago and indicated the consumer electronic demand was a little softer than they anticipated. So that's reflected in the numbers.

And, you know, we just continue to really take cost out of products and boost up in the lower cost locations. So, primarily, it's a little bit softer demand than was anticipated.

Okay. So it's not slower ramps that you might make up for in next quarter?

No.

Okay. And then did you guys mention 10% customers?

The same customers that Phillips, Cisco, HP.

Okay. Thank you .

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

Yes, thanks. Good afternoon, everybody.

I just want to follow-up, Tim, you had mentioned that in the next year you'll continue to work on your execution and your diversification, and I think in response to the last, or two questions ago, you said you're actually feeling pretty good about your mix.

I was just going to ask you to sort of follow up on that, and I mean, is the mix optimal if you had a clean slate? Is this sort of the end market mix that you would most desire? Or how would you change it if not?

My comments were in the context of acquisitions.

I see.

And how did we feel about acquisitions. And I think the civil transactions, some of the other deals we have done in the past year, were specifically and strategically about diversifying the company, producing us better in segments that we had a keen interest in, like automotive and consumer electronics.

From an acquisition -- being -- feeling the need to do acquisitions in order to kind of jump start or accelerate diversification of the business, I think we're in good shape. So that would not -- no longer be the strategic rationale for an acquisition.

Is it optimal? You know, probably not. I think there's some work we can continue to do. I'd rather not have any segment be more than 20%, I'd rather not have customer concentration at 70ish% for a top 10. So there's always additional work we can do there. I think we can -- it's more pruning the bush than planting a new garden.

Okay. Then I guess, maybe perhaps for Chris, could you just refresh us, Chris, on when we should see the full benefit of the restructuring plan? Will you be done with the restructuring charges after your fiscal fourth quarter? And related, when do you think that the acquisition-related charges will cease?

The benefits of restructuring we started to see a little bit in the third quarter, Mike, but we'll see the full benefit in our fourth quarter. We talked about it before, that we expect it to be 4 to $6 million a quarter in savings.

As far as our restructuring, it's pretty much followed according to plans we set forth at the beginning of the fiscal year. That's allowed us to move the footprint to 70% low cost and 30% higher cost location, so that we -- you know, we've been real busy moving through that. It's allowed us to be where we need to be in the United States in terms of our footprint. So I think it's positioned us to have the appropriate footprint that we need to have today to go execute for this next year.

But, you know, beyond that, I really can't talk about fiscal '04. But I think it's where we need to be with our overall level of business.

Okay. The acquisition-related charges, do you think those will persist in the fourth quarter?

The integration costs, Mike, will really, really drop off. We'll largely be integrated with all the Phillips acquisitions at the end of Q4, we'll see that drop off very significantly as we move into the first quarter of fiscal '04.

Okay, thanks very much.

Sure.

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

Thank you, good afternoon. I was wondering about the seasonality in Phillips as we look out into your fiscal first quarter. What would be a reasonable assumption in terms of the sequential growth as we hit the seasonal peak there?

I think you have to look at what the consumer does and to the December or holiday season, and understand that that will be a big quarter for us. September, October, November, going in through December. But, you know, we do expect a good ramp with that business, not only Phillips, but the whole consumer segment. As we move into our first quarter. That will be, you know, our strongest quarter because of seasonality. Again, not only with Phillips, but some of the other pieces of business we have.

Would you expect that, you know, obviously there's a margin differential in the Phillips business, especially in the gross margin side, but would you expect that through your cost savings initiatives and better loading of the facilities that you could, at least, keep your operating margin flat for that first quarter, even though you've got it ,obviously, a little bit of a mixed shift going into the first quarter?

We're in good position with our operating margins. What we are seeing as a company is the benefits of the 10 to 15 new organic wins we had through all our Jabil plants, we're final getting, what I would call, critical mass or good contribution occurring from that. We're seeing efficiencies in our acquisitions. We're, obviously, continuing to try to improve the efficiencies with Phillips and our other acquisitions.

As I mentioned before, this restructuring is largely complete for Jabil in that we have our footprint where it needs to be. And Shawn, you know this, and we talk enough about it, we don't really obsess on what the percentage is in operating percentage terms, but what we need to do is, obviously, grow the absolute dollar of operating income.

But, you know, part of that will be through more revenue, leveraging our SG&A, and, you know, with that, we'll be able to keep a good operating margin as well. But it's more about growing that absolute dollar of operating income.

Okay, thank you.

Your next question comes from the line of George Nissan of Merrill Lynch.

Good afternoon, congratulations on a very solid quarter. I've got a couple of questions for Chris; it's a two-part question.

Chris, could you tell me, right now I'm interested in how you're approaching the compliance of the Sarbanes-Oxley Act. Could you elaborator on that?

Sure. I mean, we do a pretty thorough process internally as far as sign-offs, and we go through, you know, all the things that are associated with Sarbanes-Oxley in terms of my certifications, all our top people certifying.

We're also starting to address Sarbanes-Oxley 404 in terms of internal control, which the deadline for Jabil is actually our next fiscal year on that. But we want to have a jump start on that, make sure we're proactive. And it's something we take very seriously and have everything in place to make sure we comply.

I understand the time line, isn't it supposed to be in place by June 15 of '04? For the final 404 roll in?

June 15 of '04 for section 404?

Correct.

Yes. I believe that's right.

Have you already started looking at solutions right now?

Yeah, we have. Again, we want to be proactive with it. And move forward. So we've started.

Are you bringing in consulting firms right now to help you with that?

Well, sure. I mean, we'll have help and we'll go through it, but sure.

Okay. Congratulations on a good quarter. Thank you.

Thank you.

Your next question comes from the line of Darrett Winger of Jeffries and Company.

Yes, thank you. Hi. Your capital expenditures for the nine months, around 67 million, can you let me know what they expect them to be for the year, 8/03, and, perhaps, next year, 8/04 fiscal year, capital expenditures?

Capital expenditures for '03 will be 80 to 85 million. And for '04, it's kind of a tough one, depending on how we ramp, but, you know, a range of 70, 80, to 100 million.

Okay. Thank you very much.

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

Yes. Good afternoon, Tim, Beth, Chris. First, two quick accounting questions. It looks like there was a tax benefit of 4 million or so on the income statement. And then can you give us detail on the receivables growth?

Tax benefit, Tom, is the effective rate of the nonrecurring charges, which is the higher rate than our 16% that we use for core earnings. So that resulted in a tax benefit.

But the growth in receivables was proportionate with the revenue growth, which was about 6%. But in terms of days, I think our receivable days were 53 in the third quarter, as well as 53 days in the second quarter.

Okay. Great.

Then for it to change in our third quarter on 7% again, production or revenue growth was, we actually decreased our revenue or excuse me, our inventory by a few percentage points, or $40 million.

Okay. Great. Then back on this return on invested capital question, I think it's worth lingering on, because there's so much discussion of this with EMS. I think, Chris, you also said that you expected the Philips business to generate returns above your cost of capital. Is that what you said?

Yes.

Okay. So when we think about programs like consumer outsourcing, is it -- is it still true that what you're looking at there is, you might have slightly lower margins, but you've got the asset velocity and any asset turns and you can do equal to or better than your cost of capital? Is that true with what's going on with Philips, or is there something else?

That's correct, Tom. I mean, to the extent you have business like that, a lot of the return relates to turning inventory very well and again, as a company, that's something we're working on is improving our inventory turns and that type of business, that's how you, on that type of business, have returns above cost of capital. That's correct.

Okay. I think that's it. Thanks a lot, guys.

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

Yes, thank you. Could you tell us of the difference in the contract you sign with Marconi, which I guess goes to effect at the end of June, compared to the previous contract, and whether you are receiving cash payments from Marconi under the old contract, and whether, in effect, that's going to be the case, or might probably be the case under this contract?

John, the business with Marconi is primarily in Jabil plants, and we price the business or the economics with that business similar to our other customers. The overall supply agreement with Marconi is through June 2005.

The monies we receive from Marconi are no different, in that we are paid for our manufacturing costs, we are paid for our bill of material costs, and that's priced every quarter with Marconi or any other customer. It's not really any different.

Is the level of market --

The difference from where we were a couple years ago, is we had a lot of plants with Marconi, and now literally, not 100%, but most of the business is within the framework of the Jabil plants.

Is the level of the Marconi business now in the 100 to $200 million range?

They're part of, when we look at our customer base, John, we have three 10% customers, we have seven customers underneath that that are in the 3 to 5% range. They'd be one of those customers.

And one last question on Philips, if in effect, again, you had to cut back as employees in the Philips operation in Europe, can you do that? Are you free there to make any changes you want? Or are there some statute of limitations you have to adopt?

There's a whole slew of individual country-based regulations, and we have to observe labor laws and notification periods and the rest of that, and any legal jurisdiction we do business in. So there's not a generic answer to that.

As it relates to our agreement with Philips, I mean, there are, you know, specific elements of, you know, what plants have which -- what levels of production, and that type of thing. But they're our factories now, and it's coming on us to operate them efficiently and to make decisions about the employment of the labor as our good business judgment tells us to do.

So you're not encumbered by any past agreements that you had with Philips?

We don't have any past agreements with Philips. I mean, when you assume responsibilities for employees in Europe, you sometimes assume contractual responsibilities for employees, and we've done that in some cases and again, that's according to the individual legal jurisdictions in each country we do business in.

Okay. Thank you.

I'm not sure what you're getting at, maybe if you could just ask me the question directly, you know, can we lay off people in Europe if we need to? Yeah, we can do that. Depending on the facility, that could take as little as a couple of months, it could be as long as, you know, six, nine months.

That's at your option, that's my point?

Yeah, we're operating the factories according to, you know how our good business judgment tells us to operate them.

John, this is Chris to remind everybody as far as the footprint with Phillips, 80% of it is in low-cost areas, so we've aligned the footprint to meet the business needs that we have for Philips. We like the footprint that we took over.

Okay. Thank you very much.

Your next question comes from the line of Jeff Rosenberg of William Blair.

Hi. Chris, when you talked about the 4 to $6 million in quarterly savings and the bulk of that sort of being recognized in Q4, could you -- how much do we think that operating income is going to improve as a result of those savings, sequentially in the quarter?

If you look at our business, what we're doing, every quarter is reducing our costs, our manufacturing costs and we're moving, again, more of our capacity to low cost. But we'll see full benefits of that in the quarter.

But again, there's a whole lot of other moving parts, so I don't think you can just take the four to 6 million and assume that. Our guidance for the fourth quarter is that we plan to increase our operating income as a company on a core basis by 5 to 10% which is, again, on an overall basis, 3 to $5 million. As far as an increase in operating income.

That's one of the factors, and there's a whole lot of other factors as far as moving the business and what we're ramping in various factories. But that is a positive that we started to see in the third quarter and we'll see more of that in the fourth quarter.

Okay. So are there some offsetting increases in costs other than NEC that -- because I would think as you're bringing in business organically and from other Philips stuff, you would get a little more leverage there.

Within Jabil, the increase of cost we talked about was the SG&A going up slightly, in the fourth quarter by a million to $2 million, but, you know, it's hard to look at that one particular savings in isolation and say that's the only moving part. I mean, there's 100 moving parts we're executing through a $1.3 billion quarter.

That's fair. The other question I wanted to ask on the thinking about the ROIC longer term in terms of the inventory turns equation, in the past you've had them, I think, upper 12 or higher. With the mix more high volume with consumer, do you have any sort of quantification of what we can think about as, not really in a time frame, but longer term, what you could do in terms of inventory turns?

You know, it depends where our mix goes in the next year or two, but I think we're -- what we're saying is we want for this upcoming fiscal '04 is improve our inventory turns and the days in inventory. That, with more revenue and leveraging our cost structure, will improve the ROIC.

The big lever in this, though, for us right now, we're close to it, is taking our operating income up. The capital we've deployed, we're not happy with it, and we think we'll make improvements on it ,but we're also very close to, you know, really starting to produce even greater levels of operating income that is more of a driver in terms of ROIC. I guess that's a function, because we as a company are now at about 4% operating profits or somewhat higher than what the industry averages are.

For ROIC to go up, you would expect operating margin to improve, you're saying that that's also as much a driver --

--- more operating margin in absolute dollars, and what we need to do for the capital deployed is keep it consistent or, if we can, lower the amount of capital deployed.

Okay, thank you.

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

Thanks a lot. Hi guys. The question is on Philips again. You'd mentioned last quarter that it was about 15% of revenues. I'm wondering, if it stayed at roughly that level or actually declined a point as a percent of revenues this quarter?

I think that it was a little garbled -- on the percentage of revenue.

Sorry. I was speaking of Philips. I think you had said was about 15% of revs last quarter, I was wondering if it stayed flat or actually went down this quarter?

It's increasing, but another way to look at it is that it's for our quarter near 90% of the overall run rate. Expected run rate for that acquisition is about a billion dollars a year. So it increased, you know, as did our consumer segment.

Right, okay. My follow-up question then is, that you do have that guaranteed run rate, and which I believe is denominated in Euros, which means, I think, unless I'm mistaken, that the exchange rate fluctuation should be causing that to work in your favor in dollar terms.

You know, it doesn't have a whole lot of impact, and let me just tell you why. First of all, the Philips revenue, only about half of it's in Euros, maybe 40, 45%. What we do when we go into a quarter and guide to that is we actually hedge our currencies, for not only revenue, but the bill of material costs, for all the costs underneath that.

So, there's not, from a revenue standpoint for a particular date, 90-day period, there's not really an impact to revenue. Longer term, I would agree that if the Euro continues to increase against the dollar, it would have some revenue impact, but our overall business that's denominated in Euro currency, only about 10 to 15% of Jabil's business.

Because of the way that we hedge it, it doesn't have an impact on a 90-day basis. And on a basis, even a quarter out, it could have a percent or so, but it's really not as significant as you would expect. It's just not. Because of the way we conduct and run our business.

Okay. So the final question I have then is that with the Philips contribution, I think, coming in a little less than expected, as you mentioned, because of demand weakness from Philips, they do have that guarantee, so I'm wondering how that guarantee gets back? Is that on an annual basis or did it not kick in in May, or can we expect to see that in August?

We're not in a position at this point where we'll have to rely own a guarantee.

Okay. Thanks.

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

Just a clarification. On that last question, did Philips, in fact, come in lower than you thought in the current quarter?

We talked about production levels, consumer to be a little bit lower. It wasn't material, but just a little bit lower.

Okay. Can you quantify how much lower than you thought it was?

The guidance was for 13% sequential increase in consumer, and it was 7. So I think on an overall basis, that's 10, $12 million for that entire segment.

Okay.

So I -- you know, again if we were 13 to 15 in consumer, we would have been closer to, you know, 1230, 1235 instead of the 1219 as a company.

Okay. Fair enough. Just following on the consumer seasonality question, can you just take us through what you think are going to be some of the stronger product categories you're watching over the next couple of quarters?

And then also, just take us through what your thoughts are in terms of dealing with putting those products in the inventory channels and what that might even mean for the quarter beyond the November quarter. Thank you.

I'm not sure how to answer it beyond the November quarter. The nice thing about our consumer electronics segment, it's very well diversified. There's a whole range of audio, visual, and other types of products, set top boxes, and that's really the goal of the company, is to have very strong diversity in this segment. Some seasons products do well and other seasons they won't. That's the beauty in having good diversity.

You know, beyond the November quarter, I don't think there's any product category that will mitigate the seasonality of consumer electronics. Beyond the November quarter. We're going to have some seasonality, you know, and as we get into fiscal '04, and start providing guidance through those quarters, you know, we'll certainly provide that information to you.

Okay. And then just on the telecom sector, you said it was a little bit better than you thought in the current quarter. And then it's down again in the fourth quarter.

Can you talk about some of the products that did a little bit better than you thought, and is it just seasonality going into the fourth quarter? Is there anything else going on there? Thanks.

Are you talking the telecom sector?

Yeah.

Yeah, there's really not a seasonality factor, and again, we do a variety of different products in the telecommunications space. Some of it's long haul transmission product, other products are frame relayed TM switching gears. There's even some circuit switching products that are still in production. So it's a pretty well-diversified portfolio of products.

The explanation on, you know, having a quarter that seemed a little better than expectations, I think generally that segment is starting to hold up a little bit so that it's -- it isn't -- it isn't eroding at the rate it had for the previous six to seven quarters. You know, the reason that we're looking at a downward trend in our Q4 has more to do with a couple of customer-specific issues. Again, there's a variety of companies in that segment. All the way from, you know, the Redbacks and Telions and Sycamores (phonetic) to the Lucents.

There are some companies that have specific issues, as well as the fact that we've moved a lot of production from high cost to lower cost locations. Those reductions are passed along to the customer, which will have, even on identical unit volume, revenue will go down, even though profitability is still as good or better than it was previously.

So I don't think there's additional sickness in that segment. I think there's just some really customer-specific issues at work there.

Great. Thanks a lot.

Your next question comes from the line of Dave Miller of Kim & Company.

Good evening, guys. Could you talk a little bit about, I'l go halfway around the world in Japan, announcing the NEC deal is closed, what's the strategy near term and longer term to develop that market for you guys?

The NEC transaction closed in June. And the strategy is the same, is to use what we think is a very stable, long term, downsize protected platform as an NPI kind of port to the portfolio of lower cost manufacturing options that we can provide to Japanese OEM customers and telecommunications, as well as consumer electronics and other things that they do.

Giving us a real long-term process, you know, there's a gathering movement to outsource in Japan, but until a very successful company outsources very high proportion of their business, that's successful for them, you won't see a lot of Japanese OEMs adopt outsourcing as the central part of their manufacturing strategy. But once that herd affect starts, I think even more so in Japan than anywhere else in the world, everybody will want to jump on the band wagon. They want to see a couple of people go first, and then the rest of them will follow.

But we've got a small kind of safe, stable platform to be in the market again, to provide a port for the portfolio, low cost options we can provide and see how it goes.

Do you think there's an inherent advantage or disadvantage to EMS players versus some of the Asian-based guys, trying to convince Japanese companies to outsource?

Well, you've got to -- let's start with the way you posed the question. We're as Asian-based as anybody. Speaking of the EMS sector.

I've read some things that would seem to indicate that because a small, financially insecure Asian contract manufacturer with 100,000 square feet of capacity in China, because that's 100% of their capacity and we only have 20 and Flextronics (phonetic) only has 50, and so forth, that we're poorly positioned. We aren't. We're very well-positioned in Asia. I think that's true of several EMS players and most of us have done a heck of a lot of good work over the last couple of years to get our footprint in place.

Now, if you're talking about ODMs and Japanese customers choosing products solutions, as opposed to the services solution that EMS providers provide, I don't think that's any different for a Japanese company than it is for an American or European company.

If they want a notebook computer and it makes no sense for them to invest all the R&D dollars in developing a notebook computer, because there's absolutely no IP in it, they'll go to a well-established ODM. If they want manufacturing services for some of their core products, I would imagine they would consider one of the top EMS providers in a very serious way.

So we don't feel, the answer to the question, we don't feel disadvantaged at all in competing with anybody in the world. For any customer in any geography.

Okay. Great, thanks.

Your next question comes from the line of Jim Savage of Wells Fargo.

Hi, nice to be here. A few questions about where you're going to get your growth next year? This year it was very clear who your customers were that drove the growth.

And if there is not a recovery in the end markets, or is there new outsourcing activity that you're seeing? Are you seeing sectors that have major opportunities?

And I guess the other question is, with some of the volume purchase agreements from the previously acquired facilities, sort of ending at this point, do you see possibilities of some customers possibly switching suppliers?

Hi, Jim. It's good to hear from you.

I think sources of growth, I talked about this earlier, we feel more and more confident that our primary engine of growth in fiscal '04 will come from internal existing, and some new customers that we've added in the past year. You know, to detail those for you at this point, I think, would be premature. It would start to call into question what customer product plans are and that type of thing. I don't want to have that domino effect out there.

But right now, you do have --

[INAUDIBLE] controversy.

Tim, you already do have, even if they're not at production levels yet, there's NPI stuff going on that would indicate expansion in some of these relationships?

Yeah, absolutely. These are customers that are in the barn that, you know, that we feel good about the production plants going forward.

Some of that's market share gains, I suppose, but not so much market share gains from, you know, the top five or six EMS providers. You know, there's still a lot of consolidation for the second and third tier going on, a lot of rationalization of strategic suppliers, among the major OEMs.

And indeed, we are excited about the new segments that we've opened up, consumer electronics, automotive, medical instrumentation. These segments are growing like crazy. Each of them is up over 80% year-over-year for us. Not all that comes from acquisitions, a bunch is organic.

Right. I guess on the instrumentation side, particularly, that's true.

Yes.

And going forward, do you think they're going to continue to outsource more? And are you getting those orders at this point? Or discussions at this point regarding increased outsourcing levels from your customers in those new segments?

Absolutely. You know, some of them are actually OEMs that have a hundred factories around the world, and each factory has output of 40 to $150 million a year. So they recognize, you know, the impossibility of divesting 100 factories to anybody in the world, they're not going to do it.

So the process will be a little bit slower if they rationalize their capacity, move to an outsource model, but we're seeing more, among some OEMs, this isn't across the board, but among some of the OEMS, a willingness to rationalize their factories on their own, to get that production out to the major global players in the MS base. That's a really healthy dynamic that's emerging in the business.

I guess the one other question, if there is an upturn, do you think a lot of customers cut capacity, and would likely, if they're going to see increasing levels of production, outsource rather than add their capacity back internally?

Well, I tell you, you know, as this model's taken hold and the length and depth of the recession, you know, has become apparent, there aren't many VP officers, CO's that are going to get a CFO to sign off on a 50, or $100 million factory anymore. He's not going to get that approved.

So, the capex for manufacturing operations has been cut off. And I haven't talked to a single -- well, maybe one OEM out of, you know, many, many that I talk to, that plans to spend another nickel in capex on internal factories when, you know, EMS providers can do it faster, better, cheaper.

Okay. One housekeeping thing for Chris, 16% tax rate going forward?

Yes.

Great. Thank you very much.

Operator, we have time for one more question.

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

Just under the gun, thanks. Two quick questions.

Just with reference to your segment breakout, you're mentioning that the computer storage was up 10% sequentially, you mentioned both production, as well as new assembly. I was wondering if you could give a little bit of granularity on perhaps, more production, more assembly, a little bit of flavor on that?

Part of it, Chris, is us ramping more production levels on the server side.

Hm-hmm.

Computing and storage. Also added some new storage products with the new customer in the quarter, as well. Those are a couple of examples that helped our growth in the third quarter.

Were you seeing any specific end market trends in that sector that obviously was helping you? I.e. whether it was --

No, I mean, a lot of it's our taking on more assemblies and ramping new pieces of business.

Right. And just kind of a generalized question, you were mentioning, it was either you or Tim was mentioning, with reference to Phillips and the increased opportunities, both with Philips, as well as with other customers, clearly Philips has other segments such as medical, et cetera, I was wondering if you could go into a little bit more discussion about some of the opportunities and perhaps when you might start to see them, or where, perhaps, they might come from?

Well, there's nothing chain drive that would generate business from medical, lighting, their domestic appliance business, semiconductors and other areas that there are opportunities for us, you know, we have to earn that business just like any other supplier will.

We're excited about it. We're pursuing opportunities in the other business groups and, you know, consistent with our past practice, as business is secured and won and goes into manufacturing, we can start to talk about it more.

Okay. Thanks.

Thank you very much for joining us for today's conference call.

As I mentioned at the start of the call, the press release and slide presentation are posted on the Jabil website, as well as information on how to dial in for a taped replay of this call. So you can reach all of that information at jabil.com. Thank you very much.

Ladies and gentlemen, this concludes today's Jabil Circuit conference call. Thank you for participating. You may now disconnect.