捷普科技 (JBL) 2003 Q4 法說會逐字稿

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

At this time, I would like to welcome everyone to the Jabil Circuit fourth quarter 2003 and fiscal year-end earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

I would now like to introduce your speaker for today's call, Ms. Beth Walters Vice President of Corporate Communications and Investor Relations of Jabil Circuit.

Ms. Walters, you may begin your conference.

Thank you.

Welcome to the Jabil fourth quarter and fiscal year '03 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 these statements are just predictions, and the actual events and results may differ materially.

We refer you to the document that Jabil files from time to time with the SEC, including our most recent 10K, filed November 25, 2002.

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

I would like to let you know that today this call is being recorded and will be posted for audio playback on the Jabil website in the Investor Relations section.

This, along with the press release and a slide show presentation on the fourth quarter and fiscal year 2003 results.

So in brief, our results for Q4 '03 on record revenue of $1.296 billion GAAP operating earnings were $27.4 million.

Core operating earnings, excluding amortization of intangibles, acquisition related and restructuring charges for the quarter, were $52.8 million.

Core earnings per share were 20 cents.

On a year over year basis, this represents 33 percent growth in revenue and 48% growth in core operating profits.

On a sequential basis, revenue and core operating income increased 6 and 11%, respectively.

Looking at our quarterly sector performance for the fourth quarter, the automotive sector was 10% below our prior quarter, due to normal seasonally lower levels of production.

Our computing and storage sector remain flat, including the impact of end of life production, with certain PC accessory related products.

The consumer product sector increased by 8% in the quarter, reflecting increasing production of Phillips consumer electronics products.

Instrumentation and medical sector increased by 100% sequentially, reflecting strong organic growth, ramping programs with multiple customers, and the initial production of our recent NEC acquisition.

The networking sector had consistent production in the fourth quarter.

The peripheral sector was up 6% in the current quarter, reflecting increasing demand levels from previous expectations, and the telecommunications sector decreased 2% sequentially, reflecting a greater demand profile as compared to our previous estimate of an 8% decline in the quarter.

Our second information for the quarter and for the year in percentage terms for our sectors was as follows: Automotive Q4; 8%.

For the fiscal year, 9%.

Computing and Storage; 15% for Q4, 15% for the full fiscal year.

The Consumer sector; 22% for Q4, 20% for the full fiscal year.

Instrumentation and Medical; 11% for Q4, 6% for the full year.

Networking; 21% for Q4, 23% for the year.

The Peripheral sector; 7% Q4, 8% for the full year.

The Telecom sector represented 12% for Q4, and 14% for the full year.

And finally, our other sector is 4% for Q4, and 5% for the full year.

I'll turn the call now over to Forbes Alexander.

Thank you, Beth, good afternoon.

Reviewing our sales cycle and balance sheet improvement, our inventory turns were nine, consistent with the previous quarter, and the company's sale cycle improved by four days to 37 days.

Cash flow from operations was approximately $75 million in the fourth quarter, our 11th consecutive quarter of positive cash flow.

Over the past two and a half years, we have generated in excess of $1 billion of positive cash flow from operations.

For the fiscal year 2003, we generated approximately $250 million in positive cash flow from operations.

This represents the 8th consecutive full year of positive cash flow.

Our capital expenditures in the fourth quarter were approximately $20 million.

Depreciation for the quarter was approximately $45 million.

The result in EBITDA was approximately $98 million.

Cash balances were $700 million at the end of the quarter; and during the quarter, we amended our three year credit facility upwards by $100 million to $400 million.

There are no borrowings outstanding under this facility.

We also issued $300 million, 7 year senior unsecured debt, with standard investment grade covenants, further strengthening our capital structure and improving the overall cost of capital.

This financing has created even greater liquidity for the company, and will allow us to continue our growth as we move into our next fiscal year.

This transaction was highly successful, and was oversubscribed five times.

Although cash flow from operations is our primary source to fund growth, we are in a position to fund the business at lower debt costs than any company in our industry.

Our return on investment capital increased to 12%, compared to 11% last quarter.

We produced approximately 11% incremental operating return on only 1% incremental capital.

With our recent financing and continuing improvements in ROIC, we are now projecting returns above our cost of capital.

We look forward to improving our returns in fiscal year 2004.

I would now like to briefly turn to our cost reduction and integration activities.

We incurred $3.9 million in integration and acquisition charges relating to the Phillips and NEC acquisitions in our August quarter, consistent with our previous expectations.

We estimate that we will incur approximately $2 million more in integration costs in our November quarter.

We have continued to make good progress regarding aligning our capacities.

Re-alignment of capacity charges were less than we anticipated this quarter, coming in at approximately $9 million instead of the $12 we had anticipated. $5 million of this charge were cash costs.

The remaining costs related to building exit costs.

Charges we have incurred over the last three years have allowed us to move approximately 70% of the capacity to lower cost areas.

We do not anticipate restructuring charges in our November quarter.

Turning to the Phillips acquisition, the Phillips acquisition is proceeding according to schedule.

Current production represents 100% of the business.

We are ramping to higher seasonal levels of production in the November quarter.

Production levels are expected to increase by over 25% in the quarter, having begun this ramp in the latter portion of the August quarter.

We have begun to move several new customers into the newly acquired sites in Europe and Brazil, and we are excited about further leverage and production that can occur within these sites over the next year, particularly in Eastern Europe and Brazil.

With regards to our NEC acquisition, this acquisition closed in June.

Production levels were above previous expectations, due to a full quarter of production and seasonally high levels of production; and this business is estimated to be seasonally lower in the first and second quarters of our fiscal 2004, with higher production levels in our May and August quarters.

We will look forward to using this new operation as a platform to glow incremental business in the Japanese market.

Integration activities going well, and we plan to complete integration of this site in our first quarter of fiscal '04.

I would now like to hand the call over to Chris, who will give you a business update.

Thanks, Forbes.

Our current forecast indicates increasing production levels in our November quarter, by an estimated 6-10%, and we are guiding to an overall range of $1.375 billion to $1.425 billion for our first quarter.

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

We expect gross margin will be 9 to 9.2%, reflecting our current mix of business while taking into account a large ramp in consumer products in our upcoming quarter.

We expect SG&A expenses to decrease as a percentage of sales in the first quarter to approximately 4.6%, compared to 5% in the previous quarter.

In overall expense, we estimate consistent SG&A.

As a percentage of revenue, we estimate an equal to slightly higher operating margin, approximately 4.2 to 4.3% of revenue compared to 4.1% in our most recent quarter.

We estimate interest expense for Q1 to be 3.5 to $4 million, with a tax rate of 16%.

We estimate a total of $2 million in integration-related, and no restructuring related charges in our first quarter.

We will continue to review opportunities to allow for a more efficient cost structure, but do not have immediate specific plans for incremental restructuring costs at this point.

Excluding amortization of intangibles and acquisition-related charge, we estimate core earnings per share to be 22-24 cents in our November quarter.

Reviewing revenue by sector; again, production levels are anticipated to grow by 6-10%, or approximately $1.375 billion to $1.425 billion for our first quarter.

The Automotive sector is estimated to increase by 10-11%, reflecting seasonal higher levels of production.

Computing and Storage sector is estimated to have lower production levels by approximately 8%.

The decrease in this sector is principally due to end of life production in certain PC accessory products.

This sector is positioned for growth throughout fiscal year '04, due to multiple server programs beginning to ramp in our second fiscal quarter and throughout fiscal '04.

The Consumer sector is expected to be up over 35% in our first quarter, principally result of increasing levels of Phillips' products.

The sector is also benefitting from incremental consumer products with our existing customer base.

This sector is anticipated to be seasonally lower in our February quarter by over 20%.

New wins in this sector, along with normal seasonal higher production levels in our May and August quarter, will allow this segment to grow to higher production levels in the latter portion of our fiscal '04.

The Instrumentation and Medical sector is anticipated to increase by 5% as we continue to grow with new customers in this area.

The Peripherals, Networking and Telecom sectors are each expected to have consistent levels of production in the first quarter.

Reviewing our full year guidance -- over the past several months, our overall demand has remained steady.

Additionally, we have had a very successful quarter, completing numerous new business awards, with more material wins in Communications, Computing and Storage, Consumer, and Instrumentation and <Medical sectors.

Several of these new programs will ramp in the second half of the fiscal '04.

A significant portion of our new wins has come from our existing customer base.

While we expect the seasonally lower level of revenue and operating income in our second quarter due to consumer electronics, the new wins will serve as incremental growth to the company in the back half of fiscal '04.

Our second quarter is estimated to be 1.33 to $1.35 billion in production.

For fiscal '04, our current estimates are for revenue of approximately 5.6 to $5.8 billion, operating earnings growth above 25%, and earnings per share of 90 to 96 cents.

This estimate is based on a current demand basis, taking into account the various ramps of new businesses occurring in the latter half of our fiscal '04.

For segment purposes, on a percentage of revenue basis, we estimate the following breakdown for our next fiscal year: Automotive, 8%.

Computing and Storage, 14%.

Consumer, 24%.

Instrumentation and Medical, 11%.

Networking sector, 21%.

Peripherals, 7%.

Telecom 10%; and other 5%.

I would now like to turn the call over to Tim.

Thanks, Chris.

Our fiscal Q4 was the satisfying close to an eventful year.

Our sixth consecutive quarter of growth completed a year in which we grew operating income 48% on a 33% increase in revenue.

During the year, our invested capital increased about $325 million, and on this incremental invested capital, our core operating income increased $59 million.

At current tax rate, the return on this additional invested capital is over 15%.

Our people accomplished this during a year of external turbulence and a variety of internal challenges, including the transition and integration of complex acquisitions and the transformation of our global footprint to be 70% located in low cost locations.

Although we clearly have room for improvement, I think our people did a commendable job throughout the year, steadily improving results and positioning us well for fiscal 2004.

During fiscal 2004, we will be leveraging what we put if place over the past 12 months.

Our footprint is where we want it to be, and the bulk of our acquisition and integration activity is behind us; therefore, we do not expect internal restructuring charges to impact results in fiscal '04.

Output will increasingly come from low cost locations, especially Asia and Eastern Europe, and we expect the overall output from the USA and Western European locations to remain roughly stable with current levels, but the percentage of the contribution to output will continue to decline.

For example, while our U.S. sites remain critical to the long term long-term success and value proposition, we expect that just over 10% of our revenue will be produced in the U.S. in fiscal '04.

We expect our segment diversification will continue to improve, and we expect significant growth to occur in our Consumer and Medical Instrumentation segments.

In addition to Phillips, growth in our consumer segment is being fueled by other rapidly growing organic relationships, including a major relationship in the mobile communications area.

If Medical and Instrumentation segment continues its rapid growth, it is likely to exceed 10% of our overall revenue business -- of our overall business for the year.

The most encouraging aspect of our anticipated fiscal tour 2004 growth is that will be driven predominantly from organic sources.

Of the $1 million in additional revenue we expect, over 70% will come from completely organic sources unrelated to any acquisitions made in the past 24 months, and this growth is well diversified.

Growth organic relationships exceed growth acquisition relationships by a ratio of 10 to one.

We have expanded our customer base selectively and have expanded market share with a select set of long term relationships.

We recently added two additional defense industry accounts, several large-scale design-based programs, and developed new business with vertical OEMs converting to a virtual model.

Recent new wins include [INAUDIBLE], GE, [INAUDIBLE], Microsoft and Honeywell, among others.

A continuing investment in our systems services and capabilities is yielding an expansion of our boundaries to include broader supply chip ownership.

To an increasing extent, our responsibilities encompass system integration, order fulfillment, closure assembly, prepared [INAUDIBLE] management services, and of course, design.

Our investment in design capabilities continues, and we now have mobile design services in China, Europe and the Americas.

Our collaborate design models have been critical in several large scale [INAUDIBLE] in the past year, and the trend is clearly toward broader supply chain ownership, and Jabil's value proposition is to provide completion solutions to complex challenges.

So finally, we painted a fairly positive picture for the [INAUDIBLE].

We do not expect rapid macro economic improvements, but strive for immediate large-scale recovering end markets.

We do expect a gradually improving economy leading to modest improvements in business spending later in our fiscal year.

European economies are weak, and the geopolitical environment is tenuous at best in my opinion.

We are therefore cautious with regard to a broad based economic recovery supply [INAUDIBLE].

In short, things do look better, but they're not great yet.

Aside from these external risks, we feel good about our ability to execute what is under our direct control.

Our objectives for the year include continuous improvement of our inventory velocity, controlling operating expenses, improving asset utilization, driving higher operating margins and continuing to rate of return on invested capital further and further above our weighted average cost of capital.

Most of all, we will work to set the bar for operational execution and excellence in our industry.

We have some work to do in this regard, but with the relatively clean plate and adequate organic growth, we will make this our first priority and give it our complete focus.

I would like to close by thanking the people of Jabil for commendable performance during challenging times, and I'd like to thank our customers for their patience, integrity, and business confidence.

Thank you.

Operator, we're ready to take questions.

And I would like to remind everyone we have about 40 minutes available for the Q&A session, so if you could limit yourself to one question and one follow-up, we can get to as many people as possible in the time allotted.

Operator?

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

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

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

Your first question comes from the line of Patrick Farr of UBS.

Evening, folks.

I wanted to ask if you could let us -- give us a sense right now of what your longer term margin and return on invested capital goals are?

Do you think we could get back to sort of late 90's levels, and if so, what sort of level of sales would it take to do that?

Patrick, our goals haven't changed as far as the growing operating earnings 30% a year and that is our range.

In terms of return on investment capital, our near term goal is just to continue to improve it, and we are in a position now move up into the teens, or you know, from 12% to 13%, and over a period of time as we continue to bring more operating income through the company, we can be into the upper teens along the lines of 15%.

The longer term, if you look at this industry, it has the ability of the returns of 15-20% ROIC.

I think the -- three years ago we were maybe 15 or 17% ROIC, and that is the trend we're moving towards as we move into this fiscal '04.

Okay.

And is there kind of a sales number, Chris, that you feel you can reach that level?

A sales number?

Yeah, I mean what kind of top line sales do you need, assuming all of the things stay the same?

No, I guess, you know, Patrick, what we're trying to do is take on good business that will continue to grow for us year after year, delivering that operating growth and with our business improving and gaining strength, continue to improve our ROIC, but I don't -- I don't really have a revenue target in mind at all.

Okay.

Fair enough.

Thanks.

Your next question comes from the line of Steven Fox of Merrill Lynch.

Hi, good afternoon.

Could you talk about the impact from the higher mix of consumer business on the gross margins this quarter, and then secondly, is it possible to add any color around the major relationship, the new relationship, in the mobile communications area?

The mix this quarter for the fourth quarter -- I mean, we had higher value add assemblies coming into the fourth quarter in the instrumentation side.

We have the consumer business, but the blend of our gross margin was a little bit higher than we anticipated.

I think we were guiding to 9.2 and a little higher in gross margin.

As we move into the first quarter with the consumer ramp, the consumer business has a higher material content or a lower gross margin.

Therefore, we expect the overall gross margin to be a range of more of 9% to 9.2.

So it has some impact into our first quarter of having the gross margin be, you know, a little lower than where we were in the fourth quarter.

Does that imply it's roughly 20 basis points, or not really?

Well, that is an overall company impact.

I really am not in a position to give you the specific gross margin by a customer or anything like that, but that is the overall impact.

Okay.

We also have other moving parts with other sectors going up and down as well, but if you look at it in balance, you know, that is what we are projecting, is a 9 to 9.2.

The other part of your question was the new relationship, or more color on that, or?

Yeah, you mentioned the new relationship in mobile communications.

Yeah, the customer is sensitive to mentioning their name, but it isn't a new customer; it just happens to be a customer that we kind of constrive with them and enjoy some pretty strong growth all year.

Okay.

Thank you very much.

Your next question comes from the line of Matt Sharon of Thomas Wiesel.

Yes, thank you.

If you could just talk about the deal, the environment out there, looks like there is a lot of new projects that you are ramping and existing customers that you are expanding with.

If you could just tell us what is happening in terms of the environment, of price competition out there, and you know, what the prospect is going forward for adding more of that business?

Competition is still fairly intense.

Pricing environment, I don't think, has eroded much in the last couple quarters.

We've said all along that pricing environment is extremely competitive, but not in an unliveable -- you know, not an unliveable environment, and from time to time, even in good markets we see one-off competitors or single plants offering pricing that doesn't appear to include a profit.

You know, that is the kind of business that we try to avoid.

I think the environment has gotten a little bit better for healthy businesses, and I wouldn't be surprised if some of the other large EMS providers wouldn't be seeing the same thing.

Customers are seeing a few EMS providers go out of business in the last year, and you know, it is really time I think to focus on reducing costs in the supply chain and doing business with companies that bring more capabilities to the table and that can do more for the OEM, as opposed to providing the cheapest circuit board assembly price, because in the grand scheme of things assembling a circuit board or even turning screws to put an enclosure together is a very small appeal for all the costs of converting come components into a product consumers will buy out on the marketplace.

So I think the environment is good for globally-based EMS providers with sophisticated supply chain systems and good balance sheet.

Mm-hmm.

Okay, and looks like from the segment breakdown you gave us projected for next fiscal year, looks pretty broodly based, although consumer is the biggest chunk.

Is that kind of a mix that you like, or are you looking to maybe add, for instance, in the Computing sector or Medical Instrumentation and Industrial where you get the better margin there?

Yes, not so much a margin play for us.

It's really about maintaining good diversity so that we don't have an overexposure in our portfolio, I would like to see things below 25 and actually closer to 20 in terms of a maximum segment, so you know, we can continue to diversify and dilute both networking and consumer electronics.

Instrumentation and Medical is a strong focus here, and Computer and Storage, particularly in Storage area.

This area focused [INAUDIBLE].

We mentioned we landed two additional defense industry accounts, and that is a little bit longer term in terms of turning that into significant business, but that is another area that we are chasing.

So there is not really many segments here that we don't like.

We're just really trying to find the right customers with the right product that will supply us, you know, both immediate and long-term organic growth and bring lots of diversity to the company.

Okay.

Thank you.

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

Thanks, good afternoon.

I guess I will ask the question on pipeline for both organic business and what you might see in terms of acquisitions.

You made some statements in the past that you are going to start slowing that down as you integrate what you have done recently, but I thought if you could comment on organic pipeline and then appetite for trying to win business in particular segments, both organically and through acquisition.

I think based on our comments you would have to assume that the organic pipeline is in pretty good shape.

This will be the most significant organic growth period for the company in a long, long time, if ever.

In terms of the acquisition activities, that has cooled off a little bit.

Given the strength in the organic side, we're not going to press that real hard.

We've made a number of acquisitions and really, the integration process actually -- you know, you get them transferred, but then the integration process can take, you know, really a couple years to get them fully on systems and diversified in bringing new customers into the plant, so it is not to say we won't do a deal.

If something came up that looked attractive, we would certainly pursue it but it isn't at the top of the list in terms of priorities.

In terms of the segments on the organic side, can you give us a sense of what you think looks promising, and then what specific areas within that you are targeting?

Chris, did you provide segment -- provide segment guidance for the year?

We gave segment breakdown estimates of percents for fiscal '04; but in terms of organics, what we are seeing is you know, clearly Instrumentation and Medical is a big growing part of our business.

The last two years that segment has grown purely organically, 75% over the last couple fiscal years.

Other areas of focus that we have seen in the last year or so in Computing and Storage has been in the server side, as well as Storage; there has been a number of storage companies that have come in to Jabil with lots of growth opportunity there, so I would say those are two areas.

Tim mentioned the defense segment or part that is part of our Instrumentation and Medical

that will take a longer period of time, but that is starting to develop for us as well.

So those are three examples of good growth.

The Computing sector is another area where on a sector basis, in addition to what we have seen with Phillips, we have seen a lot of opportunities there over the last year.

You know, part of it is we now have this large platform in the consumer side, but I also think there is more activities in terms of growth on the consumer side, more projects available to the EMS providers.

So those are, you know, four examples where we are seeing very good growth.

The Automotive segment has come for us in the last year or so, I would say in bigger chunks of revenue, the largest part which is the value acquisition which greatly increased Automotive.

But there is activity out there as well that is slower to develop..

But I think there is also very good secular opportunity in the Automotive side, as well, for the next year or so -- does that give you a little perspective?

Yes, thank you.

Sure.

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

Okay.

Great.

I think you mentioned something where you are providing engineering services around the globe now, and I guess my question would be, since obviously so many of your manufacturing is now moved out to Asia, specifically China, do you think the engineering will eventually follow in that same percentage?

Because I guess my guess right now would be still skewed to the old percentage, maybe located more out there with you all in Florida.

I think it will gradually skew to lower cost locations; but having said that, I think it will depend a great deal on the industry segment.

You know, consumer electronics and computing devices, mobile communications and that type of thing that wants to be done in Asia; but there are some product areas, medical high end networking communications where U.S. design teams are still very valuable, so I think without you know -- the driver is this design area is growing very rapidly and has over the last couple years and we're getting some pretty good traction there, so I don't think we will have to cut back in our higher cost locations as much as we will be skewing the growth into low cost locations.

Okay.

Great.

I guess sort of similar to that, is there any update -- not so much on a competitive front but also on a strategy front -- for you all doing anything in the ODM or contract design area, or is it more typical things Jabil has done, just adding engineering services to the programs as need?

I don't think we have any firm update, Lou.

I don't think our tune has changed much.

If you look out three to four to five years, we don't think there will be a hard line distinction between ODM's and EMS providers for the mainstream in the market.

There will be EMS and pure ODM providers on the fringe, but in terms of mainstream service providers, complete product design will be a part of the service set that large scale electronic solution providers provide their customers as a matter of competitors.

Great, good luck on the new year.

Thanks.

The next question comes from the line of Alexander Blanton of Ingalls and Schneider.

Hi, good afternoon.

You guys are certainly doing a good job.

Could you repeat the new customers that you mentioned earlier?

I didn't get them all down.

Sure.

So many it was hard writing them all down, right? [SPEAKERS OVERLAPPING] You mean the ones that would allow us to mention them?

VeriPhone,GE, Harris, Microsoft, Honeywell.

GE, Microsoft, Honeywell -- Harris, did you say?

Yeah, Harris Corporation.

Okay.

What is the Microsoft product?

That is a level of detail that we are not allowed to get into.

Or give us that level of detail on any of these, for GE or Honeywell or whatever?

Not really.

Okay.

Sorry.

All right.

Second question is this, if looks at the mid-range sales forecast up about 20%.

And EPS about 30, 31% which is back to the old days.

And what percentage is coming from -- or can you say -- from end of market improvement that you anticipate, and what percentage from either new organic or other business higher penetration?

In other words, are you going to get any effect from end markets at all, and how much?

That is a really great question and I wish we had a real crisp answer.

It is hard for us to -- into our customers forecast how much end market recovery they are including in their forecasts, and the back half of our year will be, you know, 3 to $400 million heavier than the front half of our year.

Most of that is organic wins, so we talked about a billion dollars in additional revenues, 70% of that being organic wins.

A significant amount of that will be ramping into production this year.

Most of that revenue is kind of existing programs and stuff that is -- or new products that are trading out for old products.

So it feels fairly stable.

You know, but it is hard for us to back stuff out in terms of how much hope is in the forecast of customers.

If I had to guess, you know, I would say that, you know, maybe there is a 20-25% recovery factor in that growth.

So if the economy went sideways, we have a growth here, but, you know, maybe not as good here as we were hoping.

Business, you know -- for Jabil to really have an outstanding '04, we do need to have business spending recover a little bit.

The server market needs to recover a little bit, networking needs to recover a little bit; telecommunications needs to hang in there.

It can be kind of squishy, but it needs to hang in there.

So business spending needs to recover a little bit.

Right now the signals are that we will see that to an increasing extent as the year rolls on, but really the bulk of this though, Alex, is organic wins and existing programs, and, you know, not a big tail win to the business.

So this is the way it is supposed to work, isn't it?

It's the way it's supposed to work.

Increasing outsourcing.

You got if.

Okay.

Thank you very much.

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

Great, good afternoon, Tim, Beth, Chris.

Tim, what in your mind has changed with customers to the point where, you know, we saw the thing last week with Three Com and you guys and Flextronics, and Gateway is out there.

Pretty close I guess to making some decisions, and then Tel labs with Samina [PHONETIC], and I'm referring to specifically is, all of the recent transactions or situations where the OEM is closing its own plant and laying off a number of employees and going to move this business into your facilities, and this is the way the industry used to work ten years ago and then of course it went through a period where they were all trying to cram the plants down your throats, and so we seem to be switching back at the trough of the worst downturn in tech history.

So what is going on with the conversations and what has changed here?

Why are they now all willing to go ahead and close their plants and move all the business into your plants?

The appetite for capacity just isn't there, and unless in the customer has enough mass, like in the case of Phillips where there is the very significant requirements and most of the capacity cost locations and it's just impossible for you to transition into the [INAUDIBLE] plants, there's absolutely no reason for you to take it.

And you know, if you do agree to take it you've got to have downside protection, and got to have restructuring costs protected and long term commitments, and then you know, for some of us we just don't want to run a company that is in the business of laying off employees.

Been tough enough the last couple of years, and to go buy stuff that is going to get shut down is not a fun job.

So you know, those conversations are getting more realistic from an economic standpoint and I think that is healthy, and we have had a couple of these happening and some vertical OEM's converting to a virtual model.

On a small scale, trying to hit some singles, it's a 20, $30 million program here, a $50 million program there, and the factory shutting down for consolidation their going through, and you know, I hope that that is the way it continues to run.

You know and if there is -- if there is a good opportunity with appropriate economics and protections, you know, we will continue to consider them.

But I think most of us in the industry that have the capability to do a good job from supply chain management have elected to pass on the absorption of additional capacity.

Okay.

Follow-up, the 22 to 24 cents here will put you somewhere, I don't know, 94, 95 cents annualized.

Your last peak in earnings on a LTM basis was about 90 cents, so you appear to be on the brink of putting out EPS numbers that are higher than your last peak in earnings and I think two or three years ago many people speculated that most EMS companies wouldn't be able to do that.

The key variable is the operating margin, and I think Chris mentioned guiding to 4.2 to 4.3 operating margin in November, and what a lot of investors are asking is, what is the normalized or intermediate term earnings power for Jabil and other EMS companies, and where is the best assumption over the intermediate term on the 4.2 to 4.3 operating margin, where can it go?

Well, you know, Tom that is just a function of the type of business we take on and our ability to grow the business, the economy getting stronger.

But I think what Tim talked about for us near term over this next fiscal year is we have a lot of booked business, we have a lot of business that is coming from an outsourcing standpoint that will allow us to leverage operating margins and put us in a position to grow that absolutely operating income by over 25%.

So that is really what we are focused on, and if things pick up -- absolutely, there is more operating leverage in our model or other EMS provider models.

Again, what we are trying to do is take on very good business, grow the operating income and then focus on the things we always do, our sales cycle and improving our return on invested capital because we are pretty excited to see us now earning above our cost of capital, and we just want to keep improving from this point.

But is there any reason or hard rule right now why your operating margin couldn't get to 5% over the next 18-24 months?

There is no reason we can't continue to grow our operating income and increase our returns on capital.

So if that means\ high value add business that has a 5% or higher model for Jabil, you know, this is no reason that that couldn't occur.

Again, you know for those of you that follow the company, we're absolutely trying to continue to have good returns.

This near-term issue we are at for the next year has absolutely increased our operating margin.

We have lots and lots of revenue booked.

But we do not pick a particular target in terms of percentage, but yeah, I mean there is the potential to do that.

We look at it more, what is our ability to again, grow our operating income 30% and see our return on invested capital move up into the teens?

You know, that is more how we look at it.

Okay, great.

Just housekeeping -- did the $300 million the debt offering -- did that cost a penny and a half or two cents per quarter?

On an overall basis, we had you know, maybe a half a penny or so in the fourth quarter; and for fiscal '04, it is a couple pennies dilutive, but that is taking into account, you know, our 90 to 96 cents.

Okay, okay.

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

Good afternoon.

Could you just give an idea of the kind of confidence and visibility that you have today.

I mean, are you comfortable out to a three month forecast for your customers now, and how would that compare from you know, maybe say a three, four, five months ago, has that changed at all?

We have some additional comfort in the customer forecast.

I don't think we have -- we would have come out with, you know, with full year guidance otherwise.

You know, forecasts are always poor from customers and always very volatile, but as Chris, said we have seen enough stability over the last three or four months; and forward-looking, we are seeing enough stability that we are gaining a higher level of confidence.

Is it fair to say then the lead times have extended for you throughout the supply chain for you, or still not at that point yet where we are seeing them really stretch out?

On certain commodities, lead times have extended, but overall lead times have not extended.

Okay, and just a clarification.

The telecom business is a little better than expected.

Is that because you had other business that was stronger than anticipated, or the things that were going end of life just kind of got pushed out a couple quarters or things like that?

I think it was just other business that was a little bit stronger than anticipated, Sean..

Okay.

And then lastly, housekeeping, what was the percent of system build in the quarter?

The overall systems build is -- that has box fill applications to it is about 30% of our overall revenue.

And is most of the Phillips business box fill?

No.

No.

Is there any percentage we can try to get out of what the consumer is?

And I assume that is not --

Box fill for consumer?

I don't know, Sean.

Okay.

Great, thank you.

Your next question comes from the line of Joseph Wolfe of Bank of America.

Thanks.

I had a question on the geographic footprint.

Now that you have got a 70 percent low cost, could you describe what is left in the United States?

Is it just new product and engineering, or what you are keeping in the United States; and also is your equipment all in the right place?

Meaning that even if you are not running at full capacity, are all the machines in the right place; and could you talk about the cap ex level for fiscal '04?

Okay.

Well, our U.S. plants are what I would say -- we have a couple of new customer development plants in Massachusetts and San Jose, remaining plants in Michigan and Florida, and they're transitioning to some new pretty -- for us, very exciting industries in terms of defense and medical, so they have what I would say a very good growth profile over the next couple years, but this will take time to develop.

So there's lots of opportunity, it is just going to take us some time.

That is how our U.S. plants are set up.

The machinery is -- you know, we have moved the machinery as we have gone along this process over the last two or three years, and the machinery is where it needs to go.

And what was the other question?

Well, I wanted to tie that into cap ex, or if you had incremental improvement, does that now mean you can own it or relocate it in the sense to start buying equipment, or what kind of cap ex do you see this year?

The cap ex estimate we have is 80 to $100 million for fiscal '04.

And we are presently buying at about a $15 million to $20 million quarter basis.

That is our best estimate right now.

Our depreciation for fiscal '04 is estimated to be approximately $180 million.

Great, thank you.

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

Hi, I guess first off, given it is the end of the fiscal year, do we get names and numbers on 10% customers?

Sure, Jeff, the overall 10% customers are Cisco, Phillips, HP.

Cisco with 16% of the revenue, Phillips 15%.

HP 11%.

Great, and then I guess the other thing I wanted to ask was, if you look at the back half plan, the 300 to 400 million you mentioned in organic wins, can you give us some flavor for how many programs it is, and I am getting at sort of the lumpiness, the risk of a push out, that sort of a thing, you know.

What sort of a -- how diversified are you in terms of if one or two slip how much effect it has?

Jeff, I think it is pretty diversified across the industry segments that I mentioned.

And that is something that we need to do is to identify programs and we need to execute to it, but it is in our hands to go execute and operate to those plans.

I mean there is go always going to be risks, but we are in a position to -- you know, it's not one or two programs, it's a number of programs that we will go execute to.

Right, and I guess I meant more things that might be out of your hands, in terms of customers pushing things out and then --

That is the typical ramp of the product and programs, and obviously we took that into account in any guidance we gave.

Okay, thanks.

Your next question comes from the line of Michael Walker of First Boston.

Hi, good afternoon, guys, just any color on the peripheral strength?

Just a little bit better.

I mean it -- you know we guided I think to flat, and we were up a few percentage points, so it was just a little better as far as the demand.

You know, that has been a tough one to predict, but lately it's a little bit better for us in our August quarter.

And then on the telecom side, would you say that was more -- the strength there was more in the wireless or wire line side of things?

I don't know between the two.

I really don't.

It was just with our specific customers there was a little by the more demand than we had anticipated.

And then, Tim, would you say that you're taking any share from your larger competitors?

Or in this slightly better, more exuberant outsourcing, do you think everybody is getting their fair share of quality contracts right now?

I can't speak for the rest of the players in terms of the quality of the programs that they are getting.

I wouldn't say that we're living on taking share from the larger players.

You know, market share shifts among the top players now and then depending on who is doing a good job and who isn't, and there has been some nervousness about financial conditions in the business, but for the most part it is a continuing trend of consolidating with global companies that have the right capabilities, and you know, the smaller tier players and regional players are having an increasingly difficult time competing for the big wins.

Okay.

Thanks.

Okay.

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

Hi.

We have been hearing increasingly that there are tightening -- there is tightening in certain components.

If that does continue as a trend and you begin to see a broader base of components where you are getting allocation and tightening, what is the impact of that going to be on your inventory situation?

Well, that would mean the business is hot and would generally be good for inventory turnover.

In terms of being able to meet schedules, generally the component suppliers will provide components to the larger players in the business, and I think kind of the Blue Chip customer base we have, they would be able to fight through the allocation.

I would take you all the way back to the severe capacity allocation, when people were traveling to Africa to find out where [INAUDIBLE] was being mined and that kind of stuff, and we got through that okay so you tend to hear --

We have been through a couple years now, Jim, where there has been nothing but price erosion.

And you know, the first thing people want to do from the component side is say, hey, things have tightened up and everything is going on allocation and we need to raise prices, and that -- on the front end, that bark is a little louder than the bite.

Certain commodities are tightening up.

I think we're probably in a stable environment from a supply and pricing standpoint.

But we will probably run -- if the economic recovery happens -- we will probably run into some tight spots mid-to late in calendar '04.

Okay.

And that would generally lead to you needing to increase your inventory elf levels to make sure to meet your customers' demand?

No, not at all.

We don't do that by increasing inventory level.

That is parts inventory on the balance sheet.

Okay.

And one other question.

You increased your liquidity during the course of the quarter fairly substantially between the increase in your credit line and the new debt deal.

And yet you seem to be saying that you are not anticipating -- it doesn't seem that you are anticipating real use of that capital in the near to medium term.

Are there -- are there potential acquisitions that you would use cash for at this point?

Jim, this is Chris, I mean we wanted to take advantage of the historical low interest rate.

Put some really good long-term capital on to our balance sheets and that was the primary reason for funding the debt we did in the summer time; and we also have a convertible that is -- we have the ability to call in May of '04; for example; which; you know; on a stock basis that is actually a higher cost of capital for us.

So we have that type of flexibility.

But it wasn't to ramp up liquidity for acquisitions or anything like that.

It was primarily to strengthen the balance sheet and take advantage of the historically low interest rates.

Okay.

Thanks a lot.

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

Good afternoon.

I was wondering just kind of broad industry scale in just regarding your customers, perhaps give us kind of a quick picture of the tone that is coming out of your customers.

Are you starting to hear now at this point that they are becoming a little bit more confident in their own forecasts kind of what you were discussing with what you were saying with the confidence from the customers themselves; and also given the fact that you are going out a full year, is this something that you think perhaps there is something that goes that plus the tightening of the components and what we are seeing from that aspect?

I wonder if you would just talk about that for a second.

Well, I think over all the tightening of components is a lot more talk than reality right now with with the exception of a couple of commodities.

On the customer side, yeah, they are more confident and have had sequential months of pretty decent demand signals.

It is a still, though, a shallow slope to the upper right, it is not a real robust, run out of the gate, type of recovery.

So while there is confidence, and longer term planning taking place, there isn't the feeling, particularly in areas that are reliant on business spending, that we're heading for near term boom times.

I mean, it's just not there.

But the stability and the kind of sequential slow growth, people are getting more confidence around that.

Has anybody even mentioned anything about you know the new tax law changes and any potential impact that might have on '04 business spending?

Sure, the big question there is if that -- if that stimulus kind of fades away in the back half of the year and then the economy kind of flops over again after a short-term fiscal stimulus, and you know, who can tell/ The idea of a fiscal stimulus is to jump start the economy and maybe that is happening.

There is a lot of risk factors out there.

European growth is under a point.

The IMF just reduced European GEP growth to less than a percent, and Japan is still trying to get out of its doldrums; and while China is growing, that doesn't drive a lot of jobs in the U.S. so you know, there is I will still of lot of risks to the economy, although a lot more confidence.

And last question, just when we were seeing some of your facilities in Europe recently, they seem to be at pretty high capacity and pretty high utilizations rates.

I was wondering if you would kind of walk us through how the utilization picture is looking ages the demand is starting to pick up.

Yeah, we get that question every quarter and every quarter we kind of take a swag at it.

We do not track the utilization the way other people do and a confusing metric so it is getting better, and it's better than it has been in the past.

We have taken a lot of cost out of the company as we ramp into the Europe, it's continuing to get better and that ought to show up in the business in of the profitability.

Right, I guess I was just looking for that directional comment.

Okay.

Okay.

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

Wow, I think I just got under the wire!

I wanted to ask Chris, if we look at your forecast for the year, what level -- if you picked the mid-point or high end, whatever you would like, Chris -- what level of cash cycle, inventory turns and fixed asset terms would we expect Jabil to record, assuming you do hit the forecast for the year?

The cash cycle where we want to be, Mike, is we would like to be mid 30s, upper 30s.

We are at 37 now, and we have been in a range of 37-40, but I say as a company we would like to be mid 30s and we'd like see our inventory turns move more to 10 up from 9 is what we would like to do from a cash cycle point -- standpoint.

Okay.

And my second question has to do with the comment about having the footprint that you would like and really the locations that you want.

If we take a static picture of your footprint today and assume a relatively optimal level of utilization, understanding your disclaimer on utilization, what kind of revenue and operating income do you think you could drive-thru the pipe that you have right now?

That is a tough -- a tough question to answer.

Simply because we have, you know, some additional floor space in China, but we don't have, for instance, the equipment and people to go with it.

So you have got different levels of investment depending on where it goes off and whether or not there is additional floor space there.

We talked about what our capital expenditures outlook is for the year, you can kind of take a look at our revenue for the year and make some assumptions around that.

I think we can certainly pour some additional revenue on top of the infrastructure we have, but it is highly dependent on the business and where it goes off.

Mike, I know what you're asking as far as fixed asset turns and the structures and buildings we have invested in over the last five years.

We are in a position to see the fix the asset turns go up allot if you look at amount of capital expenditures we are forecasting in '04 relative to when we were building the footprint, which could have been three times that amount of capital spend, we are in great position to have much better terms in terms of our fixed asset.

You're right, that is sort of what I'm driving at, Chris.

Maybe I'll ask one little offshoot of the question which is, if you hit your guidance for the fiscal year, would you be able to also pour more revenue into your footprint at that point do you think?

Yes, in our footprint, sure, sure.

Okay, great, thanks very much.

Your next question comes from the line of Rick Reed of Robert D. Baird company.

Good afternoon, I just wanted to ask you about the networking and side and see if you could put some more detail on it.

You guys were expecting things to be up a little bit and Cisco had a pretty good August, better than expected, and put a little color in terms of why it was flat for you guys?

I think we went into the call talking about consistent levels of production and networkings booting the NEC business, and the NEC business is classified in instrumentation and medical.

So the overall networking side of our business in the fourth quarter met our expectations in terms of consistent production.

With regards to the specific customer, we're not in a position to talk about specific customers, unfortunately.

Is -- so my understanding was though if I looked back last quarter you guys were suggesting it was going to be up 10-12%.

Let me help clarify that for you, the other part of our comments in the guidance was that was -- I don't know if we said solely or principally due to the NEC acquisition.

The NEC acquisition has been categorized and it was in the wrong category in instrumentation and medical.

And the other part of guidance said the underlying networking segment is expected to have relatively consistent levels of production.

Okay.

In that regard, sorry if that confused you.

That is helpful And then just one question on leal levels in engineering, are you ramping the number of engineers that you are trying to hire back up or somehow that working?

We're increasing our level and and investment in engineering that is happening.

And is that -- is that happening within the last couple of months or has that been happening throughout the --

I would say -- I'm sorry -- in the last six month.

Okay, great, thank you very much.

Sure.

Thank you for joining us today.

That is the all the time we have available today for the Q&A and the conference call, and we appreciate you joining us for the call.

I might note that we will be appearing tomorrow morning on CNBC squawk talks and Bloomberg TV, both of those are in the 7:30 to 8:00 time period for those who might be interested in catching those, so thank you very much.

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

Thank you for participating, you may now disconnect.