捷普科技 (JBL) 2004 Q2 法說會逐字稿

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

At this time, I would like to welcome everyone to the Jabil Circuit first quarter fiscal 2004 earnings release conference call.

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

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

If you would like to ask a question during this time, simply press star then the number 1 on the telephone keypad.

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

Thank you.

I would like to turn the call over to Ms. Beth Walters, vice president of corporate communication and investor relations of Jabil Circuit.

Ms. Walters, you may begin your conference.

Thank you.

With me today are Tim Main, our president and CEO, Chris Lewis, our chief financial officer, and Forbes Alexander, our treasurer.

This call is being recorded and will be posted for audio playback on the Jabil website in the Investor Relations section along with a press release and a slide show presentation on second quarter results.

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 Jabil.

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

We refer you to the documents that we file from time to time with the SEC, including our most recently filed 10-K which was filed on November 12, 2003.

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.

Operating results.

Revenue for our second quarter of fiscal 2004 was $1,492 million.

GAAP operating earnings were $50.2 million.

This compares to $11.6 million in GAAP operating earnings for the same period in the prior year.

Core operating earnings excluding amortization of intangibles for the quarter were $62.2 million.

Core earnings per share were 24 cents.

On a year-over-over basis, this represents a 30% growth in revenue and a 47% growth in core operating profits.

On a sequential basis, revenue and core operating income decreased 1 and 4% respectively.

Turning to a discussion of results for the quarter and looking at revenue by sector.

Our production levels in the automotive sector were 6% below the previous quarter.

The computing and storage sector increased by 5% from the first quarter.

Consumer products sector decreased by 34% in the quarter, reflecting seasonally lower levels of production.

The instrumentation and medical sector increased 14% sequentially.

The networking sector was up 29% in the second quarter.

The peripheral sector was up 10% in the current quarter.

The telecommunications sector increased 15% sequentially.

So reviewing sector information for the quarterly in percentage terms, our automotive sector represented 8%; computing and storage, 14%; consumer represented 21% of revenues; instrumentation and medical, 11%; networking sector was 23% of revenues; the peripheral sector was 6; the telecom sector was 12% of revenues; and the other sector represented 5% of overall revenues for the quarter.

I'll now turn the call over to Forbes Alexander to review our sales cycle and balance sheet movement for this period.

Thank you, Beth.

Improved term [INAUDIBLE] compared to 9 in the previous quarter.

The company sales cycle improved by 7 days to 26 days.

During the quarter, we utilized a portion of our $100 million accounts receivable securitization program.

This had the impact of decreasing our day sales outstanding by approximately six days for approximately $90 million.

We plan on maintaining this level of securitization program utilization as this is the source of very cost-effective capital.

During the quarter we positioned inventory from the new program wins and higher production levels in fiscal third quarter.

Demand in the instrumentation and medical sector with characteristically lower inventory terms was particularly strong.

On a forward basis, our inventory turns were approximately 9.

Although this is comparable to our prior quarters, we expect our turns to improve ten turns or greater by the end of fiscal year as our business mix is proportionately changing to lower mix, higher inventory turns production and as we consume inventory position to support fiscal Q3 requirements.

Our cash flow from operations was approximately $180 million in the second quarter, our 13th consecutive quarter of positive cash flow.

Our capital expenditures were approximately $45 million, depreciation for the quarter was approximately $45 million with EBITDA at approximately $107 million.

Cash balances were $901 million compared to $749 million as of the end of the first quarter.

During our upcoming quarter, our $345 million convertible subordinated notes of a print option on the 15th of May and co-option at any time on or after the 18th of May.

Our return on invested capital was 14%, consistent with our first quarter.

Our ROI continues to be approximately four times the industry average.

Total net capital [INAUDIBLE] in the business was $1.49 billion versus $1.56 billion in the prior quarter.

On a year over year basis, we have maintained efficient control [INAUDIBLE] while greatly increasing operating earnings.

Comparing our February term quarter results to a year ago, we increased operating earnings by $20 million or $80 million annually while deploying $30 million less in [INAUDIBLE].

We are currently generating approximately $430 million to $440 million in annual EBITDA from a net capital investment of $1.49 billion for a cash return of approximately 29%.

This significant cash return and strong performance with our sales cycle positions the company for continued positive cash flow from operations.

As we operate throughout the remainder of our fiscal year, we are in excellent position to continue to produce solid positive cash flow from operations while producing very good incremental returns on the capital deployed.

We'd expect to generate approximately $300 to $400 million in cash flow for this fiscal year, allowing the company to have its ninth consecutive year of positive cash flow from operations.

Our improving returns were a function of continued good operating performance while enjoying the benefits of an increasing organic growth profile across a broader base of sectors as compared to prior years.

We would expect our return on investment capital to increase to the range of 15-16% in the second half of the year as we are in a position to improve our sales cycle while leveraging our operating profits.

I'd now like to hand the call over to Chris Lewis.

Thanks, Forbes.

I'm going to take everybody through capacity and operations and give everyone a business update.

Regarding our second quarter, manufacturing deficiency in the quarter was slightly lower than expected resulting in a slight decline in our gross margin by 20-30 basis points from previous expectations.

Regarding our capacity going forward, our business outlook is for consistent to increasing productions across all geographies.

While we continue to transfer business as a normal course from high value adds locations to lower cost locations, the rate of transfer is under a normal, steady course.

As we ramp through the remainder of this fiscal year we will be challenged in numerous plants with ramping requirements that are in a position to have adequate capacity.

The investments we've made in our footprint, primarily on a greenfield or organic basis, over the last ten years, will continue to serve as the majority of capacity needed for the foreseeable future.

Our incremental investments are expected to be primarily related to existing plants, but due to the continuing need of our customers along with the secular growth in the industry, we are currently reviewing additional expansion such as in southern China and eastern Europe.

Our capital investment plan is now somewhat above our previous estimate.

We estimate capital expenditures to be $150 million for the year versus $120 million previously estimated.

Looking at the business update, we estimate our Q3 revenue to be approximately $1.575 billion to $1.625 billion or an increase of 7% in the previous quarter.

We expect overall revenue levels to be approximately $400 million higher for the full year than our previous estimate or $6.2 to $6.3 billion as compared to our previous guidance of $ 5.7 to $5.9 billion.

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

Our EPS estimate for our May quarter is 25 to 27 cents.

We estimate full year EPS of $1.00 to $1.04 per share.

This compares to our previous estimates of 93 to 97 cents.

On a full-year basis, our estimates are for revenue growth in excess of 30% with operating income and EPS growth of over 40%.

For the second half of our fiscal '04, we expect revenue growth of approximately 8% from the first half of the year along with an increase in operating income of 10% in our second half as compared to first six months.

We expect to have operating leverage in the second half of this fiscal year as we execute the higher production levels.

We estimate our operating margins to be 4.2 to 4.6% over the next two quarters.

Our gross margins are expected to be 8.4 to 8.8% in the second half of our fiscal year.

This reflects the continuing shift of production to lower cost areas where the revenue has a higher degree of materials based revenue and a lower manufacturing component.

Additionally, this reflects the relative shift of more material-based revenue sectors such as consumer electronics along with increasing productions of more systems assembly or [INAUDIBLE] productions.

SG&A in absolute dollars is estimated to be relatively flat and estimated to decline by 30 to 40 basis points as a percentage of revenue to 4 to 4.1% of revenue.

Reviewing revenues by sector.

Again our production levels are anticipated to be $1.575 billion to $1.625 billion for the third quarter.

Our automotive sector is estimated to increase by 15 to 17%, reflecting seasonal higher levels of production.

The computing and storage sectors are estimated to have higher production level by approximately 8%.

This sector is benefitting from good organic growth along with increasing production on new assembly.

The consumer sector is estimated to increase by over 20% in our third quarter.

New wins in this sector along with normal seasonal higher production levels in our May and August quarter will allow the segment to grow throughout this fiscal year and into our first quarter of fiscal '05.

The instrumentation and medical sector is anticipated to increase by 10%.

This segment is positioned to be over $700 million of our business in fiscal '04 or an increase of over 100% on a year-over-year basis.

This represents over 300% growth over two years as more companies are electing to outsource production in these areas.

Our peripheral sector is estimated to increase by 7%.

This growth is occuring primarily through additional box build or system assembly production as we have added new business in this area with existing customers.

Our networking telecom sectors are expected to have consistent levels of production in our third quarter.

These levels of productions follow a 29% and a 15% sequential increase from our previous quarters productions respectively.

Now I'd like to turn the call over to Tim.

Thanks, Chris.

Our fiscal second quarter reflected broad-based strength in most segments, offsetting the anticipated seasonal slowdown of consumer electronics.

End markets appear to be on relatively stable ground and are growing at a steady pace.

In fiscal 2004 we expect to establish new highs from revenue, operating income, net income and EPS.

We are leveraging our capacity and operating expenses, readily apparent in year-over-year fiscal Q2 comparisons wherein we expanded operating income 48% on a 30% increase in revenue.

Controlling our invested capital and operating expenses against rising revenue will lead to further improvement in operating income and return on invested capital for the balance of the year.

There is room for improvement in our operational execution, and we'll continue to focus on running the company better, but the direction of the business is clearly on a positive trajectory.

Stable end markets are part of the story but are certainly not the full story.

We are enjoying strong organic growth this year as we more fully realize the positive benefits of our sector and customer diversification efforts over the past three years.

Jabil is becoming more sector neutral, with the growth engine less customer or sector-specific and more directly related to the secular trend to virtual manufacture.

And our management team's ability to properly capitalize on that trend.

Taking two sectors as an example, in fiscal 2002, the medical and instrumentation and consumer segments combined represented 13% of our business or about $455 million in total revenue.

In fiscal 2004, we expect these segments to represent approximately 36% of our business or about $2.27 billion in revenue.

In the past few years, we have significantly expanded our growth opportunities across a broader range of customers and sectors.

Since fiscal 2002, excluding acquisitions, Jabil has added 42 customers.

Of these 42, 13 are with vertical OEMs moving to a virtual model, 12 represent gains from the trend to tier one consolidation, and the balance are various service and market share expansions.

From a sector standpoint, 17 of the 42 wins have occurred in the medical and instrumentation sector.

The other 25 wins, however, are equally spread across all other sectors ranging from 2-4 wins each.

These wins combined are contributing over $1 billion to our growth in fiscal 2004.

We expect this new business momentum and its contribution to our revenue and our earnings growth will continue into fiscal 2005.

In summary, the go-forward strategy is clear.

We will stay focused on improving our day-to-day performance and execution, work to build stronger customer relationships, and deliver solid returns to our shareholders.

Operator, we're ready to take questions now.

Will you conduct the question-and-answer period.

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

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

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

Your first question comes from Lou Miscioscia with Lehman Brothers.

Thank you.

Great job with the numbers.

My question has to do with when you mention organic growth, are you actually referring to your base business with just customers increasing or actually the new wins that are adding or a little bit of both?

Louis, it's quite a bit of both.

When we started the year, we guided to a number of about $5.7 billion of revenue.

That was a billion dollars over the previous year and we expected about $300 million of that to be full year contribution from acquisitions and $700 million of that to be organic growth which was a significant combination of both existing customer growth, [INAUDIBLE] expenses, as well as new business growth.

And we'll still get the full year benefit of the acquisitions but the organic side has been stronger than where it was at the beginning of the year.

So that's where the incremental growth is coming from in the business.

Okay.

And with that organic, what I'm trying to understand, you're winning a lot of business which is great, I'm trying to get a read on the underlying tech trend since it is such a broad base of business.

The tech transits, I don't think you'll hear anything different from us than anyone else.

It's stable, we see growth, but it's a slow, steady growth.

It isn't hold on to your seat and go for a quick ride.

And for us, that's really an excellent climate for us to run the business and add new business to our existing [INAUDIBLE].

So, and, again, what we are talking about, really, is changing Jabil from a sector specific or customer specific technology play into more of a play on our ability to capitalize on the secular trend of outsourcing and our ability for management team standpoint to do that and the more diversification we have and the more spread we have on the organic wins we've obtained over the last few years, I think the more that type of visibility will show through on numbers as opposed to being dependent on any technology specific trend.

Okay, great.

Last question on the inventory.

Seems to pick up a bit.

Not sure if you had an explanation in the press release if you could review that with more color.

We talked about it in the car.

We are ramping to higher levels than we thought we were going to be in the third quarter.

On a forward basis, we are at nine turns.

We also had a good increase in the instrumentation and medical sector and that sector has lower turns.

Even with that, though, we think we are going to on a forward basis improve our turns to nine or ten turns through the back half of the year.

The combination of the instrumentation and medical sector being up higher and having a much higher ramp into our third quarter is why our inventory kicked up.

Great.

Thank you.

Your next question comes from Patrick Parr with you UBS.

Good afternoon, guys.

A little more clarification on Chris's gross margin comment.

You talked about manufacturing efficiency providing a little bit of a downside to your expectation on gross margin, I wonder if you could give us more color there?

Talking about the third quarter or going forward?

The February quarter.

The February quarter we had a lot of new programs that were moving actually into the third quarter.

We also had our first experience of a seasonal low from the consumer sector.

We had start-ups going into the third quarter, much higher production level in the third quarter and machinery coming in, some element of staffing.

If you roll that all up, it probably cost us $3 million at a manufacturing spend level.

The thing about this quarter that was interesting is we executed very well considering we saw a good demand from a technology standpoint and I was pleased that taking that into account, we surpassed our operating income goal by about 10%.

We were at the high end of our operating income percentage, close to 4.2% and obviously made a couple extra pennies as well.

It didn't line up exactly the way we would have liked but considering we've got a much better demand profile in the back half of the year, I was pleased with the quarter.

I get it.

So then sticking with the gross margin team, you're talking about gross margins being in the 84- to 88 range for the rest of the year, are we to assume that 9, 10,11% is achievable in the future as utilization rates rise or is the profile of Jabil changing from where you were a couple of years ago?

Our material content is a function of where the production is and the type of business.

We talked about it that our production is proportionally moving to more low cost areas.

That mix of production has a higher material content which causes lower gross margin.

May be a 20 or 30 basis point reduction from where we are at.

Our SG&A side of it in this type of production is less SG&A intensive and expect our SG&A to decline as a percentage of revenue by 30 to 40 basis points.

So when you look at that in an aggregate basis, we actually expect operating leverage to occur, our guidance is an operating percentage of 4.2 to 4.6% in the back half of the year.

I think you know, though, that's good and we'll see the leverage from an operating standpoint which will be good but our key goal is increasing operating income on a year-over-over basis.

If you look at our third quarter, we are guiding to 7% revenue growth, but we fully expect to grow our operating income by 10% or greater and we expect our return on capital to improve from 14% to 15 to 16%.

Where we are at right now, we expect some operating leverage and we expect an improvement in our return on invested capital up to 15, 16% in the back half of the year.

Okay.

So, Chris, if you were to look at a couple of years, would Jabil be below 4% SG&A and at or above 9 or 10% of growth, or --

Again, we look at operating income but relative to SG&A, obviously because of the nature of the revenue stream going through, we expect SG&A lower going forward and our goal is to, obviously, grow the absolute dollar of operating income and continue to produce good returns on capital in that 15-16% range and try to improve that as time goes on.

We don't have a set gross margin goal for the operating income.

Great.

Thanks a lot.

Your next question comes from Scott Craig with Morgan Stanley.

Good afternoon, guys.

Just quickly on the networking and [INAUDIBLE] sectors, you saw better than expected revenues there.

Can you provide more color and you mentioned in the networking business, you saw material constraints that guided you a bit.

Can you explain how that played into the better than expected strength in the quarter.

That may have a little bit of an impact.

That cost us a couple percentage points in the quarter but the demand throughout the quarter was solid in networking across the board and telecom across the board.

When we talked in terms of demand for technology, generally it was good and broad-based and, yeah, we execute to much higher production levels both in telecom and networking than we previously anticipated and as we go into the third quarter, we're obviously executing to higher levels than we thought we would be going into the May quarter.

Is the function in networking, teleco is that base business, more new business.

Can you help us understand that?

It was with our existing customers, Scott.

We have new things happening with customers such as 3com.

One of most significance but with our existing customer base.

Thanks a lot.

Sure.

Your next question comes from Steven Fox with Merrill Lynch.

Hi.

Good afternoon.

Can you talk a little bit about the system assembly business.

You mentioned that as a proportion of your sales that could grow in coming quarters.

What proportion is it now and what area is it going to grow to, if you can give us a sense on that.

The material part that's changing, our gross margin have changed a bit is the production of low cost and some of the mix.

But we are on the peripheral segment, we added a box build program that's not gigantic but a good incremental extension of our existing business in that particular sector with the customer.

I think over time we'll have a lot of opportunity of systems assembly or box build, but near term for this fiscal year but it's not overly material but over the next two or three years, there's a lot of opportunity for us to grow the business incrementally and that type of business is more material-intensive than the printed circuit board business.

But it's not overly material to the next couple quarters or the back half of this year.

Okay.

Second question, just in terms of procuring components, given the type of demand environment you just tainted, I would assume you're seeing components readily available.

Can you give us an idea whether there's a risk that could hurt efficiencies in the next quarters or how you perceive the component market?

Things are tightening up a bit on the material market.

Some flash organizations are difficult to get.

High end circuit board fabs are a little bit more constrained.

It feels like a manageable, a very manageable materials market.

A bigger issue for the customer base and Jabil will be efficient demand planning.

If lead times extend from four weeks on an 8-layer PCV fab to eight weeks, that's not a significant time on fabs but the behavior set ingrained in 2002 and 2003 that all material is immediately available, that's no longer true.

Eight weeks is a manageable lead time as long as there's sufficient demand plan in place.

If we do a good job with that with our customer base, we should have adequate material supply.

Thank you very much.

Your next question comes from Matt Sheerin with Thomas Weisel.

Thank you.

You talked about a good demand environment, has that had positive impact on pricing because pricing for core EMS has been competitive the last few quarters.

I don't think -- we get this question every quarter and it isn't -- this pricing environment is not unlike environments that we've seen over the last 20 years.

When we go into our recessionary environment, you don't price your way into capacity because you can't raise prices on customers when capacity returns and by the same token, when demand is better, these are not transaction relationships that you can spot price to business.

They tend to be long-term relationships with economic models established with the customer and we expect the customer to abide by those economic models when times are softer and they expect us to abide by those models when things are better.

You know, it's nice to be in a position where there's adequate organic growth for us so we don't feel like we are grasping for business and there seems to be an adequate pipeline for us for the foreseeable future.

That is good.

From a pricing standpoint, it's not going to be a richer environment.

I wouldn't expect it to erode, either, though.

Just back on the inventory question, are you seeing customers concerned at all about needing to build any buffer here, the constrained environment and what are you telling them?

Yeah, we are seeing more demands to put in place a week or two of buffer stock either good level or critical raw materials level.

Business unit by business unit we are working through that.

Should not be a significant issue going forward and probably a good thing to do in this environment for manufacturing efficiencies.

We're working through that.

Great.

Lastly, if you could give us a breakdown of your 10% customers and customer concentration, thanks.

The 10% customers are Cisco, HP, Phillips, and top 10 is 70% of our business.

Thank you.

Your next question comes from Steve Savas can Goldman Sachs.

Thanks.

Good afternoon.

Obviously your revenues are quite strong and better than we all expected and given that you're off an ordinary calendar quarter, if you can give us a feel of the pattern in the quarter, was the up side consistent, more upside in December or back ended in February, how did that feel and how might it be tracking into March.

It was true throughout the quarter.

It was strong each of the three months.

It wasn't backended or anything like that.

So we've got good demand going into the third quarter.

That's great.

One last quick question on R&D.

You guys are running a modest level relative to your peers.

If your plans are to roughly keep it in that zone of $3 million a quarter or plans to start stepping that up at all and if so, on what?

I think it will stay in that zone.

Some increases we had in the last quarter.

A few hundred thousand dollars a quarter but not a big change to our spend levels or a proportion of revenue that we currently have.

We significantly expanded our design competence around the world and probably tripled in size over the last couple of years and we actually have -- we don't break that out to a revenue and cost standpoint but we have R&D type revenue that's getting to be relatively material.

But at this point at this cost level, you're roughly in a zone of having the right sized R&D and design capabilities without stepping them up dramatically through the year or anything?

I guess there's two parts of the question from a financial modeling standpoint.

Chris has given the guidance and, no, we don't expect to have to make any additional investments there that would be P&L dilutive from a business strategy standpoint.

The business is growing, we've grown that competency dramatically over the years and in order to keep pace we'll continue to expand it.

That's great.

Thank you.

Your next question comes from Thomas Hopkins with Bear Stearns.

Good afternoon, guys.

Nice quarter.

Tim and Chris, Beth, we need to come back a little bit to this telecom and networking growth given that 29% sequential increase and 15% sequential increase sizable and given the fact there was so much noise in the quarter or at least what we regard as noise in the networking business.

How do you classify 3Com, in the networking segment or telecom segment?

Networking.

Would you say this is the first full quarter of that program that you won in the middle of last year?

What I talked about in the second quarter with existing customers and really can't talk about specific customers, but that activity is more so in the back half of this fiscal year.

Our guidance in networking was 15-17% sequential increase and obviously we went past that.

You doubled it.

Right.

It's new, new assemblies with existing customers along with good demand, we're, we're happy it's a combination of those two things with our existing customers.

Telecom has surprised us.

We guided up in that and we did see throughout the quarter increasing demand in that particular sector.

But it was with our existing customers.

Okay.

Great.

And a follow-up, the return on invested capital is impressive, cost of capital is around 11.5%.

You're doing 14, 300 basis points above and targeting 15 to16% for the second half of this year, just at this point, when you look at utilization rate and we did see your Cap Ex is tracking higher, I'm more interested in the denominator and return on invested capital.

For every dollar of incremental sales at this point, how much do you have to spend at Cap Ex?

Probably 6-8%.

And the reason I say that is if you look at we're probably $500 million ahead of where we started and even from the last quarter, and we've increased our capital by about 30-40 million from the 120 or 150.

Probably along the lines of 7 to 10% for the revenue.

By the same token, if we improve our inventory turns in the process from a capital, from an invested capital standpoint, we'll end up paying for some of that.

If you look at that, five days of our inventory if we go to nine turns is $75 million out of capital.

We fully expect to be close to $1.5 billion in capital.

When you look at that denominator, we really have the opportunity to increase that denominator down into the $1.4 billion range over the next couple quarters on higher revenue.

We've got on the balance sheet side, great opportunity to improve return on invested capital.

On the P&L side, we have opportunity by leveraging our operating profits.

We'll go at it really hard this back half of the year and see what we can do.

Nice quarter.

Thanks.

Your next question comes from David Pescherine with Smith Barney.

Good afternoon.

If I could go back to the inventory question.

You made comments you were building a little bit of buffer inventory, I'm assuming the comments were at Jabil were buffer inventories, with inventories extremely lean throughout the supply chain, give us a sense if some of the upside was actually your customers building buffer inventory and how aggressively do you think they'll be building inventories in the next couple of quarters?

I don't think a big portion of -- I don't know the exact numbers, but I don't have the sense that a big part of our Q2 revenue was associated with stationing inventory to finish goods level on our customers' part.

When I talked about establishing buffer stocks internally, I'm really talking about some small raw material buffers in order to really support some of our high mix manufacturing lines where demand is unpredictable in terms of mix, and therefore, you establish raw material buffers.

It ends up not being a huge number and huge driver overall in inventory levels.

I think where that nets out is we saw pretty generous sell through rates in the second quarter.

We're building up some raw material inventory buffers internally in order to support more efficient manufacturing operations.

And in order to more predictably ship to our customers.

Along those lines, if we assume we have a continued modest recovery in electronics and inventories being extremely low levels, can't we foresee at some point in time production levels will ratchet up more as some of the customers do build some inventory to take advantage of the rising revenue trends?

That's going to depend entirely on individual customer strategies.

We're certainly not, that's not built into our expectations.

Inventory is the enemy.

Customers don't like to have it, we don't like to have it.

We think, our observation is we're in a fairly stable, steady but not high growth period which should be a better environment for customers and EMS suppliers to plan the business.

To an extent we do a more efficient job of demand planning and we ought to be able to manage through the balance of the year without building significant inventory levels.

We don't want our customers to build big inventory levels because it creates a whip-saw effect down the supply chain and I don't think customers want to, either.

And to switch gears, on the last call you indicated you would have to say where you were on the May quarter to sue see whether or not to call the convertible offering.

Can you give us an idea how much cash you need on the balance sheet to run the operation today and be able to take advantage of some of the growth opportunities when they arise.

And can you also quantify some opportunities you are pursuing today that might require significant capital acquisitions over the next 6-12 months?

We obviously are in a position to be able to pay the convert off and that's something we will decide throughout the course of the quarter.

That's $900 million in cash and converts to $345 million.

If we decide to call up, we'll obviously let our shareholders know -- through the course of the quarter and let them know.

If we did pay it off, there are non-cash costs associated with paying that off, something like $6 million.

As far as what we need from a cash standpoint to run our business, we're obviously generating a lot of operating cash flows today, but an aggregate probably a range of 500 million to $700 million in cash.

As far as the incremental opportunities in the industry and with our customers, there's a lot out there over the next couple years but we are generating a lot of that cash from our operations.

Great.

Thank you.

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

Great.

Good evening, everyone.

Just going back to the telecom and networking sector, if you could give us some color on why you think the business is flattening out in the May quarter, is it a pause in the pickup we saw in the most recent quarter?

What is -- you saw across the board strength, why is that going to flatten out in this quarter?

Thanks a lot.

As far as where we are at, we are after a 90 day period close to 30% higher than where we started in the networking sector and 15% higher from where we started 90 days ago in the telecom sector.

We'll have to see.

That demand profile is significant relative to where we thought we would be back when we had our December call.

Our production levels are actually quite high relative to where we started and the overall demand part of it like Tim said, we see good steady demand through our customers but not some gigantic increase.

The increase is for us in the third quarter through our guidance are more on a secular basis.

Instrumentation and medical, the automotive side, consumer side, some of what I call the non-technology sectors were having great growth in our third quarter and will execute in the networking and telecom side to the higher levels and see how that goes over the next quarter or so.

The base business is higher than where where we thought it would be.

I guess what you typically see particularly on the telecom side is a recovery from that seasonable dip in the first quarter of the year.

I understand you're at higher levels.

I guess what I would say when I see that is we saw less seasonality than normal in telecom this year for a variety of good reasons and I'm just wondering why that's stalling out.

It sounds like you're not saying it's stalling out, sounds like you're calling out flat and see where it gets to in the quarter.

And that's, that's what we see and it is on higher levels, so we're just trying to tell it like we see it in those sectors and a whole heck of a lot of growth occurring throughout the whole company and just fortunate that like I said, those are at higher levels than where we thought we would be going into the quarter.

Great.

Thanks a lot.

Your next question comes from Joseph Wolf with Banc of America.

Thanks.

I wanted to follow-up on the cash question, Chris.

You mentioned that you dipped into the accounts receivable securitization that you guys, the program that you have.

I'm wondering if you could walk through with us how you are balancing cash flow growth because it would seem you could cover most of your cash needs without going to the receivables securitization.

We could, but that's a form of capital we wanted to open up.

We have obviously quality assets as far as our receivables across the company.

That's a very efficient form of capital we wanted to open up similar to us last spring opening up the public debt marketplace for the company.

We wanted to open up that particular capital for the company not only for this year but for the next several years.

But beyond that, I mean, I agree we are obviously in great cash position as a company, but I always wanted to be able to look for what are new ways for us to open up efficient forms of capital and in particular those forms of capital that are right now not equity-related.

You're looking to drive down the total weighted average cost of capital for the company over this growth cycle?

I don't know how, we're not highly leveraged.

We'll have to leverage the company up significantly and not suggesting we do that and don't see us doing that.

That is the forms of debt capital that we're talking about do drive down the cost of capital of the company and very efficient form of capital on an after-tax basis.

So just to wrap up, would you -- you would -- this is driven because you have a bullish outlook for the rest of the business?

We have a positive outlook.

I wanted to open up that form of capital and still continue from the internal generation of cash in the company, drive lots of operating cash flow.

I mean, that's not stopping anything we are doing.

Okay.

Great.

Thank you, Chris.

Your next question comes from Michael Walker with First Boston.

Good afternoon.

Just on a high macro level, I wonder if you can compare and contrast what you are seeing organically in the telecom networking areas whether it's you sense that the computer storage area was stronger last year and whether that's tapped out from a demand perspective and now the communications turn to grow or how would you compare and contrast those two areas?

It may not show up that they're perfectly in sync each quarter as we ramp a new program or a new customer win comes through.

On balance, those segments are going to behave in a similar fashion.

They are relatively mature segments dependent on enterprise spending, and we have the leaders in those segments or customers and we can grow the business by further penetrating services offerings, box build services design, opening up our global foo print, new customers particularly in the computer and storage area that could bring additional revenue.

Some telecom segments like access that might be more robust in the near term than long hall switching.

All in all those two segments are going to behave very similarly.

And that's in fact what we see.

Okay.

And second question is on acquisitions.

Obviously like to deal with Nortel, kind of reopen the box in terms of are there big opportunities out there.

That seems to be a way, a year and a half a big deal.

I know you're not going to talk about deals pending but what is your overall thought process?

Going to zero in on organic growth of existing customers or scale opportunity as soon as.

I think it's really interesting, the Nortel deal, it's indicative that even in mature industries, there are significant pockets of new service penetration available.

So I think most people, most casual observers feel that Nortel fully outsourced their business with SDI years ago, and here is this electronics that just does a $2 billion deal on the integration side.

I think you'll see that across a number of what would immediately appear to be mature industries.

Still significant pockets as we expand the services that we provide in the supply chain and move way beyond the assembly to end customer fulfillment management services.

We are opening up significant new opportunities to tap even in mature industries.

So I think the Nortel is a great example of that and we are excited about it.

In terms of being significant opportunities available out there, there's hundreds of billions of dollars of vertical capacity left.

I couldn't find, if I talked to, if I spent the next month doing nothing but calling the CEOs and CFOs of vertically integrated companies, I probably couldn't find many, more than a handful committed to vertical integration.

Everybody wants capacity so there's no shortage of opportunity.

What you have to do is craft these things such that the end customer gets what they truly need, not what the transactional value could provide them and that's a more complicated scenario.

For our business strategy, as long as we have organic growth opportunities and we see significant organic growth opportunities for the next 12-18 months, I think we'll just primarily focus on that and look at big deal opportunities on a more opportunistic basis.

If they come up, we'll take a look at them.

If we can structure them, we'll take them.

Meantime primarily focus on running the business better than we do today.

Ultimately we think that's what wins customers and develops customer loyalty and drives EPS as well.

Thanks a lot.

Your next question comes from John McManus with Needham and Company.

Of your 42 new customers, how many, for example in two years could break into the top 20?

Yeah, that's a good question, John.

Without going into details, because I know you could drag me through painstaking details on 42 customers.

Admittedly, the bell curve would be, a lot of them are smaller relationships to start.

But there are a handful of them that are very significant.

Particularly the ones we mentioned that are vertically integrated OEMs going to an outsource model.

Those are big markets to us.

Although the relationship may start off relatively small.

The 20, 30, 40 million relationship in the first year.

They have growth opportunities into the hundreds of millions of dollars.

So in terms of the 42, most will not be big, big customers.

But a handful of them certainly have that opportunity.

And could you give us some idea if you look at your utilization by the different areas, U.S., Europe, Asia, say by the end of the fiscal year, could you give us some idea where you think that might be and what triggers expansion in southern China, eastern Europe, or even a new plant?

Utilization, John, is going up and we talked about production throughout the world is going up.

We're seeing increasing levels in U.S. as well which has been the part, it's been the hardest.

I could throw out a percentage but we don't model our business on this.

Last call we talked about blended capacity utilization of 67% and world wide up to 70 and we'll move up a few percentage points as we go through the course of the year.

New investments we make in eastern Europe and China would be to serve as a platform as we move into fiscal '05 and beyond and those won't be huge capital investments, but something that will provide even more capacity in those parts of the world.

But our near term plans are, you know, filling out.

We're not seeing the need to make significant capacity increases for this fiscal year, but obviously as we grow into fiscal '05, we'll have to add some capacity.

Do you see a need there for actually new plants in sales size?

We talked about exploring more fully eastern Europe and more capacity in southern China, but the near term view on that which could change but as an expansion of Wang Foo which is an existing Jabil plant to the extent we would expand that to bring that plant up to a 40-line plant.

We've got a very robust platform throughout the world to grow our business over the next couple years.

That's the whole point of when I talked of what we've done over the last 10 or 12 years.

Our plants are in the right places.

There are modifications we need to make in the next couple of years.

We're in reasonably good shape.

Thank you.

Operator, we have time for one more question today.

Your final question comes from Jeff Rosenberg with William Blair.

First I wanted to ask, Chris, you talked about as you grow from a $6 billion run rate which you'll be at this quarter up to $8 billion.

You need $100 million in equipment to get there.

Now it sounds like from what you're saying it's more like 150, 160.

Into that as far as adding capacity or why that number has gone up a bit?

I don't think so.

And it really depends, Jeff, on that revenue stream and how capital intensive it is or not to the extent we take on more box build business, we could be at the lower range of $100 million.

Really nothing to read into.

It will depend on the mix.

Okay.

But your return on net assets as you take that business is still within your target range.

That's the whole point of our model, and you know we operate our model on return on net assets at an operating level and we look at every business that we take on, that's how we look at it.

Okay.

And last thing I was going to ask you is on inventory turn potential, when you've seen a similar trend in the past where you do mix and material intensive stuff, you've seen turns go north of ten.

Is there any reason over the next 4-6 quarters, you can't reach higher than ten or something that makes ten more of a goal that you think that's as good as it will get.

It depends on the mix.

We want to move toward ten.

That's 36 days and we're at 45 now, so that's nine days to the company and we are definitely in position to do that over the next couple quarters.

It does.

We want to do better than ten.

We don't know if we'll get there at this point.

Step by step.

Okay.

Thanks a lot.

Thanks for joining us today.

Let people know that tomorrow morning Jabil management will be appearing on CNBC Squawk Box at 7:25.

Appreciate your time and attention today and thanks for joining us.

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

Thank you for participating and you may now disconnect.