捷普科技 (JBL) 2004 Q3 法說會逐字稿

Good afternoon, my name is Sharika and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Jabil Circuit third 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 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 Miss Beth Walters, Vice President of Corporate Communications and Investor Relations of Jabil Circuit. Miss Walters, you may begin your conference.

Thank you. Thank you for joining us today. With me are Tim Main, our President and Chief Executive Officer, Chris Lewis, our Chief Financial Officer, and Forbes Alexander, our Treasurer. To remind you, this call is being recorded today and will be posted for audio playback on the Jabil website in the investor relations section along with third quarter of fiscal 2004 press release and a slide show presentation that we will be using and referencing during the call today.

Moving on to slide two, during the course of this conference call, we will be making projections or other forward-looking statements regarding future events and the future financial performance of Jabil. We caution you that such statements are just predictions and that actual results or events may differ materially. We refer you to the documents that we file from time to time with the SEC, including our most recent 10K filed November 12th, 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.

Moving on to slide three and four, results for the third quarter of fiscal 2004, on revenues of $1,626 million, GAAP operating earnings were $55.9 million. This compares to 2 .5 million in GAAP operating earnings for the same period in the prior year. Core operating earnings, excluding amortization of intangibles for the quarter, were $66.7 million. Core earnings per share were 26 cents. On a year-over-year basis, this represents 33% growth in revenue and 39% growth in core operating profits. On a sequential basis, revenue and core operating income increased 9% and 7% respectively.

Moving on to slide five and turning to a discussion of the results for the quarter, looking at our revenue by sector. Production levels in the automotive sector were 23% above the prior quarter. The computing and storage sector increased by 3% from the February quarter. The consumer products sector increased by 15% in the quarter. The instrumentation and medical sector increased 12% sequentially. The networking sector had consistent levels of production during our third quarter. The peripheral sector was up 9% and the telecommunications sector increased 6% sequentially.

On slide six, we have our sector information for the quarter in percentage terms and I'll just look at Q3, our automotive sector accounted for 8% revenues, the computing and storage sector accounted for 13%, the consumer sector represented 22% of revenues, the instrumentation and medical sector was 12% of revenues, networking sector, 21. The peripheral sector, 7% of revenues; the telecom sector representing 12%; and other sectors was 5% of revenues. I'll turn the call over now to Forbes Alexander to review our balance sheet and ratio trends.

Thank you, Beth, good afternoon. I'll ask you to refer to slide seven, eight and nine, as I review our balance sheet highlights and ratio trends. Our inventory turns were 9 in the third fiscal quarter compared to 8 in the previous quarter. The company's sales cycle remained consistent, 26 days. We plan to continue to make progress in our inventory with a near-term goal of reaching 10 turns in our fourth fiscal quarter. Cash flow from operations was approximately $95 million in the quarter -- our 14th consecutive quarter positive cash flow. Our capital expenditures in the quarter were approximately $55 million. Depreciation was approximately $44 million, with EBITDA being approximately $111 million.

Our cash balances were 596 million compared to $901 million as of the end of this third quarter. The lower cash balance is due to the company retiring 345 million in convertible notes during the quarter, offset in part by positive cash flow from operations. The return on investment capital increased to15% from 14% the previous quarter. Total net capital deployed in the business was $1.457 billion versus 1.485 billion in the second quarter. On a year-over-year basis, we have maintained efficient control of capital deployed of greatly increasing our operating earnings.

Comparing our May current quarter -- current year quarterly results to a year ago, we've increased operating earnings by approximately $76 million annually, while deploying over $70 million less in capital. We are currently generating approximately 440 -- $450 million in annual EBITDA from a net capital investment of $1.46 billion for a cash return of approximately 30%. The significant cash return and strong performance with our sales cycle positions the company for continued positive cash flow from operations. We expect to generate approximately $450 million in cash flow for this fiscal year, allowing the company to have its ninth consecutive year of positive cash flow from operations. This positive cash flow has been accomplished with the company growing in excess of 30%. Clearly demonstrating the ability to generate positive cash flow from operations and a significant growth environment. I'd now like to hand the call over to Chris Lewis.

Thanks, Forbes. Referring to slide 10, regarding our capacity. Our business outlook is for consistent to increasing production across all geographies. Our incremental investments are expected to be primarily relating to existing plants but due to the continuing need of our customers, along with an additional number of new customers, we are planning additional expansion in areas such as China and Eastern Europe. Our capital investment plan is now somewhat above our previous estimate. We estimate capital expenditures to now be 180 to 190 million versus 150 million for our fiscal year estimated previously. Part of the increase in the capital relates to new customer relationships and our ramp into the first quarter of fiscal '05.

I'd now like to refer to slide 11 and talk on a fundamental basis and outline of how we view our business and this will take us through slide 11 and 14. Starting with the year-over-year basis, Beth has mentioned this but our revenue increase was 33% year-over-year. What we've focused on is growing operating income year-over-year, which is 40%. In terms of our return on invested capital, we've been able to leverage our capital base through the last 12 months, improve our return on invested capital by 40%, increasing ROIC from 11% to 15%, and as we've mentioned, our earnings per share on a year-over-year basis grew 37%.

Reviewing slide 12, looking at our long-term objective of growing operating income, our long-term goal is 30%. This slide depicts the last seven quarters of operating performance for the company, and you can see from this slide that -- that from the first quarter of fiscal '03 to the third quarter of this -- this year, we've grown our absolute dollar of operating income from $39 million to approaching $70 million a quarter in operating income or about 71% higher than where we were seven quarters ago, well above our trend line of growing operating income 30% on a year-over-year basis.

Tying that into improving return on invested capital and capital deployed is slide 13. Slide 13 shows that over that same seven-quarter period, fundamentally we've maintained the same capital base, and Forbes mentioned it's something along the lines of about $1.5 billion in capital. But by the same time, we've increased our operating earnings over that period of time 70% higher over the seven-quarter period, or a 50% improvement on our invested capital of the company.

Reviewing slide 14 and the end results of increasing our operating income and leveraging our capital base, we've been able to generate over $600 million of positive cash flow from operations over the last seven quarters with this most-recent quarter generating $95 million in cash flow. The end result of it is growing a good base of operating income, increasing our return on invested capital and producing incremental returns to our shareholders and creating value.

I'd like to now turn to slide 15 and review Q4 and talk a little bit about some of the operating aspects of our third quarter. Starting with our revenue guidance in the fourth quarter, we estimate our fourth-quarter production revenue to be equal to slightly above the previous quarter, or approximately 1.6 to 1.65 billion. This compares to approximately 1.6 billion in production revenue in the previous quarter excluding the impact of parts sales. During the latter portion of our third quarter and in our June forecast, our production schedules have been reduced by approximately 2 to 3% as our customers are repositioning their inventory levels into our upcoming August quarter. Overall demand is estimated to be on a steady-state basis, with an increasing demand profile as we move past our August quarter and into our first quarter of fiscal '05.

We look forward to completing our fiscal year with record revenue and profit, and are very encouraged about a significant ramp in our first quarter of fiscal '05. Our operating margin in the fourth quarter is expected to be consistent to slightly higher or approximately 4.1 to 4.3%. Our EPS estimate for the quarter is 25 to 27 cents. Our gross margins are estimated to be 8.3 to 8.6% in our fourth quarter.

Over the past year, we have added a significant number of new customers that are intended to be a large part of our growth driver for the company in fiscal '05. The level of activity and integrating the new accounts into our factories has increased over the last quarter, resulting in a slightly dilutive impact to our gross margin in the near term. As these programs are ramped and moved to a more mature state in the latter portion of the calendar year, we expect increasing contributions from these programs as we enter into our fiscal '05. As a result, we expect the near-term gross margins to be approximately 8.3 to 8.6% over the next couple quarters, and that's compared to our previous estimate of 8.4 to 8.8%. The gross margin in the third quarter was also slightly diluted due to approximately 25 million in parts sales.

As mentioned previously on our calls before, our revenue also reflects a continuing shift in 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 continuing shift of more material-based revenue, such as consumer electronics, along with increasing production of more systems assembly or box-build type production. Our SG&A in absolute dollars is estimated to be relatively flat and estimated to remain between 4 to 4.1% of revenue or about 50 basis points lower than where we started at the beginning of the year.

Reviewing slide 16, full-year estimates remained the same from previous guidance. We expect revenue to be between 6.2 to 6.3 billion, consistent with our previous expectations. On a full-year basis, our estimates are for revenue growth in excess of 30%, with operating and EPS growth in excess of 40%. Our estimated full-year operating income is approximately $260 million. This compares to approximately 182 million in the previous year, and is greater than two times the operating profit in fiscal '02. Additionally, as we've talked, we have significantly improved our returns with an estimated 50% improvement in return on invested capital to approximately 15% in fiscal '04.

I'd like to talk a little bit about fiscal '05 in our first quarter. As we complete our fiscal year -- and this is slide 17 -- as we complete our fiscal year and enter into fiscal '05, we are positioned with numerous new customer wins to allow for continuing growth, a number of the new programs and customer wins are expected to occur throughout fiscal '05 with in increasing contribution in the latter portion of the year. Our existing programs along with our new wins will serve as the primary basis for our growth in the next fiscal year. As we start our fiscal '05, our usual seasonal ramp in consumer electronics, along with the steady growth profile in our remaining sectors will allow the company to grow sequentially by 10 to 15% of revenue and 15 to 20% in operating profit. As a result, our current estimates for the November quarter are for revenue of 1.75 to 1.85 billion, and earnings per share of 30 to 32 cents. We would expect operating leverage to occur in the first quarter and estimate our operating margins to be 4.2 to 4.6% in our November quarter.

I'd now like to review the sector information reviewing our fourth-quarter guidance and also touch on the guidance for sectors into our first quarter of fiscal '05. The automotive sector in the first quarter -- excuse me, the fourth quarter is estimated to decrease by 10%, reflecting normal -- normal seasonal lower levels of production. In our November quarter we anticipate this segment will grow by over 7%. The computing and storage sector was estimated to have lower production levels by approximately 8%. This sector is estimated to resume growth in the November quarter.

The consumer sector is expected to increase by 10% in our fourth quarter. We anticipate a continued strong ramp by over 20% in the November quarter as we will enter the high season for consumer products. The instrumentation and medical sector is anticipated to increase by 10% in the fourth quarter. This segment is anticipated to continue to grow as we move into the first quarter of fiscal '05. The peripheral sector is estimated to increase by 5%. This growth is occurring primarily through additional box builder systems assembly production as we have added new business in this area with existing customers. This segment is expected to continue to grow by over 7% as we enter into the November quarter. The networking and telecom sectors are expected to have approximately 5% lower levels of production in the fourth quarter. In our November quarter, these segments are anticipated to grow by 5 to 7%.

On a personal note, I'd like to thank Jabil for the opportunity to be the company's CFO over the last eight years. I look forward to my new challenge on the business development side of the company, as I plan to transition to my new role over the next several months. As is evident from our continued success in the marketplace, the company has added a significant number of new customers. I look forward to working with a number of our existing and new relationships. I'm happy to be able to move into a new role as our company continues to display good growth and is positioned to be successful for many years to come. I am delighted to have Forbes Alexander succeed me as our company CFO. Forbes and I have worked together very closely over the years and I am very confident in his ability to continue to lead Jabil in his new role. I now will turn the call over to Tim.

Thanks, Chris. First a few words on management role changes and then onto the quarterly business. Chris has wanted to expand his horizons at Jabil for some time now and we think the time is good to accommodate his wishes. We believe a notational assignment will enrich the experience of our senior people and this will do that for Chris. Forbes has been waiting in the wings to take on this role as well, and so we expect a very smooth transition over the next few months. Congratulations to both Chris and Forbes in their new roles. We think the regional leadership positions we announced today are positive as well. This will allow us to make regional decisions faster, and be more responsive to local needs while preserving our global business unit model. It is also indicative of our commitment to develop senior people with the global skills needed in our business today and in the future.

On to the quarter. Overall the environment is very good for our business. End markets are showing steady and stable growth in a solid macroeconomic environment. Operationally, we have inventory levels under control as we adjust to near-term schedule changes and as we continue to ramp a large portfolio of new customers through the balance of fiscal '04 and into '05. We expect the well diversified portfolio of new customers to contribute to earnings in an increasing way throughout fiscal 2005.

New business wins for fiscal 2003 and 2004 are already contributing to our diversification efforts. Examples of this diversification are apparent specific segments in our overall level of concentration, for example, the instrumentation and medical segment is now pacing at close to a billion dollar annual run rate and our top 10 customers now comprise less than 65% of our overall revenue. This reduction in top 10 concentration is a trend we expect will continue in fiscal 2005.

On the profitability front, we are continuing to post very strong year-over-year comparisons and are generating more cash and income by using less capital to do so. Using our fiscal Q3 2004 as an example, year-over-year we generated over $400 million in incremental revenue and operating margins accretive to our current corporate average. At the same time, our invested capital has declined over 4%, driving over a 40% improvement in our return on invested capital. This is consistent with our goal to generate higher and higher levels of cash in a highly controlled capital base. Prospectively based upon our fiscal Q4 guidance, we expect to close fiscal 2004 with revenue up over 30% and operating income, EPS and ROIC up over 40%. Our guidance for the first quarter of fiscal 2005 is a good indication we expect growth in '05 that is consistent with our track record and long-term objectives. Beth.

Okay. Thank you, operator we're now ready to do the question and answer period, if you could start the questions.

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 hand set before asking your question. We'll pause for just a moment to compile the Q & A roster. Your first question comes from the line of Steve Savas with Goldman Sachs.

Thanks, good afternoon. Or good evening. Um, I guess a question -- first on guidance. You're now going out a couple of quarters, which is nice to see, I was wondering if that's -- I guess a reflection of increased visibility that you're seeing out of your business, or is it just stability in end markets that you now feel comfortable going out that far? Um, is it a combination of those things? Just trying to get a sense, or are you trying to rein in some estimates that might be out there?

The -- we started the year with a full-year guidance, and if you look at our business, uh, the reason we thought it was appropriate to definitely talk about the next couple quarters is we have a lot of business that's planned and occurring from the August to November time frame. We have a big seasonal ramp that we're preparing for, we have a number of new customers that we're launching so we thought it was appropriate to not only talk about near-term in the fourth quarter, but our -- our first quarter where both on a seasonal basis and from the standpoint that we've added a lot of customer wins, we have a very healthy profile over the next six months. That was our logic.

Okay. And then do you feel that they are given all the -- the new program ramps that -- is it another two, three quarters that you're getting kind of that -- that margin squeezed because of start-up costs and is that when we should think about those additional costs starting to fade?

Well, and again this is -- this is an interesting question because our -- our returns are actually moving up to a 15 -- 15% return on invested capital. But the answer to your question on where we expect contribution. With the new customers, we -- we expect incremental contribution for them to occur incrementally higher throughout fiscal '05. But there's a level that -- that is -- is causing a little bit lower in percentage terms for our third and fourth quarter of this fiscal year. Some of that will be offset in our first quarter of fiscal '05, because we have a very big ramp planned and it's purely from the seasonal ramp on the consumer electronics side. But we expect incremental contribution from those programs to start occurring at higher levels throughout fiscal '05.

Okay. Fair enough. Thank you.

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

Yeah, good evening, everyone. Um, could you just tell us what sectors are shifting their inventory?

I -- from an inventory standpoint, the reason we mentioned it -- and this is just some -- some movement and it's really on an overall technology standpoint where we've seen about a 2 to 3% reduction. But it's more, um, our sectors that are more technology related as opposed to in the consumer side or the automotive side.

So --

That would be a cross-dollar -- what I would consider more technology based sectors such as computing and storage, net networking, telecom and that type of thing.

Okay. And if I look at your performance from an end-market perspective in the third quarter, it looked like the consumer products sector grew a little bit less than what you had projected, um, off the last call. Can you just tell us if in fact that is true and if that business is coming in a little bit lighter than you thought.

It's a little bit lower than we thought. I think that -- that primarily relates to -- to ramp plans -- the ramping of new business.

Okay. Great. Thanks a lot.

Sure.

Your next question comes from Thomas Hopkins with Bear Stearns.

Good afternoon. Just want to go over a couple things, Chris, related to the gross margin. You mentioned, um, 25 million in parts sales in the quarter.

Yeah.

And I just wanted to first of all just -- if that was unusual or if that's kind of the amount that you've been seeing on a quarterly basis -- basis recently.

No. It's probably a little bit more and that's just -- just part of us bringing our inventory back in line and I would say that it's a little bit more and that's probably cost us in aggregate maybe something like 10 basis points. And that is most mostly material pass through, which is just a small, if any, margin associated with it.

Okay.

It was higher than -- than in previous quarters.

Okay. And, uh, again on the gross margin, you talked about more mix -- more on a mixed basis more materials intensive basis, are you just referring to the consumer stuff with Phillips or --

Well, to the extent we refer to material -- more materially intensive, the consumer side of our business typically has -- has more material pass-through, yeah.

Okay. And just on SG&A, uh, it looks like it was, you know, up only a million -- a million point two versus the sales increase. Can you --

It's about flat, Tom.

Yeah, yeah. So flattish. Can you talk about -- again, is that related to mix, how you're able to keep -- keep it relatively flat given the sales increase.

This is something we reviewed that we have significant leverage available for SG&A for the company not only now but over the next two or three years and, uh, you know, our objectives are to leverage SG&A. Some of the composition changes as you move more of your resource to lower cost, you have a lower absolute dollar spend, but this is just something that is a key objective for us over the next several years.

So you think there's more room to improve the SG&A.

Oh, sure. In terms of the percentage of revenue, absolutely.

Okay. Great. Thanks. And congratulations on the promotion.

Thanks.

Your next question comes from Lou Miscioscia with Lehman Brothers.

Okay, great. Do you think you could go into maybe the inventory explanation a little bit more? Obviously with numbers going down a little bit more from a revenue perspective in the next couple quarters, is -- you know, did you think your customers didn't get the pull-through that they expected for the build rates, or just a -- I guess some more information there would be helpful.

Sure, Lou, let me try and give you a little bit more -- more color. I mean, over the next few quarters we're really not seeing a revenue decline Q1 '05, which we're two quarters forward is a very significant ramp and, you know, Q4's call it flattish to up a little bit. Um, in terms of -- of the -- kind of the inventory correction, made a little bit of a pullback, Chris talked about computing and storage. Consumer was a little softer than -- than expected, I don't think the Olympics is creating the demand for some of the home entertainment stuff that's out there and some of the mobile telephony products are -- our ramp is slower than we anticipated. But -- but as Chris -- Chris characterized it, we're talking about a 2 to 3% change that -- that we -- we expect to fully absorb in our Q4. And I think if you look at -- in our inventory levels, our -- Jabil's inventory levels, we seem to have those under control pretty well. And so between May and last month of our Q3 and the three months of Q4, we should be able to -- to fully absorb the -- you know, 2% to 3% pull-back in some of the segments that Chris mentioned. And then going into Q1 '05, you know, really -- really ramp hard into not only the consumer but the other areas. And if you looked at Q1 '05, really looking at about a $200 million sequential increase in revenue and about half of that is consumer but the rest of it's spread across these other segments. So -- so we're really starting to see very good contribution from -- from new customer wins and also growth across the board of the other segments.

So it sounds like it's an adjustment, maybe a little bit lower expectations, but not a -- not a disaster theoretically.

Not a disaster. I mean, it's the type of thing where we built manufacturing infrastructure for a certain level of demand. We're going to have about 2% to 3% less than we anticipated. That's probably cost the company 20, 30 basis points of -- of contribution and -- and we'll be able to absorb that and go into Q1 '05 with a pretty clean slate. And it's pretty clean inventory position as well.

Okay. Then when you look out to the first quarter, how would you characterize that number? Would you say that that right now it's conservative for -- for obvious expectations or aggressive?

I'd rather not characterize it either way now. I think it's, you know, kind of the middle of the road of what we expect and, uh, you know, in -- in September, when we look around and try and give you a better feel for the full year of '05, we can be a lot crisper on fiscal Q1.

Okay. Last quick question. The 25 million of part sales, maybe you could explain that a little bit.

Yeah. That's just where we have, uh, various components that are, uh -- and alike that there's obligations from the customer side and -- and this is normal course of business where it's recognized as revenue as the parts sales.

I -- I would just add that it's old inventory, it isn't stuff that we bought for Q3, Q4, generally.

Okay. Thank you.

Your next question comes from Parrust Lagobba with BMO.

Thanks, good afternoon. Just a big picture question relating to a chart you put up at your analyst day in April. I'm still wondering if you're expecting the same kind of revenue profile in '04 and '05 from new customers? Just looking at your numbers, it looks like maybe it's being pushed out a little bit or maybe that's the inventory correction you're talking about?

As far as the -- the segmentation of it or -- or absolute dollars or --

Absolute dollars and planning.

Well, as far as absolute dollars for this year, we -- from a range standpoint we had guidance of 6.2 to 6.3 billion, 90 days ago. And if you took the midpoint of our guidance, we're now projecting the midpoint of those numbers. As far as '05, our indications are, you know, we expect to have a very good start in the first quarter of '05 and that increasing contribution with lots of -- of new business for '05. So we're -- we're still, you know, very -- very confident that '05 would be a very good year for the company.

Now, I guess what I'm saying -- I'm asking, Chris, about [INAUDIBLE], the chart where you talked about a billion this year, a billion and a half next year. I'm just wondering if those are still on track and if this noise in the next couple of quarters is, you know -- when the inventory correction goes through, should we still see that profile, or are you changing your outlook on the profile.

No, better -- a good way to look at it is that, uh -- that the -- the amount of opportunity we have in our [INAUDIBLE] with our existing customer base and the new customer wins has not changed at all. And the primary growth driver for us is -- is -- has been the organic driver in terms of the wins and the sector growth in the industry. Now, that hasn't changed at all. And that is 80, 90% of our growth driver.

So you still see by the end of '05, fiscal '05, you should have 2.5 billion of new business.

Well, I don't know really what -- what you're relating that to. And that's a really tough one to answer. I --

I'm relating to a chart. We can take it offline. I'm relating to a chart you presented at your analyst day.

Yeah, I mean --

Still -- I think that's still a very valid outlook on the business. You know, that's an estimate that's made in April for fiscal year that was -- you know, by the last month of that that fiscal year is 16 months hence.

No, absolutely.

And there's certainly a level of imprecision particularly with regard to ramping new programs. [INAUDIBLE] all kinds of things that go bump in the night. But in terms of the overall outlook in terms of the number of new customers and the size of those customers, that's still very much intact.

Thank you very much.

Thank you.

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

A couple of things. Um, in terms of your revenue growth at this point, um, there's been some slowing of the revenue growth or there's anticipated to be some slowing in the revenue growth. Some of that you can attribute to the inventory over the next quarter. Um, but on a year-over-year basis, by the November quarter, you know, maybe it's a 20% year-over-year growth. Do you expect, as -- as we go into the winter and as we get past Christmas and the consumer ramp, that you will have a quarter to-quarter comparison that's more like last year, or what would be a normal seasonal pattern with a more significant downturn sequentially, or are the new programs going to offset the -- the normal seasonality?

New programs should offset that a little bit. But if you're trying to shape fiscal year '05, we're really not provide providing guidance for the full year yet. Um, by next year -- or this fiscal year we did a billion 509 in Q1 and we came in with a billion 492 in Q2, which was a little less, uh -- a little less of a down -- down cycle than we anticipated, although consumer electronics was down 30% for that quarter. So it was right on target. And, uh, with consumer electronics being, you know, 22, 23% of our business, I think we can expect that to be down 30% and -- and the other segments, uh, you know, we'll provide more guidance when -- when that quarter comes up, but, uh, certainly we'll get some contribution from new customers and new programs to mitigate that consumer electronics seasonality.

Can you talk at all in terms of who some of these programs are with? I know we've talked -- you've talked in the past about some server programs that you had and are those still on track?

I don't think we're in a position Jim to really go into detail on the customers on the programs.

Okay.

I think, you know, the point that we're trying to make on this is we're starting to achieve -- and as '05 unfolds it'll be more apparent, that we're achieving a level of diversification where really just not dependent on any particular customer and any particular program, uh, will not be a big variable in our results. So the winners will offset the losers and that's really what we're going for.

So this year you have three 10% customers, assume.

Right.

And do you think that that will -- based on what you're seeing and what you're expecting from the new customers, do you think that that will still be true next year?

My speculation would be that one of those will drop and wind up with probably two 10% customers, but, you know, as we continue to grow the company, you know, the objective would be not to have any.

Okay.

About 10%.

One other question. Are you doing any selling of receivables at this point in terms of -- in order to keep your receivables --

No. Well, we -- we did last quarter, Jim, and I think that was -- was something along the lines of $100 million and then this quarter was maybe one more day.

So it was about a one-day difference with the sale of the receivables?

Yes.

Okay. And that's something that you will continue to do to some extent.

I think -- yeah. The way I look at it, Jim, we're going to keep -- keep it there or along those ranges and see -- see where we go with that. Our near-term opportunity on the sales cycle is another four to five days with inventory and I think our -- our payables cycle actually balanced back out to a higher number of days in the fourth quarter. So there's -- there's some pretty good scope in our fourth quarter to actually decrease our sales cycle and obviously if we do that we'll probably be closer to 16% ROIC instead of 15 in the fourth quarter.

Okay. And that means, also, generation of more cash from operations.

It would be a lot. This -- you know, the steady state we're in now, Jim, is 80 to $100 million a quarter, every day it's worth about $15 million to the company, a n additional five to eight on the sales cycle is worth $75 million to it.

Okay. Terrific.

That hard.

Okay. Thank you.

Your next question comes from Dave Miller with Tradition.

Good evening, guys. Could you just quickly talk about what the plan is or estimated decision on what you're going to do with China either extend the [INAUDIBLE] facility or put in something new?

We have three sites in China today, just for the listeners, Shanghai [INAUDIBLE] and WONGPOO, we're likely to -- we're likely to start a new facility in China, you know, sometime in the next three to six months. Um, probably not -- probably not WONGPOO, but probably in an area that would support Central to Northern China. But, you know, we'll -- as those plans become firmer, we'll certainly let people know.

Okay. And then can you just talk about from a pipeline of business, where you're seeing the most opportunities based on the way you guys supply us with your end-market cycle breakdown?

It -- an earlier caller referenced the analyst meeting, and if you just refer back to the analyst meeting and the new customer segment, it's really well-diversified across all of the industry segments with a notable heavier contribution from the instrumentation of a medical segment. And, again, this was the segment that didn't exist for us, um, a couple, two and a half years ago, and today is a billion dollar business. And most of the customers in that segment, um, are formerly vertically integrated OEMs that are either de-verticalizing, adopting the outsource model, or they are consolidating their fragmented small mom and pop shop type of outsourcing strategy into a tier-one global suppliers. So we -- we think that's a very good indication of -- of trend outsourcing being in great shape. Beyond that, you know, we're seeing customers in military and aerospace, automotive, peripheral, computing and storage really across the board.

And, Tim, when you're talking to particular customers in instrumentation and medical, is the discussion around, uh, keeping the -- the production here in the U.S., or is it talking about moving things offshore pretty quickly?

Like -- like the rest of the industry segments, most of that production wants to be in lower-cost locations. And it really depends on the customer and the type of product and what their supply chain and customer service requirements are. But most of it's going to be in Asia, Mexico, or Eastern Europe.

Okay. Thanks a lot, guys.

Your next question comes from the line of Scott Craig with Morgan Stanley.

Good afternoon. Could we maybe tackle the gross margin question from a different angle, Tim. If we step back a year ago, your gross margins were just over 9%. At that time, you know, we knew you were going to be shifting business to low-cost areas, consumer had already become a pretty good portion of your business. You were looking to build up your systems, box-build capability, and you had hoped to get, you know, more new business rampings. So, you know, at that point, we -- there was no discussion of sort of an eight -- three to eight-six model on the gross margin side, so what changed there, or what dynamic has shifted a little bit to force the gross margins much lower than we thought maybe a year ago?

Well, a year ago, Scott, we didn't provide year out gross margin guidance, you know, in contrast to the -- to the sensitivity in the analyst community, which I respect, we're not a gross-margin focused company and we've always said that all along.

Yep.

And actually a month ago in our analyst meeting, we indicated the long-term objective for gross margins again emphasizing that this is not a metric that we watch closely or obsess on of 8% to 9% would fundamentally satisfy our economic model very well. Focus of the company is growth and operating in income, operating margin and return on invested capital. And those are the metrics we are really driving forward. In terms of the near-term impact of gross margin, again, you know, we've got a little bit of a -- a 2% to 3% demand pull-back, we've got a lot of manufacturing infrastructure we're pouring into place and -- and some part sales all combined probably 40 to 60 basis points of -- of gross margin dilution, which, you know -- which will absorb as we go on. So I think the eight 4 to 8 model longer term, um, is -- is fine and we'll -- will support an economic model on an operating margin basis, which is our -- which is our real focus of -- of -- you know, a high four or 5% type of operating margin longer term.

Okay. And then just a quick question on the capex. I might have missed it. But did you give the '05 estimate on rough roughly how you think the capex is going to play out?

We haven't, Scott. It's something we'll need to look at, but I don't think it's going to be, uh, some -- some huge capex because fundamentally we have a footprint in place for our '05 plan with the exception of a couple of additions that we'll plan to make, which will be minor relative to our overall capital spend. We have just not provided a number.

Okay. Thanks.

Your next question comes from the line of Chris Whitmore with Deutsche Bank.

Good afternoon. I wanted to follow up on the inventory adjustment question. Is it fair to say that the adjustment you're seeing is fairly broad based across multiple customers?

It's multiple customers, yes. Um, and multiple segments. That in terms of being broad based, now it's -- you know, consumer was a little lighter than we expected, computing and storage is a little lighter than we expected, telecom and networking a little lighter than we expected over the next four months.

And just to follow up on that. What -- what gives you confidence that this is only a one quarter or four-month phenomena rather than something that -- that may take a little longer to clear out?

We watch -- we watched our -- our visibility on a weekly basis and, uh, you know, it's -- it looks to us, based on analyzing the data very carefully, looking at our own inventory levels and -- in the forecast and schedules again that we review in detail every week that, uh, this will be relatively straightforward for us to absorb. The macroeconomic environment's good, you know, if you listen to the other guys in the industry talk, you know, demand out there is pretty strong. So, um, we feel like this is -- like we've got this well under control.

And -- and tied to the consumer electronics comment, it sounds like a wireless program is ramping a little slower than expected. What was the issue with that -- with that program ramp?

Um, you know, I really can't speak specifically to -- to programs because I don't want to cut too close to -- to the customer bone, so to speak. Um, but, uh, you know, the overall, the cell phone market's growing pretty well this year. So I think that'll -- that'll bounce back for us, you know, we're launching new programs, sometimes those programs don't launch on time because of design issues and the rest of it and, you know, there's always some market share shifting going up -- on out there at the OEM level that could have a short-term impact as well.

Last -- last question here, just one question on the gross margin. Do you think pricing has -- has had any impact on the gross margin, the change in gross margin guidance here over the past, you know, couple quarters?

Yeah. I think it's a -- it a's a great -- a great question and talk a little bit about. I know people want gross margin to be about pricing but it's really got absolutely nothing to do with pricing whatsoever. I mean, it -- you know, the contrary signals to it being pricing I think are pretty apparent. And it just -- just if you look at -- at the year-over-year results, you know, we've done about $407 million in incremental revenue since Q3 of '03. And the operating margin on that incremental revenue is accretive to our corporate average. So that wouldn't indicate that there's a -- there's a pricing issue. In terms of the macroeconomic environment and what -- what our competitors are saying, that wouldn't indicate that the pricing environment is -- is difficult. You really have to look at the contribution of -- of material and the revenue stream, the move to lower-cost locations. You know, and specific to us, a 2% to 3% lighter revenue stream, pouring out lots of manufacturing infrastructure.

Try and think about -- you know, I think it's hard with all these new programs and stuff we're talking about, but if you were to imagine a billion, billion and a half dollar customer that we were launching for fiscal year '05 and the amount of manufacturing infrastructure that we needed to put in place to accommodate that billion to billion and a half dollar customer, you can start to appreciate that any movement, even -- even a month or two, uh, sideways, um, can result in, you know, a 30, 40, 50 basis point, uh, dilution in gross margins pretty easily. And, uh, what you do is you just -- you just keep at it, keep your shoulder down and get the stuff launched and built and then things come back. So -- so we're -- we feel like we're in a -- in a decent pricing environment and if anything it's getting better and, uh, in the gross margin is really a reflection of -- of long-term trends to lower-cost locations. And, again, I -- everybody on the -- on the call needs to understand that that is not a margin metric that we're obsessed on, again, it's operating income growth, operating margin and return on invested capital and all those are moving in the right direction for us.

Right. Thanks a lot.

Okay.

Your next question comes from Thomas Dinges with J.P. Morgan.

Just a couple quick questions for you most of my questions have been answered. You mentioned the expansions that you're doing to China, Eastern Europe. Can you walk us through kind of, Tim, following on that question you were talking about about adding, you know, when an aggregate would be a billion and a half dollar, you know, new customer across all these programs that you're ramping, um, how quickly those facilities will be up and running and up to volume and is that also, uh, if you could, you know, maybe quantify that a little bit on the impact on what you're seeing on just a little bit of the drag on the margin and then I have a follow-up.

Well, you know, in terms of -- of what the current footprint will accommodate, um, we don't need to build a lot of factories to do that. There is a capacity -- you have to put the people in place and the equipment in the place and you have to put the people in place and all of that. But in terms of the building floor space, you don't really need to build a lot of new factories in order to a accommodate the level of the business for '05 that we're talking about, so that will actually result in better absorption as we go forward. Do you have a follow-up?

Yeah, just a real quick one on the cash cycle. You guys were talking about, you know, long term kind of driving that down, you know, three, four days and -- and one of the -- one of the ways to do it was -- was on the payable side and I was just curious in conversations that you guys have had with -- with suppliers, um, you know, what's been the -- the discussions around that? Obviously nobody really likes to get, you know, receivables stretched on them a little bit, but maybe walk us through how you guys have -- have worked through that negotiation in order to kind of eke out a couple more days or is this just also a function of shifting more production to the lower cost geographies as you guys are doing where typically payable days are a little bit longer, that would help.

No, I mean the payroll days are just a function of -- of one of the metrics we looked in what we call the overall sales cycle for any piece of business that we have. Look at inventory, we look at payables, we look at receivables. As far as our payable dates, the company -- they were probably more 58, 59 days the previous quarter and they're now 54. But our -- our agreements are more along the lines where I think we'll see the payable days go up into the upper 50s in the fourth quarter. Payable days are also a function of the credit, and, uh, you look at the Jabil credit, um, you know, it's a high investment rate type credit so I don't think there's any -- any big issues with, uh, having a few more days for Jabil. It's a -- you know, extremely strong, well-capitalized company.

Okay. Thank you.

Your next question comes from the line of Heather Aloflin with State Street.

That makes it kind of legitimate, I think the timing is suspect, I just read that in C 7. We know -- when I look at -- they sent Forbes Alexander out with the little mini conference in Boston. That's kind of weird since normally Chris Lewis and he goes on a trip.

Operator, operator. Operator. You know, you're listening in on a conversation, so why don't you go to the next question, please.

Your next question comes from Patrick Parr with UBS.

Uh, good afternoon, guys. Um, I guess back at the analyst meeting you had talked about a long-term goal getting your SG&A down below 3% of sales.

Right.

And I'm wondering if you could remind us exactly what the plan is to do that, just greater volume and more production in the lower cost geographies or are there more specific things you can point to?

Well, that -- that's correct, as we -- we scale and grow the company, there's -- there's about -- what we talked about, about 80 to 09% of our SG&A. It's -- to the extent we've put more and more business through this footprint we have, which is -- is there that we go over the last 10 years, I -- what we talked about is, you know, on a dollar revenue we likely only need to add one percentage point or lower as far as SG&A. One thing you can look at is just if you do look at our SG&A, for example, this quarter, uh, you know, what we're doing that, it's actually below 1%. So it's just -- it's just leveraging the company as we go bigger and bigger across a large portion of our SG&A costs that are relatively fixed. And those areas would be what I would call IT accounting, uh, you know, those types of areas that are largely fixed.

Chris, on a -- now that you're going to be around in the role to manage this, I guess this is a better question for Forbes. But, um, on a dollar basis, would one expect that SG&A would tend to be flat moving forward and higher sales would basically drive higher, uh, operating margins?

You know, it -- we -- we look at -- at -- I hate to keep going back to what we look at, but to the extent we -- we add operating margin to our company, we look at it on a return on net asset basis and we look at -- we don't look at the gross margin and the SG&A, we look at the operating contribution associated with that additional dollar of revenue or a hundred million of revenue. We look at it in -- in the -- the total picture between gross margin and SG&A, I don't know, Tim, if you want to --

Yeah. I mean, it is true that -- that -- you know, to the extent that so much of that SG&A pool is fixed, we will leverage operating expenses and deliver higher operating margins as we -- as we grow the business. We -- in '03, we grew operating margins about 30, 40 basis points over '02, '04 we'll grow operating margins about 30, 40 basis points over -- over '03. And '05 I expect we'll grow operating margins again over '04. And again as we control operating expenses, drive revenue and control the capital investments. So, yeah, you're right.

Okay. And I'm sorry, guys, not to beat the gross margin horse to death here, but, um, I guess we used to think in terms of utilization rates rising would give you better cost absorption and that would be a positive for gross margins but obviously there's other things in the mix that are -- that are driving it down. Are you seeing any benefit from higher utilization rates and where are we now, if you can tell us?

We -- we look at utilization on a work-sell basis but to give you an overall utilization number, which is not a -- our primary driver, but it's probably upper 16s heading towards -- probably upper 16s worldwide. And to the extent we would this theory would be either more operating leverage as well. I think that's what Tim's talking about as we move into our fiscal '05. There's just a whole lot of other moving parts that -- that -- it makes it difficult. But, uh -- that's our capacity percentage.

Okay so bottom line.

We model our -- everything we run is on an individual business unit or work sell basis. It's not a metric that is, uh very, very helpful for us in running the business.

Okay. All right. So bottom line, we're looking longer term in an 8 to 9% gross and SG&A ideally below 3%, and returns on capital, you know, in the 20s, I guess.

Yeah.

Yeah.

Okay. Thanks.

Your next question comes from Steven Fox, with Merrill Lynch.

Hi, good afternoon. A couple questions. Um, with regard to telecom, it looked like it grew faster than you were previously expecting, was that customer or market specific, how would you describe that?

Well, I'm -- it's -- the business was just a little bit better and -- I don't know.

I -- I described that as segment-specific, all the customers in that segment had pretty good growth, access products and even -- even long-haul products did okay, so that was really more of a broad-based -- broad-based movement.

And then have you detected anything in China from a business practice standpoint that would suggest, um, some risk to, you know, future growth rates given some of the slowdown measures they put in place?

We have very little of our revenues that's consumed domestically within China. You know, the -- the revaluation of the currency and the efforts of the Chinese government to slow growth down I think are really intended to control the economy and not end up with -- with wild swings and -- to the extent there's a more rational, sane growth profile, I think that's good for us. But, uh, in terms of how much of our output from our China factories is consumed in China, very, very little. Most of it's -- most of it's exported.

One final question. When you look at to next year, I know you don't want to talk formally about the outlook, but 30% operating income growth target, um, macro issues, what would stop you from realizing that -- um, you know, that target in fiscal '05?

Well, uh, technically, I refer you to our 10K for an explanation of risk factors associated with our business. Um, you know, as it stands now, you know, we feel really good about our business and if things were to continue on the current plane, we'd feel great about it. But man oh man, there's so many things that can go sideways, I mean literally everything from war to bad economic trends, so most of them are exogenous, so I think we've -- in terms of our internal controls we're in good shape.

Thank you very much.

Operator, we have time for one more question today.

Your final question comes from Chris Lippincott with Key Bank Capital.

Good afternoon. Just -- most of my questions have been answered, but just in terms of expansion, it clearly looks like we're adding a little bit more capex than you initially thought and it looks like in China, some in eastern Europe. I was wondering if you could touch on how your customers are responding in terms of when you look to expand Eastern Europe, how much farther east you can go, and what kind of customers these are, are they -- is it more of a regional basis and perhaps more sort of the lower mix and also what kind of capabilities are you find finding there?

Most [INAUDIBLE] of the products are the customers that will be the most willing to be pioneers and go as far east as possible, and the higher value add, highly configurable products are less pioneering and more concerned with being close to customers and having the technology within the facility. I mean, you could go -- we are -- we have competitors with plants in Russia today, so that's -- that's not out of -- that wouldn't be out of consideration. I think all of the -- the industry is -- is, you know, Bulgaria, Romania, more Hungary, the Ukraine, plants in Russia. I think that's just a -- you know, a trend over the next 10 years you continue to see and hopefully we'll continue to see economic development in those countries create more consumption and more demand and incomes will rise and -- you know, we'll be able to create actual demand there as well.

And just in terms of the additional capex, are you -- do you think that's more evenly spread between China and Eastern Europe, or is it favorable more -- one region over the other?

Chris, that's a -- a capex -- really throughout the world because we've been growing everywhere. It's not just specific to eastern Europe and China. Where we're at for this year would be more China-based than Eastern Europe, though.

Okay. Thanks.

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