捷普科技 (JBL) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Jabil Circuit conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce Ms. Beth Walters, Vice President of Corporate Communications and Investor Relations of Jabil Circuit. Ms. Walters, you may begin your conference.

Welcome to our first -- fourth quarter and fiscal year 2005 conference call. Before we begin today we would like to take a moment to express our heartfelt grief about the suffering and losses that Hurricanes Katrina and Rita have caused to parts of Louisiana, Mississippi and Texas. While we did not experience any disruption to our business, nor do we have any manufacturing operations in any of these states, we join the rest of the country and the world in offering our assistance to the victims of this devastation.

Now turning to our results here today, during the course of this call we will be making projections and other forward-looking statements regarding future events, or the future financial performance of the Company. We wish to caution you that such statements are just predictions, and that actual events or results may differ materially. We refer you to the documents the Company files from time to time with the SEC, including our most recently filed 10-K, which was November 5th of 2004. 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.

I would like to remind you that this call is being recorded and will be posted for audio playback on the Jabil website in the Investor Relations section, along with the press release and a slide show presentation on our fourth quarter and fiscal year results. We will be referring to the slide show during our presentation today, and I ask you know to refer to slides 2 and 3.

Our results for fourth quarter of 2005 on revenues of 2.037 billion GAAP operating income increased 51% to 86.1 million. This compares with 56.9 million in GAAP operating income for the same period in the prior year. Core operating income, excluding amortization of intangibles for the quarter, was 93.4 million, or 4.6% of revenues, compared to 67.7 million, or 4.2%, for the same period in the prior year. Core earnings per share were $0.37.

On a year-over-year basis the quarter represents a 25% growth in revenue and a 38% growth in core operating profits. On a sequential basis, revenues increased 5%, while core operating income increased 18%.

Turning now to slides 4 and 5. Revenues for the fiscal year of 2005 were 7.524 billion. GAAP operating earnings were 287.4 million compared to 6.253 billion and 216 million, respectively, in fiscal 2004. Core operating earnings, excluding amortization of intangibles and other charges for the fiscal year, were 327.1 million as compared to 261.1 million in fiscal 2004, resulting in a core earnings per share of $1.28 versus $1.02. On a year-over-year basis this represents a 20% growth in revenues and a 25% growth in core operating income and core earnings per share.

On slide 4, turning to a discussion of the results for the quarter and looking at our revenue by sector. As I mentioned, fourth quarter revenues increased 5% from the third quarter, which was consistent with our prior expectations. Production levels in the Automotive sector decreased by 10% from the prior quarter, reflecting seasonal lower levels of production. The Computing & Storage sector decreased 15% from the third quarter. Consumer Products sector increased 20% in the quarter, reflecting the ongoing ramp of existing and new products.

Instrumentation & Medical sector increased 10% from the third quarter, reflecting the ongoing growth across multiple customers in this sector. Comparing fiscal '04 to fiscal '05 in this sector, it grew at 45% organically, and almost 60% including the Varian acquisition, which we completed in March. The Networking sector, levels of productions were consistent with the previous quarter. The Peripheral sector increased by 25% over the third quarter, reflecting expanding sales of LCD projectors. The Telecommunications sector decreased 15% sequentially.

Turning to slide 7. Our sector information for the quarter and the fiscal year in percentage terms was as follows. For the fourth quarter Automotive was 7, for the fiscal year Automotive was 7. Computing & Storage was 11% for the fourth quarter, 12% for the fiscal year. The Consumer sector was 31% in the fourth quarter, 29% for the full fiscal year. The Instrumentation & Medical sector was 17% in the fourth quarter, 16% in the fiscal year.

The Networking sector represented 15% in our fourth quarter, and 15% for the full fiscal year. The Peripheral sector accounted for 8% in the fourth quarter and 8% for the full fiscal year. The Telecom sector was 7% of revenues in our fourth fiscal quarter and 9% of revenues for the full fiscal year. And finally, our other sector accounted for 4% in fiscal Q4, and 4% for the full fiscal year.

For the full fiscal year we had three customers who accounted for more than 10% of revenue. Philips accounted for 14% of sales, Nokia was 13% of sales, and Hewlett-Packard was 10% of sales. Our top 10 customers accounted for 65% of sales overall.

I will now turn the call over to Forbes to review our balance sheet.

Good afternoon. Please turn to slide 8. In absolute dollars inventory increased by 79 million as compared to the third fiscal quarter. This increase was despite two additional days of inventory of 39 days and 9 turns, swapping (ph) a pre-positioning of inventory for our first fiscal quarter of '06, an estimated revenue growth of 13%. Days sales outstanding were consistent with the prior quarter at 42 days.

Accounts Payable days expanded to 64 days at the end of the fourth fiscal quarter, an increase of 5 days over the prior period. The Company's sales cycle was at its lowest point in our history, 17 days, an improvement of 3 days over the prior quarter.

Our return on invested capital increased to 19% from 18% in the previous quarter. This represents an improvement of some 26% over the same period a year ago.

Please turn to slides 9 and 10. Cash and cash equivalents, 796 million as compared to 681 million at the end of the third quarter. Cash flow from operations was approximately 173 million in the fourth quarter, our 19th consecutive quarter of positive cash flow.

Our capital expenditures during the quarter were approximately $93 million, higher than previously indicated as a result of building investments in India, China and Hungary being completed ahead of schedule. Capital expenditures for the fiscal year were approximately $256 million.

Depreciation for the quarter was approximately 45 million, amortization 7 million. EBITDA in the quarter was approximately $138 million. Depreciation for the full fiscal year was approximately $180 million. And EBITDA for the fiscal year was $507 million.

Also, during the fourth quarter we are pleased to note that Standard & Poor's recognized Jabil with an investment-grade rating of BBB minus. Now making Jabil the only U.S. EMS provider with an investment-grade rating from all three ratings agencies.

In fiscal year 2005 we have generated approximately $590 million of operating cash flow, while growing the business by 20% over the same time period, demonstrating good control of our working capital management. As we move to fiscal year 2006 and beyond, we continue to be well-positioned to generate incremental operating cash flows.

On a year-over-year basis we continue to maintain efficient control in capital deployed, while increasing revenues and our operating earnings. Our net capital investment at the end of the quarter was $1.67 billion. From this base we are currently generating approximately $560 million in annual EBITDA. That is a cash return of approximately 33%.

Our business model demonstrates the returns on invested capital in excess of our weighted average cost of capital, and strong cash flows are sustainable and predictable. We are on track during the course of fiscal 2006 to move such returns on invested capital returns to 20% and above.

At the beginning of fiscal 2005 we laid out a plan of continuing to capitalize on the trend to outsourcing by first defining (ph) our industry sectors, expanding our service sets, and adding numerous customers in a climate of slow end market expansion. We're gratified to see the results of this plan in our fiscal '05.

During the course of the year we have added numerous customers across multiple sectors, added multiple design-related relationships, demonstrated revenue expansion of 20%, earnings expansion of 25%, cash flow from operations of $590 million, and exited the year with returns on invested capital of 19%.

If you know please turn to slide 11. I would like to review our capacity and give you an update on our operations. In regard for capacity in our global footprint, our business outlook continues to show consistent to increasing production levels across all geographies. As we enter fiscal '06 we shall be challenged in numerous plants with ramping requirements, but are in a position to have adequate capacity.

As I discussed earlier in the call, our capital investments in fiscal 2005 were related to existing plants and additional expansion in China and Eastern Europe, specifically, Hungary and the Ukraine and India. With our Wuxi China and Ranjangaon, India facilities are positioned to be available a full quarter ahead of plan. These plans were accelerated to support production demand levels we are seeing from existing and new customers.

In the latter portion of our first fiscal quarter of '06 we expect production shipments from our Wuxi facility. We are well-positioned to see production levels continuing to ramp throughout fiscal '06 to support customer demand across multiple sectors. In India we have added approximately 175,000 square foot of capacity in Ranjangaon. Production started during our fiscal fourth quarter, a full quarter at head of schedule. We are well-positioned in fiscal '06 to support customers in the sectors of Consumer, white goods (ph) and Instrumentation & Medical.

During the fourth quarter we also began production operations in our new 160,000 square foot facility in Szombathely, Hungary to support our repair and warranty operations in Europe, with another 60,000 square foot of capacity being available by the end of the calendar year to support new and existing customer relationships.

Our investments in fiscal 2006 are expected to be related to the above locations and existing plants, as we continue to see increasing levels of production. We estimate capital expenditures to be in the range of 250 to $350 million for the fiscal year. Depreciation is estimated to be in the range of 180 to $210 million.

I would now like to take a moment just to discuss stock-based compensation, specifically, the expensing of such compensation. As of the first of September 2005, the commencement of our fiscal year 2006, the Company is required to adopt FAS 123R and expense all sums associated with any stock-based compensation. The costs associated with such compensation are expected to be in the range of $0.09 to $0.11 in our fiscal year '06, and $0.03 to $0.06 in the first fiscal quarter. This range is consistent with previous years had expensing of stock compensation been required. Such costs shall be excluded from our core earnings guidance to you, as we wish to provide you with an alternative method for assessing operating income, earnings and earnings per share from what we believe to be our core manufacturing operation.

Now I would like to give you an overall business update, and if you return please to slide 12. Full fiscal year 2006 guidance. The Company's growth in fiscal '05 was achieved against the backdrop of slow end market expansion. As we move into fiscal '06 this backdrop has changed little, nor has our strategy of positioning the Company to capitalize on the trend to outsourcing. The level of integration and product ramp activity is increasing in numerous factories as we expand our relationships with existing customers across multiple product platforms and in industry sectors to allow a similar growth rate in fiscal '06 to that which we have delivered in fiscal '05.

Our current estimates for fiscal '06 are revenue growth in the range of 15 to 24% over fiscal '05, or approximately $8.7 billion to $9.3 billion. And core earnings per share in the range of $1.55 to $1.65, reflecting earnings per share growth of 22% to 31% over fiscal 2005.

For sector purposes we estimate fiscal '06 to be as follows, Automotive 7% of revenue, Computing & Storage 12%, Consumer 30%, Instrumentation & Medical 18%, Networking 14%, Peripherals 8%, Telecom 6%, and other 5%.

In fiscal '05 we added design resource and expanded our relationships with new and existing customers. We did so with great success. In fiscal 2006 we shall build on this ongoing success in design-related programs. As a result, we currently expect our research and development costs to be approximately $12 million higher than in fiscal '05, or approximately $36 million for the full year. The tax rate is estimated to be 16%, consistent with that of fiscal '05.

Please turn to slide 13, our first quarter of '06 guidance. We estimate our first fiscal quarter of 2006, our November quarter, to be consistent with the guidance we provided to you 90 days ago. That is a revenue range of 2.2 billion to $2.4 billion, or a sequential growth in the range of 8 to 18%. This revenue growth had been driven by our usual seasonal ramp in the Consumer Electronics sector, continued healthy double-digit growth in the Instrumentation & Medical sector, and steady growth across most of our remaining industry sectors.

Core EPS is forecast to be in the range of $0.40 to $0.44. As a percentage of revenue, we estimate operating margins to be in the 4.6 to 4.8% range. Research and development costs are expected to increase by approximately $2 million to $6.7 million in the fiscal quarter, reflecting our ongoing success in design-related programs. Capital expenditures are estimated to be in the 60 to $90 million in the quarter. And the tax rate is expected to be 16%, consistent with that of the fourth quarter.

I you now please turn to slide 14, addressing revenues by sector for the first quarter. Our Automotive sector is estimated to increase by 5%, reflecting seasonal higher level of production. Computing & Storage sector is estimated to have an increase in production levels by 5% also from the third quarter. The Consumer sector is expected to increase by approximately 30% in the quarter as we enter the peak demand season for consumer products.

Instrumentation & Medical sector is anticipated to increase by 10% in the first quarter, reflecting the ongoing growth of assemblies within this sector. Networking is expected to increase by 5% in our first quarter. The Peripheral sector and the Telecom sector are both estimated to have consistent levels of production with the fourth fiscal quarter.

Now I would like to hand the call over to Tim.

Good afternoon everyone. First of all, I would like to thank our people for their diligent efforts this past quarter, and for completing a remarkable year on a positive note. Inside Jabil we tend to spend almost all of our time talking about the things we want to do better, as we should. But now and then it is okay to take a look back and appreciate for a few moments what you have accomplished. Thank you for a job well done.

Fiscal 2005 was our third consecutive year of outstanding growth. In support of this growth we added sites, customers, services and capabilities throughout the year. I will take a few moments to provide an update of what we have been up to, along with thoughts about the coming year.

We recently commenced operations at Wuxi, China and Ranjangaon, India, our newest green field sites located in critically important markets. We also continued to be enthusiastic regarding our Ukrainian site, which commenced production earlier this year. Our fulfillment site in Memphis is expanding rapidly to accommodate our growing order fulfillment business, while our medical, instrumentation, and defense and aerospace customers have growing needs from our other U.S. operations. Our mass production mainstays and Guadalajara Mexico, Penang, Malaysia, Huangpu, China, and Tiszaujvaros, Hungary are successfully focusing on improving their value proposition to deliver higher quality at lower cost.

Our product development capabilities are continuing to benefit from investment around the world in an environment of increasing demand. We will add approximately 10 basis points to our R&D spend in fiscal 2006, as demand in this area continues to grow. We are finding an increasing number of opportunities to help our customers rapidly bring a broader range of products to the market at a lower cost.

Over the past year we added approximately 40 new customer relationships. And we expect these new relationships to contribute about 10% our of overall revenue in fiscal 2006. These new relationships reflect our emphasis on diversification as about one-third are in the Instrumentation & Medical markets, about 20% are in the Computing & Storage sector, 15% are in the consumer electronics, with the balance evenly split among the Automotive, Peripheral, Defensive and Aerospace and Communications sectors.

The pipeline of opportunity look strong enough to support sustained growth through fiscal 2007 and beyond. We see growth in demand for higher complexity supply chain and order fulfillment services in addition to full product development and traditional production services. The trend is clearly for customers to demand a complete end-to-end solution, and we are in an excellent position to compete on this basis.

We hit some positive notes in fiscal 2005. Cash flow from operations increased 31% year-over-year. Our return on invested capital hit 19% in fiscal Q4, and our return on the incremental $163 million in invested capital was 35%. Year-over-year we are improving core operating income 17 basis points, and leveraged over 5% core operating income on the incremental 1.3 billion in revenue.

Looking forward into fiscal 2006 the song remains the same. At the midpoint of guidance we are expecting $1.5 billion in revenue growth. 92% of this growth will be organic what about 8% coming from the full year contribution of our acquisition. Of the 92% organic growth we expect end market growth to provide no more than the 3 to 5% it contributed in fiscal 2005. We expect methodical improvement of our financial return metrics while we grow our business, ascending our position among the best of the S&P 500 companies.

That is it for my prepared remarks. I think, Beth, we can open up to questions.

Operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS). Brian White with Kaufman Brothers.

Great quarter. Could you talk a little bit, maybe Tim, about end market trends, especially in light of some of hurricanes recently? And also discuss maybe the outsourcing and some of the opportunities you see for fiscal '06? What markets look the most promising for fiscal '06 in terms of outsourcing?

We have not discerned any economic slowdown as a result of the hurricanes. I'm not sure when that would show up. With the consumer, I guess the highest level of concern would be the seasonal consumer ramp up. Right now all of that is on track. I don't think this year at this point -- it is a little too early to make a call. But we're really not seeing any slowdown as a result of hurricanes.

And then looking respectable perspectively at outsourcing opportunities, just as a reflection of new customer wins we have had in fiscal '05, Instrumentation & Medical, Defense and Aerospace all look very strong. We are seeing quite a bit more outsourcing in the Consumer Electronics segment. Computing & Storage looks very strong for us in the next year. And also, from a service standpoint, I think we will be doing a lot more product development -- full product development for Consumer Electronics and Computing & Storage customers. And we will see I think a greater emphasis on order fulfillment and full supply chain management of complex products. So really all in all a pretty healthy market.

Lou Miscioscia with Lehman Brothers.

Maybe if we could just drill in on China a little bit. It sounds like you opened Wuxi. Can you compare that maybe a little bit to the Shanghai location? And will the two sides differ? And how does the demand look? I know that Wuxi is obviously just opening up here?

Wuxei is a couple of hour drive from Shanghai. I think it is about 100, 120 kilometers away. The site will be a mass production site. We will enjoy very low costs. It is in a free trade zone. Shanghai is a little higher cost operation. It handles higher complexity products, and it is also the site of corporate, our Asian corporate headquarters, and also our Jabil Technical Services Divisions headquarters. So the guy that run Jabil Design Services lives there, works there. It is our largest design site worldwide today. So there's a lot of NPI, new product development, design work going on there. I think the idea would be to have Shanghai continue to serve its role as higher complexity, higher mix product launch, and then Wuxei will be in the portfolio of mass production China sites.

Could I flip over to Forbes for a second and ask him about the stock compensation in the sense of, maybe you could explain as to why it might be skewed towards the first quarter in like that some investors might start factoring this in actually to ESP -- you mentioned earlier that there was actually no change from prior years. Would you expect that there would be a change, i.e., less stock options given out as you go forward?

The shewing for the first quarter really is a result of some performance-based stock compensation that was awarded I think two or three years ago now. That had an opportunity, a measurement base to affect at the end of the first fiscal quarter, hence the skewing to the first quarter. As it got invested this quarter then it moves out another year. So that explains that.

In terms of our guidance for the full fiscal year, as I said, it is consistent with our stock compensation award policy that we've had in previous years.

I think we should point out that there is no final plan here. We are still working out the details. But I think it is reasonable to have an expectation somewhere in that range. So I think it is a number where -- don't freak out about it. It is a material number, but it isn't something that I think people should be worried about it distorting our financials. And it is relatively consistent, and I think Jabil, we haven't settled on the components of long-term incentives at this point, but that options probably will not only be reduced in importance, may even be eliminated in their use, substituted with other forms of long-term incentives such as performance-based restricted stock and stock appreciation rights and those types of vehicles. But again, this plan is not formalized. We will provide crisper guidance and more detail when that is finalized.

Last thing, I know you have an analyst meeting here in New York Thursday, if you want to give a 20 second highlight as to what we might expect or look forward to?

You've got to show up to find out.

If we told you now, it would spoil the surprise.

Okay. Looking forward to it. Thank you.

There won't be a major merger announcement, so --. I hope some of that is what you are expecting.

I was getting you the opportunity for a commercial. Thank you.

Steven Fox with Merrill Lynch.

Tim, last quarter you talked about the margins the new business was coming in. Could you provide an update on what type of margins you are bringing in new business in, and what you expect for the coming fiscal year in that?

We don't provide any guidance on incoming business margins. I think what we have talked about is if you looked at the Company's incremental revenue growth and the operating margins earned on that incremental revenue growth, the margins have been accretive to the corporate average. For example, in fiscal 2005 we posted about $1.3 billion in incremental revenue, on which we earned an excess of 5% operating income. We would expect in fiscal 2006 to continue to improve, be accretive to our corporate operating margins. And I would expect that to be anywhere from 15 to 25 basis points, depending on mix of production and actual volume levels.

Just two quick financial questions. On this inventory turns, is it still reasonable to expect your inventory turns to hit double digits? And then where did your off-balance sheet receivables stand at the end of the quarter?

To address your first question, yes, it is still reasonable to expect double-digit returns. Excuse me, double-digit turns in terms of inventory. Absolutely, and that is a focus for us. In terms of the receivables, they remained level with the previous period of 175 million.

Forbes, can you just expand on the turns. What is holding -- what do you think is holding back the inventory turns from doing better?

I don't think there's anything holding them back, particularly this quarter. We are pre-positioing for a ramp -- at the midpoint of guidance, 13%, the upper end 18%. That is -- what -- 250, $300 million worth of revenue and cost of goods sold. I'm actually very young pleased with the way we're positioned as we move into the first fiscal quarter, and we should see double-digit turns as we move into '06.

The margins, free cash flow, return on invested capital don't suggest we really need to do anything with inventory turnover. At 9 turns we are at a 19% return on invested capital. Free cash flow is over $100 million. So cash flow from operations very healthy. We really don't have to do anything with inventory turnover, but we would like to get it up in double digits, and we think we can do that.

Matt Sheerin with Thomas Weisel Partners.

Tim, it sounds like the Varian acquisition has worked out very well. If you can give us an update on that, and also discuss any incremental opportunities that gives you in terms of capabilities and attracting additional customers?

We're very pleased with the Varian acquisition. Synergies have been great between the two companies. And I think from a strategic standpoint, looking at Instrumentation & Medical segment, very high complexity, scientific instrumentation products, and really being able to access I think a fairly rich market of what today is fragmented outsourcing. To look at many of the OEMs in Defense and Aerospace, Medical Electronics, Instrumentation, they are outsourcing pockets of 5 to $50 million with EMS manufacturers that have one site, are regionally based. And having a business model that can support that type of customer well and profitably is a key advantage, having also the capability to service billion dollar relationships with very high-volume customers. So the ability for us to successfully and profitably operate alternative business models and manufacturing approaches for a very diverse customer base, I think is a real advantage for Jabil, and a real advantage for us looking forward to generate significant profitability.

Is most of that manufacturing shorter or long term? Is it U.S.-based or will there be opportunities to utilize your global footprint?

Yes. You're asking a couple of questions there and they are not mutually exclusive. There will be continuing opportunities for U.S. production. Some of those relationships are large enough that they may leverage into a global footprint or a global relationship as well, and take advantage of our low-cost footprint. We certainly bring the ability to have procurement leverage and reduce material costs, as well as access to a low-cost global footprint. It is a real advantage to those customers that historically have been trapped in a U.S. or regional model. We liberate them to have a more diverse global model and access to lower material costs.

Just as a quick follow-up you're building a nice pile of cash. Are you looking at other acquisition opportunities, niche acquisitions either in that market or related markets?

We are always looking for acquisitions. We have an investment in an India-based EMS provider, for example. And we're looking, but I think you could look at our acquisition appetite to be bite sized and not extremely large. And at some point I think one of the things that we are validating is that this is a sustainable growth cash flow model in business. And we're generating more cash then we consume in our business organically, and probably more cash than we need to even including bite sized acquisitions. Sometimes in the next fiscal year we will make decisions on a return of capital to shareholders, what form that will take. We will talk about when that decision has been made. But I think the good news is that we have a cash flow engine here that is generating more than is necessary to support the business growing it 20, 25% a year.

Thomas Hopkins with Bear Stearns.

Tim, just still I think the number one question I get from everyone is trying to really get comfortable with both the sequential and year-over-year growth rates in Consumer. Obviously, you have ramped some new business with Nokia. But if I look at these I think you mentioned 40 new relationships, and then I think you talked about 10% of your '06 growth coming from some of these new relationships, and you talked about the Consumer piece. Is there any expansion at Phillips on the existing platforms you have? Are there new platforms to Phillips? Are there other consumer customers that you'll be talking about outside of Phillips and Nokia?

That started with concern about the Consumer segment and it kind of evolved into a what is going on with Phillips question. Take a look at Phillips results. They are a great customer. We like Phillips a lot. I think we have a long-term relationship there. I don't think there's anything that causes us to be overly concerned with the Phillips relationship. The Consumer segment overall is growing dramatically. I think 30% sequentially and year-over-year it has grown very well. So help me a little bit with what the concern is?

Yes. Just trying to understand the year-over-year and the sequential growth rates in the Consumer segment. I'm specifically asking if some of the platforms you have -- are you expanding from say board assembly to full system assembly? Are there new platforms? How do we explain that, because obviously the global growth rate I think in consumer electronics is not 30%.

Right. It is a outsourcing trend for sure. Thanks for cleaning that up. We are moving from printed circuit board assembly in many cases to full system integration, and really into full product development and product design. I think in the next 12 to 18 months' time you'll see us out there with a full product development capability offering to consumer electronic companies that really kind of accelerates the growth purposes in that area.

And there is a big appetite in that market. It isn't a traditional EMS appetite in some cases and you have to have very strong capabilities. But, you're right, it is moving from the more pedestrian printed circuit boards assembly into full product build, global supply chain management, and now it is moving also into a product development design phase.

That would help explain some of the growth rates, because I think if people look at an an individual program and they look at unit growth and they look at the price reductions in consumer platforms and then they try to look at some of your growth rates, and that would help explain some of it.

Also, there is a healthy customer list in the Consumer segment. While Phillips and Nokia are two of our larger customers, we've got -- we're entering '06 with a healthy stable, if you will, of some 11 -- 10, 11, 12 customers in that sector that really have some great growth prospects.

Just, Forbes, back on the inventory, one of the things I noticed it looks like inventory dollars were up, I don't know, 10 to 11%. I know you talked about the ramp and the seasonality with the next quarter up 12 to 13%. But when I look last year I think you grew about -- it looks like you grew about 12.7% sequentially in November. And you didn't have -- I think your inventory rose about 5% proceeding that. So this looked like twice the amount on a dollar basis. I don't know if it is meaningful or not. It could be the nature of the programs. But I am just trying to understand it a little better.

I don't think it is really meaningful that particular statistic. But we are well-positioned. We do have a number of programs that continues to ramp through the quarter and beyond into September, October. I don't think it is a meaningful statistic. I think we are very comfortable with the inventory levels and pre-positioned for the first fiscal quarter.

Great. Congrats on a great quarter.

Alex Blanton with Ingalls & Snyder.

Tim, I would like to go back to this question of outsourcing growth. I recently saw an estimate from the Street that there could be as much as $5 billion in new outsourcing from OEMs in 2006. And yet you're telling us that you're going to have almost 1.5 billion yourself, or about one-third of that. It seems to me that people are constantly underestimating the amount of outsourcing growth that we could have. Could you comment on that and as to why that is and expand on that a little?

I don't think they look hard enough to find out who is growing. There are some great growth stories in our industry -- Jabil, there's a couple other U.S. guys. There's a couple of Asian guys that are growing a lot. And I think from a $5 billion growth in '06, I think it will probably be even more than that. Most estimates I have seen is that outsourcing will grow 10 to $15 billion. So our $1.5 billion of that seems relatively modest when you scale it that way.

I think people have a hard time separating tax spending from secular trend outsourcing. That is fundamentally what you have to do to understand how it is that we have the three years that we have, and actually the 25% growth rate we have had for the last ten years. It is not end markets obviously. And the only thing it can be is some type of secular movement. It could be market share gains. We're not gaining that much market share. It could be raising prices. We're not raising prices. It's got to come down to there's something else going on here that is supporting this Company's growth.

And, yes, it's execution. Yes, it's good financial management. It is having a great team of people. But we are taking advantage of a really strong trend to outsourcing, and it has absolutely spread to other industries. You take a look at our pie chart today in the diversified segments that we're in and it has really spread to virtually every segment that has electronic content in its product -- is outsourced today. And the choices are just becoming simpler and simpler to make that outsourcing is a better alternative to trying to build it internal. And we're finding bigger and bigger profits of stuff that even in mature industries -- for instance, in computing and storage there is a lot of outsourcing that has gone on there for subassemblies and that type of thing. But you look at the full order fulfillment capability in the end-to-end solution, even in mature industries there is opportunity to expand outsourcing.

Now in a related question, on July 1 next year all of the electronic products, or with a few exceptions, in Europe will have to be manufactured without lead and without certain other materials that are being prohibited. And some of those regulations have actually spread to some states in the United States. And it may be that small and medium-sized companies won't have the capability to make the changes in the processes that will permit manufacturing -- of lead free manufacturing. And so they would have a bigger incentive to outsource than ever before to someone who can do it, such as yourself. All of the EMS companies have been preparing for this for years. So could you comment on that? Do you think that is going to be a significant factor in your new business -- the green laws, the new green laws for next year?

I think that is a great point. I see it happening. We are clearly assisting our customers and preparing for so-called Rohar (ph) directives and requirements, and that is expanding our business. How big an emphasis that will be to growth next year, I am not really sure. It is clear though that EMS providers that don't have the global bandwidth, that don't have the capital to invest in the technology it takes to develop lead free processes, and really understand what it means and what your responsibilities are in the context of global supply chain management are going to have a very serious handicap computing going forward.

That means you'll get more business from the smaller EMS companies as well?

Yes.

Bernie Mahon with Morgan Stanley.

Just a quick question on one of your end markets. The Computing & Storage that was a little weak in the August quarter, and the guidance looks a little weak. But you had talked about that as an opportunity for growth. Can you just talk briefly about what is going on there?

It was marginally weaker than we had expected. I think 5%, which equates to about 10, $12 million in revenues, so nothing really material going on there, just a little weaker than we had expected. But as Tim have commented there's plenty of opportunity as we move into fiscal '06 in that area and others.

I apologize. When I talk, I think in terms of longer-term buckets of time. I'm really thinking about the next three or four quarters, and what is in the pipeline, and what opportunities we have with existing and new customers. And I think that will be -- that sector will exhibit some pretty decent growth in '06.

But for the August and the November quarter was a weakness -- I know was a slight weakness. Was it more in the server side or storage side, or can you provide an granularity there?

We can't really discuss any of our customers' ramps or product sales.

Michael Walker with First Boston.

Continuing on the theme of end market specifics, I want to talk about telecom a little bit. We all know about Lucent stuff going over to Solectron. But that is -- it does kind of stick out as the one end market that you actually look like you want to shrink for the fiscal '06 time frame. Is there no outsourcing upside? Do you demand kind of weakening on a permanent basis there? What is going on with telecom outside of the Lucent stuff?

It's not many places for us to go. Wireless infrastructure would be -- some people classify that differently than others. That would be about the only place that may have some growth in the next year. The technologies have gone to a point where long-haul optics are -- there's so much capacity out there it is just hard to imagine that market is going to expand. We have some very good customers in that segment. We like it a lot. And we will stick with the customers we have and see if we can help them build market share. I will let the chips fall where they may.

Then just secondarily, the 3 to 5% of your growth for next year coming from demand equaling basically what had happened to you in fiscal '05. Do we read into that to say that you are kind of looking basically for a pretty lackluster demand environment as well? And if demand does get stronger then it would be essentially gravy to your growth rate at this point?

I think we're looking for '06 to be kind of a repeat of '05, very mid to low single digit end market growth.

Thomas Dinges with JP Morgan.

Just a quick one, Tim, to kind of stick on the trend to outsourcing question. Obviously, you guys had done very well, especially if you look at sort of this last quarter's numbers on kind of the more non-techish area where it seems as if there's a lot more wide-open landscape for outsourcing. In the areas where you historically have been very strongly centered, and Jabil has been historically associated with, is the trend still there from a standpoint of moving people as one other questioner from just simple board assembly to system assembly?

Is the impediment of still having to purchase fiscal assets from the OEMs still there? And is maybe that one of the reasons generally speaking why the lack of the really, really large deals has not been there, not just with Jabil but across the industry over the last year or so? And then I have a quick follow-up.

Traditional markets -- I guess I would look at traditional markets being computing and communications. And from an end market standpoint computing and communications has been relatively sleepy for the last few years. I don't think there's any large impediments to additional outsourcing because of physical assets in those industry segments. I do think there is significant pockets of outsourcing yet to come. More mature markets are moving to an end-to-end model with a higher degree of velocity, so there is more outsourcing to come.

But I don't believe that physical assets is the primary impediment. Big deals, and we have been saying for long time that there is too much capacity in the world. And it would be great to have it rationalized, but a lot of the capacity is -- most of the world's capacities is with OEMs and most of that is in the wrong spot. So what we've got to do is we've got to have a very, very competitive world-class, low-cost global footprint. And the primary focus of our business is to have people outsource to us and fill up the factories that we build. We built a lot of green field factories in the last couple of years, and they are great sites, and offer a very, very competitive solution. You can write scenarios where operating from a high-cost location in an OEM factory makes sense, but it is hard to really rationalize that when you look at the economic benefit of outsourcing to a Company like Jabil with a low-cost footprint. We're not pursuing big asset deals.

And then just a real quick one for Forbes on the inventory side. I know you talked about getting to 10 turns or so forth, still a very long-term goal. In terms of just for this particular quarter, any particular weighting on the increase in inventory, more so towards finished goods as some of the programs that you're doing might entail a little bit more finished goods -- stocking ahead of the quarter, or was it a little bit more on the component side, maybe some buy ahead in case of some shortages here and there? Just a little more color there would help.

Sure. Actually, it has relatively consistent throughout the fiscal year with -- I can actually tell -- give you -- I have got some numbers here actually. Raw materials ended up about 70% at the end of the quarter. Work in process 18%, and finished goods 12. And actually throughout the fiscal year we intend to run at 12, 13% finished goods. So pretty consistent.

Operator, we have time for one more question please.

Jeff Rosenberg with William Blair & Co.

I guess the first thing I wanted to ask was another question about the 40 new plus customers and the 10% of sales you expect them to be in '06. Are those a lot of customers that came from the Varian acquisition or not? And then maybe some sense of how ramped up to that revenue target for '06 these customers already are?

I would save 20, 25% came from the Varian acquisition, and all of them have some level of production today.

I guess when you look at the incremental 1.3 billion or thereabouts that you're looking to add in revenue in '06, it sounds like a good chunk of that is coming from this group of customers. Is that the right conclusion to draw?

No, because some of them had production levels in '05. And I think the way that -- to look at that is at the midpoint of guidance it is a $1.5 billion increase that is coming from a variety of customers. Some of these new customers actually started production in '05. Some of them are in production today starting this quarter. I don't think there's vulnerability that these customers won't come to the fore. And I think the way to look at it is our '06 guidance is kind of stuff that is in the barn. Things can always go bump in the night, but we're not really speculating as to what might happen other than there's the same visibility issues everybody has. But we don't need to land a big new customer to hit the numbers in Q3 and Q4 and that type of thing.

And if you will back the tapes on our guidance in '04, we said $0.90 to $0.96. We did $1.02. And then last year we said $1.00, $1.24 and we did $1.28. We're starting with a range of $1.55 to $1.65. That is really based on things that we know about. To the extent that things turn a better from an end market perspective or we land some deals that contribute in '06, and that would be tough. Really if we plan any deals now -- we're really working from a management team standpoint. We're more focused on making fiscal 2007 turn out than fiscal 2006. But the extent that things go a little bit better and we won in deals in '06, that would be additive to what we know about today.

If I could add some color to Tim's comment. The Varian acquisition, all those customers are associated with that, will only add about 100 to 150, 175 million incrementally over fiscal '05. So you do have a strong revenue growth engine across the multiple sectors. As I said earlier Consumer sector now has 11, 12 customers in it. We're entering fiscal '06 with Instrumentation and Medical with some 26, 30 customers in there. So really very well-positioned in that regard.

Thank you for joining us today for the call. As mentioned earlier on the call, we're having an analyst meeting in New York on Thursday at the New York Stock Exchange. If you're interested in participating in that you can RSVP to the Jabil Investor Relations website. It is investorrelations@jabil.com.

The meeting will be held from 9:30 to noon on Thursday. And if you're interested, it will also be webcast if you can't participate in person. Again, that information can be found on the Jabil website. And I might also mention that Jabil management will be participating tomorrow on CNBC's Squawk Box at 7:30, and also on Bloomberg TV at about 8:15. So thank you very much for joining us.

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