捷普科技 (JBL) 2006 Q4 法說會逐字稿

Good afternoon. My name is Jodie and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil Circuit fourth quarter and fiscal year 2006 conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

I would now like to turn the conference over to Ms. Walters, Vice President of Investor Relations and Communications. Please go ahead, ma'am.

Thank you. Welcome to our fourth quarter conference call.

Joining me on the call today are President and CEO, Tim Main, and our Chief Financial Officer, Forbes Alexander.

This call is being recorded and will be posted for audio playback on the Jabil Web site in the Investor section along with today's press release and a slide show presentation on the fourth quarter and fiscal year. The slides complement the presentation today and you can join me now by going to the slide show and turning to Slide 1.

Our call today may contain forward-looking statements including those regarding our unaudited fourth quarter and fiscal year 2006 net revenues and certain other financial measures, our currently expected first financial quarter, 2007, and full fiscal year 2007 net revenues, the anticipated date we will file our Annual Report on Form 10-K, the anticipated outlook for certain aspects of our business and our long-term outlook for our Company, our industry, our business sectors, and our realignment of our manufacturing capacity and the related costs and timing.

Statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include but are not limited to the finalization of our fourth quarter and fiscal year 2006 financial statements and the audit thereof, including those portions relating to our historical stock option grants, the results of our review of the recently issued guidance on historical stock option grants issued by the Office of the Chief Accountant of the Securities and Exchange Commission, the results of the review of our past stock option grants being conducted by a special committee of our Board and governmental authorities, the accuracy of the stated dates of our historical option grants and whether all proper corporate and other procedures were followed, the impact of any restatement of financial statements of the Company or other actions that may be taken or required as the result of such reviews, risks, and costs inherent in litigation.

Included in that related to the Company's stock option grants or any restatement of the financial statements of the Company, whether or when we will realign our capacity, and whether any such activity will adversely affect our cost structure, ability to service customers and labor relations, our ability to effectively address certain operational issues that have adversely effected certain of our U.S. operations, changes in technology, competition, anticipated growth for us and our industry that may not occur, managing rapid growth, managing any rapid declines in customer demand that may occur, our ability to successfully consummate acquisitions, managing the integration of businesses we acquire, risks associated with international sales and operations, retaining key personnel, our dependence on a limited number of large customers, business and competitive factors generally affecting the electronic manufacturing services industry, our customers and our business, other factors that we may not have currently identified or quantified and other risks, relevant factors and uncertainties identified in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005, subsequent reports on Form 10-Q and Form 8-K and our other security filings.

Jabil disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Last week, the Office of the Chief Accountant of the Securities and Exchange Commission publicly issued general guidance for public companies concerning various issues that have arisen in connection with the recent widespread evaluations by public companies of their historical stock issuance processes. Jabil is in the process of evaluating this guidance.

It is premature to determine whether or not the application of that guidance to the Company's circumstances will result in it recording any additional compensation expense or that it will cause the Company to determine that it would need to restate financial results for any prior period.

As previously announced, the Company's Board of Directors appointed a special committee of the Board to review the Company's stock option grant practices in response to derivative lawsuits filed concerning certain stock option grants. In addition, a similar derivative lawsuit has been filed in federal court as well as reported class action securities fraud lawsuits containing historical statements the Company has made with respect to stock options.

The special committee of the Board is in the process of conducting its investigation and analysis of the claims asserted in the derivative action. Jabil is cooperating fully with these ongoing events of the Board's special committee, the SEC's informal inquiry on stock option grants, and a subpoena from the U.S. Attorney's Office regarding certain stock option related material.

The Company does not anticipate having any additional comment on this topic until its makes its next filing with the Securities and Exchange Commission.

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

Thank you, Beth.

I'd now ask you to turn to Slide 2. Revenue for our fourth fiscal quarter of '06 was at the upper end of guidance at $2.955 billion. On a year-over-year basis the quarter represented 45% growth in revenue and on a sequential basis revenues increased by 14%.

Please turn to Slide 3. Revenues for fiscal year 2006 were $10.267 billion, representing a 36% growth over fiscal 2005.

Now I ask you to turn to Slide 4. Fourth quarter revenues increased 14% over the third quarter.

Production levels in the automotive sector decreased 4% from the prior quarter reflecting seasonal lower levels of production. The computing and storage sector increased by 14% over the third quarter as a result of higher production levels than we had forecast.

Consumer products sector decreased by 5% from third quarter. The instrumentation and medical sector increased by 7% from the third quarter.

In networking sector, levels of production there increased by 141% from the previous quarter. This increase reflects the results of our partnering with one of our communications customers in new, lean manufacturing initiatives.

The peripheral sector decreased by 10% from the previous quarter and finally, the telecommunications sector increased 6% over the third quarter.

Now I ask you to turn to Slide 5. Reviewing our sector information for the quarter and the fiscal year in percentage terms, they were as follows. I'll cover the fourth quarter first.

Automotive was 5%, computing and storage, 12%; consumer, 31%; instrumentation and medical, 17%; networking, 18%; peripherals, 6%; telecom, 6%; and other was 5%. For the full fiscal year, the automotive sector was 5%; computing and storage, 12%; consumer, 36%; instrumentation and medical, 17%; networking, 13%; peripherals, 7%; telecom, 6%, and other, 4.

On a year-over-year basis we have added approximately $2.75 billion worth of revenue. With our computing and storage sector growing 27%, our consumer sector growing 68%, instrument, excuse me, storage, 51%, networking, 16%, peripherals, 27%, our services sector, 34%, while automotive and telecom were consistent with the previous year.

In the fiscal year two customers accounted for more than 10% of revenue. Those were Nokia with 20% and Philips had 12%. Our top ten customers accounted for approximately 66% of our revenue.

Please now turn to Slide 6. Reviewing selected ratios and balance sheet items, the Company's sales cycle in the fourth fiscal quarter fell by five days to the lowest level in our history to 14 days. Inventory turns for the quarter were consistent with that of the third quarter at eight.

Cash and cash equivalents were $774 million as compared to $855 million at the end of the third quarter. The lower cash balance reflects the use of $200 million to repurchase shares and the payment in June of our first quarterly dividend of approximately $15 million offset by cash generated from operations.

Our capital expenditures during the quarter were approximately $95 million, at the higher end of our previous guidance reflecting the continued investment to support forecasted future demand. Capital expenditures for the fiscal year were approximately $280 million.

With regard to our stock repurchase, on the 28th of June 2006, our Board of Directors authorized the repurchase of up to $200 million worth of shares of the Company's common stock. On the 27th of July 2006, we completed this share repurchase program, repurchasing approximately 8.4 million shares an average price of $23.76 per share.

As we move into fiscal year 2007, we are well positioned to continue to generate cash flow from operations in excess of our investing activities.

As we discussed on our last earnings call in May, based upon the strength of our expected future cash flows, and as a commitment to working capital discipline, we announced a quarterly dividend. The second such dividend was announced on August 2, 2006, $0.07 per share. This was paid on September 1, 2006.

I'd now like to review some of our operational and capacity activity. The three operational execution challenges we identified last quarter played out much as we anticipated during the fourth fiscal quarter.

All are contained and on track to resolution as we identified and discussed in last quarter's earnings call. These items will diminish in terms of materiality to our overall operating performance as we move through our fiscal 2007.

Now I'd like to update you with regards to our restructuring activity. On our earnings call last quarter, we'd advised you that we intended to realign our manufacturing capacity in certain higher cost geographies to properly size our manufacturing sites with current market conditions. We have now begun consultation with employees during the quarter and our Board of Directors has now approved such plans.

Out of respect for our employees, their families and their representatives, statutory and consultation periods required, we will not be providing details as to specific plant sites under consideration and discussion. However, during the fourth quarter, we did accrue costs of $84.6 million in connection with our restructuring plans, along with a deferred tax valuation allowance totaling $35.6 million.

As we discussed last quarter, we estimate that the realignment of capacity could result in approximately 200 to $250 million of charges. The cash costs of such charges remains an estimate in the range of 150 to $200 million over the course of the next two fiscal years.

Discussions with our employees and their representatives are underway and we are complying with all statutory consultation periods required of us.

Based upon the information available to us at this point in time, we estimate that we shall record additional costs through the course of fiscal '07, with the majority of these estimates being recorded towards the end of the fiscal year. Cash outlays associated with these activities are estimated to occur in the second half of fiscal '07 and throughout fiscal 2008.

Now turning to capacity. Regards to capacity, in our global footprint, our business outlook shows increasing production levels in Asia and Eastern Europe. As a result in Eastern Europe, we plan, during the course of fiscal 2007, to add additional capacity to our existing site in Poland and expand our operations in the Ukraine.

In Poland we plan to add approximately 300,000 square feet of capacity. We estimate that this capacity shall be available by the end of our third fiscal quarter of 2007.

And in the Ukraine, we shall be adding approximately 275,000 square feet with this capacity anticipated to be available in the early part of our third fiscal quarter of 2007. The estimate for the total cost of these building expansions is expected to be approximately $36 million.

Our overall investments in fiscal 2007 are expected to be related to the above locations and existing plants as we continue to see overall increasing levels of production. We estimate capital expenditures to be in the range of 200 to $250 million for the fiscal year.

I now ask you to turn to Slide 7. We'll review our fiscal year 2007 revenue guidance.

The Company's growth over the past few fiscal years has been achieved against a backdrop of slowing market expansion. Our growth coming from our ability to capitalize on the continuing trends are a source.

We see little change in outlook for our upcoming fiscal 2007. Our current estimate for fiscal 2007 is revenue growth of 20% over fiscal 2006. We estimate from a sector perspective that the fiscal year shall be similar in makeup to that of fiscal 2006.

Now I ask you to -- excuse me. [We start] the first quarter '07 revenue, we estimate our first fiscal quarter of 2007, our November quarter, to be in a revenue range of 3.1 to $3.3 billion, or an increase of 5 to 12% from the fourth fiscal quarter. This revenue growth is being driven by our usual seasonal ramp in our consumer sector.

Now I ask you to turn to Slide 8, please. Reviewing the sectors for the first fiscal quarter, our automotive sector is estimated to have consistent levels of production with the fourth fiscal quarter. Our computing and storage sector is also estimated to have consistent levels of production.

Our consumer sector is expected to increase by approximately 30% in the first quarter as we enter the peak demand season for consumer products. Our instrumentation and medical and networking sector are both expected to be consistent with the fourth fiscal quarter.

Our peripherals sector is estimated to increase by 5% in the first fiscal quarter. And finally, the telecom sector is estimated to decline by 30% in the first quarter as a result of the short-term demand reduction from an existing customer.

Now I'd like to hand the call over to Tim Main.

Thank you, Forbes.

Revenue for the quarter was on plan as were other important elements of our business. Excluding the impact of lean inventory initiatives during the quarter, organic revenue growth was approximately 4 to 5%.

Revenue growth in our November quarter will be 33% year-over-year, 27% excluding the impact of lean initiatives. We expect fiscal 2007 to be another solid year of growth across all dimensions of our business.

From a segment perspective, computing and storage, consumer, instrumentation and medical, networking, peripherals, and our services group all expect revenue growth well above end market growth rates in fiscal 2007. Our diversification strategy and deeper penetration to each of our segments are contributing to a greatly enhanced value proposition for customers and a sustainable growth engine for our Company.

On a quarterly run rate basis, we are now the third largest EMS provider in the world. During fiscal 2007, growth will continue to come principally from the trend to outsourcing, expansion of our services, and market share growth.

Geographically, we will continue to expand our low cost footprint in Eastern Europe and Asia. Functionally, we will continue to grow our end-to-end supply chain services, including configure to order services, product development, and electromechanical capabilities. These services and product offerings will increasingly be tailored to specific market segments, differentiating Jabil solution from other offerings in the marketplace.

We suffered through some growing pains in fiscal 2006 and highlighted some distinct operational issues impacting our fiscal Q3 2006 results. We are confident that we have these previous issues under control and expect them to steadily diminish in importance to our results for the first half of fiscal 2007.

Our rationalization plan is also proceeding according to plan. The net result of these actions, combined with our continued revenue growth, should deliver solid results for fiscal 2007.

Finally, I regret not having the ability to provide full financial details of the quarter due to the continued review of the Company's stock option grants, practices, and our accounting for the same. We are fully cooperating with the review process and assisting in every way we can.

As part of the ops review process, we've restored over 340 backup tapes through forensic computer experts. Searches of this restored data and other documents have generated a database of 175,000 documents with over 850,000 pages of data. There have been extensive interviews of numerous, relevant persons involving several nationally recognized law firms and accounting experts.

Over 13,000 option grants were issued in the period being reviewed, and this has entailed thousands of man-hours and time and over $3 million in expense to the Company in the fourth quarter alone. The investigation is not under management's control, but at this point we believe we should be in a position to file our 10-K on time. That is our objective.

I can promise you all this, as soon as the review process is complete and we're able to publish GAAP numbers, we will do so and we will schedule an additional call to review those results.

Operator, we are now prepared to take some questions on the material just presented.

[OPERATOR INSTRUCTIONS] Your first question comes from Steven Fox with Merrill Lynch.

Hi. Good afternoon. A couple questions.

On the top line, can you talk about networking and consumer trends, specifically, if you took out the Cisco lean transfer, what was networking looking up sequentially or was it flat? And why was consumer down 5%?

Yeah. With regards to the lean initiative, sequentially that was up approximately 8 or 9%. So we take out the lean initiative quarter-over-quarter.

In consumer, consumer was down principally due to some inventory corrections from several of our customers principally in Europe and primarily in home entertainment products.

And then, talking about the full-year guidance of 20%, it sort of assumes a slowing growth rate as you go through the year based on your first quarter outlook. Can you talk about the level of conservatism in saying 20% and what could turn that into a higher number, I guess?

Your initial observation is correct. What I would point you to and caution investors on is that our first fiscal quarter is typically, you know, it's a very large quarter for the Company, particularly with the element of consumer business we have, you know 36% last year and continued growth in that sector. So we're seeing the seasonal demand.

The shape of our year may turn out better than we're looking at here in terms of this 20% guidance. Very much dependent upon how we see consumer demand responding in the latter part of the November time payment, December and January.

Over the last couple of fiscal years, we've seen that consumer business -- I refer to it as the tail, but certainly holding there in terms of demand profiles for the Company. But certainly, from where we sit now, 20% seems like a very reasonable number with the visibility we have and there's opportunities to go out beyond there.

Really, Steve, you look at fiscal 2006 and it was really an extremely hot year, I mean the kind of revenue growth we put up was extremely high. It hasn't been that high since probably since the dot com communications explosion.

We started 2006 with an expectation that was quite a bit below where we added up. I mean it was about a $9 billion year, we ended up at 10. The previous year I think our initial guidance was $5.7 billion, it's 6.2, we ended up at over 7.

I think given the macroeconomic trends, I think it's appropriate to be relatively conservative and the focus this year probably will not be on revenue growth. The management focus this year will be earnings growth, capital efficiency, and making sure that the revenue that we've generated predictably delivers better profitability and return on invested capital than we had in '06.

Fair enough. And then one last question.

I know you can't talk about specifically about gross margin trends but, and you said that the operational issues are improving as planned. Outside of that, was there anything else impacting gross margins that you could sort of preview?

I don't think so. I think, again, we're not a gross margin focused company, but even from an operating margin standpoint, what's happening with these operational issues behind us, one of the dynamics in our business we've talked a lot about is that we have a lot of production in low cost locations, that continues to increase. Most of the revenue growth is occurring in low cost locations.

In addition to that, the material concept in our business continues to increase. Okay? And what that's going to mean is that gross margins are going to fluctuate based on how much material content's in our business, but it is still our intent to have operating margins improve over time through leveraging operating expenses, SG&A expenses and being very efficient in the capital that we use in the business.

Fair enough. Thank you very much.

Your next question comes from Lou Miscioscia with Cowen.

Thank you.

Tim, I was wondering if you could maybe help us out a little bit with the, I guess, not putting out financials and going back and mentioning the new SEC guidance. I guess going back to the analyst meeting, I would have thought if there was no, I guess, financial impact because there was no backdating of options that the new guidance from the SEC wouldn't really make a difference one way or the other, or is it the concern that some, I guess, options do have to be adjusted somewhere?

It would be grossly inappropriate for me -- by the way, I think this is the first time I think the operator's got your name right, so I think that's a good omen for all of us for fiscal '07.

It'd be very inappropriate for me to comment on the investigation and why there's an expense or there isn't an expense or why there's delay. One of the reasons I pointed out the number of documents that have been generated 175,000 documents, 850,000 pages of data, 13,000 option grants issued in the period being reviewed, $3 million in expense to the Company. The scale of this review process is very comprehensive and it's not under our control how fast it moves.

Part of the review process is an independent committee that has their own schedule and we're not in control of that. And when that review process is complete, we will publish numbers as rapidly as we can.

I can only promise you this that we, as soon as those results are available, we will schedule another call and we'll go through the financial results in detail, including an explanation of anything that's come out of the review process. And until that time comes, then we cannot comment.

Okay, fine.

Maybe we can switch over to, I guess, the three issues last quarter. I know you did have a comment that they should be diminishing in the first half. Can you maybe give us a little bit more help on the quarter that just finished?

And also you had talked about getting back to 4%, I think it was operating margins in the November quarter. Are you still very much on track with your prior thoughts after the last quarter and basically everything would be close to what we expected, or any other comments here would be helpful.

Lou, in terms of the operational issues we identified last quarter, I think it's fair to say that we're on track in that regard. With regards to comments in terms of guidance in terms of income or margins, I'm afraid I can't answer that question.

Okay. Thank you for taking my question.

Your next question comes from Shawn Harrison of Longbow.

Hi. Good afternoon.

My first question just has to deal with the restructuring actions and maybe you could possibly now go into a little bit more detail in terms of the time line for the savings to fall to the bottom line, the 40 to 50 bips you talked about last quarter.

Yeah, absolutely. As we commented, you know, we have accrued costs associated with the realignment or restructuring activities in the first fiscal quarter. The key word there is accrued. Those are accrued on the U.S. GAAP.

There were no cash outlays in the fourth quarter with regards to that restructuring activity and we don't anticipate that really much of that will be de minimus in the first half of the fiscal year '07. In other words, those activities will not commence until the back half of the fiscal year i.e. you know, personnel will not be leaving the Company until that timeframe in fiscal Q3 and [our], you know, wrapping up capacity. So it will be the third fiscal quarter and we'll start to see more of the full effects of that in the fourth fiscal quarter of 2007 and beyond.

We'll also see some impact there in 2008 as we move through that fiscal year. It's a little bit early to talk about yet depending on consultation and how we move through this and the satisfactory requirements and such like, but certainly, you start with the impact in our fiscal Q3 and the full brunt of that in fiscal Q4 of '07.

My second question has to do with the use of cash in '07. Just in terms of beyond capital expenditures maybe where you'd look for acquisitions in 2007 either by a geographic basis or maybe end markets.

Our acquisitions are relatively opportunistic and pointed to expansions of the customer relationships, geographic footprint of services. From a geographics footprint standpoint, we're clearly interested in Asia and from a service standpoint, I mentioned configure to order services, design, product development and electromechanical capabilities, those would be areas that are of interest to us.

And of course, anything that's rational from a customer relationship standpoint and expansion, helping OEMs convert from a vertical to an outsource model, we always have a high interest in that provided there's a rational economic model and not a lot of high cost capacity in the deal. We always keep our rifles nice and shiny, well oiled and loaded with ammo and if we see good opportunities come up, we have the benefit of a good balance sheet and plenty of cash and, more importantly, cash generation above what our capital needs are to be able to fund rational acquisition activity.

All right. Thank you.

Having said that, I mean the organic side of this business is very, very strong and we don't need to make any acquisitions for there to be excellent growth, certainly well above end market growth rate. So we feel very positive about the prospects going forward.

All right. Thanks a lot.

Your next question comes from Jeff Rosenberg with William Blair.

Hi.

First question I want to ask is I'm still trying to figure out what the lean. I think you had said that you expected it to add about 150 to $200 million per quarter and it looks like it was more like $300 million and the delta there I don't think is explained by the organic growth. Could you talk a little bit about whether that was higher than you thought it would be?

Sure, Jack, let me try and explain that. So the number you quoted there, remind me, that was, you said, 150 to 200?

Yeah, that's what I had in my notes.

Okay. So that's correct. That is on a, how can I phrase it, that's on a, in effect of a 90-day period. If you recall in the third fiscal quarter, we removed I think approximately, or we didn't recognize approximately $50 million, rough numbers, of revenue or inventory associated with that lean initiative in our third quarter.

So you saw our networking sector, I don't have a number in front of me, but it declined quarter-over-quarter.

Yeah, in fact, it was down about $60 million, I think so you're saying--

50 to $60 million, right.

Start to finish then you're up more like $260 and that makes more sense.

Right. Does that make sense to you?

Yes it does.

Because [inaudible] back into the previous quarter. It gets you closer to the number.

Yes. No, that makes more sense.

So we did see some sequential growth there, you know, of 8, 9% on, you know, if you strip out that lean initiative.

Yeah, now it gets a lot closer.

And then can you just talk about whether or not the working capital worked out the way you'd expected it to? In other words, the amount of inventory you added and was it completely offset by increases in payables?

Yeah, it was. It worked out as we expected. As you correctly point out, we did assume inventories associated with that lean initiative and correspondingly the payable matched to that, yes it did.

Okay.

And then my other question was, I don't know if you gave us this directly or just give us the pieces to know what free cash flow was if we back out the share repurchases, the dividend and then maybe if, I don't know if there was any cash element of the restructuring, but if you net all that out, what was free cash flow in the quarter?

I'd love to Jeff, but unfortunately my hands are tied in that regard given that we're not in a position to provide any GAAP or operating numbers to you. I apologize.

[Inaudible] cash number but you have to start with earnings to get cash flow.

So I apologize.

Okay. Yeah, I thought maybe we could just do it from the balance sheet. Okay. All right. Thanks.

Your next question comes from Michael Walker of Credit Suisse.

Thanks.

Just one more question on the margin front, I probably know what the answer is. But you had said that you would be able to do at least 4% operating margins in the November quarter. Are you able to continue to endorse that?

Well, we are -- our hands are kind of tied on that. I can't, we can't give you core guidance without giving you GAAP guidance, and that is the issue. And to go back and even validate something I've said before would be a validation of one metric over the other.

I'd just tell you this. I mean I think the business is on track, it's moving in the direction we thought it would move, we don't see any major distortions to our business, and we feel pretty good about the track that we're on and the trajectory we were on. And as soon as we are in a position to provide you GAAP earnings, we'll go through all the core numbers as well and bring you completely up to speed.

Okay.

And then just on the telecom guidance, down 30% sequentially, I heard you say that you're seeing demand reduction, but it's still a pretty sharp reduction. I want to make sure that it's not like a lost customer or a program that you walked away from or anything like that.

Yeah, Mike, no, absolutely not. You know, there's no loss of customer. That customer is a good customer of ours, a strong customer.

We haven't walked away from any piece of business. We are their provider for their product set, but they did see a demand reduction in their business outlook in our first fiscal quarter and certainly from the visibility we have, that makes nice recovery of [inaudible] fiscal '07 and beyond.

Okay. And then just a final question so I can understand the strictures that are on you guys right now.

So Tim, back at the analyst day in May, which was after the whole options thing had started, you showed us the dates of the board logs when the options were recorded. You were pretty adamant at the time that there was simply no backdating that took place.

I just want to make sure I understand correctly that you're not necessarily walking away from that position, but you're saying that you're simply not allowed to have a position on whether backdating took place or not?

I'm allowed to have a position because I'm in control of my own speech process and thought process, but at this point the review process isn't complete and it's just inappropriate for me to comment until that review process is completely done.

I think you should appreciate and help your investors appreciate that what's contemplated as a review process at one point in time can change. And the number of documents that have been reviewed and the number of people and man-hours gives you an appreciation for the comprehensiveness and the scope of this review process.

So that's not changing anything I've said in the past, but for me to validate or update my comments would be inappropriate until the review process is complete.

Okay. Thanks a lot.

Your next question comes from Matt Sheerin of Thomas Weisel Partners.

Yes, thanks. Just one quick question.

You talked about the expenses related to the whole option issue amounting to about $3 million. Is that something that's going to flow through the income statement?

Yes.

So we'll see --

And that $3 million is for the fourth fiscal quarter. Obviously, we're now into our first fiscal quarter and the inquiry is ongoing, or the investigation is ongoing. So we'll anticipate further costs.

But you can't -- can you give us an estimate at this point?

I cannot at this point. No, I'd say the investigation is pretty much out of management's hands so I'm unable to do so.

Okay.

And just if I can take another stab at the operational issues. It sounds like things are going as planned but could you rank for us in order of the most progress of the three issues, if you could give us an idea of which issues are going better than others?

Yeah, I think our services business is the most rapid turnaround. The Americas issues are in progress and the rationalization process is actually a part of improving profitability in the Americas, but the specific issue we identified is something that takes a little bit longer to resolve and in the electromechanical tooling operation, we said on the last call would take at least the first two quarters of fiscal '07 to completely resolve or at least to have it diminish in materiality to our financial results. And that's on track, but that's the longest pole in the tent with regard to those three issues.

Okay. Thanks very much.

Your next question comes from Brian White of Jeffries & Company.

Forbes, I'm wondering, could you talk a little bit about inventory and the sequential increase that you saw there?

Again, my hands are tied a little bit in that regard in terms of the inventory dollar growth, but our turns are about eight, we did anticipate what we discussed bringing on inventory from the lean initiative which was in the range of $150 million. But certainly, the revenue was about eight turns for the quarter.

Okay. Would we expect, inventory to go up in the November quarter, sequentially?

You know, that would very much depend upon how we see the consumer forecast and volumes as we move into the November period, but certainly I would hope to hold that flat to see some of those, you know, burn that off. As I say, we're prepositioning for some healthy growth here in our first fiscal quarter but, certainly, we should hope to see that level off and just come down a little bit.

One of the things I would point out in terms of why I can't give you specific dollar numbers around inventory tables and receivables is the cash cycle did improve by five days in the quarter, so there was some good working capital management during the course of the period.

Okay.

And just, Tim, if you look at the different market in '07, what market do you think will grow the fastest?

Of course, for Jabil, even with the lean initiative, we'll see on an absolute dollar basis, the networking segment grow quite a bit during the year. I would expect to see organic revenue growth in that segment even excluding the lean initiative.

I think we'll still see very strong growth out of the instrumentation and medical segment. I think we'll see strong growth in consumer, and I think in computing and storage, which is growing as a segment, we'll see high double-digit or high teens, low 20s type of year-over-year revenue growth in that segment.

That happens to be a very strong segment for us and we're making significant progress in enterprise computing and storage and is a great segment for us.

And when you talk about 20% growth for the year, what are you assuming in terms of end markets?

It's a fairly conservative view of end markets. It doesn't discount the recession.

Okay. Thank you.

To state the obvious. We're looking for very moderate, slow to moderate GDP kind of growth.

Okay. Great. Thanks.

Your next question comes from Shawn Severson of Raymond James.

Thank you. Good afternoon.

Tim, could you just give a little color on the organization itself and maybe how, you know, has this whole options thing has been incredibly distracting? I know you said you spent a significant amount of man-hours on it, but have you felt that it's so weak in any other part of the organization from a distraction standpoint, or do you think it's been pretty well isolated that people not involved in the day-to-day operations of the Company?

We try to keep that pretty well isolated from rank and file employees. They didn't have anything to do with this and they've got a full-time job as we do, and I don't think it's dispirited the organization, either.

Jabil's kind of a stand up and fight organization culturally and when this stuff started to happen, my in box was just full with hundreds of e-mails from folks pledging support and continued commitment and I haven't felt that waiver at all. So I don't think it's dispirited.

I think people are a little bit frustrated as investors are and analysts are that it takes as long as it has to fully resolve, but other than that, I think people have gone about their business, along with customers and everybody in our organization, to continue to run the business as we have in the past. Taken up a lot of the executive management's time, but that's just something you have to put up with.

And you found everything from a compliance standpoint, you know IT systems and the information that you need, I assume this was a pretty good test of the IT systems in terms of financial reporting and such. Has that been, you know, any additions or changes you wanted to make there or has it been pretty solid?

No, I think that's been pretty solid.

I concur, pretty solid.

Thank you.

Your next question comes from Yuri Krapivin of Lehman Brothers.

Good afternoon, everybody.

Could you comment on your supply chain situation? We keep hearing from different companies that the supply chain overall remains tight and lead times for certain components are still extended. What has been your experience lately?

I think generally speaking, lead times are relatively stable. From a supply chain management standpoint, logistics costs we expect will continue to increase as energy and fuel prices go up.

Lead times extended a little bit earlier in the year, they've stabilized somewhat. There are certain organizations and memories and other devices that are in periodic short supply, particularly this time of year when the consumer electronics business is starting to ramp-up. But I think it's a very maneuverable, livable component marketplace.

Right. And can you provide an update on your relationship with Philips? Your original agreement with them expires soon and I believe you're negotiating new terms with them?

I think the Philips relationship is in good shape. The expiry of the initial agreement will occur in October.

We would expect Philips to continue to be a significant customer from Jabil. I don't expect any significant disruptions of our business. I think that investors should take a look at the value of incumbency when they look -- or think about what the ramifications of the initial contract period will be.

Generally speaking, companies that have engaged in that type of activity have enjoyed a continuing relationship following the expiry of the initial agreement. That's been true of our competitors as well as Jabil.

So we would expect volumes to fluctuate based on how Philips does in the marketplace and how we do competitively and that can change from time to time, but we think Philips is a great company and a good customer and I think we'll have a very solid business relationship with Philips in '07.

Thank you for the comments.

Okay.

Your next question comes from Tom Dinges of JPMorgan.

Hi. Forbes, a quick one for you. Just point of a clarification here.

The CapEx that you're expecting for next year, 200 to $250 million, that's inclusive of the roughly, call it, $40 million that you're going to spend for the two buildings, is that c correct?

That is correct, yes.

And is the function of why CapEx seems a little bit lower than I think some of us were expecting is that some of the equipment from some of the sites you're downsizing can be moved to other sites on an as needed basis and therefore not as much new equipment that you're having to purchase?

There's some of that but, really, if you look at our capital expenditures in fiscal '06, we're at approximately, what, $280 million or roughly about 10% of the additional revenue we added. That's typically a good measure in terms of our capital expenditures.

So our guidance we've given, we're adding just over $2 billion in fiscal '07 or '06. So it's in the range there. Last year we did add capacity in China, a site in India as well, which we roughly, in terms of building costs, [no], in the same type of region, 35 to $40 million.

And getting more, better productive capacity and utilization of existing assets in place.

And then just a quick one for you, Tim, it was along the lines of the distractions perhaps that have been caused by what's been going on with all the investigation and so forth, but a slightly different way to ask the question, which is, as you guys look forward, you're now at the end of your fiscal year, obviously, this is the time of year where you go through and evaluate compensation and the mix that you're going to have between cash compensation, equity-based compensation and various forms of equity-based compensation.

Is it fair to say that there's a shift inside your organization there that perhaps weights that a little bit more towards the cash compensation now given some of the things that have happened, or is there really expected to be no change? Because essentially, if it's optioned-based or it's cash-based, it's all falling through the income statement now.

That will be in the end up to the compensation committee and the Company. We have not established that yet. I don't anticipate any major shifts. The people on the management team, I think, would rather have equity than cash.

I mean cash is good, but for many years, the philosophy of the Company has been that the primary objective of management should be weighted to long-term shareholder wealth and long-term value of the Company. And we're big believers in that and I don't think any of these short-term issues that are very important for us to deal with and require our attention, however, I don't think any of that should detract from how we've incented management and how we've run the business in the past.

We want to grow operating income, we want to have efficient use of capital. We want to grow cash flow, we want to build our market share and we want the senior management team in as tight alignment with shareholders as they can and the best way to do that is to have their compensation weighted significantly to the equity side.

Okay. Thank you.

Your next question comes from Todd Coupland of CIBC.

Good afternoon, everyone. Just a quick question on consumer.

The growth that you saw in this quarter and anticipating, I guess, for next quarter and 2007, can you comment on how much of that is market growth versus outsourcing or is there still a long way to go in terms of some of the ramp-up in outsourcing you've seen with a couple of these key customers?

Now, I think this is, in terms of our sequential experience this year, it's principally existing customers and seasonal patterns with those customers as opposed to a major new customer moving into the revenue stream.

There are new customers that I think will contribute significantly in 2007 and will be probably a material part of our results when we look at Q1of '08, but they'll be home entertainment products and other consumer electronic products that will be commencing during the course of 2007 and we would expect it to be significant contributors to 2008. But this particular year, it's principally going to come from existing customer relationships.

Okay.

And then is there any -- you talked about the growth that you expected in computing and storage. Is there any additional color there you can provide in terms of market growth or new programs, market share wins, new outsourcing, just talk a little bit about that?

I think demand has been pretty good. And as consumer spending has been fairly flattish, but enterprise spending overall has been surprisingly robust, in my opinion, all right, from patterns that we've seen in the past so I think the end market strength has been a little better than I originally anticipated when I looked back at the beginning of the year.

Having said that, we are engaging in configured order services there, we're doing more product development work. We have a couple of new customer relationships that are showing significant growth, and we really love that sector.

It's a very rich segment in terms of the number of services that Jabil can bring to bear. Complex design, complex NPI, printed circuit board production, full scale product integration, configured order services, complete end to end supply chain solution and I think we have a very attractive offering from a service standpoint for that space. And we're going to place a lot of emphasis in that area over the next couple of years.

Great. Thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Your last question comes from Jim Suva of Citigroup.

Great. Thank you very much.

Tim, can you give us a little bit of clarity on, as you're working through the resolution of the electromechanical tooling item, is that more of a function of getting additional business in the door or gaining share at existing customer or operational issues, or how do you exactly work through that challenge?

It's primarily a loading issue now. I think we know how to build the product, how to make the product. It's principally a loading issue now and I think we'll get that resolved and as we go through Q1, Q2 and into Q3, we'll deal with that issue and I think we'll probably stop talking about it because it will no longer be a material item to our results.

Okay.

And for that loading, can you reach it with existing business, or are there new businesses will fill into that loading requirement?

We could reach that loading with the existing customers in the site. We don't have to perform any miracles in terms of finding new customers and creating business development miracles. We can do that with the existing customers for the site today.

Okay. Thank you, everyone.

Okay. Thank you.

Thanks, everyone, for joining us on the call today. And as Tim has mentioned several times throughout this call, we will look forward to sharing our full results when we are able to publish them. Thank you.

Thank you. This concludes today's Jabil Circuit fourth quarter and fiscal year 2006 conference call. You may now disconnect.