捷普科技 (JBL) 2007 Q1 法說會逐字稿

Good afternoon. My name is Crystal and I will be your conference operator today. At this time I would like to welcome everyone to the Jabil first quarter fiscal year 2007 conference call.

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

Ms. Walters you may begin your conference.

Thank you. Welcome to our first quarter earnings call. Joining me on the call today are President and CEO, Tim Main, and Chief Financial Officer, Forbes Alexander.

The call is being recorded and be 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 first quarter. You can follow our presentation now with the slides that are posted on the Web site and begin with Slide 2 now, our forward-looking statement.

During the call today we may make forward-looking statements including those regarding our unaudited first quarter fiscal year 2007 net revenues and certain other financial measures, our currently expected second quarter fiscal quarter 2007 and full fiscal year 2007 net revenues, the anticipated completion of the new sites and acquisition of Taiwan Green Point, 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.

These 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 fiscal year 2006 financial statements and the audit thereof and our first quarter fiscal year 2007 financial statements and a review thereof including those portions relating to our historical stock option grants, the results of and review of our past stock option grants being conducted by a special committee of our board and governmental authorities, and the review of our historical recognition of our revenue and any other issues by our audit committee with the assistance of independence legal counsel, 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 our financial statements or other actions that may be taken or required as a result of any such reviews, risks and costs in litigation including that related to our stock option grants or any restatement of our financial statements as a result of the evaluation of our historical stock option practices and financial statements, 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 consummate the tender offer for Taiwan Green Point and satisfy the conditions to closing the tender offer and subsequent merger, and our ability to successfully address the challenges associated with integrating this acquisition. Our ability to take advantage of the perceived benefits offering customers vertically integrated services, our ability to effectively address certain operational issues that have adversely affected 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 securities filings.

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

If you could now turn to Slide 3 I'll turn the call over to Forbes Alexander.

Thank you, Beth. Good afternoon.

Revenue for our first fiscal quarter '07 was in the midpoint of guidance at $3.224 billion. The quarter represents a 34% growth in revenue on a year-over-year basis and a 9% on a sequential basis.

Please now turn to Slide 4. Turning to a discussion of revenue by sector for our first quarter. Production levels in the automotive sector increased 5% from the prior quarter, slightly above expectations but consistent with seasonal patterns in previous years.

The computing and storage sector increased 2% from the fourth quarter consistent with expectations. The consumer products sector increased by 25% from the fourth quarter, somewhat lower than expectations as end market demand was somewhat softer than initial expectations.

The instrumentation and medical sector decreased by 4% from the fourth quarter as production levels and certain transaction processing and task automation process categories were below our expectation. Year-over-year this sector enjoyed 31% higher revenue than in the comparable fiscal 2006 period. We remain positive on our growth prospects for this sector.

Our networking sector levels of production increased by 8% from the previous quarter as production levels were strong throughout the quarter. The peripheral sector increased 19% over the previous quarter reflecting strong seasonal demand.

And finally, the communications sector decreased by 23% sequentially, as an anticipated short-term demand reduction from an existing customer rebounded earlier than we'd anticipated.

I'd ask you now to turn to Slide 5. Our sector information for the quarter and fiscal year percentage terms was as follows: Automotive, 4%, computing and storage, 11%, consumer, 36%, instrumentation and medical, 15%, networking, 18%, peripherals, 6%, telecom, 5%, and other, 5%.

On a year-over-year basis we have added revenue of $820 million with all sectors except automotive and telecom enjoying revenue growth of over 30%. The quarter marks our fifth consecutive quarter of year-over-year revenue growth above 30%.

For the quarter, three customers exceeded 10% of revenue and our top ten customers accounted for approximately 68% of revenue.

Now I ask you to turn to Slide 6, reviewing our balance sheet. The Company's sales cycle in the quarter expanded by nine days to 23 days due to a high level of days sales outstanding and a lower level of accounts payable outstanding.

Our inventory days declined slightly for the quarter. Inventory turns for the quarter were consistent with the previous quarter at eight.

Cash and cash equivalents were $658 million which compared to $774 million at the end of the fourth quarter. Our capital expenditures during the quarter were approximately $72 million.

I'd now just like to update you in terms of our restructuring and rationalization plans. During the first quarter we continued to manage our overall rationalization plan consistent with the comments we made in previous quarters.

Our initial estimates were for total restructuring charges of 200 to $250 million. We now expect to be the high-end of that range.

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 and consultation periods required of us.

Turning now to capacity. With regards to our capacity and global footprint, our business outlook shows increasing production levels in Asia and Eastern Europe.

As discussed previously, we will be completing and then ramping new sites in Poland, the Ukraine, and India during the course of fiscal 2007. We will continue to ramp significantly higher production levels in our sites in China.

Our investments in fiscal 2007 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 200 to $250 million for the fiscal year.

Now I'd like to update you on our recently announced acquisition of Taiwan Green Point. As we previously disclosed, shareholders controlling over 50% of Green Point have tendered their shares. We fully expect the acquisition to move forward and presently expect the transaction to close during our fiscal second or third quarter of 2007 depending upon timing of government approvals.

Upon completion of the tender we are obligated to purchase those shares tendered for cash consideration, hence [inaudible] currently estimated to be in mid January. At this point in time, it is expected that we shall have controlling interest of Taiwan Green Point. I would expect to consolidate their financial results with our own from that date.

There is expected to be some level of minority interest until we can acquire the remaining shares not tendered prior to the conclusion of that tender offer. We are excited to finalize the transaction and we welcome the people and capabilities of Green Point to the Jabil family.

Now I ask you to turn to Slide 7, our second quarter revenue update. We estimate our second fiscal quarter of 2007 to be in a revenue range of $2.75 billion to $2.85 billion, or a decrease of 10 to 14% from the first fiscal quarter. Our revenue expectations are based upon seasonally lower sales in our consumer sector along with a more muted view of overall end market growth.

I'd now ask you to turn to Slide 8 for a review by sector for the second quarter. Our automotive sector is expected to decrease by approximately 6% reflecting seasonally lower sales. The computing and storage sector is estimated to decrease 5%, as certain customers balance inventory levels with lower demand.

The consumer sector is expected to decrease by approximately 33% reflecting normal seasonal patterns and higher than desired inventory levels for certain products. The instrumentation and medical sector is estimated to be consistent or slightly better than the previous quarter.

The networking sector levels of production are expected to be consistent with the first fiscal quarter. The peripherals sector is estimated to be consistent with the first fiscal quarter. And the telecom sector is estimated to increase between 10 and 15% as production levels recover with a major customer.

I'd now like to hand over to Tim Main.

Thanks, Forbes.

Revenue for the quarter was roughly to plan, however, product mix was not in our favor during the quarter and our revenue stream was more material intensive than expected by approximately 50 basis points. We also noted that demand expectations for the season became more subdued as the quarter unfolded.

During the quarter we launched a new product in the consumer segment which was developed by Jabil. Due to technical delays and production ramp issues with the product we experienced significant cost overruns and lowered forward-looking demand expectations from our customers.

Accordingly, we have elected to withdraw the product from our business plan and we will record charges and other expenses of approximately $12 million in the first fiscal quarter. We also continued to experience losses in our electromechanical tooling operation and suffered from certain underperforming sites in the Americas and Europe.

Due to these challenges in product development and in certain other operations, we are taking remedial actions that will include restructuring and the movement of production to other sites and strategic partners. As discussed in previous calls, we expect the impact of these changes to affect our operations through our second fiscal quarter.

We also spent over $4 million during the quarter in legal and accounting expenses related to the option and independent counsel reviews. We regret that we are not in a position to provide complete financial details at this time as we await the completion of review processes now underway.

We acknowledge this is a challenging time for the business and for investors and shareholders. We believe we are taking the correct steps to manage the business and to deal with other issues in the most appropriate manner and in a timely fashion.

We remain committed to growing Jabil's business in a healthy and profitable way and are motivated to work to these challenging times. In spite of the present day challenges we are enthusiastic regarding our long-term prospects.

Overall, we are serving customers well and in most cases we are expanding our relationships to include new product lines, services and geographic locations. Our people are doing remarkably fine job in a high growth and high stress environment and I thank them all for their efforts.

We are also anxious to consummate an exciting transaction with Green Point and to offer our mutual customers a best-in-class end-to-end supply chain solution. We will be sure to focus on preserving the great capabilities and technology of Green Point and maintaining the superb support Green Point has given its customers over the years.

Our revenue growth for the year is expected to be supported by the secular trend to outsourcing, service expansion and market share gains with certain new and existing customers. For the year we anticipate revenue growth of approximately 20%, which we believe to be above our sector growth rate and well above end market growth.

We are experiencing some uncharacteristic challenges at the moment but remain firmly committed to long-term growth and returns in the business.

Operator, we're now ready for the Q&A session of the call.

[OPERATOR INSTRUCTIONS] Your first question comes from Lou Miscioscia with Cowen and Company.

Okay. Thank you.

I guess, Tim, going into the comments that you just gave about the different issues that you're running into, you went through them a little quick so I wasn't sure if I was able to write them all down. Are these all incremental to this quarter that we're talking about or are some of them a continuation of some of the May operational issues? Maybe if you could sort of help define that a little better?

Yes, to rephrase a little bit I mentioned a few areas of concern. One is that the product mix during the quarter was more material intensive than expected by approximately 50 basis points. And demand for the quarter was a little bit more subdued than we actually expected in the consumer electronics area.

I talked about a product that we launched in the consumer segment that we're drawing from our business plan and will take approximately $12 million in charges associated with that product in the quarter.

I made some comments regarding the electromechanical tooling operation which we talked about in previous quarters. And on previous calls, the expectation was that that would continue to affect us through the second fiscal quarter.

I also discussed $4 million in legal and accounting expenses due to the various reviews that we're going through right now but are in the press release.

Okay.

Then the electromechanical one, the one you've been working on it seems since May, does it seem like now it's going to get extended well beyond the second quarter or maybe just a little clarification there?

In summary, I talked about under performing sites in the U.S., in the electromechanical tooling operation with remedial actions being restructuring and the movement of production to other sites and to other strategic partners. So I don't think the expectation is that will not continue to affect our company in a material way in fiscals Q3 and Q4.

Okay. And then my last question, I'll pass on to someone else.

On the demands issue I guess it's just, you obviously, you clearly laid it out on one of your slides so obviously on the consumer side but it seems that some of the other areas seem to hold up a little bit better, I guess in the sense of computing and storage seemed a tad better than what your prior thoughts were and maybe the networking.

I mean would you say the environment is continuing as we're in the late part of December to moderate, I guess, as we go into first quarter? Because you did keep your full-year guidance for top line.

I think from an end market standpoint things are relatively subdued, maybe a little less optimistic than earlier this year. Currently our [inaudible] which we think 20% year-over-year growth in this type of environment is fabulous, but our growth at this point is really dependent on the secular trends to outsourcing, gaining new customers and gaining market share and we're doing very, very well on those fronts.

The inventory situation you mentioned on the consumer side, was that something to do with [inaudible] could you [maybe define] which consumer area that would be in?

I'm principally speaking to, no, I don't think I will make a comment there. I think there's certain product categories that didn't have the sell through rate even in the summer and that kind of extended into the Christmas selling season.

I don't think it's a huge issue. There's not an enormous inventory issue that we see. But sell through rates in the second half of 2006 have not been as robust as original plans for some of our customers in that segment.

It's not typical for us to have, in the last few years, because of end market growth and the addition of customers and continued sell through in December and January, to have as steep a decline in revenue from Q1 to Q2.

If you look back into previous years and in '04 there was a 1% sequential decline in '05, it was about a 6.5% sequential decline, in '06 it was about a 3 to 4% sequential decline, and this year we're looking for, I think we said a 19 to 14% sequential decline. So a little bit steeper decline and that's, I think that maybe a more typical seasonal pattern for the consumer electronics area.

Okay. Thank you.

Your next question comes from Stephen Fox with Merrill Lynch.

Hi. Good afternoon. A couple things.

Just going back to the product launch cancellation, is there any details you can provide on what type of product it is and what's encompassed in the $12 million charge?

I can't get into details about the product. I mean it's an important area for us.

We've made significant investments in our product development capability as most of you know. We still think that's a pivotal capability to our solution for customers and it's still an area that develops, or generates significant amount of profitability for the Company.

This particular experience is a bad experience and the $12 million is associated with what we anticipate to be the final excess inventory numbers, tooling and other, test equipment and other expenses associated with cancelling the project.

But the cancellation revolves around technical issues with what you developed? Is that fair to say?

No, I think most of the technical issues are resolved and I think the fact that the product was delayed and the pricing in that area is becoming unattractive to us to continue in the activity and is a less attractive area for some of our customers.

I think we're making the decision to withdraw from that product category and I think that's the right thing for us to do for long-term profitability.

Then lastly, Tim, just on, just to make sure I'm clear on the May issues. I don't want to put words in your mouth but it sounds like you're resolving them as you planned or are you behind, ahead of where you thought you'd be at this point? Can you just sort of clarify that?

On the May issues specifically, I think we're resolving them. I'd say we're a little bit behind where we expected to be at this point in June. But I think ultimately they'll all be resolved to plan and particularly as we get into Jabil's fiscal Q3 and Q4, I think we're going to be very pleased with the overall results of our rationalization plan, the corrective actions, the remedial actions that we're taking and [inaudible] electromechanical tooling operations in certain sites in high-cost geographies and more specifically in the Americas.

We have a lot of remedial actions underway right now. I think we're a little bit behind where we expected to be over the summer but I think ultimately within a [quarter] give or take a two to three-month period a quarter, they'll ultimately be resolved and we'll be able to look to fiscal Q3 and Q4 as more indicative of the earnings power of the Company going forward.

And then lastly, your 20% outlook for growth does not include the Thailand Green Point acquisition. That's correct?

That's correct.

Thank you.

Your next question comes from Shawn Harrison with Longbow Research.

Hi, good evening.

Just on the consumer business again, maybe if you could, if I could just talk about the set top box business. You mentioned last quarter that was an issue. Is it safe to assume that's part of the continuing problem at this point in time?

I'm absolutely certain we did not mention the set top box business as being an issue last quarter and I'd be extremely reticent to discuss any particular product categories in that segment.

I think it's pretty well documented that while it seems that LCD flat panel TVs and another product categories are flying off the shelf. The recent results from Circuit City and others are indicating that this Christmas season is going to be relatively soft to the previous few years. And I'd like to leave that comment, that general statement and just leave it at that.

Okay.

Just moving on to your inventory if we could talk about that for a second. Are you comfortable with your inventory position currently in terms of the raw and finished goods or, you know, how much maybe in days do you think you need to pull it down if necessary?

I think that we're relatively comfortable with our inventory position being eight turns. I think it's a bit more than we'd like to have at this point in the seasonal cycle.

But particularly in our networking segment due to some lean inventory, lean management arrangements with customers there, we've actually added probably three to five days in inventory in that segment. And if that were normalized our inventory turns would be more like nine.

And I think with nine inventory turns we'd be very comfortable going into Q2 which is typically a quarter where we collect a lot of cash and we normalize our inventory levels and prepare for Q3, Q4 and Q1, which tend to be growth quarters for us. So with the exception of inventories being a little bit higher than we'd like in networking and here or there in small pockets, I think best case we'd be looking at nine turns and we're at eight, so we feel relatively comfortable.

Just to be clear, there's no plan at this point in time to draw down your raw material inventory by any significant factor?

I'm not sure what you mean by that.

I guess componentry, semis, passive components, boards, things of that nature, just raw material inventory.

I'm not sure what you mean by draw down.

I guess reduce the inventory position that you're carrying at this point in time in your hubs?

Well, those are a couple of different things. I mean we're going to work as a company very hard on improving our inventory turns in days and inventory in coming quarters and in coming years.

Generally speaking, I think we have too much capital invested there but when you compare Jabil's results and the mix of our business with other people in our sector, I don't think our current levels are unreasonable.

Okay. Thank you.

Your next question comes from Jim Suva with Citigroup.

Great. Thank you. First a quick clarification question.

Sorry about my voice but on your slide you mentioned revenues should be up approximately 20% year-over-year and previously you said that they would be up 20%.

Throwing in the word approximately, am I just splitting hairs or are we just looking at just a slightly more subdued outlook than maybe we were three to six months ago?

I think the environment's a little bit more subdued than six months ago. I still feel like our trend line growth rates of 20% or greater, particularly when we talk about long-term growth rates, is, we have every confidence that we've ever had in that type of belief in our growth rate.

Approximately 20%, I think given the sector growth rates are very small to negative and end market growth rates aren't expected to be more than 1 to 3% this year, that putting up something about 20% growth would be phenomenal for the Company.

Okay. And then, great.

You guys have successfully navigated through the lean initiative by one of your large customers, Cisco. Can you talk a little bit now about since you've navigated through that, kind of your status and ability to start to work down that inventory?

I believe Forbes mentioned that at first there'd be an inventory pop and you looked to push some of that inventory down into the supply chain. Have we started down that road yet and how is that progressing and what should we anticipate?

Hi, Jim. It's Forbes. Let me try to address that for you.

It really goes to the previous question that was asked on the call and Tim's comments around, we're carrying a little bit more inventory than we'd like, maybe three or four days more than we'd really like in terms of our networking sector. We did mention, I think I mentioned on the previous call that we do need to take control of that supply chain and work that down.

The status really hasn't changed. That's somewhere between [our] one to three quarter process. I think we're now into our second quarter of that initiative so we still got some work to do but as we head through this second fiscal quarter into the third, I'm pretty optimistic that we can get in and manage that supply chain and bring benefit to our customer and to Jabil and to the whole supply chain.

Okay. Thank you and happy holidays, everyone.

Thanks, Jim.

Your next question comes from Michael Walker with Credit Suisse.

Okay. Thanks.

I guess just to kind of tail off the last question, since you're essentially maintaining full-year growth at 20% and yet demand is weaker now than you had thought, does that imply that there are more new programs, I guess, coming into play in the second half of the year that offsets the weaker demand or am I reading too much into that?

No, I think if you look back at Jabil's history over the last couple of years we've tended to start the fiscal year with relatively low expectations. I believe we started '06 with an expectation of 8.7 and $9.2 billion in revenue, we ended up at 10.2 and I think we had a similar experience in fiscal '05 with beginning expectations in the $6.5 billion range and we ended up at over seven.

So we tend to only count things that in our parlance, in the barn, at the beginning of the year, and then the effects of end market growth, new customer wins and how sell through rates grow, tune that number as the year unfolds. So hanging on to an approximately 20% growth rate is indicative of, I think, the underlying strength of our business.

We do have new programs that have been awarded but we think that even in times that are relatively soft and relative to fiscal '04, '05 and '06, maybe, that our growth rate at 20% is still very doable.

Okay.

And then just in the consumer business guiding it down 33% I know that you, I heard what you said about inventories. Can you just confirm just because in the past there have been some concern about whether some of the bigger customers in there were starting to move some of their programs away. Can you confirm that that's not part of that 33% that it's really all seasonality and inventories?

I can confirm that there are no material customer losses in that segment that is the driver for the sequential decline. I think in previous years we've not seen the sequential reduction that was originally expected.

I think, I believe that almost every year we predict that the consumer electronics segment is going to decline by 25 to 35% and it's rarely done that and it's rarely done that for two reasons. One, end market growth has been better than expected, the sell through in December is better than expected, and we've had rapidly ramping new programs and market share gains.

And so we don't have those things this year so I think what we're seeing is not a more pronounced pull back in that area, I think we're just seeing a more normalized seasonal pattern in consumer electronics.

Okay.

And then just my last question's on margins. I know we're not talking about margins at least directly on the call, but not really referring to this quarter or next quarter, you know, in the past you talked about being able to get back to a 4% operating margin level, you talked about increasing operating margins by 20 or 30 bips a year.

Just in light of some of the issues that we talked about this quarter which basically all sounds like margin impacts in terms of the higher material content, et cetera, is it still realistic at some point in the future or a year out to be getting back to those historical margin levels?

Yes, I think that's a great point, Michael, and let's be absolutely clear that we are not trying to signal any type of permanent change to our objectives or the earnings power of our business. We remain committed to not just 4% operating margins but moving the business to a 5% operating margin.

I think the return on invested capital metrics that we talked about in the past are still very doable for us and, again, we're dealing with some uncharacteristic challenges that I think we'll work through but we are not trying to imply that there's any kind of permanent change to the business that would cause us to back away from what we talked about in the past.

Okay. Thanks a lot.

Your next question comes from Scott Craig with Banc of America.

Hi. Good afternoon. Just a couple of questions.

Tim, when you talk to your consumer OEMs and they talk about the inventory side of things how long are they telling you that they think this inventory correction is going to go on? Because if I look at your consumer business and your guidance it's kind of implying flat sales for you guys on a year-over-year basis.

And then secondly, just a clarification with regards to the material mix increasing. So that's a 50 basis point quarter-on-quarter impact to gross margins. Is that essentially what you're saying? Thanks.

I'm saying, I really can't talk about gross margins, that type of thing, but what I'm saying is that material content of our revenue stream was about 50 basis points higher than what we expected. I'm not sure I -- are you saying that what it looks like for fiscal Q2 '07 would be flat to fiscal Q2 of '06 in the consumer electronics area?

Yes, roughly.

Yes, roughly I think you're roughly correct. And, you know, Scott, I want to make sure that we're not over emphasizing this inventory thing because I think it's a very modest issue. I just think people need to understand, you know, we started the quarter expecting consumer electronics to be up 30%, it was only up 25%.

We're seeing a more normalized seasonal pattern and expecting consumer electronics to decline by 33%. So I don't think there's any type of very serious inventory issue there and so to the extent that there is I think it could be worked through within a quarter.

Okay. And then just one quick follow-up.

On the consumer product that you guys were developing, I assume that's on a basically on an ODM basis. Is there lingering cost issues there even though you've dropped the product that could potentially impact margins going forward?

How do you think about the ODM model for you guys given that a lot of your counterparts have tried to get in and have had to get out at some point? Are we looking at the same thing for you guys?

So there won't be any lingering costs associated with this particular product so let's check that box off. And then the whole ODM question.

I think there's a couple ways to look at it. We have an excellent product development capability that has been principally directed to collaborative development products and in some cases products which compete directly with ODMs. And we're going to continue to do that and actually we have $800 million roughly in business that's, you know, type of product development relationship with the customer and it's a very profitable business with us.

We got off, this was a particular technology that we're very interested in, we thought we had something that was very, very unique and was more challenging than we thought it would be and, really, it isn't even as much as the challenge and the technology, it's that the marketplace really kind of moved away from this product set.

Pricing and competitive technologies declined very rapidly, unexpectedly, and so in order for that product to continue to be competitive the price points came down very dramatically and so we made the decision to exit the business. Typically, we're in much more mainstream applications where things are much more predictable and we aren't exposed to that type of risk.

So I don't think this is, we're certainly not going to back away from our investment in product development and our capabilities there. But we typically do not have this type of risk in the products that we take on. So I wouldn't expect this to be a recurring thing

Okay. Thanks, Tim.

Your next question comes from Bernie Mahon with Morgan Stanley.

Hey, good evening.

A question for you on the, could you just go through the three operational issues that had you in the May quarter and just give us an update on each one of them? I mean, if they're fully cleared, if you're 90% clear.

It seems like there's still some issues on the tooling side. Just so we have that straight.

No, I don't think I will, Bernie, that's kind of a lengthy time ago. They're essentially on track. I think I talked about early on the call, maybe a little bit, taking a little bit longer than we originally expected and having an impact for our fiscal Q2 but that's what we expected and so things are contained, things are understood.

Working on the issues, they will be resolved and we'll be able to go in a lot more detail when we will get the published financial statements and we can talk about the impact of these various things in better detail.

So you can't quantify it at all saying 50% complete, 70% complete, I mean are you comfortable with any of that?

No, I don't think so.

Okay.

How about maybe a follow-up on demand? Looks like the networking segment was a little bit better than plan and the guidance there is, seems to be kind of in line with normal seasonality but yet you talked about a slowdown in the overall demand environment.

Is it safe to assume that maybe you didn't see that slowdown in the networking segment or there are new programs there, is it just a pretty healthy demand environment there?

I think it's a pretty good demand environment there and I think we're doing well with our customer base in that segment and a combination of those two things it's been a little bit better than expected.

Okay. Thanks a lot.

Okay.

Your next question comes from Brian White with Jefferies Asset Management.

Yes, Tim, if you could talk a little bit about the product that, the ODM product that had the issue, when did you start developing this product, how long ago was that, and will there be any impact to the quarter other than the charges from this product?

What other type of impacts would you be looking for?

Like an impact to pro forma net income, beyond just taking a charge and segmented out as a one-time expense.

I'm not sure I understand that question. I would expect the charges to be the charges, Forbes?

Would it be considered one-time, Tim, just like a restructuring?

That's not for me to decide.

We haven't contemplated that. Again, we're just giving you what information we can. But certainly, we wouldn't expect any ongoing impact as a result of these charges.

The development of the product started probably over a year ago.

Okay.

And then on Philips, you know, contract came due in November. You indicated you didn't think it was going to be an issue, it would continue as planned. Were there any surprises there on pricing, on volumes, anything change in terms of working with that customer?

Still have a great relationship with Philips that we think will remain strong and continue into, in the future years.

So nothing changed materially with that relationship?

Just what I said. I think they're a great customer, strong relationship and a customer we intend to have in coming years going forward.

Okay.

Forbes, operating cash flow, do we have at least some type of discussion on that? Was it positive, was it negative, and inventories, did they go up or down in the quarter?

Unfortunately, my hands are tied in providing you specific detail but in my prepared remarks we did talk about our sales cycle and that did increase by, unfortunately, nine days in the quarter so that was a considerable expansion. That one day is [running] about $30 million. So right there we have 270 to $300 million of working capital expansion in the quarter.

We do expect that to recover or swing back the other way during our fiscal, our second fiscal quarter which is typical for this business given the high seasonality and terms with some of our consumer customers.

Okay. Thank you.

Your next question comes from Alex Blanton with Ingalls & Snyder.

Hi, good afternoon.

Tim, maybe a bit of a philosophical question but I don't really understand how the shareholders interests are served by what your lawyers are requiring you to do which is to not talk about earnings for months on end, not talk about margins, not even gross margins, or cash flow.

We have a lot of moving parts. Got the Green Point coming up. You've got fiscal lean impacting.

You've got withdrawal of your product. You've got product mix changes. Material costs going up, and some disappointment on some of the sales in consumer electronics and so on, and yet we have no indication at all of how earnings are being affected by any of this.

So I'm just wondering how are the shareholders interests being served here by these requirements that you can't discuss the earnings effects at all?

I'm very, very sympathetic with your frustration. I acknowledge that more information is better for shareholders to make intelligent judgments about whether to invest in our company.

I think that the reviews that are being conducted are theoretically and in reality intended to be for the benefit of shareholders to ensure from an independent standpoint that the Company has high ethical standards and integrity and is reporting financial information accurately and we have to be in complete support of that.

And it's very important that these things be allowed to be reviewed and determined and that the Company is thoroughly vetted for whatever they're looking for, whatever they're looking at. And I want to just remind everybody that this is not something which is under my or Forbes or the senior executive management team's direct control.

So I'm very, very frustrated with the time. I sympathize with you completely. I would love to give you more information but these reviews are intended to be for the benefit of shareholders in determining the integrity of the Company and I think that's very, very important to me personally that we get this right, that we do the right thing and that these things are able to be conducted and reviewed the way they need to be in order to determine with finality exactly what has to be done going forward.

All right.

Maybe you can explain a little bit more about why -- these things that are being reviewed relate to past events. But we're being told that we can't have any information on earnings or margins regarding current events or future prospects.

I don't understand that. Why is that? We're not talking about the past here, we're talking about what happened this quarter.

Alex, let me try and address that.

There are specific regulations that prohibit us from providing information. Now those regulations were created a number of years ago, again, in the best interests of shareholders and the investing public.

The specific regulation I'm referring to, Reg G, I believe, which prohibits us from providing information to investors until we can provide it accurately in timely basis.

Can't you provide accurate information about what's going on currently?

We cannot provide you accurate information whilst these reviews are ongoing as it relates to U.S. Generally Accepted Accounting Principles. And that's what Reg G addresses. So if we are to give you any information we must do so with a statement under U.S. GAAP.

Okay. I'll have to take this off-line but I really don't understand why you can't provide us with information about what is going on currently. The reviews have to do with past events, past periods.

I sympathize with your frustration.

Thank you.

Your next question comes from Yuri Krapivin with Lehman Brothers.

Good afternoon.

I'm looking for additional clarification with respect to your material costs. Did the material costs go up or higher than you expected because of the product mix or is it because simply the prices for materials went up?

Not because of the price of materials went up but because of the product mix and the products that we had sell through on for the quarter increased the material content in our revenue stream. So more of a product mix issue.

Okay.

And then with respect to your networking segment, can you confirm that 8% quarter-over-quarter growth that you saw? Was it all organic or was there some residual input from the lean initiative?

There's probably a little content from the lean initiative but it's principally organic.

Okay.

And finally, with respect to the peripherals, that segment, you experienced strong growth in the November quarter you mentioned that it was seasonal. Is it just seasonality or did you win some incremental business there?

We are relatively successful in the peripheral sector so there are business wins but the first quarter experience was principally very good sell through.

Okay.

And then finally, would you expect additional costs related to stock option investigation in the February quarter?

I'm certain that we'll have additional expenses in fiscal Q2 and we'll see about fiscal Q3 and onward. I have no way of giving you any estimate beyond that but we are experiencing additional costs in Q2.

Okay. Thank you.

Your next question comes from Kevin Kessel with Bear Stearns.

Thank you.

Tim, just on the product mix question again, just to kind of touch back on that, you said that product mix was unfavorable due to the sell through of certain products that are more material intensive.

And I imagine, in your mix if we look at what happened, I mean peripherals were obviously up much more than expected, consumer, where I would expect maybe a higher material content potentially wasn't up quite as much as had you expected, and then you obviously had you telecom down less. What segment actually drove that mix or the unfavorable mix, would you say?

Even within segments that you might typically characterize as higher margin generally there are products within those segments that have higher material content and [if] the instrumentation medical segment was a little weaker than expected, that has a negative impact and within the consumer segment we were dealing with higher material content products than others.

In addition, Kevin, within the networking sector, as we've broadened this lean initiative, I think we outlined when we did that back in the second or third fiscal quarter, that our expectation would be that that would have some 30 to 40 basis points on our overall fiscal '07 margin impact.

So clearly, as you see there's some impact as you see healthier demand perhaps than we first anticipated in that sector, but we are accruing more material through given we are now managing that material [inaudible]. So that's had some impact also.

But, Forbes, doesn't the, I mean the lean initiative is something that's here to say, I mean in the sense that the practice now of procuring those components will kind of be the way you do business with this customer so is it always going to kind of reflect negatively on mix or, I mean is there a way to improve that over time or not really?

There's a way to improve it but it's more diversification in that segment and dealing with higher end products that might have a lower material content in the revenue stream. Again, within each segment there are high-end, mid-range and higher end products, or low-end products, mid-range and higher end products that all imply different levels of material in the revenue stream and quarter-to-quarter that mix might change.

I got it.

And then Tim, in terms of the 4% operating margin that was spoken about back in May, I understand in terms of what you're currently saying on those three issues, but I guess would it be fair to say based on your comments on the negative mix change and some of these other hiccups that are happening that the 4% operating margin, is it being implied that it's more like a Q3, Q4 event meaning once these things are essentially behind Jabil that's when you would expect to breakthrough that level?

I can't answer that directly, but I can say that when we look it into Q3 and Q4 we expect to have the rationalization expenses and more so the profits in moving products around what we've talked about in terms of remedial actions for certain sites in the Americas, electromechanical tooling operation, the short-term issues associated with a product that we've withdrawn from our business plan.

Those issues will be behind us and the expectations will be that our financial results in fiscal Q3 and Q4 will be much more indicative of what the Company's capable of than the uncharacteristic circumstances that we're in today.

I got it.

And then just a clarification here on the U.S. I mean it sounded like from your prepared remarks, Tim, you were implying that there would be additional restructuring to take place in the U.S. now and you mentioned also a shift of business to strategic partners. Maybe you can clarify was you meant by that.

I'm not really speaking to any additional incremental efforts. I think all the areas of concern for the Company have already been identified and we're moving along with that process.

And strategic partners? When you mentioned that, how should we read into that, what does that mean?

Particularly related to electromechanical tooling operation, we've elected to have that capability [resident] at low cost locations and rely more on strategic partners for that capability than to try and manifest that entirely internally.

It could still a profitable business for us but we've made the strategic decision to transition some of the production from that site and to rely on our partners to provide that capability to us going forward.

You're talking about the Austria site then? Or no? The one that had the tooling issue?

Yes.

And then lastly, your 20% growth you mentioned how it doesn't incorporate Taiwan Green Point but does it incorporate the expectation of maybe any potential divestitures or OEM divestitures during the year that would be done with customers or new customers?

No, it's, it was standard Jabil values, it's stuff that we can reach out and touch right now and our confidence in the underlying strength of our business, our business model, how we've been winning business with customers and the rest of it.

I mean that's still very, very solid for our company. I mean we're still winning. We've become the third largest EMS provider in the world and we're going to continue to grow the business.

Our solution for customers as dark as this may seem and as murky because you don't have financial statements in your hand and it's getting more and more difficult the more time that goes by to really understand what's going on, I mean we are winning in the marketplace.

We are growing as a company. And our solution as it relates to customers ability to execute, that type of thing, is in fabulous shape. It's really, really in good shape.

And then just on the divestiture front you mentioned the auto divestitures. Maybe you can touch that because you've got Delphi coming out of bankruptcy soon.

I imagine that a lot of the restructuring that they're going to need to do will be in terms of the way they manufacture because it's been highly inefficient for them and for Visteon. Any sense on that going forward for the whole industry?

I think eventually it will be a very positive thing for the automotive supply business and I think it would end up being a positive thing for the EMS business because I think consistent with what I've said in the past, a lot of that business really should be outsourced. We can do it faster, better, cheaper and I think that's going to be a good thing.

There's a lot of private equity money circling around the automotive supply industry in some circumstances and we can certainly help with taking over the burden of manufacturing product in a more diversified plant, on a lower cost location, reduced cost, it's kind of a home run value proposition for companies that are supply chain focused and supply chain intensive.

So, again, I think if you get out of the next 90 and 180-day kind of fixation that we all tend to have and think about it long-term, it should be very, very good. It should be an excellent sector for Jabil and other EMS providers to grow.

Short-term it's going to be a little bit dodgy. I mean we're going to have to step through the opportunities, make sure we're in the right transactions with the right customers and doing the right thing.

And I think we're going to have to be highly selective in the types of things that we engage in. But Jabil has a very significant automotive business today that's six, $700 million a year in business.

So we've got a great running start. We've got great capabilities into Europe and the Americas. And we're producing automotive electronics in Asia.

And we know how to build automotive electronics at extremely low DPM levels and understand all of the long-term product development requirements that are associated with it. So I think Jabil Circuit's in a great position to benefit from the automotive supply business long-term.

And just on the filings, Tim, I mean is there any, what's the Company's most current position in terms of when these would be filed? Is there any type of broad, you know, the goal is by January something or by, I mean, how do we think about this in terms of when filings might reasonably be out?

We can't say.

Okay. Thank you.

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

Thank you.

Tim, a question concerning the Green Point acquisition. You obviously believe your vertical integration is important to compete in the handset business.

Can you tell us other areas within handsets you may be looking to fill in terms of product capabilities? And then aside from that space, are there other segments where you think it makes sense to have more vertical integration?

I think that's a great question, Matt, and we don't have a shopping list of other things that we think we need to buy to support our business in that area. I think we'll be opportunistic and we'll be selective in the types of technologies and capabilities we invest in.

We think the consumer electronics area and more particular mobile products because of style being so important and because of the constraints of the product being so important that that electromechanical design, manufacturing and cosmetic treatment capability enhances our value proposition of global supply chain management and electronics production capability and design to a very attractive extent.

So we think the Green Point marriage with Jabil provides a very compelling value proposition for customers in that segment. And that's really what we're focused on right now. We're not focused on buying a lot of other stuff to add to a basket of capabilities.

Okay. Great. And just a quick question.

You mentioned three customers above 10%. Can you tell us who they are? Thanks.

Yes, absolutely. That would be, in the quarter that would be Nokia, Cisco and [inaudible].

Okay. Thank you.

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

Good evening. My question's been answered. Thanks.

Your next question comes from Amit Daryanani with RBC Capital Markets.

Just want to go back to this product mix issue that we're talking about. Looks like it's a 50 basis headwind this quarter. Could you just talk about if you expect to recover this headwind next quarter or would it take a little longer to get back to 50 basis points?

Amit, that's going to depend on product mix and we'll talk about that on our next conference call.

But, I mean I guess, you know, looking at what you see in terms of now the production schedule that you have is the product mix improving in your favor in terms of margins or is it staying stagnant the way it was this quarter?

Yes, I'm really not in a position to go there at this point. We're only two weeks into the quarter, or three weeks into the quarter and a lot of things can change between now and February 28th.

So I need to reserve any comments on that. Amit. I wish I could help you more but.

Fair enough.

And then just looking at the restructuring actions [you've been] looking to take over here, a lot of the charges will happen in the next two fiscal years. When should we start to expect to see some savings from this [inaudible] for the P&L [inaudible]? Is there a time [inaudible] on that you could update us on?

Consistent with our previous remarks when we announced this plan a couple of quarters ago, and we'd expect to start seeing benefits in our fiscal third quarter and fourth quarter of this fiscal year of '07. We should start seeing results of that and then we should see that continue through our fiscal '08.

Fair enough. Just a final question.

Given all the issues that you have with regard to the SEC investigations, are you seeing a bit of a squish from your suppliers who might be reducing the terms that they give you at this point which may explain why the AP days have moved so much this quarter or is this just a timing issue in the quarter?

No, not at all. That's just a timing issue in the quarter, Amit.

All right. Thanks.

Your next question comes from Paras Bhargava with BMO Capital Markets.

Good afternoon, gentlemen.

Tim, is the demand weakness in consumer only or is it more broad-based?

You know, I, you say a few things to try and give a little bit of color and then it can get blown out of proportion. I think demand was a little bit soft.

It's still okay. I mean it's still a growth environment. Things are relatively stable.

I just think that generally speaking our customers, and particularly in the consumer electronics area, we had a beginning of the quarter expectation of 30%, it was up 25%. Still a good season and looking forward to the balance of the year.

I just think from a tone standpoint and less so from current production schedules, I mean really from a tone standpoint, people are a little bit more subdued, a little bit more reserved in their expectations for what things are going to be like in calendar 2007 from a growth rate standpoint.

I'm just trying to provide some color in that regard as it relates to what our expectations are for our business. I don't think it's an environment where we're going to see strong end market growth.

No, no, is it just consumer, though, is it across everything is what I'm asking. [inaudible]

It's more the consumer.

Okay.

And, Forbes, it looks like working capital might have chewed up, it's hard to tell with the amount and I'm guessing as much as 300 million bucks. Is that, am I doing my math right or is that totally off base?

No, [inaudible] at these types of revenue levels, it's right about $30 million so our sales cycle expanded by approximately nine days so the math is about right.

I just wanted to check. Now, were there any other unusual sources or sources of nonoperating cash? I'm just trying to reconcile Tim's statements about problems with the cash performance given that working capital drained a bunch of cash.

I don't remember saying anything about cash performance.

No, I mean in terms of your comments, sorry, about operating challenges, and then it looks like the cash performance given what happened to working capital [inaudible] you quite good. Were there any other unusual sources of cash for it?

No, there were not.

This is still a good business. I mean, we can't talk and, again, we acknowledge how frustrating this is we can't publish financial statements, you can't put this all in your hands but it's still a healthy business.

I mean two quarters ago it was an investment grade company, it was a great balance sheet and we haven't wrecked it I mean we're not wrecking the business. This is still an excellent business to be in and we're still growing.

I'm just trying to fill in the holes because it's just, we're trying to, it's like a jigsaw puzzle here.

No, I understand.

So now the other question, you didn't buy back any shares, I don't think you can this quarter, right?

No, that share buy back was exhausted in our fiscal '06. We do not have the capability to do that, i.e., we're not approved to do that.

And tax was normal in terms of tax expense and cash taxes. There wasn't any mismatch there. Big mismatch.

I cannot make any comments with regard [inaudible].

No, I understand you're a little bit hamstrung here. Okay.

And then finally, if I just look at your telecom business it did better and you mentioned I think that one of your customers is coming back. Is that a broad, like is that a counter trend, telecom and networking are maybe doing better and the rest of [inaudible] is doing worse, maybe just slightly or is that just very customer specific in those two segments?

In the telecom sector our comments indicated that it was customer specific and I think that's a fair statement. In the networking segment, I think it is what it is.

I mean it was a little bit healthier for the quarter than we expected and we expect production levels in Q2 to be consistent with the first quarter. So it's not going gangbusters but going pretty well.

All right. Thanks a lot, gentlemen.

Operator, we have time for just one more question tonight.

Thank you. Your next question comes from [Monish Pari] with [Sarif].

My question was answered. Thank you.

Okay. Thanks, everyone for joining us on the conference call for today.

This concludes today's conference call. You may now disconnect.