捷普科技 (JBL) 2008 Q2 法說會逐字稿

Good afternoon. My name is Kahlea, and I will be your conference operator today. At this time I would like to welcome everyone to the Jabil second-quarter fiscal year 2008 conference call. (OPERATOR INSTRUCTIONS).

Thank you. Ms. Walters, you may begin your conference.

Thank you and welcome, everyone, to our second quarter of fiscal 2008 year 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 website in the Investors section, along with today's press release and a slideshow presentation on the quarter. You can follow along with the presentation the slides that are posted on the website and begin with slide one now.

Our second-quarter forward-looking statement. During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business; our currently expected third quarter fiscal year 2008 and full fiscal year 2008 net revenue and earnings results; our long-term outlook for our Company and improvements in our operational efficiency and in our financial performance. Statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2007, on subsequent reports on Form 10-Q and Form 8-K and are other securities filings with the SEC. 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.

If you could please now turn to slides two or three, our results for the second fiscal quarter. On revenues of $3.06 billion, our GAAP operating income was $1.6 million. This compares to $36.7 million GAAP operating income on revenues of $2.93 billion for the same period in the prior year, the reduction principally due to restructuring charges which were $41 million higher than a year ago period. Core operating income, excluding amortization of intangibles, stock-based compensation and restructuring charges for the quarter, was $67.8 million or 2.2% of revenue as compared to 55.6 or 1.9 for the same period in the prior year.

Core earnings per diluted share were $0.20 as compared to $0.14 for the same period in the prior year. On a year-over-year basis for the quarter, this represents a 4% growth in revenue and a 22% increase in core operating profits. On a sequential basis, revenues decreased 9%, while core operating income decreased 44%, reflecting the seasonal nature of the Consumer Division.

Please turn to slide four for a discussion of revenue by division and sectors for the second fiscal quarter. Starting with our EMS division, it represented revenue of 66% or $2 billion, growth of 2% on a sequential basis. Core operating income for the division in the quarter was 3.2% of revenue.

Sector movements are as follows. Production levels in the automotive sector declined by 13% versus the prior quarter, primarily reflecting seasonal demand. Computing & Storage sector increased 1% from the first quarter. Industrial, instrumentation and medical sector declined by 3% from the prior quarter, reflecting decline in product revenues in line with our previous expectations and guidance. The networking sector levels of production increased by 2% from the previous quarter. Telecommunications sector increased 26% sequentially as a result of a full quarter's revenue from the Nokia Siemens Networks relationship announced in the first fiscal quarter.

Turning to our Consumer Division, the Consumer Division represented approximately 29% or $900 million in the second fiscal quarter, a sequential decline of 28% reflecting the seasonal nature of this division. Core operating income for the division in the quarter was negative 1% of revenue.

Sequential sector movements are as follows. Mobility and display product sector decreased 36% from the prior quarter, reflecting the seasonal nature in the sector across both the displays and mobile products. Mobility decreased by 31% and displays by 40%.

The peripheral sector decreased by 9% from the first fiscal quarter, reflecting less seasonality than previously estimated. The Aftermarket Services division represented approximately 5% overall Company revenue in the second fiscal quarter. Core operating income for the division was 7% of revenue.

Please turn to slide five. Our divisional and sector information for the quarter in percentage terms is as follows. Automotive, 4%; Computing & Storage, 13%; Industrial, Instrumentation and Medical, 18%; Networking, 22%; Telecom, 7%; and Other, 2%. In the Consumer division, displays 7%, mobility 11%, peripherals 11%. The Aftermarket Services, as mentioned, 5% revenues overall.

In the fiscal quarter, two customers accounted for more than 10% of revenues, Cisco Systems and Hewlett-Packard. Our top 10 customers in the quarter accounting for approximately 64% of our revenue, which is consistent with our last fiscal quarter. Selling, general and administration expenses declined by $1 million in the quarter, reflecting ongoing cost management initiatives. Research and development costs were $9.9 million in the quarter or approximately $3.3 million higher than in the previous quarter, reflecting ongoing investments in our collaborative design services.

Net interest expense fell $3 million from the first quarter, reflecting lower average debt balances in the quarter. The tax rate in the quarter was 8% as a result of sources of income from lower tax jurisdictions during the quarter and year-to-date.

I would like to turn the call now over to Forbes Alexander.

Thank you. Good afternoon. I would now like you to turn to slides six, seven and eight.

The Company's sales cycle in the quarter expanded by one day to 23 days. Days sales outstanding decreased by three days, while Accounts Payable days outstanding were consistent with the prior quarter at 63 days. Inventory days increased by four days from the prior quarter, inventory turns being eight.

In dollar terms inventory grew by $10 million versus the November quarter as a result of the schedule declines we saw in mid to late February impacting our third quarter. We would anticipate inventory reductions as we moved through the upcoming quarter.

Cash flows from operations were approximately $134 million in the quarter versus 0 in the same period in the previous fiscal year. Our returns on invested capital were 8% as compared to 7% in the same period of fiscal 2007. Our cash and cash equivalents were $531 million, $133 million lower than the previous quarter, reflecting the repayment of $150 million on our revolving credit facility.

Our capital expenditures during the quarter were approximately $87 million, including approximately $27 million related to our ongoing expansions in China, India, Poland and the Ukraine, along with associated IT infrastructure of $20 million. Our depreciation in the quarter was approximately $58 million and EBITDA in the quarter at $126 million.

During the second fiscal quarter, we completed a $250 million 8/10% ten-year senior unsecured note offering. Proceeds from these notes and cash flows from operations during the quarter were used to pay down $400 million drawn on our five-year $800 million revolving credit facility. During the quarter we also terminated the 180-day $200 million revolving credit facility we had entered into in the December period of 2007.

At the end of the second quarter, there were no bridge facilities in place and no balances outstanding on our five-year, $800 million revolving credit facility which expires in July 2012. We are pleased and we executed to our expectations within the quarter in what is a challenging demand environment. The results posted for the first half of fiscal 2008 revenues of approximately $6.4 billion, a core operating income of approximately $190 million or 3% of revenue represents growth in revenue of 4% for the first half of fiscal year 2007 and core operating income dollar growth of 35%. It remains pleasing to note cash flow from operations remains strong in the quarter at $134 million.

In the first half of the fiscal year, approximately $280 million of cash has been generated from operations or approximately $100 million of cash after capital expenditures and dividend payments over the same period.

I would quickly like to review our restructuring activity with you. We continue to manage our overall rationalization plan according to our previously announced detail. During the second quarter, we recorded charges of approximately $42 million. Total charges recorded to date against our overall plan were approximately $241 million. We continue to expect our total restructuring charges to be approximately $250 million as we previously discussed.

During the quarter cash payments associated with the restructuring activities were approximately $10 million. Total cash payments to date against the plan were approximately $105 million. The cash costs of such charges for this plant remain in an estimated range of 150 to $200 million. Discussions with our employees and their representatives continue, and we're complying with all statutory and consultation periods required of us.

As a result, we currently estimate that cash payments totaling approximately $20 million will occur in the balance of this fiscal year. The majority of the balance of cash payments shall occur during the first half of fiscal 2009, and we expect to see the benefits of such actions in the fourth fiscal quarter of 2008 and the first half of fiscal 2009 as previously discussed.

I will now ask you to turn to slide nine. As we move through February, we received indications from our customer base of broadbase reductions in demand across the second half of our fiscal year. These reductions represent approximately 7% in revenues in the second half of the fiscal year from the midpoint of our previous guidance.

Turning to the third fiscal quarter, we now estimate revenue to be in the range of 3.05 to $3.15 billion. As a result, core earnings per share are expected to be in the range of $0.18 to $0.22. As a percentage of revenue, we estimate core operating margins to be in the range of 2.3 to 2.6%. Selling, general and administrative expenses are estimated to be approximately $113 million. Research and development costs are expected to be approximately $7 million in the quarter. Tangible amortization, approximately $90 million. Stock-based compensation is estimated to be approximately $15 million in the quarter. And finally, interest expense is estimated to be approximately $25 million in the third quarter.

Based upon the current estimate of production and income levels, tax rate on core operating income is expected to be approximately 20% in the third quarter and 19% for the full fiscal year.

Capital expenditures for the third quarter are estimated to be in the range of 60 to $80 million. Capital expenditures for the full fiscal year remain an estimated $250 million to $300 million. These capital expenditures estimates reflect commitments to manufacturing footprint expansions and IT infrastructure upgrades made at the beginning of our fiscal year.

I now ask you to turn to slide 10. The EMS division was estimated to increase by 3% from the second quarter or 10% on a year-over-year basis. The sector breakdown is as follows. Automotive is expected to increase 10% from the second quarter, reflecting product ramps with a recently noted new customer. Our Computing & Storage sector is estimated to be consistent with that of the second quarter. Industrial instrumentation and medical is estimated to increase by 8% from the previous quarter, largely on the strength of growth in our medical business, including the ramp of a new medical customer. Our networking sector is expected to be consistent with that of the second quarter as is our telecom sector.

Turning to the Consumer Division, this is estimated to decline by 4% in our third fiscal quarter. The sector breakdown is as follows.

The display sector is expected to decrease by 20% in our third quarter, reflective of inventory corrections across our customer base. The mobility sector is estimated to be consistent with that of our third quarter. Finally, our peripherals sector is estimated to increase by 2% in the third fiscal quarter, reflecting an increased demand for set-top boxes. Our Aftermarket Services division is expected to increase by 6% in the second fiscal quarter.

I now ask you to turn to slide 11. Our estimates for the full fiscal year and our revenue in the range of $12.6 billion to $12.8 billion with core operating income expected to be in the range of $355 million to $395 million, up 2.8 to 3.1% of revenue. As a result, core earnings per share are expected to be in the range of $1.00 to $1.16.

At its midpoint, this guidance reflects a year-over-year growth in revenues of 4% and core operating income growth of $44 million of 13%. EBITDA of approximately $605 million or growth of 10% on a year-over-year basis.

On a divisional basis, we estimate for the full fiscal year revenues for the EMS division of approximately $8.3 billion, the Consumer Division approximately $3.8 billion, and the EMS division approximately $700 million. Core operating income expectations is an estimate for approximately 3.4% of revenue for the EMS division, 1.3% of revenue for the Consumer Division, and 7% for the EMS division.

Cash flow from operations were estimated to remain in excess of $600 million, providing in excess of $260 million of free cash flow after capital expenditures and dividend payments.

I would now like to hand the call over to Tim Main.

Thanks, Forbes. Fiscal Q2 came in as expected. Cash flow from operations was good at $134 million. This could have been better, but inventory levels were a bit higher than expected as forward-looking demand softened leading into fiscal Q3.

Over the course of the last 90 days, but in particular during February, demand expectations declined significantly. Our revenue expectations for the second half of our fiscal year are now approximately 7% below our previous estimate. This decline is clearly a function of softening macroeconomic environment. There are no customer losses or material program or market share losses driving the decline.

We have seen the largest declines in telecommunications in our display sectors, but most sectors experienced a reduction. The exceptions to this are our Computing & Storage sector and our Aftermarket Services business, each continuing to show positive gains in a poor environment.

We had been on a good path of margin recovery, showing 170 basis point improvement in core operating margins of fiscal Q2 '07 to a 3.6% level in fiscal Q1 '08. Regretfully this progression will be more challenging in the next quarter due to the reduced revenue outlook.

Our business is actually in very good fundamental condition. While acknowledging room for improvement in certain areas, we have no known major fixes or issues or broken parts of our business. We will work our inventory levels down a bit and drive cash flow while demand is slack. Thankfully our balance sheet is in good condition to accommodate the current environment.

With no major issues to fix and the ability to write off the present turmoil, we can focus on growth and our prospects for fiscal 2009, now less than six months away. Recessions come and go, and the stronger players can use the opportunity to strengthen their position and really thrive in early period of recovery.

Our new business activity has been quite good. We have sizable new customer wins in telecom, medical, mobility and industrial areas amounting to over $750 million in annual revenue. This, combined with a wide range of new program wins with existing customers and rejuvenating growth in mobility, should result in a robust fiscal 2009.

Revenue growth will contribute directly to a strong resumption of margin expansion, sustained free cash flow and improvement to our returns on capital. We will focus on this future as we manage through a more challenging present.

Thank you.

Operator, we're ready for the question and answer session.

(OPERATOR INSTRUCTIONS). Louis Miscioscia.

Can I ask a question about the August quarter? It seems given your full year of EPS guidance, that there's a reasonable EPS bounce back in the August quarter where I guess I would normally would have thought that seasonality would not help too much, that August would more likely be flattish to May. Is there anything going on like restructuring that is helping, or is it really just revenue growth kicking in?

I think the forecast calls for about $100 million of additional revenue in that quarter, which is a function of a variety of programs that are ramping currently and some recovery in our mobility business which we have actually given the current environment have pretty good confidence about.

If you look at the operating income improvement, there's about a $35 million improvement in operating income in Q4 from Q3. Where that comes from, there's about $10 million of benefit from the rationalization and manufacturing efficiencies, which leaves about $25 million improvement, and that is really driven from the revenue. Getting about 20 to $25 million depending on mix, 20 to $25 million of operating income for each additional $100 million of revenue.

Okay. And then looking at the consumer area, it looks like from a seasonal aspect I'm assuming mobility is flat quarter to quarter after obviously the big drop in the February quarter, but displays continue to decrease. Is there anything else that is going on under the cover there?

No, no major customer losses or program losses. Actually, if anything, we're expanding our market share there such as it is. We have an inventory correction going on. We actually drove LCD TV production pretty strong throughout Q1 and actually going into Q2, and I think demand really backed up on our customers in that space pretty quickly as consumers basically stopped buying. So we are going to see the downturn in Q2 obviously extend into Q3 as that inventory correction takes place.

Okay. And then a final question on another industry topic. For computing, networking and telecom, you have got a flat quarter to quarter obviously as per your guidance. Would normal seasonality give you about a 5% lift going into the May quarter?

Typically, yes. Yes, we definitely see some bounce back from our February quarter in May.

Brian White.

Yes, could update us a little bit on the vertical integration in the mobile handset area? I think we are looking forward to that sometime in late '08.

The integration is going pretty well. We have things like SAP integration completed. We have won a number of new programs and have actually had a couple of new customers in that space. And as we talked about in the prepared comments, the mobility sector is stable Q2 to Q3. So we have been experiencing pretty much sequential declines for the last year and a half as we reduced business with our major customer in that segment. That is now stabilized, and what we have talked about it in previous conference calls and in conferences out on the road and that type of thing is that we would expect business there to stabilize and then start to grow again in the back half of this year, and indeed, that is what we see happening. So we are actually pretty pleased with the way things are going right now.

Okay. And just in the display business, I know Philips has brought on other companies to help them with some of the assembly work. You don't think that had anything to do with the soft outlook in displays?

No, they have been doing business with other folks for a long time. And so that really has nothing to do with it.

Well, I know but they have brought in some new partners.

They churn people all the time.

Okay. Thank you.

Yes. Our business with Philips is actually up this year over the previous year.

Amit Daryanani, RBC Capital.

Just looking at the overall demand softness that you talked about over the last 90 days, can you just talk about are you starting to see some stability in your order book at this time, or is it a case for every time you run that order book things seem to be a little bit softer?

Well, I think Forbes will probably slap me for this, but I think things are bottoming actually from what I can see. I tend to be a little bit more optimistic and pro-business in these environments, but the housing market kind of lead us into this. That is stabilized. Some of the white goods customers are stabilizing.

You know, the Computing & Storage segment continues to do pretty well. Consumers are backed up. Consumer confidence is at an all-time low in the United States, but demand is still very strong in Asia. Europe seems to be hanging in there. So my sense is that we may see things bottom here in the spring and early summer and start to see a real strong bounce back in the fall.

Alright. And then just the computing segment, that clearly seems to be bucking the trend for you guys. Is your sense that is really a reflection of Jabil winning more market share there, or are the end markets in general a lot more stable on the computing side?

I think the end markets are pretty strong there, but we have been winning market share there as well.

Just finally, one of the big positive things through the whole process for the last six or nine months has been you generated a fair amount of cash as you go through the revenue decline. Could you just talk about given the fact that you have debt financing security at this point options, or have you explored a stock buyback in this environment?

Based on the evaluation of selling it for 4 times EBITDA kind of thing, we would love to go back and buy back a bunch of stock. The prudent side, the Forbes Alexander side of the table would say, look, we are in a recession. We don't know if it is going to get better or worse. It is a good time to hold onto your cash for a little bit and make sure that the balance sheet is in good shape. If things started to turn around and we saw the business moving in the other direction, I mean we were generating sufficient cash, stock buybacks would be something we would look at it where continued to be at the kind of valuations we are today. But right now I think we would want to hang onto our cash.

I think that is fair. As you see, strong cash generation as we look through certainly the next couple of quarters and into '09. Let's see if this business, you know, in terms of recessionally trend comes back. But with the way the debt markets are today, it is tougher and tougher out there. So I would like to see some easing there because there are still many many opportunities ahead of us here as we move into '09.

So I think the prudent thing to do right now is build that cash back up, and we will certainly review that as we move through the balance of the year.

The way our planning cycle works, we're getting a look now at our fiscal Q1 in our November quarter from our customers and our internal business units, and we might need the cash because it looks like pretty strong growth.

You know, I'm sure everyone is skeptical about that as well we will be, but based on how customers are feeling and the ramp of our business with new customers and accounts and new program wins, significant expansion in our November quarter and we might need the cash.

Alright. Thank you.

But we will take a look at it as the year progresses.

Kevin Kessel, Bear Stearns.

Tim, I actually had a question here. So in the statement that you guys made in your release regarding you actually say the slowdown in end markets will reduce your growth rate and then impede the margin expansion. I'm just thinking back to in the past the way you guys have typically talked about the businesses as the end markets have had a much less significant impact on the overall growth rate for Jabil.

So what is different this time around? Is it that more of the pipeline of business is back-end loaded this year? Why are the end markets specifically kind of the reason for the actual decline at this point?

You know, in a steady environment, Kevin, you are absolutely right. Our compound annual growth rate for the last dozen years has been around 25%. Really only about 4% to 5% comes out of end market growth on an annual basis. However, we are hitting a pretty significant macroeconomic air pocket here, and I don't think anybody is immune from that.

So it is -- how this usually works for us is it is a quarter or two looking back on previous recessionary periods. That is about how long they have lasted for us before OEMs get back to outsourcing. They start to look at their own internal operations and outsource a little bit more. Things kind of settle out. Some of the weaker players have to exit or get consolidated, creating opportunities for us as well.

So when you hit an air pocket when there is a significant contraction, nobody is really immune from it.

And so that is where you also get the timeframe being the next quarter or two is it is both how looking back at the past and how Jabil's businesses performed during these sort of periods and also looking I guess at your customers' forecasts?

Yes, I have been through two recessions here. One was not as a public company, '91, '92, and we came out in '93 and went public. And then the 2001/2002 time period and that prompted a four or five-year expansion of our business that was very robust and good for shareholders.

Just on mobility, if I recollect correctly, the mobility segment was actually expected previously to start to show some more significant growth in the May quarter and then the August quarter as a result of numerous new programs that you guys have won. And I know now you guys are calling for more of a consistent environment. Is that more the result of macroeconomic forces, or is it that some of the new programs have maybe been delayed as a result or pushed out or --?

That is really I think incorrect. We have said consistently that Q2, Q3, we would see a stabilization of that sector in total. And we actually have not until this quarter, and this guidance call provided specific information on mobility. Other than to say that the revenue declines would abate in the Q2, Q3, and then we would start to see growth in Q4 and into Q1 '09, which is exactly what is happening.

Matt Sheerin, Thomas Weisel.

I wanted to just ask a question regarding the inventories. You said they were up, and you are working them down. Could you be more specific about where you have some inventory build? Is it mostly in the TV or display area, or is it other areas as well?

It is really associated with those areas where we have seen the sharp declines that we have experienced in the February period. So yes, certainly in displays and telecommunications are the areas that we called out were principal areas, and there's little pockets here and there where we have seen lesser declines.

But again, with material pipelines in this business, inventories are prepositioned during the month of February for a March and April build, and those schedules have been pushed out or cut. So we have been actively working that during this month, in fact, and through into April to work those inventories down. (multiple speakers) -- seen inventory degradation. (multiple speakers)

Okay, great. And then just turn back to your comments about visibility going into the August quarter, it sounds like you have reasonable confidence and you are going to see an increase in margins and in revenue, and yet just a quarter ago obviously your guidance for the year was a lot higher than it is now. What gives you confidence, or what are you seeing from your customers that gives you a little bit more confidence in another quarter out here?

I think we're being a little bit conservative just based on what has happened over the last 90 days. But again, there are contributions in Q4 from new customer programs and new programs that are ramping. So we have that going for us, as well as the existing business.

It is -- we provided a range, and that range hopefully will accommodate additional softening should that take place. We feel reasonably confident about Q3 and Q4 if that topline comes through at about the $3.2 billion level. I think there's no doubt that we will see -- we don't have any doubts about the fact that we will see significant improvement in profitability in that quarter.

Yes, what you will actually see there again at the midpoint of the guidance, what that is implying at an operating income level at right about 3.4, 3.5% in our fourth quarter. Even though we have seen this substantial 7% revenue fall in the back half of the year, with that leverage coming in, we really drive that operating income back up into the mid-3s. And remind everyone that our first fiscal quarter, we're right about 3.6%.

So with our revenue coming back in, leveraging the cost base, we feel pretty good about that, and now we can continue to drive that back up as we move into fiscal year '09.

Okay. Thanks. And just lastly, on mobility you have seen stabilization. It sounds like you have got some wins there. Are you gaining traction or getting any leverage with Taiwan Green Point in terms of cross-selling and opportunities for some volume business with some of their customers?

Yes. We don't have anything specific to talk about today, but yes, we're seeing some definite synergy there. I think that is going to work out great for us.

Steven Fox, Merrill Lynch.

Just two questions. First of all, when you look at the $750 million of new wins, that is in addition to what you have already had in your book of business prior to this quarter?

Then secondly, just to be clear on the display business, you're confident that it's mainly related to TV. There is not any market share loss going on at your largest customer and that you still have a bulk of business that is ramping in, say, the second half of the calendar year?

So I will answer that in reverse. Our business with our largest customer in the displays area will be -- in fiscal '0 8 will be above fiscal '07.

But I'm saying that the customer did not lose share in their market. Not that you lost share --

No, I meant you can go take a look at what market share is going on there. That is public information out there, and I'm not going to make any comments on this call that will just get me in trouble somewhere. And then the other question, the other part of your question, Steve?

So that it is mainly related to TVs and that your book of business in the TV business in the second half of the calendar year is still -- you are saying it is pretty robust I guess and intact?

Yes. I thought there was another element to your question.

Well, then on the -- (multiple speakers)

The new wins. Right. Those wins have occurred over the last couple of quarters, just put it that way. They are a business that will not ramp, though, until very late this fiscal year and early in fiscal '09.

Okay.

So they are contributions to our fiscal '09 year.

Net of losses and whatever type of organic growth you have with the core business?

Yes, we do not anticipate any losses.

Okay. That is what I was getting at. Thank you.

Sean Hannan, Needham & Co.

Just to follow up on an earlier question, I wanted to ask if when you saw some of these changes to your order forecast, was this a consistent progression that you saw once it began, or was this more of a downward step function and kind of a softer outlook sustained from there?

So like a sudden downdraft versus --

Correct.

Yes. I mean if you looked at week to week, it is a gradual progression, but most of the reduction occurred in a period of 30 to 45 days. So it depends on your point of view.

If you look close enough, it is -- if you are very, very micro week to week, it was kind of a steady decline. If you're more macro, it is a pretty sudden downdraft in the post-January, post-January, February and early March period.

Okay. And then just on your prior guidance, the lower end of that guidance was kind of stated as factoring some recessionary pressures I think. That was correct, right?

That is correct.

Now with this 7% decline and most of this being attributed to telecom and displays and you are seeing some broad-based weakness in some of your other areas, is there a way that you can just provide a little bit more color in walking through these different sectors specifically?

A little bit. Automotive from -- looking at half-year guidance, so from changes from the previous guidance automotive is down 3% to 5%. Instrumentation and medical is down about 5%. Our military business is pretty steady actually. Networking business is down a little bit. And peripherals and some other areas of consumer are down around 4% or 5%. It is virtually -- it is every sector with the exception of Computer & Storage. Aftermarket Services is pretty consistent.

Okay. And then lastly, this business that you have taken on with Nokia Siemens, can you comment or provide a little color around how that is playing out from an expectation standpoint today versus when you first took on the business?

I think expectations are in line. It might be a little lighter than what we originally expected.

Yes, certainly in the fiscal quarter which is next, it was onto our expectations. As we are looking out to Q4, it is just a little bit lighter in terms of demand profile. Q3 is in relatively good shape.

And you are chalking this up to being in line with the rest of the softness that you are seeing in that sector, or is there a little bit more or less of an impact that you see from that business?

It is a little bit less of an impact in terms of percentage terms for the sector.

Sherri Scribner, Deutsche Bank.

If I look at the numbers, it looks like the networking sector -- the guidance for the networking sector is a look bit better than I would have thought. Can you maybe give a little bit of commentary there in terms of is that also performing for the better than the overall market like Computing & Storage?

So our networking guidance we have given is consistent. I think it is a little bit lower than our previous expectations as Tim just commented on. But we are seeing some pretty consistent demand patterns and schedule patterns from our customer base. You know, certainly not as volatile -- volatile is a strong word -- but volatile as we have seen in some of the other sectors. It seems to be relatively consistent in terms of the week to week order planning that we are seeing, but certainly below the expectations we had 90 days ago, but not dramatically so.

Okay. Thanks. And then in terms of visibility, it sounds like you guys started to see a slowdown. Obviously your comments were that you saw a slowdown starting in February. What do you think your visibility is in terms of the orders that you have in place now? Do you think it is about 90 days, or can you maybe comment and talk about that a little bit?

Yes, we have just to kind of give some perspective, we go through a planning process it takes a look at a full 12 months, and typically we have visibility from customers for as long as 12 months. So that is kind of the starting point.

Now with the believability, obviously the near-term forecasts are much more believable then three or four quarters out. Generally looking at the next 90 days, there is a very, very high confidence level. We have rarely if ever missed the current quarter. I can think of one time in the last 10 years.

And looking a couple of quarters out, we tried to bracket expectations for the balance of this year on the last call. Maybe that was not the right thing to do given the fact there were a lot of fears about going into a recession, and we have got a little leg in our face here because of it. I think it softened a little bit more than we even anticipated on the December call.

But looking at the 90-day period, I would say our confidence is very high, and looking at a 91 to 180 day period, our confidence is good, but we were just surprised. So we try to be a little bit more conservative in the guidance that we provide the further out we go.

So the discounts will become heavier in the second through third and fourth quarter of any guidance we provide you. So progressive discounting depending on how far out we are going.

And would you say that you are discounting for the 91 to 180 days has gotten more conservative in the current environment?

I think our -- yes, I think our mentality in preparing for this is to be a little bit more conservative than -- yes, to be more conservative period.

Okay. And then can you just -- I'm sorry, but can you just repeat what the operating margins were for each segment in Q2?

We do not do it by sector I think. It is by division.

By division.

Yes, that is what I mean.

Yes. The EMS division was 3.2%. The Consumer was minus 1. It reflected the seasonal nature of that revenue stream there. And the Aftermarket Services was 7%.

Mark Moskowitz, JPMorgan.

A few questions. I have a clarification first, though. Tim, did you say or suggest that the air pocket that has bottomed in your view, or how should we think about how it is continuing into margin going into April?

Yes, I made the comment that I think we might be in a bottoming period right now. And that we might see a nice bounce back in late summer, early fall.

As far as your earlier commentary regarding how things have somewhat changed in the industry in terms of how the end market, the dynamics are having maybe having a little more impact on your business model versus prior years, has there been any change presently in times of the economics? I know maybe not so much for the current quarter, but are you getting a little more negotiations and sales cycles with your customers in terms of the economics of your deals that could be at risk as you go into the summertime?

That could be at risk? I'm not -- could you help me with that a little bit?

I'm just trying to get a sense in terms of the economics of your deals with your customers. Are they starting to give you a little more squishiness in terms of how they are feeling about their overall businesses, and maybe they are asking for some sweeteners from you that could hurt your margins as you go a little further out into the year.

No, the business does not really work like that. If they get squishy about how firm their demand is, our offering as sweeter to them isn't going to make it any better. We typically have -- actually for most of our products that we build, we are the sole source for that product. So we will live and die based on how that product sales. And our business is actually pretty high mix, particularly obviously in the EMS sector.

So it really is not a function of there is less -- the pie is smaller, therefore, everybody -- all my suppliers need to bid even more aggressively for the next quarter's production. It is not really how the business works.

Okay. And then as far as the sectors, can you talk a little bit more about the automotive in terms of what went on in the quarter report, and how are you kind of thinking about that business philosophy going forward? Because it came in a little lighter than expected.

A little lighter than expected. That is a seasonally down quarter, one. Two, we had a significant new program win that was delayed by about 45 days in terms of ramping. And we will see that ramp commence and gain some steam in our third fiscal quarter in our May quarter, and that is why we're guiding it to be up a bit.

And you have pretty high confidence in terms of the deferral being captured now?

100% confidence in that revenue being captured. I mean in terms of automotive sector overall experiencing some additional decline in April and May, I don't know. But the program that was launched, the delayed launching in the February quarter is launching now, and we are capturing that revenue.

Okay. And then just one last question for Forbes or for Tim, just bigger picture obviously we're sensitive to what is going on in terms of last quarter. The outlook was not as good as maybe folks were looking for and now we're here again similar situation. I was just kind of wondering why you do not provide yourself a little more wiggle room in terms of the full-year guidance in terms of the revenue range. It seems pretty tight just given that the macroenvironment seems to be hurting your model right now.

Well, I think in terms of the guidance we gave 90 days ago, we gave what we believe was a pretty wide range there, $400 million, which typically in this business is certainly discounted with our experience moving out in those quarters.

I think we are certainly in a recessionary environment today, which is certainly stronger than we had anticipated 90 days ago. We were not seeing these types of indications, and we had a very, very strong November quarter, and we are having those indications from our customers.

So certainly look in the rearview mirror, it certainly (inaudible) well to widen that gap but certainly given the information and planning process that we have in place at the time we felt it was appropriate. You know, obviously a 7% reduction in the latter six months is pretty extraordinary in this business. I think the last time we saw anything of that nature was seven years ago now.

But at this point, not to put words in your mouth, but why not just go 12, 3 to 13 billion for revenue range? Why still have such a tight range?

And then the next caller would say, why is your range so wide? Q3 is here. You have got to know what Q3 is, and then that means the disparity in Q4 is $800 million or something. And, therefore, you must be fearful you're going to lose a major customer.

And look, we're just looking at the numbers. We're trying to be more conservative. We are only guiding now for two quarters instead of three. We have already taken a big step down in this demand pocket, air pocket. If things degrade a little bit but not a great deal from here, we will be fine. If they did degrade a huge amount from here, then hopefully we will still be within the range, but things will be certainly at the bottom. We're trying to give you a realistic look at what our business looks like.

Shawn Harrison, Longbow Research.

A quick clarification just on the inventory correction. Do you think it will be completed on the communications and the display side by the end of the quarter quarter, or will that trickle somewhat into the fourth quarter?

I would certainly hope we will get the majority of that done in the fiscal third quarter.

How much inventory are we talking about in terms of dollars associated with that type of reduction quarter to quarter?

Probably somewhere in the nature of 50 to $75 million on the (inaudible).

Okay. And then just a second follow-up question, I think, Tim, you had mentioned that the outsourcing environment may have just been stopped up here a little bit. I wanted to make sure I was clear on that and just how long do you think before maybe that situation clears itself up and additional opportunities present themselves?

Well, we are working on new opportunities all the time. I did not mean to say that or infer that outsourcing is locked up right now. I think what my comments were you are maybe drawing that inference was about what the behavior of the marketplace is during a recession and then more importantly right after a recession as OEMs take a much closer look at their internal factories and see that the justification of maintaining vertical capacity is a poor investment choice relative to outsourcing and they actually embark on more aggressive outsourcing programs.

My experience is that when OEMs go through a recession like this, it becomes much more difficult for them to justify long-term investments and manufacturing capacity when people like Jabil can do it faster, better, cheaper. So when we start to see the end market recovery at the tailwind of a recession and early in the recovery, we have the impetus of end market demand, all of the business we currently have and the new customers, and we typically did some tailwind out of new outsourcing opportunities.

Okay. So the quoting opportunities have not taken a step back similar to what the --?

No. No, actually we're pretty busy right now working on all kinds of quotes in the business.

Jim Suva, Citigroup.

Tim, can you comment a little bit about a lot of people believe that the EMS model is very flexible, and when we see an air pocket like this, you can maintain your profitability, and yet we're seeing May year-over-year revenues being up but profitability being down. How should we think about that?

I don't think that at least people that I have spoken with think that when revenue goes down that you're able to maintain profitability or margins. I think our business is less -- if people have a tendency to think about us as a semiconductor company, oh if business goes down you're going to lose money because it's a very high fixed cost business, and that is not true because it is more working capital intensive than it is fixed cost intensive. And, therefore, we can maintain profitability and actually generate significant cash flow during a contraction as we reduce our working capital requirements. And I think, in fact, that is what you will see as we go through the next quarter or two. But in terms of margins and return on capital, that is going to be little bit more difficult.

No, I guess I was referring to year-over-year. Sales are up year over year for May. Profits are down, and you are in the middle of coming out of a restructuring. How can we connect those dots of coming out of restructuring, adding NSN which should be accretive, the sales being up but profits being down year-over-year?

Yes, we have added a lot of new business over the last year. We were really structuring the business to run by this time about 3.3 to $3.4 billion a quarter in terms of revenue, and losing $300 million in revenue does create some margin issues for us and some fixed costs that are not being absorbed.

So having said that, we are very confident that once we get back to that $3.4 billion per quarter level or more, we will be -- margins will recover, snap back and cash flow will snap back smartly.

Okay, that answered my question. As a quick follow-up, can you tell me what Jabil's capacity utilization was this quarter and kind of what you expect it to be?

In the slowing environment, would it be fair to think that competition and pricing is going to increase in this environment?

Depending on how long the environment goes on. I don't think it is appropriate to think about that in terms of the next quarter or two. Capacity utilization, we are significantly lower than we were a couple of quarters ago in Q1. It is not a metric that we track real close that we share with investors.

Do you see any change in competitive landscape as far as pricing, or do you think it is stable, or what are your thoughts there?

No, I think it is relatively stable.

Yuri Krapivin, Lehman Brothers.

I wanted to ask you about the cost savings from your current restructuring program. I believe initially you targeted the savings range of between 100 and $125 million, and Tim, you mentioned that in the August quarter you would expect to see some incremental savings of around $10 million. I'm just wondering when do you guys expect to hit the full run rate for these savings? Whether the original range of 100 to $125 million, is it still a good range to use?

I don't recall a range of savings of 100 to $125 million. But having said that, we're anticipating some improvement from our restructuring activity in Q3. We have actually been seeing some of that if you look at out -- in terms of SG&A line as we have moved through the last quarter or two also.

Tim talked about $10 million in Q4. And then what you're going to see in the first fiscal quarter of '09 and what I draw your attention to is follow the cash. Once we accrue these restructuring charges is when that cash is paid that we are actually closing facilities or downsizing facilities and unfortunately employees leaving the Corporation.

So we are anticipating to see more of -- much more of that in our first fiscal quarter and as we move into our second fiscal quarter of '09 where we anticipate about $50 million of cash coming out of the Company as employees leave, which will equate to probably around about the 10 to $15 million there.

I think what we have said consistently since we started the rationalization program quite a while ago, is that we would expect it to save us about 30 to 40 basis points. And in terms of absolute dollars, we talked about absolute dollars of cost avoidance because we did not have production to fill factories in certain high cost locations.

So if you looked at 30 to 40 basis points of benefit on a $13 billion run-rate, you're looking at $47 million a year, 40, $45 million a year, something like that.

So if we're saving $10 million in Q4 of '08, that is reasonable to think that we're getting the contribution we were looking for there. A lot of things change over a two-year period, so I'm not going to say it is as neat and tidy as that, but it does merely put with what we have been saying.

Okay, and then I have another question about your cost. I think recently a number of companies, in particular electronic component manufacturers, pointed to yet another wave of cost increases related to things such as utilities and transportation. You know, in Mexico, for example, currently the utility costs are going up quite rapidly. Are you seeing that kind of broad-based cost increases? And if so, what is your ability to recover those costs by charging your customers a higher price actually?

Logistics costs have gone up as fuel prices have increased, and our customers pay freight out, and our freight in is incorporated into our bill of material and cost structure. If we get caught with an increase mid-quarter, we have to absorb that in our margins. So typically the bill of materials are reset on a quarterly basis. So we would try and include that in the next quarter's pricing.

On the energy costs, frankly, I have to admit that I'm not -- I have not heard a lot of crazy talk there. We are not a huge energy user. It is not a big line item in our cost of goods sold, so frankly I'm just not tracking that personally.

We have time for one more question.

Paras Bhargava, BMO Capital Markets.

Tim, at an investor conference, I think it might have been the Goldman conference a few weeks ago, I think I heard you say you're seeing -- you have been seeing a slowdown for 180 days or so. And I think now you're saying 90 days and particularly in February. Maybe you could just help put all these dates together for us.

Yes, what I said is, on consecutive 90-day planning cycles, we have seen 3 to 5% reductions in the forward-looking plan. We plan our business a couple of times a quarter, but we do one very, very deep dive each quarter. And in those deep dives of consecutive 90-day periods, we have seen demand fall by 3% to 5%, and that is what I said.

So really this is a slowdown that has been going on for six months or so?

We talked actually in our December call the about parts of our business -- just to go back and give you perspective in the first quarter that we actually hit 3.6% operating margins, had a great quarter. We talked about the EMS division being about $50 million light to their original plan due to industrial control customers that were facing the US housing industry.

So if you want to start -- call that the beginning point, that would be the beginning point. Our fiscal Q2 was a little bit lighter than what we thought at the beginning of the year, and that has gotten quite a bit deeper in the February timeframe since that December conference call.

So you are probably referring to I don't know the Goldman Sachs conference that was in February. At that point in time, we had -- I said that things had weakened quite a bit in the last planning period. So I think that all kind of fits with what we have been saying.

Okay. (multiple speakers) Now last quarter I think I remember you saying you had won $400 million so of business that was going to come in in the second half of this year, and you actually broke some of it down by segment. are you actually seeing that business come through, or is some of that softening too?

All the new business we talked about is coming through. It is going to be a little bit lighter than our original plans just as everything else is a little bit lighter, to talk in general terms.

Sure. No, no, by --

(multiple speakers) -- each individual program individually, that would be -- I don't know how productive that would be. But in general terms, yes, I mean when you win new business and you hit a demand air pocket, it is going to be a little bit lighter than what the original intent was.

And in some of the business that you won, if people come back, some of the other people that were bidding on it come back with lower prices, is that sort of materializing here too, or is that not happening?

No, no. Typically when you win, you win, and it is a done deal. Things can get a little dicey or in some of the higher commoditize businesses, but for 90% of our business, once you have won it, it is won.

Okay. The final question for you, Forbes, SG&A, I think I seem to remember you saying it was going to be down a little bit this quarter and then down -- keep on going down. Maybe you can just give us a little color of what is going on and what do you expect in the next few quarters for SG&A on a dollar as a percentage of revenue?

Absolutely. So last quarter I actually guided up to about $115 million. We came in at about 110, and that guidance up was principally around bringing on resources associated with the NSN transaction that we closed towards the end of the first quarter.

What we have actually seen there is some good cost control there. We have obviously got some restructuring dollars activity in terms of coming through there also.

For the balance of the fiscal year, I'm guiding to about 113 to $114 million a quarter. Again, we have got some incremental staffing we're doing in our IT area as we build out footprints in India, Ukraine and in China. But otherwise, I would expect that to be relatively consistent for the balance of the fiscal year.

And then next year? Same sort of numbers or will it start to ramp up?

No, it may go up a little bit. Obviously you have got the salary increases and such like working through there, but it should not be dramatic. And once we get revenues back in place, we should be able to very much leverage that. I still have a strong belief system that SG&A can be a 3% type number or sub-3% we can put this revenue back on the topline here.

Thank you, everyone, for joining us on the call today. I would like to mention that management will be interviewed tomorrow on CNBC's Squawk Box at 6:50 and on the Fox News Station at 7:10. Thank you very much.

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