捷普科技 (JBL) 2008 Q3 法說會逐字稿

Good afternoon. My name is Vanessa, and I will be your conference operator today. At this time. I would like to welcome everyone to the Jabil earnings 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 third 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 slide show presentation on the quarter. You can follow our presentation with the slides that are posted on the web site and begin with slide 2 now.

Our forward-looking statements. During this conference call, we will be making forward-looking statements including those regarding the anticipated outlook for our business, our currently expected fourth quarter fiscal of 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. These 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 8-K and our other security filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Please turn to slides 3 and 4 now for the results of our third quarter.

On revenues of $3.09 billion, GAAP operating income was $63.1 million. This compares to $33.6 million GAAP operating income on revenues of $3 billion for the same period in the prior year. Core operating income, excluding amortization of intangibles, stock-based compensation and restructuring charges for the quarter was $85.3 million or 2.8% of revenue as compared to $87.1 million or 2.9% for the same period in the prior year. Core earnings per diluted share were $0.26 as compared to $0.23 for the same period in the prior year. On a year-over-year basis for the quarter, this represents a 3% growth in revenue with core operating profits declining 2%. On a sequential basis, revenues increased by 1% while core operating income increased 26%. Please turn to slide 5 for a discussion of revenue by division and sector for the third fiscal quarter.

Looking at the EMS division. which represented approximately 69% or $2.1 billion, growth of 5% on a sequential basis. Core operating income for the division in the quarter was 3.6% of revenue. Sector movements are as follows. In the automotive sector, production levels increased by 21% versus the prior quarter, primarily reflecting growth across four customers in this sector. Computing and storage decreased 1% for the -- from the second quarter. Industrial, instrumentation and medical increased 5% from the prior quarter, reflecting a return to growth across multiple customers in this sector including new assemblies with our medical customer base. The networking sector levels of production increased by 2% from the previous quarter. The telecommunications sector increased 4% sequentially, primarily as a result of the continued integration of the Nokia Siemens network relationship. On our consumer division, which represented approximately 26% or $800 million in the third fiscal quarter, a sequential decline of 7%, reflecting declines in the display sector. Core operating income for the division in the quarter was a negative 0.3% of revenue. Sequential sector movements are as follows: the mobility sector increased 8% from the prior quarter, primarily as a result of growth in volumes with our largest customer in this sector. The peripheral sector declined by 3% from the second fiscal quarter as a result of fewer set top box shipments than anticipated. The display sector decreased by 35% from the second quarter, reflective of a very challenging European demand environment with our customers in this sector. The aftermarket services division represented approximately 5% of overall company revenue in the third fiscal quarter. Core operating income for the division in the quarter was 6.8% of revenue. Revenue was consistent with the prior quarter.

Please turn now to slide 6 for our divisional and sector information for the quarter and percentage terms. Automotive, 5%; Computing and storage, 13%; Instrumentation, industrial and medical, 19%; networking, 22% of revenue; telecommunications, 7% and other, 3% for a total EMS division of 69%. In the consumer division, displays represented 5%, mobility 11%, peripherals 10%, again for consumer division 26% overall revenue, and the aftermarket services division, 5% of revenues. In the third fiscal quarter, two customers accounted for more than 10% of revenue, Cisco and Hewlett Packard, with our top ten customers in the quarter accounting for approximately 63% of our revenue as compared to 64% last quarter. Selling, general and administrative expenses increased approximately $7 million in the quarter. Research and development costs were $8 million in the quarter. Stock-based compensation was $10 million during the quarter, lower than forecast as a result of the reversal of stock-based compensation associated with performance-based restricted stock which is no longer expected to fully vest. Net interest expense fell approximately $4 million from the prior quarter, reflecting higher average cash balances and lower average debt rates during the quarter than in previous quarters. The tax rate in the quarter was 19%. I will now turn the call over to Forbes Alexander.

Thank you, Beth. Good afternoon.

I would like to review our balance sheet and some of our working capital metrics and would ask you to turn to slides 7, 8 and 9. The company's sales cycle in the quarter improved by two days to 21 days. Days sales outstanding improved by one day to 38 days. Accounts payable days outstanding improved by two days to 65 days. Inventory days increased by one day from the prior quarter with inventory turns being eight. Cash flow from operations was approximately $147 million in the third fiscal quarter. Return on invested capital was 9%, as compared to 8% in the second quarter. Cash and cash equivalents were $860 million, balances being $320 million higher than the previous quarter. Our capital expenditures during the quarter were approximately $66 million.

Depreciation for the quarter was approximately $61 million and EBITDA in the quarter was $146 million or 4.7% of revenue. During the quarter, we continued to add flexibility to our capital structure and completed an add-on $150 million to our 8.25% ten year senior unsecured note offer. We also completed an on balance sheet Euro Asian accounts receivable securitization program for the capacity of up to $200 million. Borrowings on this facility are effectively at rates of LIBOR plus 40 basis points, a very cost effective form of capital. At the end of the quarter, approximately $150 million was outstanding from this facility. We are very pleased with our performance in the quarter, executing to the mid-point of our revenue guidance, our core operating income levels and core earnings per share exceeded our previous guidance while improving our working capital management in excess of $50 million, or two days. Positive steps on our path to returning the company to our long-term targeted return levels.

The results posted for the first three quarters of fiscal 2008, revenue of approximately $9.5 billion and core operating income of approximately $275 million or 2.9% of revenues represent growth in revenue of 4% over the first three quarters of fiscal 2007 and core operating income dollar growth of 21%. Cash flow for operations of $146 million remains strong in the quarter. The first three quarters have produced approximately $420 million of cash flow from operations. Fiscal year 2008 to date, free cash flows, or cash flows from operations after capital expenditures of $215 million, and dividend payments of $44 million are approximately $160 million. I will briefly update you on our restructuring activity.

Charges recorded in the third quarter were approximately $3 million. Our overall rationalization plan is being managed according to our previously announced plan. With total charges recorded being $244 million. We continue to expect our total charges to be $250 million as we previously announced. During the quarter, cash payments associated with these restructuring activities were $15 million. The total cash payments to date gets the plan being $118 million. The total cash cost of such charges are estimated to be $175 million. Discussions with our employees that represent this continue, and we are complying with all statutory and consultation periods required of us. As a result, we currently estimate that the majority of the balance and cash payments shall occur during the next three fiscal quarters. Now I ask you to turn to slide 10 that will cover our business update.

Specifically, the fourth quarter of 2008. We now estimate revenue in our fourth fiscal quarter to be in the range of $3.2 billion to $3.3 billion. As a result, core earnings per share are expected to be in the range of $0.29 to $0.33. As a percentage of revenue, we estimate core operating margins to be in the range of 3% to 3.3%. Selling, general and administrative expenses are estimated to be $118 million. Research and development costs expected to be $9 million,. Intangible amortization also expected to be $9 million. Stock-based compensation is estimated to be approximately $15 million in the fourth quarter and interest expense estimated to be $23 million in the quarter. Based upon the current estimate of production and income levels, the tax rate on core operating income is expected to be 19% in the quarter. Capital expenditures for the quarter are estimated to be in the range of $60 million to $85 million while capital expenditures for the full year are now estimated to be in the range of $275 million to $300 million. Now I'll ask you to turn to slide 11.

Revenue by division and sector for the fourth quarter are estimated to be as follows: The EMS division revenues are estimated to be consistent with those of the third quarter or an increase of 10% on a year-over-year basis. Turning to the automotive sector, the sector is expected to decrease by 10% from third quarter reflective of normal seasonally lower levels of production. Our computing and storage sector is estimated to be consistent with volumes of the third quarter, industrial instrumentation and medical sector is estimated to increase by 3% from the third quarter, the networking sector, we expect consistent levels of production with the third quarter. Finally, the telecom sector is estimated to increase by 10% from the third quarter, reflecting strength in Europe from microwave products and a ramp of a new relationship in this sector.

Turning to the consumer division. We estimate an increase of 18% over our third fiscal quarter, an increase of 1% on a year-over-year basis. Breakdown of the sector is as follows: Displays is expected to be consistent in the fourth quarter, reflective of the European demand environment our customers are experiencing. The mobility sector is estimated to increase by 20% from the third quarter, reflecting increasing levels of demand and the ramp of new products crossing a number of our customers in this sector. The peripheral sector is estimated to increase by 25% in our fourth fiscal quarter, reflecting an increased demand in printing products and new product awards with our existing set top box customers. The aftermarket services division is expected to be consistent with third fiscal quarter. Please turn to slide 12.

With the fourth quarter guidance, our current estimate for the full fiscal year is now revenue in the range of $12.7 billion, $12.8 billion, with core operating income expected to be in the range of $370 million to $385 million or 3% of revenue. The result, core earnings per share are expected to be in the range of $1.11 to $1.15. At this mid-point, this guidance reflects a year-over-year growth in revenues of 4% and core operating income growth of 18%, EBITDA of approximately $615 million, or growth of 12% on a year-over-year basis. On a divisional basis, we estimate for the full fiscal year revenues in the EMS division be approximately $8.3 billion, consumer division, approximately $3.8 billion the aftermarket service division $0.6 billion. Core operating income expectations are estimated to be approximately 3.4% for the EMS division, 1.2% for the consumer division and 7.1% in the aftermarket services division. Cash flows from operations are estimated to be $600 million in this fiscal year, providing approximately $260 million of free cash flow after capital expenditures and dividend payments. I would now like the turn the call over to Tim Maine.

Thanks, Forbes.

Fiscal Q3 was a good quarter, all things considered. Margins and cash flow were a bit better than expected and the ground work has been laid for a more robust resumption of revenue growth in the coming quarters. Fundamentally, it was a good quarter of execution in a challenging macroeconomic environment. In the interest of keeping things simple, I will make a few brief comments on three areas of keen interest: current end market conditions, growth and margin expansion. The end market environment has not changed materially the past 90 days; conditions are weak but not worsening in a significant way. Macroeconomic indicators appear to be weakening. (inaudible) manifest and dramatically lower production levels for our company. Our current expectation is that macroeconomic conditions will continue as they are today for the foreseeable future. Any significant changes to environment, positive or negative, will have a direct consequence to our financial results. Still, it is under these less than exciting conditions that we expect robust resumptive revenue growth in the coming quarters. There are several underlying factors driving this expectation.

One is revenue stability in our mobility sector. We have said for several quarters that we expected revenue to stabilize in mid fiscal 2008 with the resumption of growth in the fiscal Q4 '08 to fiscal Q1 '09 time frame. We are now seeing this expectation come to fruition and hope to see an acceleration of this trend in fiscal 2009 as new program wins and significant expansion with existing customers is folded into our results. In addition to mobility, we know particular near and intermediate term strength in our telecom and peripheral sectors. We have secured new customers and have a good pipeline of opportunity with existing customers to support this growth expectation. Across our other sectors, new business wins and market share expansion is offsetting weaker demand due to the poor macroeconomic environment. Finally, I expect to trend out towards electronic design, assembly, fulfillment and service to drive outstanding long term opportunity for Jabil and other leading companies in our industry. Generally speaking, the recessions of 1991-92 and 2001-2002 were followed by very strong periods of growth for Jabil and the industry. Our strategy of diversification in providing service excellence across targeted sectors should serve us well in the years ahead.

I know that margin expansion is an important area of discussion, but I want to make a brief comment on an equality important area, and that is cash flow generation. Jabil's cash flow generation is actually quite good, especially so when a less than receptive macroeconomic environment. EBITDA in fiscal 2008 is expected to increase 13% for fiscal 2007 levels. EBITDA margins are expected to be 40 basis points higher in fiscal '08 than in fiscal '07 with capital expenditures relatively constant, free cash flow is actually increasing as a percentage of EBITDA. A healthy condition for us to be in. We also expect to expand core operating margins in coming quarters, largely from better absorption of our cost base and leveraging operating expenses as revenue expands. Additionally, we will proactively manage poor performing areas of our business and we will reduce or eliminate our exposure to areas which do not conform to our long-term strategic or financial objectives. The resumption of growth, good fundamental execution and focus attention to bring all sectors up to high performance levels should give us an increasingly positive outlook over the next year. We look forward to delivering results and achieving the high levels of expectation that have always been placed on Jabil.

Operator, we are readily for the question-and-answer period. Operator?

(OPERATOR INSTRUCTIONS). We will pause for just a moment. Your first question comes from the line of Steven Fox with Merrill Lynch.

Hi. Good afternoon. Just maybe diving into the gross profit improvement quarter-over-quarter. If I include options expense, it is an impressive $23 million sequential improvement on like a $30 million gain in sales. Can you break down that dollar gain and how you got there?

I don't think we will break down the dollar gain. I think it is several factors, one is certainly better leverage in our mobility sector. That was up a little bit better than expected. Our automotive group actually swung to a profit this quarter, which was very helpful to us. We had better efficiency in other operations and a couple of other sectors that did a little bit better than expected. We may have seen a little bit of a boost also from the restructuring efforts this past quarter, but not a huge amount.

Great. Then just on the 10% increase in telecom for the -- that you are talking about for this quarter, how much is from that new program win?

There's very little from the new program. It is primarily from strength we are seeing in Europe on the microwave product.

Great. Thank you very much.

Okay.

Your next question comes from the line of Amit Daryanani from RBC Capital Markets.

Thanks. Good afternoon, guys. Just a question on the restructuring benefits. I think last quarter we talked about seeing a $10 million benefit in fiscal Q4. Are we still on track for that, or did some of those benefits get pulled into fiscal Q3.

Amit, it's Forbes. Yes, I think there's probably a couple of million dollars slipped back into Q3 here as we have -- the cash expenditures in the quarter were $15 million which was a little bit higher than we had initially anticipated. So, we had some employees leave the company during the period. It is probably a couple of million, $2 million to $3 million at most.

Okay, so we should think about $7 million, $8 million benefit next quarter then for restructuring.

That's fair.

You guys are obviously doing a pretty good job executing despite a tough demand environment. The display business, that continues to struggle. Could you talk about -- what sort of timeline would you look at eventually exiting the business if things don't stack up, and maybe talk about what do we need -- do we need more revenues, or just operationally, things need to be improved over there?

We get a lot of questions about this, probably justifiably so. We are talking about it as an area that's under close very close scrutiny and remedial action plans. We have talked about a two to three quarter of really assessing the strategic fit with the rest of our business, and certainly, revenue would help. That sector has landed a number of new customers, Japanese and Korean customers and revenue expansion would help. Right now, we have got a significant inventory correction along with some weak demand in that area that is really, really impeding the progression in that sector. So, it is not a long-term struggle. Officially, it is still a sector that we have interest in and would like to see turn around. But, we certainly won't incur the type of performance we have on a long-term basis.

But Tim, there is nothing operationally we need to address? It is more getting more revenues through the pipeline?

No, we are actually pretty good at building -- we are actually darn good at building these tv sets. I think we have the best operations in Europe by far. They're located in eastern Europe, particularly Poland. Very, very good fundamental execution, very high quality levels and I think attractive to a number of customers. It happens to be an industry with expanding volume and a lot of need for out sourcing. So it should be a sector that is ideally suited to the value of proposition that Jabil presents to the marketplace. But there's also a lot of structural issues with glass manufacturers and where the profit is actually earned and in terms of the value chain.

So, we are assessing that very closely, and we want and will drive improvement in that sector and continue to access its strategic fit with the rest of our business. In spite of that, that's one of the negative parts of the story. I think if we look back at the analysts meeting, we really talked about automotive and displays needing to get modestly better, not move into quadrant one or quadrant two, which would be high growth, high return sectors or at least high return sectors, but needing to be -- to improve modestly, and then we also expected the mobility sector, which still had acceptable returns, but growth was lower than necessary and then the telecom sector to move into a strong growth and return posture and that is what we are seeing. And with automotive swinging to a profit in the most recent quarter, I feel very good about our ability to control the profitability in that area. So, I think all in all, when you look at the total picture, we are on track to do exactly what we said we would do.

Fair enough. Thanks a lot and congratulations on the quarter.

Thank you

Your next question comes from the line of Kevin Kessel with JPMorgan.

Hi guys. The mobility segment in the quarter was above plan, I think you were looking for flat and it was up 8%. Can you describe what exactly drove that? Was that perhaps maybe the ramp of additional customers outside of the main one, or was it primarily the main customer? And then also, as a follow up to that, the 20% growth that you are expecting for the fourth quarter, can you help us give a sense in terms of the overall breath, I guess, of maybe the mobility segments, as we look at the fourth quarter and going into '09?

Kevin, it's Forbes. With regards to the third quarter, the increase above expectation was primarily our largest customer, and established customer in that sector. So we saw the results of really the integration of our service with a Green Point activity, our Jabil Green Point activity there bearing fruit and also some strength in the business lines that we operate with them in the third quarter. With regard to the up 20 forward-looking guidance, that is reflective of growth across a number of customers there. We are actually seeing increasing demand across all of our customers, in fact, in that sector. If you recall, with our Jabil Green Point activity, we do have most of the major players in the hand set market in our customer base. Of course from Nokia, Sony Ericsson, RIM, Motorola and Apple. So, we are seeing a good demand profile across all of our customer base.

Forbes, is that for both assembly as well as plastics and decorative coatings, or --

Yes.

Yes, it is.

Okay. Is there any way --

Principal customers in that sector, six of the eight are growing.

Right. And Tim, is there any way to say at this point how many, I guess of the original Green Point customers have transitioned into full manufacturing relationships?

No, I don't think we are in a position to provide a lot of detail in that area. I think it will be a few quarters before we really start to talk about that in great detail. It is progressing.

Great. Thank you, guys

Your next question comes from the line of Jeff Rosenberg from William Blair and Company.

Hi. Could you give us an update on -- relative to what the things you were talking about at the analysts day on how you see the mix over the next couple of quarters relative to your expectations of the next billion dollars of revenue growth could flow through in 18% incremental operating margin?

Sure, Jeff. I think it is relatively in line with what we talked about at the analysts day. I think perhaps the one exception there is the displays, and Tim covered this a little bit earlier in this call, where we are seeing consistent levels through the balance of this year, but expect up tick as we move into the seasonal high area in our first fiscal quarter. But in terms of overall leverage and the way things are looking, if you look at -- we talked about a billion dollars -- adding a billion dollars of revenue and about an 18% leverage on that revenue base, predicated on the particular area of displays. Automotive, mobility and some telecom revenue coming through. If you look at the progression we have made from our second fiscal quarter, with the guidance we have given you and the mid point of our guidance in Q4, if you were adding somewhere in the region of $35 million or so of core operating income, our increased revenue base of about $200 million. So that equates for that 18% type ratio. So we feel we are pretty much on track with some of the comments we made at that analysts meeting and the expectations we have out there.

Just keep in mind that that presentation was considering a billion dollars in kind of a retrospective outlook. As Forbes says, we are certainly on track so far unto that. But depending on where the revenue shows up, some of the revenue might show up in facilities that are already fully utilized, in which case we would have to expand capacity in those factories. So quarter-to-quarter, you may see some variation in how much operating leverage we gain. But when we look back in three or four quarters, it is a revenue increase that is still the level of operating leverage we would expect to accrete.

Alright. I guess that was my question, whether over a multi-quarter period, as you look as your forecasts continue to update, if you still saw the mix generally pointing you in that direction. But if it sounds like so far, so good.

So far so good, but I want to warn you that it will not be completely linear. It has been linear so far. We have got a few quarters to go, and it is unlikely to be completely linear throughout that process. Again, depending on how quickly the revenue shows up, how steep the ramps are and which facilities the revenue shows up in. If they're fully utilized facilities that operate leverage for that quarter, it might be a little bit slower as we incur more significant start up expenses for any significant steep ramps or any significant delays, that could decrease the operating leverage in that particular quarter. But again, we feel very good about progress we are making and again, when we look back at this period of time, that operating leverage will be there.

Okay. The other question I wanted to ask also related to the same presentation at the analysts day, which was moving the mobility sector back into, I think, a 15% plus growth trajectory, and I was wondering what the time frame you feel like that is in order to be able to get there, because even as you continue to ramp over the next couple of quarters -- well, into the quarter you have guided for, you are still bumping up against flat. So, is it sort of as we get through the disappointment of seasonal ramp and through the February quarter, or would you characterize how we should think about how soon your visibility into getting back to 15% plus growth in mobility?

I think we will track against easier comparables, anyway. I think you have to go back all the way to Q1 '07 before you have a real robust quarter in mobility. That quarter was $600 million plus.

Yes.

So, I think next quarter guidance was pretty robust, and I would expect to see year-over-year Jabil tracking to the 15% growth level in the present case.

Okay. Thanks.

Your next question comes from the line of Louis Miscioscia from Cowen and Company.

Okay. Thank you. Tim, can you go back to the comments that you made about the macroenvironment. I think you said two things, I just wanted to make sure I understood those correctly. One was that it appears as if the macroenvironment might be deteriorating, but then also, that you are expecting it to be more stable. If you could just maybe help clarify that.

I am comparing what our experience is and what we with see in terms of production levels with exogenous indicators, what you read in the press, what you read in the Wall Street Journal, what the latest federal indicators are and so forth. Those flags, those indicators appear to be weakening. I don't think there's -- I don't think I'll get much argument there from anybody. What I am saying is relative to what we see in terms of production levels with our customers overall in total, that increasing negativity or weakness in economic indicators doesn't seem to be manifesting itself in our production levels today. And I think everybody should be forewarned that if the economy deteriorated and that started to show up in our production levels, then this condition can change, we are basing our outlook on the continuation of a weak but somewhat stable economic environment. So we are not banking on any type of robust recovery.

If we did get a recovery, our numbers could actually be better. If the negative indicators that we read about in the newspaper and on TV constantly drilling into our heads that things are very poor, then things could be lower than what we have guided too. So that is a caveat in an environment like this. What I am saying is that based on our present production levels with customers, we are not seeing a significant deterioration. Things have not changed materially or significantly for us in the last 90 days.

Okay. And you probably would say that you get about 60 decent days of visibility here?

Well, you have been in this business a long. We have visibility for a year for customers. It is probably only worth the next 60 to 90 days, and even then, if they are abruptly hit with things that they didn't anticipate, they may change their schedules as well.

One last question on the same topic. How much do you get the sense or the feeling from customers that they are obviously just asking you to keep the production levels because -- in case things do improve, they don't want to get cut short, and then all of a sudden, we get to maybe the end of the 60 days and unfortunately things change dramatically, from just the past experience with those situations you have had.

I don't get the impression we are being led on by customers at this point. We do have some cross checks and we do have some visibility into our customers' inventory levels, so I don't believe we are being inappropriately led by customers. I don't think it is -- they are hiding anything from us.

Okay. One last question.

Was that what you asked?

Yes, that was. R&D seems to be moving around a little bit. Is that basically just some quarters you are just getting paid for it and some quarters you are not, that is why it is sort of a little choppy here.

I'm sorry Lou, we were having a little side bar. What was the first part of the question?

Sure. R&D seems to be a little bit up and down. I was just wondering, is that just because certain quarters you get paid some for it and some quarters you don't.

That's really it. Customers and pay NRE sometimes and sometimes they don't. We will run off a program and it might be a quarter or two before another program starts up. So I think you can expect to see a couple of million dollar variation there from time to time. We typically have decent visibility into the next quarter though.

Okay. Thank you.

Okay

Your next question comes from the line of Matt Sheerin from Thomas Weisel.

Yes, thanks. Just wanted to follow up on questions regarding the display business. Obviously, been weak for reasons you stated. Could you tell us what -- and you are looking to build revenue, what revenue run rate would you need for it to get back to profitability, and as you look at customer opportunities, particularly outside of Europe, are there opportunities out there to bring in new business, and are you pursuing that?

We have been pursuing new business. I think for that business to be profitable to a level that would be considered acceptable, we would probably need in the $300 million to $350 million type of run rate. We certainly have a customer base that would support that today. We do not currently have the outlook, though, to support that, so that's one of things that we will be assessing that over the next two quarters, is can we develop enough business with the present customer base, which is actually a very good customer base, to get us into the $300 million to $350 million run rate on a more consistent basis than one quarter a year.

Got you. Then on the automotive business, where it looks like it is finally a little bit more stable for you, guidance looks more seasonal than anything, could you remind us what the geographic mix of your customer base is, particularly exposure to the big three in the U.S.. and then just comment on the project wins and the some of the incremental business you are bringing on there?

I don't have a big three exposure number. We have a big European customer in automotive, we have two North American customers. The newest North American customer I think has done a fabulous job in diversifying their customer base to -- particularly to Asian vehicle manufacturers and most of our customers have efforted really as the Asian manufacturers and even some of the European manufacturers have been comparatively more attractive opportunities for them to develop real businesses there. But I'm sorry Matt, I can't tell you exactly what our big three exposure is.

Okay, that's fair. And then Forbes, just a quick question on the tax rate you guided for about 19% this quarter. Should we be thinking about that level for FY '09 as well?

Yes, I believe that's an appropriate rate to use Matt, yes.

Alright, thank you.

Your next question comes from the line of Shawn Harrison from Longbow Research.

Hi, good afternoon. If you could just maybe talk a little bit about the ramp timetable for the new telecom customer. Are we looking more early part of '09 for that to begin to ramp or beyond that?

Telecom, by its nature, is a slower ramp type of business. I think you should count on that being a multi-quarter ramp process.

And so --

I think it will eventually be a material customer for us, and we certainly hope it to be.

Okay. And then just a follow question on cash deployment. I know you have another, say $50 million in cash for the restructuring here. Generating another incremental $100 million of free cash flow in the August quarter, how should we expect that to be deployed going forward? Some working capital, some CapEx, but beyond that?

Currently our main thoughts are continuing to fund our growth. If you look over the next couple of quarters, while we are not giving any guidance into our first fiscal quarter, that is typically a very seasonally high quarter for us with our consumer base of customers. History will show you we tend to either consume cash or pretty close to break even in that fiscal quarter as we see growth with seasonality with that cash coming back into the company in the February quarter. As we see things right now, we are pretty comfortable with our dividend levels where they are. We use the cash currently for the next couple of three quarters to fund the continuing growth we see, and once we get into the second fiscal quarter, we will revisit that and maybe determine what the appropriate actions may be.

Okay. Just one quick follow up. That incremental $50 million in cash restructuring cost, what should we expect in savings from that in terms of a dollar amount?

Yes. Well, we talked before about $10 million in the fourth fiscal quarter. Some of that is coming to Q3. So, let's call it set in there and then you are probably looking into maybe another $10 million over that time frame. A lot of the costs -- the cash that is leaving the company over the next three fiscal quarters is really results the cost avoidance out of some of our western European facilities that we are downsizing in a pretty dramatic fashion.

Okay. Congrats on the quarter.

Thank you

Your next question comes from the line of Sherri Scribner from Deutsche Bank.

Hi. Thank you. I was just curious if you could comment a little bit on your inventory levels in the quarter. They ticked up a bit. Is there anything there we should think about?

Nothing particular, Sherri. You are absolutely correct, it has ticked up by $29 million in about a day there. Some of that is prepositioning for some of the growth that we are seeing quarter-over-quarter, but I am optimistic that we can take care of that day back out as we move through the next quarter here.

Okay. And then if I look at the debt levels, Forbes, you gave some pretty good detail about how you are changing the capital structure, adding $150 million and then another -- it sounded like a revolver in Europe. You have added about 100 -- $250 million sequentially to your debt levels and increased your leverage a bit. I am just curious, you are generating a decent amount of cash. What is the sort of logic there for adding that debt?

To give us flexibility. As I said a little bit earlier on, we do see some great growth opportunities here across the coming quarters, and certainly over fiscal year '09. So again, it just really gives us stability in our capital structure, spreading some of these debt elements out through 2018 and gives us lots of flexibility to grow the business. Then we will see where we go with that and whether that is an opportunity to increase dividend or stock repurchase at some point in the future, we will look at that.

Sherri, keep in mind that the $150 million add-on to the 258.25 ten year senior bond was really a completion of an intended $400 million deal that we wanted to do in January, but the credit markets just slammed shut on us and we weren't able to do the full $400 million. So, it is really a completion of the capital structure plan that we talked about, actually late in '07, as a result of the Green Point acquisition. So that was an $800 million long-term investment that we put into ten year, five and ten year money on our balance sheet through the bank term loan and our $400 million deal. The Euro, Asian, AR securitization program, that's -- I believe that's a 364 day --

It is.

That's kind of a short term, but as Forbes said, it is very, very low cost money and I think a good way for us to fund the business.

Okay. Thanks. That's very helpful. If I could just squeeze in a quick question, maybe Tim, you have been talking about the overall EMS industry. I think you have said, the potential to be grow 10% to 15% in future. Clearly, we've had slower growth recently with some customers falling off and the weakness in the economic environment. When do you think we start to see that 10% to 15% growth? Is that in the middle of fiscal '09, or -- I don't expect that we will see it this year, clearly, but when do you think we will start to see something like that?

Sherri, we haven't initiated guidance in '09, but I would expect '09 to be a much better year than '08.

Okay. Thank you

Your next question comes from the line of Sean Hannan with Needham and Company

Yes, thank you. Sorry to beat a dead horse, but if I could just drill into mobile again, you've talked for a little bit of time around a lot of the new programs that you are taking on, and if there is a way, perhaps, to get a sense of how these programs are focused in terms of whether these are more middle, lower tier. I know you mentioned Apple, so obviously, that gets to a different end product, but if there is a way to provide a little bit of color around that for these new programs with your customers.

I am not sure if I could do that other than to say, generally speaking, our activity is -- has historically, and today is more pointed at the mid to high end range of the product lines, and certainly our mechanics capability with decorative coatings and metals that we do is clearly directed more towards the mid to high end product ranges of our customer base. That said, I think we have got very strong capabilities out of our India, Ukrainian and Chinese factories that can support the low end needs of our customers and we are fully committed to be a full service supplier in those marketplaces.

Okay. That's helpful. Then secondly, this was a topic, Tim, I think that you had brought up on the last call, but we didn't really hit on it this time, and it is a small portion of your business, but is there perhaps a way to provide a little bit of incremental color around your outlook and performance within military and what you are seeing there?

We haven't been breaking that out, although I think we talked about it a little bit at the analysts meeting and have done some drill downs. The defense and aerospace business is actually doing quite well for us now. I think a $250 million to $300 million year run rate is kind of generally the position that we are in today, and over the last -- it has been -- it has taken a long time to develop the manufacturing and relationship confidence to really penetrate that market in a more mature way, but at that kind of run rate, I think it is well positioned for good growth.

Okay. Then lastly, if I could just jump into storage for a moment. In separating that out from your larger group of computing and storage, is there anything that you are seeing there from your customers and just general sentiments within the enterprise?

Most of our computing and storage sector is storage, and most of that storage is enterprise level storage. We have some great customers in that area. Network appliance, EMC, IBM, HP and others. That's actually been pretty strong, I mean even through this kind of slack economic period, it has continued to be fairly strong for us, and we are really investing in that area both in design, our mechanical capability, our global fulfillment capability. We are really -- we want to make that a real cornerstone of strategic advantage for our company, and it is a real target sector for us. We are going to continue to invest in capabilities there and really strengthen our position as rapidly as we can.

Okay. That's very helpful. Thank you.

Thanks.

Your next question comes from the line of William Stein from Credit Suisse

Great. Sounds like I got in just under the wire. First, I would like to retouch on the inventory question. Forbes, on last quarters call, or maybe it was Tim, you guys spoke about customers pulling down demand at the end of the quarter and that was what caused an inventory build in fiscal Q2, and you expected to bring down inventories by, I think 50 to 70 million in fiscal Q3, yet here we have another build. I am curious. What changed? I know you said earlier that maybe building for better anticipated demand. Did you see a change in the demand picture during the quarter that made you decide to do that?

We don't effectively decide to build the inventory. That's really driven by indication from our customers, obviously in purchase orders for products, what's driving that demand in. The build up here, it is $20 odd million, it is nothing overly dramatic when you look at the growth that we have, leaning into Q4 here. But there are some areas of our business where we are building smaller lots, particularly in areas of instrumentation, medical. There's some areas of our business where you are only looking at inventory turns and maybe four or five a year, best case six in those industries. So we have a little bit of work to do internally and -- on improving some of our processes there, but nothing dramatic in that area. So there is nothing material going on in terms of what we saw coming into the quarter and the corrections there are what we are seeing coming out.

Okay, great. Then also, on automotive, we have spoken a bit about the other unprofitable or the traditionally unprofitable segment of displays and looking at a two to three quarter analysis period, I think you said. Now automotive apparently turned a profit this quarter. Do you view that as sustainable at the current run rate, or is that something that is kind of touch and go? What's driving the range there, and do you see it as permanent or not?

What drove the change there is better operational performance and more revenue, and we will probably take a step back this quarter, but it is a seasonally down quarter, has been since as long as I can remember.

As long as I can remember.

And so that should be expected a little bit, and I think automotive is a great opportunity to swing back to profit in fiscal Q1 and have some sustainable improvement in their outlook.

So Tim, should I take that to say that for you to think that that segment is more or less off the table as far as what you might go away from if you can't turn it around. In other words, is this -- do you view this as sustainable profitable now?

I think we would like to see consistent results first and keep the pressure on the people that run that sector for us and so, we need to see more than one data point on the chart, but it certainly fits with our strategic outlook and there's no reason it cannot conform with our financial objectives. So, I think we have a high level of commitment to make this work but to be fair, we would like to see two or three quarters of improving results before we would take the pressure off of running that business.

Okay. Thank you very much.

Okay.

Operator, we have time for one more question.

Your next question comes from the line of Alex Blanton with Ingalls and Snyder.

Hi, good afternoon. First, I'd like to just ask a question regarding a story that was on Reuters this morning at about 3:00 a.m. regarding the weakness that has been seen in Hon Hai, Foxconn this year, down 50% for the year, down 6% they said yesterday -- or the day before, I should say and yesterday, and Compal also down 6%. Blaming some of that weakness on fears that there would be cost increases in labor and other cost elements in Asia for those Asian companies and your competitors. Could you comment on how that might affect you and what the differences might be between what their experience would be? Because I think that the weakness in those stocks is also slapped over into weakness in some of the North American companies, and it may not be appropriate

Yes. Thanks for keying that up, because I think one of the dynamics that happened after the 2001-2002 recessions is there was a head first pell-mell move to China in particular as companies legitimately efforted to reduce cost and rationalized the supply chain. A very attractive collusion was a -- kind of a fixed-base of operation vertical campus, everything in one place. So build in the cheapest location in the world and export from there, and that was, for Foxconn, obviously, fabulously successful for them. Maybe less so for some of the ODMs that you mentioned. But generally has been favorable for those that had limited global operations, but significant vertically integrated China scale. I think what we will see going forward is OEMs really desiring to have a more diversified global footprint.

So some of the companies that failed to invested in global IT systems, sophisticated demand supply management tools, order fulfillment capabilities around the world, really developing the capability to transition production from one location to another, globally either for cost or for customers to opportunistically generate market share within targeted markets like (inaudible) , companies that made those investments, I think, will benefit from them going forward. Because another dynamic, aside from the escalation of taxes and labor costs within China, is fundmental increase in logistics costs around the world.

As fuel prices continue to increase, logistics costs will increase and OEMs will effort to reduce their carbon footprint around the world and they will continue to get pressures from NGOs and others to reduce the complexity and the amount of logistics that they employ to get their product to market. All of which, I think, will play into fundamentally strong, broad-based global footprint supported by world class sophisticated IT systems and people. I think looking forward, the types of strength that Jabil can bring to the table will compare very well against the other choices in the marketplace. I don't know if that has anything to do at all with weakness in stock prices in North America or China or Taiwan, but if you invite me to get on the soap box and talk about the relative advantages and disadvantages, that would be my point of view on it right now.

Thank you. The other question I have is regarding, Forbes, regarding the 18% incremental margins you talked about with the first $1 billion, I am having a hard time with some of these numbers because if your sales for this year are up 15%, let's say next year at the high end, that would add $1.9 billion. If you get 18% on the first $1 billion, let's say you only get $23 million or $25 million on the second $900 million, or about 2.5% incremental on that, it gets you to a 4% operating margin on the total sales, but also gets you to $1.90 a share. So, that seems a little bit excessive to me in view of the current numbers people are expecting. Even if you reduce that to say, $1.60, that would give you about a 3.4% to 5% operating margin on those sales. You would only be getting a 6.5% incremental margin on the whole and you would only be getting $124 million on the additional $1.9 billion of sales. So it doesn't seem to add up. The 18% seems to be too high, it is giving us a number that's way above anybody's expectations.

I thinks the only too high because it doesn't fit with the valuation picture, and it doesn't fit with the valuation picture even at 3.5% operating margin. So, what the market must be discounting is in the ability to grow the business. That's the way I would look at it. And if you believe that we can grow the business, whether it is 3.5% or 4%, we will make the present valuation of the company look extremely low.

It would seem that way. Thank you.

Okay. Thank you.

Okay.

Thank you. This concludes our conference call for today. We will mention to people that cable management will participate in an interview tomorrow morning on Bloomburg at 6:40 a.m. eastern time. Thank you very much for joining us today.

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