捷普科技 (JBL) 2009 Q2 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Jabil second quarter 2009 conference call.

All lines have been place 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 second quarter fiscal 2009 conference call.

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

This call is being recorded and will be posted for audio playback on the Jabil website in the investor section, along with today's press release and a slide show presentation on the quarter.

You can follow our presentation with the slides posted on the website and begin with slide one now.

Our second quarter 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 third quarter of fiscal 2009 net revenue and earnings results, our long term outlook for our company, improvements in our operational efficiency and in our financial performance.

These statements are based in 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, 2008, on subsequent reports on Form 10-Q, and Form 8-K and our other securities 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.

I'll now turn the call over to Tim Main for some opening remarks.

Thanks, Beth.

Over the course of the second fiscal quarter, our principal focus was on managing working capital and adjusting our infrastructure to the lower demand levels across-the-board.

In this respect I think we were successful.

We generated cash flow from operations of $343 million, we paid down $100 million of debt, reduced inventory levels $200 million, and ended the quarter with $775 million in cash.

We also successfully renewed our AR securitization facilities of $450 million.

Our liquidity position has been enhanced by $224 million from the first quarter.

We are reducing our cost structure, having announced a $65 million rationalization program in January.

This process is under way, and we still expect roughly one year pay back on the cash cost of that rationalization.

The overall business environment remains poor with limited visibility.

As expected and previewed in our December earnings call, customers reduced schedules significantly, especially from mid January through the first two weeks of February.

Although the erosion in demand has abated a bit, we remain cautious and worry of further deterioration.

I'll turn the call over now to Beth and Forbes before I close with some additional comments.

Okay.

Thanks, Tim.

If everyone could turn now to slides two and three, the results for our second quarter of fiscal 2009.

On revenues of $2.89 billion, our GAAP operating income was a loss of $500,000.

This compares to $1.6 million GAAP operating income on revenues of $3.06 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 $51.2 million, or 1.8% of revenue, as compared to $67.8 million or 2.2% for the same period in the prior year.

Core earnings per diluted share were $0.13 as compared to $0.20 for the same period in the prior year.

On a year-over-year basis for the quarter, revenue declined 6% while core operating profits declined 25%.

On a sequential basis, revenues declined by 15% while core operating income declined 49%, reflecting the seasonal nature of the consumer sectors we serve and the reduction in schedules as a result of the global economic recession in which we are operating.

Please turn now to slides four and five.

Turning to a discussion of revenue by division and sector for the second fiscal quarter.

The EMS division represented approximately 58% or $1.67 billion, a decline of 16%, as compared to the first quarter of fiscal 2009.

Core operating income for the division in the quarter was 1.3% of revenue.

Sector movements are as follows: Production levels in the automotive sector declined by 31% sequentially, and represented 3% of revenue.

Computing and storage sector decreased by 6% from the first quarter and represented 12% of revenue.

Industry, instrumentation and medical sector declined 10% from the prior quarter and represented 19% of revenue.

Networking decreased by 20% from the previous quarter, and represented 17% of revenue.

Telecommunications decreased by 32% sequentially, and represented 5% of revenues in the second quarter.

In the consumer division, represented approximately 36% of overall revenues or $1.04 billion in the second fiscal quarter, a sequential decrease of 15% reflecting seasonal declines offset by the ramp of new business wins in the mobility sector.

Core operating income for the division in the quarter was 1.3% of revenue.

Sequential sector movements are as follows: Displays sector decreased by 52% from the first quarter, representing 4% of revenue.

The mobility sector increased by 13% from the prior quarter and represented 21% of revenue.

The peripheral sector decreased by 29% in the second fiscal quarter, and represented 11% of revenue.

The after market services division represented approximately 6% of overall Company revenue in the second fiscal quarter.

Core operating income for the division in the quarter was 9% of revenue, and revenue grew by 4% from the prior quarter.

Turning now to our second fiscal quarter, there were two customers that accounted for more than 10% of revenue, and our top 10% customers in the quarter accounted for 61% of revenue.

Selling, general and administrative expenses declined by 11% to $106 million as a result of restructuring and cost control initiatives in the quarter.

Research and development costs were consistent with the prior quarter at $5.7 million.

During the quarter we also recorded a distressed customer charge of $7.3 million associated with the filing for bankruptcy by Nortel.

This charge relates to a provision for pre-bankruptcy accounts receivable.

Stock based compensation was 5.2 in the quarter, reflecting a reversal of some previously expensed, associated with performance based equity awards no longer expected to vest.

Net interest expense for the quarter was $19 million, reflecting reductions of debt and increased liquidity levels during the quarter.

The tax rate on net core operating income in the quarter was 17%.

I'll now turn the call over to Forbes for a review of our balance sheet and ratio trends.

Thank you, Beth.

Good afternoon, everyone.

I'll now ask you to follow along on slides six, seven, and eight.

The company's sale cycle in the quarter contracted by four days to 20 days.

Day sales outstanding improved by eight days to 36 while accounts payable days fell by four days to 62 days.

Our inventory balances declined by $200 million, while days in inventory were consistent with the first quarter at 46 days.

Inventory turns remained at eight.

Cash flow generated from operations were $343 million in the quarter, reflective of net working capital contraction.

Our return on invested capital was 6% in the quarter, while cash and cash equivalents increased by $195 million to $775 million.

Debt levels were also reduced by $100 million during the quarter, and no sums were outstanding on our $800 million revolving credit facility.

Our capital expenditures during the quarter were approximately $70 million.

This level of expenditure primarily reflects continued investment in our IT infrastructure and capacity support in new programs being ramped in the mobility segment.

Depreciation for the quarter was approximately $64 million, with core EBITDA in the quarter being approximately $118 million, or 4.1% of revenue.

We're extremely pleased with the manner in which we executed to our quarter's working capital and operational plans, in a very turbulent economic and end market environment.

Cash flow from operations of $343 million, debt level was being reduced by $100 million, with cash levels increasing to $775 million, which will continue to execute to our plans in place, to reduce inventory levels to reflect forecasted demand to which we are guiding, while continuing to manage our accounts receivable and payables balances.

Capital expenditures shall continue to slow through the third quarter given the overall macro demand environment.

We expect our sales cycle to remain around 20 days or better in the coming quarter and as a result, cash balances at the end of the third quarter are expected to approximate $900 million while debt level has been consistent with those at the end of the second quarter.

We're also pleased to note that as we announced earlier today, we have renewed our accounts receivable securitization facilities with a total availability under these facilities of $450 million.

I'd now like to turn to our restructuring activities.

With the economic slowdown during the second quarter, we announced restructuring activity of approximately $65 million over the balance of fiscal 2009 and fiscal 2010.

Cash charges associated with such plans were estimated to be $54 million.

As a result of such activity, we expect to realize $55 million in annualized cost savings.

During the second fiscal quarter, we reported charges of $32 million associated with these activities.

Our cash payments associated with this plan were $1 million in the quarter.

Discussions with our employees and their representatives continue, and we're complying with all statutory and consultation periods required of it.

As a result, we currently have cash payments totaling approximately $10 million will occur in the third fiscal quarter.

We currently expect to record charges of $12 million on a GAAP basis associated with this activity.

Turning to goodwill impairment.

Due to the macroeconomic environment and in particular, the decline in our equity value, as of 28th of February, 2009, as compared to the 30th of November 2008, and the resultant decline in our market capitalization, we have determined that an indicator of potential goodwill impairment is present for the second fiscal quarter.

Accordingly, we're performing goodwill impairment analysis using the two step approach as required under SFAS 142.

Any such impairment may also result in deferred tax valuation allowance charge.

This analysis is anticipated to be completed in early April.

In the event that we determine goodwill is impaired, in whole or in part, a non-cash charge will reduce reported GAAP net income and earnings per share.

The goodwill net deferred tax asset balances at the end of the second fiscal quarter totaled $731 million and $184 million respectively.

Any such non-cash charges do not impact our normal business operations, our availability under our credit facilities, or are reflective of our future earnings power.

And I'll now ask you to turn to slide nine to give you a business update.

As a result of the continuing very difficult broad based macroeconomic environment, we estimate sequential declines across all sectors we serve.

As a result, we expect at the mid point of our guidance, 10% sequential decline in revenues, which will not be providing sector guidance for the quarter.

Overall company guidance for the third fiscal quarter of 2009 is as follows: Revenue is estimated to be in the range of $2.5 billion to $2.7 billion.

Core operating income is estimated to be $0 to 40 million.

As a result, core earnings per share are expected to be in the range of a loss of $0.08 to income of $0.08 per diluted share.

Selling, general and administrative expenses are estimated to be consistent at $106 million.

Research and development costs are expected to be approximately $7 million in the third fiscal quarter and tangible amortization is estimated to be approximately $7 million, and stock based compensation is estimated to be approximately $14 million in the third quarter.

Our interest expense is estimated to be consistent with that of the second quarter and based upon the current estimate of production and income levels, tax rate from core operating income is expected to be 20% for the quarter.

Our capital expenditures in the third quarter are estimated to be in the range of $40 million to $50 million reflecting ongoing IT infrastructure refreshes, and maintenance capital expenditure levels.

And I'd now like to hand the call back to Tim Main for some closing remarks.

Thanks, Forbes.

At this point the next 90 days is not only the most important test for our Company.

I believe we've assured ourselves or adequate liquidity and have solid control of our business, if business stabilizes, our earnings will rebound smartly and we will progress from there.

If business deteriorates, we continue to convert working capital to cash and will increase our liquidity.

We will remain flexible and adapt to the near term challenges we confront.

But with challenges come opportunities and as much as anything we are working to capitalize on the opportunities to increase our long term earnings power.

It doesn't show up easily in this environment but we've actually enjoyed new business wins in most of the sectors we serve.

We are encouraging customers to narrow their supply base to fewer suppliers having sustainable financial strength, and the ability to invest in critical core capabilities and technologies.

We have reduced our participation in sectors that lack the growth and return characteristics we expect, and we do think the recession will be a catalyst for more outsourcing from more companies and a broad range of industries.

We are stressing customer service and maintaining an aggressive posture to build our business.

Business has been unpredictable over the past year and I don't expect the clouds to break in the next 90 days, but I think people and businesses will continue to need electronic products and adjacent services and I expect much of this to be outsourced to experts like Jabil and a few others in our industry.

A severe recession can be transformative and cleansing, with our financial strength, breadth of services and focus on customer service I think we have a solid future ahead of us.

Operator, we are now ready to begin our question-and-answer period.

(Operator instructions).

Your first question comes from the line of Brian Alexander with Raymond James.

Thanks.

Just on the EMS segment, if I did the math right it looks like the revenue was down about 18% year on year, but operating income was down about 66%, so quite a bit more negative leverage than I think some of us were expecting.

Could you kind of talk about that and relate that to the gross margin weakness that you saw in the quarter?

Thanks.

Brian, if you look at where we've come from over the last couple of quarters, it's really about some of the declines we've seen in that EMS sectors we're serving there, against the cost base we have in place, so going back, as we have started at the beginning of the fiscal year, we're building about $3.8 billion or $3.9 billion and the EMS sector gave us a very large portion of that from in excess of the quarter, and as we've come through, we see some in the region of $300 million to $400 million of revenue peel off there and it's a case of appropriately bringing our cost base in line as that revenue declines, which we're attacking, so we've announced the restructuring plan in the quarter and that's in process.

We're communicating that to our employees and we should start to see benefits of that moving forward into the back half of the year here, and one thing we do need is revenue declines abate within the markets that we're in but it's principally around the rate of decline you've seen there, and you point out the consumer division is doing relatively well given the marketplace that we're facing here with some sequential growth in our mobility sector, offset by seasonal declines in displays and peripherals, so it's really about appropriately sizing the cost base in the EMS sector, and to a degree the consumer sector.

And maybe just comment on the guidance, the pretty tight range of revenue guidance, $2.5 billion to $2.7 billion, but clearly a wide range of profitability of breakeven to $40 million in terms of core operating income.

What's driving such a wide range of operating income on such a tight range in revenue outcomes?

Yes.

So I'll take you back to the progression of what we've seen in terms of declines and revenues, so what we saw in the second fiscal quarter versus the first fiscal quarter, for every dollar of revenue we saw approximately about $0.10 of income peel out.

The low end of our guidance as you point out, that range is wider and the low end of our guidance for fiscal Q3 would suggest the $0.12 to $0.13 decline per dollar of revenue, so we're really depending on the mix across our sector base, and some of the potential timing of that, and our restructuring activity will very much depend where we land in the quarter, so there's a little bit of conservatism built in there at the lower end, given that metric that I've just quoted of $0.10 on the dollar of decline, but we feel it's appropriate given the overall macroeconomic condition and the markets that we're serving, so appropriate, but I think realistic in terms of the range.

Okay.

I think the revenue guidance being a little bit tighter, a little bit of a function of I think the rate of erosion slowed down a bit, and I feel a bit more confident that our revenue range is pretty solid.

The mix of the business will have a pretty significant impact to the actual profitability levels, and frankly, I think we're just being relatively conservative in this environment.

Operator?

We can take the next question please?

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

Thanks a lot.

Good afternoon guys.

In the past, you've talked about looking at strategic alternatives on the display and even the auto business.

Is that still on the table and do you guys expect to have some sort of decision of business in the near term given that profitability continues to be an issue in both those segments?

Those segments are much less of an issue than they have in the past.

We've really proactively worked those sectors down below 7% of revenue, and so I wouldn't expect them to be a significant topic of discussion going forward.

All right, and then I guess as you look into calendar '09, do you get a sense that this should be the low point in terms of a revenue perspective or do you think it remains choppy and we possibly continue to trickle down sequentially on a broader revenue basis?

I don't think our crystal ball is any better than yours, and visibility is pretty tough to predict.

I think we've just really recently over the last three or four weeks started to see a little bit more stability and we're a February report versus a March report, but March reports are really bad.

Our February quarter was helped a little bit by the fact December was still a pretty good month in terms of a run rate in the consumer season, and then as an inventory adjustment took place, I think customers probably overshot or were a little bit too optimistic in the October, November, December time period, and there was definitely an inventory adjustment in the January-February period, so, I think your March reports will probably reflect that as well and it's a little early.

If we were reporting in April, which we would if we were March reporting, we might have a little different guidance and a little more confidence that maybe we were starting to see the bottom.

I've been through a couple recessions here, bottoms are unpredictable.

They by nature tend to be pretty choppy, but what you'll see is revenue levels start to stabilize overall, the mix will become very unpredictable, but the fact that we're winning new business if we can gain some stability and the numbers don't have to go up, they just have to stop going down at the rate they have been, then the new business wins will begin to show positive growth in revenue and we'll start to enjoy some significant operating earnings leverage.

At this point, we're being, if we had to take a guess, the $2.7 billion range is kind of where we are today.

We're guard banding a bit for further erosion down to $2.5 billion and we'll see, I think our primary focus right now is to make sure that we have the right liquidity and the right financial flexibility, which I think we've done, and then when things start to stabilize, whether it's this quarter or next quarter then we'll be able to start to grow earnings and margins again.

Fair enough.

Just a final question from me.

Forbes, you guys did a pretty good job of cash in ratio in the quarter.

Could you update us on the debt that come next year and is the goal to pay it off at cash you have or rollover that debt with some new issues at some point?

Yes, Amit, we'll continue to look at that but certainly, with the cash generation that we're seeing, certainly very very healthy levels as you point out this quarter, expect that to be healthy again at the end of May, but certainly, we'll keep an eye on the credit markets overall and depending where the bottom is here, we continue to see further cash generation if this were not the bottom, and we all hope it is, but certainly cash levels with our working capital would remain in that 900-plus type arena, so we'll monitor the credit Markets.

I think there's opportunity to potentially redeem those but we'll wait and see.

We'll wait and see.

Obviously, when we see an upswing, we'll be consuming some working capital.

It's just when that occurs, but so those mature in July of next year, so we've got plenty of runway yet to determine a course of action but right now it's focused on liquidity, growing the cash balance and managing working capital.

Fair enough.

Thanks a lot for your time guys.

Your next question comes from Sherri Scribner with Deutsche Bank.

Hi, thank you.

Tim, last quarter you gave a lot of detail in terms of how you had thought about revenue in the quarter and the guidance that you gave and then talking about this quarter that you're handicapping the revenue by about 9%.

I was hoping maybe you could give us a little bit of detail on how that worked out versus how the quarter played out versus your expectations.

Clearly the revenue was a bit better than the Street was expecting and then also, what you see going into the third quarter.

A little bit like Q1 and when we have the conference call, orders really hadn't been cut and we're looking at a forecast that was significantly higher than we were guiding to and then in December, we felt that probably when January rolled around that a high probability the customers would come back and cut their forecasts and that's what happens so same thing kind of happened in September.

We provided guidance and then mid-October through November, customers cut schedules pretty significantly, so I think it played out pretty close to how we thought it would play out.

We went into the quarter with a much higher revenue level than $2.88 billion.

And experienced the erosion again in mid January through February.

Again the last three or four weeks have been relative to our experience since mid October have been relatively stable.

I wouldn't say numbers have been real good but we've seen a couple of customers here and there enjoy higher sell-through rates and a couple of upsides that have offset a couple of downsides, so it's starting to look like we're either there or approaching a bottoming of the recession, but again I think Forbes said it, and I'll say it again, I think we're continuing to take, be wary of additional potential erosion and trying to handicap that into our guidance.

Okay.

Thanks.

That's very helpful, and then Forbes, in terms of the portion of your debt that's on the, in the current portion I was hoping you could give us a little detail and what is in that current portion and also give us an idea of what you think your maintenance CapEx is.

Is that about $400 million to $500 million a quarter?

So maintenance CapEx is about $30 million to $40 million a quarter.

Okay.

In terms of the maintenance CapEx.

In terms of, sorry the first part of your question, I'm sorry?

In the current portion of your debt, what is actually in that number right now?

Okay.

That's primarily the on balance sheet accounts receivable securitization program.

Okay.

That's the 364 day facility.

There's two.

There's US and European.

The European is on balance sheet and US one is off balance sheet.

And you renewed both of those?

That's correct, yes.

Okay, thank you.

Thank you.

Your next question comes from the line of Jim Suva with Citigroup.

Great, thank you.

Tim, last quarter you mentioned that you had a couple customers that were looking at insourcing a little bit due to I believe to fill some of their internal capacity and not have them lay off some of their own employees and shut facilities.

Have we reached the end of that, or there's more room to go in both terms of those couple of companies as well as are there additional ones?

I haven't heard of any additional ones, and I think the process is pretty complete.

Great and then as a follow-up, the outsourcing trend which is the holy grail of this industry, but yet we're facing a recession, does it take a little bit of stability for the OEMs to start to outsource more or when do you think we should start to see a meaningful push to incremental outsourcing?

Well, using the '91 recession and the 2001-2002 recession as guides, I know it's very hard and I know it's very hard and I don't mean to be Polyannaish about it, but it's hard to not think in 90 day buckets, let's put it that way.

These things take more than 90 days to transpire and have decisions, made so if you looked at the three to four year trend after each of the 2001-2002 recession, the '91 recession, the next three or four years, were extremely robust periods of growth for the entire industry, and pretty darn good periods of growth for Jabil as well, and for Jabil, that 2002 to 2006 time period was the most robust period of growth for Jabil, and the industrial medical sector, we opened up consumer electronics and enjoyed great growth there so our revenue in 2002 was $3.5 billion and by 2006 it had gone to $10.3 billion, so that's about 190% growth over that four year period and EBITDA grew substantially as well by 73%.

So, the next 90 days are important, I don't mean to minimize that and we're hard at work managing the details in our business to insure that we manage inventory, receivables and the blocking and tackling in our business as our bread and butter but really, that is not the most important thing from a running a Company that intends to create shareholder value long term.

What's really important for us is to make sure that we capitalize on the opportunities being what we think of it, where the best funded and financially strong large scale global players in the business, and using that to our advantage in terms of building market share and opening up new opportunities for our Company with existing new customers and even those that have not outsourced in the past.

Okay and switching it over to Forbes.

Forbes, can you maybe help us a little bit about post the restructuring efforts, what level of revenue run rate will you be positioned and any thoughts on the dividend?

Is it stable here?

Are you playing it quarter by quarter, because the yield is about 7% if I do my math right which is quite high.

Yes, in terms of the dividend we obviously review that with our Board on a quarterly basis, we'll continue to do that.

Certainly, our cash generation is strong, but yes, we'll continue to review that.

My sense is that there's not been any discussion about removing that dividend with these types of cash generation and we can expect moving forward.

Jim, your first question, I didn't quite understand, in terms of levels going forward?

Yes, post your restructuring, what fixed cost and footprint run rate of revenues for profitability are you kind of gearing towards?

Yes, so, obviously with this guidance, we're looking at breakeven rate of $2.5 billion or so.

We have the restructuring complete over the coming months here, so we're really, assuming revenues remained at those levels, that would certainly make us profitable by $50 million of annualized savings if you will, but once the restructuring is complete, I think overall, we expect to see business wins come in and we are planning really around the $2.8 billion type quarters, $2.8 billion to $3 billion type quarters over the coming six to 12 months.

Great.

Thank you very much for the details.

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

Yes, thanks.

Good afternoon.

Just a question regarding your guidance and I appreciate the fact that you're not giving specific guidance on your end markets, given lack of visibility, but could you give us a sense of, I mean I know you're guiding down for each of those areas, but a sense of areas that are stronger than others or weaker than others?

In the next quarter?

Yes.

Next 90 days I think mobility will be a little bit stronger than the rest and some of our IT areas will be a little bit weaker.

If you're to look at the percentage of our business kind of select any revenue number where they want, $2.6 billion to $2.7 billion.

I think each sector in terms of the percentage of our business will be relatively stable and mobility probably up a little bit, and then one or two of the IT areas down a little bit.

And is that mobility, Tim, related to more customer wins?

Or just strength within existing customers?

More to do with volume of existing customers.

Do you have a sense of inventory issues at customers because I know that some of them have their own inventory issues that they have to work down and how much of that do you see and how much noise do you have to deal with there, aside from end market weakness?

In terms of customers managing their inventory?

That's right.

How that shows up for us generally is a reduction in schedules.

I think that has some impact to us in the January-February period.

And it depends on the customer and their leverage point with us and it's always negotiation, but we'll continue to work our inventory levels down and continue to strive for lower levels of investment short-term and long term, and in our inventory levels, and generally that's good for customers.

Just look at the last quarter, we did reduce interest expense, I mean to the extent that we have a lower level of investment and inventory that lowers our cost structure, and it's good for our customers too, so I don't see that being, it's not like the relationship that might be in place with some distributors component distributors and customers and that type of thing where it's straight shifting of ownership responsibilities, more of a focus I think in the industry today to look at total network costs and trying to reduce those network costs and inventory is one of the costs that customers and their EMS providers have.

At the end of the day, really have a common interest in reducing.

Yes.

And on that inventory issue, you did a good job of taking inventories down and should we expect a similar reduction and do you expect to keep your inventory turns at that eight level in this quarter as well, in the May quarter?

Keep the inventory levels at eight?

Yes.

I don't see inventories falling below an eight turn level.

I think we're on a very good path.

You made very good significant progress late in the second half of the second quarter and that's really where we saw the most pronounced reduction in our orders too, so we're on top of it.

I think from a modeling purposes standpoint, I think you'd be well advised to stay with eight and then maybe you'd get a surprise if it got a little bit better, but I don't think you need to worry about being at a lower level than that.

And just lastly, your commentary about increased outsourcing as we get deep into recessions, and that makes sense, and the question is, are you having conversations with OEM customers now that may be looking to take some of their own capacity off line at some point?

Yes.

I mean, consistent with general trends, outsourcing particularly in these recessionary times.

Discussions are ongoing, and Tim said in his earlier remarks, it's not instant gratification if you will, it's not the next 90 to 180 days but certainly there is some uptick with OEMs, looking at their fixed cost base versus moving to a more variable model in the EMS space so yes, those conversations continue but again, one has to consider the timeline there in the next six to 12 months, but those are continuing across a number of segments.

Okay, thanks a lot.

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

Hi, this is Joe Wittine, calling in for Shawn.

Most of my questions have been answered at this point, but I wanted to drill into some of the details on the restructuring plan just to be perfectly clear.

So the $55 million in savings that you're forecasting, hoping you could give us some guidance for modeling on how to model that quarter by quarter, and Beth you had said in the prepared comments that I think restructuring was a favorable, or had a favorable impact on SG&A during the quarter so I'm assuming you saw a little bit of the benefit in the current quarter, but just curious how you're modeling those going forward?

Sure, yes.

I mean, there's probably $0.5 million to $1 million of benefit in the current quarter.

The way we are to think about this is to follow the cash so in my prepared remarks I gave some guidance on the cash that we expect to expand next quarter I think it's $10 million or $12 million, so that's really tied to employees leaving the Company.

So as we look forward, I haven't given guidance yet out over the next two or three quarters purely because we are still in discussion with employees and their representatives, particularly in Europe, but certainly next quarter I would expect to see $5 million to $6 million of benefit baked into the guidance that we've seen and then you should see that progress towards a double digit number and the following quarter and beyond to an annualized run rate of about $55 million.

That's helpful from a timing perspective and what about from a B& L classification perspective as far as the SG&A versus COGS break down?

I'm assuming it will be over weighed in SG&A, the savings?

It's actually more headed right now towards the manufacturing cost line, primarily because we have announced closure of one site and the scaling of direct labor in other sites so the majority of that cost currently certainly is within the manufacturing costs.

Okay, great and then switching focus, I guess a specific end market question, when I was going over your end markets versus what you said previously, the displays look like it was a little bit better than you had thought it was, down 50% versus 70% and obviously it's difficult to forecast when numbers get that big, but just curious if there were any positive surprises there or if it was just a difficult number to forecast.

Yes, no real positive supply unfortunately there.

In the scale of our sector, as we said we'll be deemphasizing that, but the revenue stream in the quarter was $100 million or so, so the actual dollar shift there or surprise if you will up or down wasn't that large.

I think just generally a little bit more robust than perhaps we felt in the December period but no clear indications of positive movement.

Great and just lastly if I could, a real quick clarification.

The Nortel write-off, what line on the income statement should that come out of?

Is that in COGS?

It's actually a reduction in revenue because that was where sums that have been billed and have been reserved against.

Okay.

Thanks very much.

Okay.

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

Thanks.

Tim, you spoke about some business wins and also mentioned some customer disengagements, it sounds like that you guys initiated maybe because of lack of profitability with them.

Can you talk about what segments you saw that in, and whether there's a broader strategy around that going forward?

Just to be clear, we didn't mention any customer disengagements.

What I said is that, if you'll look at that specifically, reduced our participation in sectors that lacked the growth in return characteristics that we desire, so, no big customer disengagements, don't expect to have any large customer disengagements actually going forward.

I think the reduction in our automotive and display sectors speaks for itself.

And new wins focused in any particular area?

Any particular segment?

We certainly have done well in mobility.

We continue to target the industrial instrumentation medical segment as a key sector that will drive our growth going forward.

We intend to be very robust and aggressive in the storage sector.

We're doing well in the peripheral sector also.

Yes, we've done actually some fairly significant wins in the peripheral sector in both traditional markets as well as set top boxes, so pretty robust sector there.

Peripherals can I take it to mean a customer consolidating into fewer vendors?

That could be part of the benefit we would expect to see there long term but specifically with regard to new business wins, I was thinking more of the set top box business but certainly customer consolidating their supply base we think would be beneficial process, and in most cases we expect to be the benefactor.

Just one other quick one.

It's been a while since we talked about Greenpoint.

Can you, and I know you don't disclose on that separately, but can you talk about status with that part of the business in terms of delivering integrated assembly and componentry are in the mobile market?

Yes, seeing a true end-to-end solution, that's still a work in process.

I'd say that I regard the integration of our traditional EMS services with the technology rich enclosure cape amounts of the Taiwan Greenpoint to be complete within our mobility sector and it's our intent to drive that end-to-end solution with our customer base.

There will be different rates of adoption and different levels of acceptance customer to customer depending on what their particular supply chain strategy is.

The traditional vertical assets we have have shown very good profitability when loaded, more difficult for them to earn satisfactory returns in an environment like this, when numbers go down abruptly but as recently as Q1, we've seen significant levels of profitability, and we think the overall trend in our strategy is the correct one within the mobility sector, so we intend to continue to press our advantage there and our focus is more in the high range smart phone area, and we think that there's really no reason to believe that numbers will be up and down and a hot product and not a hot product but we think that consumers overall around the world were continuing to migrate to a more integrated device and we're targeting the best customers in the world in that space and we intend and have seen good evidence of our ability to earn our share in that space.

So higher operating leverage in that business?

Higher operating leverage absolutely.

Yes, so in a stable to positive environment, I think it would be, mobility will be an accretive business to our overall business, and in an environment like this it's pretty tough.

Yes.

Okay.

That's what I figured.

Thank you very much.

Operator, I understand we have one final question on the line?

Yes.

Your next question comes from Amit Daryanani with RBC.

Thanks.

Just had a couple quick follow-ups.

First on the restructuring side, can you talk about how much of the savings we expect would flow through Jabil's P & L versus how much would you have to share with your customers as you possibly transition the work from one region to another.

That's a great question, Amit, and I'm sorry to say I'm not going to give you a direct answer to it.

We need to adjust our costs.

Let me put it this way.

We're making a judgment that probability is that we'll be running at a $2.8 billion to $$3 billion run rate quarter for the next few quarters, and we've got our cost base, we're trying to adjust our cost base to that level to earn a 3% operating margin or better.

If business were worse than that, then we would have to reduce our cost structure even more and if business got better than that, then we'll experience positive operating leverage and get above that 3% level.

We intend to provide our customers the absolute best cost optimized, value optimized solution in the world and deliver our shareholders a margin expansion and growth model for their investment in our Company, so that's not as easy as black and white, and when we talk about a $55 million a year cost reduction, that's a cost reduction we expect to, based on where our margins are, that's a cost reduction that we need to earn an adequate return on our business.

And on the revolver, I think a covenant of 3.5 times debt to EBITDA and at least if I annualize the guidance we have for May it looks like you would be breaching that covenant to me.

Is that fair and if that's the issue, do you have to restructure it or will it make enough money in the next few quarters?

No.

Let's be clear.

If you annualize $118 million of EBITDA,--

Tim I'm actually getting the May quarter guidance and annualizing that.

So you're correct.

The 3.5 times debt to EBITDA of the trailing 12 months, so we would have to be in this type of environment for the next year to be and do nothing in terms of cash generation or reduce our levels of debt to be near a breach of any covenant, so we are in particularly good shape, we have very strong cash generation this quarter as we talked about.

We expect the same again next quarter and it gives us flexibility across our capital structure, and the overall Management of the Corporation, so we're in great shape.

That covenant is certainly below three times and is anticipated to be so out into 2010.

Yes, we have the Company for four consecutive quarters from breakeven that would be a problem but at the high end of the Q3 guidance, which I consider probably as bad as we can imagine things getting, we are right about at the covenant and with the cash flow generation to be over $1 billion, we would simply go out and retire the bonds.

And reduce that back down to a manageable level so let's be clear that there's really no, there's no refunding debt risk there that we can't manage through, and the other side of it is if we got into the quarter and we thought instead of running $2.8 billion a quarter we're actually going to stay at $2.5 billion a quarter for the next three, four quarters we reduce our cost base more so we could earn money at that level, and we would generate a heck of a lot more cash, and actually be in a more liquid position to retire the bonds that would be necessary to stay within the terms of the covenants.

We don't really perceive any funding risk there.

Got it.

That's extremely helpful.

Tim, just to be clear, did I hear you say that at the high end of your guidance is about as bad as you think it gets?

No.

The guidance that we provided for Q3 is about as bad as we could imagine it getting.

Got it.

Thanks a lot.

Okay.

There are no further questions.

Great.

Thank you very much, operator and everyone for joining us on the call today.

This concludes today's conference.

You may now disconnect.