捷普科技 (JBL) 2009 Q4 法說會逐字稿

Good afternoon.

My name is Melissa, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Jabil fourth quarter and full fiscal year 2009 earnings call.

(Operator Instructions).

Thank you.

Ms.

Walters, you may begin your conference.

Thank you.

Welcome to our fourth quarter and fiscal 2009 year end 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 investor section, along with today's press release and a slide show presentation on the fourth quarter.

You can follow our presentation with the slides that are posted on the website, and begin with slide one 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 first quarter of fiscal 2010 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 on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.

Please refer to our extensive list of these risks and uncertainties, which 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.

If you could now please to turn to slide two, and I will go through slides two through five.

Results for our fourth quarter and full fiscal year 2009.

On revenues of $2.8 billion, GAAP operating income was $43.1 million.

This compares to $87.8 million GAAP operating income on revenues of $3.3 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 $65.4 million, or 2.3% of revenue, as compared to $104.7 million or 3.2% for the same period in the prior year.

Core earnings per diluted share were $0.16 as compared to $0.30 for the same period in the prior year.

On a year over year basis for the quarter, revenue declined 14% while core operating profits declined 38%.

On a sequential basis, revenues increased by 7%, while core operating income increased 124%, reflecting stability and growth across all but one of the industry sectors that we serve.

Revenues for the fiscal year 2009 were $11.7 billion.

GAAP operating, operating earnings were a loss of $910.2 million compared to revenue of $12.8 billion and GAAP operating earnings of $251.4 million in fiscal 2008.

Core operating income excluding amortization of intangibles, stock-based compensation and restructuring charges for the year, was $246.8 million as compared to $379.9 million in fiscal 2008, resulting in core diluted earnings per share of $0.64 versus $1.12.

Please turn now to slide six and seven for a discussion of revenue by division and sector for the fourth quarter.

First our EMS division, revenue represented approximately 58% or $1.63 billion of sequential growth of 8% as compared to the third quarter of fiscal 2009.

Core operating income for the division in the quarter was 3% of revenue.

Sector movements are as follows.

Production levels in the automotive sector increased 4% sequentially, and represented 3% of total revenues in the quarter.

Computing and storage sector decreased 5% from the third quarter, and represented 10% of total revenue for the quarter.

Industrial, instrumentation and medical sector increased 14% from the prior quarter, as a result of approximately 60% of our customer base showing growth in the quarter.

This sector was 19% of total revenue.

The networking sector, production increased by 11% from the previous quarter, and represented 17% of revenue.

Telecommunications sector increased by 13% sequentially, and represented 6% of the fourth quarter's revenue.

For the full fiscal year, revenues represented approximately $6.8 billion, or 58% of total Jabil revenues, a year over year decline of 17%.

For the full fiscal year, core operating income was 1.9% of revenue.

Looking now at the consumer division, which represented approximately 34% or $960 million in the fourth fiscal quarter, a sequential increase of 4%.

Core operating income for the division in the quarter was 0.3% of revenue.

Sequential sector movements are as follows.

The display sector increased by 9% from the third quarter, and represented 3% of revenue.

The mobility sector increased by 4% from the prior quarter, and represented 20% of revenue in the quarter.

The peripheral sector increased by 5% from the third fiscal quarter, and represented 11% of revenue.

On a full fiscal year basis, revenues represented approximately 36% or $4.2 billion, growth of 7% on a year over year basis.

Core operating income for the full fiscal year was 1.4% of revenues.

As a note, in fiscal 2010, we shall be combining our displays and peripheral sector, and reporting under the title of digital home and office sector.

Turning now to the after-market services division, it increased by 10% from the prior quarter, and represented approximately 7% of overall Company revenue in the fourth fiscal quarter.

Core operating income for the division for the quarter was 7.2% of revenue.

For the full fiscal year, revenues of $700 million represent 6% of total Jabil revenue, with growth of 8% from the prior fiscal year, and core operating income of 8.1% for the full fiscal year.

In the fourth fiscal quarter, two customers accounted for more than 10% of revenue, and our top 10 customers in the quarter accounted for approximately 57% of revenue.

For the full fiscal year, two customers accounted for more than 10% of revenues.

These are Cisco at 13%, and RIM at 12%, with our top 10 customers representing approximately 58% of revenue.

Selling, general and administrative expenses increased by $4 million to $116 million for the quarter.

Research and development costs were $8.7 million in the quarter.

Stock-based compensation was $11 million in the quarter.

Other expense of $14.5 million primarily relates to tender premium costs associated with the successful repurchase during the quarter of our 5.875 senior notes due in 2010.

Net interest expense for the quarter was $18 million.

The tax rate on net core operating income in the quarter was 28%.

This rate includes approximately 8% associated with withholding taxes associated with one-time movement of cash in Taiwan.

On an ongoing basis, the tax rate is expected to be 20%, based on our current forecast of income stream.

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

Thank you, Beth.

Good afternoon, everyone.

I would ask you to review slides through 10, and follow along with my commentary.

We were able to decrease our sales cycle in the quarter by six days to 16 days, while keeping days sales outstanding consistent at 40 days.

We improved the accounts payable days by two days to 66, and reduced inventory balances by $28 million, while days in inventory declined by four days to 42 days.

Inventory turns improved to 9.

We are very pleased with this level of working capital performance, especially being able to demonstrate the sequential decline in inventory balances, while growing revenue throughout the quarter.

We continue to generate cash flow from operations, producing $169 million in the fourth fiscal quarter.

Year to date, we have generated $556 million of cash from operations.

A return on invested capital increased to 11.5% in the fourth quarter.

Cash and cash equivalents were $876 million at the end of the fourth quarter, with no sums outstanding on our $800 million revolving credit facility.

Our capital expenditures during the quarter were approximately $57 million.

This level of expenditure primarily reflects our continued investment in our IT infrastructure and our maintenance capital investments.

Capital expenditures in the full fiscal year were $292 million.

Depreciation for the quarter was approximately $66 million, and core EBITDA was approximately $131 million, or 4.7% of revenue.

As revenue growth returned in the fourth quarter, we have successfully continued to manage our working capital and operational cash generation.

We produced $169 million of cash from operations, while decreasing inventory levels sequentially by 2%, as revenues grew by 7%.

We are pleased with the manner in which we've managed this working capital level and operational plans in a difficult economic and end-market environment over the last few quarters.

We have continued to reign in our working capital level, and are pleased to have generated $556 million cash flows from operations in the full fiscal year.

During the fiscal year, we reduced debt balances by approximately $300 million, while growing cash balances in excess of $100 million to $876 million at the end of the fiscal year.

Fiscal year 2009 free cash flows, or cash flows from operations after capital expenditures and dividend payments, are approximately $211 million.

We are well positioned to continue to produce very healthy cash flows during fiscal year 2010.

I'm also pleased to note that during our fourth fiscal quarter, we successfully repurchased $295 million, or 98% of our 5.875% senior notes due in 2010, and closed on our $312 million offering of 7.75% senior notes due in 2016, providing us continued flexibility in the years ahead.

I would now just like to take a moment to update you on our previously announced restructuring plan.

During the fourth fiscal quarter, we recorded charges of $4 million associated with these previously announced plans, while cash payments associated with this were $11 million.

Through the fourth quarter, we have recorded charges of approximately $53 million, and cash payments associated with this plan of $27 million.

Discussions with employees through representatives continue, and we're complying with all statutory and consultation periods required of us.

As a result, we currently estimate charges of $6 million, and cash payments totaling $16 million to occur in the first fiscal quarter.

In summary, we are very pleased with the way in which we executed our quarter.

As we discussed in our earnings call last quarter, the addition of revenue across our fixed manufacturing cost base will deliver margin expansion, and this has indeed been the case.

We posted core operating margin of 2.3% in the quarter, reflecting $0.18 of operating margin expansion added per revenue dollar.

We remain well positioned to continue to deliver core operating income margin expansion, as we move into fiscal 2010.

I would now ask you to turn to slide 11.

Before turning to our discussion of guidance, I would like to update you on our continuing effort to rationalize the economic performance of our automotive sector.

As part of this effort, we expect to divest of our automotive electronics manufacturing entity in Western Europe.

This transaction is anticipated, subject to regulatory approvals and other closing conditions, to close during the first fiscal quarter of 2010.

And we expect to recognize a loss on sale of this entity in the range of $20 million to $25 million, of which we estimate $4 million to be cash.

This loss shall be accounted for with core operating income as a loss on sales.

On conclusion of this divestiture, our ongoing revenue exposure to the automotive sector will be 1% or less of our ongoing revenue stream in fiscal 2010 and beyond.

As a result, we shall no longer be breaking out this ongoing revenue stream as a separate sector.

Now turn to a business update.

While we saw growth in the most recent quarter across most of the sectors we serve, we continue to have limited visibility beyond the next 90 to 120 days.

With this in mind, we will provide guidance for our first fiscal quarter only at this time.

At the midpoint of our range, our expectations reflect growth of 3% in the fourth quarter in our EMS division, and 30% growth in our consumer division.

The EMS division is expected to have consistent revenues with the fourth quarter.

While we are not providing full year guidance at this time, I would like to remind you that we would expect our second fiscal quarter to follow typical seasonal patterns, with revenue and income level declines from the first quarter, given the seasonal nature of the consumer markets that we serve.

Guidance for the first quarter of fiscal 2010 is as follows.

Revenue is estimated to increase sequentially in the range of 7% to 14%, or a range of $3 billion to $3.2 billion.

Core operating income is expected to be $85 million to $105 million, again excluding the estimated loss on the divestiture of our automotive electronics manufacturing entity.

As a result, core operating margin is expected to be in the range of 2.8% to 3.3% of revenue, and core earnings per share are expected to be in the range of $0.24 to $0.32 per diluted share.

Selling, general, and administrative expenses are estimated to be $117 million.

Research and development costs are expected to be approximately $9 million, intangibles amortization, $7 million.

Stock-based compensation expense estimated to be approximately $13 million, and interest expense of approximately $21 million.

Based upon the current estimate of production and income levels, the tax rate on core operating income is expected to be 20%.

And finally, capital expenditures for the first quarter are estimated to be relatively consistent with those of our fourth quarter, or approximately $50 million, reflecting investments in our clean technology businesses and maintenance capital expenditure levels.

With that, I would like to hand the call over to Tim Main.

Thanks, Forbes.

We are really pretty pleased with the way Q4 turned out.

The prospects for further improvement in fiscal Q1 of 2010.

On our June call, we noted demand seemed to be stabilizing in April.

That trend continued through June, with demand firming further in July and August.

We have consistently said that a stable environment will allow Jabil's business to expand and margins to improve, as market share gains and new product wins are folded into a stable existing revenue stream, and operating leverage adds disproportionately to margins.

The net of that is, we do not need a robust end-market environment to enjoy good growth and margin expansion.

The revenue upside was fairly broad-based, I think indicative of a bounce from very low demand levels in our May quarter.

I would broadly characterize the revenue increase as 60% coming from expansion of existing relationships and the production of new programs, and 40% to genuine demand increases.

I do not believe we are seeing a broad-based robust recovery in demand, rather the end of a sharply recessionary period, and the beginning of what I think will be a lengthy and sometimes sluggish recovery period.

I think this is a very good set of circumstances for the Company.

We can grow revenue and improve margins through operating leverage, while maintaining our focus on productivity and balancing performance.

I'm quite happy to see the 2009 fiscal year in my rear view mirror, but I do think the Company performed reasonably well in a difficult environment.

We generated very strong cash flow from operations, reduced debt, closed a $300 million bond transaction in a horrible credit market, added to our cash balances, and simply put ourselves in an excellent position to compete and expand in 2010 and beyond.

I just can't say enough about the tenacity and commitment of our people, and I thank them for the admirable job they have done, grinding through some very difficult times.

2010 should be a much better year than 2009, and our November quarter is a good start.

We are seeing typical seasonal increases in the consumer division, enhanced by some new programs ramping and modest market share gains.

Margin expansion will be significant, although at a slower pace than in Q4, due to the consumer and electronic assembly intensiveness of the revenue stream.

EMS and AMS revenues are a bit on the conservative side, pending affirmative confirmation that the economic recovery is in full drive.

We do expect the recovery to be a long one, with any upsides being very modest in the near term.

Cautiously optimistic about the economy and excited indeed about Jabil's prospects, would be the best way to put it.

The job at hand is customer service, cost efficiency and capitalizing on our position.

We have a better quarter ahead, the first step on a path to a much improved 2010.

Thank you.

Operator, we're ready to take questions.

(Operator Instructions).

Your first question comes from Lou Miscioscia.

Okay, thank you.

Lou Miscioscia, Brigantine Advisors.

I guess, Tim, can you give us a little bit more details, I guess last quarter you talked about that you would get some expanded margins as you obviously reramp revenue.

Is that where most of the upside came from?

Or maybe you could point to a couple of other things?

Upside to the margin structure, Lou?

Yes, or just the significance in EPS beat in comparison to last quarter's guidance.

It's really revenue-driven.

I mean, we produce $2.8 billion in revenue versus the guidance of $2.5 billion to $2.7 billion.

And so looking at the Q3 revenue level of $2.615 billion, really it's almost a direct operating leverage function, going from $2.615 billion to $2.8 billion.

That's $185 million revenue increase, and going from $29 million to $65 million, $66 million in operating income.

So as Forbes said, $0.18 on the revenue dollar.

If you look at the composition of that $185 million increase, there were some higher margin contributions to that increase in the revenue stream.

The biggest increase that we enjoyed in Q4 was in the medical instrumentation, industrial control sector.

That led all other sectors as a percentage and in terms of absolute dollars, followed by node networking, telecommunications and AMS all enjoyed good upsides in Q4 versus Q3.

And those are all pretty decent margin sectors.

And in mobility, we had a relatively modest increase in revenue, but it occurred in some of our vertical operations.

So that's really a disproportionate addition to operating margins.

So, yes, I think that, we're on the high side of our $0.10 to $0.15 of operating leverage per revenue dollar, but given the composition of revenue, I think -- and really it's a little bit easier moving from the low point of $2.6 billion.

But pretty, pretty strong performance there, and looking forward, that operating leverage would be a little bit slower given, again, that the function of it being primarily consumer electronic driven in Q1, and having that, of that consumer electronics, a lot of it being primarily the electronic assembly side, which carries very high material content and low material margins.

So a little bit less operating leverage.

But as we predicted, we went into Q4 with relatively conservative guidance.

We talked in June about things starting to stabilize a little bit, but it was a little bit early to make that call, and we saw those trends continue through June and July, and things starting to get a little bit better in late July and August.

And one quick follow-up.

As you look out at fiscal 2010, as much as you can help us out with, what are you thinking about from cash flow from operations?

And it does look like if you get that down to the free cash flow line, that maybe CapEx is going to start to slow down if it starts to flat line here at 50 million.

Yes, we're calling for about $50 million in CapEx in Q1, and we'll probably consume a little bit of cash in Q1, as we ramp up our working capital requirements, and probably get much of that back in Q2, given the seasonal slowness.

I think it's a little bit early to talk about 2010.

We're not providing guidance for the full year, but certainly we will use this opportunity to use 2009 as the next bar in terms of inventory turns, and really drive to much higher levels of efficiency, and continuing to really work our working capital metrics.

I think 2010 should be a vastly improved year.

And with a little help on the top line, which it looks like we're going to get, I mean I can't imagine 2010 having the kind of crater that we saw in late Q1, Q2 and Q3 of fiscal '09.

So really all we need is-- any GDP between 0% and 2% would be a lovely, delightful environment for us to be in, and if we have that type of environment, we'll be able to post pretty strong revenue growth year over year and strong margin improvement and very good cash flow.

Okay.

Call me an optimist, I think you'll get at least between 0% and 2% GDP growth.

And good luck on the new year.

Your next question comes from Amit Daryanani.

Thanks.

Amit Daryanani, RBC Capital.

Tim, just a question on the consumer segment.

I mean, the margins are 0.3% this quarter.

I would assume for margins to expand, or from the levels this quarter to about 3.1% in the November quarter, is most of that going to be driven from margin expansion on the consumer side, or do you think there's some room for margin expansion on the EMS side as well?

Well, we hope to see some margin expansion on the EMS side.

The EMS division I think has done an excellent job this past year improving margins and working costs out of the system and working on their working capital metrics.

We won't see much revenue leverage in EMS.

So the primary increase in the Company's operating margins in Q1 over Q4 will come from very strong improvements in the consumer division.

Got it.

And to the extent that you guys can see, November quarter looking at 11% or so growth at the midpoint, is that from your perspective at least, a reflection of end demand sell-through happening, or is it just a desire by OEMs to start to rebuild some inventory?

In the November quarter, it's really kind of a normal seasonal pattern.

So it's fairly typical for the consumer division to be up anywhere from 20% to 35% in Q1 versus the Q4 period.

So it's normal seasonality.

And the word I use is, enhanced by some new programs that will be ramping and better market share traction in some of the accounts that we have.

So we're getting a little bit of a double dose there.

Got it.

And just finally, if I could flush out a comment you made earlier about, to the extent that we get GDP growth of 0% to plus 2%, you would expect fiscal 2010 -- this year's revenues to be up year over year, is that a fair assessment?

That's a fair assessment.

Thanks.

Your next question comes from Steven Fox.

Hi, good afternoon.

Couple of questions.

Just, Tim, going back to your comment about 60% of sales coming from expanding relationships and new programs, can you put a little more color around that, generally speaking, what markets, what types of products are you starting to get some more traction on new program wins?

Sure.

Well, in terms of Q4, again, the market sector that exhibited the strongest growth both in percentage terms and absolute dollars was the instrumentation, medical and industrial control market.

And there are a number of vendor consolidation programs that we've been participating in over the last year that are beginning to bear fruit, and we're beginning the ramp of that production.

And then if you look really kind of across the board, it's a rough combination.

And when I say 60/40, that's kind of a rough justice type of term.

I mean I'm making a -- I thought that analysts and investors would be interested in our take on how much of that is really, how much of this coming from demand, filling inventory pipeline and restocking, versus how the business is performing organically.

So just trying to provide a little bit better color there.

But instrumentation medical, instrumentation sector, some very good recovery in demand, but primarily market share growth.

And then just -- thanks for that.

Just as a follow-up, on the consumer side, you mentioned it's mainly driven by assembly, but that's -- sequentially, isn't the components business still up sequentially in the November quarter, too, just not up as much as assembly?

Could you just clarify that, please.

It will be up, but not nearly as much.

It's dwarfed by electronic assembly side.

Okay, thank you.

Your next question comes from Brian Alexander.

Thanks, with Raymond James.

Tim, just want to go back to the leverage comments.

You're guiding to a 10% contribution margin in the November quarter versus August, which is still quite strong leverage, but at the low end of kind of the 10% to 15% you've talked about before.

Now much of the growth is coming in the lower margin consumer business, and you're coming off a quarter where you saw better than expected flow-through, close to 20%.

So, if we look at it on a two-quarter average basis, you're right in the range that you've talked about.

I guess going forward, how should we be thinking about the leverage throughout 2010?

And should we still be thinking of 10% to 15% contribution margins beyond the November quarter?

And at what level of revenue should we start to see the CapEx ramp up beyond this $50 million run rate a quarter?

It's a complex question, given we haven't -- particularly since we're not providing guidance beyond the November quarter.

But I think what we've been -- consistent with what we've been saying all along is that you should be able to expect that operating leverage into the $3.3 billion to $3.5 billion per quarter run rate.

And then you'll start to see less leverage because we'll have to put in more costs to produce the incremental revenue.

And that depends on revenue mix and where it shows up.

Also qualified by, on the CapEx side, whether or not we're moving into any new product categories or service areas.

So for instance, we started a clean tech activity this past year, and we did devote not a huge amount, but some capital expenditures were devoted that new activity.

They use the same factories and the same floor space, but it's a different equipment set than the traditional hardware, electronic manufacturing equipment set that we use.

So, we may have some additional CapEx if we moved into any other product categories.

But just to reiterate, that $0.10 to $0.15 per dollar of revenue operating leverage, depending on mix of revenue, should be good into the $3.3 billion to $3.5 billion per quarter run rate.

In which case it will start to slow down.

Great, makes sense.

Then just to pick up on Forbes' comment about the February quarter, you're not providing guidance--

You're breaking up a little bit.

We lost you, Brian.

Sorry.

Could you hear me?

Yes, that's better.

Just back to the comments about February, I think in the past, we've been -- we being the Street have been surprised by the negative leverage in that quarter, and the sequential decline that you would typically see.

So I think Forbes was trying to send a reminder that in that quarter we should be thinking high single digits, sequential decline would be normal seasonality, because I just noticed the consensus is closer to a low single-digit decline.

Are you talking top line or--

Top line, February versus November, would you consider normal seasonality to be closer to a high single digit decline than low single digits?

Well, you can look at our history and see what the traditional is.

I think Forbes is just providing a bookmark that, hey, don't forget that there is seasonality and the operating margins will delever at the same rate they leveraged up.

And, we have had years where the February quarter was down modestly, low single digits.

We've had times when that quarter was down significantly.

And that's going to depend on the health and breadth of the economic recovery such as it is at that time.

Brian, it's Forbes.

In terms of my prepared remarks, we still only have visibility, really into the next 90 to 120-day period, or the next quarter.

So, it's still early to call what's likely to occur in the January, February timeframe.

But to your point and Tim's point, to bookmark in that -- we've been living in an environment where we've been having sequentially declining revenues.

We have seen some growth this particular quarter, but again a bookmark for people to remember that we are -- the predominant piece of our growth in this fiscal quarter is consumer-led, and assuming we do see typical consumer spending, the profiles and patterns, we should see some slowdown in January, February timeframe.

Thank you very much.

You're welcome.

Your next question comes from Sherri Scribner.

Hi.

I apologize, I'm at the airport.

But I just wanted to dig a little bit into the segment detail.

It looks like the compute segment was a bit weak this quarter.

I'm just trying to understand what we're seeing there.

Do you think that market has stabilized for you, or do you think you'll -- and do you think you'll start to see growth in that segment between the November quarter, or what are you seeing there?

I think it's stabilizing, Sherri.

It was a little bit more robust as we went into the recession in the first couple of quarters, and then, kind of late to experience the negative side of the recession, and it's coming out of it a little bit later.

But I think calling that consistent with where we were in Q4 is a good way to look at it.

Okay, and then just looking at the guidance for the EMS segment for the November quarter, I think you said the midpoint is up about 3% sequentially.

That seems a little bit conservative.

I'm just trying to understand, are you being conservative on that number, or do you feel like that's a fair number, or are you just a little bit cautious on the outlook from the demand in those segments?

I characterize that as, in my prepared comments, as relatively conservative, both EMS and AMS.

Please don't misinterpret that, as that we're sitting on a lot of upsides because that would be inappropriate.

I also said in my prepared remarks, we don't see this as a V-shaped recovery process.

I mean that is not what we see in our forward-looking visibility.

It's a very sluggish environment, modestly better, certainly much better than the sharply recessionary period that we suffered in our February and May quarters, but just modestly better than more mild recessionary periods.

So, not really seeing a strong, robust recovery yet in our visibility.

Okay.

That's helpful.

In that light, we think conservatism is really called for.

No, I agree, conservatism is called for.

I just wanted to clarify also on the tax rate.

I think you said 28% versus more typical tax rates of 20%, the 16, that number, that's including the 28% tax rate, right?

That is correct, yes.

Okay.

So what is -- what would the EPS have been without, with the 20% tax rate?

Yes, it would have been $0.18.

Okay, because that seems like the more comparable number.

Okay.

Thank you.

Thank you.

Your next question comes from Matt Sheerin.

Yes, thank you.

Tim, could you talk a little bit more about the consumer businesses?

Your guidance obviously very strong, up 30%, but are you expecting to see that across the three subsectors or strength in one versus the other?

Mobility is particularly strong, and that's about all the color that I think we want to provide on it.

Okay.

Just as a following up there, it looks like you're coming off the bottom in the display market, and I know a few quarters ago, you were questioning, sort of what your future plans were, whether you were even going to stay in that business.

What is your strategy now and your position in that market?

It's more of a tactical approach to European production, relatively limited to Europe.

It has been deemphasized in terms of high levels of investment and design resources, marketing resources, and globalization of the capability.

So we maintain a very strong display manufacturing capability within Europe, and we operate that business on what I characterize as more of an EMS engagement model.

And it looks like that will be modest in terms of business size, will produce successful returns, and as Forbes said, from this point forward, be collapsed in a sector that we'll characterize as digital home office.

Okay, great.

And just lastly, on the auto business and the decision to divest the European operation, is that -- are you still counting the full, your full auto business in the November guidance?

No, we have allowed for an assumption of the divestiture will close during the quarter, so those, there's some modest recognition of that fact.

So in other words, if -- assuming that we do divest, yes, it's included in the guidance.

Okay, and so that's about -- sounds like, to get to the 1%, it's about half the business then, basically going away, right?

Yes.

I mean, we did 3% of our revenue stream last quarter, something like that, yes.

Okay, and then what are your forward plans in terms of the auto business, and as it is now, the stand-alone North American business?

Is that profitable?

Are you talking automotive?

Yes, yes, what's left?

After we divest this European operation, we will essentially be out of automotive electronics completely.

We have been working our North American exposure down over the last several quarters, and we'll see a very rapid reduction in activity in that area, as we wind down our relationships in the first half of fiscal 2010.

Okay.

That's great.

So really this European operation essentially represents 75%, 80% of the balance of our automotive business, and it isn't half the business in Europe.

It's -- we're getting it for half the quarter, because we're anticipating that we'll probably end up somewhere midquarter, the divestiture closing.

Got it, okay.

Thank you.

I hope that wasn't too confusing, but I think the net of it is--

You're out of the business.

-- by Q2, we'll essentially be out of automotive electronics completely, if this transaction closes.

Okay, fair enough.

Thank you.

Your next question comes from Shawn Harrison.

Hi, can you hear me?

Yes.

Okay, just a quick question on Tim's comment regarding kind of a non-V-shaped recovery.

It seems like you've gained a healthy degree of market share over the past few quarters, but maybe if you could just speak to what you're seeing in terms of the incremental outsourcing pipeline.

Is that growing right now?

Are you seeing signs that maybe it will open up over the next few quarters?

Well, I think it's characteristic of previous recessionary periods.

We'll start to see more opportunities transpire as things start to recover a little bit.

There's a good pipeline of opportunity for the Company across a broad range of sectors, and we're working hard on them.

I think investors should expect that the wave of outsourcing that will transpire on the back side of this recession will be in much smaller individual program awards and bites.

I don't think our industry is interested in a lot of large scale divestiture activities, and the types of things that have been done in the past.

So, it's kind of a grinding, painstaking plant by plant, $25 million to $50 million program by $20 million program, and will accumulate into significant business opportunities for Jabil and for the other guys in our industry, but it will be a longer period of time, and each individual win size will be a little bit smaller, would be my guess.

Okay, and then as a quick follow-up, with the restructuring program here, maybe you could kind of give an updated total savings consideration, given that I think a percentage of the restructuring focus was, at least previously, scheduled for the Western European automotive business.

Maybe just kind of the full restructuring savings target, what you're looking at now.

Sure.

Let me just update you and sort of recalibrate there.

We announced earlier this year, a program that would approximate $65 million on a GAAP basis, that we estimated that to be about $54 million on a cash basis over multiple quarters.

You are correct to say that that plan did encompass some of our Western European operations.

It did not encompass or contemplate the divestiture of this automotive facility, okay.

So where we stand today, we have recorded about $53 million, so, $10 million, $12 million shy of our original plan.

The majority of that will come in the first fiscal quarter, as we close the facility here in North America that we previously announced.

And then in terms of the cash charges, which is really what I encourage people to follow in terms of the savings, we're halfway through, exactly halfway through that at the end of the fourth quarter, with $27 million of cash.

In this next -- in this upcoming quarter, we expect about another $16 million.

That will be right at the end of the quarter, as we do see some employees leave in Western Europe.

And then the balance will roll into our second fiscal quarter, again, essentially Western European employees.

But again, calibrate, we see a $55 million savings overall on an annualized basis, and we start to see that on a quarterly basis in our third fiscal quarter of 2010.

Okay, thank you very much, and congratulations.

Thank you.

Thank you.

Your next question comes from Alex Blanton.

Hello, good afternoon.

Tim, the automotive sector that you're divesting, could you give us a little more in terms of the reason for that, because autos have historically been mentioned frequently as a non-traditional outsourcing opportunity, was fairly large, and it actually was your original business.

So it strikes me as a little bit of a surprise that you decided to get out of that business.

Yes, it's pretty difficult strategic change for the Company, Alex, and for many years we touted our leadership position, automotive electronics, which we -- was legitimate and genuine.

We have done several significant deals with major OEMs who, to try and provoke and activate an outsourcing process.

I think we've just counted cards to determine that we did not provoke a wave of outsourcing, and along with the recessionary period and the restructuring and rationalization and everything else that's going on in the automotive marketplace generally.

That this is an end market that does not afford the Company the type of growth opportunities or return opportunities that we would really require to continue to invest in the area.

So, this divestiture is a more cost effective and decisive way to end our participation in the area.

If in the future automotive electronics recovered and became an attractive area, we could always revisit that, but we think there are better end market opportunities for the Company to focus on, and we need to shift our management attention focus and capital to those better opportunities.

Well, apparently this is an industry-wide phenomena, because you would be in a very good position to get business if there were business to be gotten, it seems to me.

So, would you say then that the automobile companies, despite the growing amount of electronics in cars every year, have decided to do their own manufacturing instead of outsourcing?

That seems to be the case.

That seems to be the case as we see it.

Now, if we wanted to become definitionally a tier one automotive electronic supplier ourselves, and compete with the people that were formerly our customers, that's a potential avenue of success, but one which, again, which would require significant management attention, capital and risk that we're not willing to take.

Okay.

By the way, I don't think anybody's identified a firm on this call.

I'm with Ingalls and Snyder, so you can put that down.

The second question is this.

You talk about demand stabilizing and picking up a bit in July and August.

And then you said something about 60% is from old customers and 40% is from, I thought you said market growth.

Could you clarify that, and comment on where that seems to be coming from?

Is it truly an end market pickup, geographically where is it?

And -- or is it simply that production rates were cut too much and now have to get back closer to the end market demand?

There's a little bit of, your last comment there I think is really about how much of it is inventory replenishment versus demand.

Well, it wouldn't be replenishment if it's only going back to the level of demand.

That would just mean that inventory stopped falling.

But how much of it is that?

Well, I think it goes to the question of, is it inventory replenishment or genuine demand, and I characterize.

So, we had $185 million in revenue growth quarter over quarter, and I characterize $100 million, $110 million of that to be our market share gains and new programs that are ramping and vendor consolidation activity, that type of thing.

Then $70 million, $80 million of that being genuine demand.

Some portion of that I think is actually inventory replenishment -- but I think there's genuinely a demand increase there.

But if you look at our total revenue stream of $2.8 billion, it's pretty small.

That's a pretty small resumption of demand.

That is.

It's barely visible.

Yes, so again, not seeing a real robust recovery in demand, Alex, and I think it's, our take on it is, it's going to be a pretty long, sluggish recovery.

But again, from the standpoint of Jabil and the health of our Company and our ability to grow revenue and expand margins and generate free cash flow, it's a great environment for us.

We really don't need a robust end market to have a phenomenal business.

Okay.

And move significantly from where we've been over the last couple of quarters.

Finally, you missed your -- talking to analysts in the big meeting in April, do you plan something in the future?

Yes, I for one would love to have another analyst meeting someday.

We don't have anything on the books yet, Alex.

We'll put up a couple more good quarters, and I think our attitude about entertaining and informing will be vastly improved.

Okay, great.

Thanks.

Your next question comes from Jim Suva.

Great, thank you, and congratulations, everyone.

Forbes, you mentioned about the book end, the normal seasonality of being softer in the February quarter, and understanding that the profitability should also be a bit softer.

Can you help us calibrate that a little bit?

Because I understand your restructuring effort should be, I think close to gaining full run rate of restructuring benefits.

And if not, is that exiting the February quarter?

And should we expect the 10% to 15% flow-through on the upside to be the same 10% for 15% flow-through on the seasonally softer quarter?

Again, I just want to bookmark both sides of expectation, so people don't set your margins and EPS too high for February.

Yes, it's a tough call right now, as I said earlier in terms of the visibility that we have and in terms of that revenue profile.

So to try and address the point you raise there and give you something to work with, in terms of the restructuring activity, as I noted where you are effectively halfway through in terms of that cash and cost coming out of the corporation, you're going to get to effectively three quarters of the way through by the end of the February quarter.

The final portion, or the completion of that plan would occur towards the end of February, and that's the agreement that we have in place currently.

So you're not going to get the full benefit of anything of that restructuring.

But certainly on the downside, typically depending on the particular market, historically we see anything between $0.10 to $0.18 swing.

So I think good market in that 10 to 15 appears reasonable, given the visibility that we have to date.

Great, thank you.

And then just a follow-up question.

On your computing sector, it looks like there was a little bit softer than expected, or is that more seasonality that happened this quarter.

Or do you have some changes in maybe customer concentration or customers of what's going on in your computing segment, which was I believe down 5% this quarter?

No, no changes in the mix of customer relationships there.

I think really just echoing Tim's comments from earlier in the call, there was the last sector that we did see decline, the first sequential decline we saw of that sector in fact was our third fiscal quarter.

We've seen a little bit of continued softening into this fiscal quarter, and our outlook as we move through the November period is seeing that stable.

Okay, that makes sense.

And last follow-up, when we get beyond the $3.3 billion to $3.5 billion range, where we should expect before that $0.10 to $0.15 flow-through for every dollar, what type of flow-through should we expect beyond, say, the $3.4 billion or $3.5 billion run rate of sales?

Is that like a nickel?

It should be in that range, in that zip code, $0.03 to $0.05, depending on the mix of revenue.

Okay, thank you.

And congratulations again, everyone.

Thanks.

Your next question comes from William Stein.

Thanks.

Tim, you mentioned share gains, that a big portion of the revenue growth came from share gains.

Can you share with us the kind of competitors that you might be taking share from?

Is it some of the bigger or smaller traditional EMS vendors, or do you mean more converting vertically integrated manufacturers to an outsource model?

There's actually a little bit of both, but it's primarily -- it's better consolidation that typically happens in a recessionary environment.

The customers will tend to choose the -- not the larger, but, they will choose the more financially secure, longer-term, broader global footprint, more cost effective suppliers.

They will generally eliminate folks that are playing a minor role in their supply base.

And that will be true for the other major players in our industry.

They will enjoy some of that vendor consolidation activity as well.

The sector I highlighted was the medical instrumentation and industrial control sector that was particularly robust for us in the fourth fiscal quarter, and we'll continue to work on that in other areas.

And then one more attack at this margin contribution.

On the gross line, the contribution margin was quite strong, I think 23% fell through to gross profit, I think strongest that I've seen really, maybe as far back as my model goes.

That to me speaks maybe of better business on the vertical, the verticals, in particular plastics for you guys.

Is that a big part of what happened in the current quarter?

And maybe just a general update on the Green Point business would be helpful.

You broke up a little bit there, but I think it was really about the gross profit line and the--

How the verticals contributed in particular and update on Green Point, if that's possible.

Okay.

So, in terms of the margin contribution in Q4, again, looking at the sectors that contributed the most, there was a high percentage of the better margin sectors, like instrumentation, industrial control and medical, AMS, telecommunications, areas where the operating leverage was pronounced.

The mobility sector really only increased I think on net, something in the neighborhood of $20 million to $30 million in absolute dollars.

Most of that did occur in the vertical areas, so that does help in terms of -- it does help significantly in terms of margins.

Overall, with our vertical operations in mobility, Jabil Green Point, we think is performing very well.

We think they have performed admirably in the downturn.

They have managed their customer mix very well, and they are focused primarily on the high end to SmartPhone in the marketplace.

So we're actually very enthusiastic about their ability to compete and continue to bring value to customers and to Jabil.

Your next question comes from Jeff Feinberg.

Thank you very much.

Most of the questions have been answered.

I just wanted to follow up.

If I'm not mistaken, I thought we had discussed on one of the prior recent conference calls of the targeting of 3% consolidated operating margin next year.

Is that still the case, or would this new incremental analysis sort of supplement that?

I don't think we talked about a fiscal year of 3%.

What we did -- where we did talk about a 3% was when we were targeting levels of $3 billion and above on a quarterly basis, and with the guidance we've provided today, that $3.1 billion or the midpoint of our guidance, and we meet the midpoint of our core operating income guidance, comes to about 3.1%, so that's where that comment related to.

Fantastic.

Thank you for evidencing the leverage in the business model.

Thank you.

There are no further questions.

Great, thank you very much, everyone, for joining us on the call today.

And we look forward to meeting with you and talking with you soon.

Thank you.

This concludes today's conference call.

You may now disconnect.