捷普科技 (JBL) 2011 Q2 法說會逐字稿

Good afternoon. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter and fiscal year 2010 (sic) earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Ms. Walters, you may begin the conference.

Thank you and welcome to our second quarter of fiscal 2011 call. Joining me on the call today are President and CEO Tim Main and our Chief Executive Officer Forbes Alexander.

This call is being recorded and will be posted for audio playback on the Jabil website, jabil.com, in the Investors section. Our second-quarter press release and corresponding webcast with slides are also available on our website. In those slides, you will find the financial information that we covered during this conference call. We ask that you follow our presentation with the slides on our website and beginning with slide 2 now, our forward-looking statement.

During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected third quarter of fiscal 2011 net revenue and earnings results, our long-term outlook for our Company, and improvements in our operational efficiency and financial performance.

These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010; on subsequent Reports on the 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.

Today's call will begin with some comments and highlights from Forbes Alexander on our second fiscal quarter, as well as some forward guidance on our third fiscal quarter of 2011. Tim Main will then follow with some macro and Jabil-specific comments about our performance, our model and our current outlook. We will then open it up to questions from call attendees.

I will now turn the call over to Forbes.

Thank you, Beth, and hello, everyone. I ask you to refer to slides 3 and 4.

Net revenue for the second quarter was $3.9 billion, an increase of 30.8% on a year-over-year basis. GAAP operating income was $104.6 million. This compares to $61.8 million of GAAP operating income on revenues of $3 billion for the same period in the prior year.

Core operating income excluding amortization of intangibles, stock-based compensation and charges associated with the acquisition of sites in France and Italy increased 76.2% to $168.4 million and represents 4.3% of revenue. This compares to $95.6 million or 3.2% for the same period in the prior year. As expected, on a sequential basis, revenue decreased 3.8% in the second quarter, while core operating income decreased by 7.4%.

Core diluted earnings per share were $0.54, an increase of 86.2% over the prior year.

Please now refer to slides 5 and 6 for revenue mix and core operating income by each of the segments for our second fiscal quarter.

Our diversified manufacturing services segment grew by 0.5% sequentially. On a yearly basis, this segment grew 47%. Revenue was approximately $1.4 billion, representing 35% of total Company revenue in the second quarter.

Core operating income was 6.1% of revenue. Revenue and core operating income performance were impacted in the quarter as a result of semi-cap equipment revenues below our previous expectations, and incremental investments within specialized services to support ongoing program wins and ramps in the second half of the fiscal year.

The enterprise and infrastructure segment increased by 6% sequentially. On a yearly basis, this segment grew by 19%. Revenue was approximately $1.2 billion, representing 32% of total Company revenue in the second quarter. Core operating income for this segment was 4.6% of revenue.

Our high velocity segment decreased by 15% sequentially. On a yearly basis, this segment grew by 27%. Revenue was approximately $1.3 billion, representing 33% of total Company revenue in the quarter. Core operating income for the segment is 2% of revenue. We are pleased with the progress we are making as we move this segment into our targeted core operating income range of 2% to 2.5%.

I will now ask you to refer to slides 7, 8 and 9, which accompany my commentary on elements of our second-quarter operating and balance sheet performance.

Selling, general and administration expenses were $121.5 million and represented 3.1% of revenue. Research and development costs were $6.5 million in the quarter. Intangibles amortization was $5.7 million. Stock-based compensation was $20.3 million in the quarter, and charges associated with the recently acquired sites in France and Italy were $37.6 million.

Our net interest expense for the quarter was $25.9 million, and the tax rate on net core operating income was 16.4%. Our sales cycle in the second quarter decreased by five days from the previous quarter to 11 days. Inventory turns remained consistent at 7.

Cash flow from operations was $450.3 million. The core return on invested capital for the quarter was 25.8%, and cash and cash equivalents were $902.3 million. At the end of the second quarter, there were no outstanding balances on our revolver.

Our capital expenditures during the quarter were approximately $106 million as we continue to invest in infrastructure to support our targeted markets and capabilities. $56 million was associated with our diversified manufacturing services group, $13 million in our enterprise and infrastructure, $7 million in our high velocity, and $30 million in our IT and building infrastructure.

Depreciation in the quarter was approximately $71.3 million, and core EBITDA was $239.6 million or 6.1% of revenue, consistent with that of our first fiscal quarter.

In summary, we are extremely pleased with the results of our second quarter. Our goal and plan is to fundamentally shift the revenue and income profile of the Company to provide sustainable -- excuse me, to provide overall sustainable operating performance, a position to accelerate as we move through the second half of the fiscal year.

I will now ask you to refer to slides 11 and 12, where I would like to take a few minutes to discuss the recent events in Japan and the recent acquisition of sites in France and Italy.

Our heartfelt condolences go out to all those impacted by the recent natural disaster in Japan. Our operations and employees in Gotemba and Tokyo were not directly impacted by the events. We immediately established a supply chain command center and continue to work with customers and suppliers to assess the full scope of any impact to continuity of supply and assess best strategies to mitigate any such impact.

Towards the end of our second fiscal quarter, we acquired operations in France and Italy, with the primary motivation being to sustain customer relationships. We are currently in the process of developing a long-term business plan for these sites and expect revenues to represent approximately 1.5% of overall quarterly revenue guidance in the third fiscal quarter. The acquisition of these sites is not expected to impact our ability to meet our 2011 and long-term goals.

I would now like to provide you with our third-quarter fiscal 2011 guidance. The natural disaster in Japan may have an impact on the supply of components to our global manufacturing operations. However, the extent of this impact is not known at this time. Therefore, the guidance I'm providing excludes the impact of potential supply disruptions on these results.

I now ask you to refer to slides 13 and 14. We expect revenue in the third quarter on a year-over-year basis to increase by approximately 21% or 6% sequentially to a range of $4.1 billion to $4.2 billion. The diversified manufacturing services group is expected to increase by 6% sequentially. The enterprise and infrastructure group is expected to increase by 8% sequentially, of which approximately half of this growth is associated with the acquisition of operations in France and Italy. The balance reflects new business awards from an existing customer and the wireless telecommunications programs, which will ramp over the next two quarters. Our high velocity segment is expected to increase 3% sequentially.

Core operating income is estimated to be in the range of $175 million to $185 million. Please keep in mind that this includes a range of $5 million to $10 million of operating losses associated with the sites in France and Italy. Core operating margin is expected to be in the range of 4.3% to 4.4%, and as a result, core earnings per share in the range of $0.55 to $0.59 per diluted share.

Selling, general and administrative expenses are estimated to be 3.1% of revenue; research and development costs $7.5 million in the fiscal quarter; intangibles amortization is expected to be approximately $5 million; stock-based compensation $20 million; and interest expense $26 million in the third fiscal quarter.

Based upon the current estimates of production, the tax rate on core operating income is expected to be approximately 17% for the year.

Our capital expenditures are estimated to be $100 million in the quarter, the majority of this expenditure being associated with investments in diversified manufacturing services and enterprise and infrastructure segments to support ongoing multi-quarter program ramps.

At this point, I shall hand the call over to Tim Main.

Thank you, Forbes. Please turn to slide 15. First half of fiscal 2011 has been a great start to the full fiscal year. Revenues increased 31% year over year and a little over $8 billion.

All three business segments that we report today -- diversified manufacturing services, high velocity, and enterprise and infrastructure -- are exceeding their long-term growth targets. Particularly, diversified manufacturing services in the most recent quarter grew 47% year over year.

We're particularly heartened by the fact that diversified manufacturing services has increased to 35% of our overall business. That is from 30% about a year ago, so a very rapid growth in this area and increasing the richness of our portfolio mix.

Enterprise infrastructure is resuming its growth rate and again will likely exceed our long-term targets this year. The new wins are improving the diversification in this segment. I will talk about that in a few moments.

High velocity, we were challenged in fiscal '10 to drive operating margins to the targeted range of 2% to 2.5%. We now have two consecutive quarters where the high velocity area performed within the long-term targeted range.

And we're very happy; Forbes and I are both pleased to report that free cash flow in the first half of this year is significantly above where it was in the first half of fiscal '10, with cash flow from operations in the most recent quarter $450 million, which is I think a pretty good performance.

If you turn to slide 16, please, to recap, in diversified manufacturing services, in the second fiscal quarter, we enjoyed 47% growth over the same period in fiscal 2010. 2011 growth is very likely to exceed now our long-term growth target of 20% to 30%. Operating margin remains in the targeted range of 6% to 8%. And we are seeing continued growth, with guidance of 6% sequential growth in terms of our guidance in Q3. So, very pleased with the performance in diversified manufacturing services.

Turn to page 17. Enterprise and infrastructure is starting to demonstrate significant growth, and we enjoyed 19% year-over-year growth in our second fiscal quarter. Our operating margins continue to be at the high end of our targeted range of 4% to 4.5% -- actually exceeded that margin in our second fiscal quarter. And the expectations are that we will continue to operate within that range.

We're seeing an increasing contribution of business mix from our stores and telecommunications sector. In fact, we would look for the storage and telecommunications portion of enterprise and infrastructure to grow to as high as 70% of the overall sector's business in the second half of the year, and expect 8% sequential growth in fiscal Q3. So very, very strong growth there based on some new business wins and the targeted areas of particularly telecommunications and storage.

Turn to slide 18, please. In high velocity, we did see 27% year-over-year growth. Operating margins at 2% are within the range, so two consecutive quarters of being within the targeted range of 2% to 2.5%. We are particularly happy with that performance given our second fiscal quarter is typically a very poor quarter because of the seasonal down. And going through a 15% sequential decline and being able to maintain operating margins at 2% and within the range I think underscores our ability to run the full fiscal quarter year with our targeted long-term range. Expect the second half to show consistent results with the first half, and forecasting -- guiding to a 3% sequential growth rate.

So taking that all into account, if you turn to slide 19, please, this provides a look at our portfolio and growth mix and how we look at the second half of the year, hopefully help you how to characterize the second half of the year relative to the first half.

Our first-half actual results are a little over $8 billion. And taking the midpoint of our guidance in the third quarter and applying our long-term growth rates to the fourth fiscal quarter would result in a second-half revenue level of $8.4 billion. This is consistent with the chart that we reviewed in the last quarter's conference call, just helping you build a model for this year.

That results in a full fiscal year of about $16.4 billion. And I think it's interesting to note that if we apply the long-term growth targets to that $16.4 billion of 5% to 10% in high velocity, enterprise and infrastructure, 20% to 30% in diversified manufacturing services, and based on the business mix we will have at the end of this fiscal year, the Company would reach a $20 billion revenue level by fiscal 2013. So we're very happy to be moving in that direction and seeing significant growth in diversified manufacturing services in particular.

Turn to slide 20, please. Our business transformation is well underway and I think showing up in the results. The chart on the right depicts our core operating margin and core EBITDA margin. And tracking that from fiscal '09 through the first half of fiscal 2011, over a 200 basis point improvement in both metrics and a very significant growth year over year.

We're very stressing a great deal on customer service and operational performance. Some of the improvement in margins, particularly from the '09 levels, is due to growth in the business and scale. Some of it is due to portfolio mix, but a significant part of the improvement in margins is due to really focusing on operational excellence, lean manufacturing and higher levels of productivity.

We'll continue to focus on differentiated services and capabilities, particularly in targeted markets like healthcare and life sciences and other areas of diversified manufacturing services. And we see growing scale and advancing share in targeted markets, which tends to be a virtuous cycle of lower costs, higher capabilities and greater share.

Turn to slide 21, please. Just to kind of recap near term our challenges and opportunities, clearly, the near-term challenges, one significant near-term challenge could be the potential for near-term supply disruptions due to the natural disaster in Japan. Right now, it is too early to accurately assess the impact to supply. We're working very closely with our suppliers and customers to mitigate any potential impact.

Information -- we are now in the 11th day since the tragic event took place. I think you should appreciate that some suppliers are simply scrambling to get their employees back to work, determine if and what level of damage has been done to their operations and when they can resume supply.

Information is coming in rapidly, and we are getting better information. But again, it is too early to accurately assess what impact this might have to our results in the third fiscal quarter. We thought the best thing for us to do was to give you an honest appraisal using our conventional conservative guidance, give you as accurate a picture as we can of the shape and health of the business today, and excluding the potential impact that this might have.

We will be making, just to talk about the Q&A session today, we will not be making any specific comments regarding particular customers or suppliers. I know you're very interested to know what suppliers might be most impacted, what business sectors might be most impacted, what customers might suffer the highest level of consequence.

That is completely speculative at this point. There's no reason for us to think that Jabil's experience, if there is significant supply chain disruption, that our experience would be any different than anybody else in the electronics industry, no better or no worse. In fact, I think our diversification probably helps us in that regard.

And we're not in a position to predict or help you predict what areas of the industry may be least affected or most affected. So we will be making -- we will have no responses to any specific questions in that regard.

Second near-term challenge in Italy and France, we're working on a sustainable, profitable business plan. We think the impact to margins will be minimal. This was a difficult decision that we made on behalf of significant strategic customers, as well as protecting our reputation within the communities that we do business.

I think it provides a significant opportunity for us, though, to differentiate Jabil's customer service during a period of high stress, both in terms of acquiring sites that were struggling on behalf of strategic customers, as well as proactively working with our customers and suppliers to mitigate, minimize any supply chain disruption due to the events in Japan.

I think it is an opportunity for Jabil to use its skilled resources in the area of component engineering, design resources, as well as our global supply chain management capabilities, particularly those capabilities in Asia.

Jabil is also well capitalized to support customers during this period of high stress. And we think it is a great reason for the customers that we serve to do business with, large-scale, well-capitalized and well-funded companies like Jabil over other players in the industry that may not be as well positioned to support them during these periods of high stress.

We take this opportunity to differentiate our service, support customers and, pursuant to that, build market share and scale in targeted markets. Growth in diversified manufacturing services is exceeding our long-term targets, and we are building share in enterprise and infrastructure, and very gratified by that.

So in summary, there are some near-term challenges. There is no reason to think that those near-term challenges will be extended into any type of permanent challenge. In fact, Jabil has operated in highly allocated component markets many times, in my experience, Jabil. And though the short-term disruptions may or may not be severe -- we don't know at this point --they are temporary disruptions. And there's no reason to think that it will be any better or worse for Jabil and no reason to think that it will extend beyond the next quarter or two.

So it's a great opportunity for Jabil to differentiate ourselves with customers and the industry and continue to grow in target markets. And in summary, our long-term strategic plan is on track, and we're very pleased with our progress.

Great. Thanks, Tim. Patrick, we are ready to enter the question-and-answer session.

Craig Hettenbach, Goldman Sachs.

Tim, just starting with the European operations that were reacquired, and understanding that you said there is a minimal impact to margins, is there any precedence in terms of prior actions you have done to help improve profitability and things you can point to that, as you get that business up and running again, that you can drive some improvement?

Well, there is timing. Let me talk about first the actions that we take, and then maybe some experiences that might be instructive.

In the short term, the first things we can do are focus on productivity and cost reduction within the sites themselves. And we will be working on that diligently, immediately. Secondly is to make sure that the present customers in the sites are well served and hopefully enhance those relationships in order to give them confidence that we can not only supply their current requirements, but also potentially expand the business. Thirdly, look at the unique characteristics of the sites and develop a business plan that is sustainable, and target customers and markets that can support the cost structure and take advantage of any unique capabilities that the sites might have.

[An] experience for Jabil is our US operations today are profitable. I believe every single site in the United States is profitable. So even though we went through a period of entrenchment in the US, closed a site in Billerica, Massachusetts, by working on middle-market accounts aggressively and working on things like NPI services in plants like Michigan and really working in healthcare and areas of the business that need a US presence, we have actually developed a pretty robust and profitable business here in the US.

We decided to forgo that opportunity in Europe because the market is a little bit different, a little more challenging to make those things work in Western Europe. But now that we own the sites again, we're going to have to revisit all of those plans and really aggressively go after it. So initially, short term, it is cost reduction in the current customers, and then longer term, over the next three, four, five quarters, it's really working diligently on new markets for the sites.

Got it. Thanks for that. If I can follow up on the tablet space, just if can you go over your strategy there and really how Green Point fits into that?

Well, I wouldn't say that we have a separate strategy for tablets. We do business with some of the best smartphone companies in the world today. And I think the unique capabilities of our materials technology group and Jabil Green Point and their ability to work with new materials, a combination of materials like glass and metals and plastics and other alternative materials, these are the types of things that tablet makers and smartphone makers are very, very interested in.

So I think that our growth in smartphones and tablets will come together and continue to be pretty robust for the next few years.

Okay. And then last one, if I could, on the HBS business, Forbes, nice to see the profitability within range. Does that change at all the view there? I know it has been -- the strategy is focus on improving profitability and inventory turns. Will that remain the case, or now that you're within the range, is it possible you might get a little more aggressive there or not in terms of revenue growth?

I think, Craig, at this juncture, we're at the low end of the range this quarter, which is very gratifying in a sequentially down and a seasonal down revenue. So, still some work to do there, keeping that 2%, 2.5% range. We would anticipate that in the back half of the year. But we will view those opportunities on their own merit as we come to it.

What I would comment is our strategy around diversification has not changed. Plus we're hitting all these targets and the range of targets for each of our three segments. We're still driving towards our goal of a diversified manufacturing services business that's running 50% of the overall revenue stream longer term. So that hasn't changed, and we will continue to focus on driving more margin across each of these segments.

It has shown a little bit more growth than you might expect over the last couple of quarters. But please appreciate that for the customers that we have in high velocity, we are an attractive choice for them. And we need to support their requirements. To the extent our customers in that area grow, we're going to grow with them. But that is not an area that we're targeting a lot of new business development activity.

Got it. Thank you.

Lou Miscioscia, Collins Stewart.

Maybe if you can just talk about R&D, SG&A and the tax rate, they all came in lower than I guess what our expectations were, which is -- obviously was a good thing. But why was that the case? And can you talk about the sustainability of that for the rest of the year?

Sure. So in terms of SG&A, it was marginally lower. I think we've done a real good job over the last four or five quarters of leveraging that SG&A base in the lower to mid-$120 million a year -- a quarter, excuse me.

As we move forward, you're going to see that just come up a little bit. Guidance for this next quarter is about 3.1%, so consistent with Q2. What that does is add about $6 million of expense there, $4 million associated with the plants in France and Italy and a little bit of room for growth there to support the continuing growth across our enterprise.

R&D, nothing particular there. We've got various activities and programs that move in and out. I think as you know, design can be a little bit more challenging to predict exactly where some of these programs launch and finish. So nothing particular there. And we will continue to see that as we move forward.

In terms of the tax rate, yes, that came in lower than we had expected. And that is really being driven by the sources of revenue and income on a geographic basis. So we would expect that, given what we see today as we move forward, to being around about 17% as you move forward for the balance of this fiscal year.

Now, I would drive everyone's attention to we do still have some tax holidays in various geographies in Asia. And even with the impact of operations in France and Italy, I think we can still achieve that 17% as we move forward.

Okay, great. Then maybe just a follow-up to Tim. It's nice that you moved the $20 billion target in a year. Could you just remind us what the long-term growth target is? I think that it's -- obviously, you mentioned earlier 20% to 30% for diversified and I believe 5% to 10% for enterprise. But you also have 5% to 10% for high velocity, or do you expect that to be flat? Because if there is growth there, then obviously it seems like it should be -- the number could even be higher.

No, the long-term target is 5% to 10%, which really represents kind of a secular growth rate with the existing customer base. And I think the big thing in terms of -- if you kind of average that out with the current mix of business, it results in a 13% to 15% year-over-year growth rate.

And last quarter, I think we indicated that we like, based on those growth targets, that we were likely to hit a $20 billion or more revenue level by fiscal 2014, fiscal 2015. I think the change is that we're doing a heck of a lot better this year, and we're going to significantly exceed those long-term growth rates in all three segments.

Therefore, we're really kind of pulling in the date at which -- the year in which we were likely to hit a $20 billion run rate. So it's not guidance; it's simply applying the logic of what our long-term growth objectives are to our current state of affairs and taking a look at what this business might look like in a couple of years if we were able to achieve those aspirations.

Okay. Thanks, guys.

Amit Daryanani, RBS Capital Management (sic).

Just two questions. One, on the BMS margin, can you just talk about what drove that down sequentially, especially given that specialized services was actually up on revenues? And as you get to the back half of the year, should we expect those margins getting back to kind of the 7% range or the midpoint of your long-term target?

I will answer the second part of that question first. We do expect margins to rebound somewhat in the second half of the year.

In terms of the performance in Q2, really it's a range of 6% to 8%. We're actually pleased it continues in that range. And I think you can see some variation, and particularly in diversified manufacturing services, some variation, plus or minus, quarter to quarter based on levels of production and what we might be doing in terms of new product launches, etc.

In terms of the last quarter, we did have a little weakness in semiconductor capital equipment that was a little bit less than anticipated and making investments, particularly in specialized services, to support continued growth in specialized services in the second half of the year.

So if you take a look at where the margins were in the second quarter versus the midpoint, it's about $10 million of additional income. And you consider $3 million to $4 million in semicap and some of the other areas of instrumentation that might've been a little bit weaker in Q2, with the balance of it being expenses and investments to support more aggressive ramp of production in the second half of the year. So we would expect that picture to brighten a bit in Q3 and Q4.

Got it. And then just to clarify, on the two European sites, I think you guys said about $60 million or so in revenues and $5 million in op losses which you expect on a quarterly basis. Is that accurate?

Yes, about 1.5% of next quarter's midpoint of guidance, so around about $60 million of revenue. And it's a range, Amit, of losses, $5 million to $10 million, depending on the level of performance and our ability to structure our long-term business plan.

And probably higher on the front end and lower on the --

I'd expect to be higher on the front end, Amit, and lower on the back end as we put our plans in place.

And then just finally, this is all -- all the European sites are primarily in the enterprise side of the business, right? On a segment basis?

That's correct, enterprise and infrastructure, yes.

That's it. Thanks a lot, and congratulations on the quarter.

Amitabh Passi, UBS.

Tim, first question for you. I just wanted to understand what exactly is embedded in your assumptions for the guidance for next quarter with respect to Japan. Is your guidance basically predicated on business as you're seeing today, or have you sort of maybe factored in some conservatism, just given some of the uncertainty around Japan?

So, to be very sanitary about this, we are not baking in significant supply disruptions from Japan. Our normal process is to take a fairly conservative view of our forward-looking guidance. If you look at the last -- I believe that we have operated at the high end or exceeded the high end of our revenue range in six of the last seven quarters.

So that should give you an idea that we would typically take a fairly conservative view of revenue guidance to begin with. It is conceivable that there are scenarios where the impact from Japan would be very minimal or slight and that our guidance accommodates that impact. It could also be conceivable that the impact could be very significant, in which case we would suffer a greater deal than what is anticipated.

So we are taking our normal, conventional, typical conservative view on revenue guidance and not baking in anything specific to Japan. Doesn't mean that with some disruption we might not be able to operate within that range to begin with or in the end, but that is kind of the way we've looked at it.

And then just one follow-up. On the segments in the quarter, enterprise and infrastructure came in significantly stronger than I think your expectations and in fact even ours, which probably doesn't mean much. But I just wanted to understand the puts and takes, E&I coming in much stronger than anticipated, I think consumer or high velocity systems slightly weaker. Could you just share maybe what you're seeing there with respect to demand patterns, demand trends, and maybe some new design wins you talked about in E&I?

Yes, business looks pretty good. Overall demand looks pretty good. I think we continue to see a continuing recovery in North America. So pretty good demand all around. And in enterprise and infrastructure, some of the new business wins are particularly strong, and the wireless infrastructure area, particularly in emerging markets and secondarily gaining share in new programs in the storage market. So those two parts of the enterprise and infrastructure business are showing very robust activity right now.

And then on high velocity, any comments there?

No, really, I mean, it came in a little bit weaker. I think it was only $20 million, $25 million weaker than the guidance we provided, which on that book of business, it is -- by its nature, if you look at handsets or set-top boxes and printing products in there, by its very nature, it is a volatile business and a consumer line business. So, slightly weaker at $20 million, $25 million, nothing that jumps out there, just really around that volatility. I think it's pretty close to our expectations.

Okay, great. Thank you.

Brian Alexander, Raymond James.

This is Nabil Hanano in for Brian Alexander. I just wanted to touch on the DMS growth. We've seen meaningful growth there for the past several quarters, but we haven't seen any significant gross margin expansion. Is this a result of the CapEx you've been making over the past four quarters that have been above $100 million? And can you discuss if those investments thus far have been yielding the results that you expected?

Just a small correction, operating margin, not gross margin, because we report operating margins in this area.

Well, no, on the consolidated results, the mix, you have seen incremental revenues of roughly $450 million year over year, but the gross margins have only been up 10 basis points roughly.

Yes, so to answer the question, yes. It's around -- we've got a great leverage on our SG&A, as I said earlier on the call. And it is around these investments (technical difficulty) the areas of specialized services. There is some element of lag in terms of these investments that we are making there until we get these [helpful] products launched, up and running.

So some lag there, maybe a quarter or two. And as we've said, we've had capital investments. The majority of the investments, $200 million-plus, in the last couple of quarters has been directed toward diversified manufacturing services, and in particular, our specialized services arena. So we're continuing to see that as we move forward into Q3. But we would expect to expect to see gross margin expansion as we move into the back half of this fiscal year.

Yes, and I want to go back to this topic. There's a reason we don't provide guidance on a gross margin basis, because for years, for the last 10 years, we have said we really don't regard that as a meaningful metric for us.

There is significant changes business to business, program to program, customer to customer in terms of the material content in the revenue stream. And that is really the primary determinant of gross margin. We really focus on operating margin. As diversified manufacturing services increased from 30% to 35%, our operating margins have followed suit, from 3.7% to 4.4%, 4.4% for the first half of this year.

So a very significant improvement in the operating performance of the business, and really, gross margin is not a metric that we track. We don't regard it as significantly meaningful.

Okay. And then my last question is just, how sustainably do you view the free cash flow to EBITDA ratio you have targeted, given that most of your growth is being driven by DMS, which is the more working-capital-intensive portion of your business?

Yes, overall, I think we stand by some of the targets we have given. I think previously, we have talked about a 25%, 35% free cash flow number versus EBITDA, that based off of business that would grow long term about 15% to 20%.

[Plus] we've not given guidance for our fourth quarter. I think there is opportunity that we would certainly grow beyond the high end of that long-term target this fiscal year, given the [subpar] performance in our Q3 guidance. So on an overall basis, I think there is certainly opportunity to drive free cash flow at around about the 20% level. If one sort of backs into the math there, on a consistent growth base, 10% to 15%, that rate equates to that 30% ratio.

So really, to summarize, I think there's opportunity here to produce free cash flow this fiscal year around about 20% of overall EBITDA.

It would take a very significant deterioration in inventory turn, which is really the only difference between the DMS areas being more working capital intensive than the other areas of the business. It would take a significant deterioration in the Company's inventory turns overall to jeopardize our performance in free cash flow and the expectations of free cash flow. And we just don't see that happening.

All right. Thank you very much.

Steve Fox, CLSA.

Two questions. First of all, Tim, could you -- before the earthquake, were you guys seeing any kind of component constraints or ordering constraints for the capital equipment you need for DMS?

And then secondly, along the lines of the investment you're making in DMS, is there any way you could talk about whether the run rate should slow down, given your long-term targets for growth? And any kind of payback periods you could talk about around the investments you're making on the casing side?

Okay, the first part of your question was about supply constraints. And I thought you were talking about components, but you shifted to --

Actually, I was talking about both. I was curious if there was any component constraints, and then if you're having any equipment order leadtime issues prior to the earthquake.

So in terms of components, the market since the fourth quarter of 2010, as component supply and capacity has really caught up with demand, lead times have been coming in, and it has been turning into more of a buyers' market than a sellers' market, and I think that is pretty well known out there and pretty well covered.

In terms of specific equipment, nothing that we think will pace our business. There are certain types of equipment that lead times are a little bit difficult, but nothing that would pace our business below our expectations. And then the third part of the question was about additional investments in DMS, I think?

Yes, well, I'm just trying to understand the --

The payback periods in DMS?

Payback period and the slope of the investments, whether DMS should start to slow down in terms of CapEx.

Yes, I think particularly in the materials technology group, there was some significant investments made in 2010. And because of the success of that investment and the growing revenue there, there have been some additional investments.

I would think that that will start to slow down, maybe -- certainly in fiscal 2012. I think we're looking at CapEx rate of $100 million a quarter kind of CapEx rate. You're probably likely to see that for the next couple of quarters. But as we absorb that very rapid growth, I think that rate will start to slow down a bit. And the payback periods are relatively conventional and nothing out of the ordinary for us.

Great. Thank you very much.

Wamsi Mohan, Bank of America-Merrill Lynch.

Tim, can you talk of the new areas, perhaps, that you have been able to leverage Green Point's capabilities outside of high velocity? And can you give us some sense of the relative either mix or growth rate between high velocity and perhaps enterprise infrastructure specifically for Green Point or the relative growth rates there?

Okay, just to be clear, Wamsi, the Jabil Green Point is in the diversified manufacturing services area. You are probably saying is businesses outside of the mobile Internet business, and we do have some of the unique capabilities in applied ingenuity and innovation capabilities of Jabil Green Point directed towards our healthcare business and life sciences business. We think that will be very beneficial over the next few years and help to differentiate Jabil's solution relative to other competitors and providers in our space.

That said, that slope rate is not going to be nearly as rapid as their core business is today. I think it will start to pay dividends -- well, it's starting to pay dividends already, actually. There are new program wins that we're winning because of their capabilities today and will become more material through our results in 2012 and 2013 as we continue to provide that integration.

I wasn't clear on the questions about enterprise and infrastructure, though, how that related. Maybe you could repeat that part of your question.

No, I guess I meant like sort of where ultimately Green Point content goes or ends up as opposed to sort of where you recognize your revenues.

It will continue to be reported in diversified manufacturing services. And the areas of differentiation beyond the mobile Internet are also in diversified manufacturing services like healthcare and instrumentation and industrial and cleantech. The diversification of their capabilities from mobile Internet or in addition to the mobile Internet products that they build today are in those two business areas specifically.

Tim, thank you. And with respect to Green Point, can you tell us where specifically you are targeting your investments? Any particular investments already made in large metal casing capabilities?

We made significant investments in fiscal 2010. That investment has continued into 2011 as success in that area has proven out. So I have to be -- I really can't answer specific questions about specific investments because that can get tied directly to customers and certain programs. And I'm really not at liberty to do that.

Okay, thanks. And, Tim, you noted that you really can't talk a whole lot about Japan from a quantificational impact or a customer perspective. But when do think you will have enough information? Should we be expecting more from a quarter update from you guys?

We do not intend to provide any midquarter updates. Information continues to come in and become more discrete and granular. But we're not sure when that -- it's very -- the behavior in the industry is such that people scramble like crazy. And you may not know until very late in the game and any particular moment when a certain component will break free or if the design engineers have come up with a design-around or an alternative component that require some qualification.

And you may be thinking that there's a significant impact to the business, and then the qualification takes place with an alternative component, and suddenly you're able to run 24/7 and recover out of those deliveries.

So it is really difficult over the course of the quarter to provide any type of quantification. I think that -- I look at where this happened, and the people of Japan have shown, culturally and historically have shown tremendous resilience. And I've got a lot of friends in Japan and our own employees. And, gosh, if there is a group of people on the planet that will work 24 hours a day to recover schedules and capabilities on behalf of customers, these folks will do it.

So it's likely to be in certain areas a scramble all quarter. And we just can't quantify that impact. And it would be almost reckless for us to predict when we would be able to provide any further guidance.

There's no reason -- I might just also add, though, there is no reason to think -- if it ends up being an enormous impact, it's going to be an enormous impact for everybody. There's no reason to think that the impact at Jabil is going to be any different than anyone else's.

And if the impact seems to be minimal, and all the major OEMs in the world seem to be running at about the levels, there's no reason to think that we will be a heck of a lot different than that, either.

So our diversification, our capabilities, our global supply chain strength, the ability to proactively work with customers and potentially proactively help our smaller customers with workarounds in different components, I think are significant assets to Jabil and significant capabilities that will help us. So I think that -- I don't think that investors should think that there is anything unique about Jabil that would expose us to risks that are any different than the industry at large.

Actually, one last one from me. This might be too premature, but any early indications of increased activity levels in cleantech after this disaster in Japan?

A lot of talk so far. We'll see. Renewable energy, the world goes through cycles on these types of things, and we have seen cycles up and down. But I would think that renewable energy will enjoy a good cycle after this.

Thank you very much.

Sherri Scribner, Deutsche Bank.

Tim, you mentioned that you are gaining share in the wireless infrastructure and the storage segments for E&I. Is that with new customers or is that with existing customers generally?

Really, you know, I hate to -- using the term market share gains is a little bit of a misnomer. We have enjoyed some new business wins that will be ramping into mass production. And it is principally with existing customers.

Okay. And then are there any other areas of the business, I assume in DMS, where you are seeing that you are gaining share, whether with new customers or existing customers that you would emphasize?

The interesting thing about DMS, Sherri, is that the secular trend to outsource the design, manufacture and support of healthcare and instrumentation, cleantech and industrial products is increasing a great deal. So the penetration rate of our industry into that $500 billion available market is really only in the 10% to 15% range.

So market share is much less of an issue in that area. It's really a growing market, a rapidly growing market. And the company that can differentiate their capabilities will enjoy a greater portion of that overall market growth. And really, we think that is what we're in a great position to do, is to leverage our capabilities and unique differentiators that we have to garner more of the growth that is flooding into the marketplace and really put up strong numbers over the next few years.

Okay. So the secular trend to outsourcing there, would you say that trend is driving the 20% to 30% growth that you expect in that segment? Or does that 20% to 30% include some share gains that you think you will get above and beyond other players?

It is really principally -- that 20% to 30% is principally about the growth of the market and our ability to develop a very strong franchise in that growing market. It's much, much less about market share.

Okay, that's helpful. And then the investments you're making in DMS for the second half of the year, are those for new programs or with existing customers, or are those for new programs with the new customers generally?

The healthcare and life science area has been a pretty robust new business pipeline. So there will be some investments there to support programs. And then healthcare programs ramp very slowly, but will contribute more in 2012 than 2011. But we will see that business area start to grow again in the second half of the year and then continued investment with the existing customers. Do you want to add something to that, Forbes?

Yes. In addition, our aftermarket services business, we have some nice new wins there where we will be making some investments also.

Great, thank you.

Jim Suva, Citi.

Congratulations to you and your team. I have a details question that I will ask first, so then I can follow up with the other one while you guys look into this.

I am referring to slide 19, and that is entitled Growth and Improving Portfolio Mix. And there's four charts there. I actually had a few investors email me some questions that maybe you can help clarify.

When we look at the first half of 2011 versus the second half of 2011, the green section basically more than doubles, and the red section basically gets cut in third. Maybe while you look at that chart, can you help us understand -- is that what you expect your second-half 2011 total Company mix to be, or is that the portion of the growth that you see coming from that? Because it almost looks like high velocity is going to get cut in third.

And maybe as you look at that and give that some thought, a little bit of an easier question that is not as detailed chart-specific. Tim, when you put in the CapEx last year in May and August that was a bigger than normal CapEx ramp, has that ramped up halfway, fully on a run rate, or where are we at in that stage? And was that CapEx focused on the diversified services or what segment?

The big CapEx in 2010 was directed to diversified manufacturing services. That is fully ramped up into complete utilization. And again, because of the success in that business area, we're making new investments. And our CapEx rate is likely to continue at $100 million for the next couple of quarters.

On the depiction of the second half of 2011, that isn't necessarily an accurate depiction of the business mix. And we certainly don't mean to imply that high velocity is going to fall by half. So if you take a look at the full year 2011, that is probably a little better visual on how we would expect the year to end up, a little better performance in diversified manufacturing services and high velocity, and some pretty good growth in enterprise and infrastructure.

We were already -- if you take a look at our guidance, we've got three quarters of the year kind of in the barn. So there's no significant distortions that are going to happen in the fourth quarter. So that's kind of a boot on our part; we will try and make that pictorially more accurate next quarter.

So the best way to think about that picture is that it's more the additional business coming in on top, not your future business mix.

Well, I think you could -- specifically how we came up with the $8.4 billion, and you can do this math or we can talk about it later and just make sure we have the right numbers, so it's the actual results for the first half. And taking the midpoint of our guidance, so we said 6% growth in diversified manufacturing services, 8% growth in enterprise and infrastructure, and 3% for high velocity, so you just extend the percentages of the business in the first half, apply those sequential growth rates for the third quarter, and then for the fourth quarter apply the midpoint of the long-term growth objectives, which is 20% to 30% in diversified manufacturing services and 5% to 10% in high velocity and enterprise and infrastructure, and that is how you come up with the number.

Okay, great. That's very clear, and it does show that, then, it is not what your future business mix is going to look like. And thank you, ladies, and gentlemen, for great results and outlook, and we look forward to hearing from you in the future.

All right. Thank you, everyone, for joining us for the call today for our fiscal second quarter and third-quarter outlook, and we look forward to talking with you throughout the quarter.

And this concludes today's conference call. You may now disconnect.