捷普科技 (JBL) 2012 Q1 法說會逐字稿

Good afternoon. My name is Susan and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter of fiscal year 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Ms Beth Walters, you may begin your conference.

Thank you. Welcome to our first quarter of 2012 earnings call. Joining me today are President and CEO, Timothy Main; and Chief Financial Officer, Forbes Alexander. This call is being recorded, and will be posted for audio playback on the Jabil website, Jabil.com, in the Investor section. Our first quarter press release and corresponding webcast and slides are also available on our website. In these 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 the website, beginning with slide 2, 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 second quarter of fiscal 2012 net revenue and earnings results, our long-term outlook for our Company, and improvements in our operational efficiencies 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, 2011, 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.

You may have noticed in our last earnings call, and in our recently published Annual Report, we have begun to highlight GAAP operating results. While we are currently still reporting and publishing core results, it is our intention to move fully to GAAP beginning in fiscal 2013. In addition, we will also be providing guidance on a long-term year-over-year outlook. This change to our guidance aligns more closely with how we run the business, making strategic, long-term decisions. We believe providing guidance in this fashion gives investors the most appropriate view into our business.

Today's call will begin with our first quarter results, highlights and comments from Forbes Alexander, as well as guidance on our second fiscal quarter of 2012. Tim Main will follow with macro economic and Jabil-specific comments about our performance, our model and our current outlook. We will then open it up to questions from our call attendees. I'll now turn the call over to Forbes.

Thank you, Beth. Hello everyone.

I'll ask you to refer to slide 3. Our net revenue for the first quarter was $4.3 billion. An increase of 6% year-over-year. GAAP operating income was $170.8 million, or 3.9% of revenue, which compares to $156 million of GAAP operating income on revenues of $4.1 billion, or 3.8% in the same period in the prior year. Core operating income, excluding the amortization of intangibles, stock-based compensation, increased 7% to $194.6 million and represents 4.5% of revenue. This compares to $181.9 million or 4.5% for the same period the prior year. On a sequential basis, revenue increased 1% in the first quarter. Our core operating income increased 4%. Core diluted earnings per share were $0.65, an increase of 7% over the prior year. GAAP diluted earnings per share for the first quarter were $0.54, an increase of 10% over the prior year.

Now I will ask you to refer to slide 4 for our segment discussion. In the first quarter, our Diversified Manufacturing Services segment grew 30% on a year-over-year basis. Revenue was approximately $1.8 billion, representing 42% of total Company revenue. Core operating income expanded in the quarter to 6.8% of revenue. The Enterprise and Infrastructure segment increased 4% on a year-over-year basis. Revenue was approximately $1.2 billion, representing 28% of total Company revenue and core operating income for this segment was 2% of revenue. Our Enterprise and Infrastructure performance was below expectations as we experienced revenue reductions late in the quarter, the result of inventory leveling with specific large customers associated with specific mix and inbound product transitions. We expect a return to revenue growth and improved core operating income performance for the balance of the fiscal year.

The High Velocity segment performed above our expectations for the quarter; segment revenues decreased by 14% on a year-over-year basis. Revenue was approximately $1.3 billion, representing 30% of total Company revenue in the quarter. Core operating income for this segment was 3.8% of revenue, and on a sequential basis, we saw strength across the whole segment and core operating income performance exceeded our expectations, primarily as a result of fixed cost leverage in a seasonally high quarter. There is also now interesting to note that we have one 10% customer in each of our segments.

Now I will ask you to refer to slide 5, the review of our balance sheet metrics. We ended the quarter with cash balances of $862 million. Inventory was approximately $2.4 billion, representing a 7% increase, primarily associated with our Enterprise and Infrastructure business where we experienced some weakness late in the quarter. Inventory turns remained at 7. Overall working capital management remain well-controlled. As a result, cash flow from operations was approximately $115 million in the quarter. EBITDA in the quarter was $275 million, or 6.4%. An expansion of 30 basis points over the same period a year ago.

In regards to capital allocation, we continue to maintain a balanced approach, investing in our business and returning cash to shareholders. Our capital expenditures during the quarter were approximately $95 million as we continue to invest in infrastructure to support our targeted markets and capabilities. The second quarter of the fiscal year, we expect CapEx levels of approximately $80 million to $90 million, reflective of capacity in infrastructure to support higher levels of production in the second half of the fiscal year. During the quarter we increased our quarterly cash dividend by 14%, bringing our yearly cash dividend to $0.32 per share. Now while we did not repurchase any shares during the quarter, we still have $100 million available on our authorization for the fiscal year.

We are also pleased to announce the completion of the Telmar acquisition on December 1. The purchase price of approximately $130 million. I would like to take this opportunity to welcome Telmar employees to Jabil. Moving forward, Telmar's results will be incorporated within our Diversified Manufacturing Services segment. Specifically within the Specialized Services business, where their capabilities strengthen the depth and scope of our current aftermarket services business. Required revenue is approximately $145 million per year.

I'll now ask you to turn to slides 6 and 7, a summary of the quarter's performance. We were pleased with the first quarter's results. Core operating margin performance, 4.5%, the high end of our guidance, and revenues at the lower end of our guidance reflective of continued operational efficiency and diversification of our revenue stream. Returns on invested capital calculated on a GAAP net income basis expanded 2% on a year-over-year basis, to 26%, providing leading capital returns in the EMS industry.

I now ask you to refer to slides 9 and 10 while I'll discuss our second quarter guidance. We expect revenue in the second quarter on a year-over-year basis to increase approximately 4% in the range of $4 billion to $4.2 billion. On a sequential basis, overall revenue and operating guidance are consistent with the levels of seasonality we experienced in fiscal 2011. Core operating income is estimated to be in the range of $160 million to $185 million and core operating margin in the range of 4% to 4.4%. Our core earnings per share will be in the range of $0.52 to $0.62 per diluted share, based upon diluted share count of 213 million shares. Based upon the current estimates of production, tax rate on core operating income is expected to be 18% for the quarter and the year. Turning to our segments, and year-on-year performance, the Diversified Manufacturing Services segment is expected to increase 25%. The Enterprise and Infrastructure segment is expected to be consistent on a year-over-year basis. Finally, our High Velocity segment is expected to decrease 14% on a year-over-year basis.

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

Thank you, Forbes.

While the first fiscal quarter of 2012 was an interesting quarter, very solid results; it's a little more uneven than what we would typically like. Enterprise and Infrastructure was disappointing in total, but that underperformance was isolated and we feel confident about prospects for Enterprise and Infrastructure going forward. We have very good customer relationships in this segment, with stable to expanding share of wallet in all major business relationships. We do expect margins to continue expansion as revenue growth -- as we experience revenue growth over the balance of the year along with the benefits of cost reductions already underway in certain sites in Western Europe.

Very strong results and overperformance from our Diversified Manufacturing Services group; outstanding margin performance as well as sequential and year-over-year revenue growth. Many of you might be interested in a specific High Velocity customer, which I want to forewarn you, we will not be able to answer any questions about specific customer relationships. However, recognizing the state of uncertain generally and as a result of some of the more uneven results in fiscal Q2, we thought it would be helpful to help you understand and characterize the balance of our fiscal year and we've prepared some material to help you along with how we see the balance of the fiscal year for our Company.

If you could please turn to slide 12. Using our fiscal first quarter results and the midpoint of our fiscal second quarter guidance, revenue for the first half of fiscal 2012 should be approximately $8.4 billion. In the second half of the year, we expect the Diversified Manufacturing group to continue leading growth. We have the organic growth contribution from aftermarket services, which is typically at least 12% to 15% per year, combined with the benefit of the Telmar acquisition. We also continue to expect results from Materials Technology group and the Industrial and Clean Tech and the Healthcare and Instrumentation business areas to continue expansion over the course of the year.

Given our market share and relatively stable demand trends in the Enterprise and Infrastructure group, and I want to highlight that, we see relatively stable demand trends in Enterprise and Infrastructure. And, we see growth in the second half exceeding the first half, which we think is reasonable. We are being conservative about revenue performance in High Velocity in the second half of the year. This chart would indicate we are expecting a contraction of approximately $110 million in the second half of the year. However, the quality of that revenue in High Velocity in the margins should continue to be above the high end of our long-term targeted margin range. In essence, this results in a fiscal 2012 of approximately $9 billion in the second half and a total year revenue of about $17.4 billion. We are not trying to handicap anything more or less into this picture, just providing you a viewpoint as to where we think we are today and how the balance of the year might unfold.

Please turn to slide 13. Should the year unfold at about this level, I would regard it as a solid year with a good trend in business mix toward the Diversified Manufacturing Services business area. Margin and profit expansion can take place on much more moderate revenue growth, which I would regard as a very good thing.

Please turn to slide 14. Diversified Manufacturing Services group growth is underpinned by a very substantial market opportunity for the Company. Approximately a $500 billion addressable market with very low levels of penetration. You can find this chart highlighted in our Annual Report -- the fiscal 2012 Annual Report. It actually goes into additional detail -- market sub-segments in each of these business areas. Jabil has a leading or at least a beachhead position in all of these areas, and we look to significant growth in these areas over the next three, four, five years.

Turn to slide 15, please. So, in summary, we would regard our first fiscal quarter and the fiscal year to be very solid performance in an uncertain environment. We expect moderate revenue growth in fiscal 2012 that's a little bit lower than what we have experienced historically, but good solid revenue growth, underpinned by a strong improvement in portfolio mix towards Diversified Manufacturing Services. We are continuing our focus on lean manufacturing and operating efficiency, and all of these elements combined would help us -- keep us on track towards a third consecutive record year for the Company in terms of revenue, income and EPS. Our long-term business objectives remain on track, and we look forward to fiscal 2012 and fiscal 2013 and beyond.

Operator, we are ready to begin the question and answer portion of the call.

(Operator Instructions) Amitabh Passi.

Tim, first question for you. I think last quarter you talked about the business having to sort of outgrow despite the weak macro economic environment. We've now seen year-over-year growth trends decelerate from 32% to 4%, just wondering how you would sort of explain that and is your expectation that sort of mid-single digits is now more reachable growth target for fiscal 2012?

Well, 7%, 8% growth is significantly above macro economic growth. And, in fact, I think would be a leading position in terms of S&P 500 companies. And, I think that is based on what we see today. So, our long-term growth objectives remain on track, 20% to 30% in Diversified Manufacturing Services and 5% to 10% in the other business areas. If we look back in fiscal 2012, over growth in fiscal 2011 and 2012, it would certainly be, if not in the range, above the range of growth for those business areas. So, I am having a hard time getting to your interpretation of where we are. And actually, this growth is in terms of top line growth, it might be a little bit below where analysts had us in the -- after the conference call in September. But, given the portfolio mix towards Diversified Manufacturing Services, the income and EPS associated with this revenue stream is roughly equivalent. So, I would regard this as a nice trade out of lower margin revenue for a better earnings profile and more sustainability. So, I think I would take fiscal 2012 particularly in this environment.

And then just as a quick follow up. Perhaps for you Forbes, can you help us understand what we should expect in terms of operating margin expectations for HVS and E&I. I think HVS certainly surprised on the upside and E&I on the down side just for the February quarter, how we should be thinking about movements for these two segments?

Yes. So, I will certainly give you some color in general terms, we don't provide specific guidance around each of these segments. But, let's take Enterprise and Infrastructure first. Obviously under performed in the first quarter there is really not about revenue growth and as we said in the prepared remarks, essentially the guidance we're providing is growth through the balance of, certainly in the second fiscal quarter and the balance of the year so we should see a pretty reasonable margin progression. I remind you that last quarter we discussed the closure of our sites in northern Italy. So that's under way. We'd anticipated as that does occur there would be some benefit in the February quarter to obviously meet the margin accretion and then we'd see the full benefit of those closures in the third and fourth quarter. But principally, we add back the revenue, we see the growth and we'll start to see the margins progress from 2.5% and I would expect those to be very close to the low end of our operating targets as we head -- as we through to the fourth fiscal quarter here. Remind everyone that the long-term targets in the range of 4% to 4.5%. In terms of the High Velocity arena, as you see, extremely pleased with the performance in the first fiscal quarter, and the way we think about that is that we did have some hyper-utilization of assets in the seasonally high first quarter. So, I would expect some decline in those margins as we move forward to the balance of the year. Sequentially, we do see revenues coming down as a result of this November high season. So the way to think about that is probably certainly above the high end of our targeted range, 2.5%, to somewhere probably approaching the 3% for the balance of the year.

Amit Daryanani.

-- fully understand what drove the revenue degradation? It sounds like there was one inbound program -- that just got changed towards the end and is that the expectation that, that was as de-ramp happens you should see revenues and margin start to improve?

No, the revenue under performance from Enterprise Infrastructure in Q1 was driven by really characterized this as about $160 million, $170 million revenue miss about half was associated with excess inventory, buffer inventory, to cover inbound transition of programs from a large customer. And, they set up buffer inventory that was larger than needed to support that product transition and we are working down those buffers now with that customer. And then, there was a couple of other customers that are just going through general inventory corrections, which we think will rectify very quickly. So, I think it's really important to say the underlying demand is relatively stable, we just happened to get hit with two, three isolated circumstances of inbound transition issues and a couple of inventory corrections.

Yes, that's actually very helpful. And then Forbes, just to understand the cash flow from operations, typically Q1 I think tends to be the softer quarter and then it tends to improve over the few out quarters. So I'm actually surprised you had $100 million plus of cash flow this quarter. Should expect cash flow to continue to improve throughout fiscal 2012 as it historically tends to do?

Yes, it should and you are absolutely right, this did an outstanding job in overall working capital management this quarter, so as we move forward through the balance of the year, I would expect continued, strong cash flow from operations performance. It would certainly allow us to produce somewhere in the region of $175 million to $200 million plus a quarter as we look out through the balance of the year. So, that given with some of the CapEx and the acquisition of Telmar, both on the First of December, it certainly allows I think to certainly return somewhere between $200 million and $300 million of free cash flow in the fiscal year. So, again, another very strong year from a working capital and cash flow position.

For now if I can just ask a last one, if you could shade the $410 million off incremental revenues in the back half in three different greens is there any chance you could say how much would come from Specialized Services versus Healthcare and Industrial?

Yes, it's -- roughly as I kind of look at the board, I would say roughly $75 million to $100 million would come from -- actually about half would come from Specialized Services and half would come from the other business areas.

Brian Alexander.

If I look at your guidance for the E&I revenue in Q2, it doesn't look like you're expecting much of a sequential increase, maybe 1% or 2%, so I'm just trying to reconcile the revenue outlook for that segment with your comments that the Q1 shortfall was temporary and unusual?

Brian, this is Forbes. The sequential guidance is about 3%, as you move forward. So, that's actually above what we typically see in this February quarter. As we move -- Tim articulated now to a previous question, those end markets are relatively stable from our perspective and the customer relationships other than that inbound inventory correction that we saw. So we are seeing growth, we have seen that occur in the past couple of weeks in here in December. So we are seeing growth and we would expect continued growth in the back half of the fiscal year also.

Okay, then just on the margins in E&I, Forbes, the 60% decline in profitability year-over-year, can you break that out? How much of that was due to the one-time restructuring actions versus the operating losses in your European facilities versus maybe some of the lower-than-expected volumes that you talked about?

Yes. So, in terms of the lower-than-expected volumes, typically what we see in that instance is about a 10% deleveraging on our revenue; okay? So, that's what? $16 million, $18 million of an impact there, that was late in the quarter. In terms of the year-over-year basis, in our first fiscal quarter of last year, as you're aware, we didn't have sites in France and Italy, which are predominantly Enterprise and Infrastructure focused sites. So, this quarter, there was an impact there of somewhere between 50 and 70 basis points on that margin. So, add those back, we start to -- be it certainly not the 3 points, approaching 3, 3.5 points, I think the math works out at. As I said earlier, we have started this restructuring process, we do expect the sites in our northern Italy locations that by the end of February, at the current target, and we should then see continued pickup in Q3, then Q4 again as we see revenues continue to ramp towards the low end of our targeted range of 4 to 4.5 points.

Thanks for the clarification.

Louis Miscioscia.

Yes, maybe if you go through Diversified Manufacturing and E&I. I know you just mentioned E&I seemed stable, I guess are you getting that trend into well into the first half? And also that same comment on Diversified Manufacturing, you commented that you are growing above the macro economy. But is that mostly be due to new wins or is it macro economy from what you're seeing from your customers maybe a little bit above 1%?

The comment about macro economic activity was in response to an assertion that Jabil's growth no longer would exceed the macro economic activity generally. And, it certainly will, even with this -- even with this year, with revenue growth moderating. In terms of Enterprise Infrastructure, Lou, what was your specific question there?

Just trying to basically ask about end demand broadly?

Yes, end demand is actually pretty decent and stable. I mean, actually if you go back and look at previous years, the Q1 is typically not a very good quarter for us. We had a decline in sequential growth in 2010, a decline in sequential growth in 2011, and a little bit more of a sequential decline this quarter but, Q2 growth rebound so underlying demand trends are okay and that's why we are pointing to a few isolated customer relationships. We don't want to give investors the wrong message, because this always seems to flow back to specific customers which can be embarrassing and frankly is not true. Computing -- the storage market was actually a bright spot and we've seen very stable to upper demand and we're growing share of wallet in the storage business area. The telecommunications area, particularly wireless infrastructure. Demand is good, but we are seeing some inventory leveling and some technology changes that we elongate some of the product transitions to Jabil and then the other elements of Enterprise and Infrastructure. Nothing to write home about in terms of great growth, but decent stability and again, I think most of the marketplace has been sensitized to expect lower levels of annual, year-over-year growth in the data communications area in particular. So, I think it's nothing remarkable, we're certainly disappointed in the first fiscal quarter performance relative to our expectation. But relative to previous years performance in fiscal Q1, not a great deal worse than in fiscal 2011 and fiscal 2010. Actually when we look through the balance of the year, very high confidence levels that our revenue growth will resume growth in Q2 and continue throughout the year.

In High Velocity --

In Diversified Manufacturing Services you had a similar question -- in Diversified Manufacturing Services?

Yes, sure, just what you're saying I guess from a demand perspective?

Yes, I think demand there is really robust, given the transition from vertically integrated factories to the virtual manufacturing model when you talk about Industrial and Healthcare companies. Renewable Energy is still good, there are some elements of Renewable Energy that can be a bit choppier at this point, but it's certainly a robust, long-term growth area. The Materials Technology group has very robust demand and although we do see some seasonality in that business, in Q2, given the seasonal sell through of the smartphone products that Manufacturing's Technology group builds for and then the aftermarket services area, along with the Telmar acquisition, solid, year-over-year organic growth on a steady basis. So, DMS, Diversified Manufacturing Services, we expect to continue to see very robust demand for the services we provide.

Wamsi Mohan.

Tim, you highlighted $600 million incremental revenue in the second half versus first half. I know it's about the same as what you did last fiscal year, if you exclude the Telmar acquisition. So, maybe you can share what you're seeing in the pipeline that's giving you the confidence that you can do the same incremental dollar growth when arguably the uncertainty seems much higher in the near term?

I don't know that the uncertainty is increasing, I think the talking heads on TV are pulling their hair out at a faster rate. But, I think the overall economic environment isn't getting a lot worse or a lot better, not changing rapidly. Things seem to be a little bit better in the United States, a little bit slower in Europe, Asia continues to be stable. So I think that the economic environment is relatively benign if you will in terms of influence. $600 million in incremental revenue growth, as you point out is pretty similar to what we had last year. We see, if you look at the Enterprise and Infrastructure portion of that, we essentially get back the $166 million that wasn't there in fiscal Q1 because that's a share of wallet issue and a sell through rate issue, so once that inventory is consumed and the product transitions are completed, you get basically that same run rate back into the revenue stream. And then, there are some additional customer programs we expect to ramp into production over the course of Q3 and Q4. So, feel good about it in Enterprise and Infrastructure. Actually had very good line of sight to that as well. And then in Diversified Manufacturing Services, gosh, we're 30% year-over-year in Q1, Materials Technology, aftermarket services, Industrial, all have very good growth prospects for the balance of the year. We are actually even see growth in areas like defense and aerospace so, we feel good about line of sight to growth in those areas as well.

And, I think one of the reasons we went through this, is we want to make sure that investors are in touch with what we think is a realistic perspective on the High Velocity business segment and actually seeing that contract in the second half of the year and that attenuates the revenue growth for the year, yet again the margin profile and earnings power of the Company is unaffected by that, actually improved by that change out of High Velocity revenue for Enterprise and Infrastructure and Diversified Manufacturing Services. So, it's actually a pretty good trade out in our calculus of how the year should unfold. I think what you've got to do to put faith in this is you've got to believe that macro economic conditions continue at about the same rate. Again, I made the comment during my prepared remarks that we're not trying to handicap anything more or less into this guidance, simply what we see today based on sell through rates and the current economic environment. If you're someone who thinks the environment is going to get a lot worse, then this is probably something you won't have faith in. If you believe the economic environment will probably continue to be relatively tepid or lackluster, I think this is something you can put a lot of faith in. I think the Company has put up spectacular results in the face of significant macro economic headwinds and I don't think those headwinds are any worse today than they have been in fiscal 2011 or previously. So, we wanted to help people understand how we see the balance of the year given all the moving parts and all of the collateral information that people have been getting over the last three or four months and worrying about, frankly. So, we're looking for what we think is a pretty solid year. Maybe a little bit lower revenue growth, but earnings that will compare very favorably with fiscal 2011.

Thanks, Tim, that's very helpful. And then, a quick clarification on the High Velocity $110 million decline in the second half. Is that an expectation of just broad-based, more or fairly concentrated sort of across a couple of customers?

It's fairly concentrated in specific product categories, I think it's kind of interesting if you look at High Velocity year-over-year in fiscal Q1, we really reduced our exposure to the mobility EMS handset business and the TV set displays business. The rest, if you exclude the displays and the handset business, the rest of High Velocity is actually very stable to up year-over-year. Businesses like automotive have been robust, our printing business is strong with good year-over-year growth, so point-of-sale systems is good. So we are actually excluding the areas of the business where we have kind of intentionally pushed away from or deemphasized. High Velocity is actually in pretty good shape. So that revenue degradation is specific to certain product areas.

Shawn Harrison.

Just a follow-up on HVS, with margins running better than kind of long-term target here and you deemphasizing some of the EMS handset type business and the panels, I guess what would push it back toward that 2.5% target as you get into fiscal 2013? Is it solely mix, or is there something else that we should be looking out for or on the other hand, can it run at 3% going forward?

Well, I think it is reasonable to think that High Velocity, given what we see today can run for the year at about 3% or little bit better. So, it would be above our long-term of our targeted range. And I think opportunistically -- it's an opportunistic business area by nature, if we find opportunities to expand the business we would be looking for areas where there's higher value add opportunities for the Company. I think we will take a look at our long-term targets for High Velocity closer to the end of the year when we kind of refresh for fiscal year 2013. But I think Forbes and I would both be comfortable with the expectation that High Velocity operating margins for the year can start with a 3%, probably somewhere in the low 3%. And, we would expect to see -- I don't recall if we mentioned this in our prepared remarks or our Q&A, but we do see the Enterprise and Infrastructure margins improving over the course of the year by about 50 basis points per quarter. So if you kind of do that and you've got consistent margins in the Diversified Manufacturing Services area which we think is a reasonable expectation, that's why we think the earnings power of the Company is in pretty good shape for the year.

Okay, very helpful. Then just as a brief follow-up, I guess inventory expectations for the February quarter, would you expect inventory dollars to decline and then on the buyback, I guess what are you looking at in terms of either the stock price, anything like that? Just to maybe complete the $100 million authorization out there?

Yes, let me have the last portion on stock price. As we noted in the prepared remarks we do have an authorization of $100 million available to us and the intent there is that we use that during the fiscal year, so we should start to see -- put that into action as we move through the coming quarters here. I wouldn't expect to us to use that in any one particular quarter but in measured approach, as we move through the balance of the fiscal year. In terms of inventory, we should absolutely see sequential declines in inventory, and certainly expect to gain back the, what was it? $160 million or so sequential increase in the quarter to bring that back down to Q4 levels overall.

Matt Sheerin.

Just a question on DMS. Tim, you talk about, you gave some guidance for growth for the next quarter and then you also talked about some seasonality in the Material side, particularly with Green Point and the smartphone exposure there. But aside from Green Point and that smartphone exposure, is there much seasonality to that business? Because over the last few quarters you've been growing sequentially every quarter, and obviously with a good pipeline. But how do you see that playing out from a seasonality standpoint aside from the specialized manufacturing business?

Well, experience would say that it's typically not a great quarter for growth anyways. Even though we are not relying on end market growth and Diversified Manufacturing Services is really planning on market penetration of our industry, it still tends to be a relatively slow period. That said -- so no, there's not that much seasonality although it tends to be -- it is not intuitive that it is seasonal but it tends to be a relatively slow period anyways. And just based on our empirical evidence of behaviors. But, looking at the pipeline of growth in those businesses - Industrial, the Clean Tech area, the Healthcare area, very, very strong performance. We do have some exposure in the Instrumentation part of Healthcare and Instrumentation, there is some semiconductor capital equipment content that is very weak right now. And, when that runs through the system, I think we'll see good, year-over-year growth as the balance of the year unfolds.

Okay, great. And then, looking at Thailand, I know you have a little bit of exposure in manufacturing on the industrial side there. And then obviously, it's a big source of supply and components particularly on the hard drive side, have you seen any impact at all, negative or positive from Thailand both from a customer standpoint and a supply standpoint?

Very, very little, there is some impact, but very little impact to Q1. I think we will probably see some impact in Q2. We've got some actual -- a number of things going on in Q2 that are handicapped into the guidance so I don't want to belabor the point but, there's Chinese New Year, there's fewer working days in Q2, there will be some impact in our High Velocity business area related to set top boxes, we anticipate due to the Thailand flooding. And, our guys are working feverishly to offset those -- that impact, but the expectation is now that will be -- there will be some impact but relatively modest.

Okay, and just quickly, could you tell us who the top -- who are the three 10% customers were? In the quarter?

We don't name names at this time of the year. But, we talked about them being in three different segments. One in High Velocity, one in Enterprise Infrastructure that most people are familiar with and the other being in the Diversified Manufacturing Services area which is new for us.

Steve O'Brien.

Hi, thanks for taking my question. Just a couple quick ones here at the end. Maybe on your last point, Tim, would you be willing to tell us where the new DMS 10% customer falls within the three categories of DMS?

Again, I would like to be very specific but this stuff always flows back in customer relationships and that's why we don't name names, particularly at this time of year. But, if you take a look at the pie chart, you can see very significant growth in the Specialized Services area so, make your own bets there.

Okay. Looking out at the CapEx this quarter, I think that the expectation if I wrote it down right was that the CapEx might be a little lower in fiscal 2012 versus 2011 but, kind of what we're at parity, sort of one quarter in. And, clearly, it sounds like there is some ramping expected for the second half of the year so, I just wanted to check in and see if we should be revising that CapEx expectation? And, secondly, on free cash flow, with respect to sort of the range of outcomes would you expect it to be sort of lower if the year strengthens? On working capital? And higher if it kind of remains the same? Or, -- not?

In terms of the CapEx, we've guided into the first quarter right about $100 million, we came in just right on point there $95 million actually for the first quarter. So, overall expectations for the year if we add in our second fiscal quarter, midpoint of guidance, $85 million gets you somewhere between $350 million to $400 million in terms of capital expenditures for the year. It is where our thoughts are currently. So, last year we spent on a net basis I think $426 million, something like of that nature. So a little bit shy of that. In addition, obviously we have this Telmar acquisition about a $130 million. So I want to remind investors of that point in terms of modeling cash flow. In terms of the overall cash flows I think your question is related to performance in terms of cash flow depending on revenue growth. Certainly with the back half of the year that we've articulated in the prepared remarks today, our working capital management has really been in my opinion outstanding over the last multiple quarters actually, last five or six quarters. I don't see anything that would change that level of performance as I look through the balance of the fiscal year, so what that does based on the view we have of the balance of our fiscal year, certainly provides us an opportunity of somewhere in the $175 million, $200 million plus a quarter of operating cash flow. Take off those CapEx levels and expenditures that we talked about and you're producing $200 million, $250 million of free cash flow for the year. Now if revenue should grow faster than our current view of the back half of the fiscal year, there would be some degradation to those cash flows. Purely based upon the amount of working capital that we would need. And the way we typically think about that is somewhere in the region of $0.05 to $0.10 of working capital need for every incremental dollar in revenue. Should we see softness, then clearly cash flow as well would out perform these levels I've just discussed.

Craig Hettenbach.

Tim, just following up on the HVS and expected decline in the back half of the year, anything else you can point to in terms of diversity of the rest of your customer base or just visibility into new pipelines or wins that would help potentially ease some of the concern or risk around decline in HVS?

Yes, the decline in HVS is limited to certain business areas. And, I think most people following the Company could probably put that together. But our automotive business is in High Velocity, that's actually grown significantly year-over-year, our point-of-sale business is in decent shape, our printing business is very strong -- up this year, the displays and mobility handset parts of the business are in decline and the displays, I think investors are very aware of year-over-year. So those compares will actually start to get a little bit easier in the displays part of it. Then our set top box business has been stable. So, those are the business areas. There are new wins, very stable market share. As I said, if you exclude the handset and the displays part of the business, High Velocity is growing. Slow growth, but it's growing.

Okay, if I could just follow up with that and on the new 10% customer in DMS, any type of visibility from that customer in terms of -- would it be your expectation that, that is consistently a 10% customer through the year or how is your visibility there?

I think they'll continue to be a 10% customer. Yes.

Okay, then last one if I could for Forbes. You mentioned a 14% increase to dividend, given the increased cash flow that you're generating, any thoughts on why the dividend, you couldn't do more in terms of bumping it up?

Yes, well, we just took that up 30, 40 days ago I think. But certainly, as we look through the fiscal year, we will keep that in front of mind as we look at our overall capital return policy to shareholders. So, let's continue to put up the cash flows. I mean, a great start to the year. We will continue to perform at these types of levels in the coming quarters and we will certainly, keep that in front of mind as we review our dividend policy in -- fiscal year.

Craig, I think it's a really fair question, we've had a number of investors ask us to articulate a policy around dividends and share repurchases in some relationship to free cash flow, operating profit, some metric that investors can use to hold management accountable for return of value to shareholders. We are not prepared to articulate that today, but we are working on that type of policy and we think by the time we start talking about fiscal 2013, Forbes and I will have a position on how we look at dividends long-term and share repurchases and the role they play in how we deploy free cash flow. I think, having said that, we are not a Company that thinks that management team should accumulate all excess cash. We think our first priority is to invest the cash in the business. We had a slide that showed our 26% GAAP income return on invested capital. Our cost of capital is under 9% so this is a very high return investment of the dollars. And, we will look to have that be consistent in terms of investing in the business. But, beyond that, we will look to dividend expansion and share repurchases and other ways of returning capital.

Jim Suva.

Thank you. Congratulations to you and your team on great results in a very challenging environment and happy holidays. When we look at the EPS leverage potential for Jabil, it's been a long time since we've kind of had a steady environment, a lot of up cycles, down cycles in the past few years. It looks like for calendar Q1, sales were up about year-over-year about 6% and EPS was up about 6% year-over-year. And, if I do my math right for the full fiscal year, it looks like sales will be up about 5% to 5.3% or so year-over-year for the full fiscal 2012. For the EPS leverage, since Q1 was in line with the sales growth, I also recognize you're going through a lot of restructuring that should bear fruit in the second half of the year. Should we look for EPS to grow faster than sales? And what type of rate, kind of like twice the sales? Or 1.5 times the sales? Or how should we think about the leverage in the model to the bottom line?

To just keep in mind when you compare fiscal Q1 2012 to fiscal Q1 2011, fiscal Q1 2011 did not include the operations in France and Italy that were acquired, reacquired. That diluted income $5 million to $10 million. So, there was some leverage. There has been some SG&A expansion that is partly due to the re-acquisition of those sites, but there is some positive leverage. I think you will see, Jim, as you look out in Q3 and Q4, a more pronounced level of return of incremental revenue dollars. Associated with operating expense leverage, as well as the shift to Diversified Manufacturing Services. Did you want to anything to that, Forbes?

No, I think that's correct as we look in the back half of the year based on our point of view of revenue there we should see that our core EPS growth expand at a faster rate than the revenue growth on a quarterly basis.

Great. Thank you and congratulations to you and your team again. And happy holidays.

Steven Fox.

Tim, just one question relative to the talking heads that you referenced. If they turn out to be maybe less prescient in 2012 and the economy sort of grows slow, do you envision any of that pipeline that you've referenced maybe opening up sooner? Is there a chance that customers are ready to assume that a slow growth environment can lead to more outsourcing? What's the upside from here relative to what could still be a stable economy next year?

Well, I think it's a good question. I'm not sure how to convert the comment into -- I am not sure how to quantitatively convert the comment, but a little bit of tailwind would be exponentially good for the business particularly when you look at Infrastructure spend where we do have a previous end market share with customers and the [extent] the customers in the Enterprise Infrastructure group and get some tailwind that would be exponentially better for the business. I think, just having a stable to slightly positively biased environment would put Healthcare, Industrial types of customers that are presently vertically integrated cause them to be a little bit more aggressive and comfortable with an outsourcing model. The level of uncertainty and not knowing which way things are going to go, just naturally causes conservative people to pull their horns in. An outstanding environment doesn't necessarily accelerate the outsourcing but if there was a positive bias where they felt like the ground was firm underneath their feet, we might see an acceleration of outsourcing from presently vertically integrated companies.

Sherri Scribner.

Tim, I wanted to ask you about Diversified Manufacturing Services. That segment seems to be at least, this quarter, driven primarily by the Specialized Services segment and if we look on a quarter-over-quarter basis, Industrial and the Healthcare segments seem to be a bit weaker. Can you give us some outlook in terms of what you're seeing in those segments and what are your expectations for the balance of the year? Do you expect Specialized Services to be the primary driver of growth in that segment?

I think Specialized Services, given the acquisition of Telmar and the outstanding growth in Materials Technology group that they will continue to lead the pack in terms of the Diversified Manufacturing Services, but, we do see more significant growth from the Healthcare and Instrumentation than the Industrial and Clean Tech groups in the second half of the year. And, unfortunately, we've not been able to turn growth in those areas into linear growth ramps. They tend to be relatively stair-step, and come in some chunks with stair-step and then moderate growth sequentially and then that's why we are really converting our thinking to looking at things in a year-over-year basis because it does a better job of characterizing the actual growth rate in those areas. The other thing I would say, Sherri, is just looking at the present quarter and the present environment, the semi-cap equipment area of Industrial and Clean Tech and Healthcare Instrumentation group, that is weak and diluting the results in that area. We expect that to kind of either stay where it is, or maybe even modestly improve in fiscal 2012 but, not looking for -- that has the impact of diluting the sequential growth near term.

Okay, that makes sense. Just thinking about Chinese New Year, you did make a quick comment about it already but, is your expectation that Chinese New Year being earlier this year will be somewhat negative to the revenue growth for the quarter?

Some of our folks in Asia seem to think so, I'm not sure why that would be the case. But we do have fewer working days, the Company is producing a lot of its revenue in Asia, in China specifically and our Materials Technology group has a lot of operations in China as well. So, as our exposure is kind of inched up in the Asia market over the last few years, it actually is becoming a little bit more meaningful on the margin.

Thank you for joining us on the call today. We certainly will be available for follow-up throughout the balance of the week, the work week anyway. And, happy holidays to everyone. Thank you.

This does conclude today's conference call, you may now disconnect.