捷普科技 (JBL) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Jabil's second quarter FY15 earnings conference call.

(Operator Instructions)

I would now like to turn today's conference over to Beth Walters, Senior Vice President of Communications and Investor Relations. Please go ahead.

Thank you. Welcome to our second quarter of 2015 earnings call. Joining me today are our CEO, Mark Mondello, and our 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 third-quarter press release -- excuse me -- our second-quarter press release slides and corresponding webcast links are also available on the website. In these materials, you will find the financial information that we will cover 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 third quarter of FY15 net revenue and earnings results, the financial performance for the company, and our long-term outlook for the company. 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, 2014. And on subsequent reports on form 10-Q and form 8-K and, 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 opening remarks from Mark. We will then move on to second-quarter fiscal results, and updated guidance for FY15 from Forbes Alexander. We will then open it up to questions from call attendees. So I would now like to turn the call over to Mark.

Thanks, Beth. Good afternoon. I appreciate everyone taking time to join the call today. Before I begin, I'd like to take a minute and recognize all of our people here at Jabil. Thank you. Thanks for all you do, and thank you for your dedication. As for Jabil's second quarter, I'm really pleased with the results. The revenue for the quarter was $4.3 billion, which was in line with our guidance. From a profit perspective, we exceeded our target, resulting in core operating income of $166 million for the quarter, which is 11% above the midpoint of our guidance.

If we step back and look at the first half of the year, cash flow from operations was $525 million. I highlight this because strong cash flows are crucial, as they fuel our ability to grow. Overall, our team delivered a solid quarter. Let me talk a bit about capital expenditures. CapEx for the year looks to remain in the range of $650 million to $750 million. As we sit today, we most likely will be at the high end of this range, which I view as a positive. This is driven by additional investment opportunities, which remain strong. In fact, if things go our way, we may actually increase CapEx during the fourth quarter, as we prepare for FY16 and beyond.

For the full fiscal year, I remain confident in our core earnings per share guidance of $1.85 to $2.15. Let's look at the market. As we look ahead, we're very well positioned in the markets we serve. Most all of them have attractive, underlying catalysts and mandates that align perfectly with our solutions and broad-based capabilities. We continue to observe dramatic parabolic change across most markets. This is driven by technology, and a new generation of consumers. Consumers of that display an insatiable appetite for instantaneous access to everything and infinite customization. These demands, combined with the need for immediate gratification, drive massive disruption.

Said another way, these expectations spawn additional expectations. When I think about change, change is always present. In fact, change itself is a constant. But today, the rate of change in the markets that we serve is truly unprecedented. These dynamics continue to drive great opportunities for Jabil. As we look internally, we're carrying an excellent momentum into the second half of the year, as we stay focused on our top priorities. Priorities being exceptional customer care, thoughtful growth of earnings year on year, expansion of our capabilities, and taking exceptional care of our people.

I'd now like to look at our business segments. Let's start with our Diversified Manufacturing Services, or DMS segment. Our DMS business delivered second-quarter revenue, largely as planned, while exceeding margin expectations. The DMS team delivered core operating a margins of 6.6%, a 40 basis point increase, sequentially, quarter on quarter. It was a stellar performance. Looking to the back half for the fiscal year, we anticipate core operating income for our DMS segment to be in the range of $130 million to $160 million.

We plan to deliver this core operating income, while at the same time incurring roughly $60 million of operating expenses. These operating expenses will support bringing additional manufacturing and square footage online, executing various program ramps, and working on a wide range of development activities. The majority of this expense will occur in our fourth fiscal quarter. This reflects what we planned for and communicated at the beginning of our fiscal year. In other words, nothing is changed, specific to these expenses. Our plan continues to unfold as expected.

Within our DMS segment, our Nypro brand is delivering on their admiral goal of improving the way in which people live. The team is doing so through their outstanding performance in healthcare and packaging, by making our customers' products more accessible, more affordable, and more sustainable. Also within our DMS segment, our Green Point team continues to display terrific engineering aptitude and operational excellence. They continue to lead in areas of material sciences, and integrated plastics and metals. When one combines this with their ability to execute high-volume manufacturing, you have a winning team in the areas of mobility, consumer lifestyles, and wearable technology.

Let's move and take a look at our Electronic Manufacturing Services, or EMS segment. Our EMS team delivered second-quarter revenue above guidance, although corroborating margins were down 30 basis points, sequentially. This was largely due to seasonality within our high velocity sector, as well as additional costs incurred, as we prepare for a strong second half of the year. Our EMS team is successfully enhancing and reinventing their value proposition, while taking advantage of secular trends. These newer secular trends include connected automobiles, digital home conductivity, consumption-based IT solutions, additional bandwidth driven by the Internet of everything.

Machine to machine interactions, lower cost sensor technologies, and the ubiquitous use of predictive analytics. In wrapping up my prepared remarks, I want to reiterate that we are certainly on track to deliver a strong quarter -- excuse me, a strong year. A year that exceeds the plan we laid out for you back in September. Our business is resilient, and very well positioned for the coming years ahead. We remain thoughtful in our investments. I believe this will keep us front and center, in terms of remaining relevant.

Said another way, the lack of investment in capabilities and critical assets would have the potential to render Jabil irrelevant over time, especially when one considers the rate of change that is so prevalent in the world today. Jabil is healthier than ever. We have a great team, outstanding customers, an incredible reach, massive scale, and innovative solutions. We'll continue to expand our universe, both vertically and horizontally. This provides a multiplier effect, as we deliver more and more products, across more and more end markets, while serving the greatest brands in the world. Opportunities remain plentiful.

Thank you. I'll now turn the call over to Forbes.

Thank you, Mark. And I will ask you to refer to slide 3, discuss our second fiscal quarter. Net revenue for the quarter was $4.3 billion, an increase of 20% on a year-over-year basis. Our GAAP operating income was $125 million during the quarter, while GAAP net income was $52 million. GAAP net diluted earnings per share was $0.27. Core operating income, excluding the amortization of intangibles, stock-based compensation and restructuring expenses, was at the high end of our previous guidance, at $166 million, or 3.9% of total revenue.

Core diluted earnings per share were $0.50. Turning to our second-quarter segment discussion, in slide 4, our Diversified Manufacturing Services segment increased 52% on a year-over-year basis, in line with our expectations. Revenue for the segment was approximately $1.7 billion, representing 39% of total company revenue. I am particularly pleased with our DMS operating income performance during the quarter. At 6.6% of revenue, it reflects improving asset utilization within our mobility, healthcare, and packaging businesses.

The Electronics Manufacturing Services segment also performed well during the quarter, as revenue increased by 6% on a year-over-year basis, or approximately $75 million above our expectations. Relative to our plan, the revenue strength was broad-based, with networking and telecommunications leading the way. Revenue was approximately $2.6 billion, representing 61% of total company revenue. Core operating income was 2.1%, reflective of sequential seasonal declines in consumer-facing demand. Turning to slide 5, we ended the quarter with cash balances of $966 million, while total debt levels were consistent, at $2.2 billion.

Cash flows from operations in the quarter were $336 million, and on a year-to-date basis, $525 million. Core EBITDA for the quarter was $287 million, or 6.7% of revenue, while our core return on invested capital was 17.6%. Consistent with our previous discussions, we maintain our 4% growth for FY16, as we've invested in equipment, buildings, infrastructure and capabilities during the second quarter. Net capital expenditures were $270 million, bringing our year-to-date investments to approximately $464 million.

I now ask you to turn to slide 7, while I discuss our business outlook for the third quarter of FY15. We expect revenue in the third quarter, on a year-over-year basis, to be in the range of $4.35 billion to $4.55 billion, or at its midpoint, an increase of 17%. Core operating income is estimated to be in the range of $145 million to $175 million, with core operating margin in the range of 3.3% to 3.8%. Core earnings per share are estimated to be in the range of $0.43 to $0.55 per diluted share, while GAAP earnings per share in the range of $0.29 to $0.44 per diluted share. This based upon a diluted share count of 196 million shares.

Based upon current estimates of production, the tax rate on core operating income is expected to be approximately 25% for the quarter. I'll now ask you to turn to slide 8. The Diversified Manufacturing Services segment is expected to increase by approximately 42%, on a year-over-year basis, with revenues estimated to be $1.625 billion. The Electronics Manufacturing Services segment is expected to increase 7% over the revenues of $2.825 billion. The second half of the fiscal year remains consistent with that of 90 days ago.

Core operating income levels are anticipated to be approximately $310 million at the midpoint of our annual guidance, reflective of ongoing investments across both our EMS and DMS segments, with a particular investment focus within DMS. Our expectations for the full year remain, revenues are anticipated to go 14%, on a year-over-year basis, so approximately $18 billion. The DMS segment growing 36%, on a year-over-year basis, while the EMS segment is growing at 4%. Core operating income is now $15 million higher than our previous expectations, as a result of strong performance in the most recent quarter.

As a result of the mix of higher levels of core operating income, our tax rate is now expected to be 26% for the full fiscal year. The earnings per share estimate for the full year remains at $2. In summary, the full fiscal year is on track to be a strong year. Operational cash flows of $1 billion are facilitating investments, investments that are uniquely positioning Jabil for continued strong growth in revenues and earnings in FY16 and beyond. Now I'd like to hand the call back over to Beth.

Thank you, Forbes and Mark. Before we begin the Q&A session, I'd like to remind all of our call participants that, in customary fashion, we will not be able to address any customer or product specific questions, and we thank you in advance for your cooperation. Operator, we are ready to begin the Q&A session.

(Operator Instructions)

Jim Suva, Citi.

Thank you, and congratulations to you and your team at Jabil. One question I have is on the additional capacity that you are adding, or CapEx, on the higher end, and maybe even above that. Can you help us understand about which of the two reporting segments that will be in? And a little bit -- a question around that is, I believe the DMS business was running around like $1.9 billion in the November quarter. So it seems like you'd still have plenty of capacity there.

So is the capacity being added in that, and you expect it just to not be able to contain -- or maintain that $1.9 billion? I think you'd have the yield deficiencies that would help out. So you could go above the November high of $1.9 billion. But help us understand where you're putting in this new capacity. Thank you.

Hey, Jim, this is Mark. Thanks for the comments. So the -- right now, as we sit, we're still planning on a CapEx range of the $650 million to the $750 million. The issue is, we provided that back in December, and what Forbes and I got to talking about, over the last couple of weeks is, we've got a number of opportunities that are directly in front of us. And we're evaluating each of those, and putting them through our, if you will, our evaluation funnel, from an ROIC and cash flow perspective.

And we think we make end up saying yes to some of those before the end of the fiscal year. And that's what prompted me to put the comments in my prepared statement. With that said, I would think that the high end of our current CapEx range, most of that will be consumed in our DMS business. And if we exceed the limits, I think that'll be heavily weighted to DMS, but that there's also some wonderful opportunities for us in the EMS segment, as well. On the second half of your question, on the DMS revenue in Q1, the $1.9 billion is accurate.

And we will be adding -- in the DMS space, we'll be adding square footage in China. And then we'll be, as we talked about in the December call, looking to add infrastructure in Malaysia and Indonesia. And then we're also adding some square footage for Nypro, as well. So if everything goes as planned, I think we're setting the company up for revenue levels in excess of the $1.9 billion, at some point in time.

Great. Thank you very much, and congratulations to you and your team.

Thanks, Jim.

Steven Fox, Cross Research.

Thanks. Good afternoon. Two questions for me, please. Just first of all, on the DMS margins, the 6.6% that you put up. Was there anything unusual in those numbers? Or would you consider that normal type of margins for the revenues you just posted? And just any other help that improved the margins, quarter over quarter? And then secondly, just digging into DMS a little bit. Could you talk about where Nypro is, versus maybe some of the growth targets you talked about during the last few months of, say, 8% to 10% growth for the year? And what's driving it right now? Thanks.

Hey, Steve, it's Forbes. Yes, in terms of the DMS, you're right. It was just excellent performance, 6.6% in the quarter. Nothing unusual there. Just some really excellent asset utilization in that business, and really all marketplaces, from mobility, healthcare, and packaging. So some really strong performance, as we were bringing programs up to ramp. If you recall, there was a number of those launched in the September/October timeframe, and into November.

And the team has really got into their stride during the quarter. So very pleased with that. And I don't see any reason why that couldn't be achieved on an ongoing basis, once we have this additional levels of capacity in place, and programs of volume. And the second part of your question, could you remind me?

Yes. Just on Nypro, the growth -- if you could drill into the growth there? And how it's tracking, versus your targets?

Yes. Historically, that business is growing, organically, right about 5% in the marketplace. I think, as you are aware, our long-term growth rates for the DMS space are 8% to 12%, and certainly Nypro is tracking nicely within that band.

And anything that you would highlight that is growing faster versus the overall growth for Nypro?

No, not really. I think both packaging and the pharmaceutical side, and drug delivery, are growing very nicely. Probably about the same pace.

Great.

Hey, Steve, one thing to complement Forbes's comments on the DMS business. In my prepared comments, I talked about the fact that, for the back half of the year, DMS will do, I think I said $130 million to $160 million, for Q3 and Q4 combined. If you take a center point of that, at $145 million, that puts DMS for the year, in like the $375 million range for core op income. And what I also talked about is the investments that we're deciding to make towards the back half of the fiscal year. And those investments will be, again, to add some infrastructure, as well as prepare some product ramps for FY16.

But on a normalized basis, if you were to take that $60 million out -- and I recognize it's business as usual. But it is about preparing some nice product ramps for 2016, the back half of the year, instead of being $145 million, would be closer to $200 million or $205 million. And if you take the first half of DMS, DMS margins, I think, were 6.2%, 6.3% blended for the first half. The back half, with the investments in it, will blend out to be 4.3%, 4.4%, with Q4 being the lower quarter.

You take out the investments we are making for growth, and the back half would also normalize around 6%. So again, it gives you an idea. And I add this commentary only to add some color around what did the DMS business looks like on a normalized basis, if we weren't making the investments.

Right. Got it. That's very helpful. Thanks so much.

You're welcome.

Amit Daryanani, RBC Capital Markets.

Thanks a lot. Good afternoon, guys. Two questions for me. Mark, could you just talk about, or elaborate? I think you mentioned that, if things go your way, CapEx could be about a $700 million number. Could you maybe talk about what needs to go your way for CapEx to get about $700 million. And just broadly, do you think $650 million to $700 million CapEx is the reality for the next couple of years? Or do you think it's more of a FY15 phenomenon, and things should stabilize, as you go further out?

Sure. So I think what I said was, is, as we sit today, our CapEx range is still $650 million to $750 million, which is the range that Forbes and I provided in December. And I said that we'd be at the high end of that range, it looks like, as we sit today, based on the opportunities that we have. What I also added to that was, is, we actually could go above that range, so above the $750 million, if some things fell our way in the back half of the year. And again, where that comes from is, we had our call in December, we felt good about the $650 million to $750 million range.

And in January, February, the early part of March, conversations that we are having with customers, and some of our commercial folks, are leading us to believe that we may actually have some additional opportunities, that we would end up recognizing both revenue and income in FY16 and FY17. And what we don't want to do is, we want to continue to run the business in the correct fashion. And I don't want to run the business -- I want to run the business on a very disciplined platform, as far as cost and investment.

But I also don't want to pass on what look to be some very good growth opportunities for us, long term, because we have a CapEx budget, if you will. And our CapEx budget, again, is applied against our business planning. I'm very, very comfortable with the disciplines we have around that. But with the liquidity we have today, the balance sheet we have today, there's some really nice opportunities that we are evaluating. If we end up moving forward with those, it would take the overall CapEx for the year, weighted towards the back end, above and beyond the $650 million to $750 million range.

Got it. And then, I guess, Forbes, just to make sure I understand this. The guide implies 40, 50 basis points of operating margin drop in the back half versus the first half. That's largely driven by the $60 million incremental investments in the DMS segment? Or is there any other drivers, as well? And is there comfort that the $60 million is a one-time back-half investment? Or is that something that sustains into the early part of 2016?

No, Amit, I think you've described it well, in that it's -- the margin decline in the back half of the year is solely due to that investment of $60 million. It is just creating a fabulous platform, as we move into the first quarter of 2016. So view that, as Mark described in his prepared remarks, the addition of incremental capacity, product development teams, hiring of labor, and pre-positioning that for, really, multiple product and customer ramps, as we move into our FY16.

Perfect. Thank you.

You're welcome.

Brian Alexander, Raymond James.

So following on the question, it looks like operating income is expected to be down about 11% in the second half versus the first half, if I did my math right. And I think we talked previously about FY15 playing out pretty similar to how FY13 did. So if I go back to FY13, operating income in the second half, it was only down about 2% versus the first half. So I'm just trying to reconcile that with your comment that not much has changed versus what you articulated 90 days ago. It sounds like maybe you've stepped up the investment base, because you've over-achieved on expectations in the first half? But maybe you can clarify that.

No. The investments haven't changed, Brian. They're still moving at the same pace.

Brian, perhaps you could put your line on mute.

Thank you. As I was saying, the level of investments have continued at the pace we were expecting. We talked about in our December call. So nothing's really changed. I think our overall guidance, before, had reflected the operating income levels of about $310 million in the back half of the year, and that's consistent with the guide we're giving now.

With reference to the 2013 comparison, I think what we've going on, this fiscal year, is a significant investment in expansion and operations in China, and particular in Chengdu, which really positions us strongly, as we move into FY16 and the September/October timeframe. So really, the way we look at this is very much consistent with our thinking in December, and spans really much on track.

And sorry for the background noise. I'll just ask a quick one, and I'll go on mute. With respect to currency, and just the strength in the dollar that we've seen, is that having an impact on demand within any of your segments? As your customers are perhaps raising prices in local currency, to maintain their profitability? Just wondering if currency has affected demand conditions, or your outlook in any way? Thanks.

No, it's not. We're certainly not seeing that. We're seeing stable demand patterns, pretty much across all the end markets that we're serving in our customers. And really, from our own perspective, we're not seeing currency as a headwind. In terms of our performance, a majority of our revenue and cost base is US dollar based, so we are fortunate in that regard. So overall, I think it's very much business as usual, and some great growth opportunities ahead of us.

Okay. Thank you very much.

You're welcome.

Sean Hannan, Needham and Company.

Yes. Thanks for taking my question. I have two, if I may. First, if I were to take a look at mobility, some of the business that you do there -- and I realize there's a lot related to DMS. At this point last year, you had some early indications into the design cycle for the next round of products and plans at notable customers. And I'm talking about this in a general sense.

And it was particularly important at that time, because you were working through what was a fairly weak product cycle. Now, at this point of the year, can you -- at least a calendar year, even -- can you share some color on what you starting to look forward to, as you look to the summer? Your involvement in some of the more notable platforms? And is there a way to give an opinion around whether you are progressing towards share gains, incremental platform adds? Any color beyond just being generally positive in the space? Thanks.

Sean, it's Mark. I think our visibility -- since you're the one that brought up time frames from last year, I would answer it and say, our visibility with our DMS customers, which is inclusive of the mobility space, are very similar to last year. So said another way, I think we've got very good visibility.

Unfortunately, can't talk much about it, other than to say we're going and investing, again, roughly $60 million of what I characterized as OpEx towards the back half of the year. And again, part of that's bringing on additional square footage. But also, a significant portion of that is development activities, and preparing different product ramps for 2016. So I think that could give you a little bit of insight, as to our visibility of what we're planning for, in the out years.

Okay. And then, to follow on that -- and I know there are a number of questions around the CapEx spend and intentions. To see, perhaps, if we could drill down a little bit further, there is a lot of business that's tied in under DMS. Is there at least some indication, rank order, where incremental capital spending would go, on a market basis, if that would be incrementally biased towards mobility? Healthcare, packaging? Any sense that we could get there? Because it's a pretty large business for you folks.

Yes. That's a very fair question. How about we do this? How about, for now, I think that the [Pareto] of CapEx that we broke out for you in December is holding true. And I can't give you any more color beyond that, at the moment, because we haven't made any of the business decisions we'd need to make.

If we had, we'd actually formally take up the CapEx range. I merely wanted to get it on the docket, for all of you to know that we are looking at opportunities, and the opportunities are relatively broad-based. So I think -- if, and it's a big if -- if we decide to take up the CapEx range, I think we'll have better visibility on that for our June call. And we can re-Pareto-ize that for you at that time.

Okay. Thanks very much for taking my questions.

Sure.

Mark Delaney, Goldman Sachs.

Good afternoon, and thanks very much for taking the questions. For the first question, I wanted to talk a little bit on the DMS segment. And the management team, at some of the recent investor conferences, has talked about signing up new customers in DMS. And I think some of that was in the mobility business. Can you give us a sense about how you're progressing with that? And how material some of those new customer wins are today?

Hey, Mark. It's Forbes. Yes. Absolutely. The team is doing a really fine job in taking our expertise and knowledge, and applying capabilities that we have in place across a number of customers in the mobility space. So we're very pleased with that. I think we talked about, in the first fiscal quarter, the addition of one particular customer that had got to volume, and that continues to progress, as we move through Q2 here, and as we head into FY16.

So I think, as we start to get this capacity in place, and ensure the appropriate engineering team is in place, I think you'll see a handful of customers in that mobility space being serviced, as we go into 2016 and 2017. So very pleasing, with the level of diversity that we are starting to see.

Yes. That's helpful, Forbes. And then for a follow-up question, I was hoping to talk on EMS a little bit more. That segment, the revenues there were a little bit better than what I was expecting. I think there were some end market weakness that impacted some storage and enterprise and networking customers. But Jabil was actually able to grow that business year over year, and guided for that growth to continue. And could you just talk about what helping Jabil to do a little better than some of the customers? Are you just on newer programs? Or are you gaining share? And if you could just elaborate a little bit more between what area, specifically within EMS, are driving some of the growth?

Mark, this is Mark. So as I said in my prepared comments, I really think that a lot of our EMS business, for the last 4 to 5 years, has been a bit stagnant. And man, in the last 12, 14, 16 months, and forward-looking, we're just seeing a lot of what I think are secular changes. And so much of it has to do with, everything is changing so darn quickly. In regards to everything being connected, everything talking to everything else, cloud, data storage, processing. What we are seeing in the areas of intelligent and predictive analytics is crazy, and we're participating in all of that.

The other part is, we are really fortunate. Our EMS business is really, really diverse, from a customer perspective and a market perspective. And our leadership there has done a really nice job of -- I don't know how I would say it. Reinventing how we're approaching the market and the services we are providing. And that's driving market share gain and new opportunities. And we've got a lot of heavy lifting to do the back half of the year, but if you look at first half to second half, in EMS alone, I think we are predicting revenues to be up $400 million or $500 million first half to second half. So a pretty decent outlook.

Got it. And then, just in terms of any commentary you can give directionally, what's stronger, between areas like storage and networking? Is there anything you can call out?

I'd say, it's across the board. And I don't want to get too specific, because we typically don't. But I would say we've got really nice opportunities across the board.

Understood. Thank you very much.

Yes.

Amitabh Passi, UBS.

Hi. Thank you. Mark, can I just follow up on that last question? I was curious, the strength that you're seeing in EMS, in the various sort of markets that you participate in, are you also seeing the benefit of maybe your customer base broadening? The reason I ask is, there's some big public cloud companies that are doing their own thing. And I'm just wondering, are you starting to get an opportunity, with a new set of customers, and a different set of products. I'm just trying to figure out. Or is it still just your core markets that are just doing better over the next few quarters?

Yes. It's a good question. It aligns with something else I said in my prepared remarks that I think is very applicable to our EMS sector -- or segment. Which is, we're expanding both horizontally and vertically. And what I mean by that is, I'm watching our team expand, in a vertical sense, with a lot of our existing customers. And then, they're expanding horizontally, bringing on new customers.

So I would suggest that the opportunities that we've already booked, and the opportunities that we've talked about earlier on the call, are a combination of both. And the neat thing is, even with the current brands that we serve, we are really fortunate to have a portfolio of great companies to work with. And a lot of what you might consider legacy brands in that space, are not sitting still, and doing some really cool stuff, and we're really fortunate to be a part of that.

Excellent. And then maybe just as a follow-up, the incremental -- or I guess the total CapEx that you're spending in FY15, you said towards the upper end of th $650 million to $750 million. Let's say the number is $750 million. Is there a way that you can help us think about the incremental return on this investment you are making? I.e., should we expect, maybe over the next two years, that the incremental investment of $750 million could add maybe 20% of incremental EBIT? I'm just trying to get some sense of how we should be thinking about the return of this investment that you are making.

Yes. I think that's a very fair question. We don't have the math sitting in front of us, but in rough order -- and we can actually provide more color on that. But the way I would think about it is, our general pool of overall CapEx, you're going to have a portion of that that's maintenance CapEx. So if we just wanted to use, illustratively, a $700 million pool, and you take out what's maintenance CapEx, just to run the business, replace old equipment, et cetera, et cetera. Say that's $300 million, $350 million. You end up with a delta of CapEx, which I would characterize either strategic or growth CapEx, and maybe they are one and the same.

I would expect, at a minimum of 15%, 18% return on that. And that will lay into the business between 16% and 17%. And I think it's fair to say that the majority of it would lay in in 2016, and the balance in 2017. So I think that's a fair way to look at that and our thought process is this. Our weighted average cost of capital is 10%, 11% on the business. And at times, I made a mistake, where I was pushing the team for true ROIC returns, maybe 22%, 24%, 26%. And we do have businesses that return that.

But in some areas, where the risk profile, or the relationships, and/or the opportunities are a little lower, Forbes actually was pressing me, believe it or not, to look at businesses that may have a 16% or 18% ROIC. The nice thing is that's still 600 to 800 basis points above our cast of capital, and is triggering some growth for us in absolute cash flows, which I think is the right thing to do. So that's how I would think about it at a high level.

That's helpful. Can I just ask a clarification? Forbes, the $60 million of incremental costs, did you say that -- is that just a second half 2015 event? And do we -- should we then be thinking about things normalizing, as we enter FY16?

Yes. That's correct. Absolutely. And the majority of that cost will be in our fourth fiscal quarter.

Okay. Thank you.

There is no intent of that investment leaking over into the first half of 2016.

Thank you.

Shawn Harrison, Longbow Research.

Hi. Good afternoon. This is (inaudible) calling on behalf of Shawn. I just wanted to go back to EMS. Previously, you've highlighted the possibility of potentially growing sales about $400 million to $600 million over the first half. And today, it looks like it's closer to $400 million to $500 million. I just wanted to see what's the likelihood of maybe reaching the high end of that previous range, the $600 million? And how much of a margin improvement would -- is possible, if you do reach the high end of that range? Will any of the costs from HBS would be repeated in the second half of the year?

So in terms of EMS, yes, our guide suggests about a $500 million, or about 10% incremental growth, second half over first half of the year. I think in the December call, we had a range of $400 million to $600 million, so we're still, if you will, right up the middle of the fairway there, in terms of our guidance. And the margin contribution that that should bring, we should see margins return back into the 2.5% to 3% range in the back half of the year. So some nice leverage, as we ramp these programs.

In terms of incremental margin beyond our guidance, we'll see how those ramps go. It's pretty significant, across a broad base of customers. And broadly based, they're in a number of factories, also. So certainly, there may be some opportunity. But to say, at this stage, we should solidly see margins in the 2.5% to 3% range in the back half of the year, which essentially would put us at a 2.5% to 2.6 % range for the full fiscal year.

Thank you.

Nik Kumar, Stifel.

Hi, this is Nik Kumar for Matt Sheerin. Just a quick question on cash flow from operation. I know, like for 2015, you had expected, what, $1 billion? But can you provide any color on like, for FY15, how you think cash flow should pan out?

Yes. We certainly expect there's at least $1 billion of operational cash flow for 2015, well on track there. For FY16, we'll see how that goes. Obviously, we're making significant investments this year. We will be in a solid growth mode in 2016. But I think, with our working capital efficiency, it is really, really good. So I would certainly expect operational cash flows to be at least $1 billion next year, if not higher.

That's helpful. And finally, if you can talk about your M&A pipeline? And where are you focused right now?

Yes, M&A pipeline. We continually review opportunities. So I don't expect us to be making acquisitions of the size of our last one, being Nypro, which was in excess of $600 million. But as we said before, certainly opportunities out there for us. More tuck-in in size, maybe $100 million, a couple hundred million dollars type of scale. And those will be focused in areas of capability we're looking to enhance, to serve the markets we are performing well in. And certainly, as we move through the balance of the calendar year, we'll see what comes to fruition. But it's certainly part of our growth strategy, and we have the liquidity in place to make that happen.

That's helpful. Thank you.

Sherri Scribner, Deutsche Bank.

Hi. Thanks. I just wanted to ask a little bit on the Nypro business. You guys are seeing really good growth there that you talked about, Mark, faster than the market. How much of that additional growth is coming from opportunities that you are seeing being able to use those capabilities with your existing customers? And how much of it is share gains related to just being part of you, or just being more aggressive?

I'd say it's a little bit of both. One of the things that we are seeing within the Nypro business -- and again, the Nypro business is carved out into two distinct, independent businesses. We've got a rigid packaging business in healthcare. In the healthcare market today, along the lines of the theme of change, we are seeing, on the OEM or brand side, a significant amount of consolidation.

So if you just go back and look, in the last 24 months of the different brand companies, either combining or buying segments of different businesses from each other. Or some of them selling off parts of the businesses to private equity, the deal flow in that area of our space, so the healthcare space, is pretty dramatic. So that's driving opportunities. So some of that is with our current customers, and some of that is with new potential customers. I would say that Nypro, as an independent business, really does a nice job with their value proposition.

They do work -- Courtney Ryan, who heads that up, his team works closely, both with our EMS group and our Green Point group, as far as sharing capability and potential -- what would I call it? I guess capability or engineering technologies, to bring different value propositions forward. And we also -- the one thing that's worked out very well for us is, we have combined all of our health care business into Nypro. So the holistic approach that that team is taking has proved to be pretty powerful.

So we've got everything from single use devices to drug delivery type of efforts going on, along with the electronics portion. So again, looking at the fact that we closed that business right at not quite two years ago, that the performance has been very, very good.

Great. Thanks. And then Forbes, I just had a question, in terms of where we are with the restructurings. It looks like, based on your guidance, we shouldn't have much more restructuring in the third quarter and going forward. And then also, other accounting housekeeping items, the discontinuing operations, how much more do we have of that? Thanks.

Yes. So let me deal with the last piece first. Discontinued should be pretty much cleaned up, and you shouldn't see much of that going forward now. That was the tail on some of the divestiture of our after-market services business closing in phases. So that's pretty much done.

In terms of restructuring, we on track. I remind everyone, we talked about $188 million of charge over, really, 6 to 7 quarters. So we're pretty much done there, maybe a little bit of tail here, as we move through the back half of the year. And I'd remind everyone that we seeing about $65 million of benefit of that this fiscal year, and that should continue into next year. So restructuring, very much on track.

Thanks.

We have reached our allotted time for questions. I would now like to turn the conference back over to Beth Walters for any closing remarks.

Great. Thank you very much. Appreciate you all dialing in for the call today. As usual, we will be available after hours tonight, and the next few days of the week, for any follow-on questions that you might have. Thank you again for joining us. Have a good evening.

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