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Jabil Circuit, Inc. (NYSE:JBL)

F3Q09 Earnings Call

June 23, 2009 4:30 pm ET

Executives

Beth A. Walters - Vice President, Communications & Investor Relations

Timothy L. Main - President & Chief Executive Officer

Forbes I.J. Alexander - Chief Financial Officer

Analysts

Amit Daryanani - RBC Capital Markets

Steven Fox - CLSA

Sherri Scribner - Deutsche Bank

Shawn Harrison - Longbow Research

Jim Suva - Citigroup

William Stein - Credit Suisse

Alexander Blanton - Ingalls & Snyder

Sean Hannan - Needham & Company

Brian Alexander - Raymond James

Operator

Good afternoon. My name is Kamika and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil third quarter fiscal year 2009 earnings call. (Operator Instructions) Ms. Walters, you may now begin.

Beth A. Walters

Thank you. Welcome to our third quarter fiscal 2009 call. On the call with me today are President and CEO Timothy Main and our Chief Financial Officer, Forbes Alexander.

This call is being recorded and will be posted for audio playback on the Jabil website in the investor section, along with today’s press release and a slideshow presentation on the third quarter. You can follow our presentation with the slides that are posted on the website and begin with slide one now.

Our forward-looking statements -- during this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected fourth quarter of fiscal 2009 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, 2008, on subsequent reports on Form 10-Q and Form 8-K, and our other securities filings.

Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Please turn now to slides two and three for a discussion on the results for our third quarter of 2009. On revenues of $2.6 billion, our GAAP operating income was a loss of $7.8 million. This compares to $63.1 million 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 restructuring charges for the quarter was $29 million, or 1.1% of revenue, as compared to $85.3 million, or 2.8% for the same period in the prior year. Core earnings per diluted share were $0.04, as compared to $0.26 for the same period in the prior year.

Please refer to slides four and five for a discussion of revenue by division and sector for the third fiscal quarter. The EMS division revenue represented approximately 58% or $1.5 billion, a sequential decline of 10% as compared to the second quarter of fiscal 2009. Core operating income for the division in the quarter was 1% of revenue.

Sector results -- automotive declined 10% sequentially and represented 3% of revenue in the quarter; computing and storage decreased 17% from the second quarter and represented 11% of revenue; industrial, instrumentation and medical sector decreased 5% from the prior quarter as a result of general market declines being somewhat offset by growth in smart meter related productions. This sector represented 20% of revenue; networking sector levels of production decreased by 14% from the previous quarter and represented 16% of overall revenues for the quarter. Declines in this sector were principally related to wireless network products unassociated with traditional enterprise markets.

Telecommunications sector decreased 1% sequentially and represented 6% of the quarter’s revenue.

The consumer division represented approximately 35% of revenues, or $900 million in the third fiscal quarter, a sequential decrease of 12%. Core operating income for the division in the quarter was 0.5% of revenues. Sequential performance displays decreased by 27% from the second quarter and represented 4% of revenue, reflecting our continuing effort to rationalize the economic performance of this sector and continuing weak demand across our European customer base.

Mobility sector decreased by 12% from the prior quarter and represented 21% of revenue in the quarter. Peripherals sector decreased by 8% in the second fiscal quarter and represented 11% of revenue.

Our after-market services division represented approximately 7% of overall company revenue in the third fiscal quarter. This was growth of 11% from the prior quarter and core operating income for the division was 10% of revenue in the quarter.

In the third fiscal quarter, two customers accounted for more than 10% of revenues, while our top 10 customers in the quarter accounted for approximately 59% of revenue.

Selling, general and administrative expenses increased by $6 million to $112 million for the quarter. Second quarter expenses were lower as a result of one-time expense reductions in areas such as recovery of legal fees and bonus as the full impact of the macroeconomic conditions on the fiscal years operating performance was revised. Ongoing expenses are forecast to remain at approximately third quarter levels.

Research and development costs were $7.2 million for the quarter. During the quarter, we also recorded through core operating income a charge associated with [Disdion’s] bankruptcy filings. Discussions with [Disdion] are ongoing so I should note that we are unable to answer questions relating to our relationship and ongoing discussions at this time.

Stock-based compensation was $13 million in the quarter.

Net interest expense for the quarter was $19 million, consistent with the previous quarter.

The tax rate on net core operating income in the quarter was 20%.

I’ll now turn the call over to Forbes Alexander.

Forbes I.J. Alexander

Thank you, Beth. Good evening. I would now like to ask you to turn to slides 6, 7, and 8 where I’ll review our balance sheet and some of our ratios.

The company’s sales cycle in the quarter increased by two days to 22 days. Day sales outstanding increased by four days to 40 days as a result of $114 million less receivables that off-balance sheet accounts receivable securitization program.

Accounts payable days improved by two days to 64 and inventory balances declined by $146 million, while days in inventory were consistent with the prior quarter at 46 days. Inventory turns remain at eight.

Cash flow generated from operations was $78 million in the third fiscal quarter; this after a decrease in our A&R securitization usage of $94 million. Year-to-date, we have generated $387 million from operations. Our return on invested capital in the quarter was 6%.

Cash and cash equivalents were consistent with the previous quarter with cash balances being $769 million after reducing debt and AR securitization levels by $136 million during the quarter.

No sums were outstanding on our $800 million revolving credit facility.

Our capital expenditures during the quarter were approximately $50 million. This level of expenditure primarily reflects continued investment, IT infrastructure, and maintenance capital investment.

Depreciation for the quarter was approximately $65 million and core EBITDA was approximately $94 million, or 3.6% of revenue.

We remain pleased with the manner in which we executed to our quarter’s working capital and operational plans. In a difficult economic and end-market environment, we continue to manage working capital levels and we are pleased to have generated $387 million of cash flow from operations in the year-to-date.

While cash balances have remained consistent with those beginning -- with those of the beginning of year balances of $770 million, while at the same time reducing our debt levels by $278 million. We continue -- with our continued focus on working capital management, we have the opportunity to generate $500 million of cash flow from operations in this full fiscal year.

Now I would like to give you a quick update on our restructuring activity. During the third fiscal quarter, we recorded charges of $16 million associated with our previously announced plans, while cash payments associated with these plans were $10 million in the quarter.

Through the third fiscal quarter, we’ve recorded charges of approximately $49 million and cash payments associated with this plan of $17 million. Discussions with our employees and their representatives continue and we are complying with all statutory and consultation periods required of us. As a result, we currently estimate charges of $7 million and cash payments totaling approximately $15 million will occur in the fourth fiscal quarter.

In summary, we are pleased with the way in which we executed in our quarter. I would like to take a moment to talk about our year-over-year operating margin decline from 2.8% to 1.1%, while revenues have fallen 15% or some $500 million over the same time period, as I believe that it’s important to understand the various elements of this margin decline and how these will translate to operating income margin expansion when we see a return to revenue growth.

Of the 1.7% decline, 50 basis points were attributable to our SG&A cost base; the balance attributable to the distressed automotive customer charge, changes in foreign exchange, and most importantly fixed cost absorption. An important point here is that the value-add portion of our revenue stream has been relatively consistent throughout this period, reflective of a rational pricing environment.

SG&A expenses have been relatively fixed over the last year. I would expect this to be the case as we see revenues recover. Along with the absorption of fixed manufacturing costs, such as buildings, depreciation, information technology infrastructure, engineering and procurement activity, and a reduction in our overall cost base of $55 million annually occurring as a result of our restructuring activity.

In summary, we are well-positioned as we see revenue growth [over a] rapid margin expansion in the range of $0.10 to $0.15 per dollar of revenue growth.

With that, I would now ask you to turn to slide nine and give you a business update and fourth quarter guidance.

While we remain in a difficult and somewhat uncertain broad-based macroeconomic environment, we are seeing stabilization across all the sectors we serve. As a result, we shall not be providing specific sector guidance for the fourth quarter.

Overall company guidance for the fourth fiscal quarter is as follows: revenue is estimated to be consistent with that of the third fiscal quarter in the range of $2.5 billion to $2.7 billion. Core operating income is estimated to be $25 million to $50 million, reflecting ongoing benefits of our restructuring and cost containment initiatives. As a result, core earnings per share are expected to be in the range of $0.02 to income of $0.12 per diluted share.

Selling, general and administrative expenses are estimated to be consistent with $112 million; research and development costs are expected to be $7 million. Intangibles amortization, also expected to be approximately $7 million. Stock-based compensation is estimated to be $13 million in the fourth quarter. Interest expense is estimated to be consistent with the third quarter of $19 million, and we expect, based upon current estimates of production and income levels, a tax rate on core operating income to be 20% for the quarter.

Finally, capital expenditures for the fourth quarter are estimated to be somewhat consistent with those of the third quarter, reflective of ongoing IT infrastructure refreshes and maintenance capital expenditure levels.

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

Timothy L. Main

Thank you, Forbes. Fiscal Q3 turned out as expected. Demand continued to decline with uneven performance across most of our sectors. Some were a bit weaker than expected while others, such as our industrial instrumentation and medical, and our AMS division, performed well in spite of the circumstances.

The six-month period from mid-October to mid-April has been one of the most turbulent and difficult in our corporate experience. Excluding new business, revenues declined over 30% from fiscal Q1 to fiscal Q3. For Jabil, this was a higher level of decline than experienced in the dot.com implosion and in a shorter period of time. In addition to seeking new opportunities for growth in existing and adjacent markets, we focused on cash generation and cost control. We’re preserving our ability to grow again and to invest in our core business.

While we should and we will always effort to do better, we have produced $387 million year-to-date cash flow from operations and have converted $356 million in inventory to receivables or cash since the end of our first quarter. Our liquidity and ability to grow are in excellent condition.

Late in our February quarter and into the middle part of our May quarter, business continued to decline, albeit at a slower rate. More recently, we began to see genuine stabilization across most of our industry sectors, giving us higher confidence and guiding the consistent revenue levels for our August quarter. The cost reductions we’ve been driving, as well as the ramp of new business in targeted markets, will drive better earnings on similar revenue levels.

And now we turn to the future earnings power of the company and we have a very high confidence in our ability to quickly expand margins and income with revenue growth. Although mix will play a role, as will the timing and strength of the recovery, our operating leverage will be significant as we grow revenues back to the $3 billion per quarter level and above. With our market share and new business activity in a positive position, we look forward to growing our business again in a somewhat more receptive economic environment.

Beth A. Walters

Operator, we’re ready to take questions and answers now, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Thanks a lot. Good evening, guys. Forbes, just a question, you talked about 10 to 15 [inaudible] incremental dollar revenue flowing through the operating income line. If I kind of do my math, it looks like on a $3 billion revenue run-rate, you should be able to hit something around the 3% EBIT margin. Would that be the correct way to think about it in the long run as demand starts to come back?

Forbes I.J. Alexander

Absolutely, Amit, yes. It’s very much depending on the mix but for that type of range, if you look at the midpoint of the range to the guidance that we’ve given for the upcoming fourth fiscal quarter against that incremental revenue, that certainly gets us to that 3% and relatively comfortably, so yeah, we feel pretty good about that. The leverage that we have here, we’ve seen some of that on the way down with my prepared remarks, as we’ve seen on a year-over-year basis about $0.5 billion of revenue to come out the top line and we certainly see that recovering on the way back. And we continue to take cost down and we are in really good shape for revenue recovery.

Amit Daryanani - RBC Capital Markets

Got it, and then just broadly speaking, I realize you don’t want to get into details on each of the end markets in terms of guidance but this generally would be a time we should start to see some of the consumer centric markets start to see some up-tick in seasonality. Are you guys seeing that at all and is that getting offset by flat or softness in the enterprise and networking side?

Timothy L. Main

We generally would not see a big up-tick in the August quarter. I mean historically, Amit, this has been -- this is kind of a challenging quarter. Consumer is really transitioning products into new products for the Christmas selling season and enterprise markets tend to be pretty sleepy, so this is a quarter where historically we’ve been happy to have consistent revenue and earnings historically. We are starting to see enterprise spending in some of the U.S. markets pick up a bit. That’s been good to see. And on the consumer side, more stabilization and we have decent exposure in the smart phone market now and that’s held in pretty well and we think we’ll be pretty robust as we move into the Christmas season, so I don’t think there’s anything out of -- anomalous about the quarter in terms of certain sectors being more robust or more weaker than others.

It’s pretty spotty -- you know, it’s a pretty spotty period. We are definitely not leaning into a recovery with this guidance. We are leaning into a bottoming of the market. There are some -- you know, a few green chutes out there but they could be mowed under and muddied up pretty quickly so really, we are not leaning into a robust recovery. We are really kind of planning on a bottoming, which is what we see in terms of our market sectors overall.

Amit Daryanani - RBC Capital Markets

Got it. That’s it for me. Thanks, guys.

Operator

The next question comes from the line of Steven Fox with CLSA.

Steven Fox - CLSA

Thanks. Good afternoon. Tim, two questions -- first of all, can you talk -- you mentioned that you felt positive about new business opportunities. Can you sort of talk about the status of those and where you see the most opportunity near-term, or is it too soon to start thinking about new program wins? And then secondly, just details on the 10% customers, if you don’t mind.

Timothy L. Main

The first one is pretty easy -- we’re not going to provide the 10% customer detail at this point. I think we’ll probably do that after the year-end, maybe. You know, our customer concentration has actually been in pretty decent shape this year, under 60% for the first time. Most of the year, it’s the first time in my memory that we’ve been able to have that level of diversity in the top end of our customer range.

In terms of new business, when we look at the industrial instrumentation medical sector, that sector I think was down only 5% for the quarter and that’s indicative of a number of new business wins, and some strength in the smart grid clean tech area that is starting to blossom for us. We have some longstanding businesses and things like alternative energy with wind power and that type of thing but we are also building more product for smart grid applications in the power grid. So that’s been good, as well as new business wins in medical and we are starting to see some glimmers of hope in our semi-con business as well, so pleased to see that.

In the mobility area, the reason our revenue is only down 15% year over year is really the strength of new business wins in that area, which had been very significant and although our mobility sector was down sequentially a bit, we still expect that to be a very robust sector for us going forward.

You know, we’ll see some broad-based new business wins elsewhere. It’s not a heck of a lot to hang your hat on right now, just because overall demand has been so weak that it has really swamped the benefit of new business and I think we’ll be in a position to talk more about that when we get into Q1 and Q2 and maybe we start to see a little bit more robust economic environment, we can talk about which sectors we think will be really driving the growth going forward.

Steven Fox - CLSA

Okay. Thank you very much.

Operator

The next question comes from the line of Sherri Scribner with Deutsche Bank.

Sherri Scribner - Deutsche Bank

Thank you. I guess if I could maybe look at the segments a bit overall, you are guiding overall to revenue to be flat sequentially. Would you expect for the segments, would you expect them to, within each segment, experience typical seasonality that they have seen historically? I mean, you did comment that the industrial is probably a bit healthier and I don’t know if that continues into the fourth quarter, maybe mobility is a bit healthier but maybe just trying to gauge it versus what we’ve seen historically by segment.

Forbes I.J. Alexander

They are all relatively -- looking relatively stable. Automotive will have its typical summer seasonality, which is roughly down 10% but it’s becoming a less significant portion of our business, 2% or 3% as we look forward here, so not really meaningful in terms of seasonality. But otherwise, as we’ve been saying, we’re seeing some stabilization across most of these sectors and on a relative basis, everything is looking relatively flat within a percent or two. There’s no real wide variation.

Sherri Scribner - Deutsche Bank

Okay, so everything more likely to be relatively flat sequentially with not a lot of variation, is that fair to say?

Forbes I.J. Alexander

That’s fair to say with the visibility we have right now, automotive, you should see some seasonality and again, not material to our overall business.

Sherri Scribner - Deutsche Bank

Okay. And then Forbes, on the balance sheet, you guys have made some good progress in reducing the inventory levels and generating some cash. It seems like at least you probably stabilized -- my guess would be that you’ve stabilized at these levels and it’s going to be harder to get additional -- do additional working capital. Make additional progress on your working capital -- is that fair to say or do you think you can take some additional inventory and accounts receivable down, considering the revenue is going to be flat? Or what are your expectations there?

Forbes I.J. Alexander

I think certainly on the payables and the receivables, they are relatively flat. That’s really now around the mix of the revenue stream and the material stream, and with expectations that for that mix of business is pretty consistent. I think -- you know, expect similar results for Q4.

In terms of inventory, you know, we’ve got some very focused efforts going on there and I should say we’ve made some decent progress in dollar terms, in terms of [inaudible] and base 46. But I certainly even with flat revenue levels, I think we have an opportunity to perhaps take another day or two out, which is $25 million to $50 million. Some of that will be predicated upon how we see Q1, our fiscal Q1 looking, which is too early to talk about that yet but historically, you’ll recall that that is our big seasonal quarter with our consumer exposure. So a lot very much there depends upon the ramp of that quarter -- in other words, are we going to start to see a consumer build in the month of September or are we going to see a [leap] in consumer builds this particular year in this recession into October or November timeframe? Clearly we see that build. We indicated from our customer base, September we’ll need to preposition some inventory but towards the end of August, early September fallout [inaudible].

It’s a little bit early to call yet but certainly I think there’s still opportunity for a day or two.

Sherri Scribner - Deutsche Bank

Okay, that’s great. Thank you very much.

Operator

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

Shawn Harrison - Longbow Research

A follow-up to an earlier question on just new business wins -- maybe if you could comment on what you are seeing on the outsourcing environment, whether you are seeing potential larger programs coming to market, OEMs starting to look a little bit more at -- you know, changing their model from a fixed cost to a vertical cost structure.

Timothy L. Main

Without speaking about any large opportunities that may be out there, we absolutely expect to see a replay long-term of the move to outsourcing following a recessionary environment that is similar to what we saw in the 2000/2001 timeframe. That prompted a period of growth for the industry and for our company that was really, really very, very strong. Our revenue grew about $7 billion, $8 billion over a four-year period following the last recession, so we think we’ll see that again. There will be -- you guys will absolutely pick up on news that some vertical OEM pulling business back inside, potentially building a new factory. That’s also a normal behavior in the middle of a recession when they are really struggling to fill their own assets. I think the long-term -- the longer term response to that ability to manage their fixed costs, manage the manufacturing base will be to outsource.

I like our position, given the -- kind of the broad diversified exposure we have to a wide range of industry sectors and our ability to capitalize on those opportunities as they come up.

Shawn Harrison - Longbow Research

But -- I’m sorry, your sense is right now that -- at least my sense is it doesn’t seem like it’s changed right now. It’s -- maybe as we look out a few quarters you would see that acceleration but right now it’s pretty much the same as if we look back six months, 12 months.

Timothy L. Main

I’m not sure how to gauge that for you. There are a number of opportunities out there and my sense is that our vertical OEMs will continue to outsource more. When exactly they will show up into the revenue stream, you know, unclear to me.

Our industry overall continues to grow significantly and although 2009 will be an anomalous year in that growth because of the recession, it will certainly outpace the growth of the overall electronic market and I think when we look in 2010 and 2011, see very strong signs that the industry will grow robustly again.

Shawn Harrison - Longbow Research

Okay, and then a follow-up question on the restructuring program -- given the cash charges taken to date, my math suggests maybe there’s say $45 million to $50 million of annualized savings here to come over say the next four to six quarters. Is that a proper estimate?

Forbes I.J. Alexander

Over the next four to six, yeah. When we announced the restructuring program, we talked about $55 million on an annualized basis, so yeah, I think just the mental math, I think you’re about right there, yes.

Shawn Harrison - Longbow Research

Okay. Thanks a lot.

Operator

The next question comes from the line of Jim Suva with Citi.

Jim Suva - Citigroup

Great, thanks. Tim and Forbes, can you maybe help us better understand a little bit about the solar revenue opportunity, kind of when should we start to see these revenues come in? I assume it’s probably calendar, early part of calendar next year or -- and also, how big of a revenue opportunity it is, the margins associated with it, and what type of capital commitments that you have for this, as we’re really not used to hearing much about the solar industry going to EMS but it seems like it’s the trend that’s probably actually going to accelerate.

Timothy L. Main

I think it’s a great long-term opportunity for us and I wouldn’t look at it as being a wide, wide departure from what our core business is. These are power generation panels. They are electronic in nature. They use our present factories. Some of the process technology is a bit different. Some of the machinery equipment is a bit different but the level of capital expenditure, for instance, relative to revenue is similar to what we would find in printed circuit board assembly, so certainly not distorted from a fixed asset investment or capital exposure.

So we will defer much commentary on specifically the solar areas until later quarters as we kind of ramp into production and mature the relationships that we’ve developed in that area. Having said that, I think we are very excited about our presence in a wide range of clean tech industries which are -- some of which are currently embedded in our industrial instrumentation medical segment. We talked about smart grid products, wind generation products, and adding this exciting opportunity in alternative power generation and solar technologies is really a part of a more broad-based effort to connect the company and connect our business to what we think will be a sustained, long-term robust growth in an area that will definitely employ our strong skillsets in global supply chain manufacturing and supply chain management.

I think again, long-term, getting out of what’s going to happen over the next quarter or two, looking over the next two or three years, we’re very excited about our presence in that whole area.

Jim Suva - Citigroup

And then as a quick follow-up, on the after-market services, does that market tend to typically do a little bit better during a recession as people maybe try to upgrade their servers rather than replace new servers, or is your after market services just growing that much faster and should we look at it to continue to grow as a piece of the pie that you have?

Timothy L. Main

Yeah, we’ve had some interesting debates with our folks that run our [inaudible] services area and what the recession actually means. I mean, it’s true that people will repair products more often in a recessionary environment than buy new ones. On the other hand, there’s so much less new product flowing into the environment, people are buying 30% less products. Eventually you think that that would catch up to you. So we’re not sure. In the short-term, I think it’s probably good and I will say that our [KMS] division is doing an outstanding job in securing new programs and expanding their presence, so they are legitimately apples-to-apples growing their business significantly and doing a great job of running it.

Jim Suva - Citigroup

Thank you very much, gentlemen.

Operator

(Operator Instructions) The next question comes from the line of William Stein with Credit Suisse.

William Stein - Credit Suisse

Thanks. I’m wondering if you could talk a bit about the plastics business at Greenpoint. I know traditionally there’s a lot more operating leverage potential in that business. Can you tell us -- maybe give us an update as to how our sales are tracking there relative to the rest of the company?

Timothy L. Main

Well, they’ve experienced a significant reduction in revenue after fiscal Q1 of ’09, so Q2 and Q3 were very low quarters and we experienced significant deleveraging of our profitability there. And having said that, they’ve done an outstanding job of managing costs but also of penetrating new opportunities to grow their business, particularly in the smartphone area. I think when we look at fiscal 2010 and a number of new programs that are ramping as we speak and into fiscal Q1 of 2010, we expect to enjoy positive operating leverage with our plastics vertical business.

You’re right in that the value-add associated with that business is about twice the value-add that we have in our EMS, traditional EMS business and that means that the fixed cost as a percentage of that value-added and manufacturing cost is much higher than our legacy business, so there’s a stronger operating leverage going both ways. They’ve had a couple of rough quarters in Q2 and Q3, beginning to see some significant recovery in Q4 and into Q1, we think that business will continue to be in good shape.

It’s our technology and know-how in that area is contributing significantly to our ability to grow the mobility space, and so I’d say legitimately, genuinely that it’s a key part of our value proposition and value stream that we offer to -- particularly to higher end customers in that space.

William Stein - Credit Suisse

Great, and then maybe shifting to the telecom segment, you did the Nokia Siemens networks deal a few quarters ago and now they are buying part of Nortel’s assets. I think it’s another customer that you were ramping prior to their bankruptcy. Can you comment as to how that relationship is progressing relative to this announcement we saw earlier in the week?

Timothy L. Main

Well, we are trying to do business with everybody that we think is going to be strong and survive and establish a presence in the technology products that we think will be important in those companies longer term. I can’t comment on the NSN Nortel acquisition or what that will mean to us. Truthfully, we’ve been positive about the relationship with Nortel but given the circumstances there, it would be inappropriate for us to comment much on that and in truth, to date it’s not been very material to our results.

William Stein - Credit Suisse

And then one real quick one, if I can, we have a write-down [from disti] on this quarter, not too surprising. Do you think there’s anything else that could be come along the lines of credit problems with customers, or do you think we are behind that now?

Forbes I.J. Alexander

No, I think we’re in pretty good shape. We have a pretty robust process. Clearly there was always some risk to run in the automotive space here over the last 12, 18 months, as credit markets declined in overall economic recession but otherwise, we are in pretty good shape with the balance of our customers. We feel good that we shouldn’t see any future events.

Timothy L. Main

What we have left in the automotive space is actually pretty good company, we’re well-capitalized, [inaudible] any credit risk, so --

William Stein - Credit Suisse

Thank you very much.

Operator

The next question comes from the line of Alexander Blanton with Ingalls & Snyder.

Alexander Blanton - Ingalls & Snyder

Good afternoon. I’m going to ask you about the guidance for the fourth quarter. That seems like a very wide range. I got on late so you might have covered this during your presentation but what explains that wide range and what does it depend on?

Timothy L. Main

I think it’s the same range that we provided in Q3.

Alexander Blanton - Ingalls & Snyder

I’m talking EPS now, is what I’m talking about.

Timothy L. Main

EPS should be very similar as well. We had a $40 million spread in core operating income in Q3. We actually have a $25 million spread in Q4. That’s actually tightened up a little bit. We’ve taken money. We’ve increased the flip-side of our guidance from zero to $25 million in core operating income and raised the high-end from 40 to 50. And in terms of very specific [inaudible] on the EPS range [inaudible] --

Forbes I.J. Alexander

-- cents, 25 to the low end of the range --

Timothy L. Main

That’s versus $0.16 last time, right because minus --

Forbes I.J. Alexander

We’ve tightened the range now.

Timothy L. Main

Still a wide range -- you know, who knows? We believe we see a bottoming of the economy. We believe we see genuine stabilization of the revenue levels. We believe that we’ve got the right products, the right customers. We think we are going to do significantly better before than we did in Q3 in terms of earnings. But you know, this economy is a long, long way from being in a healthy mode where you can determine direction, so I think it’s pretty prudent for us to remind investors that we are wary of the actual [inaudible] sell-through to customers and we need to give ourselves a range and remind investors through that guidance that given the economic environment, earnings are far from a certainty.

Alexander Blanton - Ingalls & Snyder

Okay, second question is you mentioned earlier the possibility that some manufacturers initially might decide to move some things in-house. Do you have any examples of that in your business?

Timothy L. Main

I think the one that’s been well-publicized is the Nokia announcement three, four months ago.

Alexander Blanton - Ingalls & Snyder

Right.

Timothy L. Main

Other than that, we don’t have any significant customer accounts that [inaudible] that type of move.

Alexander Blanton - Ingalls & Snyder

Because recently NCR announced that they would in-source some ATM manufacturing and as I can determine, the reason they are doing that is so they can get some tax incentives from the State of Georgia that require a certain number of jobs to be created in the State of Georgia. And it really has nothing to do with the economics actually of in-sourcing. But there was some comment accompanying that in some of the local press that oh, there’s a trend toward in-sourcing. But from what you can tell, is there any such thing?

Timothy L. Main

I don’t think there’s any such thing. I might have mentioned NCR but I’m glad you brought it up. I forgot that that was a public statement that they made, so -- you know, these OEMs will have certain drivers, different personalities, and opportunities like NCR has to receive significant tax benefits for an activity that maybe they think can be supported domestically within their own site.

[If you take] a couple of data points, a $1 trillion dollar industry and say that’s a trend, I don’t think so.

Alexander Blanton - Ingalls & Snyder

Yes, well, there was a bill in the State of Georgia that if you can create 1800 jobs or more, you can get some tax incentives. Well, the only way they could do that was to in-source this ATM manufacturing because they didn’t have enough people coming from Dayton to meet the 1800 bogey. This is not the way the press presented it but it’s obviously the case, so it had really nothing to do with lowering costs or anything like that.

Timothy L. Main

Right, well, the politics that we are in today are going to really be very negative towards out-sourcing and that type of thing. I mean, that’s -- let’s just accept that but recognize that the trend to out-source and the cost benefit of out-sourcing are so compelling that these temporary political statements I think will impact the temporary and the broader economic force of what compels OEMs to do what they do will prevail.

Alexander Blanton - Ingalls & Snyder

Well, you are absolutely right. The CEO of NCR bragged that oh, we’re bringing jobs back from overseas when in reality, they are coming from South Carolina. Okay, thank you.

Operator

The next question comes from the line of Sean Hannan with Needham & Company.

Sean Hannan - Needham & Company

Thank you. So you had commented a little bit earlier, it sounds like we are seeing a little bit of stability here and that’s kind of continued on from the last call and Tim, I think you made a comment earlier, it sounds like enterprise is picking up a little bit. So without assuming guidance and just in talking around your business and mix, when we eventually get to a recovery point, what in your mind is going to show some of the stronger recovery signs, you know, excluding some of these newer markets such as smart grid, where this is really kind of new business to the industry but as you look at your traditional business, where do you expect to see some of those stronger recovery points?

Timothy L. Main

Well, I mean, this may sound disingenuous but IT enterprise spending and consumer electronics I think will be very robust. There’s been under-investment. There’s been under-investment in IT. There’s been under-investment in data centers and computing. Consumers have been on the sidelines. When we look at parts of our consumer electronics business year-to-year, unit volumes are down 40% to 45%. I mean, it’s a huge drop in sell-through rates, so consumers come off the sideline and start to buy again, I think we’ll see significant up-ticks in printing, in mobility, and in some of the other set-top boxes and some of the other areas that we support.

The sectors like telecommunications and our industrial instrumentation medical segments that have performed relatively well short-term, but we won’t be as robust on the up-side. But when you look at enterprise IT spending, I think we should see significant growth there.

Sean Hannan - Needham & Company

There’s some OEMs that have started to plant some of the seeds with the investor community around the opportunity that might come with the next Windows release and I didn’t know if there was anything from your perspective, commentary on drivers around that and how you expect that could translate within your own business.

Timothy L. Main

We don’t have much of a PC or even an industry-standard server business. Our computing and storage sector is -- gosh, must be 80%, 90% now, high-end enterprise storage, along with some lower end mid-range products but dominated by high-end enterprise storage products. Our networking sector is enterprise IT. There’s some consumer level products in there but we don’t -- I’m really referencing sectors that we play in today. We really don’t play in the industry standard server or PC notebook market.

Sean Hannan - Needham & Company

That’s helpful around the servers. And then lastly, on the industrial side, so when you talked about some of these -- the newer programs that you are having a little bit of benefit from that are relevant to the smart grid, you have some partnerships with some near companies, solar companies. Obviously this is still a pretty small space in general for you today but is there a particular group within those cleaner technologies that is much more meaningful versus another, or are they around similar levels?

Timothy L. Main

Well, you know, if we consider our participation in smart grid, smart electronics, power reduction efficiency, lighting, as well as things like solar and group that into a business activity which is directed towards power and energy, efficiency, and alternative power generation, it’s actually already a pretty decent business for us and I think that solar will be just a part of what we have in that total business activity. And I expect it to be -- I expect it to increase in importance over the next few years. It’s really a long-term play for us, not anything that will make a difference in how we perform in Q4, probably how we will perform in Q1. It’s a farther out prospect although we do have new relationships in that space and we will be ramping those relationships through 2009 and our historical behavior and protocol on that type of thing is to talk about those customers or activities when they become meaningful to our results, and that’s still a few quarters off in the distance, so I think we’ll provide more detail, more information on what’s happening there as we get closer to the advent of material revenue and meaningfulness to our business.

Sean Hannan - Needham & Company

That’s helpful. And sorry, one quick follow-up, if I could -- in terms of the guidance, if we were to extend the current environment from August, and I know we’re not giving some commentary around obviously the November quarter but if we were to assume generally similar levels, should the restructuring benefits that we are seeing that’s basically embedded in your guidance for August, kind of around 30 basis points, should we see something similar to that transpire?

Forbes I.J. Alexander

Yeah, that’s reasonable. Your question is if revenue levels were consistent?

Sean Hannan - Needham & Company

That’s correct.

Forbes I.J. Alexander

-- Q1, yeah, that’s reasonable. We’ve got ongoing restructuring activity. We expect about $15 million of cash expenditures associated with that in Q4, so yeah.

Sean Hannan - Needham & Company

That’s great. Thank you.

Operator

The next question comes from the line of Brian Alexander with Raymond James.

Brian Alexander - Raymond James

Good afternoon. Just going back to the comment that you expect to see the $0.15 of each incremental revenue dollar drop to the operating line, what are the key assumptions embedded in that expectation as you think about mix shifts, utilization levels, et cetera? And what segments are most responsible for driving that? I’m just trying to understand what would have to happen for that leverage to not materialize on the revenue -- where the revenue would actually get to that level?

Timothy L. Main

Let’s be clear on -- there was a range. It was $0.10 to $0.15, so in that range, there’s assumptions around mix, a more materially intensive revenue stream that we might find in low-end consumer electronics or highly commoditized activities like high volume printed circuit board assembly, will produce fewer operating income dollars per incremental dollar revenue. If we were to see that revenue increase, slanted more towards our vertical integration activities, our higher margin sectors, then we’ll be at the high-end of that range, maybe a little bit better. So there’s a mix.

So if you were to take that midpoint, same thing, company grew all sectors at the same rate, at the same time, we’d expect to see $0.12, $0.13, $0.14 of operating leverage, depending on how we did.

What do we need to assume? We need to assume that the company manages what it can manage, which are things like SG&A expense that we absorbed the fixed costs that we have in place today and that pricing doesn’t collapse, and I think that’s one of the reasons that Forbes discussed, all of the value-add to the revenue stream today versus a year ago, because I think it’s very important to note that the value add on our revenue stream today is within a half a percentage point of where it was a year ago, which is like very confusing to talk to investors about what the price environment is like as they fairly -- a fairly good proxy for what’s happening in terms of value-add and pricing and the overall business. So we don’t think that price will be necessary to drive additional revenue or a significant determinant of how we are able to grow revenue.

So what would it take for that not to happen? I’m not sure. It would have to be something which would be outside of our control. I think the only thing to really keep that from happening is the revenue doesn’t grow. We simply can’t seem to move from $2.6 billion a quarter back to $3 billion and I don’t think -- I don’t know if that will happen in Q1 or later. That depends on the overall economic environment and how we continue to do in terms of new business awards.

I can tell you from the management team standpoint, we have very, very high levels of confidence that in a stable economic environment, really our GDP growth of 1% to 2% a year will give us a platform that we’ll be able to grow the business significantly year over year, if there is new out-sourcing because there is new business awards because we are gaining market share.

Brian Alexander - Raymond James

I guess I was thinking back to the mobility segment where the leverage didn’t materialize because you had to end up adding capacity where you thought you’d be able to utilize existing and I wasn’t sure if that was a risk going forward.

Timothy L. Main

That operating leverage actually occurred. It didn’t occur at the high rate that we thought it would, so we’ve given ourselves maybe a little bit more conservative range in terms of that operating leverage than we gave ourselves a couple of years ago and -- but in truth, I mean, even though the operating leverage is a little less than we expected on the mobility ramp-up a year ago, still there.

Brian Alexander - Raymond James

Great, thanks, Tim.

Operator

At this time, there are no further questions.

Beth A. Walters

Great. Thank you very much for joining us on the call today and we appreciate your time. Thank you.

Operator

This does conclude today’s conference. You may now disconnect.

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Source: Jabil Circuit F3Q09 (Qtr End 5/31/09) Earnings Call Transcript

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