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Executives

Beth Walters - SVP, Communications & IR

Forbes Alexander - CFO

Tim Main - President & CEO, Director

Analysts

Amitabh Passi - UBS Investment Research

Amit Daryanani - RBC Capital Markets

Brian Alexander - Raymond James

Louis Miscioscia - Collins Stewart

Wamsi Mohan - Bank of America-Merrill Lynch

Shawn Harrison - Longbow Research

Matt Sheerin - Stifel Nicolaus & Company, Inc.

Steven O'Brien - JPMorgan

Craig Hettenbach - Goldman, Sachs & Co.

Jim Suva - Citigroup Smith Barney

Steven Fox - Cross Research

Sherri Scribner - Deutsche Bank

Jabil Circuit Inc. (JBL) F1Q2012 (Qtr End 11/30/2011) Earnings Call December 20, 2011 4:30 AM ET

Operator

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. (Operator Instructions). Thank you, Miss Beth Walters, you may begin your conference.

Beth Walters

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’ll 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 two, our forward-looking statements.

During this conference call, we’ll 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 assumption 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 and subsequent reports on Form 10-Q and Form 8-K in 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 decision. 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 macroeconomics and Jabil’s specific comments about our performance, our model and our correct outlook. We will then open it up to questions from our call attendees. I will now turn the call over to Forbes.

Forbes Alexander

Thank you, Beth. Hello everyone. I would 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% for 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 in the prior year.

On a sequential basis, revenue increased 1% in the first quarter while core operating income increased 4%. Core diluted earnings per share was $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 ask you to refer to slide four for segment discussion. In the first quarter our diversified manufacturing services segment increased 30% on 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 the segment was 2% of revenue.

Our enterprise and infrastructure performance was below expectations as we experienced revenue reductions late in the quarter as a result of inventory leveling with specific large customers associated with a specific mix and inbound product transitions. We expect a return to revenue growth and improved core operating income performance the following of this fiscal year.

Our 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 revenues in the quarter. Core operating income for the 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. It is also now interesting to note that we have one 10% customer in each of our segments.

Now I'll ask you to refer slide five for a review our balance sheet metrics. We ended the quarter with cash balances of $862 million, conventionally with approximately $2.4 billion, representing 7% increase not only 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 remained well controlled. As a result, cash flows from operations was approximately $115 million in the quarter. We began the quarter with $275 million or 6.4%; an expansion of the 30 basis points over the same period a year ago.

With 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 to be approximately $80 to $90 million reflective of capacity and 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. So why we did not repurchased any shares during the quarter; we still have a $100 million available of our authorization for the fiscal year.

We are also pleased to announce the completion of the Telmar acquisition on December 1st with the purchase price of approximately $130 million. I would like to take this opportunity to welcome Telmar employees to Jabil. Moving forward, the Telmar results will be incorporated within our Diversified Manufacturing Services segment. Specifically, within the Specialized Services business that their capability will strength the depth and scope of our current Aftermarket Services business. The acquired revenue is approximately $145 million per year.

Now I’ll ask you to turn to slide six and seven for a summary of the quarter’s performance. We are pleased with the first quarter’s results; core operating margin performance of 4.5% at 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 and 26% providing and meeting capital returns in the EMS industry.

Now I’ll walk through to the slide nine and 10 where 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 a range of $4 billion to $4.2 billion. On a sequential basis, overall revenue and operating guidance are consistent to the level 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 a range of $0.52 to $0.62 per diluted share based upon dilutive share count of 270 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%. 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 year-over-year basis.

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

Tim Main

Thank you, Forbes. Well, the first fiscal quarter 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 the 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. And we do expect margins to continue expansion as we experienced 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 over-performance from our Diversified Manufacturing Services Group and an 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 can 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 ‘12 should be approximately $8.4 billion. In the second half of the year, we expect the Diversified Manufacturing Group to continue leading growth and we have the organic growth contribution from Aftermarket Services which is typically at these 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 a relatively stable demand trends in the Enterprise and Infrastructure and we see growth in the second half exceeding the first half which we think is reasonable.

We’re being conservative of our 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 and the margins should continue to be above the high-end of long-term targeted margin range.

In essence, this result in fiscal ‘12 of approximately $9 billion in the second half and the total year revenue of about $17.4 billion. We’re 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. So the year unfolded about this level. I would regard this as a solid year with a good trend in business mix towards the Diversified Manufacturing Services and business area. Margin and profit expansion can take place on much more moderate revenue growth, which I would regard is 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 and you can find this chart highlighted in our annual report, the fiscal 2012 annual report, I mean it actually goes in to additional detail of market sub-segments in each of these business areas. Jabil has a leading or at beachhead position in all of these areas and we look to a significant growth in these areas over the next three, four, five years.

Turn to slide 15, please. So, in summary, we’d 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’ve just 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 incoming EPS. Our long-term business objectives remain on track and we look forward to fiscal 2012 and fiscal 2013 and beyond.

Beth Walters

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

Question-and-Answer Session

(Operator Instructions). Your first question comes from the line of Amitabh Passi.

Amitabh Passi - UBS Investment Research

Tim, first question for you. I think last quarter you talked about you know the business having to sort of outgrow despite the weak macroeconomic environment. We’ve now seen year-over-year growth trends decelerate from like 32% to 4%. Just wondering how you would sort of explain that and is your expectation that sort of middle single digits is now a more reasonable growth target for a fiscal 2012?

Tim Main

Well 7% to 8% growth is significantly above macroeconomic growth and in fact I think would be a leading position in terms of S&P 500 companies and I think that’s 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.

We look back in fiscal 2012 over growth in fiscal 2011 and 2012 will 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 terms of topline growth might be a little bit below where analyst add us 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 nice tradeout of lower margin revenue for a better earnings profile and more sustainability. So I think I’d take fiscal 2012 particularly in this environment.

Amitabh Passi - UBS Investment Research

And then just as a quick follow-up perhaps the way forward, 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 downside, just for the February quarter, how we should be thinking about movements for these two segments?

Forbes Alexander

Yeah, so, I will certainly give you some color in general terms, we don’t provide specific guidance around each of these segments, but you know let’s take Enterprise and Infrastructure, it underperformed in the first quarter. As you really know about our revenue growth and as we said in the prepared remarks actually the guidance we are providing is growth through the balance of the second fiscal quarter and the balance of the year. So we should see some pretty reasonable margin progression.

I will remind you that last quarter we discussed the closure of our site in Northern Italy. So that's underway. We had anticipated that would occur and there will be some benefit in the February quarter so what we meet the margin accretion and then we will 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 will start to see the margins progress from 2.5% and I would expect that to be very close to the low end of our operating targets as we get through the fourth fiscal quarter here, remind everyone that the long-term target is in the range of 4% to 4.5%.

In terms of the High Velocity arena you see, extremely pleased with the performance in the first fiscal quarter and the way we think about that is that we did some high 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 will 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% somewhere probably approaching the 3% for the balance of the year.

Operator

Your next question comes from the line of Amit Daryanani.

Amit Daryanani - RBC Capital Markets

To fully understand, what drove the revenue degradation, certainly there was one inbound program that just got changed towards the end and is that the expectation of that ground [pop] and you should see revenues and margins start to improve.

Tim Main

The revenue underperformance from enterprise infrastructure in Q1 was driven by really characterizes this as about a $160 million and $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 is really important to say that the underlying demand is relatively stable. We just happen to get with two or three isolated circumstances of inbound transition issues and a couple of inventory corrections.

Amit Daryanani - RBC Capital Markets

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 next few quarters. So I am actually surprised you had 100 million plus of cash flow this quarter, should we expect cash flow to continue improve throughout fiscal '12 as it historically tend to do?

Forbes Alexander

Yeah, it should and you’re absolutely, right. We did an outstanding job in overall working capital management this quarter. So as we move forward to the balance of the year, I would expect continued strong cash flow from operations performance. We certainly are regularized to produce somewhere in the region of $175 million to $200 million plus a quarter as we look at to the balance of the year. So that given where some of the CapEx and the acquisition of Telmar, that we bought on the 1st of December is certainly allowing us I think to probably return somewhere between $200 million of free cash flow in the fiscal year, so again, another very strong year from a working capital and cash flow perspective.

Amit Daryanani - RBC Capital Markets

For now, I’ll probably just ask last one, if you could shape the $410 million of incremental revenues in the back half in three different greens, is there anything that you could say how much would come from Specialized Services versus Healthcare and Industrial?

Tim Main

Yeah, 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.

Operator

Your next question comes from the line of Brian Alexander [Raymond James].

Brian Alexander - Raymond James

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 am just trying to reconcile the revenue outlook for that segment; what’s your comment that the Q1 shortfall was temporary and unusual?

Forbes Alexander

Yeah Brian, this is Forbes. The sequential guidance is about 3% as we move forward, so you know that actually a drop we’ll typically see in this February quarter you know as we – as Tim articulated in answer to previous question, you know those end markets are relatively stable from our perspective and the customer relationship however is not – and the inventory correction that we saw. So we are seeing growth; we have seen that occur in last couple of weeks here in December, so subsequent growth and we expect continue to work on that cost this fiscal year also.

Brian Alexander - Raymond James

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

Forbes Alexander

Yeah, so in terms of the below than expected volumes, typically we’re seeing instances of about 10% de-leveraging on our revenue, okay; so $16 million of an impact there because it 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 predominately Enterprise and Infrastructure focused sites, so this quarter and it was an impact there of somewhere between 50 and 70 basis points on that margin.

So have those back; and we started you know be settling off to 3 points and approaching 3.5 points I think (inaudible). And as I said earlier, we have started this restructuring process; we do expect to be hit the sites in locations by the end of February, that’s 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.

Operator

Your next question comes from the line of Louis Miscioscia [Collins Stewart].

Louis Miscioscia - Collins Stewart

Yes, maybe if you could go through Diversified Manufacturing and E&I. I know you just mentioned E&I seems stable, I guess you are gaining that trend into, well into the first half and also that same comment on Diversified Manufacturing, you know you commented that you are growing above the macro-economy; but is that most will be due to new wins or macro-economy from what you are seeing from your customers maybe a little bit above 1%?

Tim Main

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

Louis Miscioscia - Collins Stewart

Yeah, just trying to basically, I asked about end demand broadly?

Tim Main

Yeah, end demand is actually pretty decent and stable, I mean actually if you go back and look at previous years, Q1 is typically not a very good quarter for us, you know we had a decline in sequential growth in ’10 and a decline in sequential growth in ’11 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 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.

The computing; the storage market was actually a bright spot and you know we’ve been very stable to upper demand and we’re growing sure of wallet in the storage business area, and telecommunications area particularly, wireless. Infrastructure, demand is good we are saying some inventory leveling and some technology changes that we elongate some of the product transitions to Jabil. And then other elements of Enterprise and Infrastructure you know nothing to write a whole about terms of great growth, but decent stability and 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 its nothing remarkable or certainly disappointed in the first fiscal quarter performance relative to our expectation; but relative to previous year’s performance in fiscal Q1, not a great deal, worse than fiscal 2011 and fiscal 2010. And actually we will look to the balance of the year; very high confidence levels that our revenue growth will resume growth in Q2 and continue throughout the year.

Louis Miscioscia - Collins Stewart

In High Velocity……

Tim Main

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

Louis Miscioscia - Collins Stewart

Yeah sure, just what you are saying and I guess from demand perspective.

Tim Main

Yeah, 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, renewable energy that can be a bit choppier at this point, but certainly a robust long-term growth area.

The material technology group has a very robust demand and although we do see some seasonality in that business in Q2 given the seasonal sellthrough of the smartphone products that manufacture these technology group builds for. And then the after market services area along with 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.

Operator

Your next question comes form the line of Wamsi Mohan.

Wamsi Mohan - Bank of America-Merrill Lynch

Tim, you highlighted a $600 million incremental revenue in this second half versus the first half and that’s about the same as what you did last fiscal year, if you exclude the Telmar acquisition. So may be 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 done certainty, it seems much higher in the near term?

Tim Main

Yeah I’m not sure, 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 better in the United States, a little bit slower in Europe, Asia you know continues to be stable.

So I think the economic environment is relatively benign you know if you will in terms of influence. $600 million in incremental revenue growth you know 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 to $166 million that wasn’t there in fiscal Q1 because, now that’s a share of wallet issue and a sellthrough rate issue. So once that inventory is consumed and the product transitions are completed, you get that, basically that same runrate back into the revenue stream.

And then there are some additional customer programs we expect to ramp in the production over the course of Q3 and Q4. So feel good about it in enterprise infrastructure. Actually a very good line of sight to that as well and then in Diversified Manufacturing Services, gosh we are 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 seeing growth in areas like defense and aerospace.

So we feel good about line in sight to growth in those areas as well. And I think one of the reasons we went through this and I 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 changeout of High Velocity revenue for enterprise infrastructure and diversified manufacturing services.

So it’s actually a pretty good tradeout 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 macroeconomic conditions continue at about the same rate. Again I made the comment during my prepared remarks that we are not trying to handicap anything more or less into this guidance, simply what we see today based on sellthrough rates in the current economic environment.

If you are 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 macroeconomic 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 are looking for you know 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.

Wamsi Mohan - Bank of America-Merrill Lynch

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?

Tim Main

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 display business. Rest, if you exclude the displays and the handset business, rest of High Velocity is actually very stable to up year-over-year and businesses like automotive has been robust, our printing business is strong with good year-over-year growth. So point of sales systems is good and 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.

Operator

Your next question comes from the line of Shawn Harrison

Shawn Harrison - Longbow Research

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

Tim Main

I think it is reasonable to think that high velocity given what we see today can run for the year at about 3% or a little bit better. So to be above long term of our targeted range and I think opportunistically you know it’s an opportunistic business area by nature. If we find opportunities to expand the business, we would be looking for areas where there is 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 both will be comfortable with the expectation that High Velocity operating margins for the year can start with the three probably somewhere in the low three’s.

And we would expect to see, I know we talked and mentioned this in our prepared remarks or 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 to kind of do that and we’ve got consistent margins in the Diversified Manufacturing Services area, which we think is reasonable expectation and that’s why we think the earnings power of the company is in pretty good shape for the year.

Shawn Harrison - Longbow Research

And then this as a brief follow-up, I guess, inventory expectations for the February quarter, would you expect inventory down as to decline? And then on the buyback, I guess, what are you looking at in terms of the stock price anything like that just to maybe complete the $100 million authorization out there?

Forbes Alexander

Let me handle the last portion of stock price, as we noted in prepared remarks, we do have an authorization of $100 million available to us and you know the intent there is that we use that during the fiscal year. So we should start to see as, for that interaction as move through the coming quarters here; we wouldn't expect to use that in any one particular quarter, but a measured approach as we move through the balance of the fiscal year. In terms of inventory, yeah we should absolutely see plans for declines in inventory and we certainly expect to gain back the – what was it; $160 million or so sequential increase in the quarter to bring that back then to Q4 levels of the quarter.

Operator

Your next question comes from the line of Matt Sheerin [Stifel Nicolaus & Company, Inc.]

Matt Sheerin - Stifel Nicolaus & Company, Inc.

Just a question on DMS; Tim you talked about, you gave some guidance for growth for the next quarter and then you also talked about some seasonality in the Materials side particularly with Green Point and the smartphone exposure there, but aside from Green Point and the 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?

Tim Main

Well, experience would say that it’s typically not a great quarter for growth anyways, I mean even though we’re not relaying on end market growth in Diversified Manufacturing Services really playing on market penetration of our industry, but still tends to be a relatively small period. You know that said, so no, there is not much seasonality although it tends be – you know it’s not intuitive that it’s seasonal, but it tends to be definitely slow period anyways and just based on our periodical evidence of behaviors.

But looking at the pipeline of growth in those businesses, Industrial, and the Clean Tech area, the Healthcare area, very, very strong performance; we do have some exposure in the Instrumentation part of Healthcare Instrumentation; there is some semiconductor capital equipment content that is very weak right now and you know when that runs through the system I think we’ll see good year-over-year growth as the balance of the year unfolds.

Matt Sheerin - Stifel Nicolaus & Company, Inc.

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 the supply standpoint?

Tim Main

Very, very little. There is some impact, but very little impact to Q1. I think we’ll probably see some impact in Q2; you know we've got, you know some actual, a number of things going on in Q2 that are handicapped into the guidance, so I don't want to labor the point, but there is Chinese New Year, there is 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 that impact, but expectation is now that there will be some impact, but relatively modest.

Matt Sheerin - Stifel Nicolaus & Company, Inc.

And just quickly, could you tell us who the three 10% customers were in the quarter?

Tim Main

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 and Infrastructure that most people are familiar with and the other being in the Diversified Manufacturing Services area which is new for us.

Operator

Your next question comes from the line of Steven O'Brien [JPMorgan].

Steven O'Brien - JPMorgan

Just a couple of 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?

Tim Main

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

Steven O'Brien - JPMorgan

Looking out at the CapEx this quarter, you know I think the expectation was down right, was that the CapEx might be a little lower in fiscal ‘12 versus ’11, but you know kind of at parity sort of one quarter end and clearly it sounds like there is some ramping expected for the second half of the year. So I mean just want to check in see if you could 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 remains the same or not?

Forbes Alexander

In terms of the CapEx, we’ve guided in to the first quarter with a $100 million. We came quite on point at $95 million actually for the first quarter. So overall expectations for the year, if we add-in our second fiscal quarter by point guidance $85 million gets you somewhere between $350 million to $400 million in terms of capital expenditures for the year, its where the thoughts are currently. So last year, we spend on a net basis like $426 million something of that nature; it’s a little bit shy of that. In addition, obviously, we have this quarter the Telmar acquisition of about $130 million. So I remind investors of that point in terms of modeling cash flows. In terms of the overall cash flows, I think your question is related to performance in terms of the cash flow depending on revenue growth. Certainly, with the back half of the year that we articulated in terms of marks to date, our working capital management has really been in my opinion outstanding over the last multiple quarters actually last five or six quarters.

And I don’t see anything that would change that level of performance or direct through the balance of the fiscal year. So what that does based on the view we have of the balance of our fiscal year. It certainly provides us an opportunity of somewhere in that $175 million to $200 million plus a quarter of operating cash flow, take up those CapEx levels and expenditures that we talked about and you’re producing you know to $200 million to [$250] million of free cash flow for the year.

If revenues should go past that, then our current view of the back half of the fiscal year, there will be some degradation to those cash flows purely based upon the amount of working capital that we would use and what we typically think about that in somewhere in the region of just $0.05 to $0.10 of that working capital need for every incremental dollar of revenue. Should we see softness, but clearly cash flow as well without (inaudible) these levels that we just discussed.

Operator

Your next question comes from the line of Craig Hettenbach.

Craig Hettenbach - Goldman, Sachs & Co.

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

Tim Main

Yeah, the decline in HVS is limited to you know certain business areas and I think most people that follow a company can probably put that together, but our automotive businesses and High Velocity that’s actually grown significantly year-over-year, 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 comparison 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 winds, 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.

Craig Hettenbach - Goldman, Sachs & Co.

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

Tim Main

I think they will be continue to be 10% customer yeah.

Craig Hettenbach - Goldman, Sachs & Co.

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

Forbes Alexander

Yeah, well you know we just took that up about 30 40 days ago, I think. You know certainly as we look through the fiscal year you know we keep 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 you know we will certainly keep that in front of mind as we view our dividend policy move into the fiscal year.

Tim Main

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 in 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.

Operator

Your next question comes from the line of Jim Suva

Jim Suva - Citigroup Smith Barney

When we look at the EPS to leverage potential for Jabil, it has been a long time since we have kind of had a steady environment, you know a lot of up cycles, down cycles in the past few years. It looks like for calendar Q1, you know 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 recognized you are 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 one and half times of sales or how should we think about the leverage and models at the bottom line?

Tim Main

Just keep in mind when you compare fiscal Q1 2012 to Q1 of 2011, fiscal Q1 2011 does not include the operations in France and Italy that were acquired, reacquired, I mean that diluted income of $5 million to $10 million, so there was some leverage and there has been some SG &A expansion that’s partly due to the reacquisition 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. Do you want to add anything to that, Forbes?

Forbes Alexander

I think that is correct. As we look at top of the year and based on our point of view of revenue there, we should see core EPS growth expand approximately from revenue growth on quarterly basis.

Operator

Your next question comes from the line of Steven Fox [Cross Research].

Steven Fox - Cross Research

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

Tim Main

Well, I think it's a good question. I am not sure how to convert the comment into – I am not sure how to quantitatively convert the comment. But you know a little bit of tailwind would be exponentially good for the business particularly, when you look at infrastructure spend where we do have a pretty decent market share with customers and except the customers in the Enterprise and Infrastructure Group. I guess some tailwind that would be exponentially better for the business.

And I think just having a stable to slightly positively bias environment would put Healthcare and Industrial types of customer that are approximately vertically integrated causing to be a little bit more aggressive and comfortable with an outsourcing model. You know the level of uncertainty and not knowing which way things are going to go, just naturally causes conservative people to pull their horns in and outstanding environment that’s really accelerate the outsourcing, but if there was a positive bias it would have felt like to ground which put them underneath their feet we might see an acceleration of outsourcing from presently vertically integrated companies.

Operator

And your last question for today’s session will come from the line of Sherri Scribner [Deutsche Bank].

Sherri Scribner - Deutsche Bank

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 are 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?

Tim Main

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 and the Industrial and Clean Tech Group’s in the second half of the year.

And unfortunately, we’ve not been able to return growth in those areas into linear growth ramps. They tend to be relatively stairs-step and come in you know come in some chunks with stair-step and then you know moderate growth sequentially and then that’s why we’re really converting or thinking to looking at things on 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 and Instrumentation Group you know that is weak and diluting the results in that area. We expect that to kind of either stay where it is or maybe modestly improve in fiscal ’12, but not looking for – yeah that has the impact of diluting the sequential growth near term.

Sherri Scribner - Deutsche Bank

And then just talking 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?

Tim Main

You know some folks in Asia seem to think so; I am 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 Asian market over the last few years it actually is becoming a little bit more meaningful, on the margin.

Beth Walters

Thank you for joining us on the call today. We certainly will be available for a follow-up throughout the balance of the week (inaudible) and Happy Holiday to everyone. Thank you.

Operator

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

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