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Jabil Circuit, Inc. (NYSE:JBL)

F3Q07 Earnings Call

June 21, 2007 4:30 pm ET

Executives

Beth Walters - Vice President, Investor Relations

Forbes Alexander - Chief Financial Officer

Timothy L. Main - President, Chief Executive Officer, Director

Analysts

Louis Miscioscia - Cowen & Company

Jim Suva - Citigroup

Steven Fox - Merrill Lynch

Matt Sheerin - Thomas Weisel Partners

Amit Daryanani - RBC Capital Markets

Bernie Mahon - Morgan Stanley

Long Jiang - UBS

Yuri Krapivin - Lehman Brothers

Paras Bhargava - BMO Capital Markets

Shawn Harrison - Longbow Research

Kevin Kessel - Bear Stearns

Alexander Blanton - Ingalls & Snyder

Presentation

Operator

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

Beth Walters

Thank you. Welcome to our third quarter fiscal 2007 call. Joining me on the call today are President and CEO, Tim 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 results.

You can follow our presentation with the slides that are posted on the website and begin with us now on slide one.

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 fiscal year 2007 net revenue and earnings results, our long-term outlook for our company and improvements in our operational efficiency and in our financial performance.

The statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include, but are not limited to: the Securities and Exchange Commission having views different from ours on the results of the review of our past stock option grants conducted by a Special Committee of our Board and Governmental Authorities and the review of our historical recognition of our revenue by our Audit Committee; the impact of the restatement of our financial statements and any other actions that may be taken or required as a result of any of such reviews; risks and costs inherent in litigation, including any pending or future litigation relating to our stock option grants, the restatement of our financial statements as a result of the evaluation of our historical stock option practices and revenue recognition and associated financial statements or any declines on the price of our stock; whether our realignment of our capacity will adversely affect our cost structure, ability to service customers and labor relations; and our ability to successfully address the challenges associated with integrating our acquisition of Green Point; our ability to take advantage of perceived benefits of offering customers vertically integrated services; our ability to effectively address certain operational issues that have adversely affected certain of our US operations; changes in technology; competition; anticipated growth for us and our industry that may not occur; managing rapid growth; managing any rapid declines in customer demand that may occur; our ability to successfully consummate acquisitions; managing the integration of businesses we acquire; risks associated with international sales and operations; retaining key personnel; our dependence on a limited number of large customers; business and competitive factors generally affecting the electronic manufacturing services industry, our customers and our business; other factors that we may not have currently identified or quantified; and other risks, relevant factors and uncertainties identified in our Annual Report on Form 10-K for the fiscal year ended August 31, 2006, 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 the results for our fiscal third quarter 2007. On revenues of $3 billion, GAAP operating income was $33.6 million. This compares to $77.3 million in GAAP operating income on revenues of $2.6 billion for the same period in the prior year. For operating income excluding amortization of intangibles, stock-based compensation and restructuring charges for the quarter was $87.1 million, or 2.9% of revenue, as compared to $93.4 million, or 3.6% for the same period in the prior year.

Core earnings per diluted share were $0.23. Legal and accounting costs associated with the recent reviews in the quarter were approximately $4.1 million. Excluding these costs, operating income was 3% of revenue with earnings per diluted share of $0.25.

On a year-over-year basis, this represents a 16% growth in revenue and a 7% decline in core operating profit. On a sequential basis, revenues increased 2% while core operating income increased 57%.

Please turn now to slide four for a discussion of revenue by sector for the third quarter.

Production levels in the automotive sector increased 16% from the prior quarter, reflecting strength in assemblies for our European-based customers. The computing and storage sector was consistent with the second quarter and our expectations.

The consumer products sector, including revenues associated with our Green Point acquisition, decreased by 9% from the second quarter, reflecting the transition of business mix as discussed last quarter.

Our instrumentation and medical sector was better than our expectations, increasing 7% from the second quarter as a result of strength across multiple customers in this diversified sector.

The networking sector levels of production increased 6% from the previous quarter. The peripherals sector increased by 19% over the second quarter, reflecting new business awards with an existing customer.

The telecommunications sector increased 4% sequentially.

Please turn now to slide five, where our sector information for the quarter in percentage terms is as follows: automotive, 5%; computing and storage, 11% of revenues; the consumer sector represented 26% of revenues for the quarter; the instrumentation and medical sector was 18% of revenues; the networking sector, 21%; peripherals sector represented 9% of revenues for the quarter; telecom, 5%; and the Other sector represented 5% of revenues.

Research and development expenses were $10.5 million in the quarter, reflecting the addition of Green Point resources and our ongoing success in product development related programs with existing and new customers.

Amortization of intangibles was $8.8 million for the quarter, an increase of $2 million over the second quarter, is reflective of the revised preliminary estimates of identifiable intangibles associated with the recent Green Point acquisition as well as a full quarter of amortization for these intangibles during the third quarter. The fourth quarter amortization of intangibles is expected to be consistent with the third quarter.

Stock-based compensation expense and related charges increased $7.6 million in the third quarter to $19.4 million. This was a result of costs associated with the internal revenue code section 409-A relating to the recent stock option review and stock appreciation rights and restricted stock grants granted to certain Green Point and non-executive employees during the quarter. Full details on the 409-A can be found in our fiscal year Form 10-K. Stock-based compensation expense is estimate to be approximately $15 million in the fourth quarter.

I will now turn the call over to Forbes Alexander.

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Forbes Alexander

Thank you, Beth. Good afternoon. I would like to review with your our balance sheet and ratio trends, and ask you to follow along on slides 6, 7, and 8. The company’s sales cycle in the quarter improved by three days to 26 days. Day sales and accounts payable days outstanding were consistent with the second quarter. Inventory days improved by three days to 47 days or eight turns, a reduction of $90 million in the quarter.

Cash flow from operations was approximately $192 million in the third quarter. Cash and cash equivalents were $558 million as compared to $555 million at the end of the second quarter.

Our current debt at the end of the third quarter totaled approximately $926 million. Our capital expenditures during the quarter were approximately $88 million. Approximately $22 million of this expenditure was related to assets previously applied under an operating lease.

Depreciation during the quarter was approximately $55 million, with EBITDA in the quarter approximately $142 million. Our return on invested capital improved to 10%, as compared to 7% in the previous quarter. As we enter the fourth quarter, we are in good position to continue to produce positive cash flows from operations while producing incremental returns on our capital deployed.

We are pleased with the progress we’ve made in the quarter -- improvement in our core operating income margin at the high end of previous guidance, reducing inventory levels, returning to positive cash flow from operations, and improving our returns on invested capital to double-digit returns. This is a positive first step on our path to returning the company to our long-term targeted return levels.

I’d now like to cover acquisitions, capacity, operations and our restructuring activities. Firstly, our Green Point acquisition; on April 24th, we completed the acquisition of Green Point, acquiring the final 3% of outstanding shares. Our transition plans have been running smoothly and we continue to see very bright prospects for this new part of our service offering to the consumer segment.

Turning to operations, the electro-mechanical drilling capability will have an immaterial impact to our fourth fiscal quarter. This capability remains an important part of our value proposition and will be supported by our Green Point operations.

An update to restructuring; we continue to manage our overall rationalization plan according to our previously announced plan. During the third quarter, we recorded charges of approximately $25 million. Total charges recorded to date against our overall plan are $153 million. During the quarter, cash payments associated with these restructuring activities were approximately $13 million. Total cash payments of $57 million.

We continue to expect our total restructuring charges to be at the high-end of the $200 million to $250 million range we previously announced. The cash costs of such charges for this plan remain an estimate in the range of $150 million to $200 million.

Discussions with our employees and their representatives continue. We are complying with all statutory and consultation periods required of us.

With regard to capacity, as we’ve previously discussed, additional square footage in capacity is currently being added in China, Poland, the Ukraine and India. These facilities are expected to ramp production levels during the balance of calendar 2007, though we continue to ramp significantly higher levels of production in our sites throughout China.

In May, we announced the addition of 55,000 square feet of capacity in Ho Chi Minh City, Vietnam -- new product introduction production activity commencing during the upcoming fourth fiscal quarter with full production plans commenced prior to the end of the calendar year. Our investments in the fourth fiscal quarter are expected to be related to these locations and existing plants as we continue to invest for increasing production levels in the first-half of fiscal 2008. Capital expenditures for the fourth quarter are estimated to be approximately $65 million; an estimate of capital expenditures for the year of $280 million.

I’ll now ask you to turn to slide 9 for a business update, specifically the fourth quarter 2007. Our revenue guidance continues to reflect the muted view of end market growth, along with the impacts of the transition of the mix of business within our consumer sector. Our guidance for the fourth quarter includes ongoing legal costs. We estimate our revenue in the fourth fiscal quarter to be consistent with that of the third, or $3 billion. Core earnings per share for the August quarter are expected to be in the range of $0.25 to $0.31. As a percentage of revenue, we estimate core operating margin to be in the 3% to 3.5% range.

We are reducing the overall earnings of core operating margin by 25 basis points to reflect the repositioning of resources to support new program wins in the automotive, computing and storage, peripherals and networking sectors anticipated to ramp in the first fiscal quarter of 2008 along with seasonal growth in our consumer sector.

Research and development costs are expected to be approximately $9.5 million in the fiscal quarter. Our interest expense is estimated to be consistent with that of the third quarter, or $28 million. Based upon the current estimate of production levels, the tax rate is expected to be 17% for the quarter.

I’ll ask you to turn to slide 10, revenue by sector for the fourth quarter. Our automotive sector is expected to decrease by approximately 10% for the quarter, reflective of normal, seasonal lower levels or production.

The computing and storage sector is estimated to increase by 5% for the third quarter. The consumer sector is expected to be consistent with the third quarter. The instrumentation and medical sector is estimated to be consistent to slightly better than the previous quarter. The networking sector is expected to be consistent with the third quarter. The peripherals sector is estimated to increase by 5% in the fourth quarter, reflecting ongoing new business awards with existing customers. Finally, the telecom sector is estimated to decrease by 10% from the third quarter.

We now estimate our revenue to be split for the full fiscal year across the industry sectors we serve as follows: automotive, 5%; computing and storage, 12%; consumer, 29%; instrumentation and medical, 17%; networking, 20%; peripherals, 8%; telecom, 5%; and other, 4%.

We continue to execute to the plan we have set for the second-half of our fiscal year, growing operating income dollars and percent to 3% and beyond. Improving capital deployed and returning to producing positive cash flow from operations with disciplined pricing, cost containment, working capital management, and operational excellence.

This execution, along with the recent inquiries behind us, affords us the window of opportunity to replace the current bridge financing in place with permanent, longer term capital instrument. As we enter the fourth quarter of the fiscal year, we believe we are well-positioned for continued improvements and resumption of sequential revenue growth in fiscal 2008, allowing us to build upon the progress we are making towards our long-term targeted returns.

I would now like to hand you over to Tim Main.

Timothy L. Main

Thank you, Forbes. A year ago, we entered what has turned out to be an extremely challenging period for us. We are not where we wanted to be a year ago but we are not necessarily at such a bad place either. Many of you have asked for an explanation of the last year’s seemingly chronic disappointments and adversity.

A year ago, we believed we had three manageable, discrete issues which could be resolved in relatively short order. However, we had a number of challenges emerge that we didn’t count on at that time.

One was a long, expensive and ultimately distracting inquiry and review process. End markets largely stalled and demand has been toughest for the past three quarters. The pricing environment was more severe, particularly in the consumer area, and we changed course in the product development focus. All of these issues have played a role on our financial performance being below the standards we set for our company.

We have taken corrective action. We are in the process of a worldwide rationalization of our capacity and infrastructure. Low return activities are being eliminated, including our greenfield electro-mechanical site and certain consumer product categories. We have also made a priority of improving productivity and quality across the board in our operations as well as our corporate infrastructure and activities.

Thankfully, throughout this period our people have shown a heartening degree of character perseverance. We have wonderfully resilient people who have performed very well under difficult circumstances. Our factories have been executing well and overall, our customer satisfaction is at reasonably high levels.

We made a game-changing acquisition of Taiwan Green Point. Green Point is critically important to our mobile product strategy and we are encouraged with early results.

We have continued to land new customers and programs at a brisk pace broadly across our sectors. We have a strong position in high technology, high complexity sectors and this will remain a key part of our strategy.

In 2007, we expect the instrumentation medical sector to grow 20% over 2006. Computing and storage is also anticipated to grow approximately 18%. Even our after-market services and peripherals sectors will show outstanding growth of about 30% each.

Our results for fiscal Q3 is the first step and an indicator that we are on the right path. Margins have improved. Revenue in fiscal Q3 was $223 million lower than our first fiscal quarter, yet core operating income increased and margin improved 30 basis points.

From Q1 to Q3, gross margin improved 130 basis points. Cash flow from operations was $192 million in the third quarter and core ROIC improved 300 basis points from Q2. We are gaining control of our inventory and feel good about improving returns in future quarters.

Looking forward to fiscal Q4, we see incremental improvement in our operating margin and return on invested capital on flat revenue. A flat revenue profile from fiscal Q3 to Q4 is generally consistent with past years. We believe our consumer sector is bottoming and expect to see a typically stronger seasonal profile in the first fiscal quarter of ’08.

The balance of our business is also in good condition. Excluding our consumer sector and Green Point, on an organic basis our business will grow 20% in the second-half of ’07 over the second-half of ’06.

We are happy to be reporting earnings on time and pleased to have taken an important first step in demonstrating our long-term value potential.

On an industry note, we heard some big news come out of California recently. The Flextronics acquisition of Solectron is interesting in a number of ways. As a consolidation acquisition, I think it is generally positive for the industry but it also exemplifies the structural change to the industry overall.

The three largest players in the industry today are Foxconn, Flextronics, and Jabil. While the guard has been changing, we have been growing and doing relatively well. Consolidation is likely to continue and there will be willing and unwilling participants in that process. We are actually quite pleased with our position and look forward to continue refining our value proposition for our customers and partners. Our scale is sufficient to compete and we expect to maintain our present course and acquisition strategy.

Beth Walters

Operator, we’re ready to begin our question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Louis Miscioscia with Cowen.

Louis Miscioscia - Cowen & Company

Thank you. Glad to see decent results here. Let me see -- I guess the first question I have is that I thought on the last call you had that you were going to pull out the legal expense and it sounds like you decided to include that. If you could just clarify that both for this quarter and next.

Forbes Alexander

Yes, there was some confusion that what we decided to do is be consistent with the way we’ve historically reported numbers, clear down the confusion and continue to provide guidance and including the legal expenses. So those numbers you see on our Form 8-K filed earlier today include those expenses, so our core operating margin was 2.9% for the quarter including those. That makes it consistent with the way we’ve reported historically.

Our forward-looking guidance of 3% to 3.5% includes those expenses. Apologies for the confusion.

Louis Miscioscia - Cowen & Company

That’s okay. Maybe just -- you said they were actually $4 million, or $4.1 million in the quarter and $0.02?

Forbes Alexander

$4.1 million and $0.02, that’s correct.

Louis Miscioscia - Cowen & Company

What would be the though for the August quarter coming up and when do you think they actually do start to drift off? I guess if you could add them all together in one lump sum being the accountants, the consultants, the lawyers -- everything having to do with the back-dating and the other stuff.

Forbes Alexander

For the fourth fiscal quarter, I estimate somewhere between $2 million and $3 million. I think we’re going to continue to see some of those expenses through our fiscal Q1. Beyond that, I don’t have much visibility at this stage. We certainly were hopeful that we could conclude those expenses by the end of the November quarter.

In terms of overall costs to date as a result of the inquiries and reviews, including our estimates for the fourth fiscal quarter, it is somewhere in the region of about $17 million, $17 million to $18 million.

Louis Miscioscia - Cowen & Company

Great, and I just sort of have to ask because I have got a lot of questions about it lately, I guess there’s a lot of folks who just believe you can’t get above 4% operating margins or higher again. Maybe if you could just talk a little bit about restructuring and just sort of how you get here. You’re almost obviously basically a 3 but how do we get to 4 and above again? Thank you.

Timothy L. Main

We certainly believe we can get to 4 and above. We don’t think anything is structurally broken in the business. There are a couple of things that have a more permanent impact on margins, like the additional material revenue that we’ve taken on in order to do increased order performing activities. Having said that, there’s a lot of new areas that we’ve opened up that we think will be profitable as well.

I think we’ll stop short of making any predictions about when that will happen. This is a step-by-step process and we’ll work on incremental improvements in our operating margin. We’ll continue to rationalize factories and that will have a contribution and has made a contribution. We’ll continue to diversify our business, be judicious in pricing in the more commoditized areas, and really just run a tight ship.

The combination of those things, along with the resumption of top line growth, which we do expect to see in future quarters, this Q3 to Q4 flatness in the revenue profile is relatively normal for us this time of year. With some top line growth, we should be able to see further improvements in operating margins.

I understand there’s a lot of skepticism and the only way to deal with that skepticism is to execute and put the numbers up and that’s what we’re committing to do.

Louis Miscioscia - Cowen & Company

Thank you. Good luck.

Operator

Your next question comes from the line of Jim Suva with Citigroup.

Jim Suva - Citigroup

Thank you very much and congratulations on the operating profit margin improvement and all. But when we look ahead with flat revenues and considering that you’ve got some new program ramps and your operating numbers for your margins came down a little bit, can you help us triangulate about why you are taking it down about 25 basis points on both ends?

Just to maybe think about seasonality, as we always knew seasonality was going to come in August and the top line hasn’t changed a lot, did maybe something flip out a little bit and now this automotive is coming in a little more cost heavy? But how can we triangulate around why we slipped the operating margin outlook down 25 basis points?

Timothy L. Main

Let’s do one thing first. When Forbes provided, when we provided the guidance back in March I guess it was, we excluded the legal costs. So that’s responsible for 10 basis points. So really we’re taking, reducing our March guidance by about 15 basis points, which in this environment I don’t think is really a big deal. We certainly don’t want to take guidance down but it’s a relatively small and modest decrease.

I think it’s pretty simple. We underestimated some of the costs associated with some new business ramps that will start occurring in fiscal Q4 and extend into fiscal Q1. Nothing major that slipped out, nothing major that came out, so we are talking about $3 million to $5 million of additional costs, so it’s relatively modest.

Jim Suva - Citigroup

Okay, that’s very helpful. As a quick follow-up, Tim, you had talked about the changing game in the industry, both of Jabil acquiring Taiwan Green Point as well as the mega mergers here in California. Can you talk a little bit about if people view it as a race of three horses, it seems like the other two horses are considerably bigger, that there’s a big gap. Does Jabil want to remain with that big gap or would they be interested in closing that gap? I know organically you’re growing but it’s just a big gap. How should we think about that? Do you have room for acquisition appetite?

Timothy L. Main

I grew up in Detroit, Michigan and for a long time, General Motors had a huge gap on Toyota. Quality companies, you don’t focus as much on the gap as you focus on who your targeted customers are, what you are doing for those customers, the quality of your solution and what you are doing.

I think if Toyota were building 100 cars, it would be very difficult for them to compete. We have sufficient scale to compete and that’s really the important thing. There will be some markets that we just won’t pursue. We’re not going to try and duplicate Foxconn’s model, for instance. They have a very distinct business model that works very well for them and our hats off to their success. But it’s a big marketplace, a lot of customers and more than one way to get to, to have a valuable company.

We feel we have sufficient scale. We don’t think that gap is necessarily a problem for us. We think customers believe we have sufficient scale and ultimately, customers are the final arbiter on who brings a compelling value proposition in the marketplace.

So we’ll continue to focus on diversification. I think actually much of our marketplace in medical instrumentation and some of the higher mix areas kind of like the fact that we’re who we are and we have more focused operations and additional diversity.

Finally, I guess my final comment is that there are a number of examples in our industry where the illusion of scale being a competitive advantage has been disproved. What it will come down to is the quality of execution and your ability to translate your size into efficiencies at a cost benefit for the customer base. So that will be the challenge for people that make consolidation moves and again overall, I think it is healthy for the industry. But we will continue with acquisitions I think that help customers virtualize their capacity or bring us a capability or technology that we don’t have presently.

Jim Suva - Citigroup

Thank you very much, everyone.

Operator

Your next question comes from the line of Steven Fox with Merrill Lynch.

Steven Fox - Merrill Lynch

Good afternoon. Two questions, first on ramping the new programs next quarter; what is the implication for inventory metrics in the August quarter?

Secondly, Tim, anymore color on Taiwan Green Point in terms of how it’s integrating into the operations, the impact on financials and what the customers are saying?

Forbes Alexander

I’ll take the inventory question. I don’t see any significant impact in terms of inventory levels as we move through the fourth fiscal quarter. Certainly from our perspective we think holding inventory at eight turns is certainly realistic. We’re striving for more than that but I think we should certainly see continued, a reduction in our inventory levels as we move through the balance of this quarter, even though we are preparing to ramp these new programs coming into the company.

Timothy L. Main

On Green Point, it’s early and so these things, to generate full value, take some time. It’s so early that really it’s just a matter of are you sure you have what you bargained for. In that respect, I think we’re very, very happy. Very passionate people. We think a great culture, super technology and I’ve said a couple of times over the last three to six months, the early returns and reactions from our customer base have been very, very positive and so I continue to have a lot of optimism and enthusiasm about a combined vertical solution for our mobile products customers, with their customer base, with our customer base, with their people who are really great, strong people and with our people.

Steven Fox - Merrill Lynch

I guess what I was fishing for, I don’t now if I’m going to get it, was just some examples of how this could be moving the revenue momentum later on, as you get into November or the quarter after?

Timothy L. Main

I know that you were fishing for that. We are not going to -- we won’t speak to that until really things really start to pop.

Steven Fox - Merrill Lynch

Thanks.

Operator

Your next question comes from the line of Matt Sheerin with Thomas Weisel Partners.

Matt Sheerin - Thomas Weisel Partners

Thanks. I’d like to ask a question regarding your forward revenue. You gave guidance for August and I know you haven’t given guidance for the November quarter but Tim, you talked about some nice new program wins and also it sounds like the consumer area is bottoming out for you. Should we expect to see mid single digit growth? Could you get back to the $3.2 billion level by November?

Timothy L. Main

We’re not going to be providing any guidance for Q1, even -- but I think the thought process around the consumer segment looks like it is bottoming. We’ve got consistent revenue quarter to quarter. Even taking Green Point out, it’s a relatively consistent quarter in Q4 to Q3, so we would expect to see a somewhat typical seasonal pattern in Q1 in that segment and we’ll speak more to that in our September call.

Matt Sheerin - Thomas Weisel Partners

Okay, and then on the gross margin, which came up nicely from last quarter, how much of that was due to some of the operational issues that were resolved versus the mix with the lower consumer? As we look to the next quarter, should we expect our gross margin to be impacted by these ramp costs or is that going to be an SG&A issue?

Forbes Alexander

In terms of the gross margin improvement, there’s a number of factors going on. I don’t want to get into breaking those into basis points or anything. It’s fair to say that some of the operational issues we’ve had earlier in the year are now resolved and we don’t see any impact, ongoing impact into our fiscal Q4. We’re very pleased with the stage we’re at in terms of the restructuring and the operational job that’s been done this fiscal quarter.

As we move into Q4, you talked about ramp costs. Principally, those costs are in the gross margin line. I’d expect our SG&A to hold pretty steady with that with Q3 with perhaps some opportunity to bring that down a little bit, given we expect the legal costs determined to be under the $4 million we saw in Q3.

Matt Sheerin - Thomas Weisel Partners

Thank you.

Operator

Your next question comes from the line of Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Just a question -- so we expect in the November quarter, non-consumer business to be up -- actually, you said in the back-half of ’07, non-consumer business to be up 20%. Is that right?

Timothy L. Main

That’s correct.

Amit Daryanani - RBC Capital Markets

And you expect consumer to be up in line with seasonality the way we’ve seen historically in the November quarter, right?

Timothy L. Main

That’s correct, yes.

Amit Daryanani - RBC Capital Markets

I just want to make sure I heard all those things right. Then, just from a [tuning] perspective, could you tell us what sort of a headwind was there in the May quarter for you guys? I believe you said it would be immaterial next quarter.

Forbes Alexander

Yes, that’s right -- immaterial next quarter. It’s relatively minor in Q3.

Amit Daryanani - RBC Capital Markets

All right. And then, just going back to the Green Point question now, and I might have missed this, what sort of revenue or margin contribution did it have this quarter? Also, just in terms of integration, how are you guys doing? Or have you integrated your ERP system at green point? One of the issues with them I think historically was the volatile margin because of inventory write-offs due to program fluctuations consistently. How do we address that issue there?

Forbes Alexander

We’re not going to get into providing details on Green Point and Jabil. We’re a combined company so we plan to give the combined results going forward.

With regard to the ERP systems, we only finally acquired them effectively in the last week of April so we’ve only got a couple of months under our belts, so there’s no integration of ERP systems to date but that’s certainly on the agenda. We’re hopeful that we’ll have some of that done during the balance of calendar ’07, remembering there are multiple operations across three geographies with the Green Point acquisition. But it’s certainly one of the first items on our agenda in terms of integration and we expect to commence that prior to the end of calendar ’07.

Amit Daryanani - RBC Capital Markets

All right and then finally, the researching plan that’s underway, does that involve shutting down some sites in India that you may have acquired from Solectron or at least curtail some of those operations?

Forbes Alexander

There are some costs associated with India. We have restructured certainly headcount and some transfer of business amongst our existing operations there. I don’t have that number handy but certainly that’s included, yes.

Amit Daryanani - RBC Capital Markets

All right. Thanks a lot.

Operator

Your next question comes from the line of Bernie Mahon with Morgan Stanley.

Bernie Mahon - Morgan Stanley

Good evening. A question for you on the operating margins. So it looks like the midpoint in August, you are looking for operating margins to be up 40 basis points sequentially. Forbes, could you just walk through how is that mixed? It sounds like some of it’s a legal cost burning off. Are there any other costs that are going to be going away? What is really driving that improvement? Revenue is flat so there’s no -- there’s nothing from the revenue improvement side.

Forbes Alexander

The main driver is our continued cost containment programs on existing sites and also the impacts of our ongoing restructuring activity. As you see, revenues are principally flat quarter to quarter, so it’s really a continued focus on our cost structure within the corporation.

Bernie Mahon - Morgan Stanley

Okay, and then just a question on the revenue. If you look at the computing and storage on a year-over-year basis, and instrumentation and medical, we’ve seen pretty big deceleration over the last four quarters. The midpoint of guidance for the August quarter for computing and storage looks like 2%, instrumentation and medical is down to 13%. What’s going on there or is it just that the growth before maybe was a little bit inflated? What kind of growth prospects should we look for? Should we look for it to get back to the 20s or is it going to be at these lower levels?

Timothy L. Main

Computing and storage in the 20s in terms of percentage of our total revenue?

Bernie Mahon - Morgan Stanley

No, in terms of a year-over-year growth. If you look at the last three quarters, it’s gone from 20% year-over-year growth in February to 10% and the midpoint of guidance looks like 2%. So should we see a reacceleration there or --

Timothy L. Main

No, end markets are pretty sloppy in enterprise spending, as everybody is kind of familiar with. Even so, we have been posting some growth in that segment, which I think indicates that we are doing reasonably well there. As we look forward, I think it’s going to continue to be a very, very strong segment for us.

Bernie Mahon - Morgan Stanley

And then on the instrumentation and medical, we’ve seen that come down in the last few quarters. Should we expect a reacceleration there in growth?

Timothy L. Main

I think the -- we’re getting into some larger numbers there and I don’t -- I wouldn’t see a deceleration. I still think that’s going to be a really strong segment for us.

Forbes Alexander

Earlier this year there was some slowdown in that sector. I think it was some inventory corrections probably going on with two or three customers. They have corrected that and I think you are going to see some relatively strong resumption of growth there.

Bernie Mahon - Morgan Stanley

Okay, that’s great. Thanks a lot.

Operator

Your next question comes from the line of Long Jiang with UBS.

Long Jiang - UBS

Good afternoon. Related to the Flextronics acquisition of Solectron, in talking to your customers, have you seen any feedback in terms of some of their customers potentially defecting, seeking further suppliers? Also, can you comment about your expectation for the industry pricing situation, given this consolidation at Flextronics?

Timothy L. Main

Great questions. Those are kind of the million dollar questions and unfortunately, they are not questions that I can directly answer. On the first count, if it were to happen we wouldn’t talk about it. Secondly, a more rational pricing environment would be good for everybody. I don’t know that this will make that happen or not but we share some customers. There isn’t a heck of a lot of customer overlap but there’s a little bit.

We’re just going to run a tight ship and if customers end up being unhappy in the confusion that may or may not result, they could end up doing a fabulous job of integration. I think even Flextronics in some of the things that I’ve seen said that they are planning on some level of attrition, which I think would be expected in this type of deal when you have high levels of customer concentration. We’re not making a point of trying to destabilize deals for anybody. We’re just really going to focus on our business and to the extent that there’s any confusion, of course we’ll try and benefit from that. But that’s not really what we’re looking for.

Flextronics I think is a good company. They’ve done very well in previous years. I think the best thing is that they are a company that likes to make money too and that’s a good thing.

Long Jiang - UBS

Thanks for the comments. I have a quick follow-up question for your income statement. For restructuring benefits, obviously a lot of that of that would be reflected in your fourth quarter guidance. Going beyond the fourth quarter ’07 and into ’08, do you expect some additional restructuring benefits?

Also, regarding your increased investment for the automotive and other end market ramp ups, do you think the first quarter will be reflective of a steady state for the increase in investment or do you expect to see some further increase beyond the first quarter? Thanks.

Forbes Alexander

With regard to restructuring, yes, we’d expect to see continued benefit through fiscal ’08. We’re just a little over half of the plan we outlined four quarters ago now, halfway there. So really depending upon the timing of any further actions between now and the end of the calendar year would determine the timing of those benefits. But yes, expect to see some benefit, continued benefit as we move through fiscal 2008.

With regard to infrastructure being put in place for these ramping programs, as we said earlier it’s maybe $3 million to $5 million in the fiscal fourth quarter. There will be some impact in Q1, as these programs ramp but I don’t believe it will be anything of a material nature once we start to see these programs ramp and come up to volume through fiscal Q1 and into fiscal Q2.

Operator

Your next question comes from the line of Yuri Krapivin with Lehman Brothers.

Yuri Krapivin - Lehman Brothers

Good afternoon. Tim, you continue to hold a muted view of the end market demand. Are there any signs that the end market demand may be improving, or conversely, are there any end markets which could be deteriorating at this point? For example, you are guiding the telecom to be down 10% sequentially.

Timothy L. Main

No, I don’t see any signs of a pick-up and I really don’t see any segments that are in particular trouble though either.

Yuri Krapivin - Lehman Brothers

Okay, and with respect to the consumer segment, I just wanted to clarify one point. I believe back on the February quarter earnings call when you discussed the issues in the consumer segment, you said that the consumer segment would be down sequentially in the May quarter and then it would be down again sequentially in the August quarter. Back then, were you excluding the Taiwan Green Point acquisition from your forecast?

Timothy L. Main

I don’t think so.

Yuri Krapivin - Lehman Brothers

I’m just trying to determine whether the consumer segment was actually maybe performing ahead of your expectations back then.

Timothy L. Main

We expected the consumer segment I guess to decrease by 10% and that was excluding Green Point, actually.

Forbes Alexander

Yes, that excluded the Green Point.

Yuri Krapivin - Lehman Brothers

Okay. Thank you.

Operator

Your next question comes from the line of Paras Bhargava with BMO Capital Markets.

Paras Bhargava - BMO Capital Markets

Good afternoon. I know you are not giving a lot of information about how much Green Point generated in the quarter but in the past, I believe you said in the second-half of the year it was going to be 4% to 6% of Jabil's revenues. Can we stick with that number that you said in the past or has anything changed?

Timothy L. Main

I think that’s probably --

Forbes Alexander

That’s reasonable, yes.

Paras Bhargava - BMO Capital Markets

Great. In terms of the consumer business, on a year-over-year basis, when would you expect that we should start looking for positive numbers in that segment? I understand there’s a lot of seasonality in that and we’ve got to go back and forth, but if we look at that on a year-over-year basis, when might we expect a positive contribution to growth? It should happen in ’08 sometime or will we really have to wait until ’09?

Timothy L. Main

Can’t really get there without giving you some insight into some quarters we’re not providing guidance on, but one is that we didn’t even -- I don’t think we even had a full quarter with Green Point in Q3. If the consumer segment is bottoming and we expect a normal seasonal pattern going forward and we think we’re in good shape then -- you know, I think we’ll provide more color on ’08 and forward in the September call and just leave it at that.

Paras Bhargava - BMO Capital Markets

Thanks.

Timothy L. Main

We feel good about our direction, that’s for sure.

Operator

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

Shawn Harrison - Longbow Research

Good evening. First question just on modeling -- I think back in the March quarter call it was mentioned interest expense could potentially decline. I was just wondering if that is still the case or should we still use this kind of high $20 million number? Secondly, just a tax rate for ’08.

Forbes Alexander

The interest expense, I would use $28 million for fiscal Q4, really depending on the takeout of our bridge and how we go about that will determine interest expense for next year. For purposes of modeling, I’d continue to use $28 million for the moment and we can update you certainly the next time we speak to you in the September call.

In terms of the tax rate for next fiscal year, a little bit early for that but again for modeling purposes, use 17% at the moment. As we enter fiscal ’08, we’ll take a view on where geographically income streams are being produced and give you some finite guidance but for modeling purposes, I think 17% is reasonable.

Shawn Harrison - Longbow Research

My second question just has to deal with the wins that will be starting to ramp here in the fourth quarter, more so in the November quarter. I was wondering if there was a way to maybe quantify in aggregate the total potential dollar value of those programs and what end market or the greater chunks of business would be coming from?

Timothy L. Main

No, we can’t do that. Not because we don’t want to, it’s just I don’t want -- I think maybe our comments may have been a little misleading in that we have this enormous thing that’s going to ramp and that’s not really at all true. We’ve got a number of new customer programs and we had a fabulous back-half, having a fabulous back-half of ’07 over ’06 for everything outside of our consumer segment. It’s going to grow 20% year over year.

Embedded in that are a number of new program wins currently, so I think that in terms of the ramp costs in Q4 was really just responsive to the net change from our March guidance to the current guidance and helping people understand that. When you consider the legal costs which were excluding in March and $3 million to $5 million of costs we underestimated associated with some new plants and ramps into those new programs, that kind of accounts for the difference. It’s relatively modest. I mean, we’re talking about $3 million to $5 million, so there isn’t -- there are a number of new programs. It’s actually spread out over four or five different product launches.

Forbes Alexander

We’re also in the process of adding capacity in Vietnam so there’s some infrastructure to go in place there, which in our previous guidance in March had not been contemplated. So that’s just underway right now and is contributing also to that $3 million to $5 million.

Shawn Harrison - Longbow Research

Lastly on the restructuring costs going forward, if you could just give an update on some timing of when you expect the remaining $100 million or so in terms of when it should fall? In the first-half of ’08 or back-half of ’08?

Forbes Alexander

Certainly Q4 we talked about somewhere in the region of $20 million, and then the balance -- that’s a tough one to predict right now. We’re in consultation with the various stakeholders in that regard and as we sit right now, the opportunity could be Q2 or Q3. A little bit difficult to really put a fine point on that at this moment. I would suggest Q2 or Q3.

Shawn Harrison - Longbow Research

But suffice to say, don’t expect the restructuring benefit until at least the fourth quarter of ’08, the full --

Forbes Alexander

Q3 and Q4, yes, that’s fair.

Shawn Harrison - Longbow Research

Your next question comes from the line of Kevin Kessel with Bear Stearns.

Kevin Kessel - Bear Stearns

Thank you. Just following up on restructuring again, Forbes, I think last call you mentioned that you were expecting to realize about 25 to 30 basis points of margin improvement from restructuring in the August quarter. Is that still a fair range to think about?

Forbes Alexander

Yes, that’s reasonable. It was pretty much on track. There’s obviously a little bit of benefit in the fiscal Q3 also but that’s reasonable.

Kevin Kessel - Bear Stearns

So like you were saying earlier, that would then account for the majority of the improvement that you guys are seeing?

Forbes Alexander

Yes, it’s really cost containment and restructuring activity, yes.

Kevin Kessel - Bear Stearns

And then in terms of what you were just mentioning about 2008, how should we think about that in terms of what the potential cost savings are from when the remainder of the activities are completed?

Forbes Alexander

That’s still, as we -- the previous question, that’s tough to put a fine point on right now, given we are still addressing particular locations and structure around there. But certainly I would expect somewhere in the region of another 20 to 30 basis points, but we’ll give you finer detail on that one when we get there during fiscal ’08.

Kevin Kessel - Bear Stearns

And just on -- maybe you could mention any customers, what percentage over 10%? As well, on stock options I think you said next quarter $15 million. How should we think about that going forward into next year, given that it’s quite a bit higher than you guys were running at previously?

Forbes Alexander

I can’t really give you any color on fiscal ’08 but certainly $15 million for Q4 is correct. We’ll have to give you guidance on ’08 when we get to our September call. Once we get through the fiscal year and our consultation committee has considered any potential equity grants that may be awarded for fiscal ’08.

Your other question was with regard to 10% customers; there were three in the fiscal quarter and that was Cisco, Nokia, and Hewlett-Packard.

Kevin Kessel - Bear Stearns

Was that in any order?

Forbes Alexander

No it was not.

Kevin Kessel - Bear Stearns

Thank you.

Operator

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

Alexander Blanton - Ingalls & Snyder

Good afternoon. Did I get this right -- your guidance of $0.17 to $0.23 for this quarter did not include -- you didn’t include the legal expense, so if you had done that, it would have been $0.15 to $0.21, is that correct?

Forbes Alexander

That is correct, yes.

Alexander Blanton - Ingalls & Snyder

Okay, so you beat that by $0.02. Now, could you remind us why the SG&A is up so much? After you take out option expenses, it’s $219 million in the May quarter versus $172 million in the February quarter. It’s up 43% year over year and the sales are up 16%, and it’s 4.04% of sales versus 3.25% in the prior year. What is the reason for that? It seems a large increase, even quarter over quarter.

Forbes Alexander

Quarter over quarter, we have a full quarter of Green Point SG&A there, so that’s somewhere in the region of about $8 million. There was --

Alexander Blanton - Ingalls & Snyder

That’s $8 million added by Green Point -- what sales does that correspond to?

Forbes Alexander

We’re not breaking out the Green Point sales.

Alexander Blanton - Ingalls & Snyder

Okay, so what you’re saying this is a high SG&A versus your own.

Forbes Alexander

Yes, indeed it is. It’s the profile of their business, yes. So that was incrementally the legal costs was about another 1%, 1.5%. And then there was ongoing SG&A costs we put in place, management in Vietnam, for example, have been hired and ongoing costs in particular facilities where we are adding capacity.

Alexander Blanton - Ingalls & Snyder

So the 1.5% on legal is incremental?

Forbes Alexander

That’s correct, yes.

Alexander Blanton - Ingalls & Snyder

And the $8 million is incremental?

Forbes Alexander

Yes, it is.

Alexander Blanton - Ingalls & Snyder

All right. Thank you very much.

Beth Walters

Operator, that’s all the time that we have for questions today. Thank you, everyone for joining us on the call for our third fiscal quarter and we’ll sure be talking to you soon. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Jabil Circuit F3Q07 (Qtr End 5/31/07) Earnings Call Transcript
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