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Jabil Circuit Inc. (NYSE:JBL)

F2Q12 Earnings Call

March 20, 2012 4:30 p.m. ET

Executives

Beth Walters - SVP, IR & Communications

Forbes Alexander - CFO

Tim Main - President and CEO

Analysts

Steven Fox - Cross Research

Brian Alexander - Raymond James

Craig Hettenbach - Goldman, Sachs & Co.

Amitabh Passi - UBS Investment Research

Sean Hannan - Needham & Company

Amit Daryanani - RBC Capital Markets

Shawn Harrison - Longbow Research

Jim Suva - Citigroup

Sherri Scribner - Deutsche Bank

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 Jabil Second Quarter of Fiscal Year 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Thank you. I would now like to turn today’s call over to Beth Walters, Senior Vice President of Communications and Investor Relations. Ms. Walters, you may begin your conference.

Beth Walters

Thank you. And welcome everyone to our second 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 second quarter press release and corresponding webcast and slides are also available on our website. In these slides, you will find the financial information that we cover during this call. We ask that you follow our presentation with the slides on the website and beginning with slide two, our forward-looking statements.

During this call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected third quarter of fiscal 2012 net revenue and earnings results, our long-term outlook for our company and improvements in our operational efficiencies and financial performance. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.

An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2012 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.

And I just realized I must have misspoken, August 31, 2011, not 2012. As we indicated last quarter, we have begun to highlight GAAP operating results. While, we currently are still reporting and publishing core results, it is also our intention to move fully to GAAP beginning in fiscal 2013. In addition, we will also be providing guidance on long term year-over-year outlook. This change to our guidance aligns more closely with how we run the business making strategic long-term decisions. We believe providing guidance in this fashion gives investors the most appropriate view into our business.

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

Forbes Alexander

Thank you, Beth. Good evening everyone. If you’re following along, I’d like you to – if you would turn to slide 3 of our presentation. Our net revenue for the second quarter was $4.2 billion, an increase of 7.8% on a year-over-year basis. GAAP operating income was $150 million or 3.5% of revenue which compares to $105 million of GAAP operating income on revenues of $3.9 billion or 2.7% in the same period of the prior year.

Core operating income, excluding the amortization of intangibles, stock-based compensation increased 4.6% to $176.2 million and represents 4.2% of revenue. This compares to $168.4 million or 4.3% for the same period in the prior year. GAAP diluted earnings per share for the fiscal quarter was $0.46, an increase of 84% over the prior year. Core diluted earnings per share was $0.58, an increase of 7.4% over the prior year.

If you now turn to slide 4 for some discussion on our segments. For the second quarter, diversified manufacturing services segment grew 33% on a year-over-year basis. Revenue was approximately $1.9 billion, representing 44% of total company revenues. Core operating income was 5.9% of revenue.

Our specialized services group exceeded our expectations from a revenue standpoint. Most of the outperformance was driven by materials technology group. Gains in this group were offset by continued design investments in our healthcare business and the weakness in our aftermarket services group where an internal site transition negatively impacted both revenue and segment profitability for the quarter by some 40 to 50 basis points. We expect this transition to be resolved and operating performance within our aftermarket services group to return to previous historical levels in the upcoming quarter.

Enterprise and infrastructure segment decreased 2% on a year-over-year basis. Revenue was approximately $1.2 billion, representing 29% of total company revenue and core operating income for the segment was 1.7% of revenue. Our enterprise and infrastructure performance remained below our previous expectations. As a result, continued end market weakness across our telecoms and networking customer base. I shall provide more color towards the end of my prepared remarks on our plan to return the segment to within our long term operating range targets.

The high velocity segment once again operated very efficiently during the quarter. Revenue was approximately $1.2 billion, down 10% on a year-over-year basis, representing approximately 27% of the company revenue in the quarter. Core operating income for the segment was 4% of revenue. The sequential and year-over-year margin outperformance in the segment primarily associated the more favorable mix of products. For the second straight quarter, we have won 10% customer in each of those three segments. All our top 10 customers comprised 61.8% of revenue in the fiscal quarter.

If you now turn to slide 5, I will review some of our balance sheet metrics. We ended the quarter with cash balances with $707 million. As previously announced, we concluded the acquisition of Telmar for $128 million in cash on the first of December. And during the course of the quarter, we repurchased approximately 1.7 million shares at an average price of $22.73 per share, or approximately $40 million. We had little impact to EPS for the quarter as a result of these repurchases.

On a year-over-year basis, GAAP based return on investment capital expanded by 2% to 22% in the first half of fiscal 2012. EBITDA for the same period expanded by $45 million to $535 million or 6.2%. Our cash flows from operations was $5 million. .

Our capital expenditures during the quarter were approximately $77 million or $180 million in the first half of the year. In the quarter, inventory decreased by 1% to $2.35 billion. And inventory turns remained at 7. Cash used in operations for the quarter was $109 million as a result of a more non-renewal quarter than we previously anticipated, causing average and period end working capital levels to be elevated. We expect working capital level to return to within recent historical ranges in the coming quarter and as a result, the return to positive operating cash flows in both our third and fourth fiscal quarters.

I am also pleased to announce that we have recently amended our bank revolver adding capacity of $300 million to a total of $1.3 billion and expanding this facility into 2017, which continues to provide us flexibility in our capital structure as we continue to position the company for growth in 2013 and beyond.

If you now turn to slide 6, we’re pleased with our second quarter’s results. Core operating margin performance was 4.2%, the midpoint of our guidance. Our revenues were at the high end of our range. Both core and GAAP EPS also at the midpoint of our guidance.

If you now turn to slide 8, 9, and 10, I’d like to discuss the upcoming third quarter’s guidance. We expect revenue in third quarter on a year-over-year basis to increase approximately 2% in the range of $4.2 billion to 4$.4 billion. Core operating income is estimated to increase approximately 10% on a year-over-year basis and to be in the range of $185 million to $205 million. The core operating margin in the range of 4.4% to 4.6%. Our earnings per share will be in the range of $.060 to $0.70 per diluted share, and GAAP earnings per share is expected to be in the range of $0.49 to $0.59 per diluted share, which is based upon our diluted share count of 213 million shares. And based upon the current estimated production, our tax rate on core operating income is expected to be 18%.

Turning to our segments and year-on-year performance. The diversified manufacturing services segment is expected to increase 25% as a result of the growth across all areas within the segment. On a sequential basis, diversified manufacturing services segment is expected to grow modestly at 2% as we commence product transitions and additional capital investments in our manufacturing technologies group. The enterprise and infrastructure segment is expected to decline 8% on a year-over-year basis, citing declines in networking and telecommunications product set, offset by growth in storage.

On a sequential basis, the segment is expected to grow 5% of growth across networking, storage and telecommunications. And finally our high velocity segment is expected to decline 14% on a year-over-year basis as a result of continued declines in handset volumes, offset by growth in automotive, point of sale printing and our set-top box business.

Capital expenditures in the second half of this fiscal year are expected to be approximately $320 million. Majority of this investment is associated with continued investments in our materials technology group, group’s capacity and capabilities. Total capital expenditures for the full fiscal year are now expected to be approximately $500 million with an excess of 75% of these expenditures being invested in our diversified manufacturing services segment, positioning the segment for continued growth in 2013 and beyond.

I’d now like to ask you to turn to slide 11 for discussion on our enterprise and infrastructure segment operating margin performance. This slide shows two charts: the top being expected operating margin progression in the upcoming quarter and the bottom, progression of a return to 4% operating margins in this segment during the first fiscal quarter of 2013, nine months from now.

We expect the operating margin performance in our third fiscal quarter to improve by some 70 basis points – 25 basis points coming from both the growth in revenues in networking, program wins and product launch in storage, and the recovery to growth in telecommunications sector. The sites acquired in France and Italy during the fiscal ‘11 and targeted overhead reductions shall contribute 10 basis points each or 0.1% each.

Turning to the chart at the bottom of the slide, we have line of sight to return to growth over the balance of calendar 2012 with revenue growth in storage and networking, contributing 1% and 0.35% telecom’s revenue growth. Sites in France and Italy are expected to contribute 0.3% through the addition of revenues and cost reduction programs. Our targeted overhead reductions across the segment should yield an additional 0.65%, returning the segment to 4% operating margin performance.

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

Tim Main

Thank you, Forbes. I’d like to spend a few minutes discussing our diversified manufacturing services segment and growth by business group and also for the first time provide you some perspectives on how we are thinking about fiscal year ’13.

If you please turn to slide 13, our materials and technology group is really about ingenuity and innovation. And we have invested for growth both in 2010, 2011, 2012 and we expect further growth in 2013. Typically from the investment of CapEx, there is a lag time of approximately three to six months as we install the equipment, begin production and manage to higher levels of expected yields in that four to six months period.

Currently managing through significant expansion of our capacity and introducing new product families across a broad range of customers. We are very bullish on another great year of growth and we expect over $3 billion – roughly $3 billion in fiscal year ’12 and hope to grow to approximately $4 billion in FY’13.

Please turn to slide 14. In our healthcare and life sciences business, Jabil is really a safe pair of hands. We pursue business in essentially six modalities: patient bedside, portable on and in-body, surgical and procedural devices, analytical lab equipment, imaging and single use devices. We’re very proud of the customer base that we have and we spent a lot of time developing new relationships over the last few years. Although there was roughly a flat year of growth in fiscal year ’12, we do expect that rate of growth to accelerate as we enter FY’13.

Please turn to slide 15. This rate of growth is expected to accelerate through the pipeline of growth, particularly through the large portfolio of products that are in our design labs today, which will be introduced to production over the course of fiscal ’12 and fiscal ’13. And we have well over 20 design wins in this healthcare business area and we are very happy that when those products go into manufacturing, they tend to have -- typically have a 10-year average product lifecycle. This leads to very sustained growth and gives us a great feel of confidence that our fiscal year ’13 and ’14 revenue growth should be at the top end of our 20% to 30% revenue guidance for the diversified manufacturing services area.

Turn to slide 16 please. In industrial and clean tech market, we’re really about solving global complexity and enabling innovation. We have business in energy generation, infrastructure, heavy machinery, flight (ph) goods and a broad range of industrial products. We have some of the leading companies in the world as our customers spanning activity from smart metering to agriculture, flight goods, and other types of clean tech areas.

Turning to slide 17 please. We really are developing a global expertise that simplifies complexity. This is really a very high mix business, and nearly 50% of Jabil’s industrial energy manufacturing is in lot sizes of 50 or less. And remember the Jabil’s business, overall, Jabil builds about 70% of its output in lot quantities of 100 or less. We need to have very advanced planning tools, techniques to optimize production for these customers and we have very high performance standardized inter-plant product transfer process for business continuity and low transfer costs. We’re very excited about continued growth in the industrial and clean tech area.

Please turn to slide 18. We’re enjoying continued success of our core depot repair activity in the aftermarket services area and we are seeing additional growth in worldwide parts fulfilment, developing new capabilities that are really taking off now, including diagnostics, distributed screening and customer-facing activities. But we expect our growth in aftermarket services to continue to be 15% to 20% on an organic basis.

Taking our diversified manufacturing services group in total as we look at fiscal year ’13, we see growth in our high velocity area of approximately 0% and enterprise and infrastructure 10%, and we can see in industrial clean tech, healthcare instrumentation and aftermarket services, we think these businesses can grow year over year on a 15% basis. Materials technology group, as I mentioned previously that we expect to have another very robust year of growth. This will easily support the 10% to 15% growth in our fiscal year ’13 and we are very excited about our prospects on a longer term basis. I think we spend a lot of time focusing on the short term and we’re very pleased with how our business is coming together from a long term basis and looking forward in FY’13, ’14, and ’15 and seeing continued growth at 10% to 15%.

Beth Walters

Okay. That concludes our prepared remarks. Operator, we’re ready to take question and answer session now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steven Fox with Cross Research

Steven Fox - Cross Research

Tim, just on two questions – first on the capital spending plans around materials technology, how much of that comes online as the customer program ramps and how much overhead do you think you have to carry until you actually get into the full ramp versus the planned capacity? And then secondly, if you could just go back over the E&I margins for the quarter, you explained very well what – to get you from where they are to where you want to by the end of the year but what went wrong during the quarter to keep you at the low levels that we are at?

Tim Main

Okay. In terms of materials technology group investments, the slide that we developed and included in our presentation is – yes, slide 13 – is intended to give investors an idea of the lag time between capital investment in the advent of revenue – revenue would recommence approximately three, four, five months after the investment, and we would expect to ramp into production through months four, five and fix and get to more matured yield levels and profitability levels by approximately the six month. We’re going through our product transition now with the new product families that are ramping and we’ll be doing that over the course of the spring and summer, making some significant investments.

So I would expect the margins in the materials technology group to continue to be in the expected ranges and they’d certainly be better when you reach mature levels of production, a little bit on the lower side during periods of product transitions but still within the targeted range. It’s getting to be a very big business. Obviously half year increments we’re looking at a $1.5 billion per six months period pace in fiscal ’12 moving to $2 billion or more half year pace in fiscal year ’13. So we’re very pleased with how that business is coming together and we are adding capacity as we speak.

In terms of the enterprise and infrastructure area, there’s not a whole heck of a lot to report, Steve, except that revenue was a little bit lower than expected. And we think it’s important to really focus on how we get back to 4% from where we are today and I think we have a good line of sight. My own – when I look at this business, there has been a very significant slowdown in overall enterprise infrastructure spending from the spring of 2011 when the European debt crisis first emerged, a lot of caution throughout the summer as the U.S. had its debt crisis, government spending has been on the decline, that’s impacted some of our higher end government related types of products, 2.5G spending collapsed in certain areas of Asia. All of those provided significant headwinds over the last few quarters. In my experience, having been in the business as long as I have is that you have these periods of under investment, a little bit of excess inventory, people work through those, and then spending starts to pick up.

So provided that the U.S. – particularly the U.S. continues to be stable and grow even at a lower rate, I would expect IT, enterprise related spending to start to pick up mid-year and show some more normal levels of at least secular growth rate of 5% to 10% as we exit fiscal ’12 and begin our fiscal year ’13.

Operator

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

Brian Alexander - Raymond James

Yeah, just a follow-up, Tim, of the 135 basis point improvement that you are expecting in E&I coming from higher revenue, I think it’s about $16 million a quarter or so of incremental profit from where we are today. How much of revenue increase is required to hit that, and again, how much visibility do you have into programs ramping by the end of the year to get you there?

Tim Main

We’re actually not counting on a lot of revenue growth. Forbes, do you want to characterize about the revenue growth –

Forbes Alexander

Yeah, it’s on the overall revenue line of sight, Brian. We have line of sight to that, in some great progress in our storage area with some new wins there, but are ramping in this coming quarter giving me a great deal of comfort in terms of our rebound in terms of the storage and networking in the short term here, and then as we move forward to the bounce the next three quarters continued growth in that area. There is some rebound with our networking customers there.

In terms of overall revenue, what I get into guidance for the full second half of the year, it’s somewhere in the region of $200 million, 4250 million, some of that nature. We’re seeing a sequential uptick of 5 points this coming 90-day period and if we see any little bit of tailwind, then it includes to be better than that but we feel pretty comfortable that the telecommunications business is starting to see pick up there. I think as we articulated before we had some wins in the wireless area there over the last three quarters and we’re starting to see that pickup again which is good news as we move through the balance of the calendar ’12.

Brian Alexander - Raymond James

So the $200 million to $250 million, Forbes, that you called out over what time period is that – is that basically –

Forbes Alexander

That’s the back half of the calendar year – fiscal year, excuse me, Brian.

Brian Alexander - Raymond James

And then on cash flow negative in the quarter, I think most of that was due to payables coming down by almost $400 million. I think you said you get back to being operating cash flow positive in the second half. When do you think you will get back to being free cash flow positive given the increased CapEx investments that you highlighted?

Forbes Alexander

Yeah, based upon the CapEx that we highlighted for the back half of the year of investments in our MTG, there we are. I think moving into fiscal ’13, I would expect our overall cash from operations minus our CapEx and our acquisition of Telmar to be cash neutral. So lot to do in the back half of the year but I think that’s very attainable. As we look forward into ’13, clearly we will have some additional capital investments during fiscal ’13 but we’re very comfortable that we will see significant free cash flows during fiscal ’13.

Brian Alexander - Raymond James

Do you think you will be back at that 30% EBITDA to cash flow or cash flow to EBITDA ratio that you’ve targeted long term?

Forbes Alexander

Yeah absolutely. Certainly Tim talked to -- we’re shaping up to be a great year in ’13 with revenue growth in the 10% to 15%. EBITDA margin should be – now those types of levels tracking 6, 6.5 points, so certainly we should see that type of contribution from the overall cash flows, yeah.

Operator

Your next question comes from the line of Wamsi Mohan with Bank of America-Merrill Lynch.

Unidentified Analyst

Good afternoon. This is Rupler (ph) filling in for Wamsi. Just wanted to touch on the operating margins for the DMS segment for this quarter. The site in AMS that you had an internal transition, could you just elaborate on that, like why was that needed, and did you move to a low cost location? And is this a part of the Telmar acquisition?

Tim Main

It’s not related to the Telmar acquisition. It’s related to the movement of production among sites in Mexico which has been planned for some time. That transition did not go well. So we think we have that under control now, and I’d point out that AMS has been – our aftermarket services business has been historically very predictable and very efficient and has delivered very consistent margins over time. So it’s well under control and we are very confident that they will bounce back to its 4% historical levels in fiscal Q3.

I’ll also point out that in terms of the cycle of diversified manufacturing services, operating margins FQ2 for the last three years has been a low point. In ’10 it was significantly below the targeted range. In ’11 it was near the bottom of the range and in both cases recovered to the 6.5% to 7% area. So we see no structural issues with that business at all as we bring some of these great healthcare products into the production cycle. We continue to ramp our MTG, our industrial and clean tech business continues to grow in a predictable way at good margins and the aftermarket services recovers from their product transitions among sites in Mexico. Then we have every confidence that diversified manufacturing services will get back to our expectations.

Unidentified Analyst

Okay, thanks Tim. And Forbes, if you can just help us bridge the 300 basis points improvement between this quarter and the next quarter. I know you said 70 basis points in the E&I section and then you were affected by about 50 basis points in the DMS segment. So the remaining 180 basis points sequential improvement in op margin, can you help us bridge that between the different segments?

Tim Main

We’re a little bit puzzled at your math there because we’re at 4.2% in Q2 overall. We’re looking for 4.5% in Q3 and that’s a 30 basis point improvement to 70 basis point improvement in enterprise and infrastructure quarter on quarter and roughly 130 basis points over the next three quarters to Q1 of 2013. And Forbes walked through the four major elements of that margin improvement expected just in the enterprise and infrastructure group.

I’d point to you that even with the underperformance in enterprise and infrastructure, the company is doing extremely well from a margin standpoint fully a couple of hundred basis points against most of our competition and our EBITDA margin at 6.2% lead our industry by a fairly significant margin.

Unidentified Analyst

And just looking at CapEx for fiscal ’13, do you have an estimate for what that could be?

Tim Main

We don’t have an estimate. I would expect them – expect it to abate a little bit but we will see if our expected growth rate is conservative, not too conservative, we’re not at this point, we’d expect it to probably rotate back to normalized levels.

Operator

Your next question comes from the line of Craig Hettenbach with Goldman Sachs.

Craig Hettenbach - Goldman Sachs & Co.

Tim, a number of the EMS companies are talking of the growth opportunities in the medical industrial market. I know you laid out some of the wins that you have there but I was hoping to get your view on just kind of the competitive landscape, kind of what you’re doing to differentiate in that space and your view of kind of the margin profile on a intermediate to longer term basis?

Tim Main

Sure, we think the margin profile that we’ve articulated of 6% to 8% is sustainable into the foreseeable future and that’s a three to five year time horizon for Jabil. And we’ve been operating at that level for the past few years as well. So there is some historical basis for that. I think when we look at healthcare and life sciences, one of the things that we tried to highlight is the many, many design wins of the integration of design, our materials technology group in single use devices, our optics capability and integrating all of those capabilities into a very broad portfolio of new products that will come out of our product development labs over the 12 to 18 months and contribute significantly to an acceleration of growth in our healthcare and instrumentation area.

When I look at industrial and clean tech, although a lot of people talk about that, I don’t think that our competitors have the diversity and capability that we do. I think we build a high mix of electronics in more low cost locations than anybody else in the world and we consider Jabil op (ph) will be in the mid $17 billion range this year, at least above $17 billion in revenue this year. And 70% of that output is built in lot quantities of 100 or less. We are largest high mix manufacturing business on the planet, and we think that’s a very highly differentiated capability to bring to a market in a world where virtually our customers are efforting to get to new places, new locations, tap growth in emerging markets, bring new technologies to the products that they have in their portfolio, leverage our product development skills, and so helping our customer base, manage through that global complexity, architecting and helping them architect global supply chain networks is a significant differentiation.

Craig Hettenbach - Goldman Sachs & Co.

And then just as a follow up, as you talk to customers, what’s your sense in terms of in-demand today versus three or six months ago, and then just kind of inventory adjustments, do you think we’re through most of those?

Tim Main

I think it varies, Craig, by business area. In enterprise and infrastructure my sense is that the mood is turning more towards optimism. So there is more bias to the upside, taking overhang of the T-Mobile, AT&T acquisition, put a cap on some needed infrastructure spend in North America, the collapse of 2.5G in China and some of the economic slowdown, and worry about economic slowdown in Asia put a kind of a cap on spend there. And of course, we have Europe that’s in a midst of a recession.

My sense is that most of the inventory issues have been worked through and that we will see an expansion of the spend as some of the uncertainties have cleared down over the last three or four months, and then as people get progressive – depend on how the macroeconomic environment does but if as long as it stays in a stage of even lacklustre growth, I think that the bias is more towards the upside. Diversified manufacturing services is just growing crazy. We’ve got great growth there, we’ve had great growth there. We expect to continue to have great growth there. So our customers are happy with our performance, we’re happy with our customers, and we feel like we can continue to grow that at a world class pace.

And in high velocity that’s an area where we look for a lot of great growth but we have significant customer relationships there. Craig, we’re getting pretty good at it. And in high velocity too, I don’t think we will continue to earn 4% operating margins in high velocity. I would expect this enterprise and infrastructure margins improve. We might see high velocity move into the mid-3s because we do need to support customers, it’s a very competitive business. But that said, we’ve really been able to use lean manufacturing and consolidate our operations (indiscernible) get our customers into fewer sites and drive a lot of efficiency that way. So we’re very happy with our performance in that area. I don’t think the consumer spend has been great across the board but it’s been okay. And our customers there are doing pretty well. So I would say we’re getting progressively more optimistic than the way things looked three or four months ago.

Operator

Your next question comes from the line of Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Research

I just wanted to clarify first on margins. Forbes, do we – when we look at DMS, should we expect sort of a similar trajectory of fiscal ’11 where we would see some modest improvement in the May quarter and then maybe another step-up into the August quarter? I am just trying to understand how you go from sort of 5.9 to the high 6s over the next two to three quarters.

Forbes Alexander

Yeah, I think that’s a fair representation. We would expect obviously, as I’ve articulated the aftermarket services turns back to historical levels, so that – that naturally gets us into above 6%, 6.4%, 6.5% and we’ve got some product transitions going on in Q3. There are investments in MTG but I think a similar ramp through the back half of the year to what you saw last year is appropriate. So yeah we feel very comfortable that we can certainly go into that type of recovery back into the targeted ranges.

Tim Main

It’s certainly been the cycle of operating margins to rebound from the Q2 period. As Forbes said, there is a very straightforward reason in aftermarket services why we have confidence how to recover. I think the brighter, the more interesting part of the story is looking at FY’13 and the growth of the diversified manufacturing services segment. If you take, and what we have shown you on slide 19 overall, diversified manufacturing services is expected to grow at 22% in FY’13. Overall that drives about a 12% to 13% growth for the company when you consider enterprise and infrastructure. And if you just look at our margin mix, general speaking, with the diversified manufacturing services conservatively in the 6.5% range, and then more normalized margin, high velocity and enterprise infrastructure should be a great year for us.

So I really think that’s the more interesting part of the story. As you go quarter to quarter, these 9-year periods are relatively arbitrary. We will have margin – a little bit of margin variation as individual aspects of the business do better or worse. We’re really happy that revenue was as strong as it was in the quarter $4.2 billion at the high end of the range, and operating margins at the midpoint and EPS and earnings being where they should be in that environment. So it’s kind of a bullish set of circumstances for us to be in today, particularly when you consider we are doing relative to some of the other comparison in the industry that showed contraction in the December period and we will see how people do in the March period. But I think we are essentially doing a good job of growing the company and showing good earnings in this environment.

Amitabh Passi - UBS Investment Research

And I was also wondering on slide 15, you showed basically a list of design wins in your healthcare and life sciences area. Is there any way you can give us a sense of the size of this pipeline, just trying to get a sense of how robust –

Tim Main

Size of this pipeline along with support about 30% growth rate in healthcare and life sciences.

Amitabh Passi - UBS Investment Research

For fiscal ’13?

Tim Main

For fiscal ’13,’14, kind of grated in that area but yeah, we will start with fiscal ’13, sure.

Amitabh Passi - UBS Investment Research

And then just a fiscal question from me. On your enterprise and infrastructure for fiscal ’13, I think you put a 10% growth rate expectation. Just wondering is that all just sort of organic, are you expecting some incremental program ramps or market share wins? Just curious your thought process around the 10% growth for fiscal ’13?

Tim Main

Okay. Well, there are some new business opportunities and there always are from time to time in that business. But it’s a return to secular growth rate as some of the headwinds that we discussed from Europe to mergers between carriers in Asia along with inventory corrections, all those things kind of abating combined with some of the market share wins that we’ve attained over the last 12 months. And there are some new business opportunities for us with existing customers. So we’re in great shape with our storage customers. We think that telecommunications will start to recover as well as networking.

So I’d look at that business over a long term period of time and say that we would expect that business to grow at a secular growth rate of 6% to 8%, which you could look at a number of electronic publications that track growth in enterprise facing and infrastructure industries. And that’s kind of a normalized growth rate, we think we can do just little bit better than that in FY’13.

Operator

Your next question comes from the line of Sean Hannan with Needham.

Sean Hannan - Needham & Company

You’ve provided a lot of great color today. I think everybody appreciates that certainly ahead of your event coming up in May. The one area I want to see if I could focus around was materials technology group. There has been a lot of speculation in news out there around competitors large and small. I think that you have spoken to this at different points in time. I was looking to see if you could update us on the competition you are seeing within that space, the degree you are seeing even in some cases, perhaps new entrants or changes in the scale of perhaps even pricing of some of the other players.

Tim Main

In terms of competition, it’s usual suspects. I think Catcher is compare – Foxconn certainly has an activity in this area. HighP, Nypro, BYD, these are companies that engage in this type of activity. So the competitors are the same. I think there is a – which is typical for particularly what comes out of Taiwan sometimes is an overreaction or dramatization of brand and news bites that come out. This is a big exploding marketplace, and I think the thing that people really don’t grab entirely – it’s not a mature market yet when we talk about smartphones and higher and higher end products in the mobility marketplace. Our people believe that we are really in the beginning years of this expansion and this will be a very big market that will require more than just our MTG group to support.

And so we would caution people not to overreact to news bits that come out. Our relationships are very strong. We are expanding capacity with some very strategic customers. We have good line of sight through new product transitions and new product families. So we feel very good about our position. It’s – can be a brutally competitive market, but our engineering in innovation and ingenuity kind of carriers the day for us. And that’s where we rely on to be competitive. So we will continue to effort to keep our technology updated, keep bringing new ingenuity in the marketplace and stay at the forward part of the market developments and not be kind of fast follower beyond the – and then more commoditized part of the marketplace.

Sean Hannan - Needham & Company

That’s very helpful. And then in a follow up to some of the thoughts around the space, obviously it’s grown very well, a part of that’s been on the back of a very large smartphone and tablet OEM. Can you talk about how you rank the contributors to that ‘13 growth that you are targeting in terms of either further penetration with that largest customer in the space, others perhaps that may be within the consumer markets. I think that there is an element of some medical customers, a number of programs that will be coming in as revenues next year and if there is a little bit of insight around how much they could contribute to that 25% growth, that would be helpful?

Tim Main

That’s a great point. We are very excited about the single use device market and how we can leverage our skills in MTG into broader participation in the healthcare and life sciences area. I think you will see increasing contribution from that aspect of our business in FY’13 and FY’14. That said, I think the bigger part of the story will continue to be mobility with the existing customer base for the foreseeable future, just because the numbers are so, it tends to dwarf the great progress that we are making in areas like healthcare. But we are very excited about it, it’s very meaningful when we look at these plus 20 design wins when we can show them the capabilities that we have to integrate these complex products from optics capability to our MTG capability along with world-class healthcare design capability in manufacturing and quality to be a safe pair of hands to bring all of that capability together and really help customers create great new products. That they couldn’t manifest on their own, we struggle to manifest our their own would be a accurate way to put it.

And that’s going to be – and over the next three to five years, that’s going to increase – be an increasingly important part of the business. But so I would say when we look at FY’13, the bulk of the $1 billion or so of growth that we should see in MTG will be driven primarily through the existing customer base and continued expansion across a broad range of mobility products and accessories.

Operator

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

Amit Daryanani - RBC Capital Markets

Just have a question on the MTG group, it looks like more than half of the revenues in that segment really come from one customer. I am curious, are you guys really comfortable with that kind of concentration and other CapEx plans in place to support that one customer or is it to really broaden the customer base?

Tim Main

We would like to have more diversity overall, Amit, and we’re adding customers to that portfolio. But you also need to make sure you are doing business with market leaders. And so we are comfortable that the investments that we are making are very sound business prospects ahead of it. I’d also like to remind everybody that our larger customers in that business coinvest with Jabil. So many of the dollars that you see flowing into MTG, a very high percentage of that is matched with co-investment from customers.

So there is a very high level of commitment to the go-forward plan on a long term basis. So that really helps us get comfortable with the fidelity of the relationship and the solidity of the go-forward plan.

Amit Daryanani - RBC Capital Markets

In that segment again, could you maybe help us understand what are the current utilization rates in that segment and how much incremental capacity are you maybe adding given the CapEx plans right now and full fiscal ’13?

Tim Main

I can’t really give you a percentage. I guess an easy map, I would say, we’re adding approximately 25% to our capacity in over the course of between now and approximately the midpoint of FY’13. We’re at extremely high level of utilization right now in most areas of the business.

Amit Daryanani - RBC Capital Markets

And just finally on the high velocity side, given the fact – I think you made a comment that handsets within that segment should decline in Q3. So should we expect the margins that you continue to remain investing high 3% to 4% range for potentially for all these quarters as well?

Tim Main

I wouldn’t expect the 4% range, we’re not providing specific segment margin guidance, it gets a little bit tricky. I have indicated that I think that we can operate high velocity for the full fiscal year at 3% or above. And I think we will address our long term targets for that business area later this year on an annual cycle, revisit all of our long term targets probably on the December call.

Operator

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

Shawn Harrison - Longbow Research

Just a few clarifications I was looking to get. The repurchase I think it’s about another $50 million remaining. Is the expectation that you would finish at before the end of the fiscal year? And the with just the overhead reductions cited in the presentation, is that solely headcount reductions or is that facility closures?

Forbes Alexander

It’s Forbes. Yeah, essentially our authorization for loans was $100 million in stock and that runs through to the October timeframe of 2012. So $60 million outstanding, $40 million repurchase in the last quarter. The intent of our repurchase program was to ensure – we attenuated the dilution of our stock. We will see how that progresses but certainly at this point in time, our intent would be to complete our repurchase program over the balance of the term, if you will, through October of 2012.

Shawn Harrison - Longbow Research

Then just in terms of the overhead reduction action, is that headcount based or facility based –

Forbes Alexander

Well, we’re really characterizing that as – we don’t foresee any specific facility closures or anything of that nature. But if you look at the performance that we put off in terms of our high velocity business in some of the lean practices, leaning our processes, efficiencies there, we will look to take some of the lessons learned there, apply those across the enterprise and infrastructure segment. So at this point in time, we certainly – and I would not expect any site capacity reductions but certainly really attribute that to much more of leaning out the processes and efficiencies of running our manufacturing operations.

Shawn Harrison - Longbow Research

One final question if I could. As you move towards GAAP reporting in fiscal ’13, the variance between the margins right now the GAAP margins, how would that be split between the business units? Should we just assume it’s equitably split or just an idea of how to think about that?

Forbes Alexander

Yeah, intangible elements will certainly be attributed directly to the various business units and that’s what about $15 million to $20 million a year. The stock based compensation, we’re still working through that. That’s a little bit trickier in terms of how you want to allocate that given the datas based on headcount. So we will continue to work through that and we will certainly give you more color on that as we move towards the end of the fiscal year here.

Operator

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

Jim Suva - Citigroup

Little bit focusing on the DMS margins and understanding you have the kind of issues, get back in your margins this year. When we look at year over year, there’s very, very strong growth in that segment up 44% but operating margin was up only about 4%. If you strip out that one-time item, can you kind of let us know about what that would have been and going forward of course seasonally, we would expect the margins in that business to grow or segment to grow as it has been in the past? But can you get some leverage out of that to actually grow operating margin percents higher year over year – is it more about the throughput and velocity

Forbes Alexander

Jim, the impact this past quarter, I think that’s what you referred to, was about 40, 50 basis points in the quarter which is – that’s about for the year is –

Tim Main

$8 million in a quarter. It’s not that much.

Forbes Alexander

Yeah, it’s going to be 10, 20 basis points for the year. So as we move forward here that we certainly expect to see year over year expansion in terms of DMS segmentation margins. As we’ve articulated, we’re making some significant investments in the back half of this fiscal year, and revenues and income streams attributable to that investments will then start to appear towards the end of Q4 and certainly in the first half of fiscal ’13.

So as we run volumes through there and we start to see some of these design activities come to fruition in terms of revenue flow. The current full year’s contribution of Telmar for aftermarket services business there and the organic expansion of some opportunities there, we certainly expect to see some nice margin – overall margin expansion a reported year over year basis and a full fiscal year ’13 versus ’12 as we move through fiscal ’13.

Tim Main

Jim, when we look at FY’13, and we look at the growth in diversified manufacturing services relative to the other business areas. DMS should rise to 47%, 48% of the overall business from where it is today. And the basic margin portfolio or margin mix should provide some year over year margin expansion for the company overall that will be very attractive.

Jim Suva - Citigroup

And a quick follow up, with the CapEx number that’s higher the $0.5 billion CapEx, should we look at that as kind of the new run rate for the company or is this kind of a big, big investment here for the company or should we – I am just trying to get a grasp on what the CapEx is required given your new business model, the DMS in higher profitability? Thank you.

Tim Main

Well, it’s a great question. We don’t know what we’re going to spend in FY’13. We’re going to have to start expressing this in terms of percent of incremental revenue and things like that because the company is getting a heck of a lot bigger. And our EBITDA margins are increasing. So it’s not really – it’s fundamentally quarter to quarter -- it might look a little odd but fundamentally over the longer term period it certainly is impairing the company’s ability to generate cash flow from operations and free cash flow. Now in fact, we think in terms of EBITDA yield, we’ll still have significant free cash flow over time, with EBITDA margin of 6.2 and we are looking at margin – additional margin expansion in FY’13. CapEx could be another $500 million. I don’t think it will be that high but we just don’t know at this point. And if the EBITDA margins climb another 30, 40, 50 basis points, we’re going to be generating a lot of cash flow and even at that level, with the $19 billion plus company, we’re going to see pretty good free cash flow, which is still paramount in the company’s business plan.

Beth Walters

Thanks Jim. Operator, I understand we have one last question on the line.

Operator

Your last question comes from the line of Sherri Scribner with Deutsche Bank.

Sherri Scribner - Deutsche Bank

Most of my questions have been answered. I just wanted to follow with – I think last quarter you talked about your full year revenue guidance of $17.4 billion for fiscal ’12. Are you still comfortable with that and do you think you could beat that number?

Tim Main

I think it’s certainly possible. The midpoint of our guidance at 4.3, that would imply a much bigger Q4 than I’d ask people to model. I think we are very comfortable with the earnings and the operating income. So we might have a little bit more revenue variation, Sherri, than what we thought last quarter but we are still very comfortable with the earnings profile and driving the margins up. So the business mix is actually improving and so we are less concerned about where exactly are in terms of revenue – revenue could be plus or minus a couple hundred million dollars, and I think we will be okay with that as long as the earnings are there. And we feel very good about the earnings.

Beth Walters

Thank you everyone for joining us on the call today. Obviously we are pleased with our performance in the second quarter and our outlook moving forward and our traction to our stated long term goals of growing our diversified manufacturing services (indiscernible).

I would also note that Tim Main will be a guest on Mad Money tomorrow evening. So you might want to tune in and check out that. Thanks very much for joining us.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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