Jabil Circuit F1Q08 (Qtr End 11/30/07) Earnings Call Transcript

Dec.20.07 | About: Jabil Circuit (JBL)

Jabil Circuit Inc. (NYSE:JBL)

F1Q08 (Qtr End 11/30/07) EarningsCall

December 20, 2007 4:30 am ET

Executives

Beth Walters - VP of Communicationsand IR

Forbes Alexander - CFO

Tim Main - President and CEO

Analysts

Amit Daryanani - RBC Capital Markets

Louis Miscioscia - Cowen

Kevin Kessel - Bear Stearms

Jeff Walkenhorst - Banc of America

Jeff Rosenberg - William Blair& Co

Alex Blanton - Ingalls &Snyder

Jim Suva - Citigroup

Rashedul Din - CreditSightsIncorporated

Operator

At this time, I would like towelcome everyone to the Jabil first quarter fiscal year conference call.(Operator Instructions)

Thank you. Ms. Walters, you maybegin your conference.

Beth Walters

Thank you. Welcome to our firstquarter of fiscal year 2008 conference call. Joining me on the call today arePresident and Chief Executive Officer, Tim Main; and our Chief FinancialOfficer, Forbes Alexander.

This call is being recorded andwill be posted for audio playback on the Jabil website in the Investors section,along with today's press release and the slideshow presentation on our firstquarter results. You can follow our presentation with the slides that areposted on the website and begin with slide 1 now, our forward-lookingstatement.

During this conference call, wewill be making forward-looking statements, including those regarding theanticipated outlook for our business, our currently expected second quarter offiscal year 2008 and full year fiscal year 2008 net revenue and earningsresults, our long-term outlook for our company, and improvements in ouroperational efficiency and in our financial performance.

These statements are based oncurrent expectations, forecasts and assumptions involving risks anduncertainties that could cause actual outcomes and results to differmaterially. An extensive list of these risks and uncertainties are identifiedin our annual report on Form 10-K for the fiscal year ended August 31st, 2007and on subsequent reports on Form 10-Q and Form 8-K and our other securities filings.Jabil disclaims any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

Please turn to slides 2 and 3,the results for our first fiscal quarter of 2008. On revenues of $3.4 billion,GAAP operating income increased to $98.9 million. This compares to $61.1million GAAP operating income on revenues of $3.2 billion for the same periodin the prior year.

Core operating income, excludingamortization of intangibles, stock-based compensation, and restructuringcharges for the quarter, was $122 million, or 3.6% of revenue, as compared to$85 million, or 2.6% for the same period in the prior year. Core earnings perdiluted share were $0.36.

On a year-over-year basis, thisrepresents a 4% growth in revenue, and a 44% increase in core operatingprofits. On a sequential basis, revenues increased 8%, while core operatingincome increased 18%.

Please turn to slide 4 for adiscussion of our revenue by division and sector for the first fiscal quarter.In the EMS division, our revenues representedapproximately 59%, or $2 billion.

Sequential sector movements areas follows: production levels in the automotive sector were consistent with theprior quarter; computing and storage sector increased 8% from the fourthquarter; industrial, instrumentation and medical sector declined 8% from theprior quarter, reflecting the decline in product revenues associated with thehousing and new construction.

The networking sector levels of productiondecreased 3% from the previous quarter, as a result of lower production levelsfor the European customers in this sector. Telecommunications sector increased15% sequentially, as a result of one month's revenue from the recentlyannounced Nokia Siemens Networks relationship.

Looking at our consumer division,it represented approximately 36%, or $1.2 billion, in the first fiscal quarter.And the sequential sector movements are as follows: mobility and displayproducts sector increased 36% from the prior quarter, reflecting strongseasonal growth in each sector across both displays and mobile products.

The peripherals sector increasedby 12% over the fourth fiscal quarter, reflecting seasonal growth in thissector from printers and home entertainment products. The aftermarket servicesdivision represented approximately 5% of overall company revenue in the firstfiscal quarter, and saw revenues increased 4% sequentially.

Please turn now to slide 5. Ourdivisional and sector information for the quarter in percentage terms is asfollow: automotive 4%; computing and storage 11%; industrial, instrumentationand medical 17% of revenue; networking 20%,;telecom 5% and other 2%, for atotal of 59%. In the consumer division, 25% for mobility and display; 11% forthe peripherals division in fiscal Q1, for 36% overall; and finally, in theaftermarket Services, 5%.

In our fiscal first quarter,three customers accounted for more than 10% of revenue: Cisco, Hewlett-Packard,and Philips. Our top 10 customers in the quarter accounted for approximately64% of our revenue.

Selling, general andadministrative expenses declined $5million in the quarter, reflecting thebenefits of previously announced restructuring plans and approximately $1.6million less in legal, and accounting fees associated with the recent review.

Research and development costswere $6.5 million in the quarter, or approximately $3 million less than thefourth fiscal quarter, reflecting an increased level of consumer-funded designprojects than in our previous quarter, along with some of the repositioning ofdesign repurchase to lower cost regions.

Stock-based compensation expensein the quarter was $5 million. This expense is lower than estimated due to thereversal of stock-based compensation expense previously incurred as a result ofperformance-based restricted stock grants that is now no longer expected tovest.

A tax rate in the quarter was21%, reflecting higher levels of income and higher tax jurisdictions in thequarter.

And finally, our divisionaloperating performance. We do plan to provide divisional core operatingperformance on an ongoing basis as we are now organized in this manner. In thefirst fiscal quarter, core operating income for the EMSdivision was approximately 3%. The consumer division, as a result of theseasonal nature of this division, was approximately 4% ,and the aftermarketservices division was approximately 7%.

I will now turn the call over toForbes Alexander.

Forbes Alexander

Thank you, Beth. I'll ask you toturn to slide six, seven, and eight for our review of balance sheet and someratios. The company's sales cycle in the quarter expanded by 3 days to 22 days.Days sales outstanding expanded by 4 days, reflecting the seasonal consumerrevenue stream, while accounts payable days outstanding improved by one day, ascompared to the prior quarter. Inventory days, with the prior quarter, were 8turns.

Cash flow from operations wasapproximately $143 million in the first fiscal quarter, an increase ofapproximately $400 million over the same period in the previous fiscal year.Our return on invested capital improved to 13%, as compared to 11% in theprevious quarter. Cash and cash equivalents were $664 million, consistent withbalances at the end of the last quarter.

Our capital expenditures duringthe quarter were approximately $62 million, including approximately $30 millionrelated to our building expansions in China,India and Poland. Depreciation for thequarter, approximately $57 million, and EBITDA in the quarter was approximately$180 million.

At the end of the first fiscalquarter, $400 million remained outstanding on the bridge facility entered intoon the 20 December, 2006, to fund the Taiwan Green Point acquisition. Thisfacility was paid down fully, to date, through a 180 days, $200 millionrevolving credit facility. We intend to replace the $400 million impairmentlonger term capital some time in the new calendar year.

We are extremely pleased with thecontinued progress we have made in the quarter, 30 basis points of continuingimprovement in our core operating income margin, positive cash flow fromoperations, while growing revenues 8% sequentially, and continued improvementin our returns on invested capital to above our weighted average cost of capital.

It's particularly pleasing tonote cash flows from operations remained strong in the quarter, $143 million,over the last nine-months we have generated approximately $580 million fromoperations or approximately $300 million after capital expenditures anddividend payments over the same period.

On a year-over-year basis wecontinue to maintain efficient control over invested capital while growingrevenues and our operating earnings.

Our business model continues todemonstrate that on an annualized basis returns on invested capital in excessof our weighted average cost of capital and strong operating and free cashflows are sustainable.

Now, I'd like to very brieflycover on our restructuring activity. We continue to monitor our overallrationalization funds according to our previously announced plan.

During the first quarter, werecorded charges of approximately $9 million. Total charges recorded to-dateagainst our overall plans were approximately $200 million. We continue toexpect our total restructuring charges to be at the high end in $200 million,$250 million range that was previously discussed.

During the quarter, cash paymentsassociated with the restructuring activities were approximately $20 million.Total cash payments to date against the plan are approximately $95 million. Thecash cost of such charges for this plan remained an estimate in the range of$150 million to $200 million.

Discussions with our employeesand their representatives continue, and we're complying with all statutory andconsultation periods required of us. As a result, we currently estimate thecash payments totaling approximately $45 million will occur in the balance ofthis fiscal year. Majority of this will start in fourth fiscal quarter and $25million in the first fiscal quarter of 2009. We would expect to see thebenefits from such actions in our fourth fiscal quarter of 2008, and firstquarter of fiscal 2009.

Turning briefly to the NokiaSiemens Networks agreement. On November 1st, we entered into an agreement tolease two manufacturing facilities in Italy from Nokia Siemens Networks,and to produce GSM and the Radio Access products, microwave devices for wireline,and wireless networks. We would like to take this opportunity to welcomeapproximately 600 new colleagues to Jabil as a result of this agreement.

I'd now ask you please to turn toslide 9. I'd like to give you a business update specifically, help you withguidance for the second quarter of fiscal '08. We estimate revenue in oursecond fiscal quarter of 2008 to decline $250 million-$350 million, in a rangeof $3 billion-$3.1 billion, reflecting the typical seasonal decline in consumerproducts. As a result, core earnings per share were expected to be in the rangeof $0.16-$0.20.

Core operating income is expectedto decline through revenue decline, consistent with historical seasonalpattern. Specifically, this year, and in each of the last two fiscal years,every dollar of revenue decline from the first fiscal quarter to the secondcarries with it approximately $0.18 of income decline. As a percentage ofrevenue, we estimate core operating margins to be in the 2.2%- 2.4% range.

Selling, general andadministration expenses are estimated to be $116 million, reflecting theaddition of Nokia Siemens Networks relationship. Research and development costsare expected to be approximately $7 million in the fiscal quarter.

Intangibles amortization isexpected to be approximately $9 million. Stock-based compensation is estimatedto be approximately $14 million in the second quarter; and interest expense isestimated to be $25 million. Based upon the current estimate of production andincome levels, the tax rate on core operating income is expected to be 16% forthe second quarter, and the 18% for the full fiscal year.

Capital expenditures in thesecond fiscal quarter are estimated to be in the range of $60 million-$80million, dependent upon the timing of the completion of our building expansionswhich are underway. Capital expenditures for the full fiscal year remain in anestimated range of $250 million-$300 million.

I'd now ask you please to turn toslide 10, where we will discuss revenue by division and sector for the upcomingquarter. The EMS division is estimated toincrease by approximately 2% from the first fiscal quarter. Sector breakdown isas follows: the automotive sector is expected to be consistent with the firstquarter, slighting the seasonal declines offset by ramping volumes with the newcustomers.

The computing and storage sectoris estimated to be consistent with the first quarter. Industrial,instrumentation and medical sector is estimated to decline by 3% from theprevious quarter. The networking sector [state] level of production to increaseby 3% from the first quarter, and the telecom sector is estimated to increaseby approximately 25%, as a result of the new relationship with Nokia SiemensNetworks.

Turning to the consumer division,it is estimated to decrease by 30% in the second fiscal quarter. The sectorbreakdown is as follows. Mobility and displays sector is expected to decreaseby 35% in the quarter. The peripherals sector is estimated to decrease by 15%in the second fiscal quarter; both sectors reflecting the seasonal nature ofthese products. And finally, the aftermarket services division is expected tobe consistent with that of the first fiscal quarter.

With this guidance, overallcompany revenues for the first half of fiscal 2008 are estimated to beapproximately $6.4 billion with core operating income of approximately $190 million,or 3% of revenues. This represents growth in revenue of 4% for the first halfof fiscal 2007, and core operating income dollar growth of 37%.

Please turn to slide 11. Withregards in second half of our fiscal year, we're extremely well-positioned tosee continued growth in revenue and core operating income for the first half ofthis fiscal year and over the same period for fiscal 2007. We'll alwayscontinue to positive cash flows from operations and increasing returns oninvested cap.

From a divisional perspective,for the midpoints of the overall company guidance range, we estimate the secondhalf of this fiscal year revenues in the EMS division to approximately $4.45billion; in consumer division approximately $2 billion; and the aftermarketservices division approximately $0.35 billion. Core operating incomeexpectations were estimated to be 4% or above for the EMSdivision, approximately 2.5% for the consumer division, and approximately 7%for the aftermarket services division.

Our current estimate for the fullfiscal year is revenue in the range of $13.4 billion, with core operatingincome expected to be in the range of $400 million-$480 million, or 3.1%-3.6%of revenue for the full year. This guidance reflects the year-over-year growthin revenues of 8% and core operating income of $110 million, or 33%, EBITDA ofapproximately $670 million, a growth of 23% on a year-over-year basis.

Finally, cash flow fromoperations are estimated to be in excess of $600 million for full year,providing approximately $260 million of free cash flow after capitalexpenditures and dividend payments.

And now I'd like to hand the callover to Tim Main.

Tim Main

Thank you, Forbes. Q1 was apretty good quarter all around. It was great to see operating margins coming atthe high end of the range, but I was especially gratified by the strong cashflow from operations performance.

In last year's first quarter, weconsumed $252 million of cash, but this year we produced $143 million. Thisallowed us to pay for good deal of NSN, cover our CapEx fees and still havesome free cash flow for the quarter.

It was also good to get ROIC backin the teens and in a position from which we can really drive furtherimprovement. This is our third consecutive quarter of improvement on thecritical financial metrics we're driving namely margin expansion, cash flowgeneration, and increasing return on invested capital.

As expected, we will take a stepback in margins and ROIC in fiscal Q2. However, we will generate very strongcash flow from operations, as our working capital needs contract a bit.

Second half of the year, weexpect to resume margin expansion, cash flow generation, and increasing returnon invested capital.

Our consumer division performedwell during the quarter. Revenues in mobility and displays were particularlystrong. Global demand was very good, but US demand has been weaker thanother areas of the world.

We are fortunate to have improveddiversity in this sector and we will continue to focus on diversity in coming quarters.The second quarter may be a bit deeper V-shaped than what we would like, but itis not a great deal more than its previous years on a circular basis.

The division is expected toperform for the year consistent with our previous indications that is on ayear-over-year basis down in the first half and the stabilization, and thengrowth over the second half of the year.

The EMSdivision performed close to plans. Although the housing led slowdown in USeconomy did have some impact. Keep in mind that our industrial, instrumentationand medical sector now encompasses white goods and residential and industrialcontrol customers that are absorbed from demand reductions.

Overall, revenue for the divisionwas about $70 million less than expected after considering that NSN transactioncontributed $27 million in the quarter. With the additional $70 million inrevenue we would have hit a 4% operating margin for the company for the thirdquarter.

For division we expect modestgrowth in fiscal Q2 and expect growth for the full year to be in the low tomid-teens and that's being the EMS division.Our aftermarket services division performed well and we expect this goodperformance to continue for the balance of the year.

The company is in a very goodposition to expand margins, generate cash flow and increase return on investedcapital, particularly as revenue gained steam in the second half of the year.As the midpoint of guidance we expect EBITDA margin of over 5%, close to $700million for the year. With CapEx requirements of about $300 million, we expectto have a highest free cash flow year in our history

With that we can take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Yourfirst question is from the line of Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Thanks. Guys just looking at mix:what is the guidance? Margin seems to be down about 130 basis points. Thatseems to be a lot softer than what we have seen for last few quarters and thethird quarter. I am wondering: is there something else beyond the consumersoftness that may be impacting that? May be: simply a higher margin businessseeing a bit of softness? Could you talk about that?

Tim Main

It's actually what Forbes saidduring the prepared remarks in terms of the dollar decline and the margindecline very consistent with previous years. So, we are not seeing that beingout of line.

At $318 million decline inrevenue, it creates that lower operating margin dollars, and that's reallyactually little bit less than it was in fiscal '07. And the same amount ofincome declined for dollar revenue in FY '06. So that's actually prettyconsistent.

We also said we did have somesoftness in our UShousing-basing industries. And industrial controls, white goods: that kind ofstuff, is in our industrial instrumentation and medical segment that wasforecasted to be up 8% for the quarter. And it's actually consistent or down alittle bit.

So we've lost [awesome] revenuethere. So, call it about $70 million of better margin business in theinstrumentation, industrial and medical control segment. Those had somewhat ofa negative impact on margin.

Amit Daryanani - RBC Capital Markets

How much of your total revenuedid you assign to the US Housing?

Tim Main

Sorry.

Amit Daryanani - RBC Capital Markets

I am sorry. How much of yourtotal revenue base do you estimate is assigned to sort of the US housing market?

Tim Main

We don't have any number likethat at all. The industrial, instrumentation and medical segments are prettybig segments. But we did talk about the EMSdivision in Q1 being about $70 million less than expectation. So, if you wantedto look at that impact, that would be about the level of the impact.

Amit Daryanani - RBC Capital Markets

All right. And then just finally,I mean: unless you guys provided some full year revenue and EPS guidance. Maybe could you just talk about: what makes you to provide this guidance this timearound when you guys actually refrained from giving it at the start of theyear?

Tim Main

Right, because at the start ofthe year, we were entering a period of economic uncertainty, and the sub-primestuff was gaining some steam. And we were very reticent to provide full yearguidance at that time, because we felt it would be wiser to wait until some ofthat could be embedded into our customer schedules and our forward-lookingexpectations.

At this point, we think we haveabsorbed what needs to be absorbed in order for our investors to get a betterappreciation for how the year looks to us at this point. Given what's occurredover the last quarter, we think it would be much more helpful for you to have arational reasonable outlook on what the full year looks like for JBL at thispoint and that simply has to go off of the Q1, Q2 experience.

If you look at the year, in theback half of the year, we are looking at three significant revenue growth inthe second half of the year over the first half of the year and reallyoutstanding operating margin performance in the second half of the year aswell. So, the full year actually looks pretty good.

Q2 certainly acknowledged thatthe numbers from a margin standpoint are below where analysts had them. Thatwas a little bit of adjustment we hadn’t provided in guidance to analysts, butthe full year looks pretty good.

Amit Daryanani - RBC Capital Markets

Fair enough. Thanks a lot.

Operator

Your next question is from theline of Louis Miscioscia with Cowen.

Louis Miscioscia - Cowen

Hi, great. You guys have givenoperating margins by different sector. Could you only just give the roundnumber? Could you actually go into at least another decimal point and thenmaybe something that might be helpful to us in understanding the Februaryquarter operating margin guidance? Could you maybe give us some thoughts as towhere on a quarter-to-quarter basis the three different groups are going?

Forbes Alexander

So, Louis, in terms of the actualQ1, the guidance we gave, those numbers are very approximate, and they'repretty much dead on, round numbers, that we are seeing here across thesedivisions.

With regards to the second fiscalquarter, if we deal with the consumer division first, clearly our first fiscalquarter is seasonally led, if you will, in terms of revenues. Hence, you areseeing not 4% in terms of cooperating income margin.

With the guidance we've givenacross the various sectors in terms of revenue, doing that math, you see thatrevenue falls somewhere north of the $300 million across that sector, again,purely from a seasonal demand perspective. And what happens there is thatmargin profile then falls pretty dramatically in terms of the consumer businessto a sub-1% percent type number.

Now, as you look at it on anoverall basis, and we have given you some guidance there in the back half ofthe year to try and help you through this is you will expect in the consumerdivision as we see the sequential growth come back from the lows of Q2, Q3, Q4an overall 2.5% for the fiscal year.

In terms of the EMSdivision, 3% in the first fiscal quarter, and we expect that to drive towards4% in the back half of the year. So we should see steady increments in that aswe move through the fiscal year in that regard. And, with the aftermarketservices division, they have got a relatively consistent margin profileroundabout that 7%.

Louis Miscioscia - Cowen

Okay, great. Maybe on theconsumer side, Tim, you gave us some update. At the Analyst Meeting you hadtalked about we're improving the relationship with Nokia. Can you give us,maybe, an update there how things look for qualifying and winning new programswith them and/or some other big cell phone customers, I guess, coming intowards the tail end of the year?

Tim Main

Yeah. I can't speak specificallyto Nokia. We just now discussed direct customer relationships, but the progressin the mobility area has actually been pretty good. We have, I think, four ofthe top five device manufacturers in the world as customers. We're getting verygood penetration in the visual mechanics area as well as Jabil's core business.

So, in terms of performing theplan and what we've communicated previously, that's really right on track. Weexpected that that business, on a year-over-year basis, to be down in the firsthalf. It will be down in the first half, although we're making more money inthis segment than we did in the first half of '07. And then, in the secondhalf, we're stabilizing really in Q3, and then seeing significant growth againin Q4 of '08.

So that looks on track, Lou.Very, very good progress across all the customers there, pretty good diversity,and we're pretty excited about it.

Louis Miscioscia - Cowen

And when you said: four of thetop five. Were they TaiwanGreen Point or they are moving into then the EMSside of the business too?

Tim Main

Its rolling company now and thatkind of distinguish between the two. But you can be assured we're working on anend-to-end solution for all of the customers.

Louis Miscioscia - Cowen

Okay. Thank you.

Tim Main

You bet.

Operator

Your next question is from theline of Kevin Kessel with Bear Stearns.

Kevin Kessel - Bear Stearns

Thank you very much. Hi, guys. Ijust wanted to actually go back at this margin question that was asked earlier.When I look at your midpoint of your guidance, and then I look at your SG&Aguidance, essentially, what I see is that gross margin on a percentage basiswill be down about close to 20% or 19%, and in terms of basis points, a littleover 135. Then I look back over the same timeframe over the last five years sinceyou've acquired Philips and your consumer exposure has been growing, andreally, on average, it's only been about 1.5% gross margin decline fromNovember to February, in a basis points-wise, gross margins have only reallydeclined about 11 basis points on average.

So I'm just trying to understand:where, maybe, the disconnect is? The SG&A is right at around $122 million.And I guess that would imply that the degradation is happening at the grossmargin level. So maybe: it's something within the mix? Or, you know, I'm notsure.

Forbes Alexander

Kind of tough road to followthat: In the last five years, '04, '05, '06, '07, '08, the operating incomedecline as a percent of revenue starting in '04 has been 14%, 11%, 18%, 18%,and then this year 16%. So: very, very consistent with previous seasonalpatterns.

What happened in some of thoseyears, '04, '05 and even '06, to a great degree is we were adding a lot ofmarket share with customers and there was a lot of organic growth. And so, eventhough, program-by-program, it was a seasonal decline, we were covering thatwith new program wins and new customer wins and that kind of thing. So theactual dollar decline wasn't really as much.

So we're not doing that thisyear. Again, on a year-over-year-year basis it's going to be the first half ofthe year will be down in consumer. But, in terms of the core operating declineas a percentage of revenue right on exactly with what it's been in previousyears, so very consistent pattern.

Kevin Kessel - Bear Stearns

Right, yeah. I actually didn'tanalyze on the operating line. I was looking more at the gross line, because Ifigured once we knew what SG&A was, then we could kind of look at just howthe gross margin trends have changed.

Forbes Alexander

Yeah. I'm looking at operatingincome, and I'm not sure if gross margins or SG&A plays heavily in that ornot.

Kevin Kessel - Bear Stearns

Okay. I'm not sure. Maybe talkabout it offline. And then the other question, I guess, is just in general onthe SG&A line as we go forward. I'm assuming that the legal fees at thispoint are pretty much done as we go into the next quarter, into the Februaryquarter….

Forbes Alexander

Yeah. In that guidance there ismaybe $500,000 to $1 million. We still have some ongoing legal activity interms of cost processes and such like, but it's certainly not material in anyway, Kevin.

Kevin Kessel - Bear Stearns

Okay. So then, Forbes, I mean,obviously, the store restructuring that have to happen and there are still cashpayments that will occur at some point in the second half of the year and innext year. I think there was a 115 that you quoted for an expectation,including Nokia Siemens.

Forbes Alexander

Right.

Kevin Kessel - Bear Stearns

Would you expect that to thenstart to go down, I guess, in May and August as some of that restructuringoccurs and some of the headcounts comes off the book?

Forbes Alexander

Yeah. I think there is someopportunity in fiscal Q4 more so than Q3. Any activity in Q3 is likely to bemaybe one month of batch for there. It's really more of a Q4 event. So, we'reselling some opportunities, Kevin, and maybe a million or two come out there.We just have to see how the discussions continue with the various employees'representatives.

Kevin Kessel - Bear Stearns

Okay. And then, just lastly onR&D. I think Beth had said that the reason it was down, because almost thethird as a percentage was excess of more, was it customers paying for thedesign activity or…

Forbes Alexander

Yeah, but some of that and somedeploying some of our resource. We will be ramping up some of our designresource and in Shanghai, in particular forexample where cost trend typically lower than we have seen here in the U.S. or Western Europe.So, some element of that and some element of collaborative type design where nocustomers with ourselves are working conjunction on product platforms andfunding those jointly rather than that being a straight funding by Jabil. Thatwas down about what $2.5 million to $3 million.

Kevin Kessel - Bear Stearns

Great, thank you.

Forbes Alexander

Okay.

Operator

Your next question is from theline of Jeff Walkenhorst with Banc of America.

Jeff Walkenhorst - Banc of America

Great, thank you so much. Forbes,well, actually may be both of you guys, Tim, when you look at your varioussegments and over the past year: can you give us an idea of kind of what as youthink about managing a portfolio of revenue stream, gunning for that 4%operating margin? And I am sure some of them are above that and othersobviously below that: Are there any areas that are substantially lower than sayyear ago, because of market competition?

Tim Main

No actually in terms ofyear-over-year, all of the segments are a little bit better and so in Q1 of '07EMS division was about 2.3%, this past quarterQ1'08 it was 3. Previous year in consumer was about 2.5% operating margin thispast quarter Q1'08 it was 4. And the EMSdivision was pretty consistent.

So, what was in talking about andwhat is actually seen since our February '07 quarter when core operating marginwas 1.9%. You've seen very significant improvements in our margin structurefrom 1.9% to 2.9% in Q3, to 3.3% in Q4 to 3.6% in Q1. And everybody should haveexpected that declining consumer would be a setback, but looking our guidancefor the second half of '08, we were talking about $6.8 billion in revenue,about $4.4 billion in EMS and expect the core operating margin EMS as $4billion, $2 billion in the consumer segment, we expect the core operatingmargin about $2.5 billion and the EMS division of $350 million with consistentcore operating margins. So, that blends out in the second half of roughly 2.6%,2.7% in terms of core operating margins.

And, really, looking at this pastquarter again, another $50 million, $60 million of this housing slump revenue,we would have hit 4% this quarter. So, I think, it's really clear now that thecompany has a 4% operating margin potential on expectation. I think that's anear-term expectation than a long-term expectation and the performance in Q1 isvery, very clearly pushed us in within a hair's breadth of that level.

And you look at Q3 and Q4 theback half of the year; we are looking for about $400 million of revenue growthfrom the first half of '08 to the second half of '08. That's only $400 million.We expect that to come about $75 million to $100 million in Nokia SiemensNetworks, about $40 million from automotive business and about 100 million fromnew customer wins and a modest recovery in the Industrial Instrumentation Medicalsegment, about $50 million from defense and aerospace and about $80 million outof our networking group.

So, very, very identifiable wherethat's going to come from and that $400 million of additional revenue alongwith the benefits of the rationalization program that we have had under wayfeels very clear to watch the high 3%, 4% operating margin range is achievablein the back half of the year. That most encouraging thing for me in running thebusiness or margin expansion, but also a cash flow generation return oninvestment capital is given the additional size we have and with rapidlyimproving margins we are going to generate very significant levels of cashflows from operations and free cash flow.

Looking at the midpoint of theguidance, looking at cash flow from operations of $600 million EBITDA, $680million, $700 million CapEx requirements of $300 million, we are going to throwoff a lot of cash and that's more of a business [force].

So, I think, not withstanding maybe some of the angst about Q2, I think really step back and looked at it it'svery consistent with history and very understandable and looking at thecontinued rapid recovery of margins, free cash flow and return on investmentcapital. Even in this kind of murky, spooky economic environment it's reallykind of good annual plan.

Jeff Walkenhorst - Banc of America

Okay that's helpful color Tim.And then just a follow up, so the competitive environment hasn't crashedmargins and some of these different segments, say in the service segment: ithasn't deteriorated materially or it’s flat? Or: may be even higher given yourdifferent mix from a year ago? Or: how can we get more color on that?

Tim Main

We are providing you operatingmargin by division not by sector and we will stay with that policy. In somesectors that we talk, generally are higher margin than others. The industrialinstrumentation/medical segment tends to be very complex, very high mix. So,the margins there are generally better accretive to the overall corporate averages.However, it takes more infrastructure to run that business. And therefore thereturn on invested capital is consistent with the other segments.

Computing and storage, there aresome high lying programs there, where the operating margins might be little bitlower. But there are also some very complex areas where margins might be littlebit higher. We are not noting, we are making great progress, particularly inthe storage area, particularly enterprise storage area. And our margins arefine. We are not seeing any crazy competitor activity there. It’s a greatsegment. It's been growing for us. And we expect that to be, to that experienceto continue.

Jeff Walkenhorst - Banc of America

Okay. Thanks so much, guys. Goodluck with everything.

Tim Main

Thank you.

Operator

Your next question is from theline of Jeff Rosenberg with William Blair & Co.

Jeff Rosenberg - William Blair & Co

Good afternoon. I first wanted toask you: if you could maybe give a little bit further color on the volatilitythis year in mobility and display area? It was well above your plan for thisquarter. And so maybe a little bit of color there, if you can, on: where thatcame from? And: whether it was handsets or displays? And then also if you lookat after this quarter's decline, you will be about 10% I think below where youstarted in Q4. And I think that’s a little more of a down stroke than younormally see. So, if there is some color there as to in terms of: what you areseeing? In terms of sell through, anything at this point that’s causing thatlevel of volatility?

Forbes Alexander

Yeah. I don’t think there is anyhuge volatility there. I think we've forecasted this, that sector to be up 25%and it was up 36% or something like that. The mobility products and displayproducts were very strong and actually maybe little stronger if some componentshortages had not transpired. So, that’s pretty good, I think people have beingconservative about the second quarter. And I think that’s probably correct inthis type of environment.

Not to say anything negativeabout sell through rates, actually I'm happen to be somebody who doesn’tbelieve that we're in a recession or are likely to go in a recession. I don’tknow, we've given you a wide enough range of guidance to accommodate someadditional softening, along with higher end of the range if things seem to firmup a little bit that we have a regional side of achieving. So, it may seem alittle bit more viable to you Jeff, but it's actually pretty consistent withwhat we said, maybe Q1 was little better than we expected, but when you thinkabout the first half of '08, we said on a year-over-year basis that'll be downa bit. It will be in the second half of '08 we see stabilization and then aresumption in growth. And I think if you look at the margin side of it,actually a healthier growth.

Jeff Rosenberg - William Blair & Co

Okay. And just want to clarifyone thing you were talking about a minute ago about the $400 million ofincremental revenue in the second half versus the first: was that for the wholebusiness or just the EMS segment?

Forbes Alexander

That’s for the whole business,because if you look at consumer, it's relatively flat, first half to second half.

Jeff Rosenberg - William Blair & Co

Okay. And so, but yet, the newprograms that we've talked about does that relate to the model that you formedby integrating Green Point: is that in that $100 million? I guess may be a little bit of, may be thatpeeling back a layer to understand the business that's kind of that's buildingup and coming back through the seasonal period here, but: how should we thinkabout the magnitude of that benefit for you in the second half?

Forbes Alexander

I think you should look at themagnitude, that benefit being actually pretty low in terms of new programcontributions from the vertical model with mobility customers. Again, I am nottalking specifically about Nokia, but I think you should look at that asrelatively low. So, a $2 billion second half versus roughly a $2 billion firsthalf that takes into consideration Q1, and then a very deep decline in revenuein Q2 on average, about what we'll see in the second half of the year. We'llstart to pickup a lot of steam in Q4 of '08 in that sector. So, we feel very,very confident about that. We see it coming, but for the annual buckets thatwe're talking about $2 billion first half, $2 billion second half.

Now, also keep in mind that someof the program wins that we'll see tend to have lower dollar value in absoluteterms. So, lower end phones and visual mechanics tend to have a lower revenuelevel than higher-end phones and (inaudible). We're really driving thebusiness, not for revenue, we're driving the business for cash flow, margin andreturns and we think the mix of our business will be much healthier in thesecond half of '08 than the second half of '07 and first half of '07. So themix is actually been improving for us for the last six to nine months.

Jeff Rosenberg - William Blair & Co

Yes, and then one last question Ihad was you have been talking about the way your operating margins will getback to in the second half and you're building on the success you have had forthis quarter. But if we look toward the lower end of your guidance range itseems if that would imply you'll fall short there.

What are the risks that you seethat want you to give that wider range and leave yourself that room toward thelower end of your range? Is it strictly a matter of operating leverage if therevenue doesn't come? Or: is there something else there that needs to happen toachieve the midpoint type targets you've been referring to?

Tim Main

That's a great question and agood see up. It's got nothing to do with things magically that have to happenor things negative that we think might happen. It's all got to do with how therevenue comes through and what the production levels are. And that's goteverything to do with the macroeconomic environment.

So, we're trying to give people ataste of what additional softening would look like at the low end of the range,kind of middle of the road and at the midpoint. And then, maybe, if thingsfirmed up a little bit and we gain a little bit more steam in the second half,we could hit the higher end of the range.

So, it's really just about theeconomic environment and trying to discount what that might mean to us. So, wethink it's a reasonable range with additional softening if things begin alittle bit firmer. I think interesting thing though when you look at that. Evenif a down, lower end of the range scenario were to play out, we're still goingto have decent operating margins, strong free cash flow, and we'll produce ahell of a lot of cash as we go through that process.

So, now this is a scenario wherewe're either going to produce a lot of cash and have a lot of cash sitting onthe balance sheet in a low growth or negative growth environment, or reallygoing to have to be affirming of demand and look at very strong marginexpansion and cash flow. And that's really kind of the message of the callparameters. It's really about the revenue at this point.

The business, nothing wrong withthe business, there is nothing wrong with the customer base. We're really in anexcellent position to show very strong snap and very strong benefit from everydollar revenue increase and that feels good to us. It's been a little bit oftime since we've been in that position, but I think the picture is pretty clearif you look at the progression from Q2 '07 to Q3 '07, Q4 '07, Q1 '08, very,very strong progression. So looks good to us.

Jeff Rosenberg - William Blair & Co

Okay. Thanks a lot.

Operator

Your next question is from theline of Alex Blanton with Ingalls & Snyder.

Alex Blanton - Ingalls & Snyder

Good afternoon. Tim, just acomment, you need to get after your webmaster because your release was not onthe webpage until somewhere between 5:00and 5:15. The slides werenot there when you started the call. I actually had to sign on to the webcastin order to see the slides. So, for the future, just a comment.

Now, I don't want to be the deadhorse, but the decline here that you are forecasting for the second quarter isfar greater than anything that you've seen in the past. For example, EPS firstand second quarter in '04 was down 4%, and in '05 was down 16%, and in '06 wasdown 16%, and only last year was it down 52%. So we're looking here for a 50%decline this year. Now this is comparable last year, but not to any other year.And I think it's completely unexplained so far.

Now the other thing that I note,and this is very unusual, the incremental margins given the guidance for thesecond quarter, it would be a decremental 16%, as you said, 16% of salescompared with 3.6% of actual margin. So that's a far bigger incremental marginnegative than we normally see in this business. It's an operating figure, noteven a gross margin. It's kind of in line with what you'd see at Caterpillar orsomething.

So, if you add the reverse, ifyou had a $317 million increase in sales for the second quarter over the first,and the same incremental margin on the upside, you would add $0.21 to theearnings, or if you would have a 9% that would be a 9% increase in sales, andyou would have $0.21 plus $0.36 or $0.57 for the quarter, and you would have a4.7% operating margin in the second quarter.

So, if reversed it and you havethe increase, you would be going over the top. So I don't really understand it.And you mentioned the $70 million would give you 4% operating margin for thequarter if you had $70 million more in sales. Well, that would be a 23%incremental margin on the upside and you would have had $0.43 per share if youjust had that extra $70 million. So, I just don't understand: why suddenly thisbusiness has gotten so leveraged? Can you address that issue? I mean: there isan awful lot of operating leverage here implied in these numbers.

Tim Main

There is an awful lot ofoperating leverage, that's for sure. Depending on this business and this sectormaterials can range anywhere from 70% to 85% of our revenue dollars. So, if youare sitting here in a quarter, dollars doesn't show up. Let's say it's an 80%material cost business you are going to lose, 20% of that $70 million inmaterial margin or profit, $14 million. That's kind of the easy math on howthat would equate to a 4% operating margin and it wouldn't go to $0.43 orwhatever that is. And in terms of…

Alex Blanton - Ingalls & Snyder

Wait, wait. I don't understand:if you have a 4% operating margin, you had $70 million of sales; you would beadding $16 million to operating profit.

Tim Main

$70 million that…

Alex Blanton - Ingalls & Snyder

And that would be 23% of the $70million.

Tim Main

$70 million, a 20% going with myexample is $14 million. So, there is operating leverage there. That's for sure.And so there is operating leverage on the second half of the year. That'ssubstantial for us.

Alex Blanton - Ingalls & Snyder

And well, perhaps you'reimplying, if you get to a $1.50 with these first half numbers, but what I don'tunderstand is: why all of a sudden we are seeing this great operating leveragewhen in the past this business has not had done?

Tim Main

That's not true, not true. If youlook at the margins again in '04 and '05 the actual revenue decline Q1 to Q2was $17 million in '04 and …

Alex Blanton - Ingalls & Snyder

Okay.

Tim Main

$117 million in '05.

Alex Blanton - Ingalls & Snyder

Okay.

Tim Main

$9 in '06

Alex Blanton - Ingalls & Snyder

Okay.

Tim Main

Operating leverage was exactlythe same.

Alex Blanton - Ingalls & Snyder

(inaudible) and negative 16%?

Tim Main

I am sorry.

Alex Blanton - Ingalls & Snyder

What you are talking about isnegative incremental margin of 16%?

Tim Main

The operating leverage negative…

Alex Blanton - Ingalls & Snyder

It was and you are saying it wasin '06 quarters too.

Tim Main

Yes it was

Alex Blanton - Ingalls & Snyder

But, if you go forward and havethat one the upside that's what I am saying and the numbers go out of sight. Ifyou take a 16% incremental operating margin on a actual margin of 3.6 it goes uppretty quick once you get a sale volume…

Tim Main

You get to a point where thatmanufacturing infrastructure is sitting there.

Alex Blanton - Ingalls & Snyder

What?

Tim Main

You get to a point, where youabsorbed all of that manufacturing infrastructure.

Alex Blanton - Ingalls & Snyder

Yeah.

Tim Main

However, additional revenue youhave to add manufacturing infrastructure and the operating leverage then goesdown. So, there is a point, if we snap back to $3.3 billion level then it willbe significant positive operating leverage and then for revenue over that $3.3billion level theoretically we would begin have to start adding additionalmanufacturing capacity.

Alex Blanton - Ingalls & Snyder

Which cuts into it, of course?

Tim Main

Yeah, that's quite. So, we havepositive operating leverage which then would be less.

Alex Blanton - Ingalls & Snyder

Okay. So this big operatingleverage is operative within a range or volume, that's what you are saying?

Tim Main

That's correct.

Alex Blanton - Ingalls & Snyder

Okay. Alright, well it just asurprise because the consensus with $0.31 for the quarter and you are tellingpeople that you are going to have earnings about 40% below that and I reallythink you ought to recognized that. I mean this is quite a big disappointment,this report, the second quarter guidance and the full year guidance theconsensus is right at the top of it $1.5. So, I think that that's what you areseeing reflected in the comments on this call and in the stock price. I will getout. Get to the end of the queue, thanks.

Operator

Your next question is from theline of Jim Suva with Citigroup.

Jim Suva - Citigroup

Great. Thank you very much. Timand Forbes, can you help me understand a little bit, we talked about growth alot, but when I look at your February quarter, if I got my math right, therevenue is at $3.0 billion, $3.1 billion. Year-over-year, unless I have somebad math going on, it looks like organic growth at best is flat, if notnegative, because we got a layer in Green Point as well as Nokia Siemens. Canyou help me about my math? Or, may be: connect the dots about what's going onwith organic growth? And: what was it for November?

Tim Main

No. your math is correct.

Forbes Alexander

Math's correct and for…

Tim Main

Nokia declined by about -- Nokiain that quarter was, I can't remember what the percentage was, but certainlyover 10% customer. And so, year-over-year revenue for that particular comesdown probably $300 million?

Forbes Alexander

Yes.

Tim Main

Something in that order. So thereis $300 million of organic growth. That makes up for that one individualcustomer revenue decline.

Jim Suva - Citigroup

Great! That's very useful. So:the majority of the decline was due to that trends? Or: that’s a decision thatthat customer made.

Forbes Alexander

Yeah.

Jim Suva - Citigroup

Great! Thank you, gentlemen.

Operator

Your next question is from theline of Paras Bhargava withBMO Capital Market. Paras, your line is open. Your next question is from the lineRashedul Din with CreditSights Incorporated.

Rashedul Din - CreditSights Incorporated

Hi. Good afternoon. Thanks. Justhad a quick question on your $400 million that you have remaining in yourbridge facility: could you provide an update on that real quick?

Tim Main

Yes, of course. Today, actuallywe paid that $400 million loan on the bridge facility by using our $800 millionrevolver. At the same time, we entered into a 180-day, $200 million revolverwith the syndicate of banks. And ultimately what we are looking to do is totake that the 400 we have drawn that under revolver some form of permanentcapital as we enter the new calendar year here.

Rashedul Din - CreditSights Incorporated

Okay. So with the increased cashflows that you expect in the fiscal 2008: is there any plans on reduction or--?

Tim Main

That's clearly an alternativethat's open to us, because, as you say, these cash flows are very strongindeed. Before we have done earlier this year. In fact, it's structured ourcapital balance sheet in such a manner to allow us to do that. We put in placein July a $400 million term loan B facility as part of that structuringactivity with no prepayment penalties there in that regard.

So, that's certainly analternative to us. And there is something we'll consider as we move through thesecond and the third fiscal quarter.

Rashedul Din - CreditSights Incorporated

Okay. Great! And just going backto a question we had earlier, when we talked about $70 million to $80 millionin incremental revenue you could have got from the manufacturing stuff: wasthat example where we had $0.20 on the dollar? Was that $0.20 operating marginprofit we are talking about?

Tim Main

Yes, it was core operating andcommercialized.

Rashedul Din - CreditSights Incorporated

Okay. So now, as we are talkingabout the operating leverage looking at Q2 then, what part of that within the-- I mean as I am modeling things like your gross margins are expected to befar below where it's been over the three quarters, more of this mid-6% level.Is there any kind of additional, I guess, color you can add on that in terms ofwhat part of that -- it's not, I don't know, adding up for me?

Tim Main

I mean your math is absolutelycorrect. So it's mid-6% on the gross margins.

Rashedul Din - CreditSights Incorporated

Right.

Tim Main

What your feeling is you've seenover $300 million of revenue come out with the manufacturing cost base thatremains in place from equipment, employees, overhead in terms of factory squarefootage and space.

So, whilst we do use some levelof temporary labor to deal with these rapid seasonal growth periods, and in theconsumer products area, the majority of that labor that is in place isrelatively fixed. Remembering the seasonal dial is only a 90-day period we'retalking about here.

And looking at the guidance wehave given for the back half of the year, we are looking at additional $400million of revenue coming in, which very, very quickly drives us back up in tothe T2, T3, T4, T5 type levels to achieve that back half target. So you'll verymuch see that leverage of the manufacturing cost base coming back.

Rashedul Din - CreditSights Incorporated

Okay. And we didn't see thatsignificant in last year's Q1 to Q2 even though we had $300 million incrementaldecline. Is that a reason why --?

Tim Main

We did actually, we did. Lastyear, we had somewhere in the region of $290 million of decline with a $53million decline in core operating income, which was about 18%. No, we did havesome write-off in the first fiscal quarter at $12 million. But even that is not16% to 18%. So, it's inside this number of this year.

Operator

Ladies and gentlemen, we havereached the end of allotted time for questions and answers. I will now turn theconference back over to Ms. Walters for any closing remarks.

Beth Walters

Thank you for joining us on thecall today. Sorry about the technical difficulties we experienced. And also tolet participants on the call know that Tim Main will participate or be on[StockBox] tomorrow morning at 6:50 AM.Thanks again for joining us on the call.

Operator

Thank you for participating intoday's conference call. You may now disconnect.

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