FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (TMF Ralegh)

Jabil Circuit Inc.
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10800 Roosevelt Blvd.
St. Petersburg, FL 33716
(813) 577-9749
http://www.jabil.com

ALEXANDRIA, Va., (March 28, 1998) /FOOLWIRE/ -- Global contract electronics manufacturer Jabil Circuit reported Q2 EPS of $0.52 on revenues of $330.7 million for the second quarter of its fiscal 1998. President Tom Sansone and other executives held a conference call on March 17 to discuss the quarter and the rest of the year.

All dollar amounts in millions expect for per-share amounts.

Revenue for the quarter was $330.7, with cost of revenue of $286.6, resulting in a gross profit of $44. Sales, general, and administrative (SG&A) expenses for the quarter were $12.9 million, with R&D expenses of $0.879, resulting in operating income of $30.3. Interest expenses was $1.1 with pre-tax income of $29.2. Income taxes were $9.1 with net income of $20.1 for EPS of $0.52 based on 38.6 million shares outstanding.

Through six months of the fiscal year, revenue was $650, operating income was $60, and net income was $39, for EPS of $1.02.

At the end of Q2, cash was $56, accounts receivable (A/R) were $120, inventories were $90, property, plant, and equipment (PP&E) was $182, and total assets were $455. Total current liabilities were $171 and total stockholders' equity was $229.

Tom Sansone on Operating Results

Revenue for all sectors expanded at or above out targeted growth rate, expecting only the peripheral segments. Weak peripheral revenues reduced our overall revenue growth rate to 15% compound annual growth rate from the prior quarter, although this amounted to 49% year-over-year revenue growth rate. The communications segment grew at targeted annual growth rates sequentially as a result of new products and increased production for current customers. The PC segment increased 17% sequentially as new product production levels offset declines in production of older desktop and notebook products. The peripheral segment declined 18% sequentially as a result of lower levels of production of storage products. The automotive segment grew above targeted growth rates sequentially. The new consumer segment grew above targeted levels, the satellite set-top converter box production continued at mass-production levels, along with increased production for several smaller customers.

Gross margins increased to 13.3% of revenue, reflecting the ongoing concentration of product mix and high value-added products and continued high levels of plant loading. SG&A increased to $12.858, or 3.8% of revenue, due to further staffing of Mexico along with additional information technology and corporate staff. Operating income increased to $30.3, or 9.2% of revenue, representing a 14% compound annual growth rate (CAGR) over operating income for Q1 and a 71% year-over-year growth. Operating income growth is our key financial objective. Interest expenses increased by $0.421 to $1.224, representing 3/10 of one percent of revenues. Income tax rate decreased to 31% of pre-tax income compared with 33.4% in the prior sequential quarter, reflecting increased relative profitability in lower tax-rate areas, leading to net income of $20.139, or 6.1% of revenue as compared to 6.0% in the prior sequential quarter.

Although 14% sequential CAGR in operating income is below our targeted annual growth goal, we're pleased with these events within the context of economic uncertainty and turbulent production schedules that have been out there for the last couple months.

Balance Sheet and Asset Management

For the second quarter, we have improved asset turnover ratios from November, generating positive cash flow from operations for the ninth consecutive quarter. In reviewing the major balance sheet accounts, A/R decreased by $14 to $120 from Q1. Calculated A/R days sales outstanding was 33 days as compared to 38 days in Q1 with actual collection experience in the quarter of 33 days as compared with 35 days in the November quarter. Our inventories decreased by $22 to $90 as compared to $112 as of the end of November. Calculated inventory turns were approximately 13 times as compared to 10 turns in November. Cash balance increased $13 from last quarter. Fixed assets increased by $18 to $182, reflecting $26 in capital expenditures offset y $8 in depreciation. From a borrowing standpoint, we are not using any of our $100 credit facility. Long-term debt remained constant at $50 in Q2. Our entire long-term debt is represented by the $50 private placement debt funded in May of 1996. Principal payments on the debt begin in mid-1999.

The company's debt to capitalization ratio is now at 18% with total liability to equity ratio at the end of the quarter of 1:1. For the quarter, our average return on assets (ROAA) was 17.6% with an average return on equity (ROAE) of 37.5%.

Business Outlook

The overall business outlook is not as robust as in the last several quarters. Recent uncertainty for some products and sectors are becoming apparent as softness in planned production levels for the spring and summer. Although no pattern appears from the products effected, fears concerning Asian economic disruption may be affecting the sales of some of our customers' products. Inventory corrections and product transitions are a recurring theme, as well. Most of our major customers are indicating lower demand for sub-assemblies for our third quarter. Turning to revenue, Q3 1998 revenue is anticipated to decline to a level near that which we experienced in Q1 1998. The communications segment is expected to decline modestly in the near-term due to lower production levels related to transitions to new products for some customers. The aggregate production for the segment appears positioned for flat levels of production in the summer with increases in the fall.

Production levels in the peripherals segment are expected to rebound somewhat in the spring, approaching the revenue levels of Q1 1998. Growth in the production of PC peripherals will be offset by inventory corrections for storage products. Sequential growth is anticipated to resume at or above targeted levels by the fall. Production levels in the PC segment are expected to decline in the spring and are positioned to rebound somewhat in the summer, when production of new production of new products is scheduled to launch. Production schedules for desktop products are anticipated to decline by 15-20% in the spring. Production levels in the summer are anticipated to increase from spring levels. Customer mix in this segment is anticipated to shift significantly as production of new products for Gateway 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %> are anticipated to offset end-of-production for certain Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> products in the summer quarter. Gateway is anticipated to become a broader-base customer in the spring as additional parallel production launches in Malaysia.

Automotive products appear positioned to expand to targeted growth rates in the spring as the penetration of current products expands to more car platforms. Production is anticipated to slow in the summer months during the typical model changeover with growth resuming in the fall. Production levels for consumer products appear positioned to hold steady as declining production levels for set-top boxes are offset by increasing production of home appliance assemblies.

Gross margins are expected to return to levels experienced in Q1 based on a continuing mix of high value-added, low-revenue products. This outlook will be affected by several factors. Some of our factories are expected to have margins eroded by under-utilization of fixed costs. The new Mexico plant is positioned to achieve positive gross profit in the third quarter. Net profit should be close to break-even. In other words, the continuing concentration of low-volume, high-mix products is anticipated to maintain recent margins in spite diseconomic loading levels forecast for some of our factories.

We anticipate lower levels of operating income over the next two quarters due to the lower production levels and transitions to new products for some existing customers in the late spring and summer. Absolute operating income is expected to decline from Q2 levels by 12-14% in the spring and continue at those levels through the summer. By fall, operating income appears positioned to return to Q2 1998 levels. We are continuing our goal of a 30% CAGR in sequential operating income for the remaining quarters of fiscal 1999.

As an update on the new factories, our new locations in Mexico, Scotland, and Malaysia are all on-line and operating to near-mature levels of efficiency.

SG&A is anticipated to expand to 4.0 to 4.1% of reduced revenues, somewhat above our target goal of 3.5%. Interest costs are expected to remain at about 30 basis points (1 basis point = 1/100th of a percentage point) for the balance of the fiscal year. The tax rate should remain at the 31% rate experienced in Q2 for the balance of fiscal 1998, somewhat below our targeted rate of 34% to 34.5%. Fiscal 1999 tax rates are anticipated to average near 33%.

In summary, results for Q2 were excellent. While we are disappointed for the near-term outlook for product transitions and inventory corrections, we are encouraged by the longer-term prospects for expansion in fiscal 1999.

Question and Answer Session

Tom Sansone said that he is not hearing from his operating people of any significant developments in component pricing or inventory levels.

The competitive environment is every bit as competitive as it has always been. I don't see competition increasing particularly, as competition is as keen as it has been right along. Competition is perhaps heightening for our customers' products.

We're a board assembler, as opposed to a fabricator, and I think one of the things that Mexico needs is some good fabrication capability. As far as the assemblers go, the only Taiwanese that I'm aware of are the people that do PCs and which typically operate in the marketplace on a private label basis. I don't see them as being directly in our space although they can secondarily displace our products.

For fiscal 1999 guidance that the company is providing, this is longer-term guidance than we're seeing, but it is based on program awareness that we have for a number of our customers and the fact that a good deal of what we're seeing we perceive as pipeline reduction, inventory correction, people really going down to minimum inventory levels. Our belief is, the long-range planning that we're getting, would suggest that surplus inventory levels will be consumed and we'll be in a position to advance and return to a normalized growth rate by the fall quarter. We also have some new business targeted for that period, as well.

In response to a question about original equipment manufacturers (OEMs) looking at the possibility of selling manufacturing assets and looking to outsource to Mexico-based producers, Sansone didn't want to comment on anything specific, but did say that the kind of reduction in production levels that Jabil is seeing right now for companies that are using external manufacturing really winds up being a blip, since all their costs are variable. Companies that are fully vertical with deep bricks-and-mortar exposure to products lines wind up with real downside risk anytime that total markets slow down. Jabil is looking at reductions that are really modest compared to an OEM that doesn't have the diversified base that Jabil has. This kind of an episode, whether it's imagined or real, still has the same emotional impact on the vertical OEMs out there. I would expect that we will see a very high level of inquiries from OEMs who have historically been very committed vertical manufacturers.

As part of that, I would expect we will see more opportunities to acquire OEM factories and a higher quality of OEM factories, as people that have had more successful factories stop and reconsider whether they want to be vertical or use outsourcing as a competitive edge in the marketplace. I think that will be heavily influenced by what OEMs are successful versus those that aren't in the context of this air pocket. For some companies, this air pocket won't be a big deal, and those are the ones that are using outsourcing. I think this air pocket will be more difficult for those that are highly vertical.

We are making significant investments in re-building our worldwide enterprise resource planning tool. We've discussed that we're in the midst of an SAP implementation that we expect to roll out over the next year. I'm not sure exactly of the composition of increases in SG&A, but I would expect that costs associated with that implementation are probably the largest single shift quarter-on-quarter that we are seeing. We are also seeing full staffing in Mexico reflected, as well, sequentially. Mexico is going to be a very important resource for us going forward.

We're still working on business development issues for Mexico. I think Mexico is going to continue to expand. We've got two customers that are transferred business. We're running significant volumes for Gateway in that factory at present. Based on production schedules, we are expecting positive gross margin out of that factory in Q3. Net results ought to be close to break-even, plus or minus $0.01.

I am very optimistic about results in the fall. Some of the schedules we're looking at in the near-term might be unduly conservative, but our customers are in a better position to assess that than we. There are new products for existing customers that we're planning to participate in as well as products that are expected to be announced and launched probably in the summer that are expected to be hitting stride by the fall and thereafter.

In terms of any large systems assembly projects with corresponding reduction in gross margin, any of that kind of thing, we have not focused on that side of the system assembly business, preferring to concentrate our efforts in systems assembly that is relatively high-mix, low-volume with a relatively low materials content compared to the value added and correspondingly with a margin that is non-dilutive to the kind of margins you typically see with circuit board assembly. We're not really in that space with Solectron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %>, or for that matter, SCI Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCI)") else Response.Write("(NYSE: SCI)") end if %>. For example, final assembly of personal computers is something we've declined so far. We won't rule it out forever, but it's not part of our immediate plan going forward.

I think companies want to be very conservative with how much investment they've got in product in their pipelines. That translates into trying to contract inventory in pipeline at all stages, whether it be in the distribution channel, whether it be on-hand for OEMs, or whether it be on-hand in our operations and so forth. We're the top of the food chain that. We're the ones that are supplying the sub-assemblies are used in inventory and we're the guys that end up being the shock absorbers if somebody wants to take, say 4-6 weeks of inventory, out of the work-in-process cycle. We're going to hear about it first and that's what we're seeing right now. It wouldn't surprise, it wouldn't be dissimilar from a couple other experiences I've had over the last 15 years, to wind up getting out to May and having our customers say "whoops, please put those quantities back in the schedule. We were probably a little premature."

In the peripherals segment, we are seeing some of our customers that have had significant inventory in the channel, significant inventory held by PC manufacturers, are going to want to bleed that inventory off over the next possibly four months. That will wind up slowing down our participation in the sub-peripherals products. Others are actually growing.

We're seeing some supply chain streamlining in the communications area, but only in the case of the companies that have maintained longer inventory - product pipeline - chains. Companies or individual divisions within companies that maintained very short, tight product pipelines are not demanding significant adjustments in our production schedules. I'm getting the intuitive sense that what we're seeing right now is really kind of a positioning for minimum inventory levels for our customers to be in the most competitive posture going forward, because I think there's a lot of uncertainty out there as to what demand is really going to be. We're seeing some of that in every sector. In communications, those product pipelines that are the longest is where we're seeing inventory corrections and declines in production schedules for as long as they can reduce inventories. We're not seeing reductions to speak of from those customers in communications that have a tighter pipeline.

For Q3 and Q4, it's looking like revenues will be in the neighborhood of the $319 seen in Q1 1998 with a pickup in Q1 FY99.

The pickup in gross margin this quarter was due in largest part to product mix. There were also some currency exchange benefits.

From Q4 to Q1, peripherals revenue growth was above the targeted 7-8% sequential growth rate while revenue from peripherals was down sequentially in this quarter.

Inventories were down sequentially because of production schedules upcoming, but inventory turnover of 13 times (annualized), up from 10.7 times in Q1, was the biggest driver there. There was a real improvement in a couple plants during the quarter. Over the last six quarters, we're averaged 10-11 turns, which is our target.

As far as I'm concerned, Gateway is going to be a major new customer, which was announced last quarter, if they turn out to be a 10% of revenues sort of customers, which I think we have an opportunity to get achieve. As far as other new customers, we're in conversations with people and we'll let you know as soon as we know.

Our estimate of subassemblies per customer for the full year is 46, up slightly from 45 last times we measured.

We can see the fourth quarter reasonably well from here, particularly with customers that have been looking to reduce their inventory position and take defensive postures. They've been adjusting their schedules out from spring into summer, so we've had a lot more conversations about the summer, and for that matter about the fall, than ordinarily we would get into. That being said, the real question is whether or not I believe the guidance that we're getting from some of our customers, and it wouldn't be a bad thing to take some of that with a grain of sale if the experiences I've had over the last 15 years are valid. On the other hand, we want to keep investors informed with exactly what we're seeing rather than surprising investors.

I think the competitive position in Malaysia is an important part of our portfolio, not so much on whatever the pricing strategy is based on current costs, but on the competitiveness of the geographic location going forward with a 150,000 square foot plant there. Malaysia is our only tax-exempt location - you can inferentially see that the Malaysia plant will do relatively better than some of our other factories over time.

The biggest driver in our business is the trend to outsourcing. That's the thing that drives the 25% to 40% growth rate we've seen the major companies in our industry experience over the last decade. I see no reason for that to abate. In fact, a little ripple in total production, resulting from the kind of uncertainty we've been around, is probably just the right medicine to scare straight some of these vertical OEMs. I've seen it in the auto industry a couple times during the '80s, I've seen it in the PC industry in the early '90s. When product levels contract, even for a quarter, it really helps them appreciate the benefit of converting those fixed costs into variable costs, especially when they see how well contract manufacturers weather those kinds of opportunities. I'm looking at this as being long-term bullish.

I would expect that we are holding share or expanding at almost each of our customers, with the possible exception of products at H-P that are going to end-of-life, which we don't expect will be replaced, reducing our share there. We are probably gaining share at just about every other account with which we are doing business.

Capital expenditures are planned to be $7 for the rest of the year and depreciation of $32 is planned.

Our financial objectives are not expressed in gross margin. They're expressed as return on risk in a different risk ladder of assets that roughly translates into a return on value add. We're using the same metrics that we were using five years ago, which is the lowest sustainable level that we can offer our customers. We'll look at any business sector that offers the opportunity for us to attain our financial objectives. I don't expect that we'll go out and buy revenue to keep out top line going. We're looking for return on risk - capital is an element of risk. We'll aggressively pursue return on risk and return on value add anyplace we can find it, same as always.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.