Jabil Circuit, Inc. Earnings Call Nuggets: Capital Spending and Revenue Growth

On Tuesday, Jabil Circuit, Inc. (NYSE:JBL) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors on the latest conference call.

Capital Spending

Steven Fox – Fox Research: Tim, just on two questions. First, on the capital spending plans on raw 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 until the full ramps versus the plant 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 them by the end of the year, but what went wrong during the quarter to keep them at the real levels they were at.

Timothy L. Main – President and CEO: Okay, in terms of Materials Technology Group investments, the slide that we developed and included in our presentation is slide 13, is intended to give investors an idea of the lag time between capital investments in the advent of revenue, revenue would typically commence approximately, three, four, five months after the investment, we would expect to ramp up new production through months four, five and six and get to more mature yield levels and profitability levels by approximately the sixth month. We’re going through a product transition now with new product families that are ramping. We’ll be doing that over the course of the spring and summer and then making some significant investments. So I would expect the be margins in the Materials Technology Group to continue to be in the expected ranges. They 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, getting to be a very big business obviously and half year commence, we’re looking at $1.5 billion per six months pace in fiscal ’12 moving to $2 billion or more on half year pace in fiscal year ’13. So we’re pleased with how the business is come together and we are adding capacity as we speak. In terms of the enterprise infrastructure area, it’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 we think we have good line of sight. My own, when I look at this business there has been very significant slowdown in overall enterprise and infrastructure spending from the spring of 2011 when the European debt crisis first emerged, lot of caution throughout the summer. I mean, 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. My experience have 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 pickup. So provided that the U.S. particularly the U.S. market continues to be stable and grow even at a lower rate. I would expect IT enterprise related spending to start to pickup 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.

Revenue Growth

Brian Alexander – Raymond James: Just a follow-up. Of the 135 basis point improvement that you are expecting and 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 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?

Timothy L. Main – President and CEO: We’re actually not counting on a lot of revenue growth. Forbes, do you want to characterize that – what were revenue growth?

Forbes I.J. Alexander – CFO: Yeah. In terms of overall revenue line of sight plan, we have a line of sight for that. There’s some great progress in our storage area with the new wins there, but are lengthening this coming quarter given the great deal of comfort in terms of a rebound in terms of the storage and networking in the short term here, and then as we move forward to the – bonds of the next three quarters, continued growth in that area, and some rebound with our net working customers there. In terms of overall revenue, without getting the guidance for the full second half of the year, it’s somewhere in the region of $200 million, $250 million, something of that nature. We are seeing a sequential uptick of 5 points is coming, 90 day period, and if we see any little bit of tailwind, then clearly it’s going to be better than expected. We feel pretty comfortable that the telecommunications business is starting to see some pickup there. I think, as we’ve articulated before, we had some wins in the wireless area there; over the last two quarters, and we’re starting to see that pick up again, which is good news as we move through the balance of 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 I.J. Alexander – CFO: It’s the back half of the calendar year – fiscal year, excuse me, Brian.

Brian Alexander – Raymond James: 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’d get back to being operating cash flow positive in the second half. When do you think you’ll get back to being free cash flow positive given the increased CapEx investments that you highlighted?

Forbes I.J. Alexander – CFO: Yeah. Based upon the CapEx that we’re highlighting for the back half of the year and with investments in our MTG area, I think it will be 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 somewhat to do in the back half of the year, but I think that’s very attainable. As we look forward into ’13 clearly until we have some additional capital investments during fiscal ’13, but feel very comfortable that we’ll see significant free cash flows during fiscal ’13.

Brian Alexander – Raymond James: Do you think you’ll be back at that 30% EBITDA to cash flow or cash flow to EBITDA ratio that you’ve targeted long-term?

Forbes I.J. Alexander – CFO: Yeah, absolutely. Certainly Tim talked to just looking we’re shaping up to a great year in ’13 with revenue growth in that 10% to 15%. EBITDA margins should be in those type of levels tracking 6, 6.5 points. So, certainly we should see that type of contribution from the overall cash flows, yes.

To contact the reporter on this story: at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com