Jabil Inc. (NYSE:JBL) Q1 2024 Earnings Call Transcript

Jabil Inc. (NYSE:JBL) Q1 2024 Earnings Call Transcript December 14, 2023

Jabil Inc. beats earnings expectations. Reported EPS is $2.6, expectations were $2.54.

Operator: Hello, and welcome to the Jabil First Quarter Fiscal Year 2024 Earnings Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Adam Berry, Vice President, Investor Relations. Please go ahead, Adam.

Adam Berry: Good morning, and welcome to Jabil’s first quarter of fiscal 2024 earnings call. Joining me today are Chief Executive Officer, Kenny Wilson; and Chief Financial Officer, Mike Dastoor. In terms of our agenda today, we plan to focus on the following: Review our Q1 results, discuss the trends underway within the end markets we serve, and provide Q2 guidance. We’ll also reiterate our capital allocation plans, reinforce our core margin and EPS outlook for the year, and in doing so provide you with the detail as to why we feel confident in achieving these goals for this year and next, despite our updated outlook as discussed on November 28th. But before we begin, please note that today’s call is being webcast live. And during our prepared remarks, we will be referencing slides.

To follow along with the slides, please visit jabil.com within the Investor Relations portion of the website. At the conclusion of today’s call, the entirety of today’s presentation will be posted for audio playback. I’d now like to ask you to follow along with our presentation with slides on the website. Beginning with a forward-looking statement. During this conference call, we will be making forward-looking statements, including, among other things, those regarding the anticipated outlook for our business. 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 on our Annual Report on Form 10-K for the fiscal year ended August 31, 2023, and other filings with the SEC.

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. With that, I’d now like to shift our focus to our first quarter results, where the team delivered approximately $8.4 billion in revenue, near the low end of our guidance range provided in September, and in line with our updated expectations announced on November 28. It’s worth noting the majority of the year-over-year decline was driven by the previously announced move to a consignment model, where we transitioned certain components we procure and integrate into the cloud space to a customer-controlled consignment services model. Core operating income for the quarter came in at $499 million, or 6% of revenue.

This is up 120 basis points year-over-year, due to an improved mix of business, normal seasonal patterns within our mobility business and the previously announced accounting impacts of assets held for sale. Excluding the impact of assets held for sale, core operating margin was roughly 5.3%, up 50 basis points year-on-year. Net interest expense for the quarter came in $3 million better-than-expected at $70 million, reflecting lower levels of inventory during the quarter as a result of lower revenue and better working capital management by the team. From a GAAP perspective, operating income was $303 million, and our GAAP diluted earnings per share was $1.47. Core diluted earnings per share for the quarter was $2.60, a 13% improvement over the prior year quarter and at the midpoint of the range we provided in September.

Now, turning to the performance by segment in the quarter. Revenue for the DMS segment came in at $4.8 billion, down approximately 6% from the prior year, driven by continued weakness from our connected devices end market. These declines were partially offset by year-over-year growth in our automotive and transportation and healthcare businesses. Core operating margin for the segment came in at 7%, a 180 basis points higher than the same quarter from a year ago, given solid mix, normal seasonal pattern within our mobility business, and the aforementioned previously announced accounting impact of assets held for sale. Excluding the impact of assets held for sale associated with the mobility sale, core operating margins for DMS were 6%. Revenue for our EMS segment came in at $3.6 billion, down roughly 21% year-over-year.

This decline was driven by our move to a consignment model and a softening in demand in end markets like 5G, networking and digital print. Given this combination of consignment and mix, core margins for the EMS segment were an impressive 4.6%, up 30 basis points year-over-year. Next, I’d like to begin with an update on our cash flow and balance sheet metrics as of the end of Q1, beginning with inventory, which improved two days sequentially to 78 days. Net of inventory deposits from our customers, inventory days were 58 in Q1, consistent with our strong Q4 performance. Our first quarter cash flows from operations came in at $448 million, while net capital expenditures totaled $275 million, resulting in $173 million in adjusted free cash flow during the quarter.

In the quarter, we repurchased 3.9 million shares for $500 million, leaving us with $2 billion remaining on our current repurchase authorization as of November 30. With this, we ended the quarter with cash balances of $1.6 billion and total debt to core EBITDA levels of approximately 1.1 times. So, in summary, Q1 was largely a very good quarter. While our topline growth came in a bit lower-than-expected, the team still delivered good year-over-year growth in core margins, core EPS and adjusted free cash flow. At the same time, we were incredibly active in terms of repurchasing our own shares and we made solid progress on the sale of our mobility business. With that, thank you. I’ll now hand it over to Kenny.

Kenny Wilson: Thanks, Adam; and good morning, everyone. As Adam mentioned, on November 28, we announced a reduction in our outlook for fiscal year 2024 based on a broad slowdown of demand across multiple end markets. In short, customers adjusted demand schedules as they reacted to a slowdown in end markets heading into the end of the calendar year. Although we feel the slowdown will be temporary in nature, it is incumbent on us to react and adjust our model appropriately to align with our customers’ requirements. Agility in our industry is key. Being able to absorb changes in demand signals effectively across our network is a critical part of our value proposition. This agility is part of our DNA and is reflected in our ability to effectively absorb downsides and revenue.

Fungible assets, flexible automation, single instance of SAP, common manufacturing execution systems, focus on margin rich value-added services, and multi customer sites set up specifically to manage disparate end markets in one campus are just some examples of disciplines embedded in our model. These core areas of focus are a large part of why we believe we can manage margins consistent with our Q1 guide and EPS at $9 plus, while absorbing a broad-based slowdown. Turning to end markets, where you take a deeper look, we still expect growth in key areas like electric vehicles and renewables, albeit at a modestly slower pace than previously anticipated. In healthcare, our business remains robust and foundational in terms of what we are trying to accomplish at Jabil.

Our ability to provide key solutions and capabilities to customers in complex areas where outsourcing is underpenetrated and quality is paramount underpins our confidence that we will continue to grow in this end market. And in cloud, our team continued to drive forward within the AI data center space. Remember, this business moved into a consignment model last year, which makes revenue look unusually low, relative to previous years, while in reality the business is growing volumes by roughly 20%. In connected devices, we’ve seen softening for some time, and this doesn’t seem likely to change in the near-term. While in enterprise, communications and 5G, we continue to expect softness based on global rollouts. Turning to renewables, we’ve seen softness in solar and wind, driven by a combination of reduced channel inventory sell through, impact of interest rates and incentive uncertainty.

Outlook wise, we remain optimistic based on multiple new business wins and some supply chain consolidation within our current customer base. On the sale of our mobility business, I am really pleased with the progress we are making. The selfless collaboration between our teams while working on closing the deal, ensuring the needs of our customer remain top of mind has been really pleasing to see. Focusing on your day job, keeping product flowing, while managing a complex transition is hard. The fact that we are managing this so successfully is another proof point of our belief that BYD Electronics is the correct partner for this transaction. Taken altogether, we now expect revenue not associated with the mobility divestiture to be down 5% year-over-year on a like-for-like basis.

Reflecting on all of the above, it’s pretty satisfying to see the resilience of our model where despite end market choppiness, we expect to post year-on-year growth in core margins and EPS, while also driving in excess of $1 billion in free cash flows. Further, we remain committed to our previous fiscal year ‘25 guidance, inclusive of margins at 5.6% plus and EPS in excess of $10.65. In closing, I want to share a final thought. In Jabil, we are always planning our future. And as sad as I am to say goodbye to my colleagues as they transition to BYD Electronics, I would like to welcome the procurement services team from procureability and the silicon photonics technical team from Intel as they join our company. Welcome, and we look forward to your contribution as we focus on the next chapter of our company’s growth and diversification.

Thank you for joining us today and for your interest in Jabil. I will now hand the call to Mike.

Mike Dastoor: Thanks, Kenny; and good morning, everyone. Over the next few minutes, I plan to provide more information on the following. First, I’ll walk you through our financial outlook for Q2 and FY ‘24, which remains largely consistent with our announcement on November 28, and then I’ll provide an update on our accelerated buyback execution plans. With that, let’s turn to the next slide for our second quarter guidance. We anticipate the Mobility transaction to close during Q2 of FY ‘24. The exact date of the close will drive where we land. For Q2, we expect total company revenue to be in the range of $7 billion to $7.6 billion. The midpoint of this range assumes the Mobility transaction closes January 31, which is consistent with our modeling assumptions in September.

Core operating income for Q2 is estimated to be in the range of $339 million to $399 million. GAAP operating income is expected to be in the range of $216 million to $301 million. Core diluted earnings per share is estimated to be in the range of $1.73 to $2.13. GAAP diluted earnings per share is expected to be in the range of $0.77 to $1.37. Net interest expense in the second quarter is estimated to be $62 million. Before turning to our full-year guidance, it’s worth noting that our Q2 guidance is materially influenced by the Mobility transaction close date. I thought it would be helpful if I provide you with the financial impact of an earlier close. For modeling purposes, a December close would reduce the midpoint of our Q2 revenue and core EPS outlook ranges by approximately $400 million and $0.30, respectively.

For the year, it would also reduce our revenue outlook by $400 million, while the loss in core EPS would be expected to be offset through accelerated repurchases and lower interest expense, given the earlier receipt of net funds. Now, moving on to full-year guidance on the next slide. As we announced a few weeks ago, towards the end of our quarter, we noticed a widespread slowdown in customer demand. The majority of the slowdown we’re seeing is being driven by excess inventory in our customers channel, which we view as short-term in nature. In our view, once the excess channel inventory clears up, we’re optimistic that the secular trends across our business remain intact and gives us confidence in future growth. It is important to note that Jabil’s net inventory days is in good shape and remains consistent with our target range of 55 days to 60 days.

For FY ‘24, we expect revenue to be approximately $31 billion for our modeling assumption of a January 31 close for the Mobility transaction. Importantly, for the year, we continue to expect year-on-year growth across the end markets that are experiencing strong multi-year tailwinds, notably in renewable energy, infrastructure, electric vehicles, AI, cloud data centers and healthcare. Moving to the next slide. Despite the revenue headwinds in the near term, we are confident that we build Jabil to be more resilient as we’ve diversified across geographies, products, customers and end markets. Because of this, we don’t expect the same level of margin erosion traditionally seen in past slowdowns. Our diversified approach, global footprint and strong relationships with customers gives us confidence in weathering these near-term challenges.

We’re adapting, staying focused on margins and cash flow, and committed to delivering value. Notably for FY ‘24, we still expect core operating margins to be in the range of 5.3% to 5.5%. I would now like to walk you through the dynamics of how we are able to maintain margins despite lower revenue. As a reminder, we have completely changed the construct of our business. We’re in the process of divesting one of our highest fixed cost businesses. Additionally, four of our end markets, EVs, healthcare, renewables and cloud, are growing volumes year-on-year, albeit at lower levels than previously anticipated, which means deleveraging is limited as we are able to push our planned investments and costs which have not been incurred yet. In addition to pushing our ramp in investment costs, we’re also moving ahead with reducing our SG&A in the back half of the year and optimizing our global footprint.

All of this gives me confidence in our ability to deliver core operating margins in the 5.3% to 5.5% range in FY ‘24. Next, I’d like to provide an update on our share repurchases for the year. In Q1, we executed the previously mentioned $500 million accelerated share repurchase. In September, we originally expected to do a series of accelerated buybacks totaling $1.7 billion in FY ‘24 and $800 million in FY ‘25. We now intend to execute a series of accelerated buybacks of the entire $2.5 billion repurchase authorization in FY ‘24. As a result, I now expect WASO to be in the range of $124 million to $127 million for FY ‘24. We also now expect interest expense to be lower this year in the range of $250 million to $260 million, compared to our expectations in September, as we expect working capital levels to decline with lower revenue.

All of these actions gives me confidence that we will offset lower income and deliver core earnings for FY ‘24 to be in excess of $9 per share, and our cash flow outlook for the year remains robust and we are committed to delivering adjusted free cash flow in excess of $1 billion in FY ‘24. In my view, Jabil is well positioned to navigate the current economic environment, evidenced by our performance over the past several years. We are not only well diversified, but also markedly more resilient than we were several years ago due to our intentional efforts to invest and align our resources with areas in key end markets, which are undergoing multi-year secular growth. Thank you for your time today and for joining us this morning. I’ll now turn the call over to Adam.

Adam Berry: Thanks, Mike. So, as you can see, we remain well positioned and extremely bullish on the future of Jabil. Thank you for your time. Operator, we’re now ready for Q&A.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Ruplu Bhattacharya from Bank of America. Your line is now live.

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Q&A Session

Ruplu Bhattacharya: Good morning. Thank you for taking my questions. Can you address how you’re managing risk in this environment? For example, what gives you confidence in the $31 billion and $9 plus in EPS guidance for fiscal ‘24, given you likely have limited visibility in the second half? The question would be, how weak can revenues be for you to still hit that $9 plus EPS target for this year? And can you also comment on any risk with Jabil’s own inventory? And I have a follow-up. Thank you.

Kenny Wilson: Hey, thanks, Ruplu. So, first of all, let me take the last part of your question there, which is, I think, our model is relatively consistent that we don’t take inventory risk. So, everything that we buy is underwritten by a forecast or a purchase order. So, we’re pretty comfortable in that. And if you look at where we are in Q1, with the slowdown at 58 days, that’s still industry leading. And so, we’re pretty confident there. If you look at the way where our company is set up, we run divisions, we’ve got division leads, and we’ve then got a leadership team that support that. So, we’re pretty intimate with our customers. And all of our team have been very, very active with our customer base. You’re looking at what happened in Q1, what’s happening for the balance of the year.

And the feedback, although nuanced with different impacts in different end markets. And what we see is relatively consistent. And, incidentally, myself, I mean, I’ve been in Europe and in Asia over the last month meeting a lot of our customers also. So, the feedback is — and remember, we get forecast, 12-months’ forecast pretty much for all of our customers. And we see their feeds, we look at what they’re pooling and what they’re selling. So, the feedback generally is, look, we expect the next couple of quarters to be inventory correction and we think beyond that we’re in decent shape, and we’ve baked that into what we see for the back half of the year. The other thing I’d like to emphasize is that, in the discussions we’re having, and times like this ultimately can be good for us from a consolidation perspective.

So, we’re pretty active in a number of discussions with our customers about how can we make their business easier by helping them consolidate supply chains, so that their business is simpler to manage. So — I mean, I would say that we’re really close with our customers. The data we get is pretty consistent. And we’re monitoring really closely. I mean, we’d like for the inventory to be sold through, but it’s not — and when we think it will be over the next couple of quarters. And — but we’ll bake that into our guide for Q2 for the balance of the year.

Mike Dastoor: And, Ruplu, If I could just add, and if you look at our revenue, while we’ve taken revenue down by $2.5 billion, about $1 billion of that is the first half. So, we’re not taking the second half as it’s absolutely going to recover. We’re still being conservative about the second half of the year. There’s $1.5 billion coming out. Visibility is a little limited right now, not from our perspective but from our customers’ perspective as well. So, we think $1.5 billion to second half is appropriate at this stage. And then if I can, let me just walk you through how we expect EPS to change, because this is a very critical and important piece. If you look at what we provided in September, we said a range of $9.30 to $9.70.

If I take a midpoint of $9.50 and start from there, the revenue loss of about bill — $2.5 billion impacts us by roughly $1.20, and that is sort of the deleveraging. When you’re growing year-on-year, especially in the four end markets that we’ve been focused on, in automotive, healthcare, renewables, cloud, we’re growing year-on-year. It’s not going down. So, when you grow year-on-year, your deleverage is very limited. You can actually push out a whole bunch of investments and costs and ramps to quarters out from here. So, there’s a little bit of nuance here that most people are ignoring in that we are in the right end markets. All of them are still showing growth year-on-year, albeit lower levels, but still year-on-year growth. On some of the lower margin businesses, even if you double the deleveraging there from a 3% or 4% to 8%, you still were losing some level of income, but it’s not that much.

The margin is not that impacted on the lower margin businesses. And then I talked a little bit about buybacks in my prepared remarks. We completed a $500 million buyback in September. That was huge. That was the biggest buyback we’ve ever done in a single quarter. And what I mentioned in my prepared remarks is that we are going to double down on that. So, in September, we’d anticipated doing an additional $1.2 billion in ‘24 and $800 million in ‘25. Now, all of that $2 billion left over is going to be done in FY ‘24. We think this is a good time, it’s a good appropriate time to do it when there’s a slowdown going in. We still feel we’re highly undervalued and buybacks are the best return we can get from our free cash flows, from the proceeds of the funds that we will get once the Mobility divestiture is done.

So, it’s a bit of a long-winded answer, but you could pick up $0.40, $0.50 quite easily between buyback and lower interest cost as well. Interest will be lower because working capital will be lower because of lower revenue. Plus, after yesterday’s news, if interest rates do what the Fed is saying, I think there’s a little bit of pickup there as well. So, there’s a whole bunch of puts and takes, but we feel pretty strong about the $9 plus.

Ruplu Bhattacharya: Okay. Thank you for all the details there, Mike and Kenny. I appreciate that. Let me ask you a follow up question, which is really the same question for fiscal ‘25. I mean, you’re guiding for $10.65 plus EPS and you’re maintaining the operating margin target of 5.6% plus. What — again, the question is, what revenue level do you need to see in fiscal ‘25 to be able to hit that $10.65 target? And you mentioned that you can push out some investments, but is there any risk to doing that in terms of hurting future revenue growth? So, just your thoughts on maintaining the guidance that you had for fiscal ‘25 and how confident you are in that? Thank you so much. I appreciate the details.

Mike Dastoor: Yes. So, Ruplu, if you look at our Q3 and Q4 run rates, obviously we provided $31 billion as the annual revenue number. We’ve done Q1 and Q2, so you can extrapolate the second half of the year. If you take those run rates into FY ‘25, some small level of recovery, we’re not even thinking of a big recovery coming through, some level of new business which is already in the pipeline, by the way, so we’re working on multiple new business wins. And, overall, if you — even from a smaller base, if you grow by 4%, 5%, 6%, the margin, we’re going to be doing 5.4% at least at the midpoint from 5.3% to 5.5% that we said in 2024. It’s — 5.6% in ‘25 is not a stretch. So, margins, we expect that to be higher. If you look at the lower WASO, we’ll have not only in FY ‘24 as a result of us doing the entire $2.5 billion share repurchase authorization in ‘24, there is an impact in ‘25 as well, because you’re getting the entire WASO impact in ‘25.