Jabil Inc. (NYSE:JBL) Q2 2024 Earnings Call Transcript

Jabil Inc. (NYSE:JBL) Q2 2024 Earnings Call Transcript March 15, 2024

Jabil Inc. beats earnings expectations. Reported EPS is $7.3, expectations were $1.65. JBL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Jabil Second Quarter of Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Adam Berry, Vice President, Investor Relations. Thank you. You may begin.

Adam Berry: Good morning, and thank you for joining Jabil’s second quarter fiscal 2024 earnings call. Joining me on today’s call are Chief Financial Officer, Mike Dastoor; and Chief Executive Officer, Kenny Wilson. Over the next few minutes, Mike and I will review our Q2 results, update current demand trends and provide new guidance for fiscal ’24. We will then turn the call over to Kenny, who will provide several of the building blocks that give us confidence in our strong outlook for fiscal ’25. 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 the call, the entirety of today’s presentation will be posted for audio playback. I’d now ask that you view the slides on the website and follow along with our presentation, beginning with the 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 in our annual report on Form 10-K for the fiscal year ended August 31, 2023, and our 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 second quarter results, where the team delivered approximately $6.8 billion in revenue roughly in line with the guidance range we provided as a majority of the businesses performed extremely well against the updated guidance we provided back in December. Core operating income for the quarter came in at $338 million, or 5% of revenue. This was up 20 basis points as a percentage of revenue year-over-year due to a strong mix of business led by automotive and health care, while also supported by an ongoing mix shift within our networking and storage end markets.

Net interest expense for the quarter came in higher than expected at $72 million, reflecting higher levels of inventory during the quarter. It’s also worth noting that we successfully closed on the sale of our mobility business to BYD Electronics during the quarter for approximately $2.2 billion. As a result, GAAP operating income was approximately $1.1 billion, and our GAAP diluted earnings per share was $7.31, reflecting the substantial gain associated with the sale at the end of December. Core diluted earnings per share for the quarter was $1.68, $0.05 above the midpoint of our guidance range provided in December. Now turning to our performance by segment in the quarter. Revenue for the DMS segment came in at $3.4 billion, down approximately 16% from the prior year, driven almost entirely by year-over-year comparisons for the mobility divestiture.

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Q&A Session

On a like-for-like basis, our DMS segment performed very well, led by approximately 11% growth in our automotive and transportation businesses. Core operating margin for the segment came in at 5.6%, 100 basis points higher than the same quarter from a year ago, reflective of the ongoing mix shift within our DMS business. Revenue for our EMS segment came in at $3.3 billion, down roughly 18% year-over-year and roughly $100 million to $200 million below our expectations for the quarter. The majority of our year-on-year revenue decline within EMS was driven by our move to a consignment model within our cloud business and lower revenue in markets like 5G, renewable energy and digital print as expected. However, unexpectedly, and towards the end of the quarter, our 5G and renewables businesses were both negatively impacted by yet another decline in demand associated with those end markets.

For the quarter, core margins for the EMS segment were 4.4%, down 70 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 Q2, beginning with inventory, which came in nine days higher sequentially to 87 days. Net of inventory deposits for our customers, inventory days were 62%, which was quarter-on-quarter increase of four days. Our second quarter cash flows from operations came in at $218 million, while net capital expenditures totaled $170 million, resulting in $48 million in adjusted free cash flow during the quarter. During the quarter, we repurchased 6.5 million shares for $825 million, leaving us with approximately $1.2 billion remaining on our current repurchase authorization as of February 29.

With this, we ended the quarter with cash balances of $2.6 billion and total debt to core EBITDA levels of approximately 1.2 times. In closing, Q2 was largely a solid quarter. For starters, the divestiture of our mobility business and the allocation of those funds towards the share buybacks reflect the strategic intent of this management team to both reshape the business where appropriate, while also maintaining healthy returns to shareholders. At the same time, the business is performing pretty admirably despite considerable declines in two of the end markets we serve, as evidenced by our ability to deliver higher margins despite these headwinds. And finally, I’ll leave you with a bit of optimism as we look ahead to fiscal ’25 and beyond. As we think about the adjacencies across the end markets we serve, it’s becoming clear that there’s a common theme forming among a number of the end markets, specific to the surge of artificial intelligence, and the impact it will have on our customers’ business well into the future.

And with this surge, there’s a proliferation of data being created by EV and autonomous vehicles that needs to be harnessed. In the health care industry, we’re in the early innings of getting our arms around the benefits of AI in the operating room. And in our cloud business, we’re seeing significantly increased demand for our services related to AI specific to hardware, manufacturing and design. And perhaps most exciting, this enthusiasm is beginning to turn into tangible results. For instance, our AI GPU volume in the first half of 2024 is 200 times that of the level of 2023. So there’s a lot to be excited about as we look a little bit further down the road. In a few minutes, Kenny will share his thoughts on fiscal ’25 and why he believes our original outlook of 10.65 remains attainable despite a transitional fiscal ’24.

But first, I’ll hand the call over to Mike, who will provide more details on fiscal ’24, including an update on our growth outlook by end market. With that, thank you. I’ll now hand the call over to Mike.

Michael Dastoor: Thanks, Adam, 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 Q3 and updated outlook for FY ’24. Next, I’ll provide an update on why we are confident in our growth opportunities for FY ’25. And then, I’ll provide an update on our accelerated share buyback execution plans, which are progressing ahead of schedule. With that, let’s turn to the next slide for our third quarter guidance. Towards the end of our second quarter, we experienced a sudden slowdown within our 5G and renewable energy end markets, which we expect will continue through the second half of FY ’24 and result in lower than expected revenue for the last two quarters.

Within our renewable energy business, the inventory correction that began in our Q1 is now expected to persist through the balance of our fiscal year as customers in this end market lower demand forecast towards the back half of February. The renewable energy team has done an excellent job consolidating the supply chain within our current customer base and we will have a higher overall share of our customers’ business as we move towards the end of Q4. In 5G, towards the end of the quarter, infrastructure rollout slowed quicker than expected as faster growing markets like, India substantially pull back on all 5G infrastructure investments. As a result of these two market dynamics for Q3, we expect total company revenue to be in the range of $6.2 billion to $6.8 billion.

Core operating income for Q3 is estimated to be in the range of $325 million to $385 million. GAAP operating income is expected to be in the range of $221 million to $301 million. Core diluted earnings per share is estimated to be in the range of $1.65 to $2.05. GAAP diluted earnings per share is expected to be in the range of $0.82 to $1.38. Net interest expense in the third quarter is estimated to be $75 million. Now moving on to full year guidance on the next slide. At a high level, with the exception of the near-term dynamics within our renewable energy and 5G markets, the majority of our expectations for revenue by end market this year remains largely in line with our pots in December. Importantly, for the year, we continue to expect year-on-year growth across some of our core end markets, which are still experiencing year-on-year growth, notably in electric vehicles, health care and AI cloud data centers.