Jabil Inc. (NYSE:JBL) Q3 2023 Earnings Call Transcript

Jabil Inc. (NYSE:JBL) Q3 2023 Earnings Call Transcript June 15, 2023

Jabil Inc. misses on earnings expectations. Reported EPS is $1.85 EPS, expectations were $1.87.

Operator: Hello, and welcome to the Jabil Third Quarter and Fiscal Year 2023 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Adam Berry. Please go ahead, Adam.

Adam Berry: Good morning, and welcome to Jabil’s third quarter of fiscal 2023 earnings call. Joining me on today’s call are Chief Executive Officer, Kenny Wilson; and Chief Financial Officer, Mike Dastoor. 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 our website. At the conclusion of today’s call, the entirety will be posted there for audio playback. I’d now like to ask that you follow our earnings presentation with the slides on the website, beginning with the forward-looking statements. During this conference call, we will be making forward-looking statements, including among other things, those regarding the anticipated outlook for our business, such as our currently expected fourth quarter and fiscal year net revenue and earnings.

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 the annual report on Form 10-K for the fiscal year ended August 31st, 2022, and other filings. 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 third quarter results, where the team delivered approximately $8.5 billion in revenue at the top end of our guidance range. Core operating income for the quarter came in at $404 million or 4.8% of revenue.

This is up 60 basis points on a year-over-year basis. Net interest expense in the quarter came in better than expected at $75 million, reflecting lower levels of inventory during the quarter, resulting in better working capital management by the team. From a GAAP perspective, operating income was $375 million and our GAAP diluted earnings per share was $1.72. Core diluted earnings per share was $1.99, a 16% improvement over the prior-year quarter and towards the upper end of our guidance range. Now turning to the segments. Revenue for the DMS segment was $4.35 billion, an increase of 13% on a year-over-year basis, driven by strength in our Automotive and Healthcare end markets. In particular, it’s worth highlighting our Automotive business, which grew approximately 60% year-over-year as the team performed extremely well as volume, content, and brands continue to expand.

Core operating margin for the segment came in at 4.1%, 30 basis points higher than the same quarter from a year ago, but down 50 basis points sequentially as typical given the normal seasonal pattern within our Mobility business. Revenue for our EMS segment came in at $4.1 billion, down 8% year-over-year and in line with our expectations. Also as expected, we saw a revenue shift in our 5G Wireless and Cloud business, driven by our previously-announced move to a consignment model for certain components within that end market. It’s also worth noting that our Industrial business driven by global demand for renewable energy increased by approximately 30% year-over-year. For the quarter, core margins for the EMS segment were an impressive 5.5%, up 90 basis points year-over-year and 40 basis points sequentially, reflecting strong growth in Industrial and the aforementioned shift to a consignment model.

Next, I’d like to begin with an update on our cash flow and balance sheet metrics as of the end of Q3, beginning with inventory, which saw a great improvement sequentially to 84 days. More importantly for us, net of inventory deposits from our customers, inventory days were 62 in Q3, an improvement of seven days sequentially. Our third quarter cash flows from operations came in at $468 million, while net capital expenditures totaled $212 million, resulting in $256 million in free cash flows during the quarter. In the quarter, we repurchased 1.9 million shares for $154 million, leaving us with $821 million remaining on our current repurchase authorization as of May 31st. With this, we ended the quarter with cash balances of approximately $1.5 billion and total debt to core EBITDA levels of approximately 1.2 times.

In summary, the team delivered another impressive performance in Q3. In a moment, I’ll turn the call over to Mike and Kenny to provide some additional thoughts on our performance in the quarter and update our outlook for fiscal 2023. But before I hand it over, I’d like to announce our fourth quarter earnings call and 6th Annual Investor Briefing scheduled for September 28th, where we’ll lay out our strategy and our financial plan for fiscal 2024. Please mark your calendars. Additionally, from an Investor Relations perspective, we’re going to be active in fiscal 2024 with meetings, factory tours, and end market deep dives, where we plan to discuss and showcase some of the growth drivers that we feel support our longer-term expectations. Please stay tuned.

And thanks for your time today. It’s now my pleasure to turn the call over to Mike.

Mike Dastoor: Thanks, Adam. Good morning, everyone. Through the first nine months of fiscal year, the team has posted solid top-line growth, improved core operating income by more than twice the pace of revenue growth, and grew core EPS by 16%, while also expanding core operating margins by 30 basis points, a solid performance by the team. As you heard from Adam, our growth and improved profitability this year continues to be driven by areas of our business benefiting from secular growth like electric vehicles, healthcare, renewable energy infrastructure, and cloud. All-in-all, our solid performance year-to-date gives us excellent momentum as we enter the final quarter of FY 2023. With that, on the next slide, you’ll see our fourth quarter guidance.

For Q4, we expect total company revenues to be in the range of $8.2 billion to $8.8 billion. At the midpoint, this anticipates DMS and EMS revenue to be $4.3 billion and $4.2 billion, respectively. Core operating income is estimated to be in the range of $424 million to $484 million. GAAP operating income is expected to be in the range of $400 million to $460 million. Core diluted earnings per share is estimated to be in the range of $2.14 to $2.50. GAAP diluted earnings per share is expected to be in the range of $1.96 to $2.32. Interest expense in the fourth quarter is estimated to be $73 million which is lower than we forecasted in March, reflecting better working capital management by the team. Moving to the next slide where I’ll offer an update on our end market demand assumptions and how these translate to our FY 2023 revenue expectations.

At a high level, our assumptions remain largely consistent with our March update. We continue to be conservative in our approach given the current macroeconomic dynamics and expect strong growth from our secular markets to be slightly offset by lower demand in some of our consumer-facing markets and in Semi-Cap. In our Automotive end-market, EV growth continues to be robust, limited only by the pace at which we can scale up production across multiple geographies with several OEMs. In Healthcare, the outsourcing of manufacturing trend continues to play out as we are seeing increased activity with interest from multiple OEMs exploring our capabilities. Growth expectations for our Industrials business have also improved since March, driven higher by renewable energy infrastructure.

Specifically, we’re seeing good growth in solar inverters, smart meters, energy storage, and power and building management solutions. We now expect our Industrials business to be up more than 25% in FY 2023. This growth has been slightly offset by incremental end market weakness in our Semi-Cap business. In summary, we feel the outlook for our business is solid and expect demand across many of our end markets to remain strong. We now expect revenue for FY 2023 to be $34.7 billion, up 4% year-over-year which is $200 million, about what we thought in March. Considering this updated growth outlook, let’s now turn to the next slide, to get a view of our updated guidance for FY 2023. Notably, we see income coming through with the increase to revenue.

We now expect to deliver core operating income of $1.71 billion, a year-over-year increase of approximately 11%, while holding core margins at 4.9%. This 4.9% represents a growth of approximately 30 basis points year-on-year. With the additional income, we are now anticipating core EPS will be $8.50. We remain committed to generating more than $900 million in free cash flow this year. Beyond FY 2023, we expect our secular markets to continue to drive growth. I also believe our margins will continue to expand with the combination of our positive mix-shift towards higher-margin end-markets and operational efficiencies driven by automation and internal use of AI and ML technologies. In summary, the team is executing extremely well. I expect our strong momentum to continue into FY 2024, although we remain cautious and vigilant on the near-term macroeconomic conditions.

With that, I’ll now turn the call over to Kenny.

Kenny Wilson: Good morning, and thanks for joining us today. As you heard from Adam and Mike, our business is in good shape and the team has executed well this year in what continues to be a dynamic operating environment. The success we are seeing across our business is a key proof point of our teams’ ability to leverage multiple capabilities across disparate end markets, as we continue to diversify our service offerings, underpinning our improving financial performance. Let’s turn to the next slide where you’ll see our updated outlook for fiscal year 2023. We continue to expect good year-over-year growth and operating leverage this year, which gives us the confidence to raise our expectations for core EPS by $0.10 to $8.50.

At the same time, we remain highly focused on delivering more than $900 million in free cash flow. It also sets a firm foundation for further margin and free cash flow expansion as we look to fiscal year 2024. In fact, when I look at the growth in our business this year, it’s worth highlighting that nearly 60% of our portfolio [indiscernible] the markets with strong secular growth, specifically, electric vehicles, renewable energy, healthcare, and 5G and cloud. Our Automotive business continues its healthy growth rate as the team navigates multiple complex program introductions, increasing both our scale and addressable content per vehicle. Jabil continues to be extremely well-positioned to support our customers as they accelerate their transition to EVs in the coming years.

And in our Industrial business, we are supporting customers as they navigate the rapid transition towards clean energy. Over the last several years, we’ve invested heavily in capabilities to support energy storage, energy conversion, and grid-level power management solutions, which are now been deployed across multiple months at scale. Although we are in the early days of growth in this space, as government policies like the Inflation Reduction Act in the US mature and scale, Jabil is extremely well-positioned to support our customers in the coming years. In Healthcare, we continue to capitalize on the trend to outsource manufacturing, and our credibility with some of the leading OEMs in this space has positioned us well for future growth. Another area that is increasingly coming into focus for us is in the AI and ML space.

This has implications both on the growth side of our business across multiple end markets, but also has the potential to drive efficiencies across our internal processes and factory network. As it relates to our internal processes, we are capturing data and using the latest toolkits to help improve our operations. [indiscernible] don’t view this as a new initiative. We know the next step and a continuous improvement path we’ve been on for many years. Our operating system naturally drives us to simplify, standardize, optimize, and automate processes and this in conjunction with our enhanced ability to mine big data which ultimately drives sustainable improvements. In September, the Jabil team will go deeper in all of these areas at our Investor Briefing.

At that event, we plan to offer our fiscal year 2024 financial outlook as we continue to prioritize growth in core margins and cash flows. Specifically, we will lay out how we plan to increase revenue, while also expanding core operating margins beyond 5%, and we plan to increase free cash flow by continuing to invest in growth. We provide another year of solid core EPS growth, and finally, provide an update on our capital return frameworks. In closing, I feel strongly that we have the right team, capabilities, and diversified portfolio to support strong momentum into the final quarter of fiscal year 2023 and beyond. And none of this would be possible without a thriving and unified Jabil culture which is as strong today as it has ever been.

Thank you for joining us today and your interest in Jabil. I will now turn the call over to Adam.

Adam Berry: Thanks, Kenny. Operator, we’re now ready for Q&A.

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Q&A Session

Operator: Thank you. We’ll 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.

Ruplu Bhattacharya: Hi, thanks for taking my questions. Jabil has reported strong ROIC or return on invested capital over the past few years. It looks like over the past few quarters, it’s been really strong. I mean, we calculate above 30% ROIC. This quarter was strong as well. Can you remind us what ROIC you target and what are the factors that will influence this going forward?

Mike Dastoor: Hey, Ruplu. Yes, the ROIC that we reported is in the 30% range. We normally target in that 25%, 30%. If you look at our working capital management, the way we use our invested capital, our CapEx, and all the factors that makeup invested capital, we’re extremely disciplined on that. The returns are coming in. So, the numerator and denominator on the ROIC calculator or the ROIC calculation is actually quite robust and strong, and you can expect those levels of ROIC going forward as well, Ruplu.

Ruplu Bhattacharya: All right. Thanks for that, Mike. As a follow-up, maybe I can ask — let me ask about the semiconductor capital equipment end market. I mean that end market right now is weak and your revenues are down year-on-year. However, when I think about it, that segment offers higher than corporate average margins. So, do you think you have enough capacity in that segment to take advantage of the market move upwards when that happens, and what things do keep in mind when deciding to invest more CapEx into that end market?

Kenny Wilson: Hey, Ruplu, it’s Kenny, and good morning. Yes, it’s a great question, and in fact just this morning, I was reading an article about the covered AI and it talked about the semiconductor space and just the wafer fabrication equipment and the demand and how that increases through 2024, 2025, and 2026, so I would say that we are — our view is quite consistent with yours that we think that although it’s a low right now, that’s going to — that’s going to pick-up in the probably the second half of calendar 2024 and beyond. So, remember that we try and we diversify the all end markets and we’re very well-diversified in this market also from a front-end to back-end perspective. We’ve been expanding our footprint across the world and anticipation of the pickup in demand through the back-end of next year, so we got a pretty competent team there that are ready and we’re ready to build the demand for our customers when demand picks up through the back-end of next year.

So we feel really, really good about where we are from a Semi-Cap perspective.

Ruplu Bhattacharya: Okay. Thanks for all the details. And congrats on the strong execution in the quarter. Thank you.

Kenny Wilson: Yes, you’re welcome.

Operator: Thank you. Next question is coming from Matt Sheerin from Stifel. Your line is now live.