Jabil Inc. (NYSE:JBL) Q2 2023 Earnings Call Transcript

Jabil Inc. (NYSE:JBL) Q2 2023 Earnings Call Transcript March 16, 2023

Operator: Hello. And welcome to the Jabil’s Second Quarter of Fiscal Year 2023 Earnings Conference Call and Webcast. 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, Vice President, Investor Relations. Please go ahead, Adam.

Adam Berry: Good morning. And welcome to Jabil’s second quarter of fiscal 2023 earnings call. Joining me on today’s call is Chairman and CEO, Mark Mondello; incoming CEO, Kenny Wilson; and CFO, Mike Dastoor. In terms of agenda, Mike, Kenny and I will be offering today’s prepared remarks, while Mark will join for the question-and-answer session. 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 section of our website. At the conclusion of today’s call, a recording of the entirety will be posted for audio playback on our website. I’d now like to ask that you follow our earnings presentation with slides on the website, 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, such as our currently expected third 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 our annual report on Form 10-K for the fiscal year ended August 31, 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 second quarter results, where the team delivered approximately $8.1 billion in revenue in line with our forecast. As you dig a little deeper, it’s worth noting we saw strength in areas such as industrial, driven by continued robust demand for renewable energy generation and storage, automotive driven by the transition to electric vehicles, and healthcare as large OEMs in that space continue to partner with Jabil to deliver best-in-class personal care. Conversely, a portion of the year-over-year strength was offset by weakness in Semi-Cap and other consumer-oriented portions of our business. Putting it all together at the enterprise level, revenue grew by an impressive 8% year-over-year. Core operating income during the quarter was $391 million, an increase of 14% year-over-year, representing a core operating margin of 4.8%.

This is up 20 basis points over the prior year and just ahead of our expectations from 90 days ago based on great operational execution within our EMS businesses. Net interest in the quarter came in higher than expectations at $74 million. In the quarter, we also repurchased 1.7 million shares for $127 million leaving us with $975 million remaining on our current repurchase authorization. From a GAAP perspective, operating income was $359 million our GAAP diluted earnings per share was $1.52. Core diluted earnings per share was $1.88, a 12% improvement over the prior year quarter and slightly ahead of the midpoint of our range. Now turning to the segments, revenue for the DMS segment was $4.1 billion, an increase of 8% on a year-over-year basis and in line with our expectations, while core operating margin for the segment came in at 4.6% as expected, as a result of strong returns in auto and health care, offset by weakness in consumer markets.

Revenue for our EMS segment came in at $4.1 billion, an increase of 7% year-over-year, while core margins for the segment was 5.1%, up 110 basis points year-over-year reflecting solid leverage on strong revenue growth. So in summary, a strong close to the first half of our fiscal year. As we sit today, I know the team here is extremely proud of the strides we have made to not only improve our business over the last several years, but also make it more strong and more resilient. This improved resiliency in our business was reflected in the Q2 results. In a moment, I will 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 and I think you will see there’s so much opportunity as we look towards fiscal 2024 and beyond.

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

Mike Dastoor: Thanks, Adam. Good morning, everyone. Q2 marked a solid close to the first half of the fiscal year. Through the first two quarters of FY 2023, the team delivered strong year-over-year growth in revenue, core operating income and core earnings per share, while also expanding core margins by 20 basis points compared to the first half of FY 2022. Growth year-to-date has been headlined by areas of our businesses experiencing long-term secular growth trends, offset slightly by some of our more consumer centric markets and Semi-Cap. The team’s impressive performance through the first half of our fiscal year, despite what continues to be an extremely dynamic macroeconomic environment underscores the strength of our diversified portfolio and the improved resiliency of our business.

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 higher than expected mainly due to timing and continued component constraints on the automotive supply chain. The team did a good job offsetting a portion of our inventory levels with inventory deposits from our customers. Net of these deposits, inventory days was 69 in Q2. We continue to be fully focused on bringing this metric down further in FY 2023 and beyond, targeting net inventory days ranging between 60 days to 65 days in the medium-term and expecting to normalize in the 55 days to 60 days range in the long-term. Our second quarter cash flows from operations came in at $414 million, while net capital expenditures totaled $304 million.

With this, we ended the quarter with cash balances of $1.2 billion and a total debt to core EBITDA level of approximately 1.1. Turning now to our third quarter guidance on the next slide, we expect total company revenue in the third quarter of fiscal 2023 to be in the range of $7.9 billion to $8.5 billion. At the midpoint, this anticipates DMS and EMS revenue will both be $4.1 billion. Core operating income is estimated to be in the range of $363 million to $423 million. GAAP operating income is expected to be in the range of $336 million to $396 million. Core diluted earnings per share is estimated to be in the range of $1.70 to $2.10. GAAP diluted earnings per share is expected to be in the range of $1.50 to $1.90. Net interest expense in the third quarter is estimated to be approximately $80 million and for the year to be in the range of $295 million to $300 million, which is higher than we forecasted in December, due to more conservative interest rate and working capital assumptions.

As inventory levels normalize, I expect these interest costs to gradually decrease over the mid- to long-term. Tax rate on core earnings in the third quarter is estimated to be approximately 19%. Moving to the next slide, where I will offer an update on the end market demand assumptions and how these translate to our FY 2023 revenue expectations. At a high level, our year so far is playing out consistent with our assumptions in December. The industry continues to benefit from outsourcing of manufacturing as a macro trend due to dynamics such as onshoring closer to end consumers, complex supply chain dynamics and greater content due to ever increasing design complexities and products. We continue to expect areas of our businesses benefiting from strong long-term secular growth trends like electric vehicles, healthcare, renewable energy infrastructure, 5G and cloud to drive solid year-over-year growth.

An area where our outlook has improved since December is in our industrial business where we see robust demand for renewable energy infrastructure, which we expect to drive double-digit year-over-year revenue growth. Electric vehicle demand also continues to remain extremely strong as we continue to gain share in an end market with strong robust growth as we navigate product manufacturing life cycles and ramps at different stages in their maturity curves, constrained by a tight component supply chain. We expect a portion of the solid growth from our secular markets to be offset by lower demand in our consumer-facing markets and in Semi-Cap. In summary, we feel the outlook for our business is solid and expect the secular demand across many of our end markets to remain strong.

Considering this updated demand picture, let’s now turn to the next slide to get a view of our updated guidance for FY 2023. We expect our improved mix of business will drive incremental operating leverage, thereby giving us the confidence to raise our core margins by 10 basis points to 4.9% for FY 2023 on revenue of $34.5 billion. We continue to anticipate core EPS will be $8.40, which is reflective of our improved core operating income, offset by higher interest expense. Importantly, for the year, we also remain committed to generating an excess of $900 million in free cash flow. Overall, our performance during the first half of the year gives us excellent momentum as we look to close out another strong year and drive the company to core margins beyond 5%.

And with that, I would now like to turn the call over to Kenny.

Kenny Wilson: Thanks, Mike. I am pleased to be joining the call today. It is truly humbling to reflect back 23 years to when I joined Jabil in our manufacturing facility in Livingston, Scotland. Since then I have been afforded the opportunity to grow and lead several areas of our business. Most recently, I had the privilege to live and work in Asia, leading our Jabil Green Point organization, which has played a major role in building out multiple key capabilities that continue to be leverage across the company. Going forward, I am excited to lead Jabil as CEO, alongside a team of extremely talented and long tenured industry leaders. I would like to share a few thoughts on what you should expect from us going forward. As Mark mentioned 90 days ago, think of this as evolutionary, not revolutionary, it is our term to carry the torch and prepare our organization for future growth.

First, we have a customer-centric organization, always have been, always will be. As such, we will continue to work tirelessly on behalf of our customers and shareholders to deliver long-term value. Second, we will continue to cultivate our unique culture, which attracts, retains, empowers and enables our people, allowing their true self to turn up to work every day. Third, we will remain focused on increasing margins and delivering sustainable free cash flow through a combination of enhancing the mix of our business and excellent operational execution. It’s my belief that this in turn will allow us to earn an appropriate return on investment for the value we provide. Moving on to our business, today we see incredible tailwinds driving our business forward.

For instance, this year, we are seeing robust growth in our industrial business in areas like renewable energy generation and storage. In automotive, the team continues to navigate multiple complex program introductions, increasing both our scale and addressable content per vehicle. And in healthcare, we continue to win new business in areas such as digital health and precision medicine as the industry outsource trend accelerates. The success we are seeing in these areas is a key proof point of our team’s ability to leverage multiple capabilities across fiscal end markets as we continue to diversify our service offerings. Moving on to the year, I am pleased with the momentum underway in the business. We expect good growth and operating leverage, which gives us the confidence to raise our expectations for core margins to 4.9% for fiscal 2023.

At the same time, we remain highly focused on delivering more than $900 million in free cash flow and when I think about Jabil beyond fiscal year 2023, there is a tremendous amount of opportunity ahead. Between the mix of business and the growth trends underpinned by our long tenured management team, I am confident that we can drive the company at above 5% core margins with sustainable strong cash flows. This will afford us tremendous flexibility in our capital allocation. In the coming years, we will remain focused on executing buybacks when they produce strong returns for shareholders and remain committed to a dividend. As it relates to M&A, you will see us continue to focus on capability building deals consistent with the past several years.

And finally, we will ensure our capital structure is optimized and remain committed to maintaining our investment-grade credit profile. In closing, I feel it is appropriate to send a message to our people here at Jabil. I have spent over 20 years at our company and I am excited to be a leader. I will strive to make you proud. At Jabil, our people are our greatest asset. Our strength is in our ability to bring together a collection of people from diverse backgrounds, different experiences and multiple generations and moved into a culture that across the world is both consistent and a true differentiator. Being no doubt that all that matters every day is that you give away your best, focus on performance and strive to be the leader or coworker you wish you had.

In summary, bring your true self to work each and every day without anxiety or fear of recourse. I am truly grateful to each and every one of you for all that you do. I will now turn the call over to Adam.

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

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Q&A Session

Operator: Thank you. Our first question today is coming from Ruplu Bhattacharya from Bank of America. Your line is now live.

Ruplu Bhattacharya: Hi. Thank you for taking my questions. Kenny, good to have you on Board and on the earnings call. Let me start by asking you a question on automotive. Jabil’s revenue from automotive has been pretty strong and you have been manufacturing components, like you said, for EVs for a long time. However, this space may get crowded over the next two years to three years, I am thinking about media reports indicating at least one large Taiwanese EMS company looking to manufacture EVs. So when you look over the next two year, three years, do you think Jabil has a competitive advantage in this space that can sustain over the medium-term and how much of your auto revenues today are from EVs and do you see that percent growing over the next few years?

Kenny Wilson: Yeah. Thanks for the message, Ruplu. I really appreciate it. Yeah. So, as you know, the EMS, the automotive industry when you do automotive business, you have got to be — it takes you a while to get qualified. The programs run for five years, six years, seven years. You also got to be able to leverage that capability consistently in multiple geographies across the world. So that kind of plays to our strength and we see that — for sure we think there’s enough opportunity and enough heeding for multiple different suppliers or competitors. So, yes, we are pretty confident that, we have got a value proposition that’s going to see us continue to grow our business in automotive in the longer term. In terms of — in the EV space, if we look at our total automotive business, it’s in the order of 80% to 90% of our business now is kind of EV and autonomous.

So I think you should expect — we are pretty confident that basically we are well positioned. We have got business with most of the large OEMs and we are very, very confident that’s going to grow and continue across multiple geographies in the future.

Ruplu Bhattacharya: Okay. Thanks, Kenny, for the details there. For my follow-up, let me ask a question to Mike. So you beat the midpoint of your fiscal 2Q EPS guide by about $0.04 and you are raising the operating margin outlook for fiscal 2023 looks like by 10 bps, but you kept the full year EPS guide of $8.40. So my question is, Mike, when you look at the remaining year, at the second half of the year, do you see a weaker operating environment in the second half or is there some conservatism in the guidance, just if you can give us your thoughts? And also, EMS had a very strong margin performance in fiscal 2Q, do you think that will sustain going forward? Thanks.

Mike Dastoor: Yeah. Thanks. So, if you look at EBIT. EBIT has grown from December by about $25 million, but on the other side of the coin, interest costs have gone up as well, our business — our operating business, our secular trends, all the end markets that we perform in, that’s actually going really well. Performance is stronger than we have anticipated. So we have taken EBIT up. Unfortunately, we have had a slightly higher level of inventory, mainly due to couple of reasons. There’s timing where inventory came in at the end of the quarter. The opposite side of that shows up in AP. So I am not that worried about that piece. But the auto supply chain continues to be tight. We sort of anticipated it improving over the quarter and the rest of the year.