Jabil Inc. (JBL) Earnings Call Transcript & Summary

So yes, I think we've commented that the health care and packaging business together should be in the vicinity of $4 billion. And health care is, by far, the dominant piece of that, okay? It's -- I'd take you back maybe on a little bit of a journey. In 2013, our health care business was circa $ 0.5 billion, something like that. We did a deal and bought a company called Nypro, in large part, because of the attractiveness of adding consumable health care products and capabilities to our existing durable capabilities. And that combined business has grown nicely over the years. And of course, last year, we announced this J&J partnership. We can get into in a little bit more detail if you want, but that added another, at full ramp, about $1.5 billion of business to our health care space. So really excited about how that's moved over the last 5, 6, 7 years. It's achieved great scale. I think we're the largest health care contract manufacturer in the business these days. And the business is performing very, very well. My colleague, Steve Borges, who runs that business and his extended team are doing a great, great job with it.

Your -- part of your responsibilities are in corporate development and M&A. And so maybe you could talk a little bit about the J&J deal. And what led to that deal? And just what's attractive to that specific opportunity for Jabil?

The J&J deal is -- first of all, I give J&J a lot, a lot of credit for having the foresight to approach this and think about it long term. It's a long-tenured deal. We've talked about that. The intent is to transform the supply chain over a number of years to a flexible, efficient, hyperefficient type of supply chain. J&J was, like I said, have the foresight to think about it long term, and we were able to structure the deal in such a way that it didn't require us to buy copious amounts of assets upfront, but instead invest in working capital and rebadging employees and whatnot, and kind of gradually ramping that business over time. And that's going really, really well right now. I think J&J is quite happy with it. The integration has gone to plan. I think we feel really good about it. And this year, the business will be just north of $1 billion. And once we get the full volume going into next year, it will be about $1.5 billion.

In terms of margins, last year, it was just starting to ramp, I think, around breakeven to the business from a profitability perspective. How should we think about margins this year as it grows at roughly $1 billion or a little over $1 billion of revenue? And then what's the long-term margin potential?

Yes. This year, the margins in that business will be in the 2.5% to 3% range. So they are currently dilutive to our DMS margins. That being said, as we ramp the business over the next year or 2, we think that margin profile moves north of 5%.

That's a nice margin to have in the EMS industry. The medical industry has long product life cycles to begin with. But talk about what ability Jabil has to win the follow-on orders with J&J as you think about the long-term relationship there?

We've -- I think it's important to note that we had a 12-year relationship with J&J before we did this deal, okay? So it's not a new relationship per se. There's been a -- there's been great continuity over the years. In terms of our ability to win follow-on business, look, we've got great investments in digitization in health care. So if my colleague, Steve, were on the stage with me today, he could tell you that north of 50% of the design work we're doing is about digitization of devices in health care, okay? And I think that's a unique capability that very few people in our industry can provide. By the way, not just on durable devices, but also consumable devices. I think the other thing that companies like J&J included, but more than J&J appreciate are the investments that we're making in new process technologies like additive. So 3D printing, the ability to rapidly customize medical products is something that investments that we think will pay off long term.

I wanted to get to the 3D printing, and since you brought it up, maybe we can touch on that more broadly, and not just for medical. But how does Jabil see 3D printing fitting in with its capabilities? And do you see 3D printing longer term as a high-volume manufacturing technology?

It's hard to say on the last point. Will 3D printing become increasingly mainstream? I think our answer is yes, it certainly will. The question is how long will it take, and where specifically is it positioned? Is it going to cannibalize all the manufacturing we do today? Absolutely, not a chance. But 3D printing, where we're seeing it move from what yesterday was sort of more prototyping into today as more production is in industries that are maybe safety critical industries, industries whereby 3D printing enables a different kind of design in aerospace, for example. You can lightweight products using 3D printed technologies. You can reduce the part count significantly using 3D printing technologies, which, again, helps the system perform more efficiently. Same thing in health care. So we're seeing it move mainstream in the aerospace and health care markets. Faster than we're seeing it move mainstream in other places, but it will continue to move in a variety of different markets. So it's an important long-term technology and we've been investing in it in several years. And I would point out that we're investing in it in several different positions in the supply chain as well. We make 3D printers for a number of customers. We perform 3D printing services, of course, for a number of our customers. And we also have invested in the raw material science, polymers. And we've got the ability to custom engineer polymers, specifically for using 3D printing.

That's very interesting. Back in the DMS segment, mobility is one of the other big businesses that the Jabil has. Can you just talk about what 5G could mean for your mobility business? And could that potentially lead to a big acceleration in revenue for Jabil?

I think our working assumption right now is that there will be some increase in volumes next year. That being said, I don't think we're projecting any kind of a super cycle here. People talk about that. I don't think there -- that we're assuming that. But will volumes pick up? I think we're hopeful that they will.

When you say next year, you mean fiscal '21?

Yes. I mean, in the back half of this year. Kind of -- yes, our fiscal '21.

Yes. Okay. One of the things within mobility that Jabil had spoken to is around its casing business. And on one of the recent earnings calls, the company talked about trying to reduce capacity. But you also said you think your units are going to grow because you're picking up share. Maybe square that for us. How do you take capacity off and grow the business at the same time?

We announced an $85 million restructuring program targeted predominantly at our mobility business. We took stock of what our capacity look like. We think there was too much capacity in mobility business, generally outside of Jabil as well. There's too much capacity in the industry for the new normal. On top of that, or in parallel with that, our operations have been getting increasingly efficient and more productive. And so we see the opportunity to take some square footage off-line without affecting our actual capacity, okay? So it just made a lot of sense given the productivity improvements and the kind of the excess floor space that was out there in the world to make that move this year. And again, I think, so far, the early returns are favorable. We think it's the right thing to do.

What do you think led to that excess capacity within mobility? Because over the last sort of 3 to 5 years, as metal casing has proliferated across more smartphones and the metals have become harder, physically harder, the machine times went up. And so I thought that have been using up a fair amount of capacity. So can we just get you out over those SKUs or it's more about just efficiencies, we're generally found across the industry?

I think it's probably a little bit of all of that. I think you also saw over the years a number -- across a number of phone manufacturers that casings evolved from metal casings to glass on both sides. And so the designs themselves have changed and evolved. And the production has gotten more efficient all at the same time. So again, I think we saw the opportunity to make a move on that, and we did.

Diversification has been a focus for Jabil within its DMS segment. And the company has a goal to have no more than 10% of profit from a single Jabil product, so a product like casings from a customer. Where do Jabil stand on that effort?

We think we're -- we think we made great progress. I mean, the work is not done for sure, but we think we've made great progress. If you kind of go back 4 or 5 years, our largest customer was a 20% customer, and we know who that is. And we were fairly concentrated in a really narrow range of product line. So the last 3 or 4 years for Jabil have been about diversifying inside of that product line, diversifying inside of that customer kind of into other products and diversifying outside of the customer into other areas like cloud, like health care and whatnot. The work is never done. But we think last year was probably a pretty good proof point at how far we've come. You saw Apple pre-announce last year for the first time and I don't know how many years that their phone volumes were going to be down. And then you also saw a tremendous decline, somewhat an unexpected decline in some of our semi cap business and Alex's business. And yet, Jabil was able to weather those storms successfully. And 4, 5 years ago, I think that might not have happened.

The last area in DMS is packaging. You said it's smaller than the health care business. But talk a little bit about the growth potential, growth profile and margin range for the packaging business.

It is quite a bit smaller than our health care business right now, but we're equally as excited about it. It's -- our position in packaging currently is mostly in the rigid plastic packaging side of things. So not corrugated, not glass, none of that. It's in rigid plastic packaging. So most of our customers are CPG companies, the big CPG type OEMs. And there's a lot of work going on in packaging in the material space, developing more sustainable materials, and that's happening across the board. And I think that's exciting. It's a good opportunity for us. But what's really, really exciting for us, really exciting is the potential we have to disrupt the packaging industry by integrating sensing products into kind of yesterday's old-state packaging in a way that allows these CPG companies to reconnect directly with consumers. And we've -- we're getting lots and lots of interest in the ability to do that kind of thing. And that's why we're so excited about.

There's a metric that Jabil shared several years ago. Not when you acquired Nypro, it was 2013 or something. But I think the metric was something like 80% of the sales at a store is based on the packaging.

Yes. P&G used to have this phraseology. They may still use it, that it's kind of the moment of first truth, right. It's -- your eyes lock on to a package, and that plays a big part in your buying decisions. And I think it's probably changing over time. But nonetheless, the ability to make packaging more interactive is pretty compelling.

I want to touch on some strategic topics, and really happy to have you here, and given your role on corporate development, but one of the things that's discussed in the industry is the potential for more consolidation in the EMS industry. Jabil has done some targeted transactions, acquired Nypro, for example, the J&J assets within medical. But what's your outlook for larger scale M&A? And if you think that could occur, how many opportunities do you anticipate in that?

So we always look at M&A opportunities, kind of -- our reference point is our plan of record, right, as is always the case. So our plan of record today is almost entirely organic. We're not assuming that we're going to do any big deals. That being said, we always look at them always. I mean always looking at industry roll-ups, always looking at unique combinations. And as we sit here today, it's hard for me to get excited about a roll-up strategy in our industry because I think we have the capabilities that we need to be successful and grow the business. And so our acquisition strategy these days are more targeted for a reason. They follow the lead of our divisional CEOs who are out there, identifying unique capability gaps that we need to fill. We're typically out looking for smaller deals that might have some asymmetric upside. And that's what we get more excited about right now. Is there the potential for a large-scale acquisition down the road? Of course. I can just tell you that, that's not really in our field of view right now.

And one of the problems with the large-scale EMS transactions that took place 10 or 20 years ago, was that there was a lot of customer overlap in those transactions. And so if you're a big hardware company, and to your suppliers they're already saying, I want to make sure I have diversification of my supply base. I'm going to take some of the revenue and give it all to where sort of the revenue dissynergies. There's been a lot of change in the EMS industry, right? Jabil is a lot bigger in medical, and you have a packaging business. I mean your competitors are doing similar things. So certainly, you hear about everything you said that it's not on the near-term road map. But do you think that the EMS companies are different enough from each other now that you maybe wouldn't run into this dissynergy problem that you had 15 years ago when companies tried to merge?

I think that always depends on what combination you're thinking about. They're potentially -- potentially, I'm with you on that, but I think it all depends on what combination you're talking about, frankly.

Well, one of the reasons the companies are a little bit different from each other is focused on newer end markets or nontraditional end markets, medical, automotive packaging. There's a news report out few weeks ago about Hon Hai, and Fiat Chrysler potentially partnering to build electric vehicles, which struck me. I typically don't think of Hon Hai as doing something in the automotive space. I have a couple of questions I wanted to get to along the lines of this. But maybe first, to talk about automotive and doing something in the full-sized -- building cars entirely different than Jabil would ever consider doing it.

Alex is pretty close to that. So I think he can take that.

I think it is a step which is too far off from our core. I think we are really, really happy with our automotive platform. We continue to grow the electric content of vehicle electrification. These are 2 areas that were the growth is just amazing regards to the units of cars being sold. So we are really, really happy with our strategy there. So we -- at least, we don't contemplate at this stage to just make that big of a jump, honestly.

And then the follow-up I wanted to ask was on the automotive landscape. One of the concerns investors have had is that with so many EMS companies trying to do these nontraditional markets, that the margins, which are significantly more attractive than other parts of the EMS industry, that, that gets competed away over time. It hasn't happened. I mean, that's been a concern for a decade. And margins did very good in areas like automotive. But when I saw this Hon Hai news story, and it just made me wonder is there an increase in competition that Jabil has started to see in automotive?

So we really focus on the value that we provide to customers. And obviously, when you provide value to customers, they are willing to pay for the value. So for us, it's business as usual. We haven't seen a dramatic change in the competition space.

I mean, I think one of the other benefits, too, is -- and correct me if I'm wrong, but some of these nontraditional end markets still have a high percentage of manufacturing that's done in-house. And so there's -- it's not competition one EMS company versus another, but it's potential savings for your customers.

Absolutely. Why they do these transactions is because they're achieving economic benefits. And not only that but in several cases, our customers really are not focused on manufacturing. Manufacturing is a business that, in some ways, is out of fashion with the big companies. And so they don't even have the skill set anymore to do manufacturing. Clearly, I'm talking in generalities, but clearly, that is a trend why people is not just an economic benefit, but also is, how can I invest in the future of manufacturing. Right now, if you look at the cost of IT and what is possible with IT, automated factories, digitizing factories is something that can create a lot of value for both us and our customers. So if manufacturing is not your core competence, you're not going to invest there. You're not going to invest there, you're going to be left behind. So that's also one of the reason why OEMs comes to a company like Jabil, which is really, really focused on innovating for the manufacturing, automation, digitization, with our CapEx and OpEx in this space is actually quite significant. And we are proud of that. It's money well spent.

We have just a couple of minutes left. I wanted to see if anybody in the audience has a question. Otherwise, I will ask the last question. Well, actually, I wanted to bring up automation. So your point there dovetails nicely into my final question. What percentage of Jabil's manufacturing would you say is automated today? And where do you see that going over the next, say, 3 to 5 years?

Yes, I mean, it is very, very difficult to define it as a percentage. I would say that I don't see any line without any -- some form of automation in our factories. But I really want to point it to the importance of IT. It's not just automation. It's also digitizing the factory, which basically means putting people, be able for people to communicate with machines, being able having machines to communicate to each other. These are also large OpEx investments that we are making. It's not just the automation side.

Great. Well, we are out of time. Alex, Courtney, thank you both for being here.

Bye-bye.

Mark, thank you.