Jabil Inc. (JBL) Earnings Call Transcript & Summary

Great. That's helpful. Now I appreciate being able to strip out the noise of sort as simple as really a consignment change. Moving to your outlook for the year, your operating margin, it's always a big number of very important piece as far as investors are concerned. What do you see -- you touched on some of your end market exposure, but what else do you see will be as key for achieving your 4% operating margin this year? And really, has there any -- has there been any factor that's changed in terms of your outlook since your earnings call in terms of what's going to drive your ability to hit your target?

So let me answer that in a slightly different way. I'm going to take you back to September of 2019. So not the last call. It was the one that we had last year, which is where we provided the 4% and $4 guidance, we had confidence in some of the market dynamics that we felt confident in giving guidance beyond 1 year that we normally provide. What was some of catalysts for that guidance way back September '19. Obviously, 5G less for better volumes, that's not changed. We had semi cap making a really good recovery. That was part of our assumption. That's not changed. We had the Jabil progression, that collaboration progressing as we integrate further sites successfully. We've done that. That hasn't changed. And then we had some restructuring that we've done in the previous year, the savings for that were going to come through in FY '21. That hasn't changed. What has changed, obviously, in the meantime, is COVID costs are going to be there. So we're going to have about -- I think we gave guidance of about $40 million of COVID costs, but that's offset by some reduction in costs that we that we did, say, in July, August of this year, where there's a $40 million, $50 million save. So that $4 and 4% that we provided last year, nothing much has changed from there. Obviously, there'll be puts and takes. But overall, everything is on track and as we estimated it to be.

Great. And how do you think of operating margins over the longer run, even beyond this next year, how high could that flex up? Where do you see those trending over time?

So I mentioned some of the end markets that we're focused on, those end markets that we're focusing on are accretive margins. So obviously, you'll expect that 4% to continue to progress into higher numbers where longer term, I'm not suggesting this is going to happen tomorrow. Longer term, I see no reason for it to not be in the 4.5% to 5% rate. Internally, we've -- we're already starting discussions around that.

Great. That's helpful. So I want to shift to your mobility segment. Big area. It's a key area of investor interest. How is this cycle ramping versus expectations as well as historical levels? And then also how it plays in conjunction with the off-cycle ramp. There was the launch earlier this year that you've mentioned, has been performing very well. So I'm just trying to understand sort of the 2 concurrent cycles that are both going on. What you've learned from one cycle that might be applicable to the next? And really just your -- the latest update on your -- the mobility segment?

Sure. So the mobility segment is going as we expected, probably even better than that. The 5G is definitely turning out to be a catalyst for volumes. We see that in the flow-through. It's a little bit of -- the convergence of technology, I think we've talked about that in the past. That is coming through. That convergence was going to be part of the 5G rollout? Or was there no lag time, high fees, was always going to be a catalyst for higher mobility sale, what we're seeing is COVID-19, the work-from-home environment and a reliance on these south even to a higher extent than it used to be. It's being a big part today in the 5G cycle going forward. It's -- the 5G cycle, I think the infrastructure per se is not there fully. So you're still seeing pockets of areas where there is no 5G infrastructure. We think the 5G cycle will be good. We think the next year's 5G cycle will also be good because people will hold up. If you don't have 5G in your area, will you upgrade some of them. Obviously, well, as they should, and some will wait for next. So I think that 5G cycle has more than 1 year sort of a lag, if it goes on for at least 2, 3, 4 years is my personal opinion. And how does the off season sort of launch, play into this. We've talked about diversification. We've talked about diversification with our largest customer. It's all about level loading, where level loading our factories, and we had a season launch in FY '20. That went really well. And the launch again or a continuation of that launch in slightly lower volume quarters will actually help us from a level loading perspective. Then if you go beyond that, I think the key here is level load be it with the 5G cell phone, be it with offseason launch, be it with other devices from our largest customers, all of that is going extremely well. So we feel really good. That will help margins. That will help absorption of costs, et cetera. And then I think we're going in the right direction.

Great. So I want to come back to a few mentions on COVID-19, with sort of multiple countries in Europe getting worse or having second wave considerations here in the U.S. What's your level of concern about plants being forced to shut down in Europe and elsewhere? What steps are you taking to prepare for the potential shutdown again. We saw this earlier in the year having to reduce capacity. So what steps are being done sort of to get ready to sort of sort of limit the impact of plant, either closures or capacity limitations?

Sure. Yes, Rob, we do a lot more today than we did 9 months ago, right? I'll take it back. We've been dealing COVID really since kind of December and January with one of our facilities in Wuhan, China. And that experience allowed us to get out in front of this in a big way. I think some of the protocols we've put in place in our plants, the spirit and dedication of our workforce has been second to none. And I think we've either been uncommonly lucky or done an incredible job of keeping our people safe around the world. Having said that, of course, there may be things that are out of our control as they would be for anyone in the world. But I think we've got the right protocols disciplines in place. And most importantly, we've got a global network of factories. So this isn't the case for every particular market or customer, but we've got an ability to manage operations seamlessly from site-to-site and region to region around the world. On top of the fact that I think whether it's a factory that cuts down or just impacts that could come from large scale, second or third waves, we've got a supply chain architecture and an ability to manage the supply chain in a very resilient and data-driven fashion. So if governments shut down economies, of course, we'd be impacted like anybody. But I think we're better positioned than anyone to really manage this, mitigate the impacts and help our customers effectively navigate through different scenarios. So not something that has us completely freaked out. Certainly, we're not dismissive of it, but I think we know what we're dealing with right now. And have an ability, by and large, to manage through it pretty effectively.

And if I just -- if I could just elaborate, I think during the peak of COVID-19, we were still operating at 95% plus capacity worldwide were extremely few sort of businesses that were deemed not essential. I was pleasantly surprised by on the essential businesses that Jabil will operate in across the world. And even the businesses that were deemed not essential at that stage, mainly on the automotive side, where we feel those may be deemed substantial because of what's going on in the automotive world at this stage, again, we've provided for some expenditure, we provided for small lockdowns, et cetera, in our guidance. We obviously haven't provided for a lockdown let's say, China for 5, 6 weeks or all of Europe for a couple of months. It's -- those are out there. It's very difficult to provide guidance the scenario that me or play out. But at this stage, because of our experience because of what we've done because of the safety protocols we put in place, because of all the success we've had in this particular field even though it's come to a pretty sad state. Overall, we do feel that we will be able to weather a strong, there might be a short-term impact, this gets much, much bigger. But overall, we feel really good about life during and post COVID-19 at this stage.

Great. And then just as a reminder, we got about 5 minutes left. If anyone does have any Q&A. Please submit questions, just so we make sure we can get to them all in time. I did want to touch on if there's any areas of your business that you believe are being underappreciated by investors in the market? And then kind of another area that has gotten some attention, some investor interest is your 3D printing, for instance, possibly an area of hidden value. Anything we should understand when it comes to that sort of optionality within your business?

I'll start with the underappreciated as that's a topic very close to my heart. I do think we're in an extremely weird dynamic today. So there's a macro effect. The macro effect being this -- completely trend for the stock market to focus on the momentum on growth as the vaccine news coming out, as COVID-19 starts dissipating in the future in the next few weeks or more, hopefully, that shift from momentum growth value stock. We feel we're strongly positioned and that value sort of environment. And I think that value comes into play sooner rather than later. So that's a dynamic that's been frustrating for all of us. And then there's different pockets. I think if you look at some of our businesses, you look at the progress we've made in our health care business, you look at, which if you were to apply some of the parts sort of logic to our health care business with an EBITDA stream of $300-plus million and you apply a health care type of a multiple 12 to 15x that market valuation alone for the health care business is pretty relevant. So those are some of the areas that were underappreciated. I think automotive, sometimes we get lumped in as a proxy for the automotive world. We keep highlighting that we're not a proxy for the automotive world. We are a proxy for mainly the electrification fees which is growing in a really good way. And then cloud and some of the other buckets, I think we made such good progress. Some people get it. Some people don't. But overall, I think, in my opinion, the stock is undervalued right now. And hopefully, that self-corrects over time.

Maybe I'll take the 3D print question, Rob. Look, I think COVID was probably just the latest existential joke, if you will, to global supply chains, highlighting the need for resiliency and agility. And 3D print comes right into play there. If you look at how Jabil is positioned in 3D print and not to speak in hyperbole, but we're really the only company that plays across the entire 3D print ecosystem. And what I mean by that is we actually in a traditional EMS model, build the printers for 3D print. You're probably aware, HP had announced Jabil as a foundational partner years ago with our multi Jet Fusion technology, but we also build parts both from a platform perspective and a metals perspective. And we do materialize or processes. So we have entire facilities that are dedicated just to the material science in polymers and leveraging capabilities that we bring to bear from our Jabil Green Point materials sciences division. So we play across the entire ecosystem. And what's nice about that business is it really complements end markets that are important to us, mainly the health care business, where we're printing 3D parts today. And you look at the aerospace business, where we've done both acquisitions to allow us to do machining, but the machining, coupled with back-end special processing and the ability to do 3D print really provides nice end-to-end value to that market. And as we've seen consolidation in the aerospace markets that's benefiting Jabil well. We've made investments in greenfield facilities that are tied to long-term multiyear, like 15-year plus contracts with major players in that space. And again, I think it's just part of Jabil's answer to being a agile and responsive manufacturer to these important markets.

And Rob, there's a major dynamics going on right now as well. I think we've seen it in the last 7, 8 months, there's this whole convergence of technology taking place in our day-to-day lives right from waking up to the moment you go to sleep, the level of technology usage has gone up exponentially. It was always going to be something that was coming because of 5G and the structure with 0 lag times and higher speeds, we've seen that expedited by COVID-19. We've seen that expedited by the work-from-home experience. So macro level, there is this huge emergence of technology and where Jabil plays. And secondly, the industry is going through a bit of a change. The competitors -- all our competitors ain't on the same sheet, they're all talking about margins, they are all talking about cash flows. I think we find that the discipline in the industry has gone up tenfold as a result of which higher margins and cash flows are more and more realistic. And then you have the Jabil aspect. Why is Jabil preferred in this dynamic. One, we have a -- we probably have a better diversification play with precision mechanics with injection molding, which packaging, et cetera, with some of our other competitors don't have. And that's great. We've been investing heavily in capabilities. We've been investing in IT, we have been investing in factory of the future. And we're really well positioned. We've been taking out cost. We've done reduction in costs. So in my opinion, Jabil's really well positioned to take advantage of this dynamic that I just mentioned. And that is why...

Great. Well, I think to that, just does it a couple of minutes over. But thank you guys very much for taking the time today. I really appreciate you joining us. I hope you found it helpful, hope the investors did as well, and we will talk to you soon.

Okay. Thank you.

Thanks, Rob.

Thank you.