Jabil Inc. (JBL) Earnings Call Transcript & Summary

Good morning. My name is Paul Coster. I cover IT, hardware and alternative energy. I'm joined by Paul Chung from the JPMorgan team. This is the JPMorgan TMC Conference, the [ 49th ], and it's May 25. And I'm very pleased to introduce Mark Mondello, the CEO; and Adam Berry from IR, both of Jabil. Good morning, gentlemen, welcome.

Good morning, Paul.

So I woke up this morning, turned on my Bloomberg terminal, did a quick scan of Jabil. And noted that you are now the biggest EMS company in the space, measured by revenue. And when I talked to Adam and Mark, just now they both reminded me, it wasn't just biggest, also the best. Tell us why you're the biggest and the best, Mark?

Well, thanks for that. Before I get into those comments, Paul, I was sitting here, I woke up this morning, actually driving into the office. Actually have long pants on today, which is unusual from how I dress when I'm doing all these things from home. And I was thinking, Paul, you and I were together like 18 months ago. And man, how the world has changed from when you and I were together, I think it was January time frame of 2020. And it just seems very surreal. And that -- maybe that leads into your comment about us being the biggest. I don't know if we're the best. We like to think that in terms of our solutions and our services, Paul. I think it's a reflection of our team. I think it's a reflection of the solutions and services we're taking into the marketplace. And you know, Paul, for sure, we certainly didn't think that the recovery post-COVID would be what it's been. Whether that continues or not, we'll see. But with the stimulus funds, people working from home and then just everything that's happened in the last year, we've had some decent tailwinds. As you know, Paul, we've been around for, I guess, 50-plus years now, 55 years. We like to think of ourselves, Paul, as kind of a mix of what we would say is high-tech industrial. And I think with the size we're at today, we still look at the next couple of years, and we think that there is reasonably good room for growth. We have -- today, we serve a little over 400 customers. We've got over 50 million square feet of manufacturing space across a whole bunch of countries. And one of the things that Mike Dastoor and I, Paul, were talking about during our March earnings call, is Mike and I alluded to some secular trends plus some cyclical tailwinds, the combination of those. But I think coming back to your initial comment, I actually start to wonder is large-scale global manufacturing in and of itself a secular trend, Paul. I think about the 50-some years we've been around. I think the barrier to entry to do what we do has become extremely high. When I think about the tens, if not hundreds of millions of dollars, we invest every year on an OpEx perspective in terms of IT, IT systems linking all of our factories together. When I think about factory of the future, when I think about automation, when I think about machine learning, when I think about edge storage versus cloud storage, optimization of that, moving with speed, yet moving with precision and serving, I don't know 12, 15 different end markets and taking great care of our 400-plus customers. I think, Paul, all of that plays into maybe why we're sitting and where we're sitting today.

Size actually matters, and you have to be able to do everything in order to serve customers that have these very sophisticated needs with complex products, complex supply chains. Size matters.

I think scale matters. We -- I can tell you 100% for sure that when we meet as a leadership team, whether it's my direct reports, Paul, or we expand it to say, our top 80 to 100 leaders in the company, you won't find a single note pad. You won't find a single -- although we try not to do a lot of presentations, but you won't find a notepad, you won't find a note, you won't find a slide where we spend much time ever talking about our top line or size. We think that's an outcome of obsessing around our customers. So we spend a ton of time talking about obsession of customers, are our solutions better than our competition. If not, where, why and -- but for sure, again, I'd much rather be in this business today with significant scale than not. And that helps us in terms of our broad-based geography. So if there's an issue in China, if there's an issue in Malaysia, if there's an issue in India, if there's an issue in certain parts of the U.S., South America, Mexico, Northern Europe, Southern Europe, Eastern Europe, Western Europe, we have an outstanding, well diversified global footprint. We have great knowledge in how to conduct a business across many, many multiple currencies. We are very well versed in tax jurisdictions. And then just, Paul, we talked a lot about how important an all-inclusive work environment is and diversification of our people. And that's not just gender to us or sexual orientation or religious beliefs. But -- geez, if you look at our top 1,000 leaders, it truly is like United Nations. And I think when we're solving problems, that part of our scale is very beneficial. When I think about investments, both OpEx and CapEx that we make for our customers, having a strong balance sheet. And by the way, as I sit today, I was talking to Mike Dastoor about this last week. Our balance sheet, I think, is in the best shape I've ever seen it in my 30 years of the company. When I think about being able to move with speed and the IT systems we have and the investments we've made there over the years, that matters. And I got to say in talking to either heads of supply chain around the world, at our customers, talking to CFOs and talking to a lot of CEOs, there's not a lot of them talking about building stuff. And I think that's really good for us as well. Because it's a tight margin business. You got to watch every penny. It's capital intensive. But I think that bodes well for us. If I think about the next 2, 3, 4 years ahead, Paul.

So you have scale, you have reach, you have diversification, you have diversity. You've got so many things going for you. You're very big in terms of revenues. And yet, the market is so huge, right? I mean, how do you even think of your addressable market? I mean, it feels to me like you've got so much choice.

Yes. That's why I kind of think to myself. Why isn't large-scale advanced, high-tech industrial manufacturing a secular trend? Like we talk a lot amongst ourselves about we can get all wrapped around the bicycle wheel in terms of getting too cute around strategy. Yes, we need to be strategic in certain sectors. We need to be strategic in some of our end markets, for sure. But you know what? We -- in the most simplistic terms, Paul, we build stuff. And that, in and of itself is a strategy. And if we do that better than or as well as anybody else, to your point, the market is huge. And Paul, I kind of envision a day, in the not-so-distant future, that if we continue to obsess about customers, what we'll probably end this fiscal year, Paul, and as you know, our fiscal year ends, end of August. So it's hard to believe, but we're already in 4Q. I think this year, Paul, we'll be bumping up against $30 billion in top line. I envision a day where -- this is a $40-plus billion company. I believe, in my heart, we can run this business at 5% operating margins. I think about what the cash flows are there. I think about what the disciplines we have internally around OpEx and CapEx investments. And then to your point earlier, we have developed a really good [ knack ]. I don't know if knack sounds overly sophisticated. But we just -- we've got a really good pulse and cadence, Paul, on what we say yes to and what we say no to. And we are -- we're a big company that when you work here feels small, I think that has to do with the optimization of our structure and the entrepreneurial freedom, we give our people. But I think what I've been really pleased with is, Paul, if you think about our activity, I was going to call it our strategy. But if you think about our activity the last 10 years, we brought in a lot of new business because we believe that continuing to diversify our cash flows, diversifying our income was a really wise thing to do. And I don't know, Paul, if I'd ever say and put a stake in the ground and go, we're now diversified. But boy, our portfolio today, the construct of our business is just fantastic. And so where I was going with that is, is it does give us the opportunity now to really focus and dial in on the margin side of the business. The last 4, 4.5 years, 5 years, Paul, as we've been growing, our operating margins have been in the range of 3.5%. At the beginning of this fiscal year, so call it, September of 2020 coming out of COVID, we had our beginning year Investor Day, which we always have, and I'm really excited to think about what we're going to say a few months from now in September of '21. But in September of '20, we suggested to investors, revenue this year would be $26.5 billion, $27 billion. Operating margins would be around 4%. And as we sit here today, Paul, it looks like revenues could actually be closer to $30 billion. But the really good proxy on the discipline we have is, is if we continue to execute and continue to take great care of the customers we have, there's a good opportunity we'll end this year with margins being 20, 30 basis points better than we thought at the beginning of the year in the 4.2%, 4.3% range. And that will set a really nice foundation for us as we move to fiscal '22.

So I can't -- it is really -- I mean the momentum is excellent. I guess my question then is, what is it you're not doing? What -- you're turning -- you must have some criteria for accepting and rejecting opportunities, right? I just want to make sure I understand what you're not doing in order to kind of drive these margins higher. And what business you -- I mean if there are positive attributes you look for in a business that you go after?

Well, I think we start with -- I think that there's some decent secular trends over the next 4, 5, 6 years. And I think when you have a reasonable amount of your business that's tied to like real secular trends, that always provides a little bit of a tailwind. So we start with that. But Paul, in the way we're structured and the autonomy and accountability we give our business leaders, we just have a very, very good process they use that I think our modeling is pretty sophisticated. I think that our ability to look at a book of business, whether -- I mean, you know our company well, whether it's digital print and retail, whether it's semi-cap, whether it's light industrial, heavy industrial, 5G, cloud, networking, storage, mobility, edge device, health care, packaging, automotive, transportation, et cetera, every one of those business leaders has autonomy in making decisions on whether or not we should say yes or no to a book of business. They start with do we have great solutions and do we have a right to take on that book of business? Meaning, are we crystal clear on the solutions that we're going to bring forward and carrying for the customer? And then do we believe that we can get paid fairly for the effort that we're putting in? I also think, Paul, when you get to be of such scale, and I don't know what our employee headcount is today, but it's over 250,000 people, you -- we have to have appropriate enterprise-level compliance and control and governance. But we've somehow been able to form this entity and still keep alive our entrepreneurial spirit where we push decisions down into the organization. And in some odd way, I constantly encourage people to make mistakes. And we talk about the fact of, okay, let's not make big mistakes. And if we make a mistake, let's acknowledge it [ early ]. But if we're not making mistakes, then I don't think we're pushing hard enough to serve our customers. And you wrap all of that recipe up, and you end up baking something that's pretty impactful. And again, if we can continue to do that at substantial scale, $30 billion, $32 billion, $36 billion, $38 billion, $42 billion, there's something to that, Paul.

So you are pursuing secular trends. You're also seeing something of a cyclical recovery out of last year. Is that a fair statement?

It is. I think of -- we have seen a decent amount of recovery. I think we have to step back and see it for what it is. There's been -- whether it's U.S., non-U.S., there's been a lot of stimulus put into the system. And for sure, that's been a catalyst. I think the stimulus that we've seen go into the system and whether it becomes inflationary, noninflationary, that's always a big debate. But we think that will soften a bit in terms of the impact down the road. You'll hear more about that in our September call. But even with that, Paul, again, you take our team, you take our purpose, you take our value system. We have a value system, Paul, which is really about solving complicated problems. And if we can bring things to the marketplace that are solving complicated problems, we're going to continue to be in great shape. I think our team is relatively conservative. I think we'll have take -- we'll have taken or we'll take another conservative swing at our outlook come September. But with that said, I think the likelihood is, is fiscal '22, our margins will be higher than fiscal '21 and fiscal '23 will be higher than fiscal '22, and we'll see how it goes. When I think about it, if I start with the overall overarching umbrella of the fact that high-tech industrial, advanced manufacturing, design, supply chain management is a secular trend, if I broke that down into kind of some subcomponents, we are very well positioned in areas like electric vehicle, electrification of transportation, automated farming, cloud computing, edge computing, data storage. I think about various areas of health care, personalized health care, which I think is going to be a wonderful secular trend both in developed and developing countries down the road, Paul. Digital learning, we're just at the tip of the 5G rollout. We'll see how that goes, but we're very well positioned there. Another huge area for us is clean energy, whether that be on the metering side, whether that be again tied tangentially to electric vehicles, whether that be in different parts of solar, eco-friendly packaging. Kenny Wilson and our consumer packaging team announced a kind of a modest acquisition we did a few months back around some really cool things with eco-friendly packaging. And I'm sure I'm forgetting some stuff. I think automated retail. So there's not a lack of things for us to do. One thing -- since this is an investor conference, one thing that investors can feel comfortable with is, again, I think we have a really good playbook on being very disciplined in what we will do and what we will not do, Paul.

Well, I think there's a lot of positives for investors to take away from this, not least of which is that you sound really constructive about the year ahead. I mean the guidance called for $28.5 billion in revenues, 4.2% operating margins, $5 per share in earnings and $600 million in free cash flow. You've talked about maybe pushing up towards $30 billion, which suggests to me there could be a potential upside. And all this is against the backdrop of continuing challenges. So let's just talk about that for a moment. The guidance, does it factor in what you understand today would be component shortages and freight costs and continued, sort of, the overhang of the COVID-19 lockdowns?

It does. But that's changing day by day, Paul. I can tell you that we -- as you know, we provide guidance 4 times a year. We're not a company that -- unless something bad happens or really, really good happens, we're not a company that believes in overcommunicating how things are going financially. We think 4 times a year is appropriate for our business. And as we sat back in March, at that static point in time, we had -- again, I think we're a very conservative leadership team. So we tend to err on the side of, okay, what do we know. And then let's take -- if we were to -- if I was to index that for you, let's take a little bit of a conservative approach versus overly aggressive. And I think we've been that way a long time. As we -- we're coming up on our June call, which I think is like June 17, 18 time frame, we'll reset on that. But I can tell you, as we sit today, end of May, there has been no substantial change to what our belief system was back in March, whether it be freight costs, fuel costs, inflationary costs to raw goods: Steel, copper, gold, silver, et cetera. And then -- and the supply chain, for sure, continues to be a challenge. If I could speak to that for a few minutes. One, you talked about scale. For sure, when you buy as much as Jabil buys and you buy all the different things we buy, scale and knowledge that comes with that scale is a huge competitive advantage. And then what I would say, Paul, is the way we behaved over a number of years, the trust and rolling up our sleeves with both our customers and our suppliers in working day-by-day by day through some of these challenges has proved to be good. Not to say that every single day we don't have teams on calls and feet on the ground and people all over the phones. But -- so that's one aspect. The other aspect is, and maybe kind of an [ adder ], Paul, is proper supply chain management absolutely starts with appropriate demand signals. And the algorithms we use in our planning and not crying wolf and not double and triple ordering and not pounding our fist on the table when we really don't need the parts so that we can build inventory. And I think the digital supply chain tools we use, and I would add to that, Paul, our data, our planning tools, the way our people connect to their customers and their specific end markets. And then I add to it, in my opinion, Paul, we have the best supply chain procurement team in the world. And that -- I don't say those things lightly. But when I think about how much we buy, our scale, the different end markets we serve, the customers that we're fortunate enough to take care of and then the amazing suppliers we have today, and then just the experience in our supply chain procurement team all over the world, it's in the hundreds of years of experience. And then add to it the foundational tools we have. I think that's helped us navigate this reasonably well. With that said, for sure, there continues to be challenges in speaking to some of our more senior supply chain procurement folks end of last week, we think things continue to be challenging through calendar '21. And then we start to see things normalize early to the spring of '22. But again as we sit here today, and we'll update everybody on our June call, all of that has been factored into our outlook. And as we sit here today, I feel pretty good about how the third quarter is going to look. And again, we only have a few days left in the quarter. So I think another way to say that is our team is doing, on a relative basis, a nice job with supply chain management.

Is there any light you can shed on the situation in Malaysia? I mean, you've made it clear it doesn't matter to you at the moment. But nonetheless, I think people are interested because of the read across?

Yes. I wouldn't say -- I certainly wouldn't say it doesn't matter. It certainly matters to our customers in Malaysia, it certainly matters to our employees in Malaysia, but here's another advantage in scale. And I think Plexus came out with some communication that hit the wire. And that immediately went to Adam, immediately went to our business leads. And then I was on a call yesterday and something completely different, and I was getting a few texts. So we had -- we rallied a couple of our folks together, and we've known about this since last Friday, Saturday that it could be coming, to suggest I know all or understand all the details, I don't. But at a high level, the Malaysian government has stepped in, I think rightfully so in terms of trying to keep people safe and virus free. Some of it has to do with a work-from-home mandate request, whatever you want to call it. And -- but we've been dealing with -- we've been dealing closely with the Malaysian government around COVID since April of last year, so well over a year. And again, as we sit today, touch wood, I think we'll navigate through this just fine.

You've done a really great job of diversifying the business over the last few years. So you are no longer an Apple story. However, you are occasionally associated with the Apple story. Tell us what percentage of the business now is from the mobility segment? And within that segment, can you just clarify how many products you cover. Because I think people still don't understand the diversification even within the segment itself.

Yes. So if we're going to -- if we go to that level in detail, number one, I can say that it is factual that our mobility business is largely around our large customer, although it's not solely around our large customer. I put that in context because in the March call and then in our June earnings call, Adam and Dastoor always do a really nice job of showing you our business and they break it down into 8 business sectors, of which one of them is mobility. If I remember correctly, for the year in the March call, we said mobility would be about $3.8 billion in revenue. So if you just do the math on that, you take the $3.8 billion, divide it by, say, 29 -- maybe 29 something, that gives you an idea of where our mobility business stands today.

Right. And within that business, it's not all one product anyway, right?

It's for sure not one product, and it's for sure, not all one customer. So -- and we don't break that out.

Okay. All right. Got it.

That's why I would say that we really, really enjoy the fortunate partnership we have with Apple.

Got you. As you said, it was 18 months ago, we last met in person and well, has changed a lot. One of the things that's changed a lot is the amount of activity and the amount of heat almost that's been produced in the electric vehicle space, but sometimes without an awful lot of activity. Thankfully, the unit volumes in EVs haven't really taken off yet, even though we can tell they're about to. But you -- so 18 months that have transpired, you haven't missed an opportunity there. I'm sure you're well positioned for whatever is coming. What is coming? And what role will Jabil have in the next-generation of electric vehicles? And is it a higher-margin role than you've had in the past?

Yes. So I'm sitting here, I'm sitting here kind of laughing at myself in terms of my own head. On one hand, I'm like we don't spend a lot with sophisticated strategy at an enterprise level. Like our strategy is we build stuff. Our strategy is the market's huge. Our strategy is, let's be really disciplined in what we say yes or no to. And then let's be really thoughtful in terms of solutions and services and obsessing about customers, and let's be really thoughtful around capital allocation for shareholders. So that's kind of an enterprise-level deal. Where we get very strategic is in the 8, 10 or 12 different business sectors that we play in today, one of those being automotive and transportation, which is led by Chad Morley and Steve Borges. And I would tell you that our strategy in that area, and we do our strategic planning by sector, Paul, over a 2, 2.5 week period every single August. I can think back to those strategy sessions, 2016, 2017 time frame. And the team was really bold on saying, you know what, we really want to be a well scaled player in automotive. And then over time, Paul, 2016, '17, '18, '19, the team was very bold in saying electrification sensors, sophisticated cameras, logic, autonomous driving. If I were to go back and pull up those strategy sessions and look at the information, there was lots and lots of discussion around this part of automotive and transportation. And I would say that, boy, that has positioned us really well in the electrification EV market with multiple brands. And I would also say, in an interesting way, Paul, when I think about things like computational agriculture, automated farming and the tangents in terms of all the engineering experience we've garnered from early days of automotive EV and where that can go into some other tangential markets, I think we feel pretty good about how that looks. And I would say that area of our business will probably offer us strong double-digit growth over the next 2, 3 years, Paul.

Is your role in the supply chain slightly different from what you've seen in the past?

In what regarding?

Are you getting closer to the OEMs?

I don't want to comment on that. But let's just say that both tactically and strategically, we inject ourselves into whatever area of the supply chain, we feel like we can provide great value, I can tell you that we've made lots of mistakes as a company, me included, for sure. In fact, I think I probably lead the pack. We, for sure, regardless of sector, and now I'm not talking about EV or automotive and transport here. I'm talking in general, Paul, every single time we've kind of dipped our straw into an area of the supply chain where we didn't provide great solutions and services and have a real right to play, we knew immediately it was a bad decision. So I think with time and experience and mistakes, we've gotten better at that. We'll still screw that up some. But coming back to your question around -- specific to automotive and transportation, yes, I think we're playing at the appropriate points in the supply chain. And it feels like the solutions and the services we're providing are offering very good value.

Really got a minute or so left. I got a question come in. What is Jabil's exposure or revenue from additive manufacturing? What's the growth and margin profile on that business? And are the engineered inputs plastic filaments route to higher margins?

I think additive is here to stay. We break our additive into a couple of components, Paul. We break it into R&D. So metallurgical sciences, polymers and plastics, and we've got great scientists and folks in that area. I think we're very, very good at the R&D part. And then we have an application part, Paul, where, for this year, next year, I would say the vast majority of the applications will be defense and aerospace and health care. And then by fiscal '23, '24, I would see the applications moving to at least 1, maybe 2 other sectors. And in terms of why do we do it, because I think being very selective, 3D additive has a place in the marketplace for sure. So if we're going to play there, we'd like to be expert at it along with our customers. And I do believe it's early days. And if we do a nice job in having that technology be early days, I think our activity there will be, for sure, accretive to margins.

Let's see if I can sneak one last one in. So $600 million in free cash flow this year or better. And you've talked about getting to $40 billion, and that would, to me, imply well over $1 billion in free cash flow at some point in the future. What's the capital allocation strategy moving forward?

Well, this is always interesting because whether you're talking to the credit agencies or rating agencies, investors, our internal management team, I think, in my opinion, I think we've done a nice job with our capital allocation. I think we've been very disciplined with it. We've -- this is just fact. So this isn't even opinion. We looked at the valuation of the company in June of 2016 or thereabouts. And we looked at what we thought might -- could happen over the next 4 or 5 years. And in that time frame, Paul, we've taken our share count from about 216 million shares down to 150 million shares. I would suggest that, that's shareholder friendly, investor friendly. But I think what we'll do is we'll always be taking a look at where the valuation is relative to where we think the business is going. We'll take a look at the marketplace, we'll take a look at the macro. We'll take a look at what's happening with interest rates. And I think shareholders can count on us to continue to be very thoughtful in how we allocate capital.

Thank you, Mark. Really interesting hearing how you manage your business. You're doing great. So thanks so much for participating.

Well, it's great to see you. Thanks for having us. And as the world is starting to open up, Paul, let's get together and have a little dinner and tip of beer. But thanks for hosting us today.

Welcome. Thanks so much, Mark. Thanks, Adam.

Yes, you keep safe. Bye-bye.