Jabil Inc. (JBL) Earnings Call Transcript & Summary

Okay. Great. So thank you, everybody, for joining us. My name is Mark Delaney, and I lead coverage of Jabil. I'm very pleased to be hosting for Fred McCoy, EVP and the CEO of Jabil's EMS business; and Adam Berry, the VP of Investor Relations. As many of you know, Jabil is one of the largest manufacturing companies in the world with over $30 billion of annual revenue. Jabil reports in two segments that are about similar in size, the Diversified Manufacturing segment, which serves our markets, including electric vehicles, health care and mobility; and then the Electronics Manufacturing Services segment that Fred runs and that includes products for end markets, including renewables, data center, 5G, networking and capital equipment. Actually, before we get going, I had an interesting anecdote, I was thinking about it this morning. So if I go back to February of 2020, we had our tech conference in San Francisco. I remember Adam was the very first person to say, "oh, nobody at Jabil is shaking hands right now because of COVID". So I was thinking of that and bring that up for two reasons. One, Jabil's deep supply chain expertise and knowledge of everything that's going on in the world. And then on a brighter note, Adam did shake my hand this morning when we ran into each other in reception. So hopefully, that's sign of better things that are ahead of us.

That's actually a great memory that you have there in a sense that I remember that conference very vividly as well, and we were talking to people back in China and Asia, and it was a really big issue. And not only do I remember we were saying, hey, you need to be careful about this thing going forward. But also, I remember getting into a very, very large auditorium with probably 600 people. And I think there are some folks there from AWS presenting. And I was thinking, wow, if one person in here has it, this could get pretty bad. So I do appreciate you bringing that up because it does show you kind of the global power and nature of Jabil and just how big we are, how much information we have and just the impact we can have in terms of knowledge and those sorts of things.

Well, yes, hopefully, we're past those issues. I have some supply chain questions for you later.

But before we dig into some of those supply chains, there a question. Fred, I wanted to lead off with a question for you and maybe talk about what your key priorities are for the EMS segment currently and how you'd like that business to evolve over the next few years?

Yes. We've had some really good secular tailwinds, and we're going to continue to lean into those. First of all, I guess I should say thanks for being here. I view Jabil as an industrial company with 230,000 employees, 25 million square feet of manufacturing and machining, sheet metal, electronics. I think of ourselves as more of an industrial company than a tech company sometimes. So -- but the EMS business is growing. We're leaning into some key tailwinds data center and cloud. Obviously, artificial intelligence has gotten the buzz lately. We're involved there with our cloud customers and building out data centers and infrastructure for that. There's megatrends in the renewable space, we've invested heavily in energy storage and energy conversion and grid level power management. We've got some key priority growth in the 5G rollout that continues around the globe. And so -- and then there's some smaller trends like our warehouse automation and some of the retail automation that's going on that we think power growth for the next several years.

That's a great overview. And maybe we can dig into some of those end market trends in a little bit more detail. I think overall -- and Adam double-checking on this, if I say anything wrong, please, but I think the company guided for 2% growth this year in the EMS segment and expecting to be roughly $17 billion of revenue in total.

Those numbers are correct. But the one caveat I would point out is that roughly halfway through our fiscal year, we went into a consignment model with a handful of customers. So the impact to revenue is roughly $600 million to $800 million over the year. But -- so it hits us -- if you normalize for that, it would be more like 6% growth for the EMS segment. But no, your numbers are correct.

Speaking of the consignment model, maybe we can talk on data center in 5G. And that's a market that's been very strong for Jabil, especially if you exclude that change for pass-through revenue, a lot of companies have seen quite a bit of weakness somewhat in hyperscale, more broadly in telecom, but it doesn't seem like Jabil has really seen that. So maybe talk a little bit more around what you do in those markets and why you've been seen some strength.

Yes. I think we're kind of the last mile in the data center. So the final configuration of the racks, the infrastructure, whether it's the switchgear or their cooling. And we're leaning heavily into some of the customization trends that we see. So a lot of data centers are moving to bespoke silicon solutions for -- particularly for some of those AI and ML applications, but also for other workloads. And that plays to our sweet spot of being able to do kind of higher mix, more bespoke manufacturing and engineering solutions for our customers. So we're seeing that power our growth versus sort of the commodity server and storage platforms where you're seeing declines in the marketplace.

It sounds like there's a content story here, not just a unit type of opportunity.

Absolutely, yes.

I know this is a tough question because AI is such a new increasing focus, especially some of the new applications like large language models. Maybe talk a little bit more, if you could, on where Jabil may be exposed to some of the AI spending?

Yes. So we're seeing AI drive a number of things in the data center. You need -- obviously, specialized computing. So there's a lot of Custom Silicon Solutions, which I mentioned, and that's with our large customer, but also with other smaller customers, whether it's in the financial services industry or in kind of Tier 2 cloud providers. We're seeing that -- the other big need in AI,ML is the data transfer and copper doesn't work. We're seeing high-speed optic high-speed optical interconnect being a critical priority in the data center -- so we're seeing changes in the networking philosophy inside the data center and then in the wireline communications from the data center back to the networks. Those are areas that we've invested heavily, and we have some of our own products in. We have capabilities in. So we're leaning heavily into that.

Could you comment on the breadth of Jabil's exposure to hyperscale customers in AWS was a 10% customer at one point and disclosed in your 10-K. But how should we think about the breadth of this business? Is it mostly for one customer? Or is there a broader set of data center companies that you sell into?

Yes. There's a broader portfolio. I mean I'm not going to hide behind the fact that AWS is our largest customer. They're a great partner, and we're expanding -- continually expanding the scope of what we do with them. So to build and have another customer that meaningfully offsets that is going to be difficult in the short term. But as I said, we're heavily engaged with a number of folks, and we're Intel's launch partner in their new compute platform, a high-density modular compute platform. So -- and that's not an AWS solution that, that sells into. So I think you'll see more and more of that. And hopefully, we can open up a little bit more with our customers when those rollouts continue. But today, I'd say we've got two handfuls of customers in that cloud space.

That's helpful. And then on the 5G part, I think Jabil has been gaining some share over the last few years in 5G, but some of the telecom CapEx trends had slowed a bit in some of the regions around the world. So maybe double click a bit if you could please on what you're seeing.

Yes. I mean 5G, the rollouts are asymmetric around the globe, and I think that really plays to the favor of a company like Jabil. We can provide a solution in any region of the globe for our large customers. We're actually the largest producer of 5G radios in the world today, aside from the vertically integrated guys in Asia. So we've got the ability to quickly move the production, the production assets for one region to the other. So North America has been down this year. I think the telcos have all kind of signaled their slowing CapEx in North America, but we're seeing India and some of the other emerging geographies pick up. So -- on balance, our business is flat, and we're going to see continued growth as Massive MIMO and some of the newer fixed wireless applications come out.

That's helpful. On networking, maybe talk a little bit more on your business there. I imagine this overlap as well in terms of some of the customers that may be a data center customer, which will use perhaps some of your networking capabilities.

Yes. The networking, again, for us, we tend to do well, I'd say, globally as a company where it's highly -- it's complex, highly engineered solutions. And we're seeing that again in the networking space, the big networking and some of the big cloud providers are coming out with custom solutions, custom silicon and integrated optics in their networking products. They're relying on Jabil to help industrialize those products and bring those to market for the data center application. These are higher ASP, more -- much more content, rich for us, and they offset some of the weakness that we're seeing in sort of the core enterprise networking and a similar trend. Again, people are moving away from a standardized solution, moving to more customized solutions, and we can do that because the cost of producing custom semiconductors has come down so much.

That's helpful. One of the markets that was stronger than I was at least anticipating on the last earnings call and kind of continuing trend was in your capital equipment business. I think there's been some weakness in semi CapEx, but you commented out, renewables are actually becoming a really big driver of that segment for Jabil. So maybe you could elaborate a bit on what you're seeing there.

Yes, if you look at the way we report, our industrial and semi cap businesses together for a variety of reasons in our supply chain and our factories. That's about a $4.5 billion business. It's growing. It will grow 17% -- 18% this year. And that's with the semi cap business being down 15%, 20% like our customers are indicating. So we're still in a good position in the semi cap space, both in the wafer front-end equipment and in the back-end test. And we're continuing to launch new programs, and we're seeing the fab growth will maybe pick up next year. But that's being offset heavily by our growth in renewables. And we've got Bill Mitchell here who runs our renewables business, and we've invested heavily over the last 4 or 5 years in energy conversion, power management solutions. So we're doing everything from grid level energy storage, grid level power management solutions, think of big containerized systems to smart metering and energy efficiency in the home and storage in the home. And we don't see the secular trends changing there. Obviously, the investment recovery or the Inflation Reduction Act here in the U.S. has accelerated that. So we think that's got a multiyear tailwind behind it.

And how large is renewables holistically as a percentage of that capital equipment business?

I don't know what -- I would say not the capital equipment business, but of that entire industrial and semi cap business that we have I'd say it's 65%.

60%, 65%. Yes.

And then I think we call that business industrial, I don't think it's very reflective of what we do today. So down the road, I'd like to see us represent that business better as a renewables business and better reflect what Bill and the team over there in the industrial space are doing because that's where we're seeing the growth. That's where we're seeing the real traction with customers. And then I don't want to correct Fred in the slice bit, but 15% 17% growth for the year. We're not here to update the guidance on the industrial business here today. That's where we're at.

Okay. That's helpful. You mentioned the Inflation Reduction Act, maybe talk a little bit around where you're manufacturing products. I mean I imagine with that in place, you may be doing more specifically in the United States. And talk about any potential credit and how that perhaps gets shared between Jabil and partners?

Sure. We've seen the trend kind of in regionalization, I think really start in '18 with the Trump tariffs kind of picked up steam with COVID and some of the supply chain disruptions. And we just see the Inflation Reduction Act as a continuation of that long-term trend. We're going to see more regionalized manufacturing and optimize solutions for the end markets for those products. The inflation Reduction Act right now, I would say, is not meaningful in terms of our guidance. We still are working through and -- and I think the treasury and the commerce departments are still working through what the rules are going to be on that, and I think there's been a lot of press about that. I won't speak to that. I think folks are up to speed there. We expect that there will be continued investment in the U.S. We've opened a facility in Salt Lake City within the last 12 months, really before the act. And we're at full production now for energy storage solutions there. We're -- we've got a parallel facility coming up in Memphis, Tennessee. So we'll have East Coast, West Coast, and we're going to continue to -- I think we're going to continue to see that. But again, that was really propelled by a regionalization trend and now the Inflation Reduction Act. We're going to see maybe more content being added on to that in order to trip whatever the thresholds are that are required to get the incremental credits. -- unclear yet on how all that works. I mean, in all likelihood, our customers or the utilities will be the beneficiaries of the credits, and it won't really affect our margins at all.

Are you having any difficulty finding their factory floor space or labor. But when you think about how do you -- potentially how much more is taking place in Mexico and in the United States. I mean, you hear some news reports of labor shortages and a lot of wage inflation or even lack of warehouse square footage being available. What's Jabil seeing on that front?

Yes, we're seeing constraints in certain markets, in certain geographies. I think that's -- and so that leads us to how do we -- how to drive better efficiency of our floor space. So whether that's warehouse automation solutions, or our factory floors with factory automation. And if you look at our company right now, I think we're actually down about 20,000 employees. So maybe $260 to maybe $240 million, $230 million despite the fact that our revenue continues to grow. So we're leaning more into both business process automation, so think of AI for the office and for the designers but also factory automation and in our factories and our warehouses. So you'll see that reduction in labor, and that helps to offset some of these labor trend increases, that gives us better density in our warehouses so that we don't have to deal with safety issues because we've got robots picking. So that allows us to offset some of the cost headwinds that we're seeing for our customers.

And you've announced new facilities in Mexico, for example. So you are also finding ways to grow, as I understand it.

Yes. I mean we're expanding in our footprint across Mexico. We're expanding in Eastern Europe. We're expanding in Southeast Asia. Actually, our revenues in China, I think this year will be at or close to record. So we're seeing kind of a global improvement in our business. And we haven't had a labor constraint. I think we have a local-for-local mindset. So our leadership in the regions, tailors the solutions and the compensation and the work rules to the local market, and we don't impose anything from corporate. So I think that's also given us a little bit more flexibility and nimbleness in how we ramp up those regions.

You guys have any sense, and I realize this is a very tough question, but do you have any sense about how much share maybe you've taken because of your presence in North America? You've been in region for so long, very well established. And as some of your customers are wanting to do more in North America, I would think that would position you very well. I mean I know maybe you can't always ascertain exactly why in business. But any sense about maybe how much share you're taking that you could perhaps attribute to this phenomenon.