Jabil Inc. (JBL) Earnings Call Transcript & Summary

All right. We're going to get started, everyone. Good afternoon. Thanks, everyone, for joining. My name is David Vogt. I'm a UBS enterprise hardware networking analyst, and we're excited to have with us Jabil. We've got Kenny Wilson on my left, Chief Executive Officer; and Adam Berry from Investor Relations on my right. Before we get started, I'm just going to read a brief disclosure from UBS' perspective. There are important disclosures pertaining to our discussion today on the UBS website. If you have any questions, please e-mail me or go to www.ubs.com/disclosures.

So I think with those disclosures out of the way, why don't we jump in? I'm going to throw my questions down for a second, and then talk about -- I'll give Kenny a chance to talk about the 8-K that they just published not too long ago about business trends for the quarter. And so why don't we start there? Kind of Kenny, what did you see in the quarter that sort of necessitated sort of the 8-K that you just filed not too long ago?

Sure. Well, thanks for having us, David, and thanks, everyone, for your interest in our company. So what we've seen really toward the back end of our quarter was a marked slowdown in demand from our customers and really, really broad based. So we evaluate that, and the reason we came out with our announcement today was not so much for Q1, but we see that we don't see a recovery in the short term. So we think it's an inventory correction. We see it, and we give some preliminary guidance for Q2. So we think that, that will continue through our Q2 and to the extent that we think we'll be off by directionally 7% for the fiscal year, so $31 billion. So we felt it was important to get that information out to the investment community. What we -- so we spend a lot of time in what we do internally. Obviously, there's things that we can't absolutely control. And so it's how we react to that. So we try to guide on from a margin perspective and from an EPS perspective so that you can see that we think our business is in pretty good shape. We've just -- we've spent a lot of time diversifying the company. So if you look at through where there's been major financial impacts historically, we think that we were much better positioned to be able to ride through that. So it was really to give the message that. Look, we will react to softness in end markets. We think being diversified really helps us there. We think our model is robust. And we don't see any change in trajectory from us from where we're going directionally, but we just wanted to get that information out there to the investment community. So that was the logic behind us announcing today so that we could also -- we could be informative to the teams, to the folks out here also.

So I mean, I think since you touched on so many different end markets, you have a pretty good barometer, a pretty good read on what's happening maybe with a little bit of a lag. But we were just talking earlier, maybe if you have some color or commentary, maybe we can share it with the audience in terms of how some of the markets are trending. Whether you want to touch on different industry verticals that are still growing and what's trended over the last several weeks and so on and so forth to kind of give people a sense for maybe where the areas of softness are that maybe weren't anticipated at this point?

Sure. So again, for those that follow our stock, you know we're pretty conservative. We have division leads who run each of our end markets and that are really in touch with our customers. So we've got tight relationships there. I mean what we've seen was, as I mentioned, really, really broad based. But where we anticipated growth, we're seeing growth, it's just not at the same rate. And where we anticipated that our revenues would be off, it's soft, but the decline is deeper. So if you look at the consumer, softer. If you look in our print and retail, in digital print and retail, it's softer also. Network and storage, we're taking a hit there. And a lot of that you'd see is consistent with the customers that we serve in those end markets. If you look at 5G, it's soft. And we're really well diversified in the 5G space geographically. But it's soft across all the geos specifically, particularly in North America. But we are seeing growth in the automotive and transport space, and we're seeing growth in health care, and we're seeing growth in renewables. But it's just that our anticipation was that we'd be growing faster in the end markets we expected to grow in, and we wouldn't see the steeper decline in some of the other end markets. So really, really broad based. But I think the thing that ties them all together is that -- and remember, we're pretty intimate with our customers -- is that it generally seems to be that there is inventory in channel. And so there's an anticipation that the demand would be higher. So they're working through an inventory that's kind of -- that's locked in the channel. And then we think when that clears up, the growth that we expected and we forecasted will continue. So we're -- we do see it as a correction. We're not -- we're still as confident and bullish about our business in the longer term, but we just got to work through that with our customers.

So that's helpful. So when you think about demand as a little bit softer, when you look at sort of the signals in your internal models, I think you mentioned that you think it's another 1 to 2 quarters of inventory digestion.

Yes.

What's been sort of a good signpost to determine whether or not you're going to see maybe macro be more supportive? Is it strictly GDP growth? Is it rate driven? Is it consistency in terms of geopolitical conflict? I'm just trying to get a sense for -- because we're hearing a lot from a lot of customers that there is this persistent macro headwinds. You heard from the publicly traded networking companies, even on the storage side, a couple of companies reported tonight. So just wanted to kind of get a sense of what you're looking at as maybe a sign that gives you a little bit more confidence as we go through a quarter or 2 that the business and the industry and the demand is on a more solid footing.

Yes. So I think it varies by end market. If you look in the consumer space, it's how much money they've got to spend, the GDP growth, just confidence generally. If you look in the renewables, obviously, interest rates plays a big part and how quickly the renewables is going to be rolled out. Also, we're pretty close on what's happening with the -- from a government policy's perspective around how are we getting untangled and is that going to free up and the same in Europe. So I think it really varies by end market, and that obviously affects the EV space. So we're pretty -- we spend a lot of time on that, but we've also got some proxy. We've also got the interaction and relationships we have with our customers who are kind of front -- and remember that we've got like 27,000-some suppliers, and we spend a lot of time with the supply base. So I mean, we've got a meeting later this week with Phil Gallagher and the Avnet team who we work close with. Where that's showing with our -- we're close with the distributors. So we see what they are seeing. We've got our commodity team. We're in Samsung last week talking about the memory market. So we got enough information from all of those indicators to tell us that we're pretty confident in what we're seeing. But sometimes, you get a surprise. And that's why we wanted to be upfront out here.

Yes. So just maybe one final question on this point. When you think about -- you mentioned Avnet and you talk to the distributors. From your perspective, it sounds like you think there's still another quarter or 2 of inventory at the distributor level. Is that the fair takeaway?

Yes. And also, when we look at what our customers are trying to sell through, so we think there's inventory in the channel that the customers are selling through also. We're not -- I mean, if you look at it from an inventory perspective, we talk about we think we should be in the kind of mid-50s. It's a sweet spot for us. We were 58 in Q4. We don't think our inventory is going to go up significantly beyond that. Obviously, we've not closed out our quarter yet. But we think it's -- some of the distributors and some in the channel right now that's being worked through.

Got it. So work around here these news. So mobility. Obviously, that transaction is still kind of working forward here. Any updates that you can share with us in terms of timing and your thought process around use of proceeds in terms of, given the news tonight, does that change kind of your view of how maybe the capital is deployed going forward at this point?

Yes. I mean, firstly, it would be remiss of me not to mention that I used to run our mobility business along with Todd Munson. So I'm pretty intimate with that business and close to the people who helped us grow that business. So it's with a heavy heart that we agreed with our customer and with BYD to sell that business. But it's the best move for our people, it's the best move for our customer, and it's the best move for investors and also for BYD. So we feel comfortable it's the right call. I was in Xinjiang with Chairman Wang and the BYD team a couple of weeks ago. And so we're developing a really good relationship with the team. They spent a lot of time at our factories, and our folks have spent a lot of time in the BYD factories. And we're making good progress. We don't see any red flags. Obviously, there's been a lot of work between our organizations. So we are anticipating that, that will close. We said that I think it will close sometime in our Q2. We are very confident that's going to happen. If anything, it will be sooner than Q2 than we expected. From a use of funds perspective, I think Mike, our CFO, was clear on -- we're really, really focused, and we think our companies -- if we look in the longer term, we think our company is undervalued. And we think the best use of our -- the cash we get is buying back our stock. We get that right back to almost unanimously when we talk to the investment community. So there's no change in our plan there that I think net proceeds -- obviously, we use -- we got some stranded costs, a couple hundred million dollars of stranded costs that we'll work through. But outside of that, we think the net proceeds is like $1.7 billion. And we've got an ASR out there, which is actively buying back stock, and we'll continue to do that.

And I know you mentioned that most of your investor base is comfortable with the buyback strategy. We do get questions from time to time about M&A. And obviously, you're getting roughly $1.7 billion net of tax coming in. I mean, is there a scenario where it makes sense to add capabilities, buying another EMS company or where you need maybe a deeper footprint with the relationships that you currently have? Or as we sit here today, from an NPV perspective, buying your stock is clearly the best use of your proceeds?

Yes. I mean, they're not mutually exclusive. We -- if you look at our leverage, we're at kind of 1x. So we got a lot of dry powder. We do a lot of tuck-in acquisitions, maybe 3, 4, 5 per year that we don't publicly talk about it. And our view is that we think our culture is kind of unique, and we don't want to change our culture by doing large acquisitions that just sit at the site and just for a capability play. So we do focus on something that we can integrate, and we do a lot of that. But for sure, I mean if you look at what happened with our JJMD deal. So there's -- we have a lot of discussions in the health care space and in kind of B2B, and that's quite active. We are actively working on some acquisitions that will help us drive capabilities. We just did a deal with Intel that you probably have seen in the silicon photonics space that we think helps us vertically in the cloud space. We can talk about that later. But we, for sure, are looking at, is there something we should do, whether it's in -- and if you look at the markets we've talked about from a growth perspective, whether that be in health care or in renewables, something that can help us drive capabilities in cloud. So we are quite active in that space. The last large acquisition we did was in April. I mean, that was successful. Prior to that was Green Point. Again that's successful. We've got a good track record. And I think maybe over the next 2, 3, 4 years, that will be something that we'll definitely be looking to do. But we'll be opportunistic because we've got enough dry powder, if something gets our interest in the short term also.

Got it. And then so when you look at the portfolio today post the transaction, you've got some really nice growing businesses like EV transportation, renewables, health care, despite the slowdown that we're seeing now. When you look at [indiscernible] that you think would be sort of accretive to growth in other parts of the business, is there something that's out there, like, hey, we're underpenetrated in XYZ end market, and that's something we're looking at? Or maybe conversely, this is a great end market portfolio exposure, kind of strategic decision post mobility is where we're going to basically make our bet in the short term? And if that's the case, putting aside what we're seeing today, what do you think kind of the longer-term growth dynamic looks like for the company?

Yes. So I mean, I mentioned the Intel deal we did on silicon photonics. So we've been in that business since 2015, we did a small acquisition. And that was a kind of telco acquisition at the time. What was clear for us at the time was this was going to be a company and if you look at the relationships we've got in the cloud and hyperscale space, customers are asking us, we want to deal with fewer suppliers. Can you add more capabilities? Because if you can do that, we can deal with less people. And COVID was great for us because it demonstrated that people think they're diversifying their supply chain by having more suppliers. Sometimes it makes it worse. And you're better doubling down with someone that you can trust. So we see that -- wait a second. Sorry. Could you continue that?

So when you think about the portfolio, and let's say, you can use the silicon photonics business. Are there adjacencies that help the core portfolio going forward? And well, since you brought up silicon photonics, and I guess that would be considered sort of like a cloud-centric solution, not semi cap, right? It goes -- so it kind of expands your capability within the cloud vertical effectively. So is that kind of the strategy going forward? And then what do you think the kind of growth rate of the core business, putting aside sort of the inventory digesting today? It looks like pro forma maybe for the mobility transaction?

So we're -- if you look at -- we focus on -- I mean, if I take our -- we think we'll grow like 5%, 6%, 7%. So we think that's the kind of growth trajectory. Sorry, could you repeat your question?

Well, so can you add adjacencies like the silicon photonics that help the business grow faster? Meaning other parts of the business that are growing, let's say, hypothetically, your cloud business is growing at x. Does the completion of a transaction or the bringing in of a capability help maybe some of the legacy Jabil businesses grow a little bit faster? There's sort of a natural synergy.

Yes, yes. Apologies. So if you look at, let's take cloud, for example. We see that and we get asked questions about the cloud business. But our customers are asking us for, as I mentioned, can you -- if we get -- we need -- we'd like to deal with fewer supply. So if you look at the whole data center space, and there's a big disaggregation going on in the data center, so we've been asked now and we're looking at, should we do -- is there something we can do in liquid cooling, for example. Can we do more? And if that gets disaggregated, what capabilities can we bring to bear? An example would be also in the -- if you look in the -- we had an industrial business. In the industrial business, we've got a capability that allows us to get involved in electrification. So electrification, we use that into the EV space and also we're using that in the renewable space. So we try and develop capabilities and the capabilities we look to be able to leverage across multiple end markets. An example would be we get asked in the consumer space. Why do you double down in consumer? And what we find in the consumer space is that the velocity and the rate of change in the consumer space is significantly quicker and faster than like an automotive or an industrial. So we can incubate capabilities that we can then leverage into other end markets. So for example, we've got an optics business. In our optics business, which we acquired in '07 from Carl Zeiss, so that -- we use that to develop capabilities and consumer. And then we're using that like in ADAS, for example, in LIDAR. So what we try to do is we try to focus on capabilities that we can incubate quickly and then we can leverage across multiple end markets.

So it sounds like focus on capabilities first and then it gets applied to the different end market sort of categories, right? So you're looking for leverageable capabilities and skill sets that can kind of propel the business forward?

Yes. And what that does is it means that we don't want to try and guess, let's go and invest in something that's too disconnected from our core. So what we try to do is we try to look at kind of if it's one standard deviation from our core, something that's consistent with what we've done historically, that allows us to then grow our business and grow our end markets. But it's relatively consistent with what we've done historically, and that's how we've grown the company. And we think that's a safe path for us from an investment perspective because we're not placing wild bets and hoping for the best. And if you look at how we've grown in the EVs, leveraging what we did in industrial, if you look at the stuff we're doing in optics, we will leverage that into the EV space also. An example also, I mentioned about our silicon photonics business where we did a tuck-in acquisition back in 2015. And those things where we can incubate them and then we can develop them. And then what happens, if you look at -- if we were a pure-play photonics company, we can make photonics modules, but we wouldn't be making line cards, and we wouldn't be making systems. So that can leverage a lot of vertical opportunities for us, and that's how our model works, and that's how we focus on developing a business.

Got it. So when you think about the business going forward, obviously, you're going to have considerably less exposure to a very large customer. Is there anything -- you mentioned it's a good solution for you, your employees, your potential partner, BYD. What other kind of metrics are you looking at to kind of determine the portfolio as it stands today, maybe something that's not core anymore, right? So print and retail or connected devices. You mentioned consumer has faster turnover, but is there other items in the portfolio today as you see it that are -- I don't want you to get down out over your head or your skis on another transaction, but when you look at the business and you kind of look at the return characteristics or the cash flow generation, whatever the right metric is, that maybe just doesn't meet the standards of what you've seen with EV and transport or renewables or in health care, some of your faster and better growing businesses. So kind of what are you looking at as kind of sort of the metrics to determine whether this makes sense within the portfolio?

Yes. So we've been -- we're prudent fiscally. And so don't expect us to be involved in a business where we're having to invest significant amount of dollars. We talked about our investment will be like 2% to 2.2%, 2.3% of revenues. So we're always looking, talking to customers, and customers understand that, that's from an investment perspective. If you look at our ROIC, our ROIC is pretty strong. So we're always looking at a business that will be north of -- be accretive from an ROIC perspective. The thing that's been clear for me is cash flows is critically important in our business. So we're always looking at what's the cash flow generation going to be in that end market. And so -- and then obviously, our aggregated margin. So some business will be accretive from a margin perspective, some not. But we will look at the blend of cash flows, ROICs, margins, what we need to invest. And it becomes about managing a portfolio. So as long as we're doing a good job of managing that portfolio, we think we're in decent shape. I mean, we think we'll get some trimming to do in the business that we have right now. But we're feeling pretty confident that we're well positioned for the future.

So when you think about the portfolio then, putting aside the trimming for a second, at least from the guide tonight that you mentioned, you're going to do a pretty good job of maintaining margins as the goal over the next couple of quarters. How does the portfolio today play into your view about margin expansion going forward, right? So you've had really strong margin expansion. We've got a little bit of an inventory kind of pickup now. The reason why I'm asking is because we've heard from some investors that obviously, there's been some potentially overaggressive ordering potentially, which maybe has helped other companies maintain better margins than normal. So how do you think about where you are today from a margin perspective against that dynamic? And does that change your view over the next couple of years in terms of what you can do with margins with this portfolio?

Yes. So we've always talked about -- look, for us, it becomes value -- how much value can we add for our customers. And we think our customers should be paid appropriately for the value that we add. If you look at in aggregate our business, we're trying to grow in areas that are kind of longer term and stickier and we would have got accretive margins. And so if we continue to grow and our business grows in that direction, then the margins take care of themselves. So we're getting back to customers and telling them, hey, we need to beat 6% margin, therefore, we'll increase your pricing. The content we have on the customers is hey, we want to add more value, or can we add more value or other capabilities that we can bring to support you. So we think that the way we drive that and the model we've got will increase our margins. I mean, we've said that we were -- 4, 5 years ago, we're 3.5%, and then we go to 5% last year. We're saying 5.3% to 5.5% this year. Internally, we're goaling ourselves on 6%. The only way we get there is by adding more value. It's been by being efficient and running a good company and add more value and making our facilities flexible so that we can absorb changes and ups and downs in the end markets. The solution lies and our ability to add more value and to be efficient.

So more value oriented versus like volume driven. So it's not a loss of volume leverage kind of compresses margin. Conversely, if revenue comes back stronger, let's say, in '25, it's not necessarily a clean shot at towards 6% effectively.

Yes. You got to watch it. You do it within a certain band. You do get deleverage. So you got to watch that. And -- but no, we've got a good path. We've got a good path. And a lot of that was as cleaning up what we've done and making sure we're running a really good operation. We've got to run good factories. If we run good factories and we offer value for our customers, we take care of our customers, then we'll get a good chance of being successful. We wouldn't talk of a 6% margin if we don't think we can get there. And we think we get there by kind of leaning into the end markets, what we've talked about.

Got it.

If you don't mind...

Sure.

Maybe I'll add a little bit there too and try to take the question in a little bit different direction. So obviously, as Kenny and David have talked about, we're squarely focused on margins and cash flows. But -- and over time, we think we're going to grow margin, right? So hitting a little bit of an air pocket here. But over time, we've taken margins from, let's call it, 3.5% to almost 5.5%. So we're really happy with that. But when you look at the air pocket that we've had or the bump in the road or whatever you want to call it, so we're taking growth in a little bit, if you looked at Jabil historically, that would have cratered our margins, that would have cratered our EPS. But today, given the construct of the company and where we sit today, we feel like we're more resilient in a downturn, right? So we just took about 7% of revenue out for the year. Typically, in a high fixed cost business, you'd have much more deleverage than we think we'll see. So we think that's just another proof point that the way we've constructed the company today to focus on margins and cash flows. It's a little bit different this time. So obviously, the proof will be in the pudding when we put up results. But that was an important point that we wanted to get out and talk to the investment community and with our shareholders is that, yes, there is a bump in the road, but our strategy remains the same. Our customer base remains largely the same. Obviously, we're selling the mobility business, but that's a little bit different deal. So we're really confident in our path, and we feel like...

May I follow up on that?

Absolutely.

So you talked about taking 7% of revenue out of the outlook. And if I do the math quickly, it looks like a similar amount on EPS. Is that kind of the takeaway? It was a big statement at least $9.

Go back and read the press release. It was in excess of $9, which I believe was beautifully written. So look, nobody wants to take their outlook down. We certainly didn't feel great doing it. But you can believe that we're going to work on behalf of customers, shareholders, employees alike to make sure we deliver on what we put forth going forward here. And it's worth noting, it's November 28, we're going to go into our kind of formal quiet period. Our accountants are going to get together. We're going to do a long-term -- we're going to do a forecasting process. We'll come out in mid-December as we always do. We'll give a much more granular update on the year. But look, we're still happy with the direction of the company.

Yes. But at a high level, I mean, to your point, the leverage would have cratered EPS.

Let's look back at 2014. Revenue was down maybe even go back to '08, '09, maybe that's a better example. Revenue down 10%, earnings down 20%, right? We feel like it's a little bit better outlook this time around.

Got it. So maybe just one final question for Kenny. And we talked a lot about what's kind of going on today, but I don't think we talked enough about your vision of the business. And you touched on it a little bit in some of the questions, and I would be remiss if I didn't let you kind of talk about, where do you see this business over the near to medium term and long term? Strategically, how do you think it's positioned today versus under -- to Adam's point, if we go back to '08, '09 or the last downturn? And how much more resilient do you think the business is over the long term, given sort of the economic backdrop?

Yes. So if I -- just a little bit of background on -- so the way -- our company has got -- I mean we make things. We've got a single instance of SAP. We've got a single instance of our manufacturing engineering manufacturer, our EMS. And what that means is that we've got 100 factories. We've got factories around the world that are using the same systems, processes. We've got a unified culture. What it means is that our ability to -- if you look at what's happened geopolitically or with regionalization of manufacturing, that plays to our strengths because we can do the same things across the world. We've got the same quality systems and the same processes. So we think that going forward, we've got a phenomenal footprint in Asia. We've got the same as in the Americas and in Europe. And we're able to leverage best practice, to move products, to support customers in multiple end markets, multiple geographies. So we think that worked pretty well, future-proofed from that perspective. We're not a North American company with a unique culture that's trying to operate in Asia, China or Southeast Asia. We've been there for a long time. So we think that the future is really, really positive for us. We think we've got a good customer set. We think as our customers expand, our service offerings that we can support them. We have capabilities to be vertical to really to be able to allow them to minimize the number of suppliers they've got in their supply chain. We think we're well diversified in the right end markets. We think those end markets give us opportunities to grow and develop, and we spent a lot of time on that. We've got a leadership team that's all in our company. And we're committed to developing our organization so that in the next 5 to 10 years, we've got a really, really robust organization. So we're feeling pretty bullish about the future. Our folks around the world are feeling pleased, happy to be working in our company. And we think we're a safe pair of hands for our customers and for our investors.

Great. And with that, I think we're out of time. So Kenny, thank you. Adam, thank you for your time, and look forward to having you again in future conferences. So thank you, everyone, for joining, and we'll talk soon.