Jabil Inc. (JBL) Earnings Call Transcript & Summary

Good morning, everyone. I'm Samik Chatterjee. I cover the hardware and networking stocks at JPMorgan. With me for the first fireside chat here on day 2, we have the privilege of hosting the Jabil team. With me is Mike Dastoor, the CEO; and Adam Berry from Investor Relations. We also have Fred from the operations, Head of Operations, in the audience as well. Thank you all for making it to the conference. Mike, you're recently appointed CEO, so congratulations. And maybe just we can start with the investors in the room that maybe don't know you, just please tell us a little bit about yourself and, particularly as CEO, what do you think you'll do differently.

So thanks, Samik. As he said, I've been CEO for less than 24 hours. I was the interim CEO in the last 3 or 4 weeks, and I've had a chance to dig quite deep. But before I start, I just want to say I am honored and privileged to be the CEO. I've been in the company a very long time, 24 years. So to end my career as the CEO in the company that has been on this family for the last few years is a really good event for me. I think I'm humbled by the trust that the Board has placed in me as well. So I'll obviously try and earn that trust completely. I think as it relates to my time in Jabil. I joined the company in 2000. So I've been in Jabil for 24 years. When I joined, I think the revenue was about $3 billion. Today, we're just under $30 billion. And we've had a CAGR of double digits, which is an amazing thing for any company to do over a 24-year period, so really good progress from a revenue standpoint. Well, I've been in the company -- I took over as CFO in 2018. I've been in that CFO chair for 6 years. I think if you go back to 2018, you look at, our margins were 3.5%, our free cash flow was about $200 million and we were heavily concentrated on 1 customer to the tune of almost 30%. You fast-forward today and you look at where we are today, we have a diversified portfolio with multiple end markets, not just one, multiple end markets with long-term secular tailwinds. And if you look at our concentration today, we don't have a single 10%-plus customer, so good progress from that front. If you look at the free cash flow and margin, our margin is now 5.6%, 210 bps moved up in 6 years. Our free cash flow has gotten 5x to $1 billion-plus, so really, really good sort of dynamics going on for Jabil. I think right now, we are going through some short-term dynamics there. I do think from what will I do differently, I don't think I'll do that much differently from before, just a few things that I definitely want to talk about. I think buybacks has been one of my main sort of pushes in the company. I do think the best usage of free cash flow is returning capital to our shareholders. We'll continue doing that. We've done a ton of that already, a ton of buybacks in the last 6 years. We actually have a $750 million authorization that we have to complete in Q4. I'll be asking the Board for further authorization for FY '25. But I'll expect another $1 billion-plus there. So just overall, buybacks has been something that we've done really well. We do feel, at least personally, that our stock is highly undervalued. And today, definitely undervalued so that buyback strategy won't change. The free cash flow and margin focus will not change. In fact, if anything, we'll probably double down on that to make sure we're in the right end markets with the right customers and not indexed too heavily in one or two end markets but diversified across the board. From a strategy standpoint, I think I'll be a little bit more conservative from a guidance perspective. I think you've seen we've missed a couple of times this year. I just want to get back to beat and raise cadence that we had over the last 5 years from 2018 to '23. If you go back and look at our beats and raises, it's been a very steady cadence. So we'll get back to that. We'll be a little bit more conservative in terms of certain geographies. We'll continue to invest, especially as we prepare for this whole AI proliferation that we're expecting in all our end markets. If you look at everything that we do, AI will be an area that will impact almost every single end market that we're in. Obviously, some of them will be sooner rather than later. I think there are definitely sort of advances we've made in the whole silicon data cloud infrastructure piece, that will continue. Investments, I'll be a little bit more aggressive in terms of putting more investments in that area for sure. So plenty to be done from a market, end market standpoint. I think from a management org people standpoint, if you look at our functional leads, extremely solid, so no changes there. Obviously, as I move out of the CFO chair into the CEO chair, our Treasurer backfills the CFO position. So Greg is going to be taking over as CFO, again long-tenured. We've got a whole bunch of people who've been in the company. I think Adam has only been in the company only 14...

14 years.

14 years. And he's the baby of the company. Yes, we're all -- all of us are 20-plus, some of us, a couple of folks that we're actually bringing back to run some of the BU units, they have been in the company for 30 years. I think you mentioned Fred. Fred is here with us. He has been in the company for, I think, 23 years as well. He'll be leading our ops team, which is a very critical role. So I think there's some nice movement with three of the BU leads. Rather than have one BU over the entire company, what we're doing is focusing multi sort of BUs so that there's a sort of dedicated focus on particular end markets. It's not spread out and it will be very focused and dedicated in end markets. So as you can see, plenty of things going on here. And don't forget, I've only been here 23 hours. So we'll continue to work over the next few weeks and months to continue tweaking the organization.

Mike, if I can just follow up on that, I mean, a lot of the focus recently, and as you talked about margins and doubling down on them, have been on the higher-margin growth areas, right, EVs, AI. When you sort of talk about doubling down on margin, does it mean narrow down the focus a bit more to those growth areas that have the higher margin? How should we think about across these segments, when you look at the diverse portfolio you have, is that more of a signal to sort of more narrow it down to where the higher margin opportunities are?

I think if you look at all our end markets, we're in really good end markets. So we've got the EVs. We've got health care. We've got some level of connected devices. Again, when there's an AI proliferation taking place for the next 1, 2, 3 years, connected devices is going to play an important role. It already plays an important role in terms of the capabilities that we share across the organization. You look at warehouse automation, you look at the 5G cloud data infrastructure, you look at renewables, you look at networking and storage, they're all decent markets. Where I will sort of focus from a margin perspective would be on the networking and storage side, where we're transitioning out of the lower-margin business and into the whole accelerated switching, liquid cool switches, AI sort of driven demand. And that will be higher margin. So we might have a situation, Samik, where revenues might be down for a while as we go through that valley and then come right back up but as a better company. And our margin profile, I continue to push the organization, like I said, we're at 5.6% today. We're not happy with that. We want to be 6% and then beyond. I'm not saying going to be 6% next year, but that's the strategy, let's continue, on margin and free cash flow and everything else will take care of itself.

In addition to the leadership changes you announced yesterday, you took the opportunity to reaffirm your core EPS outlook for fiscal '24, but you did pull back the fiscal '25 guide. Just walk us through your thinking there on what's changed.

Sure. So let me spend a couple of minutes on FY '24. If you look at FY '24, it was a transition year for us. We divested our mobility business, I think it was about $2.2 billion. And we used the bulk of the net proceeds from that sale, almost all of it, to do buybacks. Because we thought we're undervalued, and we continue to think we're undervalued there. So that was going on through the years. You have very -- sort of you can't really do comps in '24. We actually -- we had some of the end markets soften on us as well. We were sort of caught out a couple of times. I think everyone knows that we did get caught out a little bit, that I think the visibility started going down a little bit. One big thing on '24, I think investors need to focus on that is our margins have actually gone better. We said 5.3% to 5.5% at the beginning of the year. We're now talking 5.6% in an environment where we've lost 15% of our revenue, which is a very strong, powerful statement. Think of this as a brand-new company, a brand-new industry, where in past recessions or slowdowns, our margin would have been trashed. EPS would have gone down considerably. It's quite the opposite right now, where we're actually focusing on margins and free cash flow. So '24 is a mixed story. I think as I look to '25 now, again I just want to make sure -- I'm looking at FY '25 through a different lens now obviously as CEO. As I look at some of the end markets that we're in, there's, I wouldn't call it, softening, but the recovery that we're expecting is slowing down a little bit. I think if you look at EVs, in particular, in China, I think everyone as well has a whole surplus of cars in China. That is having an impact on our China operations for EVs. I'm not talking just about Chinese OEMs. I'm talking about our manufacturing operations in China because the demand there is from a local perspective. So EV is slowing down a little bit. And other thing we've seen in the last -- literally last 30 days is the semi cap business, where previously, we thought our semi cap business would recover in December of this year, let's say, January of '25. That's pushing to the right a little bit. I'm hearing more and more CEOs talk about the middle of FY '25 now as the time it recovers. And semi cap is a little bit of a high-margin business for us. It's very complex, machining, it's wafer fab equipment, front end, back end. So there's a few nuances going on, on the semi cap. We talked about margin. We talked about networking and storage. We're going to that transition where we're intentionally addressing customers where the margin is lower and is bringing the enterprise margin down. So there's a few dynamics going on for FY '25. That's one of the reasons we've sort of withdrawn the guidance. I will tell you one thing, we will continue to focus on margins. So margins are not going backwards and free cash flow will continue to go up as well. So lots going on in '25, give me that 4 months. I think we have strategy meetings over the next 4 months. Mark and I have been spending a lot of time reviewing all the BUs. We've been talking to customers. We're trying to get a better feel for everything going around us. And there's a lot. So we'll spend that time in a useful way for the next 4 months. And we'll talk about FY '25 in September.

Okay. We want to talk about AI and the demand that's driving. But before we do, we're asking all of our companies to comment on what they see as operational improvements internally from AI and how does that help you and anything tangible that investors can sort of eventually see the impact of.

Sure. So I think if you look at AI, the way we approach it is with three pillars, which is what a lot of folks do from an AI perspective. The first one is sort of the algorithmic piece, where we have a whole bunch of every single factory that we have now has camera optics attached to it, where anything to do with visual inspection. You're going to have 600 algorithms built into this camera. And this camera is going to take over from human visual inspection. Now is it the right components? Is it the right design? Is it the right thickness? So there's a whole bunch of things that, that part can do. And if you look at the way, we're in 100 sites in 30 countries. So that's a good impact on reducing our operational costs. Second one is more on the analytics piece. We have what we call the self-healing line. For instance, you go from stage -- or step 1 to step 2, and there could be 10 steps in that manufacturing process. If step 1 to step 2 has a flaw in it, that line goes back to step 1. So you don't have to go through 10 steps and do a visual inspection to find we have an issue. It's done in real time. And that's where the analytics comes in. And then we have this entire gen AI. It's very sort of, I'd say, immature right now. The potential of those, the highest on the gen AI, where even the operators can make improvements through suggested AI. So we've been doing AI/ML for a long time. We've been using it in our CNC machines for maybe 5 years, where CNCs, obviously, they have three or four cutters and there's thousands of CNC machines. When one line goes down, you don't know which cutter and which machine, so you stop the entire line now we've got a process where we know exactly which CNC machine. So you stop one CNC machine and you know which cutter is going down as well. So you replace that single cutter. And the amount of time, the lead times, the turnover times, all of that change is concerned. So there's plenty of things going on. I can give you another few examples, will take up all our time. But it's exciting, that whole AI/ML piece, we've been applying it for a long time. And we're getting better and better and better. And by the way, I've always said 10, 20 bps of margin improvement should be expected from an operational efficiency standpoint.

Yes, got it. Let's talk about the demand side then, just underline for us the different product categories for you that will drive the revenue exposure to AI. And what are your growth expectations there?

So let me just talk about AI, the whole ecosystem. And I'll try and go from silicon to our data centers and then beyond. So if you start at the silicon wafer fab, we talked about our semi cap business, our semi cap business is capital equipment. So we're making equipment, large form factor, precision machining equipment for wafer fabs. We've got gas delivery systems, water handling, process chambers. There's a whole bunch going on the front end of that capital equipment market. And then we do the test, which is on the back end of that capital. So we're engaged on the silicon side. If you take the next step, which is OSAT, what we're doing with the OSAT packaging, which is a follow-on from the -- as it comes out of the fabs, it means OSAT packaging, we're actually -- right now, we're partnering with a large foundry for a North America solutions. We're not trying to compete with OSAT packaging in Asia. We're trying to bring it to North America because we're going to see more and more, especially with all the regulations that are going around the chip industrially, we're going to see some of it -- now the chip side, the dollars are still relatively low. But we're going to see some level of fabs coming in here. And that's where a local North America solution would be really good. If you look at our silicon photonics business, I think we looked at -- we made an Intel acquisition a few months ago. What did that give us? It gave us a whole bunch of design engineering on the optical transceiver side. We have now capacity to build 400G, 800G. We're right now looking at how to get to 1.6T. There's a whole bunch of things going on, on that silicon photonics side. And then if you move further down into the server rack configuration side, we've been doing servers and racks for a while now, especially for our largest hyperscaler. And we offer a Design-to-Dust solution there. So we're not -- it's not just putting six things in a box and sending it off. We actually help with the design, with the architecture. We help the PCBAs. We're doing the integration. We call it Design-to-Dust, where we actually help the hyperscalers sort of take some of the excess or obsolete servers out of the market as well. So it's a full end-to-end sort of solution from the service side. Our supply chain team gets heavily involved. Our co-location with hyperscalers, that's a big value prop as well. And then last but not least, if you look at the data cloud building infrastructure, we're looking at low-voltage, medium-voltage inverters, the power distribution units, the cooling distribution units. We're looking at liquid-to-air right now for the retrofit cooling distribution units. We have the capability to do liquid-to-liquid for new installs. So plenty going on, I'd say, from a maturity level. Obviously, our server rack business is the most mature. But all the other business, which are relatively immature, are the higher-margin businesses. And the higher-margin businesses got to look at that as a potential -- we've been -- we have all the capabilities. We're in active sort of engagement with customers. And I see the balance of what I talked about beyond the server rack integration piece as being probably the highest potential in the company.

Got it. Let's go back to industrial and semi cap. But I know you discussed semi cap a bit, so we can focus on industrial if you want. But that segment, you expected to decline mid-teens in fiscal '24. We've seen lower outlook for that segment 2 quarters in a row now. So maybe just parse out which parts of the segment are more challenged than others.

I think the renewables piece still continues to get pushed out from a recovery standpoint. I think if you look at election uncertainties, if you look at higher interest costs, a lot of the residential piece is definitely getting pushed out. Most of the OEMs are now sort of converting to the commercial side. So renewables is a little bit slow. Industrial controls, et cetera, that's steady Eddie but not with the recovery that we're expecting. And that will come in the next 1 or 2 quarters is our expectation there. I think if you look -- I talked about semi cap. I think it's important to understand the front-end and the back-end piece, where if the front end gets pushed into the middle of '25, the back end, which has a lag time of 6 months, now gets pushed into FY '26. So I think it's all a question of timing. This is all coming. It's just moving around right a little bit, left a little bit. And semi cap has always done that. So tomorrow, I might come to you and say, "Hey, look, it's pushed back to the left." So we just -- we're waiting for all different scenarios. We're trying to triangulate. Obviously, we constantly talk to our customers. But that's the situation today. And that could change very easily next week. So it's just sort of -- it's a very dynamic prospect.

Let's move to automotive. You've considerably outperformed the automotive market in the last few years. But maybe if you can help us think about the growth driver there between content per vehicle versus the expansion across more vehicle models are gaining share versus CPV.

So it's a mixed bag there. I think if you look at content per vehicle, our content on the combustion side was $700, $800 per car. Today, on the -- in the EV/hybrid space, it's in $3,500, $4,500 range, so considerable increase on a content per vehicle basis. You've seen that in some of the numbers. '22, I think, grew by, if I'm not mistaken, 40%. It was a big number. That will continue. I don't see content per vehicle going down that much. I think when we gave guidance last time, we were talking about automotive. It's more new wins. It's not end market-driven. Obviously, we all see the issues in the end market. There's been a little bit of a wall that EVs have hit. I think if you think of EV adoption, the early adopters have already adopted and they were not price-sensitive. I think the second level beyond the early adopters are very price-sensitive. And they're very range -- battery range-focused as well. So I think as soon as you get that balance between price, battery range and the entire connectivity sort of solution that you get with a car, I think that is when the return takes place. And it's one little change in battery, for instance, if the battery range goes up from an average of 250, 300 today to 500, 600, it will be a different dynamic. That EV demand will start coming back. Regardless of where -- whether it's EV or hybrid, our capabilities can be used in all three, combustion, EVs and hybrid.

A quick question there. I mean, we're seeing more and more automakers now talk about hybrid. What are you hearing? And what's your content per vehicle on the hybrid look like?

So let me just quickly talk about what we do, I think, because it's important. I think people think we're an EV -- we do EV and that's it, and EV is down, so we're -- that's not the case at all. If you look at, we're in four main areas, if you look at our software-defined vehicle, that's high-precision computing. We've got zonal controllers. That is totally agnostic. You have that in combustion engines, you have it in hybrids and you have it in EV cars. In fact, I have a combustion engine. But I have software-defined, therefore, everything is running off of [ core ]. So you can't get away from software-defined vehicles today. If you look at the next piece that we do, that's more on the electrification piece, anything to do with battery management systems. You can look at some of the AC/DC charges, DC-to-DC sort of high traction inverters. There's a whole bunch of things around battery management, the power distribution, battery management boxes that we do. And that equally, it's no different between -- there's no difference between EV and hybrid. So that's totally if hybrids are the ones that come back, we will move to hybrid piece for sure. I think if you look at the third piece, which is the connectivity, obviously, the whole -- the telematics control unit, the V2X, as everyone calls it, we have infotainment systems, the cockpit domain unit controls. All of that again is agnostic from a type of car. It applies to combustion, it applies to EVs and it applies to hybrid. And then for the last one, the fourth one, which is our ADAS technology, 96%, 97% of cars today have some level of ADAS technology hardware built-in. Some of them are better in software, some are not. But the hardware is there. It's available. It can be turned on and off remotely at any point of time. And there, we're in LiDAR, optics, image readers. There's a whole bunch of things that we play in from an ADAS perspective to the autonomous driving piece. So as you can see, we're in multiple areas. Our capabilities are across the board. They're not just EV. They're in combustion, they're in EV, they're in hybrid. We're agnostic to which of these three is the eventual winner. In my personal opinion, I think there will be a shift to EVs and hybrids for the next maybe year or so, 2 years. I do expect EVs to make a comeback at some point in time. Again, this is just my personal opinion, as long as the price and battery range balance is sort of achieved.

In the automotive segment itself, talking about diversification of the customer base beyond Tesla, how do you think about where your footprint is today versus where do you want it to be in probably 4, 5 years?

Right. So I think today, if you look at our largest customer in the EV space is around 30%, 40% of that automotive and transport end market that we put out in our earnings. So that's -- it used to be more. And we've not reduced content with them, we've actually grown around them with other OEMs. Today, I think we're engaged with probably seven or eight OEMs from Europe, from the U.S. We're engaged at different points. And some of them are in combustion, some of them are EVs, some of them are hybrids. As we go to this whole EV to hybrid place, obviously, our EV business will come down and the hybrid will take off. There will be a little bit of a time lag as that transition takes place. But it's there, it's achievable for us. I talked about the issues in China. That is having a little bit of an impact, the surplus vehicles there. But we're well positioned for the North America version. We're well positioned for our European piece, where we opened up a new factory in Croatia. And we're well positioned in Asia as well. So again, from a geographic standpoint, we're agnostic to where our customers want to build. We can help them in building those anywhere.