Jabil Inc.

Greetings, and welcome to the Jabil second quarter 2020 financial results conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Adam Berry, Vice President, Investor Relations for Jabil. Please go ahead, sir.

Good morning and welcome to Jabil's second quarter of fiscal 2020 earnings call. Joining me on today's call are Chief Executive Officer Mark Mondello and Chief Financial Officer Mike Destor. Please note that today's call is being webcast live and during our prepared remarks we will be referencing slides. To follow along with the discussion and view the slides, you will need to be logged into our webcast on Jabil.com. At the end of today's call, Both the presentation and a replay of the call will be available on Jabil's Investor Relations website. During today's call, we may be using forward-looking statements, including, among other things, those regarding the outlook for our business. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our forward-looking statements and in our annual report on Form 10-K for the fiscal year ended August 31st, 2019, and other filings. JABL disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Now, before we begin, I'd like to take a few minutes to discuss the agenda and objective for today's call. As a reminder, on February 25, 2020, we announced that the COVID-19 outbreak would negatively impact our second quarter results relative to the guidance that we had provided on December 17, 2019. And as forewarned, our second quarter results were in fact below our initial range of expectations driven by approximately $53 million in direct costs associated with labor, supplies, and supply chain inefficiencies, all caused by the disruptive impact of COVID-19. As customary, Mike will walk through our second quarter results, while also detailing the intra-quarter sequence of events that resulted in a material deceleration in earnings towards the end of the quarter. Although demand remains strong and our manufacturing capacity continues to improve each day, the overall impact of COVID-19 on our business is still yet to be determined. Consequently, we're going to deviate from our standard quarterly call format in two distinct ways. First, we're currently not in a position to provide third quarter or fiscal 20 guidance or outlooks for each of our end markets in fiscal 20 as usual. Second, following Mike's prepared comments, we will move directly into Q&A in an effort to efficiently address your questions. We do, however, expect to resume to our normal cadence of call in the future. As Mark expressed in our press release on February 25th, our first priority throughout this global pandemic has been the safety of our people. It simply makes sense to take care of our people, and we believe it's in the best interest of shareholders, too. I can speak on behalf of everyone in this room when I thank all of those who jumped into action with a typical Jabil energy. The team's swift response and hard work allowed us to be in a position to report our second quarter results today. With that, I'll now hand the call over to Mike.

Thanks, Adam. Good morning, everyone. Thank you for joining us today. As Adam stated, our Q2 results were negatively impacted by the COVID-19 outbreak. Before I cover our Q2 results, I'd like to take a moment to walk you through the dynamics that unfolded during the quarter. We began Q2 with a stronger than anticipated start to the fiscal quarter. As we moved into February, demand held, but our ability to meet demand was greatly diminished as virus containment efforts ramped in China. During the quarter, we incurred approximately $53 million in direct costs associated with the COVID-19 outbreak. I'd now like to provide you with the makeup of these costs. First, we incurred additional labor costs in Q2. During February, we strategically made the decision to compensate our employees who were restricted and quarantined. These factors contributed to higher labor costs than we expected going into the quarter. Second, our factory utilization in China was negatively impacted in February due to travel disruptions and restrictions. To add further context to the higher labor costs and lower utilization, February began with the Chinese New Year holiday being extended by 10 to 14 days, depending on location. Most of our larger sites in China began to come back online later than anticipated, and by February 14th, we were only operating at 45 to 50% capacity. We exited the quarter at approximately 80% utilization in China. Third, during the quarter, we also incurred lost revenue associated with both upstream and downstream supply chain disruptions, which impacted our worldwide footprint. And finally, in an effort to keep our employee base safe and healthy, we incurred unanticipated costs to procure necessary supplies to keep our people safe. Items such as space masks, hand sanitizers, thermometers, and personal protection equipment. I would like to highlight that February was an anomaly. Under normal circumstances, if demand diminished, our variable costs would have been materially lower as we would have adjusted our costs to the demand environment. Turning now to our Q2 financial results. Net revenue for the second quarter was $6.1 billion. GAAP operating income was $91 million, and our GAAP diluted loss per share was $0.02. Core operating income during the quarter was $159 million. Net interest expense during the quarter was $52 million. Our core tax rate for the quarter was 26.6% in line with expectations. Core diluted earnings per share were 50 cents. It's worth noting that the additional costs associated with the outbreak negatively impacted our diluted earnings per share by approximately 25 cents. Now, moving to our gap results. As expected, we incurred $30 million in restructuring and severance-related charges in Q2, predominantly associated with the 2020 restructuring plan we announced in September of last year. This plan continues to remain on track and, as a reminder, is expected to result in an incremental cost savings benefit of $25 million, mainly in the second half of FY20. Also, during the quarter, we incurred a one-time non-cash impairment charge of approximately $12 million in connection with the sale of an investment in the optical networking segment. Now, turning to our second quarter segment results. Revenue for our DMS segment was $2.3 billion. From an end market perspective, we experienced good demand in the healthcare and mobility end markets. Revenue for our EMS segment was $3.8 billion. From an end market perspective, we saw additional strength in the semi-cap space, while demand and the balance of the business came in largely as expected. Turning now to our cash flows and balance sheet. During Q2, our total days of inventory came in at 70 days, an increase of 13 days sequentially, driven mainly by idle capacity and supply chain constraints due to COVID-19. Higher inventory levels during the quarter were offset slightly by lower days of sales outstanding at the end of the quarter, driven mainly by lower February sales. Cash flows provided by operations were $63 million in Q2, and net capital expenditures totaled $205 million. We exited the quarter with a total debt to core EBITDA level of approximately 1.7 times and cash balances of $697 million. Jabil has over $3 billion of global revolver credit facilities, and at the end of Q2, over 90% of these facilities were available. During Q2, we repurchased approximately 1.8 million shares for $72 million as part of our two-year $600 million authorization we announced in September. In closing, as always, Jabil's number one priority is the health and well-being of our employees. We are also focused on providing the best possible service to our customers. We take our responsibility as a global corporate citizen very seriously. These values motivate our teams to take significant measures to prevent the spread of COVID-19 and minimize business disruption in this very challenging environment. I'll now turn the call over to Adam.