Jabil Inc.

Greetings and welcome to the JABL third quarter of fiscal year 2020 earnings conference. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Adam Berry, Investor Relations. Thank you. You may begin.

Good morning, and welcome to Jabil's third 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 reply to the call will be available on Jabil's Investor Relations website. During today's call, we will be making forward-looking statements, including, among other things, those regarding our outlook for our business and expected fourth quarter and fiscal 20 net revenue and earnings. 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 annual report on Form 10-K for the fiscal year ended August 31, 2019, and other filings. Table disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. With that, it's my pleasure to turn the call over to Mark Mondella.

Thanks, Adam. Good morning. Good morning. I appreciate everyone taking time to join our call today. I'll begin by providing a brief business update before turning the call over to Mike, where he'll offer details on our Q3 performance and address our guidance for the balance of the year. So, before I get into the business at hand, I'd like to extend a warm thanks to our people here at Jabil for their hard work and commitment, especially during these trying times. I tend to think that successful and sustainable organizations are evaluated not only on their ability to deal with what they can control, but also on their ability to react and adapt to the environment, especially environments that shift suddenly and shift unexpectedly. For this, I give our team high marks. Their response to COVID-19 gives me confidence and demonstrates our resiliency. At Jabil, we help design, develop, and bring to life numerous products, products that the world depends on. In many ways, this pandemic has reinforced that Jabil itself is an essential business. If I may, I'll now take you back to our second fiscal quarter for proper context specific to COVID-19. As our teams in China attempted to return from Chinese New Year in mid-February, they were faced with travel lockdowns, quarantines, and the need for social distancing. Add to this the fact that our sites in China were operating at less than 50% capacity. Given the ambiguity that was fast unfolding, we rescinded our financial outlook for the fiscal year. As we moved into the third quarter, COVID quickly spread, impacting regions and countries that are home to our many factories. March quickly turned into April, and April to May. And while many of us were hunkered down following stay-at-home orders, transforming kitchens or bedrooms or garages into newfound workspaces, our factories, by and large, continued to build and ship product. Most importantly, throughout it all, the global incident rate of confirmed COVID cases across Jabil remained remarkably low. I want to offer a special thanks to all of our frontline workers. Those of you that work so hard in keeping our people safe, while taking amazing care of our customers directly from the factory floor. Your ability to execute and perform has been nothing short of spectacular. And on top of it all, together you created a COVID playbook that we use today across all sites. A playbook of protocols and best practices that we openly share with suppliers, customers, communities, and competitors. Moving on, to the critical business catalyst for the quarter. We saw strong demand in healthcare and packaging, cloud, edge devices, and mobility. In our healthcare sector, we joined the fight against COVID, as it was simply the right thing to do. Our teams quickly transformed manufacturing lines around the world, contributing to the production of critical products, such as ventilators, specialized manifolds, 3D printed components, face shields, protective masks, and test kits. In terms of our packaging business, which serves many of the world's top consumer brands, demand was strong in areas like cleaners and disinfectants, touchless dispensers, antibacterial products, and eat-at-home food products. At the same time, internet usage was exploding. prompted by remote learning and video conferencing. Teams from our cloud sector, along with the teams from our mobility and edge device sectors, were in full-blown customer care mode, as end users sought digital access to family, friends, business colleagues, and patients, a trend likely to be part of the world's new normal. During the quarter, these areas of strength were offset by weakness in our automotive and transport and print and retail sectors. Nonetheless, our well-diversified commercial portfolio allowed us to deliver $6.3 billion in revenue in line with our expectation. To me, this is quite meaningful. With each passing year, the blend of our revenues become better balanced and far less dependent on any single product or product family. Quite simply, greater diversification increases the reliability of our revenue. Having said this, and as we sit here today, the impact of COVID will cost us roughly $160 to $170 million for fiscal year 20. Therefore, We're taking aggressive actions to reshape the organization and ready ourselves for fiscal 21. We'll reduce our workforce and, in return, lower our cost structure by roughly $50 million. I'll now take a minute and express my appreciation for those impacted by this difficult decision, yet a decision that's corrupt for the business. In taking this decision, we've done our very best to ensure that everyone is treated with complete respect, care, and dignity. As we make our way through the summer months, there's considerable work ahead as we prepare to host a call with investors this coming September. For lack of a better description, we look at this call as having a conversation with investors. a conversation about how Jabil management is thinking about fiscal 21 during these uncertain times. It's important to note that throughout this macro uncertainty, we remain steadfast in prioritizing free cash flow and expanding core operating margins. In closing, you can be assured that we're navigating today's issues while being thoughtful about tomorrow's challenges. Looking ahead, I believe our business landscape and how we choose to conduct our business may look and feel a bit different. It'll possibly be more efficient. It'll possibly be more optimized. I think this could have real benefits as long as we don't lose a single ounce of our customer intimacy or customer care. Also, I believe key secular trends will remain and remain in our favor. Lastly, plenty of stuff will still need to be built, and building stuff is exactly what we do. Thank you. I'll now hand the call over to Mike.

Thanks, Bob. Good morning, everyone. Thank you for joining us today. Before I cover our Q3 financial results, I thought it would be helpful to provide a brief update on how COVID-19 has impacted our business and the end markets we serve since we last spoke on March 13th. Following our call in March, COVID-19 quickly spread across the globe. However, as Mark indicated, for most of the quarter, our operations managed to remain largely open. Our teams work with local authorities and a large majority of our factories were deemed essential so that we continue to build and ship products throughout Q3. In fact, since the end of March, we have largely been operating at 95% capacity, despite a handful of one- to two-week closures in areas like Malaysia, India, and California. Putting it all together, at an enterprise level, demand largely held in Q3. However, the makeup of this demand varied extensively by end market and region as the COVID-19 outbreak and stay-at-home orders around the world impacted each in a unique way. Let me walk you through what we're seeing in the different end markets today. Within mobility, the out-of-season launch, which began in February, is going extremely well. In tandem with this, the team has also started working on the launch for our upcoming seasonal next-gen mobility products, and this too is on track. Moving to edge devices and lifestyles. As more people work and learn from home, we're seeing good demand for certain products such as tablets, headphones, and smart watches. In healthcare, we're experiencing strong demand in the markets most critical in the fight against COVID-19. Ventilators and ventilator splitters, oxygen and temperature sensing equipment, diagnostic systems including analyzers and test kits, and masks ranging from protective face masks to reusable N95 masks. This trend is being offset by reduced demand for trauma and elective surgery products. Moving to packaging. As a reminder, our packaging business is a supplier to the world's leading consumer packaged goods companies. COVID-19 is exerting enormous pressure on our customers to ship unprecedented levels of cleaning and food products. Because of this, we're seeing increasing demand in packaging for laundry products, hard surface cleaners, touchless dispensers, and antibacterial wipes. In addition, we're also seeing good demand for food packaging, spurred on by more people dining at home. Moving to EMS. Within automotive, our near-term results and outlook have been diminished due to lower forecasted worldwide unit sales and OEM factory closures. However, looking forward, we expect weakness in the traditional automotive markets to be partly offset by additional growth in electrification, which continues to gain overall share of this market. In Semicap, we're seeing solid demand driven by the ongoing recovery in this end market as infrastructure spending continues. New fab plant investments are multi-year investments, and so far, customers are marching ahead with their 2020 investments and 2021 roadmaps. In wireless and 5G, consistent with prior quarters, we continue to see growth in 5G that is being offset by 4G as the market transitions to newer technology. In the near term, we expect 5G infrastructure rollouts to continue as network operators upgrade their services. In cloud, our teams are seeing an increased demand for cloud infrastructure created by stay-at-home orders around the world, which is translating to higher growth. Moving to print and retail, we expect continued pressure in these end markets in the near term, driven mainly by office closures and stay-at-home orders. Turning now to industrial and energy. Demand has been relatively consistent today, but moving forward, we are seeing signs of new building starts being delayed. This could have an impact on future demand. And then finally, within the enterprise and markets, we are seeing increased demand for networking products due to work-from-home dynamics offset by cautious overall enterprise spend. We anticipate this demand dynamic to continue over the next few quarters. From a cost perspective, during Q3, we incurred approximately $60 million in direct and indirect costs associated with the COVID-19 outbreak. The makeup of these costs consisted mainly of lower factory utilization due to lockdown restrictions, supply chain inefficiencies, and PP&E costs to keep our people safe. Turning now to our Q3 financial results. The combination of our ability to largely remain open, efficiently navigate sporadic factory shutdowns, and the diverse nature of our end markets allowed us to deliver $6.3 billion in net revenue during the quarter in line with internal forecasts. To me, this is a meaningful and further illustration that our diversification strategy is working. GAAP operating income was $59 million, and GAAP delivered loss per share was 34 cents. Core operating income during the quarter was $172 million. Net interest expense during the quarter came in better than expected at $49 million due to better working capital efficiency and lower interest rates. Our core tax rate for the quarter was 53.7%. At the end of April, a non-U.S. entity's tax incentive was extended by the government for an additional 10 years, which resulted in a revaluation of certain of this entity's deferred tax assets. While this resulted in a one-time charge of $21 million in Q3, moving forward, this tax incentive extension will continue to benefit our effective tax rate for another 10 years. Core delivered earnings per share were $0.37. It's worth noting that the revaluation of deferred tax assets negatively impacted our core delivered earnings per share by approximately $0.14. Next, I'd like to call your attention to an item which impacted our GAAP results during the quarter. Over the past three years, we've experienced tremendous growth, adding in excess of $7 billion in revenue to our results. Importantly, the growth has been intentional and targeted at end markets that offer accretive margin and cash flow profiles. With this success in diversifying the business, we feel it is an appropriate time, especially amidst the current economic landscape, to take steps to proactively optimize our cost structure and improve operational efficiencies. Therefore, during Q3, we've taken steps to reduce our worldwide workforce. For Q3, we incurred approximately $50 million related to this, inclusive of severance costs and extended healthcare benefits to those impacted. We anticipate these costs will result in a net benefit to core operating income of $40 to $50 million in FY21. This is in addition to the anticipated savings associated with the 2020 restructuring plan we announced last September. Now turning to our third quarter segment results. Revenue for our DMS segment was $2.4 billion, up 13% year-over-year, while core operating income for the segment increased 27% year-over-year. This resulted in core margins expanding 30 basis points to 2.9%. Moving to EMS. Revenue for our EMS segment was $3.9 billion, down 2% year-over-year. From an end-market perspective, we saw year-over-year strength in the cloud and semi-cap space, offset by declines in automotive, print, and retail. Core margins for the segment came in at 2.6%. Turning now to our cash flows and balance sheet. As anticipated in Q3, inventory levels contracted sequentially with our days in inventory coming in at 67 days, a decline of three days quarter over quarter. Cash flows provided by operations were $487 million in Q3 and net capital expenditures totaled $143 million. As a result of the strong third-quarter performance in cash flow generation, adjusted free cash flow for Q3 came in stronger than expected at approximately $344 million. It's worth noting, while we recorded approximately $50 million of expenses in Q3 associated with the aforementioned workforce reductions, the associated cash outflow will largely be in Q4. We exited the quarter with total debt to core EBITDA levels of approximately 1.6 times and cash balances of $763 million. During Q3, we took steps to bolster our balance sheet, adding over $625 million in liquidity, bringing our available committed capacity under the global credit facilities to $3.7 billion. With this additional capacity, along with our quarter-end cash balance, Jabil ended Q3 with access to more than $4.5 billion of available liquidity, which we believe provides us ample flexibility to navigate the current market environment, all while maintaining our investment-grade rating. We repurchased approximately 800,000 shares for $21 million in Q3, bringing our total year-to-date free purchases to $190 million. Turning now to our fourth quarter guidance that includes approximately $45 to $55 billion in COVID-19-related costs. EMS segment revenue is expected to increase 1% on a year-over-year basis to $2.5 billion, while the EMS segment revenue is expected to decrease 8% on a year-over-year basis to $3.8 billion. We expect total company revenue in the fourth quarter of fiscal 2020 to be in the range of $5.8 billion to $6.6 billion for a decrease of 5% at the midpoint of the range. Core operating income is estimated to be in the range of $145 million to $245 million. Core deluded earnings per share is estimated to be in the range of 46 cents to 86 cents. Gap deluded earnings per share is expected to be in the range of 4 cents to 50 cents. Next, I'd like to outline our updated expectations for revenue in fiscal year 20 by end market. Within DMS, today's revenue outlook is largely unchanged. Our diversification within DMS continues to pay dividends even in the current environment. We expect full margins for DMS to be 3.8% for the fiscal year on revenue of approximately $10.3 billion. Turning now to EMS. Within EMS, we reduced our revenue outlook for FY20 driven by automotive, industrial and energy, and print and retail revenues which has been partly offset by continuous strength in cloud. We expect margins for EMS to be 2.6% on the year on revenue of approximately $15.9 billion. Putting it all together for the year, we now anticipate revenues will be $26.2 billion and core operating income to be $805 million. This outlook translates to core earnings per share of approximately $2.60 for the year. We also expect to deliver free cash flows in the range of $400 to $450 million for the fiscal year. Considering this outlook, to me it's clear that our diversification strategy continues to work and has positioned us well to navigate an incredibly challenging market environment. In closing, I'm very proud of our Jabil team and their collective efforts over the past several months. Our early and focused efforts are working to protect the health and safety of our employees, and we continue to be vigilant in increasing our efforts in this area. I'm also very proud of the innovative ways in which Jabil's teams have collaborated to join the global fight against COVID-19. I'll now turn the call over to Adam.

Thanks, Mike. As we begin the Q&A session, I'd like to remind our call participants that per our customer agreements, we cannot address any customer's product-specific questions.

We appreciate your cooperation. Operator, we are now ready for Q&A.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register questions at this time. Our first question is coming from Rupal Bhattacharya of Bank of America. Please go ahead.

Hi. Thank you for taking my questions, and congrats on the strong quadrant and guidance. Mark, for my first question, I want to ask you about your thoughts on DMS segment seasonality. In a typical year, you know, your November quarter or fiscal 1Q is a strong quarter for the mobility segment given the new phone launches that happen. But if the world moves to a scenario where every year we have two main phone launches, maybe one in the May quarter or fiscal 3Q, then how should we think about the impact to DMS segment seasonality? And also, you know, you also have a healthcare segment that is, you know, having strong revenues today. So at a high level, can you just help investors understand how you think about DMS revenue and margin seasonality?

Sure, Rupu. I think what I'd prefer to do is get into some of that detail during our discussion in September. I mentioned on the prepared remarks, Even in this crazy environment, we're going to do our best to get together with all investors in September and at least just let you know how we're thinking about everything for fiscal 21. On the surface today, I'd be careful not to, and I know you didn't mean this, but for the group, right, I'd be careful not to interchange DMS with JGP. Our DMS business, again, has got a number of components to it. If I had to think about what we may see in September is with the shape of our Greenpoint business, with the shape of mobility, with our significant diversification inside of JGP, and then you add to it the tremendous growth we've had in the healthcare packaging side, I would say over time that maybe some of the cyclicality you saw in the business specific to DMS two, three years ago will flatten out a bit.

Okay, that makes sense. And then just for my last question, if you can talk about any component shortages that you're still seeing, are you being impacted in terms of being able to ship any revenues because of component shortages?

Thanks. I'd characterize it this way just so you have some relativity. If let's say pre-COVID, let's say the supply chain activity behavior pre-COVID December, January timeframe was a 10. I think we hit our biggest divot probably in the March, April timeframe. I'd call that maybe a five to six. I'd say today we're back to an eight or nine. And I think it stays there until we get to the backside of COVID. Whenever that is.

Great. Thank you so much, and congrats again on giving guidance for the next quarter. Thank you.

Yeah, thanks, Rupert.

Thank you. Our next question is coming from Adam Tindall of Raymond James. Please go ahead.

Thanks, and good morning. Mark, before the pandemic, you were thinking about just under a billion of non-GAAP operating income, and the new guidance looks like you'd end up just under $800 million at the midpoint. The vast majority seems like it's related to COVID costs, and I wanted to dig into this. I think you mentioned 160 to 170 million of COVID-related costs expected for fiscal 20. So if you could just touch on maybe some of the nature of the costs and really how permanent these costs are. I'd imagine there's at least a portion of that that is non-recurring and should not impact fiscal 21. So any sort of breakdown between what recurs and what is more of a permanent increase to the cost structure?

All right, Adam, I'll take a shot at it. If I don't get it right, come back at me. So I think pre-COVID, so let's go all the way back to September. In September, I think we said for FY20, we'd do 960 in core op income. Then I think in the December call, we took that up to 980, if I remember correctly. And today we're sitting with the model, if you take midpoint of Q4, we're about 805, something like that, give or take. So if I go back... Let's not go back all the way to September. I don't think that's fair because we took the numbers up in December. So we'll go to the December number, call it 980. Today we're at 805. The delta is 175. And I think in my prepared remarks I said that COVID-related costs for the year would be 160 to 170. So the gap between December and now, 175, COVID-related, call it 160 to 170. The rest of it is almost immaterial and a bunch of puts and takes and noise. In terms of the COVID expense specifically, we talked a little bit about this in March when we talked about a $53 million charge in February alone. I think the nice thing that is happening here is – The March call we did, we had a $53 million charge to COVID, largely in partial February. So on a monthly basis, COVID was costing us $60, $65 million a month. Then we moved to April, May, June timeframe. I think Mike alluded to it. In Q3, COVID was about $60 million. uh, give or take. And then, uh, I think Mike in his prepared remarks was suggesting that COVID for Q4 would be 50 million. So the nice thing is touch wood today, trends coming down a bit. I think that has to do with the fact that, um, uh, we're, we're becoming more optimized in our process and protocols, getting people in and out of factories, by the way, with our number one objective is at all of our factories, keeping them safe. Um, and then, and then how those costs break out. Adam is, is, um, We have direct costs, which is largely around our protocols, temperature testing, PPE around all of our factories, very consistent to our COVID playbook. Again, protocols, processes. Then we've had some disruptions in 3Q in terms of either government shutting down factories, states shutting down factories. where we've had some confirmed COVID cases. We close our factories until we can get testing completed. Through all that, we're paying the idle labor. I think that's the right thing to do in this time and place. And then also, we're just the general pockets of disruption. So today, our entire factory network's running at – call it 90, 95%, and I think revenue reflects that. But, you know, that could lead to the question of, gee, factory networks seem to be running at a normalized pace. Why still the COVID cost? And the truth is, is 3Q, and we anticipate in 4Q, we'll still have some one-off pockets of disruption, and we've kind of tried to handicap that as best we could for the fourth quarter.

Okay, that's helpful. And it sounds like generally, to summarize, kind of on track versus your initial plan at the analyst day if you were to exclude the COVID costs. And I don't want to get too far ahead, but, you know, as we think about the fiscal 21 plan that you laid out that had that $4 EPS number, you know, if I think about what's going on today, you've got an incremental $50 million cost optimization on top of it. It seems like DMS ramp is well on track. What would be maybe the headwinds, you know, today versus that initial $4 EPS number plan?

Well, let's talk about that in September. And I say that not – I don't want to be evasive, okay? But, man, our team is a bit tired. But, boy, and I talked about it in my prepared remarks intentionally. You know, our frontline workers are the folks at the factories. I'm always proud of our folks. The folks we have on the factory floor today dealing with this stuff every hour, every day, and what they've done and given us the ability to, you know, at the beginning of the year, Adam, we talked about revenue being $26 billion. In December, we took that up to like $26.5, $26.7. And if we're fortunate enough that the world doesn't go completely haywire in the next 60 to 75 days and we're close to the midpoint of guidance for 4Q – We'll do over $26 billion this year. I think the numbers are coming in around $26,200. That's all our people at factories who are just amazing to me, especially through all this, because they are exhausted. I think what we'll try to do our best is in September, and I refrained or... stay away from, in my prepared remarks, I forget exactly what I said, but I didn't really call it a formal investor day because I just don't know what the world's going to look like, either as Mike or Adam, but we felt like it's important in September to go beyond a normal earnings call and try to lay out for you in a very descript way how we see the world and we'll provide you a fairly comprehensive assumption set. But man, I... I think – and I say this all the time, and I've said it for the four- or five-year journey we've been on. The company's so diversified, and our diversification in terms of our top line, it's somewhat kind of the main deal here in allowing us to hold revenue at what I think is a – a very, very solid level, all things considered. And, again, in the most simplistic terms, and you alluded to this with the opening of your question, which is, you know, if COVID would have never occurred, I think sitting here as a leadership team, we feel very good that we would have delivered the 980.

Makes sense. Congrats on the results despite everything going on, and thanks for the details. Yeah, thanks, Alan.

Thank you. Our next question is coming from Jim Suva of Citigroup. Please go ahead.

Thank you very much and congratulations on all the agility and hard work for your teams. Maybe a bigger strategic question. As you look at the world getting back post-coronavirus Are there changes for more like localized manufacturing just from customers wanting to mitigate risk, meaning not be so concentrated in certain regions? And if so, I assume you probably have to talk about profitability because, you know, putting together something in, you know, St. Petersburg may have a different cost profile than putting it together in a different country and then shipping it. from lowest cost to maybe a little more expensive. But can you kind of talk about, are you seeing that, having discussions, and does that really impact your profitability? Thank you.

Thanks, Jim. Maybe I could, could you clarify for me, sir, are you asking, are you asking, are we seeing, specifically you saying, are we seeing people, are they moving business around? Are they moving business out of China? Yeah. Or is business moving back to the U.S.? Are you asking all of those or one of the three?

Yeah, kind of just in general, are those discussions happening and are they material or are they just kind of, you know, because we read about the political trade wars and then we layer on a pandemic of health care on top of it. I'm just wondering if this is facilitating less of a concentrated discussion And, you know, Jabil has a very strong worldwide footprint. And if so, I assume that you have to have some discussions about costs. Just kind of overall the topic, that's all.

Okay. So I'll give it my best. I think, I don't recall, I think it was the September call where we were in this trade tariff deal. That was kind of the headlines of the day, and then COVID took over and trade tariffs was kind of taken the back seat, at least in terms of headlines. I believe what we said is there would be some costs. Our budgeting, if you will, for FY20 had suggested that the first half of 20, there was cost in there around trade tariffs as some customers were looking to hedge China on. Not a lot of customers were leaving China. In fact, as we sit today, not a lot of customers have left China. We've had a number of customers that have hedged China on new products. And that's played out largely as we thought, give or take. So then COVID hits, and I would say everything's been in a little bit of lockup in terms of conversations with customers strategically because customers are just trying to figure out which way is up, as are we. So if I had to think about maybe the discussion in September that's a little bit more strategic, I would say not a lot's changed since what we said, September of 2019 at the beginning of this year. I think people will be a little bit more cautious about in terms of having their product built at a single site. That could be trade tariff. That could be just because. That could be because of Mother Nature concerns. I don't know how much of that links to COVID. The good news in all that, Jim, is, boy, oh, boy, I'm a real believer that there's a lot of stuff that will need to be built. The few of us on the planet today that have lots of scale have a huge advantage. I'd put our footprint in that for sure. Mike talked about our balance sheet and the liquidity we have in terms of continuing to invest and then just overall leverage of supply chain. So as these dynamics ebb and flow, as they change, I think we're in a reasonably good position.

Thank you so much for the details and congratulations to you and all your employees.

Thanks, Jim.

Thank you. Our next question is coming from Paul Koster of JPMorgan. Please go ahead.

Hi, this is Paul Koster. Thanks for taking our questions. So first, just on DMS, can you give us a sense for, you know, the relative strength between healthcare, packaging and mobility? You know, from your prepared marks, the strengths seem quite broad. But, you know, judging by your unchanged fiscal year guide for these segments, assume, you know, healthcare was the largest driver, which obviously makes sense. But if you could comment there and how these trends extend into F4Q, and then I'll have a follow-up.

Okay. I would, so I think what you asked is kind of a breakdown of DMS, strengths, weaknesses. I would say tactically and maybe strategically, depending on how the whole new world order is post-COVID, both Mike and I spoke in our prepared remarks on I think companies are going to do things a bit differently going forward. I've had the good fortune to talk to lots of our customers and their CEOs and lots of conversation around geez, are you going to travel as much? Are you going to conduct business the same? I think our new normal as a proxy is I don't want to give up one inkling of, as I said in my preparatory remarks, care or intimacy for customers. So I think that's where we'll spend our travel dollars. I think net-net our travel dollars on an annual basis will come down. I think we'll use more digital tools. I bring all that up because I think when it comes to our mobility business and our edge device business and people using digital tools and working remotely for an extended period of time, I think that business will be in relatively good shape. And then healthcare and packaging, both with our strategic plan around healthcare and then with doing some PPE, I think we're getting a little bit of an extra boost there. I don't remember the exact numbers, but if you – for lack of a better word, on the chart that we provided in September, the blue-green chart, I think we had health care packaging for FY19 at just a little over $3 billion, and now the health care packaging is a little over $4 billion. And I would say, you know, if things continue to go well for us, you know, I see health care and packaging at a number greater than – the four or 4.2 billion that, uh, that you might see on the charts today.

Gotcha. And then just a quick follow-up on, on healthcare, um, specifically about, you know, elective surgeries and other products of that nature that aren't kind of related to, to COVID spurred demand. Um, how did those products during the quarter and do you see ramps from maybe pent up demand possibly in the coming quarters? Thank you.

Yeah. Uh, I would say from our observations, so don't take this as, again, a data point for the industry, but from our vantage point, elective surgery demand was down. I don't think that's any secret. I think that, but yet on a net-net basis, we saw strength in healthcare. So what you could surmise from that is there was a strong offset to our healthcare business. So elective surgery demand down. Both PPE and other areas of our healthcare were actually greater than the downtick we saw in elective surgeries on a net-net basis for 3Q. Here's what's interesting. I think an observation might be, geez, over time, you know, maybe the PPE starts to fall off a little bit. You know, how does that impact healthcare? Again, we'll talk about that in September. But I also believe that there's going to be a significant pent-up demand for elective surgeries because a lot of these elective surgeries don't go away. Just logistically, people can't get them done in the middle of COVID. So the puts and takes on that are if you look at our healthcare packaging business for fiscal 18, then you move to 19, then you move to 20, 21, and 22, I think that sector of our business is on a really good trajectory.

Thank you so much.

Thank you. Our next question is coming from Stephen Fox of Fox Advisors. Please go ahead.

Thank you. Good morning. Just following up on some of those comments, Mark, can you maybe step back and talk about the progress you've made during this period in improving the margins on some of the healthcare programs and maybe broadly as well? And then just as a follow-up, could you talk about some of the consumer packaging trends? You mentioned the pickup in that. I know you were sort of improving sort of the operations of that business going into the COVID pandemic. And so, is there a longer-term adjustment we should think about with that business going forward? Thank you.

Okay. So, in terms of margins in healthcare, I think, you know, we talked about that in September. We talked about the addition, the wonderful strategic addition of JJMB. We gave you guys some color around that. If you go back and look at our comments in September, I think those still hold. So we talked about a multi-year transition with JJMB, both with top line, bottom line margins. I think that is in tracking likely expected in September. And I envision that tracking on that same path as we move to fiscal 21 and 22. So net-net, I think that's positive. In terms of our consumer packaging business, Brenda, who runs that for us, has just a ton of experience. And although that business historically in the big picture of J-Ball hasn't been overly materialized, I think it will be, not just thinking about top line, but bottom line. I think that has the potential to be a margin-rich environment for us. With Brenda and her team, the things they're looking at is the stickiness and or how to lead with technology and engineering in a market that, in many ways, is just simplistic molding. That's not the area we're playing in. If I think about the trajectory of that business, I'm every bit as bullish on that, if not more than my bullishness around health care. And then, Steve, in terms of margins in general, you know, obviously margins this year have been handicapped by COVID. But I think it was Adam who was asking the questions and prompting the discussion around GST. Top line is holding pretty good. Again, proxy for our diversification. If you can kind of handicap for the COVID costs, I think margins this year, I think at the beginning of the year, we said that last year, last couple of years, margins have been 3.4%, 3.5%. I think net of COVID this year, if you adjust, I think this year we would have done, again, the 3.6%, 3.7%. And we'll talk in September about how we're thinking about the margins for 21. And I do recognize that we have a guidepost out there of the $4 a share and 4%, but we'll address that in another couple months.

Great. That's very helpful. Thank you very much.

Yeah.

Thank you. Our next question is coming from Shannon Cross of Cross Research. Please go ahead.

Thank you very much for taking my question. And you may want to address, I'm sure, some of this in September. But I'm curious, when you look at the revenue that was generated, even beyond healthcare, because you've talked about it significantly during the quarter, from increased demand for COVID. So, you know, whether it was some of the work and learn from home or some of the packaging and that. I guess what I'm trying to understand is what's, like, the underlying businesses that Were there some pockets of strength that surprised you, even beyond, you know, what you saw? I don't want to say they're one-timers, but obviously there's been sort of a shift in where production has been. So I'm curious, you know, in 5G or some of the other areas, are you seeing incremental strength that's sort of, you know, driving the fundamentals even beyond the upside that you saw from COVID? Thank you.

Areas I was surprised in – I would say that the uptick we had around COVID directly for healthcare was probably stronger than we anticipated if we go back to the March call. Is that sustainable? I think it's going to be sustainable for a while. At some point, that runs its course, starts to fall off, but then my comment about elective surgeries and things that are pent up, I think fill a little bit of that divot. So maybe that was a little bit of a surprise. Our cloud business was kind of as expected. We saw good continued strength there, but that was more on the expected side. I would say the other area of surprise for us, or at least speaking for me, I don't want to speak for the whole management team, is is I think maybe we underestimated how broad-based this digital learning, digital schools, and video conferencing would be, especially when you consider COVID. You know, you grossly underestimate the impact of the whole world. And I don't think that's going to be so temporary. So I mentioned it in one of the responses earlier. So... In terms of our edge device business, anything to do with people communicating differently, I think as human beings, connection is really, really important. So people are going to want to, whether it's augmented reality, WebEx, Microsoft Teams, Zoom, whatever tools people are using, they're going to want to have tools that continue to advance and allow them to have a level of really good human connection. So any device that has to do with that being maybe part of the new normal, I think we saw some upside in that in 3Q. I think we'll continue to see some strength in that in the fourth quarter, and my guess is that strength will carry on through 21 and beyond.

Thank you. And I was just curious, on 3D printing technology in terms of manufacturing, are you seeing more interest in that, or was it sort of a nice to have because of the need for some of the PPE and that that they generated? Because I know you've been one of the leaders in manufacturing with 3D.

Thank you. I would never, as we sit today, never characterize 3D as a nice to have. I think 3D additive is finally that technology. Forget about COVID. I think that technology is a secular trend in certain areas, and I think we're going to be leaning hard into that, especially in areas of healthcare, defense and aerospace, and automotive to start.

Thank you.

Yep. Thank you. Our next question is coming from Matt Sheehan of Steeple. Please go ahead.

Yes, thanks. Good morning, and thanks for all the color so far. My question, Mark, regarding the $50 million in incremental cost cutting moves that you mentioned this morning is, Could you talk again about sort of the reasoning for that? Are there certain end markets within EMS or DMS that you expect just a slower growth rate and you're adjusting, or are there some mixed issues as well?

Thanks, Matt. It's got nothing to do with any of that. So throughout – my long time at Jabil, we go through different pockets in the company where growth rates change. They're up, they're down. We went through a significant growth spurt, nearly doubling the size of the company over a fairly short period of time. I think every four or five years, I think it's important for leadership teams to really reflect on what's worked well, what hasn't worked well, what we can do better. Said differently, you know, being adaptable and flexible to change. I think our org structure that we had in place the last four, five, six years has served us really well, hence the tremendous growth. And so we actually started talking in our strategic discussions in the fall about, okay, you know, what's next in terms of the next three, four years in the company. We've done a wonderful job diversifying our top line. We've made it clear to investors that our focus, we're going to take a little bit of a slight pause, a deep breath, and focus hard on the cash flows and the margins as such. pre-COVID, we were having lots of discussions about how to optimize the structure, how to remove any friction points in a company this size, how to be sure that everybody has access seamlessly and quickly to all of our capabilities. So this was underway through the fall and into the winter. And then COVID hit and added to our thinking around maybe taking some costs out of the business. So It's not really a reaction. I think Mike and I both said in our prepared remarks, 3Q provided us some pockets of strength that was offset in a few pockets of weakness. This action had nothing to do with any of that. It just had to do – it's more structural in nature. It's more permanent. I could suggest to you these costs aren't going to come back when COVID is over. And I really like how it positions the company today. For 21, 22, and beyond, the decision point we had to make as a leadership team is, with everybody working remotely, did we think this would be a good time to go do this? Because things like this are not easy. And we made a decision to do it because if we can do it properly and get to the other side of this with the new structure as COVID starts to clear up, I think it gives us a really, really nice foundation to run the company.

Okay, great. That was very helpful. And just as my follow-up, Mike, regarding the balance sheet, it looks like your inventory days were down sequentially, which is credible, certainly taking into account the supply constraints that you and your customers had. saw, you're still up a year over year. In terms of where you think that inventory is pointed directionally, do you expect to stay somewhat elevated as customers look to keep some buffer stocks and there's still supply constraints, or do you see that coming down over time?

So in Q2, Matt, the inventory shot up to 70 days. I think we had some issues in China. There wasn't anything being shipped out. So the 70 days was unnaturally high. We've come down to 67 this quarter. So progress, but not as much as I would have liked to see. So my target right now is, hey, let's get to that 60 in the medium to long term. We need to be in the mid to low or mid to high 50s. So that's the eventual target. Will we get there right away next quarter? The answer is no. But over time, I feel good that we will get there.

Okay. Thanks very much.

Thank you. Our next question is coming from Mark Delaney of Goldman Sachs. Please go ahead.

Yes. Good morning. Thanks for taking the questions. First, I was hoping to better understand if Jabil was able to pass on any of the extra costs from COVID mitigation to customers on your existing projects. And, you know, are these costs related to COVID mitigation factoring into the pricing discussions you're having for your business?

Hey, Mark. The $160 to $170 million for the year I spoke to is a net cost. So those conversations are going on all the time. You know, of our 400-plus relationships, 80%, 90% of those are highly strategic, long-term. And those conversations, they have endless dimensions to them. So let's just say that, you know, we've got a business to run. Our customers understand we have a business to run. We also want to be very, very thoughtful to all of our customers because they're going through tough times as well. But be rest assured that – I think those discussions, for the most part, that have taken place through the third quarter and will continue through 4Q and into 21, I would characterize as being very fair conversations.

Okay. That's helpful. For my second question – On the last earnings report, the company didn't have enough visibility to provide guidance, and there was uncertainties at that time related to both production and customer demand. And on this call, J.P. has already spoken at length about how the production side has improved in terms of component availability and factory utilization. I was hoping to better understand the demand side of the equation, and not so much in terms of different end markets and what you're seeing, but just the visibility that you have into customer demand markets. and ordering and how much invisibility has improved and how that maybe led to your comfort in being able to provide guidance as we sit today for this call. Thanks.

So let me try it this way. You know, the processes and the tools and the analytics we use for understanding demand haven't changed at all. And, in fact, I really am glad we have the tools and the analytics we have because they're helpful when, When the horizon gets a bit foggy, those tools are helpful. I would say that so net-net, the visibility we have is unchanged. The issue is how much our data analytics and our resources align or misalign with some customers' outlooks. And I think that's where the tools are most beneficial because if there's a disconnect from what we're seeing or we believe we should be seeing versus the feeds that we're getting, the demand feeds, it's driving lots of really constructive conversations. I think that, you know, there's still going to be quite a bit of choppiness in the business through the fourth quarter and into early FY21. I think that, you know, to have this feeling like COVID's behind us, the stock market's doing great, the world's getting back on its feet, I don't think that's the case. With that said, the reason we decided to give guidance for the fourth quarter is we've tried our best to handicap multiple scenarios. We've kind of taken an average of, say, a dozen or so different scenarios and tried I think we have a degree of confidence that justifies the guidance for the fourth quarter. Thank you. Yeah, you're welcome.

Thank you. Our next question is coming from Robert Mueller of RBC Capital Markets. Please go ahead.

Hi. Can you just talk a little bit about your share repurchase and capital allocation plans? Do you plan on resuming the pace that you expected pre-COVID? And if so, by what timeframe? And are there any rough targets for when you'd like to exhaust your authorization?

So we do have a $600 million authorization out there. We've done about 190 of that already. We're going to continue to be sort of thoughtful on our capital allocation, be opportunistic. I do want to balance buybacks with cash and make sure – that our balance sheet is in a very strong position, which it is today. So the answer is we will be looking at it opportunistically for sure. Great. Thank you.

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you for joining us. Please reach out to us with any questions. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.