Jabil Inc.

Hello and welcome to the JBL fourth quarter fiscal year 2020 earnings call and investor briefing. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Adam Berry, Vice President, Investor Relations. Adam, please go ahead.

Good morning and welcome to Jabil's fourth quarter of fiscal 2020 earnings call and investor briefing. Joining me on today's call are Chief Executive Officer Mark Mondello and Chief Financial Officer Mike Dasdor. We'll begin today with Mike, who will review our fourth quarter and fiscal 2020 results. These slides are currently posted on our website at jabil.com. Following those comments, we will transition to our third annual investor briefing, where Mark will review our business overview and Mike will provide an outlook for our first quarter and fiscal 2021. We will then open it up for your questions. Please note, to view our investor briefing slides during today's session, you will need to be logged into our webcast at Jabil.com. Following today's session, you will find our entire slide deck for both our fourth quarter earnings and investor briefing on our website. The entirety of today's call will be recorded and posted for audio playback on Jabil.com within the investors section. Our fourth quarter press release, slides, and corresponding webcasts are also available on our website. In these materials, you will find the earnings information that we cover during this conference call. Before handing the call over to Mike, I'd now ask that you follow our earnings presentation with slides on the website, beginning with our forward-looking statement. During this conference call, we will be making forward-looking statements, including, among other things, those regarding the anticipated outlook for our business, such as our currently expected first quarter 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. 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. With that, it's now my pleasure to turn the call over to Mike.

Thank you, Adam, and good morning, everyone. I'm very pleased with our fourth quarter performance. Both segments executed extremely well and delivered financial results that came in well about the guidance we provided on June 19th. The overperformance was driven mainly by two factors. First, during Q4, we experienced fewer COVID-related disruptions than we anticipated in June, which resulted in higher than expected throughput in our plants, a more efficient supply chain, and lower COVID-related expenses. And second, our teams in both segments quickly moved to capitalize on upside demand, mainly in the mobility, 5G wireless, and cloud end markets. The compounding effects of higher than expected sales, improved productivity, and lower costs allowed us to deliver strong revenue core operating income, and core delivered earnings per share in Q4, well above our expectations in June. With that, I'll now review our Q4 and fiscal 20 financial results. Net revenue for the fourth quarter was $7.3 billion, an increase of 11% year-over-year. GAAP operating income was $197 million, and our GAAP delivered earnings per share was 44 cents. Core operating income during the quarter was $255 million, well above our expectations in June, driven mainly by the aforementioned higher sales and lower COVID-related impact that came in approximately $25 million lower than anticipated. Net interest expense during the quarter was $46 million. Our core tax rate for the quarter was 24%. Core delivered earnings per share was 98 cents. and 11% improvement over the prior year quarter. For the full fiscal year, net revenue was $27.3 billion, up 8% year over year. FY20 GAAP operating income was $500 million, with GAAP net income of $54 million. GAAP net diluted earnings per share was 35 cents for the year. Core operating income was $864 million, representing a core operating margin of 3.2%. Core deleted earnings per share for the year was $2.90. Now, turning to our fourth quarter and FY20 segment results. Revenue for our DMS segment was $2.8 billion, up 17% year-over-year. This growth was mainly due to our mobility and healthcare end markets. Core margins for the segment improved 60 basis points year-over-year to 3.5%. Revenue for our EMS segment increased by 8% year-over-year to $4.5 billion, driven mainly by the Semicap, 5G Wireless, and Cloud N markets. Core margins for the segment were 3.5% during the quarter. For the year, our DMS segment revenue was $10.7 billion, up 8% year-over-year, mainly due to our healthcare business. Core margins for the segment were 3.9%. Moving to EMS. In FY20, revenue increased by 8% year-over-year to $16.6 billion, as our value proposition continues to be well-received in the areas of 5G wireless, cloud, and SEMICAP. Core margins for the segment were 2.7%. Turning now to our cash flows and balance sheet. In Q4, inventory days came in better than expected at 56 days, a decline of 11 days sequentially. Net capital expenditures for the fourth quarter were $241 million, and for the full fiscal year came in as expected at $796 million. Our fourth quarter cash flows from operations were very strong, coming in at $687 million. As a result, the strong fourth quarter performance in cash flow generation adjusted free cash flow for the fiscal year came in higher than expected at approximately $461 million. We exited the quarter with total debt to core EBITDA levels of approximately 1.7 times and cash balances of $1.4 billion. To further strengthen our balance sheet during Q4, we issued a $600 million 3% senior note maturing in January of 2031. We used the proceeds to redeem our $400 million 5.625% senior notes due in December 2020. We ended Q4 with committed capacity under the global credit facilities of $3.8 billion. With this available capacity, along with our quarter end cash balance, J will end at Q4 with access to more than $5.2 billion of available liquidity, which we believe provides us ample flexibility to navigate the current market environment. During Q4, we repurchased approximately 760,000 shares for $25 million, bringing our total year-to-date repurchases to $215 million. In closing, I am very pleased with our strong execution and resiliency in a challenging environment, and I'm encouraged by the positive momentum we carry into fiscal 21. With that, I'll now turn the call over to Mark.

Thanks, Mike. Good morning. I appreciate everyone taking time to join our call today. I'll begin by offering my sincere gratitude to all of you here at Jabil. Thanks for hanging in there during these trying times while never compromising the safety of our people. Your response, stamina, and attitude have been amazing and so appreciated. Again, thank you all. Today is our third consecutive year where we not only share our results and give a quarterly guide, but we also provide a complete outlook for the year ahead. So I'll get us started with thoughts on our outlook, and Mike will offer additional detail during his follow-on remarks. Moving to slide 11, I'll offer a few thoughts on our approach, beginning with diversity and inclusion. Being that Jabil is a service business, we know that each employee is critical to our success. We also know that each employee has the right to be treated with dignity and respect all day and every day. We operate our business in 30-plus countries, employing people that don't look the same, don't talk the same, people that practice different religions, have different sexual orientations, people with physical limitations, and neurodiversities. Diversity and inclusion is top of mind as we employ folks all around the world. But we've got more work to do. We won't abide racism or lack of human rights. We won't accept discrimination or social injustice. Our team challenges the status quo, and we hold ourselves accountable through action. Most recently, we formed a nine-person council to assist and guide our internal D&I efforts. This Council will provide advocacy as we push to improve our own shortcomings. These nine Council leaders are talented and without a doubt will make us better. Consistent with this focus, we're pleased to be a premium sponsor for the upcoming Special Olympics U.S. Games. This sponsorship has evolved into a partnership, granting our employees the remarkable opportunity to engage with the athletes and their coaches. This will also make us better. In summary, our team continues to safeguard our work environment and ensure that everyone can be their true self without fear or anxiety, without harm or recourse. and with full acceptance of our individual differences. A second aspect of our approach pertains to ESG and sustainability. At JABL, we aim to always do what's right. This includes doing right by our planet and doing right in helping others. We'll expand our use of clean energy as we strive to reduce our greenhouse gas emissions by 25% within the next five to six years. Equally important is the pursuit of our sustainability goals as influenced by the United Nations Decade of Action. We're determined to lead our industry by attaining highest standards in the areas of employee safety, water usage, hazardous waste, and supply chain management. Also, we understand what gets measured gets done. So we've applied this mantra to our people and their incredible generosity, which allows us to quantify their contributions as they volunteer their personal time. Let's now turn to slide 13. This slide paints a terrific picture, underscoring the effectiveness of our team and the strength of our commercial portfolio. What you see is two segments where one plus one equals three. Two segments that complement one another, both in terms of end markets and capabilities. Relevant capabilities that when properly combined, fuel our services and our solutions. Two segments that when placed side by side suggest resiliency at scale. So let's break down each segment. Please flip to slide 14. Roughly 50% of our DMS segment is comprised of Jabil businesses that operate in a regulated type environment. Businesses such as healthcare and automotive. These end markets share similar certification and validation requirements and must meet certain standards as they bring products to market. At the same time, capital investments align with the longer, more stable product life cycles. The other half of our DMS segment is also comprised of two divisions, our connected devices and mobility divisions. These divisions excel at high volume production, advanced material sciences, aesthetically complex molding, precision mechanics, and flexible automation. We're excited about the balanced portfolio within our DMS segment, with a focus on expanding margins while offering reliable cash flows. Let's now move to slide 15, where I'll share a few thoughts on our EMS segment. Jabil's ability to combine years of manufacturing know-how and process standards with data analytics set us apart. Our longstanding customers leverage Jabil's unique IT network as we manage all types of sophisticated global supply chains. Today we serve a wonderful blend of markets across our EMS segment. markets that include 5G and cloud, industrial and semi-cap, digital print and retail, networking and storage. We're excited about the broad range of customers in our EMS segment with a focus on growing cash flows while offering stable margins. Putting this all together, let's look at our outlook on slide 16. For fiscal 21, we plan to deliver a core operating margin of 4% on revenues of $26.5 billion. This mirrors what we committed to you one year ago. It's important to note that the 4% operating margin on the $26 billion correlates to $4 in core EPS, again, mirroring what we said last September. Three primary actions give us confidence in our outlook. One, the improved makeup of our commercial portfolio. Two, reduced levels of overhead. And three, lower costs associated with COVID. These three actions sum to roughly $180 to $190 million of additional income year on year, FY20 to FY21. If I step back and think about where we're at today, much of our success here at Jabil is because we place the needs of the customer first. And we do so through non-parochial sharing of all resources and all capabilities. I think about this sharing as frictionless collaboration. When this collaboration is combined with the experience and actions of our team, you have a winning recipe. A recipe which delivers optimized solutions and services to our customers. I ask that you now please turn to slide 18. In closing, our outlook for fiscal 21 is indicative of the positive momentum we're carrying into the year. It's an outlook that's grounded by the continuation of our straightforward strategy. A strategy built on five basic pillars. Ensuring our business mix remains well diversified. Obsessing over our customers while leading with engineering. driving growth through sharing and integrating our capabilities, expanding margins by contouring our portfolio, and leveraging our varied end markets to deliver reliable cash flows. Lastly, to our entire leadership team, once again, thank you for making Jabil, Jabil. Most importantly, thank you for being your true self. As CEO, I'm honored to serve you year in and year out. I'll now turn the call back over to Mike.

Thanks, Bob. I would also like to thank our employees for their hard work, dedication, and excellent execution during a challenging FY20. Over the next few minutes, I plan to provide you with a framework that highlights how we will execute on our strategy and deliver on our financial commitments in the coming year. As we turn our focus to 2021, our financial priorities remain unchanged. First, we're fully focused on expanding margins. To position the company to deliver higher margins, over the last few years, we've targeted growth in areas of our business that have higher return profiles that offer accretive margins and strong cash flow streams. At the same time, we're focused on optimizing costs to ensure we deliver SG&A leverage across the worldwide Jabil footprint. Secondly, in FY21, we're forecasting core earnings per share to improve nearly 40% over FY20. And finally, we're focused on generating strong free cash flow through optimization of working capital and disciplined capex management. Next, let's take a look at each of our operating segments, and I'd like to walk you through what we're seeing in the different end markets we serve and how each of these plays a role in delivering our financial targets. Our DMS team's strong performance over the last few years reflects our improving business mix as a result of our intense focus on diversifying our end markets, products, and customers to create a more sustainable business. The team continues to do a tremendous job leveraging our deep capabilities in this segment like tooling, precision mechanics, acoustics, optics, automation, and material sciences, to capture new opportunities in high-value adjacent markets. Nowhere is this clearer than in our healthcare and packaging businesses, which have grown tremendously over the last few years through several key wins, including a transformational strategic healthcare collaboration. Today, we are one of the largest healthcare manufacturing solutions companies in the world, and we're well-positioned to capture future similar opportunities. In packaging, we're uniquely positioned to benefit from the convergence of electronics and smart and eco-friendly packaging. As we move to automotive, the bulk of our business focuses on electrification of auto, based on a nearly 10-year relationship with the leading electric automotive company in the world. In the near term, this market is recovering faster than we expected just a few months ago. Looking forward, we remain well positioned as demand for increased safety, governmental emission regulations, and the race towards electrification and autonomous vehicles are all playing a significant role in shaping the future of driving as we know it. Moving to connected devices. As more people worked and learned from home, we saw good demand for products such as tablets, headphones, and smartwatches in FY20. As we move forward into FY21, we expect this dynamic to remain. Beyond these devices, we're also continuing to shape the portfolio with products that meet our margin and cash flow profiles. Consequently, this will result in lower revenue for FY21. Beyond FY21, we believe the adoption of 5G will provide a further catalyst for future growth. And finally, within mobility, We remain extremely well positioned across all models and components as we continue to benefit from our diversification strategy. The out-of-season launch continues to perform extremely well. In tandem with this, the upcoming next generation launch which began in Q4 is going extremely well. Our team's technical expertise and focus on operational efficiencies continues to contribute to a very strong customer relationship. In summary for DMS, to me, the key takeaway this year is the considerable mix shift underway. In FY21, healthcare and packaging is expected to be more than a third of our DMS business with estimated revenue growth of approximately $600 million in FY21. Putting it all together, for DMS in FY21, we're expecting an impressive 80 basis points of margin expansion on mid to high single-digit revenue growth. Turning now to EMS. The trends in technologies disrupting the IT industry today are numerous and accelerating at a rate never seen before. The interplay between a dramatic increase in bandwidth brought about by 5G and the ever-growing power of computing in the cloud is creating a technology and business ecosystem that is changing at faster rates than earlier generations. All of this is happening in the context of increased consumption of silicon chips, unprecedented change in the retail landscape, additive manufacturing, and software-driven architectures. In digital print and retail, we continue to expect softness during the first half of FY21, driven by office and retail closures. However, longer term, we're well positioned in these end markets as we partner with our customers Bring next generation print and retail technologies to market. Shifting gears to industrial. Demand has been relatively consistent to date, but moving forward, we're seeing signs that new building starts are being delayed, which could have an impact on demand in the first half of our fiscal year. However, in the medium to longer term, we are well positioned to take advantage of favorable macro tailwinds through capturing growth in the smart metering, power conversion, and energy storage spaces. In SEMICAP, during the slowdown, the team did an excellent job of aggressively managing our costs while capturing market share and diversifying our business across both the front end and back end. With the ongoing recovery in the space, our efforts over the last 18 months are manifesting in stronger results. We are seeing solid demand, and so far, customers continue to march ahead with new FabPlan investments, executing to their 2020 and 2021 roadmaps. In cloud, our unique offering continues to resonate with the hyperscalers, evidenced by the significant growth over the last three years. And this growth has only accelerated in the near term as work and learn from home has significantly increased the demand for cloud infrastructure. Our customers are looking for much more flexibility in their server and storage hardware supply chains while greatly reducing their cycle times. The message that is resonating with our customers is that design to dust capability to provide a consistent experience across capabilities, functions, and geographies. Keep in mind, that when we talk about our design to dust value prop, we can design, create, make, and recycle all within the same four walls, which is incredibly powerful as security and transparency at every step of the hardware lifecycle become continually more important to our customers. Coupled with our vertical integration strategy, this level of engagement creates very sticky relationships with our customers. It's worth reminding everyone our cloud business is a bit unique and has been deliberately structured as a geocentric asset-light service offering. With this in mind, in FY21, approximately $1 billion in components we procure and integrate will shift from the current purchase and resale model to a consignment service model. We will benefit from higher margins and lower cash use in this business as a result of the transition. which will further bolster the asset line nature of our offering. Another area undergoing rapid disruption is the 5G wireless end market. Over the last several years, we have invested in accelerated NPI, test processes, and R&D, increasing our stickiness with customers and so maintaining our leadership role in the manufacture of base stations and radios as we transition to a 5G world. We continue to see growth in 5G offset by legacy wireless as the market transitions to newer technology. In FY21, we expect 5G infrastructure rollouts to continue as network operators upgrade their services. And then finally, within the legacy networking and storage end markets, we expect consistent networking demand but reduced storage demand driven by cautious overall enterprise spend and the ongoing shift to the cloud. In FY21, this demand dynamic, coupled with our decision not to pursue other products that do not meet our margin and cash flow profiles, will result in lower revenue. Following three years of tremendous growth as part of our diversification efforts, we expect EMS revenues to be down year over year, mainly due to the consignment shift within our cloud business and lower networking and storage revenue. With the current mix of business in EMS, we expect a healthy 80 basis points of core margin expansion in fiscal 21. Turning to the next slide. As I mentioned earlier, we expect to expand overall core margins through cost optimization and targeted growth. We also anticipate a COVID related negative impact of approximately 30 to $50 million for the year significantly less than FY20 due to fewer COVID-related disruptions in our plants and the supply chain, along with lower PP&E costs. As a result, at an enterprise level, we are well positioned to deliver 4% in core margins for FY21. Turning now to our CapEx guidance for FY21. Net capital expenditures are expected to be in the range of $800 million, consistent with FY20. This will come through a combination of both maintenance and strategic investments for future growth. Let's talk about our maintenance capex for a moment. We now have over 100 sites in 31 countries. At this scale, our factories require approximately $550 million in annual maintenance investments. This is inclusive investments in areas such as IT, automation, and factory digitization, which will drive optimization across our footprint and position us to deliver higher profitability. We are also investing in strategic growth in targeted areas of our business that are expected to deliver strong margin expansion and free cash flow. The bulk of our strategic growth capex will be in the healthcare, automotive, 5G wireless, semi-cap, and packaging end markets. Turning now to free cash flow. In FY21, we intend to continue generating strong cash flows as a result of earnings expansion, along with our team's ability to execute and efficiently manage working capital. Working capital improvements will come mainly through improved inventory levels. These factors, coupled with our disciplined CapEx, gives me confidence in our ability to deliver adjusted free cash flows of more than $600 million in FY21. Turning now to our capital allocation framework. Our capital return framework, beyond organic investments, will prioritize a commitment to our dividend, share repurchases, and a combination of targeted M&A and optimizing our capital structure. We are comfortable with our ability to generate strong cash flows, which will allow us to continue to return capital to shareholders, maintain investment grade ratings, and ensure we maintain an optimal capital structure. Turning now to our first quarter guidance on the next slide. DMS segment revenue is expected to increase 1% on a year-over-year basis to $3.8 billion. while the EMS segment revenue is expected to decrease 15% on a year-over-year basis to $3.2 billion. We expect total company revenue in the first quarter of fiscal 21 to be in the range of $6.7 to $7.3 billion. Core operating income is estimated to be in the range of $295 to $335 million, with core operating margin in the range of 4.4 to 4.6%. GAAP operating income is expected to be in the range of $238 to $283 million. Core Delivered Earnings Per Share is estimated to be in the range of $1.15 to $1.35. GAAP Delivered Earnings Per Share is expected to be in the range of $0.79 to $1.02. The tax rate on core earnings in the first quarter is estimated to be in the range of 26 to 28%. As we transition to our final slide, you can really begin to see the earnings power of a diversified and balanced JBO. Today, our business serves a diverse blend of ed markets in areas that provide confidence in future earnings and cash flows. We have deep domain expertise complemented by investments we made in capabilities. all of which gives us confidence in our ability to deliver 4% in core margins in FY21, along with $4 in core EPS and more than $600 million in free cash flow. And importantly, our balanced capital allocation framework approach is aligned and focused on driving long-term value creation to shareholders. I'd like to thank you for your time today, and thank you for your interest in JABO. I'll now turn the call back over to Adam.

Thanks, Mike. As we begin our Q&A session, I'd like to remind our call participants that per our customer agreements, we will not address customer or product-specific questions. We appreciate your understanding and cooperation. Operator, we are now ready for Q&A.

Thank you. We're now conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Adam Tindall from Raymond James. Your line is now live.

Okay, thanks. Good morning, and congrats on a strong finish to fiscal 20. Mark, I just wanted to start on COVID costs. It was, I think you said, $25 million lower than expected in the quarter. So I think in the quarter, a little under $10 million a month. Thinking about where you sit here towards the end of September, is that still getting better? I'm just trying to understand how much you have to go to get to this $30 to $50 million that you talked about for the full year in fiscal 21. And secondly, just to clarify, is the 50 million or so restructuring program the reason that this came down, or is that separate and on top of this? I just want to make sure I'm not double counting.

Hey, Adam, thanks for the nice comment. I'll have Mike talk about the restructuring, and maybe we'll ask you to clarify that a little bit. In terms of COVID, geez, I am really, really happy with how we've handled it all in a really, really kind of opaque, murky deal. I mean, we I'll take you back to February. Things were blowing up. I think our COVID costs in February on a total monthly basis were like 55, 60 million for the month. Then we moved into Q3 and COVID costs were around 50 million. And then Q4, as we were sitting in the June call, I think either Mike or I said Q4 would be around 40, 50 million. And as we got into 4Q, June was still kind of along that run rate. Then it started to dissipate a bit in July and in a more normalized run rate when compared to FY21 as we're leaving August. And as we continue to index through September, our run rate in September looks to be much like August. So assuming that the whole world doesn't blow up again, at that point, all bets are off. But with everything kind of the way we see it, we feel pretty confident in the 30 to 50. I think a way to think about those costs are maybe 60, 65% in the first half of the year and something like 35 to 40% in the back half of the year. And with that, maybe you could expand a little bit on the restructuring question. I'll let Mike address that.

Yeah, I was just trying to understand with the restructuring, is that what is helping the COVID costs to get better? Or is the restructuring program on top of this and going to help in Q1? The restructuring effort is on top of that. Nothing to do with the COVID reduction at all, Adam. Okay. Maybe just as a quick follow-up, I wanted to understand from a seasonality perspective as we think about fiscal 21. It's just a little bit unusual based on your Q1 guidance to see revenue down sequentially in November quarter for a JBL. So maybe you could touch on why that's occurring. Is that, you know, is the full move to the consignment shift in Q1 and what it means for the out-quarters and also the cadence of margin as that occurs? It looks like you're starting at such a high point about, you know, mid-4% range in Q1, but the full year is guided to around 4%, just trying to understand the cadence of that drop off in margins as well. Thank you.

Yeah. So there's a couple things in that. One is if I take a look at kind of our DMS business, I think kind of year on year, Q1 20 to 21, 21 is in the range of around 1%, so on the DMS Q1 to Q1. And I would think about our DMS business, Adam, more kind of first half to first half just based on timings and products. So if I take a look at, and I don't know the exact numbers, but rough numbers would be kind of DMS first half, first half of 20 to first half of 21, we'll probably see growth in the 6% to 8% range. And then I think if you look at the blue-green slide, overall for the year, DMS will be up about $800 million. from call it 1313 to up to around 14. So I wouldn't get too caught up in the Q1 revenue numbers. And then overall for the enterprise, you know, if we execute well in Q1, like Mike said in his prepared remarks, we expect margins to be around the 4.5% range. If we, with that same execution kind of total comparison, You know, we could have a six handle on our margins for DMS in Q1. So off to a relatively strong start, which is typically how our years kick off. And I would say as I think about kind of Q2, Q3, Q4, if I'm thinking about shaping the year at an enterprise level, margins should be pretty stable. So if we kick off with a four and a half, I think Q4, you know, we could end somewhere around four and then Q2, Q3 in between in the high threes, something like that. And if you sum all that up kind of on a weighted average basis, EMS to DMS, we're shooting for 4% overall for the enterprise for 21%.

Thank you. Our next question today is coming from Rupal Bhattacharya from Bank of America. Your line is now live.

Thank you for taking my questions, and congrats on the strong guide and the $4 target for fiscal 21, which is pretty much what you had guided in fiscal for Q19. So congrats on the guide. Just my first question, conceptually I'm wondering why add automotive and transport into DMS? So just your thoughts on why that segment was added into the DMS segment?

I think it's because, you know, every couple years, Ruplu, you know, we've been on a, I don't know, a five, four, five, six-year journey. And, you know, we disengaged with BlackBerry back in the day. We sold our services business. We were really successful in the mobility sector today. And we've been working really, really hard to continue to diversify the portfolio. I don't think that work's ever done. But, you know, where we sit today, if you just kind of sit back and look at the, for lack of a better word, you know, the portfolio slide on the blue and the green, geez, we've got eight areas of our business reflected there. And I just love the way it looks. I said something like that in my prepared remarks. As part of kind of always reshaping, or I think I use the word contouring the portfolio, we like to have businesses together that make sense from a capability perspective and market perspective. And we just felt like automotive and transport fits really well with our healthcare business in terms of overall regulated markets. And then the other shift we made, and again, I know this can be aggravating to investors because it ends up being a lot to follow. That's not our intention. Our intention is to give us a good platform again for the next 24 to 36 months. We took our smart home business, which had been in our networking storage because a lot of devices in home were networked together, and we moved some of that over to connected devices just because of 5G coming on board. And when we think about things throughout the home, From a capabilities and an end market perspective, it fit really well into connected devices. The good news is those modest shifts don't change the enterprise level numbers, but that's the logic behind it.

Okay. Thanks for the clarification on that. And for my follow-up, just on the EMS segment, just looking at industrial and semi-cap, you're guiding year-on-year flat at $3.5 billion. that just seems a little conservative given industrial end markets should improve next year. And I assume Semicap is not at target revenue or margins. It should be improving. So just your thoughts on what are the puts and takes in that segment? Why are you guiding flat revenues year on year?

I don't want to get into all the puts and takes only because, Ruplu, our industrial business has all kinds of puts and takes. I'd say, you know, if I were to – Knowing that we're not going to be right on any of these numbers exactly, if I had to handicap industrial and semi-cap, I would say I agree with your comments. If we're going to handicap that one way or the other sitting here today for the year, there's probably more upside than not. I would say certainly in semi-cap, and that's offset by some softness at the moment in industrial, and I think Mike talked in his prepared remarks about construction starts, both residential and commercial, we think will soften a bit, certainly through the first half of the year, and then regain some momentum towards the back half of the year. But I think you're thinking about that the right way.

Okay. Thanks for taking my questions, and congrats again on the strong guy. Thank you.

Thanks, Rupalu.

Thank you.

Our next question today is coming from Jim Suva from Citigroup. Your line is now live.

Thanks. Could you spend a little bit of time talking about the shift to consignment model and you know, not that there's anything wrong with doing that, but was it, is it across all your customers or a particular customer driving that? And is it all completed in calendar, I'm sorry, fiscal Q1 and the revenue impact? Because I believe it would be a, you know, revenue comes out of the model for, and then I'm just wondering, does it impact seasonality going forward?

Thanks, Jim. Sure. So, um, I think it's really important for everybody to understand that our move to consignment wasn't reactionary. It wasn't something that we just thought of. If you go back, and I don't remember when we first started talking about our cloud business. It was four, five, six earnings calls ago. I remember at that point in time, we gave it enough attention. We were doing the JJMD deal, and we also, in one of those calls, We had two separate slides, one talking about our JJMD engagement and collaboration, which, by the way, is going very well. And then we had a slide on cloud. There was a lot of questions at the time about are we getting into white box manufacturing and this, that, and the other. And we've been very, very consistent in our approach strategically to the cloud business that we were going to go into this in a geocentric service model. It was going to be a very asset-light, very agile model. both on the fixed asset and networking capital side. As that business has scaled through, call it back half of 19, all through 20, we've always had a thought process in terms of, again, keeping the networking capital asset light as well. So this has been in the works for quite some time, and I would say The consignment model that we've went to is largely around our cloud business, and it's largely in place. So, again, if you look at the shape of our EMS business, I think our guide for Q1 per Mike's comments and the press release is like $3.2 billion for EMS. You compare that to a 3.7, Q1-20, Q1-21. that's just reflective largely around consignment. And then we also have some intentional reshaping of our networking storage business on top of that. But I would say you can consider it in place and it'll be reflective quarter to quarter throughout the year.

Dr. So you said effectively in place in Q1. So that would mean the revenue impact is pretty much all absorbed in Q1 and going beyond Q1, it sounds like revenue seasonality should be closer to normal because it seems like Q1 would be hindered a little bit because of the shift to consignment model, if I understand consignment correctly, where you won't recognize the revenue.

Yeah, I want to be careful that I understand your comment because this is kind of an important topic. The 3.2, saying it Straight up, right? The 3.2 billion guide for EMS in Q1 is fully reflective of the consignment model. So there's no, geez, we're going to come back and go, the 3.2 turned into 2.5 because of consignment. It's all in. So again, if you take that and you take a look at our Q1-21 relative to our Q1-20 on EMS, I think you'll see the distinction there. Q1 20 in EMS was around 3.7, something like that. Q1 of 21 is 3.2. So, again, it's fully reflected. In addition to that, Jim, I believe that the blue-green slides that we shared, I spoke to it a bit, Mike went a bit deeper, shows... Our overall company revenue for the year, around $26.5 billion. The EMS segment, which is where our cloud business sits, shows $12.5 billion. So again, overall for the company for the year, $26.5 billion midpoint. About $14 billion of that is our DMS segment. $12.5 billion is our EMS segment. That's where our cloud business sits. Those numbers also are fully reflective of any and all consignment.

Gotcha. Thanks so much. My last follow-up is, with the U.S. political entity list of can't build to, can't ship to, things like that, is any of that impacting your company, and how should we think about that?

Well, we talked about that last year. That was a hot topic as we were – coming out of 19 into 20, then COVID kind of dominated everything. But that's something we watch every week, every month. And I think we had talked about the fact that the first half of 19, I may be off a quarter or two, Jim, but directionally, as we exited fiscal 19 going into first half of 20, somewhere in that timeframe, When the tariff talks were hot and heavy and relatively new and front headlines, we had said we were going to have a two to three quarter portion of our business where we were going to spend upwards of 20, 25 million bucks in terms of moving product around for customers. At that point in time, we had suggested that if the macro holds or even weakens a little bit, all of this product needs to get built. And I can't think of a better place for customers to build it than at Jabil just because of our global footprint. So we can continue to keep an eye on that. I've mentioned previously that if we kind of collate up all of our business in mainland China as we sit today, and I've said this in the past, there are certain parts of that business that we just don't think will move based on the indigenous supply chain and other factors. We've also said that there's a significant amount of our China revenue today that's China for other parts of the world, non-U.S. And then the China revenue that we have that happens to be products to be consumed and shipped to the U.S., some of that has already shifted, and some of it customers look at it and they're comfortable keeping it in China for now.

Thank you so much for the details and clarification. It's greatly appreciated.

Yeah, thanks, Jim. Thank you. Our next question is coming from Stephen Fox from Cross Research. Your line is now live.

Thanks. Good morning. Mark, I was wondering if you could talk a little bit about, you know, not to put the car before the horse in actually hitting four bucks, but, you know, you've been messaging that that wasn't a major top-line driver to getting to $4 over the last couple years. It was more about improving margins on the different new programs you have won. So can you just talk about how much of that is still holding true? And then as you transition through those new programs, what is the messaging to the go-to-market teams beyond this year? Is it to return to growth, leverage more internally, et cetera? And then I had a follow-up.

Okay. Well, there's a couple questions in there, and I appreciate you not putting the cart before the horse, although I think we kind of asked for it because we We came out with the four in the four, so we got a lot of work to do to deliver the four in the four, but we wouldn't have put it out there if we didn't see a clear path. Yes, for the last three, four years, we've been talking about diversifying the top line, but at the same time, we've been caveating those comments with the fact that we're not going to chase revenue for the sake of chasing revenue. We're going to diversify income and cash flows, which is exactly what I think we've been up to. And I would suggest our team's been quite successful in that. If I think about FY21, we're certainly not chasing revenue because on an absolute basis, some of this is consignment. Revenue is going down. But again, I would say overall, it is about us kind of continually taking a file and not a chisel, and filing the portfolio with a real kind of no-kidding focus on the margins and the cash flows. So that's what we're up to, and we're going to work really hard to do our best to deliver the four and the four.

Thanks for that. And then just as a quick follow-up, I understand the accounting math behind the consignment shift, but what does it mean in terms of your ability to drive better engagements with those cloud customers? Is that Is that a competitive advantage? Is it something everyone's doing? Or what would you say that means in sort of at the customer level for this?

I would say it's neutral. That one aspect is neutral. You know, in our geocentric asset light service business, there's high dollar components where we don't provide much value. And so having those pass-through materials is distortive to the real returns we should be getting on the value add we provide the customer. I would say our cloud business is founded on the services our team provides, the geocentric nature of it, the flexibility, the agility. I mean, I think about, you know, COVID was unplanned, and COVID hits, and all of a sudden people are working remotely, working from homes, and the ability of our cloud team to react, oh, by the way, as well as our mobility team and our connected devices team. I mean, those volumes spiked up. So I would say it's the most important part of our approach to that model is, or that business is, is the model itself and the relationships that we have, Steve.

Thanks. That's helpful, and good luck in Game 4.

Yeah, we'll need it. It was a good win by the lightning last night, so thank you.

Thank you. Our next question is coming from Mark Delaney from Goldman Sachs. Your line is now live.

Yes, Ed. Good morning. Thanks for taking the questions, and congratulations on the strong quarter. The first question is following up on what Stephen was just talking about in the cloud business. The company has been driving some very nice growth in cloud. I think one customer in particular has been good, but Jabil has talked about having a handful of customers in cloud and some opportunities to grow. Obviously, that's a market that should exhibit growth, but grow as Jabil becomes bigger within the cloud market. Can you talk a little bit more about what sort of opportunity Jabil sees either in FY21 or longer term to continue to take share within the cloud business?

Mark, I really, really appreciate the question. I'm not trying to duck the question, but we're in the process now of varying conversations going on with current customers, hyperscale customers, smaller customers, So I don't want to get into it on a customer-by-customer basis. I think what we've said in the past is we've got reasonably good confidence in our approach to what we're doing in that market overall, and we certainly expect that market to be kind of multi-customer faceted, if you will, and that's still our path and still our intent.

Okay. That's helpful, and I understand the sensitivities. One other question I wanted to understand, I think it's on the mind of a lot of investors who I speak to, is thinking through some of the cyclical dynamics and the risk that either because some of the geopolitical tensions with China or just with COVID supply chain uncertainties, there's potentially been pre-buying taking place in certain end markets. Can you talk about how Jabil is thinking about that risk and what you may have factored in as you were contemplating your 2021 outlook?

Which risk in particular?

Well, you know, I think in a few areas. One is, you know, to the extent you're helping, you know, if there's any customers in China and they're worried about some of this geopolitical tension, have they pulled in? But even, you know, just more broadly with, you know, there's been some uncertainties around, you know, what ability has the supply chain, you know, been able to service customers and, you know, if customers are worried about companies not being able to manufacture, maybe they were pre-building products because they didn't know how COVID may impact the overall supply chain. So had they maybe pulled in any of their plans? So just high level to the extent you've seen for either COVID or geopolitical reasons, customers building more than maybe they otherwise would have. Do you think you've seen any of that or did you try and think about that risk at all when you're contemplating your 2021 outlook?

Okay, I understand the question, and it's appreciated. I would say if I'm sitting on your side of the table, you know, along with kind of the buy side folks, it's immaterial. You know, I'll give you an example, and I'm not suggesting that there's not pockets that are material, but in the big picture of what we just guided to Our outlook for Q1 and then certainly for 21, I think all those puts and takes, there's a lot of them. I think they're immaterial. I'll give you an example. There's certainly been, in Steve Borges' business with healthcare, there's certainly been some upside, near-term upside in healthcare through the back half of 20 and probably the first quarter or two in 21, demand driven solely by COVID. Yeah, there's been a fall off in his business due to COVID with elective surgeries as an example. You spin all that up and you kind of get kind of a normalized business plan. And same holds true with some puts and takes in industrials. Same holds true with some puts and takes in connected devices, although that ended up being a net strength. So I would say all in all, we don't have a crystal ball. But our Q1 guide and our overall outlook for the year, Mark, we've taken kind of all those puts and takes. We've stress tested it with all the teams, and we feel like we've kind of normalized it to the 4%, the $4, and the $26.5 billion in revenue.

Understood. Thank you very much.

Yeah, you're welcome.

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question today is coming from Matt Shearer from Stiefel. Your line is now live. Hello, Matt. Perhaps your phone is on mute. Matt, if you can hear me, I cannot hear you. Please return to the queue by pressing star one. Our next question today is coming from Shannon Cross from Cross Research. Your line is now live.

Thank you very much. I had more of a big picture question as you look forward over the next few years. You talked about the investment that you're making in terms of CapEx and maintenance and that within your facilities. But I'm curious, what kind of drivers do you see really improving productivity and providing more of a margin either to you or to your customers today? from a technology perspective within your factories? And, you know, sort of how do you see the, I don't know, the factory of the future in the next few years? And then I have a follow-up. Thank you.

Okay, Shannon, that's a cool question. That's kind of what we're all about. You know, we're a company at the core that builds stuff, and so we're, you know, if, I think Mike, when he talked about CapEx and his prepared remarks, talked about split between growth and maintenance I would say I would say in terms of productivity in the factories that's probably split between matrix maintenance and growth we I would say we're one of the the leading companies that I know of in terms of automation what I would call flexible automation what I would call automated real useful automated platforms you combine that with augmented reality, that'll start hitting our factory floors. You combine that with machine learning. And then the other thing I think that sets Jabil apart is you take all of that, Shannon, we've got a ton of factories, call it, you know, we run, we largely run most of our business on 35, 40 sites, although we have more. If I take those, if I take the sites that are most impactful to our earnings and You know, they're all wrapped together in a single holistic IT system, and I don't know that anyone else has that. So we will always continue to invest aggressively in terms of the technology, the productivity that you alluded to. I think what shareholders should hold us accountable for is with those investments and with the aggression around that type of investing, I would hold us accountable for continued margin expansion and good cash flows. If I think about the journey we've been on on top-line diversification, where we've been going through that, our margins for two, three years have been stuck around 3.5%. You know, we're starting to see the efforts come through on the margin line. That's why Q1 is looking at 4.5% and the year around 4%. So I think the returns we're getting on those investments are coming through in terms of our bottom line.

Okay, thank you. That's helpful. And then you talked about strength in health care, but maybe if you could be a bit more specific. I know obviously there was pressure from electives not happening and benefit from COVID in the near term, but what other key drivers, maybe talk about the Johnson & Johnson relationship, are benefiting health care? Thank you.

Well, I don't want to, you know, I look at the J&J collaboration, and that's kind of business as usual now. You know, we spoke about that for a number of calls. That partnership, the team that's responsible for that, that has gotten so deep. And, boy, has that turned out. I think from both sides, we had high expectations. I think it's turning out better than even we expected, and I hope J&J would feel the same. But the business is so far beyond that. I mean, I think we're talking about healthcare and packaging combined bumping up towards $5 billion. I think about that business, Shannon. I always have my timing a little bit off, but it's typically directionally correct. Our healthcare and packaging business in FY... Late 17, early 18 was like a $2 billion business. Then it started bumping up against $2.5 billion. FY19, healthcare and packaging was probably closer to $3 billion. Last year, it was closer to $4 billion. And now we're bumping up against $5 billion. And again, as pleased as we are with the Johnson & Johnson collaboration, it's a lot more than that. Steve and his team are focused in areas so broad-based today relative to four years ago with things like pharma, the med device, orthopedics, diagnostics, et cetera. And then I think they'll also start to gravitate towards digital analytics and digital diagnosis as well. And then you add to it You know, I'm very, very excited about what the next couple years hold for our consumer packaging business as well. So that line item, when you look at it on the green-blue slide, again, this is a little bit of a commentary around the whole company, but the healthcare packaging line is as diverse, both end market and customer base, as it's ever been.

Great. Thank you.

Yeah. Thanks, Shannon.

Thank you. This question today is coming from Paul Koster from J.P. Morgan. Your line is now live.

Yeah, thanks for taking my question. Obviously, a lot to like here. I was particularly impressed by the statement of intent around diversity and inclusion, so that was welcome. A couple of quick things. One is it sounded, Mike, like you intentionally culled some business in the DMS segment. I think I heard that correct. What was the criteria for doing so? What impact does that have in terms of the year-on-year sort of base percentage growth or headwind, I suppose, in 2021?

Hey, Paul. Thanks for the question. We did call some. We're constantly reshaping the portfolio as we see it right now on the networking and storage side in particular. We have been looking at all businesses we have. I think we've declared a couple of years ago that we're focusing on margins, we're focusing on free cash flow, and we're tightening up all our financial metrics around existing and future customers. So that's one of the areas that we've looked at in particular. I talked about connected devices as well in my prepared remarks. That's another one where we've gone and called some customers there. So it's all directional. We've said we'll do that. We'll focus on that. And that is exactly what we're doing.

And can you quantify in terms of headwind for that segment year on year?

Yes. So if you look at the blue and green slide, I'll just highlight the networking and storage. That's the last line on the blue side. That's down by about $600 million. A lot of that is a simple, straightforward, hey, let's get this to our financial metric level. And then you have connected devices on the green side as well. There's parts of businesses that are doing really well on the connected devices, and then there's parts that we feel the financial metrics don't just justify moving ahead with them.

Okay, got it. I think, Mark, you mentioned that you're starting to see sort of green shoots in the auto space, especially with electrification, which is good, but it's really confusing monitoring that space at the moment. The big tier ones all seem poised but not active, and instead you're seeing a lot of small companies kind of sneaking into the space at the moment, and that seems to be where most of the action is, and they're focused on sort of niche markets that seem to have the best payback perhaps on electrification. Do you concur that that's the kind of business that you're seeing now or are you actually starting to see the beginnings of the passenger vehicle market kicking into your business?

What I would concur is it is confusing from the outside in. It's an interesting market. I think I don't want to generalize but a portion of the automotive market is starting to be just a big rolling mobile device, and that's a really good spot for us. And that's where we're focused most of our attention. We do support legacy automotive technology, but as we continue to look forward, a lot of our attention will be, again, if you just think of the automotive industry in the next 10 years, being a connected device on four wheels That's kind of how we look at it, and that's where we're making most of our investments.

Do you think that the inflection point there is in a couple of years still? I mean, that's the impression I get is 2022, 2023, that the action really starts to heat up.

I would say that's probably best case, yeah. We're thinking somewhere, I would say volumes and whatnot start to heat up, call it 2025, something like that. But there's a lot of work. There's a lot of work that goes in. between now and then, so we'll be busy.

All right, thank you. Appreciate it.

Thanks, Paul.

Yeah. Your next question today is coming from Matt Sheeran from C4. Your line is now live.

Yes, thank you. So I did want to thank you for all the details so far, Mark and Mike. One follow-up question regarding your guidance for the storage and networking. segment, I understand that you're reshaping it, walking away from some programs that are not profitable or don't meet your returns goals. But could you talk about how you see those end markets playing out, particularly storage? It sounds like you're looking at your further weakness there because of the move to the cloud. And then beyond that, we're seeing not just table but some of your peers also walking away from some of these programs in the data space where they're not meeting certain metrics and goals. And at some point, it looks like the leverage might swing back to the EMS guys like you where you make win deals because customers really have nowhere to go.

Yeah, I don't know. I look at it quite simply as I don't ever want to walk away from a relationship that Uh, but there's certain relationships where if we get to a point that customers can provide, uh, you know, others than Jabil, uh, business and get, and get better value add for it, then so be it. And, um, uh, I think in the network storage space, it's been, it's been a market that we've played in actively since the early nineties. We've got some longstanding relationships that are, uh, uh, you know, I don't want to lose, but, um, Again, if we get to a point where things start to change, our value proposition starts to fall off, you know, there's no reason to force that. And I think if I think about how well diversified the company is today, you know, when those situations occur, we don't need to force it. I think that that's a – of the eight different – business line items you're seeing there on the blue-green slide, that's an area at least specific to Jabil that probably isn't going to have a lot of hyper growth to it for some of the reasons you described and others. If I had to handicap it today, again, knowing that our numbers aren't going to be exact, the $2.2 billion we're showing on that line item, I think it might come in A little bit stronger than that, but again, directionally, I think network and storage will be down year on year.

Okay. Thank you for that. And, Mike, regarding the inventories, which came down nicely and your inventory gains were down, and you did talk about the supply chain being a little bit more efficient than it had been, do you expect to maintain those low inventory levels as we get through next year, and is that part of your pretty strong pre-cash flow guidance?

Yes, that is certainly part of our guidance. That is part of our assumption. We are constantly working on inventory levels in the organization, and I feel good about continuing to take that down further over the year.

Okay, thanks very much.

Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you. That's it for our call today. This call is concluded. Please reach out to us if you have any further questions. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.