Jabil Inc.

Greetings and welcome to the Jabil first quarter of fiscal year 2023 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Adam Barrett, Vice President of Investor Relations. Thank you. You may begin.

Good morning and welcome to Jabil's first quarter of fiscal 2023 earnings call. Joining me on today's call is Chairman and Chief Executive Officer Mark Mondello and Chief Financial Officer Mike Dester. 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 slides, please visit Jabil.com within our investor relations section. At the conclusion of today's call, the entirety will be posted for audio playback on our website. I'd now like to ask that you follow our earnings presentation with slides on the website, beginning with a 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 second quarter and fiscal year 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 on our annual report on Form 10-K for the fiscal year ended August 31st, 2022 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, I'd now like to shift our focus to our solid quarter. To kick off the fiscal year, the team delivered approximately $9.6 billion in revenue, well ahead of our forecast and at the top end of our guidance range, driven by even better-than-expected revenue in automotive, healthcare, and industrial. All other end markets largely performed consistent to our expectations from 90 days ago. When you put all of this together at the enterprise level, Revenue grew by 12% year over year and 7% sequentially. Core operating income during the quarter was $461 million, an increase of 15% year over year, representing a core operating margin of 4.8%. This is up 10 basis points over the prior year and in line with expectations. From a GAAP perspective, operating income was $362 million and our GAAP diluted earnings per share was $1.61. Net interest expense in the quarter came in higher than expectations at $66 million as the combination of higher interest rates and better than expected demand drove our working capital needs higher during the quarter. During the quarter, we also repurchased 2.6 million shares for $161 million. Core diluted earnings per share was $2.31, a 20% improvement over the prior year quarter and at the higher end of our range, as core operating income grew much faster than net interest expense. Now turning to the segments. Revenue for the DMS segment was $5.1 billion, an increase of 8% on a year-over-year basis and ahead of our plan from September, while core operating margin for the segment came in at 5.2%. Slightly below expectations as upside strength in automotive and healthcare was offset by operational inefficiencies associated with mobility in China. Revenue for our EMS segment came in at $4.5 billion, an increase of 18% on the year-over-year basis, while core margins for the segment was 4.3%, up 50 basis points year-over-year, reflecting solid operational execution on strong revenue growth. So in summary, another strong quarter is in the books for Jabil. And I know the team here is extremely proud of the strides we've made, to not only improve our business over the last 10 years, but also make it stronger and more resilient. In a moment, I'll turn the call over to Mark and Mike to provide some additional thoughts on our performance in the quarter and update our outlook for fiscal 23. And I think you'll see there's still so much opportunity as we move into fiscal 23 and beyond. Thanks for your time today. It's now my pleasure to turn the call over to Mike.

Thanks, Adam. As Adam just detailed, our performance in Q1 was quite strong. I continue to be extremely pleased with the strength of our business, which delivered double-digit growth in revenue, core operating income, and core delivered earnings per share in the quarter. Our diversified portfolio and continued participation in end markets with long-term secular trends was once again reflected in our Q1 performance. I'd now like to walk you through our balance sheet and cash flow performance in the quarter. In Q1, cash flow from operations was $166 million, and net capital expenditures totaled $164 million. As a reminder, our customers routinely co-invest in plant, property, and equipment with us as part of our ongoing business model. We often pay for these co-investments up front, which are then later reimbursed to us by customers. Due to the high dollar value of these co-investments from our customers and how they're reflected on our cash flow statement, it is important to net the two line items shown on the slide to reflect the true capex number and what we refer to as net capital expenditures. For the quarter, inventory days came in at 78, down one day sequentially on improved working capital management by the team. As a reminder, we offset a portion of our inventory levels with inventory deposits from our customers. Net of these deposits, inventory days were 61 in Q1, also down one day from Q4. We continue to be fully focused on bringing this metric down further in FY23 as some of the supply chain constraints continue to improve. We exited the quarter with total debt to core repair levels of approximately 1.2 times and cash balances of $1.2 billion. Turning now to our second quarter guidance on the next slide. We expect total company revenue in the second quarter of fiscal 23 to be in the range of $7.8 to $8.4 billion. At the midpoint, this anticipates DMS and EMS revenue to be $4.1 billion and $4 billion respectively. Core operating income is estimated to be in the range of $347 to $407 million. GAAP operating income is expected to be in the range of $319 to $379 million. Core delivered earnings per share is estimated to be in the range of $1.64 to $2.04. GAAP delivered earnings per share is expected to be in the range of $1.44 to $1.84. Interest expense in the second quarter is estimated to be approximately $67 million and for the year to be in the range of $265 to $270 million, which is higher than we forecasted in September due to more conservative interest rate and working capital assumptions. The tax rate on core earnings in the second quarter is estimated to be approximately 19%. Moving to the next slide, where I'll offer an update on the end market demand assumptions that we noted in September. As a reminder, our FY23 guidance assumed a moderate economic slowdown and some moderation in growth in the second half of our fiscal year. Based on what we know today, our assumptions from a demand perspective remain largely consistent. Across many of our end markets, demand has been extremely resilient, particularly in areas that continue to benefit from strong secular tailwinds like electric vehicles, healthcare, renewable energy infrastructure, 5G, and cloud. We continue to expect these secular markets to expand in the face of an economic slowdown. At the same time, we also continue to expect some consumer-centric end markets to underperform year on year, consistent with our thoughts since September. Altogether, we still expect good growth in FY23, as you'll see detailed on the next slide. Starting with our automotive business, which continues to outperform despite global supply chain issues as the transition to EV accelerates. We've seen this rapid acceleration manifest in FY23 automotive revenue growth expected to be in excess of 40% year on year. We're also expecting double-digit year-over-year growth in our healthcare business, which continues to benefit from an outsourcing of manufacturing trend and has historically been recession-resistant with long product life cycles, accretive margins, and stable cash flows. Further, our industrial business is also expected to expand by double digits this year, fueled by growth in clean and smart energy infrastructure, as government legislation, such as the Inflation Reduction Act in the U.S., accelerates investment in the space. And in 5G wireless, we continue to expect solid year-on-year growth. Infrastructure rollouts are accelerating, and our localized manufacturing capabilities are leading to growth in other geos, such as India. We expect these rollouts to play out over the next several years, regardless of near-term economic conditions. Within our cloud business in September, we detail our plan to shift certain components we procure and integrate from a purchase and resale model to a customer-controlled consignment service model. This transition, in fact, began in November, which is earlier than our expectations 90 days ago. As a result, revenue will be lower than previously expected as an incremental $300 million of components will shift to the new model. This is in addition to the $500 million of consignment impact we announced in September. Adjusting for the shift, we expect continued robust unit growth in the cloud space in FY23 and beyond. In summary, we feel the outlook for our business is solid and expect demand across many of our end markets to remain strong, with year-over-year revenue growth at an enterprise level to be approximately 3% for FY23, despite an assumed economic slowdown in the second half of the fiscal year. Now, turning to the next slide. We have intentionally structured our business with the aim of delivering core operating margin expansion, sustainable earnings growth, strong predictable cash flows, and shareholder returns. With that in mind, while we continue to expect growth in our business, despite recessionary headwinds, we have identified certain cost savings mainly in our SG&A and support organization for the second half of our fiscal year as we continue to look at doing more with less. The non-core expenses associated with our optimization activities will be approximately $45 million, with the benefits expected in the back half of the fiscal year. We anticipate these costs will result in a net benefit to core earnings per share of approximately $0.10 in FY23 and $0.20 in FY24. This benefit has been considered in our updated core EPS outlook for FY23 of $8.40. We expect the cash outlay associated with our optimization efforts to be incurred over the next two quarters. and we continue to expect free cash flow of more than $900 million in the fiscal year. We expect the momentum underway across our business to continue, even in a subdued economic environment, and feel the steps we've taken to optimize our business are appropriate and make us stronger. I would like to wish everyone a safe and happy holiday. Thank you for your time today and thank you for your interest in Jabil. I'll now turn the call over to Mark.