Jabil Inc.

Greetings. Welcome to the Jabil second quarter of fiscal year 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Adam Berry, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Jabil's second quarter fiscal 2024 earnings call. Joining me on today's call are Chief Financial Officer Mike Destor and Chief Executive Officer Kenny Wilson. Over the next few minutes, Mike and I will review our Q2 results, update current demand trends, and provide new guidance for fiscal 24. We will then turn the call over to Kenny, who will provide several of the building blocks that give us confidence in our strong outlook for fiscal 25. Before we begin, 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 the investor relations portion of the website. At the conclusion of the call, The entirety of today's presentation will be posted for audio playback. I now ask that you view the slides on the website and follow along with our presentation, beginning with the 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. 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 31st, 2023, and our other filings with the SEC. The 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, I'd now like to shift our focus to our second quarter results, where the team delivered approximately $6.8 billion in revenue, roughly in line with the guidance range we provided, as a majority of the businesses performed extremely well against the updated guidance we provided back in December. Core operating income for the quarter came in at $338 million, or 5% of revenue. This was up 20 basis points as a percentage of revenue year over year due to a strong mix of business led by automotive and healthcare, while also supported by an ongoing mix shift within our networking and storage and markets. Net interest expense for the quarter came in higher than expected at $72 million, reflecting higher levels of inventory during the quarter. It's also worth noting that we successfully closed on the sale of our mobility business to BYD Electronics during the quarter for approximately $2.2 billion. As a result, GAAP operating income was approximately $1.1 billion, and our GAAP diluted earnings per share was $7.31, reflecting the substantial gain associated with the sale at the end of December. Core diluted earnings per share for the quarter was $1.68, five cents above the midpoint of our guidance range provided in December. Now turning to our performance by segment in the quarter. Revenue for the DMS segment came in at $3.4 billion, down approximately 16% from the prior year, driven almost entirely by year-over-year comparisons for the mobility divestiture. On a like-for-like basis, our DMS segment performed very well, led by approximately 11% growth in our automotive and transportation businesses. Core operating margin for the segment came in at 5.6%, 100 basis points higher than the same quarter from a year ago, reflective of the ongoing mix shift within our DMS business. Revenue for our EMS segment came in at $3.3 billion, down roughly 18% year over year, and roughly $100 to $200 million below our expectations for the quarter. The majority of our year-on-year revenue decline within EMS was driven by our move to a consignment model within our cloud business and lower revenue in markets like 5G, renewable energy, and digital print as expected. However, unexpectedly and towards the end of the quarter, Our 5G and renewables businesses were both negatively impacted by yet another decline in demand associated with those end markets. For the quarter, core margins for the EMS segment were 4.4%, down 70 basis points year over year. Next, I'd like to begin with an update on our cash flow and balance sheet metrics as of the end of Q2, beginning with inventory, which came in nine days higher sequentially to 87 days. net of inventory deposits for our customers inventory days were 62 which was quarter on quarter increase of four days. Our second quarter cash flows from operations came in at $218 million, while net capital expenditures totaled $170 million, resulting in $48 million in adjusted free cash flow during the quarter. During the quarter, we repurchased 6.5 million shares for $825 million, leaving us with approximately $1.2 billion remaining on our current repurchase authorization as of February 29th. With this, we ended the quarter with cash balances of $2.6 billion and total debt to core EBITDA levels of approximately 1.2 times. In closing, Q2 is largely a solid quarter. For starters, the divestiture of our mobility business and the allocation of those funds towards the share buybacks reflect the strategic intent of this management team to both reshape the business where appropriate while also maintaining healthy returns to shareholders. At the same time, the business is performing pretty admirably despite considerable declines in two of the end markets we serve. as evidenced by our ability to deliver higher margins despite these headwinds. And finally, I'll leave you with a bit of optimism as we look ahead to fiscal 25 and beyond. As we think about the adjacencies across the end markets we serve, it's becoming clear that there's a common theme forming among a number of the end markets specific to the surge of artificial intelligence and the impact it will have on our customers' business well into the future. And with this surge, there's a proliferation of data being created by EV and autonomous vehicles that needs to be harnessed. In the healthcare industry, we're in the early innings of getting our arms around the benefits of AI in the operating room. And in our cloud business, we're seeing significantly increased demand for our services related to AI specific to hardware manufacturing and design. And perhaps most exciting, this enthusiasm is beginning to turn into tangible results. For instance, our AI GPU volume in the first half of 2024 is 200 times that of the level of 2023. So there's a lot to be excited about as we look a little bit further down the road. In a few minutes, Kenny will share his thoughts on fiscal 25 and why he believes our original outlook of 1065 remains attainable despite a transitional fiscal 24. First, I'll hand the call over to Mike, who will provide more details on fiscal 24, including an update on our growth outlook by end market. With that, thank you. I'll now hand the call over to Mike.

Thanks, Adam, and good morning, everyone. Over the next few minutes, I plan to provide more information on the following. First, I'll walk you through our financial outlook for Q3 and updated outlook for FY24. I'll provide an update on why we're confident in our growth opportunities for FY25. And then I'll provide an update on our accelerated share buyback execution plans, which are progressing ahead of schedule. With that, let's turn to the next slide for our third quarter guidance. Towards the end of our second quarter, we experienced a sudden slowdown within our 5G and renewable energy end markets, which we expect will continue through the second half of FY24 and result in lower than expected revenue for the last two quarters. Within our renewable energy business, the inventory correction that began in our Q1 is now expected to persist through the balance of our fiscal year as customers in this end market lower demand forecasts towards the back half of February. The renewable energy team has done an excellent job consolidating the supply chain within our current customer base, and we will have a higher overall share of our customers' business as we move towards the end of Q4. In 5G, towards the end of the quarter, infrastructure rollouts slowed quicker than expected as faster-growing markets like India substantially pulled back on all 5G infrastructure investments. As a result of these two market dynamics for Q3, we expect total company revenue to be in the range of $6.2 billion to $6.8 billion. Core operating income for Q3 is estimated to be in the range of $325 million to $385 million. Gap operating income is expected to be in the range of $221 million to $301 million. Core delivered earnings per share is estimated to be in the range of $1.65 to $2.05. GAAP delivered earnings per share is expected to be in the range of $0.82 to $1.38. Net interest expense in the third quarter is estimated to be $75 million. Now, moving on to full year guidance on the next slide. At a high level, with the exception of the near-term dynamics within our renewable energy and 5G markets, the majority of our expectations for revenue by end market this year remains largely in line with our thoughts in December. Importantly, for the year, we continue to expect year-on-year growth across some of our core end markets, which are still experiencing year-on-year growth, notably in electric vehicles, healthcare, and AI cloud data centers. Moving to the next slide. Despite the revenue headwinds in the near term, we're confident that we will be able to be more resilient as we've diversified across geographies, products, customers, and end markets. Because of this, we're not anticipating the same level of margin erosion traditionally seen in past slowdowns. Our diversified approach, global footprint, and strong relationships with customers give us confidence in weathering these near-term challenges. We're adapting, staying focused on margins and cash flow, and committed to delivering value. Notably, for FY24, we expect core operating margins to come in higher than we expected in December at 5.6%. Three reasons largely account for our ability to drive margins higher despite lower revenue. First, As our agile model allows, we pushed our planned investments and costs that will plan to support new ramps in renewables in the back half of the fiscal year. Because of this, deleveraging is limited. Second, we expect to offset lower revenue with fixed cost recoveries from 5G and renewable energy customers. And third, we made progress with our efforts to align our cost structure and footprint with our go-forward business. All of this gives me confidence in our ability to deliver core operating margins of 5.6% in FY24 and positions us well for future margin expansion as we drive revenue growth higher on an optimized cost structure. Putting it all together for FY24 on the next slide. We expect our improved mix of business and optimization efforts will drive incremental operating leverage thereby giving us the confidence to raise our core operating margin guidance to 5.6% for FY24 on revenue of $28.5 billion. We expect the dynamic to result in core EPS of $8.40, which is reflected by improved core operating income margin and accelerated share repurchases. Importantly for the year, we also remain committed to generating more than $1 billion in free cash flow. Moving to the next slide. Overall, we feel good about the trajectory of our end market portfolio and are well positioned to drive growth in FY25, headlined by continued growth in automotive, healthcare, and AI data centers, along with anticipated recoveries in areas of our business that have contracted this year. Globally, both EV and hybrid platforms continue to outpace ICE unit growth rates, albeit at a lower rate than we had originally anticipated at the beginning of the fiscal year. Our EV business is supporting a number of new vehicle platforms with multiple customers in areas such as next-gen compute and control modules, power conversion, battery management, LiDAR, and other sensors, as well as charging solutions. Additionally, we were recently awarded new business in optical camera modules where OEMs are pre-deploying optics hardware capabilities, enabling the rollout of different levels of autonomous driving through software updates. It is important to note the majority of the year-on-year growth we expect in EVs in FY25 will be driven by new programs and will be less reliant on volume growth with existing customers. These new platforms gives us confidence in our expectations of another year of growth for EVs and FY25. Longer term, Jabil is well positioned to support both EV and hybrid technologies as they continue to take a larger overall share of auto unit growth globally. Within our healthcare business, we see significant opportunity to offer critical solutions and capabilities to customers outsourcing complex tasks. J-Wool's credibility in healthcare as the largest EMS provider in the space positions us well to take advantage of the growing outsourcing of manufacturing trend. In FY25, we anticipate another year of growth in our base business as we continue to explore opportunities in new capabilities and B2B transactions similar to our strategic collaboration from a few years ago. And in the data center space, there is a common theme forming among a number of our end markets related to the surge of investments in AI and ML. The pace of AI investments continues to accelerate and Jabil is winning a fair share of this growing pie as we have positioned ourselves well to assist our customers build out next generation AI data centers. Our teams are quickly diversifying and winning share across multiple end markets in the AI data center infrastructure space, where we're seeing growth in AI GPU rack configurations, accelerated optical switches for AI backend networking applications, silicon photonics, liquid cooling capabilities, and power and energy storage. Given our success to date in this space, we now expect AI-related net revenue across multiple end markets to be approximately $6 billion in FY25 are an increase of 20% year-on-year. Within the semi-cap market, we continue to anticipate demand to remain muted for FY24. However, overall market dynamics are expected to improve as commentary across the industry suggests recovery may be on the horizon with the growing expectation that things improve towards the end of this calendar year as fab utilization takes higher and memory inventory normalizes. And in renewables, as we look to FY25, while we expect this end market to recover very slowly, we're winning new business and market share along with the aforementioned consolidation within our current customer base. Longer term, we remain well positioned to support secular growth in the renewable energy infrastructure space due to Jabil's unique combination of power engineering expertise in region manufacturing and supply chain capabilities. Looking forward, we're excited about the underlying momentum across our diversified portfolio and are well positioned to drive growth in FY25. Next, I'd like to provide an update on our share repurchases. In December, I outlined our intentions of executing a series of accelerated buybacks for the balance of the $2.5 billion repurchase authorization in FY24. I am happy to say that we're ahead of schedule with $825 million repurchased in Q2. This brings our year-to-date repurchase amount to 10.4 million shares for $1.3 billion for an average purchase price just under $127 per share. We fully anticipate completing the remaining $1.2 billion on our current repurchase authorization in FY24 and will continue to opportunistically optimize our repurchases. With the plan in place and progress to date, I expect WASO to be in the range of $123 to $126 million for FY24 and approximately 110 to 113 million in FY25. On the next slide, in summary for FY25, I'm excited about the underlying momentum across a diversified portfolio, and I'm confident that we're well positioned to drive multiple paths of growth in FY25 as a result of the following. Consolidation of share in the renewable energy space. Expected recovery of the semi-cap end market. Confirmed market share gains with multiple existing customers. New programs booked with new customers. And I am particularly excited about a silicon to solution strategy which will help accelerate the infrastructure that will be required to fuel the AI ML macro trend in the market. This is borne out in the continuing mix shift of our networking and storage end market where we continue to replace legacy lower margin networking equipment with higher margin AI driven equipment. On top of all this, when you consider our optimized cost structure, we are well positioned to expand core margins to more than 5.7%. In addition, accelerated share repurchases and expected lower net interest expenses gives me confidence in our ability to deliver core EPS of $10.65 in FY25. In my view, Jaywood is not just more diversified, but also significantly more resilient than we were several years ago due to our intentional efforts to invest and align our resources with areas in key end markets. which offer higher returns and multi-year secular growth opportunities. Thank you for your time today and for joining us this morning. I'll now turn the call over to Kenny.