Jabil Inc Q3 FY2020 Earnings Call

Greetings, and welcome to the Jabil 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. 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 Dastoor. Please note that today’s call is being webcast live, and during our prepared remarks, we will be referencing slides. To follow along with the discussion and view the slides, you will need to be logged into our webcast on jabil.com. At the end of today’s call, both the presentation and a replay of the call will be available on Jabil’s Investor Relations website. During today’s call, we 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. Jabil 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 Mondello.

Thanks, Adam. Good morning. I appreciate everyone taking the 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 in environments that shift suddenly and unexpectedly. To 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. 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 catalysts for the quarter. We saw strong demand in health care and packaging, cloud, edge devices, and mobility. In our health care 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, touch-less 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 & 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 becomes 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 million 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 correct 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 can 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 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, Mark. 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 were the 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 average 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 smartwatches. In health care, 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, touch-less 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 semi-cap, we’re seeing solid demand driven by the ongoing recovery in this end market as infrastructure spending continues. New fab plant investments are multiyear investments, and so far, customers are marching ahead with their 2020 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 to date. 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 end markets, we are seeing increased demand for networking products due to work-from-home dynamics, offset by cautious overall enterprise spread. 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 PPE 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 forecast. To me, this is a meaningful and further illustration that our diversification strategy is working. GAAP operating income was $59 million, and GAAP diluted loss per share was $0.34. 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, our non-U.S. entity’s tax incentive was extended by the government for an additional 10 years, which resulted in the revaluation of certain of those entities’ 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 diluted earnings per share were $0.37. It’s worth noting that the reevaluation of deferred tax assets negatively impacted our core diluted 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 the 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 took steps to reduce our worldwide workforce. For Q3, we incurred approximately $50 million related to this, inclusive of severance costs and extended health care benefits to those impacted. We anticipate these costs will result in a net benefit to core operating income of $40 million 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 and 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 repurchases to $190 million. Turning now to our fourth quarter guidance that includes approximately $45 million to $55 million in COVID-19-related costs. DMS 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 diluted earnings per share is estimated to be in the range of $0.46 to $0.86. GAAP diluted earnings per share is expected to be in the range of $0.04 to $0.50. 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 core 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’ve reduced our revenue outlook for FY20, driven by automotive, industry and energy, and print & retail, which has been partially offset by continued 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 million 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.

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 customer product-specific questions. We appreciate your cooperation. Operator, we are now ready for Q&A.

Thank you. The floor is now open for questions. Our first question is from Ruplu Bhattacharya of Bank of America. Please go ahead.

Hi. Thank you for taking my questions and congrats on the strong quarter and guidance. Mark, for my first question, I want to ask you about your thoughts on DMS segment seasonality. In a typical year, 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 also have a health care segment that is having strong revenues. So, at a high level, can you just help investors understand how you think about DMS revenue and margin seasonality?

Sure, I'd prefer to dive into some details during our discussion in September. I mentioned in the prepared remarks that despite the current challenging environment, we aim to meet with all investors in September to share our thoughts on everything for fiscal '21. On the surface today, I want to clarify that DMS and JGP are not interchangeable terms. Our DMS business consists of various components. Looking ahead to what we may discuss in September, I will consider the state of our Green Point business, the mobility sector, and our significant diversification within JGP. Additionally, the substantial growth we’ve experienced in the healthcare packaging area suggests that the cyclicality we observed in the DMS business two to three years ago may stabilize over time.

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 just 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 5 to 6. I’d say today, we’re back to an 8 or 9. 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.

Yes. Thanks, Ruplu.

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

Thanks and good morning Mark, before the pandemic, you were thinking about just under $1 billion of non-GAAP operating income and the new guidance looks like you’d end up just under $800 million at the midpoint, 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 cost expected for fiscal ‘20. So, if you could just touch on maybe some of the nature of the cost 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?

Adam, I'll answer that, and if I miss anything, feel free to ask me again. Before COVID, going back to September, we projected $960 million in core income for FY20. In our December call, we raised that estimate to $980 million. Currently, based on Q4 estimates, we're around $805 million. If we consider the December figure of $980 million and the current $805 million, the difference is $175 million. I mentioned that COVID-related costs for the year would be around $160 to $170 million. Therefore, the gap of $175 million since December is primarily due to COVID-related expenses, estimated at $160 to $170 million, while the rest is relatively minor and comes from various fluctuations. Regarding COVID expenses, we discussed in March a $53 million charge primarily for February. During that monthly period, COVID costs were about $60 million to $65 million. In the April, May, and June timeframe, as Mike pointed out, COVID expenses were approximately $60 million in Q3. For Q4, Mike indicated an expectation of $50 million in COVID costs. Fortunately, trends are showing a slight decrease, likely due to our improved processes and protocols for managing factory operations while ensuring safety. The COVID-related costs include direct expenses for protocols like temperature testing and PPE across all factories, consistent with our COVID playbook. There have been disruptions in Q3 due to government or state shutdowns, and when confirmed COVID cases occurred, we temporarily closed factories for testing, continuing to pay idle labor which we believe is the right approach during this time. Overall, our factories are operating at about 90% to 95% capacity, reflected in our revenue. However, even with this operational level, we still expect some isolated disruptions in Q3 and foresee similar issues in Q4, which we've tried to account for as best as possible for the upcoming 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 as we think about the fiscal ‘21 plan that you laid out that had that $4 EPS number, if I think about what’s going on today, you’ve got an incremental $15 million cost optimization on top of it. It seems like DMS ramp is well on track. What would be maybe the headwinds today versus that initial $4 EPS number plan?

Let’s discuss that in September. I don’t mean to be evasive, but our team is a bit tired. I want to emphasize how proud I am of our frontline workers at the factories who are dealing with these challenges every hour, every day. Their efforts have allowed us to revise our revenue expectations from $26 billion to about $26.5 billion or $26.7 billion by December. If everything goes smoothly in the coming 60 to 75 days, we’re on track to exceed $26 billion this year, with estimates around $26.2 billion. This achievement is a testament to our factory workers, who continue to impress me despite their exhaustion. We plan to provide more insights in September, not as a formal Investor Day since the circumstances are uncertain, but to give a thorough overview of how we view the future along with comprehensive assumptions. I often mention that our Company is diversified, and this diversity has been key in maintaining solid revenue levels despite the circumstances. In the simplest terms, if COVID had never happened, I believe our leadership team would feel confident in achieving our original targets.

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 we look at the world getting back post-coronavirus, are there changes for more 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 putting together something in St. Petersburg may have a different cost profile than putting it together in a different country and then shipping it from the lowest cost, may be a little more expensive. But can you kind of talk about are you seeing that having discussions, and does that really impact your profitability?

Could you clarify for me if you are asking whether we are seeing people moving business around, specifically if they are moving business out of China or back to the U.S.? Are you inquiring about all of those scenarios or just one of them?

Yes, are those discussions taking place and are they significant? We've heard about the protocol trade wars, and with the added complexity of a healthcare pandemic, I'm curious if this leads to a less concentrated footprint. Jabil has a strong global presence, so I assume you must be having some conversations about costs in this broader context. That's all.

Okay. I'll do my best. I think it was during the September call when we discussed the trade tariff situation, which was the main topic at the time, but then COVID became the dominant issue and trade tariffs took a backseat. What we indicated was that our budget for FY20 suggested there would be costs related to trade tariffs in the first half of the year as some customers aimed to hedge against reliance on China. However, not many customers have actually left China. Currently, we don't see a significant number of customers moving away. Some have hedged their exposure to China with new products, and that situation has unfolded largely as we anticipated. Then COVID hit, and conversations with customers have slowed down as everyone is trying to navigate the uncertainties, including us. If I were to reflect on the strategic discussions from September, not much has changed since then. I believe people are becoming more cautious about having their products manufactured at a single location, which could be due to trade tariffs, natural disaster concerns, or the impact of COVID. The positive aspect in all this is that there will still be significant demand for production capabilities, and not many companies have the large-scale capacity that we do. Our company has a strong position in that respect. Mike mentioned our solid balance sheet and the liquidity we have for ongoing investments and optimizing our supply chain. As the situation evolves, I think we are in a reasonably strong 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 Coster of JP Morgan. Please go ahead.

Hi. This is Paul Chung on for Coster. Thanks for taking our questions. So first, just on DMS, can you give us a sense for the relative strength between health care, packaging, and mobility? From your prepared remarks, they strength seems quite broad, but judging by your unchanged fiscal year guide for this segment, assume health care was the largest driver, which obviously makes sense. But if you could comment there and how these trends extend into in 4Q? And then I have a follow-up.

I understand you're asking for a breakdown of the strengths and weaknesses of DMS. Tactically and possibly strategically, considering the post-COVID environment, both Mike and I discussed that companies will be approaching things differently moving forward. I have had numerous conversations with our customers and their CEOs, and we've talked about their future travel and business conduct. Our new normal emphasizes care and intimacy for customers, which I believe will guide our travel expenditures. Overall, our annual travel budget has decreased, and we will be leveraging more digital tools. This is particularly relevant for our mobility and edge device businesses, which are likely to remain strong as people continue to work remotely using digital solutions. Additionally, our strategic initiatives in health care and packaging, including some involvement in PPE manufacturing, are providing us with extra support. Although I don’t recall the specific figures, based on the blue-green chart we provided in September, I noted that health care packaging revenue for FY19 was just over $3 billion, and now it exceeds $4 billion. If current trends persist, I anticipate that health care and packaging could rise above the $4 or $4.2 billion currently indicated on our charts.

Got you. And then, just a quick follow-up on health care, specifically about elective surgeries and other products of that nature that are kind of related to COVID spurred demand. How did those products do in the quarter? And do you see ramps from maybe pent-up demand possibly in the coming quarter? Thank you.

From our observations, elective surgery demand has decreased, which is not surprising. However, we saw overall strength in health care that offset this decline. Even though elective surgery demand was down, both PPE and other areas of our health care business were stronger than the drop we experienced in elective surgeries in the third quarter. It's worth noting that there might be a gradual decline in PPE demand over time, and we will discuss its potential impact on health care in September. Additionally, I believe there will be significant pent-up demand for elective surgeries since many of these procedures cannot be completed due to logistical issues during COVID. Looking at our health care packaging business from fiscal 2018 through 2022, I feel confident that this sector is on a positive growth trajectory.

Thank you. Our next question is coming from Steven Fox with Fox Advisors. Please go ahead.

Thank you. Good morning. Mark, could you provide an update on the improvements you've made in the margins of some health care programs and perhaps give a broader overview as well? Additionally, can you discuss recent trends in consumer packaging? You noted a pickup in that area, and I know you were enhancing operations in that business as we approached the COVID pandemic. Should we expect any long-term adjustments for that business moving forward? Thank you.

In terms of health care margins, we discussed this in September, particularly the strategic addition of JJMD. Our comments from that time still apply. We mentioned a multiyear transition with JJMD regarding top-line and bottom-line margins, which is progressing as expected. I foresee this trend continuing into fiscal '21 and '22, which is a positive outlook. Regarding our consumer packaging business, Brenda, who manages that area, offers significant experience. While this segment hasn't historically been significant within Jabil, I believe it has the potential to contribute positively to our margins. Brenda and her team are focusing on how to integrate technology and engineering into what is often a basic molding market. I'm very optimistic about the future of this business, perhaps even more than I am about health care. As for margins overall, this year has been challenging due to COVID. Adam raised questions about our top-line performance, which remains strong—this reflects our diversification. If we consider the impact of COVID-related costs, I believe that despite disruptions, we would have achieved margins of around 3.6% to 3.7% this year. We will provide further insights into our margin strategies for '21 in September, and I recognize we have a target of $4 a share and 4% margins that we will also address in a few months.

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

Yes.

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

Thank you for taking my question. I know some of this will be covered in September, but I'm interested in the revenue generated beyond health care. You've highlighted this significantly during the quarter due to increased demand related to COVID. I'm trying to understand the underlying business. Were there any surprising areas of strength outside of what you've already mentioned? I'm curious if there are pockets of growth in sectors like 5G or elsewhere that are contributing positively to the fundamentals, even beyond the boost from COVID. Thank you.

I was surprised by the stronger-than-expected uptick we saw in health care related to COVID, compared to what we anticipated back in March. While I believe this trend will be sustainable for a time, it will eventually level off. The pent-up demand for elective surgeries also plays a role in this shift. Our cloud business performed as expected, showing continued strength. However, I was taken aback by how widespread the adoption of digital learning and video conferencing has become, especially during COVID, which highlighted the immense impact on a global scale. I believe this trend will not be temporary. Regarding our edge device business, effective communication remains essential for people, meaning they will seek out tools that facilitate strong human connections—whether it's augmented reality, WebEx, Microsoft Teams, Zoom, or other platforms. I think we observed some growth in this area in the third quarter, and I anticipate continued strength in the fourth quarter and into 2021 and beyond. I would never characterize 3D as something optional. I believe 3D additive is finally becoming a key technology. Setting aside COVID, I see this as a lasting trend in certain areas. We intend to invest heavily in this, particularly in health care, defense and aerospace, and automotive to begin with.

Our next question is coming from Matt Sheerin, Stifel. Please go ahead.

My question, Mark, regarding the $50 million in incremental cost-cutting moves that you mentioned this morning. 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 in your adjusting, or are there some mix issues as well?

It’s unrelated to any of that. Throughout my extensive time at Jabil, we experience varying growth rates within different sectors of the Company, sometimes increasing and other times decreasing. We underwent a significant period of growth, nearly doubling the company in a relatively short time. I believe it's essential for leadership teams to periodically assess what has been effective and what hasn't, and how we can improve, essentially being adaptable and open to change. The organizational structure we've maintained over the last several years has been instrumental in our remarkable growth. We have started discussing our strategy concerning the next few years for the Company. We have successfully diversified our revenue, and we have communicated to investors that we plan to take a brief pause to concentrate on cash flows and profit margins. Prior to COVID, we were engaged in discussions about optimizing our structure and eliminating friction points within the business, ensuring that everyone can access our capabilities smoothly and quickly. This work was ongoing through the fall and into the winter. Then COVID occurred, prompting us to reconsider cost reductions within the business. This approach is not a reaction. As both Mike and I mentioned in our prepared remarks, the third quarter showed us some areas of strength alongside some weaknesses. The current actions are not driven by that but are more structural and long-term in nature. I believe that these costs are unlikely to return once COVID is over, and I feel confident about how this positions the Company for 2021-2022 and beyond. As a leadership team, we had to decide whether this was the right time to implement such changes, particularly with everyone working remotely, as it can be challenging. We chose to proceed with it because if we manage it well and transition through this period with the new structure as conditions improve, it will provide us with a strong foundation to operate the Company effectively.

Okay, great. That was very helpful. As a follow-up, Mike, regarding the balance sheet, it appears that your inventory days decreased sequentially, which is commendable considering the supply constraints you and your customers experienced. You still have an increase year-over-year. Looking at the direction of your inventory, do you anticipate it will remain somewhat elevated as customers seek to maintain buffer stocks? Are there still supply constraints, or do you expect inventory levels to decrease over time?

In the second quarter, the inventory increased to 70 days due to some issues in China where nothing was being shipped out. This figure was unusually high. We have reduced it to 67 days this quarter, which is progress, but not as much as I had hoped. My current target is to reach 60 days, and in the medium to long term, we should aim for the mid to low 50s. That is our eventual goal. We won't achieve that right away next quarter, but I am confident we will get there over time.

Okay. Thanks very much.

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

Yes. Good morning. And thanks for taking the questions. First, I just wanted to better understand if Jabil is able to pass on maybe extra costs from COVID mitigation to customers on your existing projects. And are these costs related to COVID mitigation factor into the pricing discussion you’re having for new business?

Hey, Mark. The $160 million to $170 million for the year I spoke to the net cost. So, those conversations are going on all the time. Over 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 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 conversation.

Okay. That’s helpful. My second question, on the last earnings report, the Company didn’t have enough visibility to provide guidance, and there were uncertainties at that time related to both production and customer demands. And on this call, you’ve 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 and ordering and how much visibility has improved and how that maybe led to your comfort in being able to provide guidance as we sit today for this call? Thanks.

Let me put it this way. The methods and tools we use to assess demand remain unchanged. I'm actually pleased we have these tools and analytics because they are useful when things are uncertain. Overall, our visibility is the same, but the real challenge is how well our data and resources align with our customers' expectations. This is where our tools prove most valuable; if there’s a gap between our expectations and the demand signals we receive, it leads to productive discussions. I anticipate continued fluctuations in our business throughout the fourth quarter and into early FY21. There’s a sense that COVID is behind us, the stock market is strong, and the world is recovering, but I don’t believe that is accurate. We decided to provide guidance for the fourth quarter because we have attempted to evaluate multiple scenarios. After considering around a dozen different possibilities, we feel confident enough to justify our fourth-quarter guidance.

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

Hi. Can you just talk a little bit about your share purchase and allocation plans? Do you plan on resuming the pays 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?

We have a $600 million authorization, and we have already utilized about $190 million of it. We will continue to be careful with our capital allocation. I want to balance buybacks with available cash to ensure that our balance sheet remains strong, and it is at the moment. So, we will certainly consider it opportunistically.

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.