Jabil Inc (JBL) Q2 2021 Earnings Call Transcript

Greetings, and welcome to the Jabil Second Quarter of Fiscal Year 2021 Earnings Call. 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. I would now like to turn the conference over to your host, Adam Berry, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Jabil's second quarter of fiscal 2021 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 slides, please visit jabil.com within our Investor section of our website. At the conclusion of today's call, the entire call will be posted for audio playback on our website. Before handing the call over to Mark, I'd now ask that you follow our earnings presentation with the 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 third quarter and fiscal year 2021 net revenue, earnings, and cash flows. 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, 2020, 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 now my pleasure to turn the call over to Mark.

Thanks, Adam. Good morning. I appreciate everyone taking time to join our call today. I'll begin by offering a warm thanks to all of our people here at Jabil. Thank you for your commitment and thank you for always making safety your top priority. And stepping back and reflecting for a moment, it's hard to believe that 12 months have passed since we first encountered COVID. I think about sitting alongside Mike and Adam one year ago, here in our March 2020 earnings call, when clarity vanished and uncertainty ran wild. Yet in typical Jabil fashion, our people did what they do; they dove in and gave their very best to combat the pandemic. They did so by looking after one another while taking outstanding care of our customers. It's a point in time that I'll never forget; it's a point in time that highlights the level of respect and admiration that I have for our team here at Jabil. Their attitude and their actions continue to impress. And for sure, there is no other team I'd rather be part of. Again, much thanks to all of our employees who simply make Jabil, Jabil. Please turn to Slide 5 where we'll take a look at our 2Q results. Our second quarter came in well ahead of expectations, driven by stronger than expected product demand, solid execution, and a well-balanced contribution throughout the entire company. The team delivered core earnings per share of $1.27 on revenue of $6.8 billion, resulting in a core operating margin of 4.2%. I'm really pleased with our financial results for the quarter. Although, what's quite interesting to me is the overall construct of the business in combination with the improvements we've made to our balance sheet. All in all, our performance during the first half of the year gives us excellent momentum as we push towards the back half of fiscal '21. It also sets a firm foundation for further margin expansion as we look to FY22. As customary, Mike will provide more detail around our second quarter results during his prepared remarks. I'd now like to share a pie chart which is indicative of our commercial portfolio. Slide 6 underscores the effectiveness of our approach and the base from which we operate. Today, our business is wide-ranging and resilient; this is especially true when any individual product or product family is faced with a macro disruption or cyclical demand. Furthermore, our current business mix provides a unique set of capabilities, innovative capabilities openly shared across the enterprise with speed and precision as we simplify the complex for our customers. It's a proven formula that's trusted by many of the world's most remarkable brands. Moving to Slide 7, I'll address our updated outlook for the year. We now believe core earnings will be in the neighborhood of $5 a share, an increase of 25% from what we anticipated back in September with top line revenue coming in around $28.5 billion. This incremental revenue improves our portfolio as evidenced by another 10 basis point increase to core operating margin, which we now forecast to be 4.2% for the year. Lastly, we remain committed to generating a minimum of $600 million in free cash flow, a testament to how we're managing our capital investments. As I wrap up the outlook, it's notable that our strategy is working, our path is well understood, and how we go about producing results is important. On this last point, when we think about the how, we think about purpose; a purpose that guides us in our journey, a purpose which is grounded in a series of behaviors; behaviors such as keeping our people safe, servant leadership, ensuring a fully inclusive environment, and giving back to our communities around the world. I'm just so proud that our team is hitting the mark in all of these areas. As we transition to my final slide, I want to once again say thanks to our team. Their efforts over the past two to three years have allowed us to reshape the business as we've targeted growth in select markets; markets that largely align with secular trends. A few examples of these being 5G, personalized healthcare, electric vehicles, digital learning, cloud computing, clean energy, and eco-friendly packaging. Our team continues to develop deep domain expertise in concert with these secular tailwinds. I like the decisions we're making and what we're doing, and we do what we do while respecting the environment and safeguarding our workplace. We're committed to a workplace that encompasses tolerance, respect, and acceptance. We encourage each and every employee here at Jabil to be their true self. We strive to make the world just a little bit better, a little bit healthier, and a little bit safer each and every day. One factor that makes good companies great is possessing a value system that allows them to solve problems over and over again; we embraced this way of thinking and welcome the challenges put forth by our customers. Thank you. And I'll now turn the call over to Mike.

Thank you, Mark, and good morning, everyone. As Mark just detailed, our second quarter performance was outstanding driven by the combination of broad-based end-market strength and associated leverage, and improved portfolio mix and excellent operational execution by the entire Jabil team. We saw broad-based revenue strength across the business, most notably in mobility, cloud, healthcare, connected devices, automotive, and semi-cap. Given the additional revenue, I am particularly pleased with the strong leverage we achieved during the quarter which enabled us to deliver a strong core operating margin of 4.2%. And finally, our net interest expense came in better than expected during the quarter, due in large part to better working capital management coupled with the proactive steps we've taken over the past year to optimize our capital structure. Putting it all together on the next slide, net revenue for the second quarter was $6.8 billion, $300 million above the midpoint of our guidance range. On a year-over-year basis, revenue increased by $700 million or 11%. GAAP operating income was $236 million, and our GAAP diluted earnings per share was $0.99. Core operating income during the quarter was $285 million, an increase of 78% year-over-year representing a core operating margin of 4.2%, a 160 basis point improvement over the prior year. Net interest expense in Q2 was $33 million and core tax rate came in at approximately 23%. Core diluted earnings per share was $1.27, a 154% improvement over the prior year quarter. Now, turning to our second quarter segment results on the next slide. Revenue for our DMS segment was $3.6 billion, an increase of 26% on a year-over-year basis. The strong performance in our DMS segment was extremely broad-based as several of the end-markets we serve are becoming increasingly critical such as connected devices, healthcare, automotive, and mobility. Core margins for the segment came in at an impressive 5.1%, 210 basis points higher than the previous year, an incredible performance by the team. Revenue for our EMS segment was $3.2 billion, also reflecting strong broad-based demand. Core margins for the segment were 3.1%, 80 basis points over the prior year. Turning now to our cash flows and balance sheet. Cash flows provided by operations were $20 million in Q2 and capital expenditures, net of customer co-investments, totaled $152 million. We exited the quarter with a cash balance of $838 million. We ended Q2 with committed capacity under the global credit facilities of $3.8 billion. With this available capacity, along with our quarter-end cash balance, Jabil ended Q2 with access to more than $4.6 billion of available liquidity, which we believe provides us ample flexibility. During Q2, we repurchased approximately 1.9 million shares for $82 million. At the end of the quarter, $254 million remained outstanding in our current stock repurchase authorization, and we intend to complete this authorization during the second half of FY '21 as we remain committed to returning capital to shareholders. Turning now to our third quarter guidance. DMS segment revenue is expected to increase 19% on a year-over-year basis to $3.5 billion; this is mainly due to strong end-market outlook. EMS segment revenue is expected to be $3.4 billion, an increase of 1% on a year-over-year basis. It's worth noting our EMS business remained strong and healthy. The modest increase is reflective of our previously announced transition to a consignment model in the cloud business. We expect total company revenue in the third quarter of fiscal '21 to be in the range of $6.6 billion to $7.2 billion or an increase of 9% on a year-over-year basis at the midpoint of the range. Core operating income is estimated to be in the range of $220 million to $270 million. Core diluted earnings per share is estimated to be in the range of $0.90 to $1.10. GAAP diluted earnings per share is expected to be in the range of $0.69 to $0.89. Next, I'd like to take a few moments to provide an update on the long-term secular trends underway across our businesses which we believe will drive sustainable growth across the enterprise in FY '21 and beyond. In healthcare today, the industry is undergoing tremendous change due to rising costs, aging populations, the demand for better healthcare in emerging markets, and the accelerated pace of change and innovation. Consequently, we are witnessing healthcare companies shifting their core competencies away from manufacturing towards innovative and connected product solutions. We're in the early days of outsourcing of manufacturing in the healthcare space. On top of this, we are also seeing the impact of connectivity and digitization across healthcare. I expect these trends to accelerate over the next few years. Our deep domain expertise within the healthcare industry uniquely positions us to build technology-enabled products that help our customers excel in today's evolution of healthcare. Another end-market experiencing a rapid shift in technologies is the automotive market. Today, electric vehicles account for less than 2% of total vehicles in the market. Climate change, fuel efficiency, and emissions are ongoing concerns and regulatory policies worldwide are beginning to mandate more eco-friendly technologies. As a result, OEMs are making a substantial investment into vehicle electrification effort. Jabil's long-standing capabilities and over 10 years of experience and credibility in this space have positioned us extremely well to benefit from this ongoing trend. Turning now to 5G; 5G will transform the way we live, work, play, and educate. As the underlying infrastructure continues to roll out, 5G adoption is accelerating. Jabil is well positioned to benefit from both the worldwide infrastructure rollouts and with devices which would be needed to recognize the full potential of a robust 5G network. 5G is also accelerating secular expansion of cloud adoption and infrastructure growth. This, coupled with the value proposition Jabil offers to cloud hyperscalers, is helping us gain market share in an expanding market, evidenced by the significant growth over the last three years. The value proposition that continues to resonate with our customers is our design-to-dust capabilities which incorporates engineering, manufacturing, and eco-friendly decommissioning observers, all within collocated facilities. This is incredibly powerful as accelerating cycle times, security, and transparency at every step of the hardware lifecycle become continually more important to our US domicile hyperscalers. Shifting now to packaging; we are uniquely positioned to benefit from the global shift to smart and eco-friendly packaging. As consumers become more informed about the environmental impact of plastic waste, demand for sustainable packaging solutions is accelerating. And then finally, within semi-cap, the demand for semiconductors has never been higher with the accelerated convergence of technologies and the associated data generation and storage needs. Nearly every part of the economy runs on silicon today. Jabil serves the semi-cap space with end-to-end solutions, spanning the front end with design and complex fabrication equipment along with the back end with validation and test solutions. In summary, I'm extremely pleased with the sustainable broad-based momentum underway across the business which has allowed us to deliver much better-than-expected results in the first half of FY '21. As we turn our attention to the back half of the year and beyond, we fully expect the long-term secular tailwinds that are driving our business to continue. This coupled with our improving portfolio mix and lower interest and tax expenses has given us the confidence to meaningfully raise our FY '21 estimates for revenue, core operating income, core margins, and core earnings per share. We now expect core operating margins to be 4.2% on revenue of approximately $28.5 billion. This improved outlook translates to core earnings per share of approximately $5. And importantly, despite the stronger growth we remain committed to delivering free cash flow in excess of $600 million for the year. We've been working extremely hard as a team to grow margins, cash flows, and positively impact our interest and tax. I am very pleased with our team's exceptional execution of our strategy on all fronts. With that, I'll now turn the call over to Adam.

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

Our first question today is from Ruplu Bhattacharya of Bank of America. Please proceed with your question.

Hi, thanks for taking my questions and congrats on the strong results. You know, I had a couple of questions. Maybe Mark, first question on the EMS side. You're guiding now to $13.4 billion that's almost a billion dollars higher than the previous guidance. But the operating margin is still guided at 3.6%. So just curious, I mean, why isn't the operating margin target for that for this year for EMS moving up a little bit more? Just if you can just talk about the puts and takes on that. Thanks.

Thanks, Ruplu. I feel good about where the margin. I think you're right, we look at the overall corporate margin for the year, we think we'll be around 4.2%. And EMS will be in the range of I would guess 3.6%, 3.7%. I look at that relative to fiscal '19. If I go back that far, and I think EMS in '19, was around 3% all in. Last year, we're below that and I acknowledge that was a COVID year with excessive COVID expenses. But I feel pretty good about that business overall. I think we're doing the right things in cloud. I look at that business today in terms of a mix of legacy business, some businesses that we've gotten a bit of a nudge or help with COVID. But most importantly, Ruplu, I think about things that Mike was talking about in his prepared remarks in terms of trends that we think are going to be around for a while. Things like 5G, electric vehicles, cloud computing, clean energy. So I feel good about the year. We continue to make OpEx investments as well in the EMS segment, but I think we're on a good trajectory. The things I obsess about or worry about. The condition of the EMS business, the next two, three years isn't one of them.

Okay. Thanks for clarifying that. And that makes sense. Just on the mobility side, I want to ask a general question. I mean, are you concerned or how concerned are you about any configuration changes that might come up in the rest of the year? Can you maybe at a high level, just talk about how prepared Jabil is this year versus in prior years about handling mobility-related, you know, volatility that can come up in the rest of the year?

I don't want to speculate on any configuration changes or anything like that. Our relationship in that space with our main customer there is super solid. And when I just think back about the last two, three years of execution, I've got again, very little doubt in our ability to execute on the mobility side, configuration changes or not. So again, not an area that then I'm losing a lot of sleep over.

Great. Thanks for the details and again, congrats on the quarter end and the strong guide. Thank you.

The next question is from Adam Tindle of Raymond James. Please proceed with your question.

Okay, thanks. Good morning. Mark. I wanted to start with a question on operating margin and acknowledge it's been very strong so far. A two-parter just on near term and long term moving forward. So first on near term, your Q3 guidance implies that total company operating margin is going to be down, maybe somewhere around mid-3% range or so and then back up to around 4% or so in Q4, based on the EPS guide if I got that correct, doesn't look like that's volume related because revenue is going to be flattish during this time. So maybe just more color on drivers of the Q3 dip and rebound in Q4. And secondly, you mentioned longer term as you exit this year with a four handle. The trajectory that that puts you on as you think about fiscal '22 and beyond, because you said you wanted to build on that?

Yes, thanks Adam. Q3 is always a little bit of a debit for us. And, as much as we take a lot of I don't know if the words pride we feel really good about the overall mixing of the business. What we've done in the last two, three years. But again, we always see a little bit of a soft spot in terms of enterprise level, in terms of up margin. I think you're right, enterprise margins for Q3 will be around the 3.5% range. And again, I compare that to last year, which maybe it's nonsense, because of COVID it's up substantially year-on-year. I'm going off a memory, but I got to believe that if we went back to fiscal '19, we'd be up year-on-year in terms of Q3 to Q3 as well. So none of it has anything to do with reflection of the business other than for certain parts of our business as you know, Q3 tends to be more of an investment quarter on an OpEx line than the other quarters. The thing that I'm focused on more than anything is beginning of the year. So we've had, we've strung together, I don't know, adding four, five years where the overall enterprise up margin line has been bouncing around 3.5%. That says we've really been focused on adding good quality growth to the company. And in September, we gave an outlook that said for the year we do a four handle on up margin. 90 days ago in December, we took that up to four one now we're taking that up to four two. So I feel, I'm more focused on that trajectory than the quarter-on-quarter results. And in terms of your comments forward looking beyond '21, we'll give more detail around that in the Investor Day in September, I had said something in my prepared remarks today around the fact that we're very focused on continuing a positive direction with margins as we get into fiscal '22. And that would be relative to the four two, that we hope to post this year.

Got it. And maybe just as a follow up for Mike, you talked about being able to plan to generate over $600 million of free cash flow this year, wondering if that's also something that you can build on like Mark's comments on operating margin as we think about a go forward basis, or are there CapEx investments to achieve that operating margin improvement? And maybe you can just tie in your capital allocation priorities as you answer that question? Thank you.

Thanks, Adam. Yes, definitely free cash flow will, I think we've said more than $600 million for this year, as we continue into FY '22. I expect that to continue to grow. Again, we've said this before CapEx is something where we've been extremely disciplined in that 2.9%, 3% range. So free cash flows next year again, we'll get guidance in September, but I expect that to go up on a similar trajectory as it's done in FY '21. As relates to capital allocation Adam, we continue to be sort of well balanced. We continue with our buybacks. I talked about our buybacks in my prepared remarks, we have to earn $34 million left of our authorization, we intend to complete their authorization in Q3 and Q4 or in the second half of the year. So that shows that we're extremely committed to the buyback program. And that will continue into '22, '23. I don't want to preempt anything now. But I'm sure we'll be continuing that progress from a buyback standpoint. Most of the, I think we laid out a few quarters ago the capital allocation percentages, roughly half buys into buybacks, dividends, some of the balance of that goes into debt restructuring and the balance would be opportunistic, sort of M&A as well. So well balanced. Capital allocation continues going forward.

Very helpful. Thank you both.

The next question is from Jim Suva of Citigroup. Please proceed with your question.

Thank you and good results. If I look at your updated guidance on the buy segments, am I correct that the 5G wireless and cloud is the one that kind of is giving you the most surprise there? And if so, are any of your segments or all of them or any of them experiencing semiconductor shortages? Are you able to procure all the components and items needed? Thank you.

Thanks, Jim. I assume you're talking about our eight sectors. Yes, so, I'm not quite sure we mean, in terms of surprise, in terms of the uplift, for sure. So I don't know that it's a surprise to us that we're seeing strength in 5G and cloud. Back in December, we knew that there was going to be some component shortages and constraints. But we've been very bullish on the 5G wireless infrastructure and cloud area of our business. So whether surprised or not, it's certainly an area where we continue to see strength. And I think that's largely both on the 5G side and the cloud side. Our services and our solutions are being well accepted and embraced out in the marketplace. So feel really good about that area of the business. In terms of supply constraints, I would say that we talked about this a bit in December, let's say, nine months ago, or so. You know, there was demand drops everywhere, based on COVID. I think that people took a lot of their demand signals, cut them abruptly. And then, at least our conversations with our customers, very few people anticipated the rebound that we've seen, which largely started August, September timeframe, and a bit to our surprise is continued to be very strong through early stages of 2021. And on the supply side, again, all of that drove constraints. One good piece of information, I think to share is any type of supply constraints, whether it be around resin, whether it be around silicon, whether it be around passives, whether it be around mechanicals, all that's handicapped into our numbers and I would actually say that we took a fairly deep handicap to that for our Q3 and Q4. So I feel if anything, maybe there's some slight upsides to what we've put out today, assuming that the supply constraints don't work and worse. And the other thing I would say is, I think the procurement team at Jabil just simply the best team in the business. And if I think about our scale, if I think about our holistic approach to demand planning, whether that cuts across healthcare or mobility or EMS business or automotive, our team's knowledge of the marketplace, the knowledge of the commodities, knowledge of technologies, and the long-standing relationships we have is really allowing us to navigate what otherwise is a tough component market at the moment. So I feel we're getting along and getting by quite well, all things considered on a relative basis.

Thank you so much for the details.

The next question is from Steven Fox of Fox Advisors. Please proceed with your question.

Thanks. Good morning. Two questions if I could, please. First Mark, could you just give a little more color on where the healthcare solutions businesses on its margin journey and how it did in the quarter? You know, maybe referencing back to when you first did the J&J deal, and what you were thinking for next year? And then secondly, I just don't clear based on what you just said about constraints and potential inventory builds, Mike, you're talking about still doing $600 million in cash flow, free cash flow is the difference between prior thinking just basically higher EBIT, offset by more inventory investments or there other puts and takes. Thanks.

Please hold on; the presentation will resume shortly. This is the operator, and the presenters have returned, so please continue.

Hey Steve, somehow you cut off.

Sorry for breaking the conference call. Did you hear any of my questions? Or should I repeat?

If you could repeat them, that'd be great.

Yes, sure. So first question, again, was on the health care area. So if you can provide some color into how it performed during the quarter, both top line and margin and where you are on the margin journey, you know, referencing back to when you first did the J&J deal? And then secondly, I'm just trying to understand make sure I understand the that the cash flow target staying at $600 million plus, you have higher EBIT, but it sounds like higher inventory investments. Is that basically the puts and takes versus 90 days ago, or is there anything else? Thanks.

Thank you. On the healthcare side, we're performing very well. Steve Borges and his team have been managing the JJMD relationship effectively. We outlined a roadmap for this collaboration about two and a half years ago, and our healthcare team has executed it nearly perfectly. I'm pleased with our progress, especially regarding our JJMD business. I've mentioned various trends in my earlier comments, and the team is concentrating on areas like personalized health and digital health. During the quarter, we announced another partnership focused on technology related to auto-injection and auto-injectors. I'm optimistic about the investments our healthcare teams are making in technology. Last year, our healthcare and packaging business generated around $4.1 to $4.2 billion, and I anticipate that as we close out this year, we will approach $5 billion. I expect continued strong growth in this sector over the next few years. Regarding the $600 million cash flow target, I feel positive about it. It might seem a bit confusing at first glance since EBITDA and margins are increasing, yet cash flow isn't rising similarly. We have been working hard to refine our portfolio, with our primary focus being on cash flows and management over the next few years. If we ever reach a point where we decide not to pursue growth, it would be a risky move for us, especially if we're adding quality business linked to lasting trends that enable margin expansion. At the beginning of the year, we projected revenue of $26.5 billion to $27 billion. Now, we're nearing $28 billion to $28.5 billion. With the increase in our top line and the way the teams are managing working capital and capital expenditures, and considering Mike mentioned that we would complete our buyback authorization by August 31, I believe we're striking a good balance between capital investments, operational expenditures, and returning value to shareholders. I'm confident about achieving over $600 million in cash flow, and we'll provide an update on what you can expect in stronger cash flows as we approach Investor Day in September.

Great, appreciate all that color. Thank you.

The next question is from Paul Coster of JP Morgan. Please proceed with your question.

Yes, thanks for taking my question. You talked earlier of a platform for better margins in the future. And they're really improving. And I'm just wondering, Mark, if you can talk about how much of this is structural in the industry itself? And how much of it is under your control? What is that you are doing today that makes you feel sure that you're locking in higher margins in the sort of medium term?

I don't know that it's structural to our industry. I hope so. I think if our competition can lock in higher margins that's always good but we're pretty inwardly focused, Paul. I think about first and foremost we obsess about customer care and customer solutions. And I think, if we don't get that out of order, Paul, and we continue to obsess about our customers and what they need in solving their issues; the financials will follow. If I step back and I look at this fiscal year, I was noticing something over the weekend, this will be along with the margin trajectory, I think this would be the first year we've ever had in the history of the company, if we execute, and that's a big capital, if but if we execute, we're going to string together four consecutive quarters where every single quarter is at or exceeds $1 per share. And that just kind of jumped off the page. But in terms of margin expansion, you asked about is it structural? I think so. That's our plan and that's what will allow us to take margins up from the 4.2%, as we get into next year. And I think about everything from our balance sheet, if you take a look at, and again, now I'm coming at it a little bit more from an EPS perspective. But since you asked the question around is it structural. Our balance sheet continues to improve, net debt's going down, interest expense is going down. Overall, liquidity has gone up. And then I take a look at the business and I look at things like I think we have very, very good overhead and overhead costs, I think about overall demand, I think about the secular trends that we've talked about, sometimes that's a really, really overused term. But we are truly embedded in so many of those markets, which I think are going to be around for the next two or three years. And then, the whole COVID thing, it's not behind us yet. But with the vaccine being here, we hope to have 70%, 80% of our employees globally have access to the vaccine over the next six to eight months. It's just and then I think lastly, and we've been talking about this for 10 to 12 quarters is the mix of our businesses as healthy as it's ever been. So I think you shake all that stuff up together. And again, I take a look at the last couple of years margins have been around 3.5%. I think that there's a real opportunity here for us to, on a structural basis, increase margins by 100 basis points as we look forward after that 3.5% base.

Well, maybe the follow up then Mark is, what is it that you're not doing? Are you able to, it sounds like you had the choice of not doing some business, because you could be satisfying your customers delighting them even but it could be bad business that you're doing ultimately, from a margin perspective. So can you talk to us a little bit about how you shaped the portfolio and what you do at the front end to prevent low margin business coming in and hurting the overall business model?

I think it starts with absolute clarity, communication to the troops internally. You know, I can tell you this, I've been with the company a long time. Right screw things up is when I have stuff in my head with the leadership team and we don't communicate it to the group. What I can tell you and the reciprocal of that is when the group understands where we're going and why we're going there and what our purpose is there's no better team, there just isn't. And so people understand that there's two things that we're focused on for the next two, three, four years, and that's continued expansion of cash flows, and continued expansion and margins. And by the way, our portfolio, we kind of refer to as a portfolio for a reason. We have some business that might be a little softer on the margin side, but based on terms based on the business itself have tremendous cash flows. And we have other businesses that have tremendous margin, but maybe the working capital is a little richer, we have some of that in our healthcare space and other areas. But when you blend all that together, I think there's just a picture here that we're just starting to paint. And, again, we feel pretty good for the next two to three years. To answer your question directly. We're just going to stay away from bad business. And you know that that could mean a variety of things. But I think internally people are pretty clear on what we're going to go after. Certainly, if we can go after business where there's going to be positive trends going forward. It's goodness for everybody. But I think I think the organization is pretty clear about the type of businesses we're not going to go after.

Thank you very much. I wanted to dig a bit more into the 5G Wireless and cloud outlook, the increase? I'm just curious to know specifically, maybe you can give some more details on what's driving that and what I'm trying to figure out is, is this demand that would have come in the future but as being pulled in now as people start to ramp 5G? Or are you seeing market share gains and actually end market growth because obviously, the market is growing? But how much of it has been driven by increased demand overall? And then I have a follow-up. Thank you.

Shannon, I'd say and I don't want to be offensive by not getting into details. I would say this with a high degree of confidence. For sure, we're seeing stretch secular trends and trends that are very positive in terms of cloud and finally, what looks to be reasonable plans in terms of the 5G Wireless rollout. So that's going to be helpful. And we think that's here to stay for, not a number of months, but a number of years. And by the way, we think that's going to have all kinds of tangents tied to it as well, once the 5G rollout gets underway in terms of derivatives to other parts of our business. And then I think I complement that with saying, there's just been good acceptance of our solutions and our services in the space, both on the design side, I think Mike alluded to, he was using some fancy terms around, what we call a kind of designed to dust and repurposing older servers. And he did a nice job explaining it, but it sounds a little, I don't know, overly technical or whatever. But when we talk about the design side, all the way to repositioning and disposing of older hardware, kind of front to back, I think, Shannon, the solutions we have in that space. Again, it's still what I would call early days, but had been received quite well. And I would also suggest that there is some market share wins in there as well.

Great, that was helpful. And then my second question is just on stimulus, if you think back to last summer, and maybe what you, I know, it's somewhat hard to determine how much benefit you guys saw directly from stimulus, but how are you thinking about it, when you gave us the guidance for this year in terms of the checks that are going to be hitting in the next few weeks? Thank you.

Thank you. Let me analyze the latter part of 2021 in relation to 2022 and 2023. The US equity markets have become difficult for me to understand, as they seem disconnected from fundamentals in many respects. With $4 trillion in stimulus injected into the economy, that money has to find a destination. I believe this stimulus will influence the next couple of quarters, potentially extending into the first quarter of 2022. As we move through 2021, I see two key factors at play. First, some segments of our business are influenced by behaviors stemming from COVID, where some habits may fade while others persist. Second, other areas are linked to the effects of stimulus. For instance, if you try to purchase a vehicle or an appliance in various parts of the US, you’ll encounter significant backlogs, which I attribute to stimulus effects. However, as the impact of both stimulus and COVID diminishes, what follows are genuine, enduring secular trends. Mike mentioned them, and I discussed them in our prepared remarks; these specific trends will drive our business over the next few years. So, it’s not a matter of concern that when stimulus recedes or COVID-related demand declines, there won't be other factors continuing to provide us with some growth. I hope this addresses your question.

Yes, very helpful. Thank you very much.

Yes, thank you.

The next question is from Matt Sheerin of Stifel. Please proceed with your question.

Yes, thank you and good morning. Mark, your commentary across end-markets extremely positive; one area that you're still guiding down year-over-year as networking and storage. Looks like you took that up a little bit from $2.3 billion to $2.4 billion but still down. Could you tell us what you're seeing in that market? Is there still weakness in on-prem spend and expectations of that improving as the recovery continues post-COVID?

Certainly. The network storage business was approximately $2.8 billion in fiscal '20. By September, it decreased to $2.2 billion, which reflects some challenges in our legacy business losing traction in the marketplace. Additionally, as we assess our portfolio for fiscal '22 and '23, there are parts of this business that may no longer align with our overall investment strategy. However, from September to December, and continuing to today, we have been on an upward trajectory. We maintain strong relationships with key customers in this sector and will continue to serve them effectively as long as they value the benefits we deliver. To summarize, we moved from $2.8 billion in '20 to $2.2 billion last December, and recently we have seen a revival with an increase of about $200 million. I view network and storage as a crucial component of our overall business portfolio. Despite some tighter margins in certain areas, the cash flows remain robust, making it a valuable complement to our other sectors.

Okay, thank you for that. And then just a question regarding your packaging initiatives, particularly the eco-friendly initiatives; you just announced a big paper bottle solutions investment and plan. Could you talk more about that; the opportunity? And how important is that in terms of a growth driver for Jabil?

Well, won't be much of a growth driver this year. We have to be very, very, very selective in our M&A. We are committed to returning capital to shareholders but at the same time, and I made this comment around growth; you know, if we ever get to a point where we're not growing the company, then shame on us, but we have to do so in a margin-friendly, cash flow-friendly way, which is I think, what I hope this year's results will start to prove out. And as part of that the good news is, almost all of our material growth is organic which is the best growth to have by two magnitudes, but we will continue to complement that with select M&A activity, and for us to put some dollars in play with the acquisition you're talking about is a wonderful company with wonderful people and great leadership, a company called Ecologic. We are very excited about the platform that they've developed, and we always ask ourselves the question; when we're looking at acquisitions, we start with culture alignment, we start with capability and competency, and then what are we going to do with the business when we own it strategically. We have a wonderful roadmap internally around sustainable packaging, and this is kind of a second or third step for us, we believe that we'll be able to take that technology, and as we look towards fiscal '22, fiscal '23, give that technology its due in terms of further R&D, and then giving that technology exposure to maybe bigger brands that we support based on our balance sheet, our scale, and our relationships.

Okay, thanks very much.

Matt, you're welcome.

The next question is from Mark Delaney of Goldman Sachs. Please proceed with your question.

Yes, good morning. Thanks very much for taking the questions. The company's doing very well on margins and guiding to 4.2% for this year, despite what I would think are some temporary cost headwinds related to the supply chain environment, including the shipping cost as the most important component shortages that the whole industry is having to deal with. Can you talk about how much of a headwind the company may be seeing from some of those supply chain types of costs this year? And if we were to add that back, do you think that's more representative of the underlying margin levels that the company can hopefully build off of going forward? Or are there any other temporal factors that we should be thinking about that's influencing margins this year?

Thanks, Mark. Earlier, I mentioned that we've assessed the business outlook for Q3 and Q4, and I believe our assessment has been valid. This may suggest that without these considerations, our margins could reach 4.3% for the year, which I don't expect to exceed significantly. I also highlighted our effective supply chain management, which is performing well despite the challenges we face. Feedback from customers, suppliers, and industry peers indicates we are managing this situation effectively, and the impact on us should be relatively minor. Last week, our procurement team had a meeting, and we anticipate that conditions will start to improve by the first quarter of 2022 and definitely throughout that year. Specifically, we expect some relief around September to November, leading to a return to more normal conditions by January, February, and March of 2022. With that in mind, we provided our guidance for Q3 and Q4, and I feel optimistic about it. Considering the projections, I believe we can maintain a positive trend for margins, targeting an upward movement going into 2022, despite short-term supply chain adjustments.

That's very helpful. My follow-up question was on the EV opportunity, and automotive has been a growing business for Jabil, and an area I realized that Jabil has a lot of capabilities already; Foxconn is moving to divert or brought it out it's business in doing full electric vehicle architectures, and even final car assembly. I'm interested if that's the type of business that Jabil would also consider expanding into within the automotive and EV space? Thanks.

I believe it's reasonable to consider setting up automotive factories. The capital requirements are substantial, and I prefer our team to concentrate on what we excel at, which is providing sensors, components, and sub-assemblies for the automotive industry. I appreciate the acknowledgment of our strong track record in this field. A significant strategic decision we made two and a half to three years ago was to focus intensively on electrification and electric vehicles, not just in cars but across all forms of transportation. I think this decision is already yielding positive results for us. Regarding electrification, it aligns with our core competencies, and the research and development investments we've made in this area have been considerable. I'm optimistic about our positioning and how it will unfold in 2022 and 2023. If I were to speculate, looking at the H-sector chart, automotive transport revenues were around $1.7 billion in fiscal year 2020, and we increased that to $1.9 billion in September. Currently, I anticipate it will exceed $2.2 billion. If I had to make a prediction today, I believe the growth trajectory for that sector will remain upward as we progress through 2022.

Thank you.

Yes, thank you.

This now concludes our call. Thank you for your interest in Jabil. You may disconnect your lines at this time. Thank you for your participation.