Jabil Inc Q4 FY2021 Earnings Call

Greetings and welcome to Jabil’s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Berry, Vice President, Investor Relations. Thank you. You may begin.

Good morning and welcome to Jabil’s fourth quarter of fiscal 2021 earnings call and investor briefing. We have a great session planned for you today. As an organization, we are excited to provide you with a little extra detail about our business as typical for our September call. Over the next 60 minutes or so, we will review our strong fourth quarter and fiscal 2021 results, followed by yet another great outlook for fiscal 2022. As usual, you will hear from both Mark Mondello, our CEO, and Mike Dastoor, our CFO. Throughout our presentation today, we will do our very best to help you understand what makes Jabil so unique and special. And we will kick that right off with the following brief video. Such a great video. As we all know, the world is complex and only getting more so each and every day. But as Mark often says, our people are our greatest differentiator, and that couldn’t be more apparent as you visit our global network of factories and meet the roughly 260,000 people that make Jabil’s foundation so strong. To our people, thank you again for all you do to help keep the world connected despite a seemingly never-ending set of new challenges thrown your way. Our foundation is solid. Through over 50 million square feet of manufacturing space and over 100 sites, our people strive to make anything possible and everything better for over 400 of the world’s most recognizable brands. Our agility and global scale enable us to respond quickly and flexibly to meet customer needs in key end markets, like mobility, industrial and semi-cap, automotive, and healthcare, just to name a few. These wide-ranging end markets represent a diverse and thoughtfully designed portfolio that, over the years, has helped reduce volatility and improve the reliability of our financial results. To illustrate our diversification strategy over the past few years, I’d now ask that you turn to the next slide, which shows our revenue growth and the end markets we serve. As you may know, the EMS industry has long struggled with customer concentration, which has created a lot of variability in operating performance from one year to the next. In 2016, our management team concluded that our model was missing an important characteristic if we were going to deliver upon our financial priorities consistently and sustainably. This important characteristic was product diversification. Beginning roughly in the 2017 timeframe, we embarked on a journey to grow and diversify our business in areas such as 5G, cloud, healthcare, packaging, connected devices, automotive, and semi-capital equipment. As a result of our efforts to diversify the business, revenue has grown rapidly. Since 2017, we have added more than $10 billion in revenue across several key end markets. It’s important to note that this growth has been very intentional and focused. Moving to the right side of the chart, you will see the composition of our $29.3 billion in revenue, and you’ll likely notice that no end market dominates our diverse portfolio. In each of these areas, Jabil partners with some of the world’s most recognizable companies to accelerate their speed to market through product engineering, supply chain design, and of course, manufacturing. In healthcare, think of drug delivery systems, such as inhalers and insulin pens, diagnostics, medical devices, orthopedics, and instruments that all meet exacting FDA standards. Our healthcare business serves programs and products with long stable lifecycles of 10 to 20 years with high cost of change, thus providing stable earnings and cash flows. In packaging, we design and manufacture highly engineered rigid plastic packaging for many leading consumer brands.

Thank you, Adam, and thank you for joining us today and for your interest in Jabil. As Adam highlighted, our business model is fundamentally structured to deliver core margin expansion and strong predictable cash flows, and our capital structure has been optimized to maximize our flexibility. This flexibility has enabled us to reshape our end market portfolio over the last several years. In the last 18 months, our strategy has been pressure tested, and our diversified, well-balanced portfolio performed extremely well evidenced by our solid Q4 and exceptionally strong FY ’21 results. In Q4, the teams in both segments successfully managed to navigate an incredibly dynamic supply chain environment. During the quarter, demand continued to be broad-based and robust, but revenue came in slightly lower than expected due to some incremental tightness in the supply chain, mainly in healthcare, industrial, and cloud. This was partly offset by upsides in connected devices and networking and storage. Despite this, our core operating margin performance in the quarter was quite strong, coming in at 4.2% and approximately 10 basis points higher than expected, a testament to our team’s execution in the quarter, solid cost optimization, and our increasingly resilient end market portfolio. In Q4, our interest and tax expense also came in better than expected, which when combined with the strong margin performance allowed us to deliver strong core diluted earnings per share in Q4. Net revenue for the fourth quarter was $7.4 billion, up 1% over the prior year quarter. GAAP operating income was $265 million, and our GAAP diluted earnings per share was $1.16. Core operating income during the quarter was $314 million, an increase of 23% year-over-year, representing a core operating margin of 4.2%, a 70 basis point improvement over the prior year. Net interest expense in Q4 was $36 million, and core tax rate came in at approximately 22.3%. Core diluted earnings per share was $1.44, a 47% improvement over the prior year quarter. Now turning to our fourth quarter segment results, revenue for our DMS segment was $3.9 billion, an increase of 9.7% on a year-over-year basis. The strong year-over-year performance in our DMS segment was broad-based with strength across our healthcare, automotive, and mobility businesses. Core margins for the segment came in at 4.1%, 20 basis points higher than the previous year. Revenue for our EMS segment came in at $3.5 billion, down 6.4% and primarily driven by our previously announced transition to a consignment model. Core margin for the segment was 4.3%, up 120 basis points over the prior year reflecting solid execution by the team.

Thanks, Mike. Good morning. I appreciate everyone taking the time to join our call today. I’ll begin by saying thanks to all of our employees here at Jabil. Your attitude is amazing and your stamina is incredible. It was your collective body of work that drove the terrific results we just posted while overcoming COVID quarantine mandates, supply chain challenges, factory inefficiencies, and in many cases, a lack of face-to-face interaction. Fiscal ‘21 came in well ahead of plan, resulting in a core operating margin of 4.2%, all in all, a really nice year across all fronts. Today marks our fourth annual investor session, a session where we take a little extra time to lay out the groundwork for the upcoming year. As you heard earlier from Adam and Mike, our business is strong and what we’re doing is working. So let’s start with our approach, beginning with diversity, equity, and inclusion. We know that each employee is critical to our success and has the right to be treated with dignity and respect each day and every day. At Jabil, we operate our business in over 30 countries. We employ people that don’t look the same, don’t talk the same, and have different backgrounds. We understand that the current diversity of our team simply makes us better. A second aspect of our approach pertains to the area of ESG, where we aim to always do what’s right. Our goal is a 25% reduction in greenhouse gas emissions by 2025 and a 50% reduction by 2030. Another action is our commitment to giving back. Our employees will look to complete 1 million volunteer hours in aggregate during calendar 2022, which will make a positive difference in our communities.

Before handing the call over to Mike, I’d now ask that you follow our presentation with the slides on the website, beginning with our forward-looking statement. During today’s presentation, we will be making forward-looking statements, including, among other things, those regarding the anticipated outlook for our business in the first quarter of fiscal ‘22 and beyond. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.

Okay. Thanks and good morning. Mark, you talked about diversification into secular trends, auto, healthcare, cloud, and I couldn’t help but notice reference customers like Tesla, J&J, and Amazon. I was just wondering if you could maybe talk through the new customer acquisition efforts, the sales motion to leverage this reference customer list. And if you could perhaps tap into pipeline and timing because I couldn’t help but notice over 40% auto growth expected in fiscal ‘22. I’m wondering if there are some new logos in there?

Thanks, Adam. I want to clarify that over the years, we have had a reluctance to dig too deep into new wins and customer wins due to the nature of customer confidentiality. However, our organic pipeline continues to remain robust. The vast majority of our gains from fiscal '18 to fiscal '22 are organic in nature. Looking at the growth rates on Mike’s projections, automotive, healthcare, and digital print are all seeing growth.

There is an element of supply chain constraints and the impact on inventory that’s included in the $700 million free cash flow guidance. Our revenue growth of $2.2 billion over '21 to '22 comes with associated working capital needs. So while $700 million is strong given our growth, it can potentially go higher if the supply chain constraints ease.

Thank you. Regarding the challenges in the supply chain, is it kind of stabilizing a little bit or getting incrementally better or more challenged? Are the power outages in China impacting you?

When we think about our supply chain, our estimate is that we will experience tightness in Q1 and Q2. However, I believe things will start to improve as we enter the back half of '22 if demand holds.

Hi, thank you for taking my questions. I heard in the prepared remarks something about a change in the compensation program focusing on operating margins, cash flows, and EPS. Mark, you’re guiding about a 30 basis point improvement in operating margin overall for fiscal ‘22. Should we take this as an indication that there is more focus on margins now versus revenue growth?

We want a significant amount of our compensation tied to the commitments we are making to shareholders. Our core operating margins have increased from 3.5% to an outlook of 4.5% this year. We expect further growth into fiscal '23 and beyond as we focus on margin improvement.

So, you called out healthcare where you are seeing acceleration from kind of a small penetration rate of in-sourcing. Do you expect to see continued structural step-up in margins as we look further out beyond '22?

I think there is a good opportunity for a step-up in margins if we continue to execute well. Our healthcare business has doubled in size in just a few years, and we are positioned to take advantage of these trends going forward.

As planned, we shared quite a bit over the past hour. To summarize, we began by describing how Jabil has undergone deep and sustainable improvements to its business model. We highlighted the solid foundation on which Jabil sits today. Then Mike walked you through our financial results and outlook, which demonstrate the strength of our portfolio structured to navigate fluctuations while benefiting from long-term secular tailwinds. Finally, Mark shared our unique approach, solutions, portfolio, and path forward.

Thank you. Our first question is coming from the line of Adam Tindle with Raymond James. Please proceed with your question.