Jabil Inc Q4 FY2023 Earnings Call

Hello, and welcome to the Jabil Fourth Quarter and Fiscal Year 2023 Earnings Call Webcast and Investor Briefing. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Adam Berry, Vice President of Investor Relations. Adam, please go ahead.

Good morning, and welcome to our call today. My name is Adam Berry. I'm Head of Investor Relations, and this is our Q4 earnings call and the sixth annual investor briefing. Joining me on today's call are Chief Executive Officer, Kenny Wilson; EVP of Global Business Units, Fred McCoy; and Chief Financial Officer, Mike Dastoor. For the sixth straight year, we're going to use this session today to accomplish the following: review our fourth quarter and fiscal 2023 results; discuss the trends underway within the end markets we serve; provide an update for our pending transaction to sell the Mobility business to BYD Electronics; refresh our capital allocation policy given the pending deal; offer a thoughtful fiscal '24 outlook that demonstrates enterprise level growth in some key areas while also remaining sensible and grounded given the realities of the dynamic global macro environment surrounding us today; and finally, we'll do our very best to walk through the many moving pieces we foresee in the upcoming year as we work to make our business more profitable and more sustainable. But before we jump into the details, please note that today's call is being webcast live, and during our prepared remarks, we will be referencing slides. To follow along with these slides, please visit jabil.com within the Investor Relations portion of the website. At the conclusion of today's call, the entirety of today's presentation will be posted there for audio playback. I'd now like to ask that you follow our presentation with slides on the website beginning with the forward-looking statement. During this 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 fiscal year net revenue and earnings. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2022, and other filings with the SEC. 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, I'd now like to shift our focus to our fourth quarter results, where the team delivered approximately $8.5 billion in revenue, equal to the midpoint of our guidance range. Core operating income for the quarter came in stronger than expected at $477 million, or 5.6% of revenue. This is up 60 basis points on a year-over-year basis and 80 basis points sequentially, driven by strong execution across both segments. Net interest expense in the quarter came in better than expected at $71 million, reflecting good progress by the team on inventory and solid working capital management. From a GAAP perspective, operating income was $441 million, and our GAAP diluted earnings per share was $1.15. Core diluted earnings per share was $2.45, a 5% improvement over the prior year, and towards the upper end of our guidance range. Revenue for the DMS segment came in better than expected at $4.4 billion, up marginally compared to the same timeframe from a year ago, driven by strength in our Auto and Healthcare businesses. This strength was completely offset by continued weakness in Connected Devices. Core operating margin for the segment came in at 6.1%, 100 basis points higher than the same quarter from a year ago, given the solid mix and the normal seasonal pattern within our Mobility business. Revenue for our EMS segment came in at $4 billion, down roughly 13% year-over-year and approximately $200 million below expectations. As expected, during the quarter, we saw a major revenue shift in our cloud business, driven by our previously announced transition of certain components we procure and integrate to a customer-controlled consignment service model. In Q4, the overall mix of consigned components came in higher than expected. For the quarter, core margins for EMS were 5.2%, up 40 basis points year-over-year, reflecting strength in renewables, which is in our industrial portion of our business, and the aforementioned consignment shift. In fiscal '23, our DMS segment revenue was $18 billion, an increase of 8% year-over-year. In particular, it's worth highlighting our Automotive and Healthcare businesses, which were up 42% and 12%, respectively. Core operating margin for the segment came in at 5%, up 10 basis points year-over-year. In EMS, core margins for the year were strong, also coming in at 5%, 70 basis points higher than the prior year on revenue of $16.7 billion. The strength in fiscal '23 income was driven by growth in renewables within our Industrial and Semi-Cap market as well as the benefit from consignment. Next, I'd like to begin with an update on our cash flow and balance sheet metrics. Beginning with inventory, which saw good improvement sequentially by four days to 80 days. More importantly, net of inventory deposits from our customers, inventory days were also down four days to 58 in Q4. Our fourth quarter cash flows from operations were strong, coming in at $686 million. Net capital expenditures for the fourth quarter were $28 million and, for the full fiscal year, came in lower than expected at $708 million, mainly due to the timing of CapEx payments that are shifting to Q1 from Q4. As a result of the strong fourth quarter performance in cash flow generation, adjusted free cash flow for the year came in higher than expected at approximately $1 billion. With this, we ended the quarter with cash balances of $1.8 billion and total debt to core EBITDA levels of approximately 1.1 times. For the year, we repurchased 6.7 million shares for $487 million, leaving us with $776 million remaining on our current repurchase authorization as of August 31. Please note that in Q4, we were out of the repurchase market mostly as a result of the pending Mobility deal. As Mike will share in a few minutes, when our opportunity to buy back reopens, we plan to accelerate repurchases in Q1 fiscal '24. As I flip to the next slide, looking at the five-year financials, it's hard to believe that another year is in the books for Jabil. And as I look ahead, I can't help but think that there's so much more opportunity ahead for us. In a moment, I'll hand the call over to Kenny, Fred, and Mike, but before I do, I want to spend a few minutes setting the stage for what you're going to hear today. Over the next couple minutes, I think you're going to hear a lot of the same from us. From a financial target perspective, you're going to hear us talk about winning our unfair share of business and leveraging those wins to drive margin expansion, free cash flow generation, and further shareholder return. From an end market perspective, you're going to hear more about the areas of our business which continue to see solid double-digit growth and why we believe we're one of the best positioned companies to benefit from global trends such as electric and autonomous driving, digital healthcare, AI infrastructure, and the long-term shift to renewable energy. But there are some new dynamics to share today as well, and as a team, we're excited to share a few key updates. For starters, you may have noticed that our previously announced transaction to sell our Mobility business to BYD Electronics has moved from the preliminary stages of agreement to a definitive agreement, as announced earlier this week. As we move through our session today, you'll hear from both Kenny and Mike as they weave the strategic rationale and financial impact into our economic model. At the same time, we have some updates to provide today on capital allocation framework, given that the Mobility definitive agreement is now in place. And then given that fiscal '24 will be transitional for Jabil, in terms of closing the Mobility transaction and the subsequent planned accelerated buybacks, Mike will offer a viewpoint of fiscal '25, including the full impact of both initiatives. So, with that, I'll now hand it over to Kenny.

Thanks, Adam. Good morning. Thanks for joining us today. As Adam highlighted, fiscal year '23 was another strong year, and I am pleased with the progress we've made relative to our financial objectives. Every day at Jabil, we strive to do the right thing. It is how we are wired. So, it's heartening when looking at our end-of-year report card to see that we are making progress on all fronts. Most satisfying for me is the resilience of our model, where despite end market choppiness, we posted very impressive year-on-year growth in core margins, up 40 basis points to 5%, earnings up 12%, and EPS up 13%, while also driving in excess of $1 billion in free cash flows. This time of year also sees us complete our annual strategic planning process. And it is reassuring to note that similar to last year, we reconfirmed our focus on investing in key areas of our business, including electric vehicles and autonomous driving, AI cloud solutions, renewable energy and healthcare. All of this sets a firm foundation for fiscal year '24 and beyond, and is a testament to our customer-centric model, which is both robust and adaptable to changes in end market. The next slide shows how these characteristics have shaped the last 10 years. And seen in this context, fiscal '23 was just another step in the journey. If I was looking for one word to summarize activities highlighted, it would be intentionality. We have and will continue to be very intentional as we look to grow and modify the mix of business to include longer lifecycle industries like healthcare with the acquisition of Nypro and our strategic collaboration with JJMD. In addition, we have also increased investment, both organically and inorganically, in emerging technologies. We view our capabilities as a match for important end markets, like renewable energy, infrastructure, electric vehicles, and cloud data centers. From an enterprise perspective, we began materially redirecting more and more of our free cash flows to buybacks and reinvest in ourselves at very attractive valuations. And finally, just a few weeks back, we unveiled yet another step on our journey as we announced the pending divestiture of our Mobility business to BYD Electronics for $2.2 billion. As we move into fiscal year '24 and beyond, you can continue to rely on this leadership team to allocate capital with a view to expanding shareholder value. I'd now like to spend a little time talking about our decision to sell the Mobility business. As you know, over the past five years, I've had the privilege both to lead and work alongside some of the most skilled and talented manufacturing engineers, operations leaders and material scientists in the world. And during that time, we were fortunate to build an incredible business while also delivering best-in-class products for one of the world's greatest brands. I had the front row seat, unlike any other, to truly appreciate and develop a deep understanding of the level of complexity involved in introducing and manufacturing precision mechanics at huge scale for our largest customer. This perspective provides me some credibility to make the claim that our Mobility team is second to none when it comes to innovative automation, tooling design, and manufacturing of these components at scale. And I also truly believe this talented organization can reach new heights when their capability is matched by a supportive business model focused on significant growth. To all my friends in the Mobility business, I will miss you deeply. Thanks for showing your company at its best, for never flinching from the sometimes seemingly unsurmountable asks, and doing so all with humility, professionalism, and great skill. It has been my honor to be a part of your team. Looking forward, I think your particular skill sets can be leveraged in endless ways. And while it's bittersweet to say goodbye to some great friends and colleagues, I know this is the best route for our customers, employees, and shareholders alike. In a moment, I will turn the call over to Fred to go deeper into our end markets, but before that, I wanted to reaffirm what you can expect from me as CEO. I will work tirelessly on your behalf to ensure that we are in the correct end markets and geographies with the correct capabilities to serve our customers. I will continue to ensure that our capital allocation is shareholder friendly, while appropriately funding our growth. And all of this will be underpinned by an unwavering passion and commitment to preserve, protect and grow our unique culture, which is the foundation of everything that is great about our company. Thank you for joining us today and for your interest in Jabil. I will now turn the call over to Fred.

Thanks, Kenny. Good morning, everyone. As you've heard from Adam and Kenny, there's a lot going on at Jabil at the moment and quite a lot to be excited about. It's my privilege to join the call today and, over the next few minutes, to walk you through the demand dynamics inside our diversified markets and how we see each shaping up for the coming year. As we move into FY '24, we continue to expect growth in our business to be headlined by end markets that are benefiting from strong multi-year tailwinds, specifically renewable energy infrastructure, electric vehicles, AI cloud data centers, and healthcare. Let's begin with what's going on in our Industrial and Semi-Cap end market on the next slide. In Industrial, we're experiencing robust growth in clean and smart energy infrastructure, as governments globally implement legislation such as the Inflation Reduction Act in the United States to increase investment in new projects. As a reminder, we play across the entire energy value chain from energy generation, power conversion, transmission, storage, and metering, and to the management of power inside homes and buildings. These projects have multi-year investment timelines, independent of underlying short-term economic growth forecasts. So, we feel comfortable with the visibility we have in this space given these elongated infrastructure build-outs. As an example, a relatively new market that we're particularly excited about is the energy storage systems market, from grid level to inside the home and in support of rapid EV charging. On the back of several recent wins in the U.S. and Europe, we expect this space to drive solid growth in the coming years, leveraging our investments in battery module integration. We are well positioned to support growth in the renewable energy infrastructure space due to a unique combination of power engineering expertise, in-region manufacturing, and supply chain capabilities. As a result, we expect revenue for our industrial business to be up more than 20% in FY '24. Offsetting this growth slightly is our Semi-Cap business, as we anticipate market demand to remain muted for most of our fiscal year. As a reminder, our Semi-Cap business spans both front-end, with gear that turns wafer into chips, to the back-end with gear that inspects and tests the wafer or resulting chips. Our strategy in this end market has been very thoughtful due to the high cyclicality of the market, and we've been very focused around how we've invested in this business, expecting demand to remain muted in FY '24 while preparing the capabilities and regional footprint for us to be well positioned to grow when the market moves higher as end market demand rebounds. Within our Automotive and Transport business, we continue to expect growth to be driven by the global transition to electric vehicles. For FY '24, we expect another year of 20%-plus revenue growth, despite what is a choppy overall global demand environment. The global shift to EVs continues to accelerate, and we expect EVs to represent a larger share of the global auto market in FY '24, regardless of near-term global growth dynamics. In this space, we support an increasingly diverse set of the world's leading automotive OEMs as they launch new electric vehicle platforms across multiple geographies. Our focus areas in the EV market we refer to as ACES, or ADAS and autonomous, connectivity, electrification, and software-defined vehicle architecture. In the EV market, we support products such as compute and control modules, power conversion, battery management, optical camera modules, LiDAR, and other sensors, as well as charging solutions. The path to mass adoption of electric vehicles globally is exceedingly complex, and there are very few companies that are as well positioned as Jabil to support customers' multiple complex program ramps on multiple continents with industry-leading supply chain, design and manufacturing capabilities. Moving to cloud. Our cloud solutions continue to resonate with customers of all sizes, from large hyperscalers to Tier 2 cloud providers, such as technology companies and leading financial firms. Today, cloud represents a relatively small portion of overall global IT spend, but we expect secular growth in this area to accelerate, including the related data center infrastructure, especially with the proliferation of AI and ML. Next-generation clouds, and especially AI cloud data centers, present unique challenges to customers. AI workloads, which are powered by extremely powerful GPUs that consume significantly more energy and drive increased data generation. This creates three challenges: insufficient power supply on the grid to support expanded data center needs; heat generation that surpasses the capabilities of air-cooled data centers; and enhanced data interconnections between racks to support increased data inside the data center. Our design-to-dust capabilities continue to resonate with customers, and we are investing in the areas of data center infrastructure services, liquid cooling, and silicon photonics to help our customers solve the above challenges. Jabil is extremely well positioned to support customers as they incorporate innovative technologies into their data centers. And with the asset-light nature of the business, we have maximum flexibility to adapt and support customer needs around the world. We're already seeing success in this area. Jabil was recently awarded and began production of our largest cloud customers' artificial intelligence rack configurations that are GPU dense, which are consigned. Because these components are among those consigned, we will see year-over-year headwinds to revenue, especially in the first half of the year. In spite of the revenue decline, the underlying business and associated unit volumes, however, are expected to grow by more than 20% in FY '24. In Healthcare, we expect another robust growth year with revenue up 9% year-on-year. In the healthcare space, the range of products we design and manufacture lean into digital healthcare trends and include: highly complex diagnostic equipment and related consumables; orthopedics, including 3D printed implantables; precision health and medical devices, like minimally invasive devices; and pharma solutions, including smart injection delivery devices for diabetes and obesity drugs. Jabil's credibility in the healthcare space as the largest EMS provider in the space positions us well to take advantage of the outsourcing of manufacturing trends. In the coming years, we expect OEMs to continue to accelerate this outsourcing trend regardless of global macro growth. A recession-resistant end market with long product lifecycles and accretive margins and stable cash flows is why healthcare continues to be such a critical component of our diversified portfolio. Within Digital Print and Retail, we're seeing slower demand in legacy print and point of sale markets. This is being offset by growth in warehouse and retail automation markets, as we have a number of key wins that will be ramping in the back half of the fiscal year. These wins leverage unique capabilities in 3D printing of production components, robotics, engineering software and integration, and complex manufacturing automation. Our recent success shows we are well positioned in these end markets to help our customers bring next-generation automation technologies to market. Within our Networking and Storage end markets, we continue our ongoing efforts to optimize our portfolio as we prioritize margins and cash flows. We also expect overall market demand to be muted this year. Longer term, however, we anticipate growth coming from new programs in development for advanced optical networking, for high-performance data center interconnect that will support growth in cloud and AI data center applications. And finally within our Connected Devices business, demand remains soft, reflective of weakness in consumer goods spending. We expect another year of market challenges in this area.

In a moment, let's turn to the next slide. We heard Fred take us through each of our end markets and how we plan to optimize this portfolio even further. We continue to benefit from multiple long-term secular growth end markets, such as electric vehicles, healthcare, renewables, and AI-driven cloud data centers. In fact, for FY '24, we expect these four end markets to make up nearly 70% of our FY '24 revenue mix, excluding the revenue associated with the Mobility sale. Upon closing the Mobility transaction, we no longer anticipate having any customer that represents 10% or more of revenue. The long-term viability of these end markets continues to give me a high level of confidence as we navigate a range of economic scenarios while expanding margins and free cash flows. FY '24 is a pivotal year in our journey. After considering a range of scenarios with differing outcomes associated with the timing of the Mobility transaction close, we thought it might be helpful to provide a time-based range for FY '24 results including our Mobility business until the transaction close date and highlight the FY '25 outlook excluding Mobility and after considering the full impact of accelerated share repurchases. But before I do that, I'd like to walk you through some assumptions we have used, most of which we have already discussed on this call. For FY '24, we assume economic conditions remain challenged for the consumer, which we have reflected in our consumer-related end market guidance. In the coming year, we continue to optimize our end market portfolio in Networking and Storage. As Fred mentioned earlier, we began production of our largest cloud customers' artificial intelligence rack configurations. These racks are GPU dense and are among the components that have transitioned to a customer control consignment service model, which has effectively doubled the consignment percentage from a year ago. While volumes are expected to grow by more than 20%, we expect the shift to result in lower revenue as compared to last year of approximately $500 million in Q1 and approximately $200 million in Q2. Within our Mobility business in Q1, we expect the change in work content associated with new products to impact year-over-year revenue growth by approximately $300 million to $400 million. And finally, we anticipate the Mobility transaction to close sometime during Q2 of FY '24. The exact date of the close will drive where we land on the time-based range. With that, let's turn to the next slide for our first quarter guidance. For Q1, we expect total company revenue to be in the range of $8.4 billion to $9 billion. At the midpoint, this anticipates DMS and EMS revenue to be $5.1 billion and $3.6 billion, respectively. Core operating income is estimated to be in the range of $474 million to $534 million. GAAP operating income is expected to be in the range of $423 million to $483 million. Core diluted earnings per share is estimated to be in the range of $2.40 to $2.80. This includes a benefit of approximately $0.25 associated with accounting impacts of assets held for sale. GAAP diluted earnings per share is expected to be in the range of $2.02 to $2.42. Net interest expense in the first quarter is estimated to be $73 million. Moving on to full year guidance, beginning on the next slide. For FY '24, we expect revenue at an enterprise level to be in the range of $33 billion to $34 billion. As I mentioned a moment ago, we anticipate closing the transaction during Q2 of our fiscal year. Therefore, our FY '24 guidance range reflects a range of potential outcomes. I would caution against reverting to the midpoint of these ranges as they are time-based ranges and will be highly dependent on actual transaction close date. Importantly, for FY '24, we expect core operating margins to improve by 30 basis points to 50 basis points year-on-year, mainly driven by our improved mix of business. Our investments in IT and factory automation will also drive improved optimization across our footprint and are anticipated to lead to higher margins in the future. Moving to our thoughts around CapEx for FY '24. In the coming year, we expect net capital expenditures to be in the range of 2.2% to 2.5% of net revenue. This is higher than the 2% in FY '23 due mainly to timing of CapEx investments rolling into the first quarter of FY '24. Upon closing the Mobility transaction, longer term, we now anticipate our CapEx to be lower as a percentage of revenue in the range of 2% to 2.3%. Our CapEx investments this year are expected to include a combination of maintenance and strategic investments for future growth and efficiency gains. We plan to continue to invest in targeted areas of our business with the bulk of our strategic growth CapEx aimed at the automotive EV space along with healthcare and renewable energy end markets. Moving on to cash flow generation. We closed out FY '23 with strong free cash flows north of $1 billion. We expect to continue generating strong cash flows in FY '24 with adjusted free cash flow of more than $1 billion. With that, let's now turn to our capital structure on the next slide. We have a solid and flexible debt and liquidity profile with current maturities, appropriately staggered at attractive interest rates. We ended FY '23 with committed capacity under our global credit facilities of $3.8 billion. With this available capacity and our year-end cash balance, we had access to more than $5.6 billion of available liquidity, which we believe affords us ample flexibility. We also remain fully committed to maintaining our investment-grade credit profile. In fiscal '24 and beyond, we expect to generate significant free cash flow. Given this dynamic, along with expected net proceeds from the Mobility business sale, I believe it's an appropriate time to reiterate our capital allocation priorities and at a high level how we plan to deploy our capital over the next two years. This morning, included in our earnings filing, we announced that our Board of Directors expanded our current share repurchase authorization to $2.5 billion. We expect to begin executing on this upsized authorization immediately. You heard Adam say that we were unable to complete our Q4 share repurchases due to restrictions around the Mobility transaction. We plan to launch a $500 million accelerated share repurchase transaction in October prior to the close of our Mobility transaction. Post-closing of the Mobility transaction, we intend to execute a series of additional accelerated buybacks throughout FY '24 and FY '25 with the intent of optimizing share repurchases and interest expense, thereby maximizing the EPS impact. Moving forward, we are comfortable with our ability to generate strong cash flows and will remain balanced and thoughtful in how we allocate our capital. We believe this capital allocation framework will allow us to continue to grow our business and create value for shareholders. As a reminder, we have already reduced our outstanding shares from 203 million in 2013 to 131 million at the end of FY '23, a 35% reduction over this time period. Over the past 10 years, we've brought back our shares at an average price of $32.71 a share. Next, let's look at our FY '24 guidance. For FY '24, we expect the momentum underway across our business to continue, even in a subdued economic environment. Today, our business serves a diverse blend of end markets in areas that provide confidence in future earnings and cash flows. We have deep domain expertise complemented by investments being made in capabilities, all of which gives us confidence in our ability to deliver 30 to 50 basis points of core margin expansion in FY '24 along with core EPS in the range of $9.30 to $9.70 and more than $1 billion in free cash flow. And importantly, our balanced capital allocation framework approaches the line and focuses on driving long-term value creation to shareholders. As we transition to our final slide, I thought it made sense to provide you with a view of FY '25 excluding our Mobility business, but including the impact of our accelerated share repurchases post-closing. We believe we're on the path to deliver core operating margins at or above 5.6% in FY '25 and deliver more than $10.65 in core EPS. To deliver this, we need to only grow our revenues by a conservative 3% while continuing to execute a series of accelerated share repurchases. In my view, Jabil is well positioned to navigate the current economic environment, evidenced by our performance over the past several years. We are not only well diversified, but also markedly more resilient than we were several years ago due to our intentional efforts to invest and align our resources with areas in key end markets that are undergoing multi-year secular growth, all of which gives me confidence as we march towards 6% core operating margins in the future.

Thanks, Mike. As we talked about at the outset of the call, there's a lot to be excited about here at Jabil. And we've given you a forecast for fiscal '24, which we believe will be a bit transitional, and fiscal '25, which we believe will be a bit more normalized and will include the full impact of the share repurchases from both our previous program as well as the portion from the Mobility deal. There's a lot to be excited about here at Jabil, and we're ready to get into your Q&A. Operator?

Thank you. We'll now be conducting a question-and-answer session. Our first question is coming from Ruplu Bhattacharya from Bank of America. Your line is now live.

Hi. Thanks for taking my questions, and congrats on the strong results and the very strong guidance. In fact, your margin guidance is significantly higher than we had expected. You're guiding for 60 basis points of improvement over two years and you've also talked about 6% operating margin. So, can you help us dive a little bit into that? I mean, how much of this margin improvement is coming from mixed shift within the portfolio? How much would you say is like-for-like pricing improvement? I mean, I would think that, by fiscal '25, you would have some recovery in Semi-Cap, maybe there is less inflation passed through and maybe you are taking some cost actions. So, any color you can give in terms of what are the different drivers for such a strong margin improvement?

Good morning, Ruplu, and thank you for your question. I mentioned earlier that we are being very intentional with our strategy. Following our annual review of strategic planning, it's clear that post-Mobility divestiture, 70% of our business will focus on electric vehicles, AI clouds, renewables, and healthcare. These areas are all expected to enhance our margins. If we look ahead at our projected growth in these sectors, it represents a significant part of our overall performance. Additionally, as the Mobility business exits, we're adjusting our operations to align with the new direction of our company. This approach has been part of our planning. We anticipate that as we grow in higher-margin areas, those will make up a larger piece of our business, which will positively impact our margins. This isn't about renegotiating higher prices with our customers; it's about increasing the value we offer in key markets. Lastly, we tend to be quite conservative in our outlook, so we wouldn't make these statements unless we were confident in the likelihood of achieving them.

Thank you for the information, Kenny. Regarding the automotive sector, you've experienced significant growth in recent years, with over 40% this past year and forecasts of more than 20% growth for the next year. The business has grown to a considerable size of about $4.5 billion. Do you believe this growth rate is sustainable, and what factors contribute to it? Are you increasing the content per vehicle, or are you expanding your reach to more original equipment manufacturers than before? Could you provide further insights into what is driving this growth? Additionally, are you worried about competition in this area as more companies aim to capture market share in different facets of the automotive industry?

Let me address that. I've mentioned before that the automotive sector is challenging, but those challenges are beneficial for us. It's essential to have a global presence with uniform processes and capabilities, and the ability to launch products simultaneously across various regions. Few companies can achieve that, which gives us an advantage. We've been committed to the automotive market for a while, with Chad Morley and his team leading the charge. We recognized early on that electrification would be a significant trend, so we focused heavily on it. As Fred discussed regarding ACES, we are now also looking at software-defined aspects. We're strategically working to include more key brands in our portfolio. As we bring in more brands, we become involved in an increasing number of programs. Mike has mentioned that our business typically operates on seven-year cycles, introducing products at varied rates. Looking ahead, we believe the products currently in development will positively impact revenue and margins in the next few years. We are optimistic about our growth, targeting around 20%. Regarding competition, we face strong global rivals, which compel us to improve. We are fully aware of our competitors' capabilities and confident in what we offer as a U.S.-based company with robust capabilities in Asia, Europe, and North America. We believe this model will benefit both our customers and Jabil. Therefore, we are confident in our automotive growth prospects in the short, medium, and long term.

Okay, thanks for all the details. I'm going to try and sneak one more quick one in. I mean, you're guiding for strong growth in new areas that I haven't heard of before, like the energy storage side is now much stronger for you and the data center side. So, do you think you have enough footprint to support this growth over the next few years? And when I look at your CapEx guidance, it's still in that normal range of 2.2% to 2.5%. So, I mean, do you think that is enough CapEx to support this new growth? So, just your thoughts on the footprint and CapEx and areas of investment? Thank you so much again. Congrats on the quarter and the day.

Hey, Ruplu, this is Fred McCoy. I'll take that for you. Yeah, we've announced some expansions in previous calls. We've expanded our footprint both in North America and Europe. So, we feel really confident and comfortable in supporting the regional needs for those markets that you cite. We've seen some movement, as I mentioned, with some of the legislation in Europe and the U.S. driving specific regional requirements, and we think we're well positioned to support those energy storage and energy conversion programs in those regions. And all that's within our CapEx that we guided in the call. That's just part of our normal course of business in adjusting our capacity to meet customer needs.

And, Ruplu, if I can just add, if you look at our capital expenditures, historically, a few years ago, it was in the range of 3.5%. Over the years, we've reduced it to what we've suggested as a 2.5% to 2.6% range. The Mobility transaction is progressing, and we are working on significantly reducing this capital expenditure figure. The normalized range, based on what happened in fiscal year 2023, shows our capital expenditures fell to 2%, although that was somewhat influenced by timing. For fiscal year 2024, we expect capital expenditures to be in the range of 2.3% to 2.5%, but looking ahead, a range of 2% to 2.2% to 2.3% seems very achievable. If you consider our growth over the past few years, we've increased our revenues from $17 billion to $35 billion, effectively doubling them, while maintaining control over our capital expenditures during that growth phase. The same will apply in the automotive sector and other high-margin growth markets. We will continue to manage our capital expenditures with a lot of discipline, and I believe that our figures already reflect all expansion when we provide capital expenditure percentages.

Great, thank you so much.

Thank you. Next question is coming from Steven Fox from Fox Advisors. Your line is now live.

Hi, good morning. A couple questions from me. First of all, I was wondering if you could dig in a little more into the cloud slide that you presented from the aspect of the growth. Mike, you mentioned 20% sort of like-for-like growth on the rack configurations, but it seems like the drivers are a couple of different areas. Like, can you explain what you meant by customer diversity? And then also, how investing in new technologies like liquid cooling is driving some of the growth? And along those lines, I noticed you mentioned OSAT packaging, which I think is new. Can you just sort of give us an explanation on that bullet point? And then I had a quick follow-up.

Hi, Steve, good morning. We discussed this earlier today, and I want to emphasize our position in the cloud space. We believe our model is exceptional. It's asset-like and co-located with our customers, which we see as a significant advantage as they aim to disaggregate various parts of their data centers. The relationship we build allows us to collaborate effectively, focusing on efficiency and supporting their growth, particularly as we anticipate substantial growth driven by AI. Our existing cloud business has been enhanced by a strong shift toward AI. Regarding GPUs, as Mike noted, they represent a pass-through for us since we don't add value there. However, our cloud model enables us to deepen our relationships with customers and expand our business. Now, about OSAT, as we engage with our customers, particularly in liquid cooling, we recognize that the power demands of data centers have significantly increased. Air cooling is no longer sufficient, prompting a need for liquid-cooled solutions. This also necessitates extensive usage of photonics due to power needs. Our close collaboration with customers leads them to ask for our assistance with liquid cooling, photonics, and pluggable transceivers, among other things. This collaboration informs our strategic planning regarding investments to support our customers. The positive aspect for us is that as we delve deeper into vertical markets, we simplify our customers' operations and enhance the robustness of our solutions, which ultimately facilitates business growth. This is our perspective on the cloud, and I hope that clarifies things for you.

Yeah, no, that's very helpful. And then just as a follow-up. Mike, it sounds like what you're saying with the fiscal '25 guidance is to assume that you sort of execute on $2.5 billion of buybacks by then. And if that's the case, is there any way to sort of give us an idea of how much we should assume in buybacks, or how the share count conservatively comes down this year? I know there's a lot of timing issues there, but it seems like that's an important part of the EPS model to understand now for a little while.

Absolutely, Steve. I think you're correct. The buyback scenario depends on when the close occurs, but let me clarify that this morning the Board expanded our current authorization to $2.5 billion. As Adam noted in his remarks, we were unable to complete our share buybacks in Q4 due to restrictions linked to the Mobility transaction. Starting next week in October, we will initiate an accelerated share repurchase program of $500 million, regardless of when the close occurs. This will serve as a catch-up and allow us to take advantage of the current market conditions. After the transaction closes, we will carry out a series of accelerated share repurchases. The timing will depend on when it closes in Q2, and we won’t execute the full amount in one go; instead, we’ll conduct multiple buybacks. We are adopting this approach to balance interest costs with the benefits to the weighted average shares outstanding in a way that maximizes earnings per share. Consequently, by the end of fiscal year 2024, we may have completed about $1.5 billion to $1.7 billion of the authorized buybacks, with the remainder to be completed in fiscal year 2025. Looking at the weighted average shares outstanding by the end of 2024, I anticipate it will be between 126 million and 128 million shares, and in 2025, it should range from 115 million to 118 million shares, depending on our management of the process.

Great, that's helpful. And one just quick question on all that. Should an acquisition come up, would that possibly change the goals you just laid out, or could you do M&A and still do this amount of buybacks? Thanks.

No. I believe the company and the management team feel we are still significantly undervalued, and the best way to achieve a return is through buybacks. However, if an acquisition opportunity arises, I want to emphasize that our debt leverage is quite low, around 1.1. This provides us with enough flexibility to pursue an acquisition if the financials align and it targets the right markets. Our approach will depend on our debt structure. I see the buybacks as a definite priority, with any potential M&A activity being an addition to that, and we have ample liquidity and leverage to support both.

Yes, thanks, and good morning, everyone. A couple of questions for me if I can. One on in terms of your guidance for EMS, it looks like you're guiding Networking and Storage down 6% and you also talked about,, Kenny, the fact that you're disciplined, you're starting to optimize your customer portfolio there. So, does that guidance reflect just weakness in end markets in terms of visibility with customers, or are you disengaging with some programs that don't meet your return or profitability goals?

Yeah, hey, Matt, it's a little bit of both in this instance.

Okay. Maybe drill down a little bit in terms of what you're seeing in those markets?

There are some legacy EMS models that are primarily built-to-print, and our perspective is to continuously seek areas where we can add value. If our role becomes entirely built-to-print, there are likely others who could do that more cost-effectively. This would allow us to focus on delivering greater value to other clients through vertical integration or by providing more engineering services, for example. We're not abandoning any customers; rather, we're assessing if certain engagements align with our strengths and those of our clients. Additionally, we're experiencing some softness in both the market and the consumer sector, but we anticipate a recovery. It’s important to note that we are not stepping away from the Networking and Storage segment. In fact, the demand for advanced networking solutions to support AI data centers is substantial. We believe this business will perform well in the long run, though we are currently facing some short-term challenges and ongoing discussions with a few clients.

Okay, thanks for that. And then, my next question, just regarding the inventory picture, supply chain challenges that you've had, and how we should think about how that flows through the model in the next year. You had a nice inventory reduction quarter-on-quarter. That net number is down. So, are you expecting that to reduce further? And are you seeing any other supply chain issues that you've called out in previous quarters, particularly in auto and medical in terms of legacy parts?

Let me try and take that, Matt. The inventory days did come down by four days. I think the team did an excellent job. If you look at our supply chain team, our ops team, our BD teams, finance teams, all of them have done a fantastic job in getting that particular metric down. I think the focus that we put on that from a free cash flow perspective, from a working capital perspective, is all paying off. Having said that now, I don't expect it to go down into the low 50s. I think that 55 to 60, I think on previous calls I mentioned that's the range I was expecting mid to long term. It came sooner than expected, which is always a pleasant surprise. But I would expect that 55 to 60 day sort of range to be maintained. It might differ by nuances in particular quarters. It might go up a little bit, it might go down a little bit, but over the long term, I expect 55 to 60 days to be maintained. From a supply chain perspective, yes, supply chain constraints are coming down. However, I think, like you mentioned, the automotive and healthcare pieces, there still are some shortages going on there. Maybe not the same level that they were at three to six months ago, but we're still seeing some issues in those end markets all because of the legacy chips like you said as well. So, something we're watching, and when that starts coming down and normalizing, yeah, we'll get to the 55-ish range over a long period as well.

Thank you. Regarding the interest expense line, which you're projecting at $73 million, what should we expect for the full year, especially considering your excess cash in relation to reducing short-term borrowings? Is there a figure we should anticipate for the year?

Yeah, the excess cash has been built into our forecast. I think the number I'd say of FY '24 would be in the range of $290 million to $300 million. Again, we're being conservative there. If interest rates continue to go up, we don't have a crystal ball around that. But it's mainly our variable rate, which is higher right now because of everything that's going on in the markets. So, conservatively, I'd model $290 million to $300 million, Matt.

Yes, good morning, and thank you very much for taking my questions. First on Mobility, by exiting that business, do you think you can allow Jabil to better pursue some of these other end markets? And maybe give us a little bit more details as you think about things like management time, perhaps feeling less constrained by customer diversification considerations or having more capital to invest?

Thank you for the question, Mark. First, I want to express our appreciation for the Mobility team and the excellent work they have done. We are currently in the midst of a transition, and the collaboration with the BYD team has been exceptional. We are very pleased with our progress. Regarding our business focus, we are concentrating on where we can provide the most value to our customers by viewing the market from their perspective. This is why we are targeting end markets where our capabilities and global presence can truly support our customers' growth. We plan to emphasize areas like automotive, healthcare, renewables, AI, and cloud, which will provide us with significant opportunities. From a capital management standpoint, this approach will also help us. It's going to allow us to dedicate more time and resources to these strong areas of growth.

Okay. Thanks for that, Kenny. Speaking of AI, you spoke about some of the nice growth you're seeing and opportunities. Could you clarify how much of your cloud and 5G business is tied to AI at this stage? And how do you see that progressing in your '24 and '25 outlook?

Yeah, so at '24, it's roughly 20% to 25%, and we think that that's going to grow in the longer term and going to become a much bigger part of our cloud business.

That's very helpful. And just a clarification on the data center business. I think this is the third year you're seeing this transition to the consignment model, which has the revenue impact but helps the profit margin. With the shift you're expecting this year away from some of the consignment, do you think you're fully done now and is it the last year of that transition, or could this continue beyond fiscal '24? Thanks.

I think it's going to be really dependent on the mix of the businesses. So, we are expanding the space there to allow us to do more cloud. Mike mentioned that we're up 20% year-over-year. And we don't see any slowdown in terms of the cloud rollout. So, I think it depends, but certainly for sure, we think that our volumes are going to grow, but it will grow in the AI space. So, probably our revenues would probably be relatively consistent at that level, I would think, in the next year or two.

Hey, Mark, I believe the current consignment levels will be stable moving forward. We've managed to double our consignment, and even with a 20% increase in volumes, our consignment levels have significantly risen during this time. This positively affects our total revenue. Overall, this is good news. It’s a major advantage for us as it benefits our balance sheet, improves our margins, contributes positively to cash flow, and enhances customer satisfaction. This benefits Jabil as well, creating a win-win situation for all involved. Now that we've doubled our consignment levels, there might be an additional 5% to 10% increase possible, but overall, I think we are in a good position with the indicators we've shared.

Great. Thanks guys for taking my questions. And I appreciate all the detail. It's incredibly helpful. I have a couple of questions, and maybe one for Kenny and a couple for Mike. So, Kenny, just on the Mobility transaction, I know you're probably limited in terms of what you can say. But what gives you confidence? We're just trying to think through, what gives you confidence that this deal could close, let's say, within two quarters? Because I'm sure you're aware there's other deals that have been pending earlier in the year that are taking upwards of 12 months, if not longer. So, kind of what's going on there and kind of what are the steps that we should be looking at following sort of the purchase agreement date that you published last night? And then, I'll just hold off and ask Mike my follow-ups, if that's okay.

Thank you for the question, David. We are currently deeply engaged in this process. As I mentioned earlier, our collaboration with BYD has been very effective, which is especially encouraging for everyone involved and the leadership team is exceptional. We have engaged with all stakeholders and developed a comprehensive plan. We are very confident that we will complete this within the timeline we discussed in our prepared remarks. Our aim is to finalize it as soon as possible, ideally within this calendar year. With the support of BYD in Asia and our efforts in North America, we believe we will meet the timeline we outlined.

Great. Mike, I appreciate your insights on the margins and the mix shift reflected in the fiscal '24 outlook. Can you provide some specifics about the first quarter? It seems that at the high end, operating margins are approaching 6%. I assume this includes Mobility for the entire quarter, as Kenny pointed out. Looking at the full year '24, I expect that the base case for projections would assume Mobility exits the business by the end of fiscal 2Q, leading to lower margins in both 2Q and the latter half of the year. So, what’s happening in the first quarter? You mentioned earlier that the mix is a growing business, which supports full-year margins. But specifically for 1Q, why are margins so strong, and what does this mean for Mobility margins? Additionally, as a quick follow-up, you mentioned that the fiscal '25 outlook anticipates about 3% growth. I would assume this is based on a '24 figure that excludes Mobility. Is that the correct way to look at it? I’ll stop there.

Yes, it excludes Mobility. When we look ahead to FY '25, the 3% growth is based solely on the non-Mobility segment. Regarding the Q1 margin, there are a few factors at play. We mentioned consignment in the cloud, which slightly impacts margins in Q1 and throughout FY '24. Our mix continues to lean towards higher-margin end markets, which is beneficial for us. Currently, 70% of our non-Mobility business is concentrated in four key end markets. There are no significant changes in Mobility aside from some adjustments in consignment and work content that is more affected by bills of material than by any manufacturing changes. The added value we provide remains the same, but it's a matter of bills of material moving upstream instead of through us, which positively impacts margins. Finally, we signed a preliminary agreement on August 27, triggering an asset held for sale accounting treatment under U.S. GAAP. In Q4, this had minimal impact, with no effect on the P&L, other than some tax provisions we needed to account for. However, in Q1, we anticipate about a $40 million to $50 million increase due to the removal of depreciation as part of this accounting treatment, which I noted in my remarks as contributing to a $0.25 improvement. Keep in mind that this improvement will be offset by stranded costs later in the year. In Q1, although our revenue may seem lower, it's mainly driven by bills of material and other factors.

Mike, just to clarify, so is the stranded cost and this sort of triggered gain embedded in the core non-GAAP projections, or is that just strictly in the GAAP numbers for '24?

No, the asset held for sale, the depreciation is embedded in our core. I think I mentioned that specifically when I was talking about the core EPS, there was a $0.25 impact. The stranded costs are also included in core. We've got stranded costs towards the end of the year. We'll only be able to get to restructure those in maybe Q3 or Q4 well after the transaction closes.

Hey, guys. Thanks again for taking my question, and congrats on the quarter and the strong guide. Yeah, just a couple of quick questions. Firstly, can you kind of talk about share gains? Just maybe pass out kind of what are you seeing in terms of the continued share gains, whether that's mostly from new markets or existing growth markets you guys already in right now?

Hello, George, it's great to speak with you. Currently, we are experiencing some mixed results in different markets. For instance, in the consumer segment, identified as Network and Storage, we're seeing a decline. However, we are not losing market share in that area. Conversely, in sectors such as automotive, healthcare, and renewables, we are successfully gaining market share. This progress is helping us mitigate the decline in the consumer segment and continue to grow our overall business. We are indeed seeing significant gains in these targeted sectors.

Okay, great. And also, I kind of want to double-click on the opportunities out of China, especially given the reshoring trends and maybe kind of specifically in Eastern Europe, kind of on the EV production side and also Mexico. Would you like to call out a few other regions kind of outside of China, also in particular vertical, like that could drive incremental growth as this reshoring trend continues?

We have excellent capabilities and a strong presence in China. We utilize many resources across the company from our operations there. We recognize opportunities in China for the domestic market, particularly in electric vehicles and various other sectors. Our facilities are currently busy, and we are seeing increased demand. When we discuss regionalization, it's important to note that it does not undermine our operations in China. We anticipate long-term growth in demand there, supported by our exceptional teams in the country. In addition, we are actively focusing on reshoring in Europe and North America, which plays a significant role in the growth of our targeted markets. Our company benefits from standardized processes and a consistent culture, adapted to different regions. This allows us to move capabilities and products around the globe efficiently. Overall, our emphasis on supporting the Chinese market while also leveraging our strengths internationally bodes well for our future growth. Therefore, we view regionalization or reshoring as a positive development for us, and we are optimistic about what lies ahead.

Hey, thanks for the question, guys. This is Joe Cardoso on for Sameek Chatterjee. Just one question for me, but maybe a two-parter. Your outlook for Industrial and Semi-Cap encompasses more muted forecasts for your Semi-Cap business for '24. Within that, can you just bifurcate between what you're seeing in the front-end and back-end of the business and how you see those tracking through the year? And then, you talked about prepping or investing into that business for '25. Can you just dive into that a bit and touch on if there's any specific areas you're investing in, or is that more of just a broader comment relative of being prepared for that end market as it recovers? Thank you.

Hi, this is Fred. I'll address that question. Currently, there is a lot of uncertainty regarding our fiscal '24. The industry appears to be anticipating a rebound in the latter half of calendar '24. We have factored this into our projections for the Semi-Cap business for fiscal '24, across both the front-end and back-end, where we are facing challenges. Regarding investment, we are aware of the CHIPS Act as well as other investment initiatives in Europe. We are also strategically positioned to take advantage of regional trends related to manufacturing and components for semi-capital equipment. We are using this time to optimize our operations and capacity in key regions to support the anticipated recovery, likely towards late 2024 or early 2025. We are confident that, as Kenny mentioned in a previous question, our global presence and standardized practices will enable us to be a leading supplier in all three regions of the world.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you. Our call has now ended. If you have any further questions, please reach out. Thanks.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.