Jabil Inc Q4 FY2024 Earnings Call

Good morning, and welcome to Jabil's Fourth Quarter and Fiscal Year 2024 Earnings Call. It's also our 7th Annual Virtual Investor Briefing. I'm Adam Berry, Senior Vice President of Investor Relations and Communications. As a team here at Jabil, we're excited to share with you a couple of updates as it relates to our business. This includes some organizational updates as well as an outlook for fiscal 2025. We'll begin today's call with a quick introduction, setting the stage for what promises to be an informative session. Then, we'll move on to our 2024 results, led by Greg Hebard, our Chief Financial Officer. In thinking about 2024, it was a challenging year, no doubt, but it was also a very important year as we took some strategic strides as an organization while continuing to look after our customers, employees and shareholders. For starters, we divested our Mobility business for $2.2 billion, and returned the majority of those net proceeds to shareholders through a robust buyback program. Through this divestiture, we not only improved our diversification in terms of geographic footprint, but we also reduced our exposure to a business that required higher levels of capital. At the same time, the organization persevered in the face of some pretty stiff headwinds. This is evidenced by strong margins, roughly in-line core earnings per share, and strong free cash flows. And we did all this despite $6 billion less in revenue year over year. This suggests to me that Jabil is far more resilient today than when compared to previous downturns. And finally, we reorganized our internal structure to focus on speed, precision and solutions. This approach targets our ability to serve each distinct end market effectively by creating domain expertise in core areas and better positions Jabil for growth. As a result of the organizational realignment, we will transition our financial reporting structure from two segments to three. This change better reflects not only how we operate as a business today, but it also positions the organization for growth. The first segment is called Regulated Industries, led by Steve Borges. It is comprised of end markets that simply demand best-in-class care and manufacturing, as the products built in this segment keep us healthy, safe and moving ahead. In a bit, you will hear about our healthcare, automotive and transportation, and renewable energy infrastructure markets. Next, our Intelligent Infrastructure segment, led by Matt Crowley, has been designed to support end-to-end growth from the cloud to the data center and the networking and communications gear within, as the world further embraces artificial intelligence. And then finally, our Connected Living & Digital Commerce segment, led by Andy Priestley, encompasses both consumer-facing products in Connected Living and retail and warehouse automation in Digital Commerce. Again, this enhanced organizational framework will enable greater focus, customer care, collaboration and growth. In a bit, you will hear from all three of these business leaders. And finally, we'll conclude with a business update from our newly appointed Chief Executive Officer, Mike Dastoor. From Mike, you will hear about team, targets, strategy, and why we think Jabil is uniquely positioned to benefit from a recovery through our global capacity and network of factories. But before we jump into the details, please note that today's presentation is being live streamed, and during our prepared remarks, we will be referencing slides. To view these slides, please visit the Investor Relations section of jabil.com. After today's presentation concludes, a complete recording will be available on the website for playback. In addition, we will be making forward-looking statements during this presentation, 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 on our annual report on Form 10-K for the fiscal year ended August 31, 2023, 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, we're excited to share our progress and future plans with you. Now, let's dive into the details.

Thanks, Adam. Good morning, everyone. Thanks for taking the time to join our call today. I'd like to begin this morning by walking through our fourth quarter results, where the team delivered approximately $7 billion in revenue, $364 million above the midpoint of the guidance range. This was driven by stronger-than-expected results in our connected devices, networking and storage markets. Core operating income for the quarter came in at $401 million, or 5.8% of revenue, a solid improvement of 20 basis points compared to last year. Net interest expense was better than expected, coming in at $65 million, which was due to lower inventory levels and strong working capital management. On a GAAP basis, operating income was $318 million and our GAAP diluted earnings per share was $1.18. Core diluted earnings per share was $2.30, which is $0.07 above the midpoint of our guidance range. Now, let's look at the numbers by segment for the quarter. Our DMS segment posted revenue of $3.5 billion, which exceeded expectations by $79 million. This was primarily due to stronger growth in our connected devices business, although it was slightly offset by lower-than-expected revenue in the automotive business. Year-over-year, DMS revenue was down approximately 22%. This decrease was mostly due to the Mobility divestiture. Core operating margin for the segment came in at 5.4%, slightly lower than expected, reflective of the mix. In the EMS segment, we saw revenue of $3.5 billion, which was $285 million higher than anticipated. This was driven by stronger demand in our advanced networking markets as we closed out the year. While EMS revenue was down roughly 13% year-over-year, mainly due to the ongoing softness in the end markets like 5G, renewable energy and digital print, we did see solid year-on-year growth across our cloud, semi-cap, and warehouse automation markets. This dynamic drove core margins for EMS to 6.1% in Q4, up an impressive 90 basis points year-over-year. Moving now to our end market performance for the year. Compared to our thoughts in June, connected devices, networking and storage came in better than anticipated, while auto and transport came in slightly lower. All other end markets largely came in as expected. Shifting gears to cash flow and balance sheet metrics, we continue to see robust results. Inventory at the end of Q4 was down five days sequentially, bringing it to 76 days. After adjusting for inventory deposits, net inventory days were 54, which is a four-day improvement quarter-over-quarter. Thanks to disciplined working capital management by the team, our fourth quarter cash flows from operations were very strong, coming in at $535 million. Net capital expenditures for the fourth quarter were $116 million and, for the full fiscal year, came in at $661 million, or 2.3% of revenue. As a result of the strong fourth quarter performance and cash flow generation, adjusted free cash flow for the fiscal year came in north of $1 billion. We exited the fiscal year with a healthy balance sheet with debt-to-core-EBITDA levels of approximately 1.3 times and cash balances of approximately $2.2 billion. With that, let's now turn to our capital structure on the next slide. We ended FY '24 with capacity under our global credit facilities of $4 billion. With this available capacity in our year-end cash balances, we had access to more than $6.2 billion of available liquidity. Our debt and liquidity profile are both solid and we believe current maturities are appropriately staggered and at attractive interest rates. We also remain fully committed to maintaining our investment grade credit profile. Moving now to our capital returns to shareholders on the next slide. We have repurchased 5.3 million shares, bringing total shares repurchased to 19.4 million shares, or $2.5 billion, which completed our FY '24 share repurchase authorization. This brings our cumulative shares repurchased since FY '13 to approximately 128 million shares at an average price of approximately $47, bringing our total return to shareholders, including repurchases and dividends, to approximately $6.7 billion. Importantly, included in our earnings release this morning, we announced that our Board of Directors authorized a new share repurchase authorization of $1 billion, which we expect to fully execute in FY '25. We remain committed to returning capital to shareholders through a disciplined and balanced capital allocation approach. Moving to the next slide. The team performed well in FY '24, operating within a highly dynamic environment. In summary, over the past year, we sold off our Mobility business and used the net gains to buy back $2.5 billion of our shares, all while managing temporary challenges in major end markets like renewables, electric vehicles, 5G infrastructure and semi-cap. However, looking at the broader perspective, the company continues to be highly resilient and is well-positioned for future revenue growth, margin enhancement, and delivering robust free cash flow. With that, let's turn to our next slide for our first quarter guidance, beginning with revenue by segment. As Adam highlighted earlier, we're pleased to unveil this new business unit organizational reporting segment structure today. We will transition our reporting segments in FY '25 from DMS and EMS to three new reporting segments, Regulated Industries, Intelligent Infrastructure and Connected Living & Digital Commerce. This change is aligned with our new management structure and with how we drive our long-term planning and forecasting. For Q1, we anticipate revenue for our Regulated Industries segment will be $2.9 billion, down 9% year-on-year, reflective of softness in the renewable energy and EV markets. For our Intelligent Infrastructure segment, we expect revenue for the quarter to be $2.3 billion, down 4% year-on-year. This is mainly due to us exiting certain legacy networking businesses at the end of Q4 FY '24. In our Connected Living & Digital Commerce segment, revenues are expected to be $1.4 billion. The year-over-year decline is primarily driven by our Mobility divestiture. Speaking of Mobility, I'd like to highlight the seasonality of our business in FY '25 will reflect the impact of the divestiture. As a reminder, our Mobility business typically generated a significant portion of its income during Q1. This means going forward, our quarterly income and earnings progression will more closely resemble our historical EMS business, where typically 40% of earnings come in the first half of the year and 60% in the second half. So, you can expect a more back-half weighted year as we go forward. Moving now to the enterprise guidance. Total company revenue for Q1 is expected to be in the range of $6.3 billion to $6.9 billion. Core operating income for Q1 is estimated to be in the range of $304 million to $364 million. GAAP operating income is expected to be in the range of $143 million to $223 million. Core diluted earnings per share is estimated to be in the range of $1.65 to $2.05. GAAP diluted earnings per share is expected to be in the range of $0.26 to $0.83. Net interest expense in the first quarter is estimated to be approximately $65 million and, for FY '25, we expect it will be $245 million. And our core tax rate for Q1 and for the year is expected to be 21%, reflecting impacts of Pillar Two global minimum tax legislation and jurisdictional earnings mix. We continue to believe it's prudent to anticipate higher tax rates beyond FY '25 in the range of 23% to 24% due to additional expected impacts from global minimum tax legislation.

Hi, everyone. I am excited to share some details on our Regulated Industries segment. Each of the end markets in this segment plays a critical role in addressing some of the most pressing challenges and opportunities in the world. Let's first start with healthcare. Many of the macro trends we've been discussing for the last several calls remain unchanged. Connected care is creating new markets by enabling remote monitoring and telehealth solutions. Personalized medicine continues to drive improved patient outcomes, particularly in the management of chronic diseases. By tailoring treatments to individual patients, healthcare providers can achieve better results and enhance the quality of life for millions of people. In addition, the introduction of weight loss drugs or GLP-1 drugs are all becoming increasingly important in today's healthcare landscape. New care settings are also emerging, creating opportunities for innovation. As healthcare delivery evolves, we see a shift towards more decentralized and patient-centric models. This opens new avenues for developing advanced medical devices and technologies that can be used in a variety of settings from hospitals to the home. As a result, we continue with a strong pipeline of design engagements to enable connected devices and home healthcare products for our customers. Meanwhile, the tailwinds of growth in autoinjectors, medical devices and diagnostics continues, most especially with the advent of many new biologics and individualized testing platforms. Another significant trend is the need to simplify the supply chain. The complexities of the healthcare supply chain have been highlighted in recent years, especially during the rise of COVID. There is a growing demand for streamlined and efficient solutions. This need for simplification is leading to expanded outsourcing as healthcare device companies seek partners who can provide comprehensive supply chain management, engineering, design and manufacturing expertise, coupled with the quality requirements our customers demand. We are the largest manufacturing solutions provider for the healthcare industry with great diversification, covering diagnostics, medical devices, orthopedics and pharmaceutical delivery systems. Staying the largest will require us to expand our capabilities and accelerate growth by entering areas of the market with macro tailwinds, which will provide substantial TAM expansion while focusing on specific geographies, like Croatia and the Dominican Republic, to fuel that growth. The expanded capabilities and geographies will enable us to further simplify the supply chains for our customers. Internally, the most powerful aspect of what we produce is that, every single day, millions of patients around the world are using a product manufactured by Jabil. Now, turning to our automotive and transportation end market. Our expertise in product industrialization and manufacturing continues to enable innovation in powertrain electrification, autonomous driving and connected vehicle technologies. As the automotive and transportation industries undergo a transformative shift towards the mass adoption of electric vehicles and advanced driver assistance systems to meet global regulations and safety requirements, as well as the associated shift to centralized architectures, Jabil is playing a pivotal role in shaping the future of transportation. We have seen some short-term volatility in demand due to regional changes in EV tariffs and incentives, which has been experienced across the entire automotive industry. The Jabil team has managed this well, supporting our customers as they manage their business through this unprecedented market evolution. Jabil remains partnered with global market-leading automotive OEMs across the most important technology platforms of the foreseeable future, advanced driver assistance and autonomous driving systems, connectivity, electrification and software-defined vehicles. Three of these platforms are agnostic to vehicle type, providing us with an opportunity to support our customers, however they choose. Each year, we continue to add new automotive OEM customers and technology leaders, providing further diversification across our customer portfolio. This positions Jabil extremely well as the automotive industry works towards meeting future governmental vehicle emission targets. Outside of our automotive customers, we remain engaged with strategic OEMs and suppliers focused on advancing precision agriculture. We leverage experience gained from serving automotive customers, as well as capability expertise from across Jabil, such as optics and fluidics, to help our customers bring the most innovative new farming technologies to the market. As the automotive and transportation market recovers, Jabil is well-positioned to capitalize on growth with expanded strategic capabilities, including our new facility in Croatia, which will support the growth of our European automotive business. We are focused on technology collaborations and investments and capabilities that best serve our long-term OEM customers and expand Jabil's role within the value chain. We are committed to delivering cutting-edge solutions that enhance vehicle performance, sustainability, safety and connectivity. Jabil is recognized in the market for our ability to industrialize complex technology designs, develop robust supply chains, and create automotive-grade automation strategies for the next-generation technologies entering the market today. We deliver these highly complex products with speed and quality while meeting functional safety requirements.

Thanks, Steve, and good morning, everyone. Today, I'm excited to share some insights into our work in the Intelligent Infrastructure segment and discuss the evolution of cloud technology cycles, including the transformative impact of artificial intelligence. Our segment is dedicated to developing and delivering cutting-edge solutions that support the backbone of the modern digital ecosystem. This includes everything from cloud and data center infrastructure to telecommunications, networking and capital equipment. Each of these end markets plays a crucial role in shaping the future of how we connect, compute and communicate. The evolution of digital technology has laid a robust foundation for today's advancements. Starting with e-commerce in the '90s, moving through Web 2.0 in the early 2000s, and advancing with cloud computing, mobile apps and big data in the early 2010s, each phase has been pivotal. Now, we're on the cusp of a new era. Thanks to artificial intelligence and machine learning. These emerging technologies promise to reshape everything in our lives, from solving major health conditions to seamless autonomous transportation, emphasizing the critical role of cloud infrastructure as an enabler to these innovations. AI is the next cloud technology cycle, revolutionizing the way we process and analyze data, enabling more intelligent and automated decision making. At Jabil, we're at the center of this evolution, providing our customers with advanced manufacturing solutions, they need to stay competitive in a rapidly changing landscape. Our expertise in this segment allows us to support the development and deployment of next-generation technologies to the market. The journey to fully harness AI comes with its own set of challenges that spur innovation and investment. Old compute architectures are inefficient for new models, necessitating the development of massive parallel architectures that drive huge data transfer needs. Additionally, AI requires immense amounts of energy. As processing power demands continue to exceed the capabilities of conventional cooling methods, there's an increase in need for advanced liquid cooling solutions. While liquid cooling has been around for many years, it has traditionally been a way to deliver efficiency. With the explosion of AI and the high-power GPUs required to fuel it, liquid cooling is now a requirement to deliver capacity and will soon be the standard for how data centers address cooling. The pace of innovation associated with today's GPU silicon is twice as fast as legacy silicon architectures. This creates new challenges when launching products from development into production. In our Intelligent Infrastructure segment, Jabil has built engineering and architecture capabilities that allow us to enable this transition of hardware from development to production at scale, while also enabling us to keep pace with the accelerated development cycles we see being driven in the market today. Additionally, as GPU speeds increase, so does the need for high bandwidth interconnect, driving the need for cost and power-efficient photonic interconnect. Across all of these technologies, we are actively investing in capabilities that offer our customers differentiated value for solutions that meet these emerging requirements. One specific example of differentiated capability is our recently announced investment in Jabil's advanced packaging OSAT and process development facility for photonics. This technology will become more important over time, as power continues to become more scarce and the need for higher speed and lower latency inside systems becomes more important. Our investments in this space positions Jabil to be at the center of one of the next innovation cycles, as the industry moves to co-packaged optics and on-chip solutions. In addition to our focus on creating these key capabilities, we're also expanding our footprint in strategic geographies as we scale our support of AI data center buildouts. Our facility in Pune, India, is a key manufacturing site for our AI customers and has executed exceptionally well. And while our demand for manufacturing in India has been driven by AI-related hardware requirements, Jabil has customers across all three of our segments asking us to leverage the region. Because of this, we have recently announced our intention to further expand our footprint in the country. The unique capabilities we have built throughout this technology value chain are core to a strategy that is both agile and resilient, giving Jabil the ability to support massive scale from secular tailwinds like AI, while being ready for whatever comes next in the market. Ultimately, Jabil is a key player within the technology ecosystem, ready to help customers overcome today's challenges and prepare for tomorrow. We're leveraging our expertise to support the increasing demand for advanced processors, high-speed photonics and sophisticated hardware solutions. Our solutions are designed to be scalable, secure and adaptable, helping our customers to stay ahead.

Thanks, Matt. Hello, everyone. I lead Jabil's Connected Living & Digital Commerce segment. Today, I'd like to take a few minutes and talk to you about our work in digital commerce and more specifically warehouse automation. When we think about the definition of commerce, it's the exchange of goods and services, especially on a large scale. Commerce is made possible by production and fulfillment. And at Jabil, we are a critical enabler within that ecosystem. Jabil is the largest manufacturing solutions provider for digital commerce and warehouse automation customers. Our expertise and scale allow us to support the largest players in this industry as they navigate the complexities of digitization and automation. Leaders in this market are focused on digitization. In the aisles, electronic shelf labels and other connected technologies are becoming part of a unified commerce strategy. These innovations are transforming the shopping experience, making it more seamless and efficient for the consumer and allowing a higher standard of compliance for the retailer. At the checkout, most shoppers are now using contactless payments. Jabil is a leading provider of point of sale and self-checkout solutions, having over 15 years of experience building and now designing these products. This shift in technology not only enhances convenience, but also aligns with the growing demand for safer, touch-free interactions. Additionally, research shows that most consumers today are likely to choose a business that offers grab-and-go services over a more traditional business model, highlighting the importance of speed and convenience in the modern retail landscape. Another element of the digital commerce system that may not be as immediately visible or apparent is what happens behind the scenes in warehouses and distribution centers around the world. Billions of dollars of goods are moved through these warehouses and fulfillment centers every day, and warehouse automation has seen significant growth. The integration of digitization, automation and robotics in these environments is revolutionizing the way we manage inventory and fulfill orders. E-commerce has more than doubled since 2019 to over $1.2 trillion to date. This would not have been possible without higher and higher levels of automation being deployed in these fulfillment centers globally. Jabil is working both directly and indirectly with many of the world's largest brands on autonomous mobile robots, automated sorting systems and automated guided vehicles. At Jabil, we're constantly looking for ways to help solve some of the macroeconomic issues facing industry today. For example, the availability and cost of labor, to name but one. Jabil builds over 1,000 warehouse robots a month and powers another 4,000 a month with sub-assemblies that we also make. As we look to the future, we have several exciting projects that look to solve these labor issues with even more creative humanoid robotic solutions. As I have already discussed, digitization, automation and robotics can play a role in a wide range of settings, all of which are designed to increase safety, improve day-to-day operational efficiency, and deliver a superior customer experience. From automated picking and packing to real-time inventory management, these technologies are driving significant improvements in productivity, cost, accuracy and compliance. At Jabil, we're committed to helping our customers stay ahead of this curve by providing innovative solutions that address their unique challenges. For example, we have used our expertise in 3D printing to create solutions that allow our customers to solve technical issues and provide superior products to the markets they serve. We're constantly looking for ways to continue to help our customers become more efficient and meet the needs of their own customers. Our goal is to enable a more connected, efficient and customer-centric approach to commerce and logistics. We look forward to continuing to drive innovation and deliver value to our customers in these exciting and rapidly evolving fields.

Thanks, Andy, and thank you everyone for joining us today. Over the last three months, I've had the opportunity to travel to a number of our sites and spend a lot of time on the shop floor with our teams. Let me address a question that understandingly came up a number of times in my travels, and which I believe many of you on the call have as well. I'm often asked, 'Mike, are you going to change the strategy? What are you going to do differently?' Well, our enterprise-level strategy is sound and, while I have made some changes to focus the organization more on profitable growth while also reducing risk, I will largely maintain the same direction that has allowed us to be so successful for the past few years. Our diversified approach across multiple end markets with secular trends continues to provide a solid foundation. This approach was pressure tested in FY '24, as we faced multiple headwinds across several end markets and still delivered strong margins and free cash flow. Today, the company is much more resilient than in years past. During my first few months as CEO, I've spent considerable time ensuring we have the right people leading our three distinct businesses. Each of these businesses has a different growth expectation, lead time, margin and balance sheet profile, outsourcing maturity levels and product lifecycle times. It was imperative to ensure our teams remain focused in their respective areas of domain expertise. Based on what I've seen in the last three months, I feel like we've gotten that part right. We have three business leaders in Steve, Matt and Andy that have the tenure and experience in Jabil, solid pedigree, deep domain expertise and know-how to run a global manufacturing business at scale. I also believe we have the right team running our factories, led by Fred McCoy, another nearly 25-year Jabil employee. Fred's unique combination of commercial experience and manufacturing operations will allow us to be more agile and more efficient as the complexities of manufacturing continue to grow. And finally, our supply chain organization is in exceptional hands with Frank McKay. Frank has developed a highly-experienced, long-tenured team with extremely strong relationships in the supply chain over the last 25 years, which, along with investments and advanced supply chain systems, gives me full confidence that Jabil continues to be best-in-class in the industry. This well-rounded enterprise leadership team is already delivering results, securing new business across each of our distinct segments. In Regulated Industries, Jabil continues to partner with global market-leading automotive OEMs, offsetting EV demand softness with new wins, particularly as tariffs dictate the localized manufacturing of vehicles. In healthcare, we will soon be expanding our GLP-1 drug delivery business in Europe, through new wins with existing customers. We've taken our manufacturing and automation and industrialization capabilities designed in the U.S. market and replicated those efforts in Europe, which we believe will result in solid multiyear growth. We've also recently won new programs in the diabetes wearables area. As mentioned earlier, lead times on new wins in the healthcare space due to medical validation requirements mean these wins only show up in FY '26 and FY '27. In Intelligent Infrastructure, our team is squarely situated at the center of the data center infrastructure backbone. We lead with design and engineering to build the hardware and infrastructure that will enable artificial intelligence. Jabil is also well-positioned to participate in the recovery of the capital equipment end market during our fiscal '25. Year-on-year, we expect the Intelligent Infrastructure segment to be up by $1 billion after adjusting for the exit of legacy networking businesses Greg mentioned earlier. In Connected Living & Digital Commerce, our team is driving innovative solutions to address our customers' desire to automate their warehouse and retail environments as labor becomes increasingly difficult to find. As we move through FY '25, our digital commerce business will grow, as we have won new programs with both new and existing customers in that space. Also, while early days, the robot and humanoid end market seems to be evolving rapidly, and Jabil is currently participating in that. At Jabil, we build staff, leveraging our vast engineering capabilities, global footprint and long-term partnerships. Technologies constantly evolve, but Jabil will continue to skate to the park by investing in engineering-led tuck-in capabilities which will allow Jabil to be technology agnostic. For instance, in the automotive sector, Jabil has built engineering capabilities that are equipped to support both hybrid and EV platforms, depending on which one prevails. In the data center infrastructure space, Jabil has built engineering and architecture capabilities that allow us to keep pace with the accelerated development cycles and transition from older computer architecture to GPU-led system level design and hardware production at scale. This, along with our investments in OSAT and power management engineering capabilities, means we're in a good position to offer our customers differentiated value for the solutions that meet the ever-evolving requirements in this space. Similarly, in the digital commerce space, Jabil's advanced automation engineering investments uniquely position us to provide automation solutions across various fields, including retail warehouses and robots. Transitioning to our financial priorities and unique approach to the market, it's important to highlight that both will remain consistent. Six years ago, we deliberately refocused our organization with the intention of achieving core operating margin expansion, consistent earnings growth at robust predictable cash flows. To this end, we align the management compensation metrics to better match investor expectations. None of this changes. And importantly, our capital allocation framework continues to be aimed at creating long-term value for shareholders. And when it comes to our approach with customers, we utilize customer-centric work sales that are focused on supporting a single customer. This approach is highly effective and sets us apart from competitors. Regardless of the customers manufacturing location worldwide, a dedicated team supports them across the three regions in Asia, the Americas and Europe. Each work cell provides tailored solutions in three key areas of expertise, advanced engineering-led engagements, AI, ML supported manufacturing solutions, and robust supply chain systems. Currently, around 70% of our engagements are led by engineering initiatives. The complexities of modern supply chains and geopolitical challenges, along with the need for advanced software solutions and manufacturing closer to the end market have significantly enhanced Jabil's value proposition. This increased engagement means enhanced stickiness and margin improvement compared to even five or six years ago. And when you look a level deeper within each of our segments, you'll find an exceptionally diverse array of customers, including some of the world's biggest, most innovative and successful brands. This is by no means a complete list of the customers we serve today, but it's certainly impressive by any standard, especially when considering many of our customers rely on Jabil as the sole source for their products. Now, let's discuss our global footprint, which we believe is a significant competitive advantage. To be abundantly clear, we place considerable value on maintaining a large-scale global manufacturing footprint. However, as the geopolitical situation continues to evolve, our ability to adapt, combined with our designation as a U.S. domiciled manufacturing service provider, is becoming increasingly important as we help our customers navigate this complexity. Following the divestiture of our Mobility business, our footprint has become largely balanced with nearly one-third of our factories located in each of the Americas, Europe and Asia. Over time, we believe there will be further demand for manufacturing that resides closer to the end customer. And for that reason, we will work with our customers that seek to near or re-shore their manufacturing, whether it be a bifurcated approach or simply lift and shift. As this dynamic plays out, I believe our factories in both Europe and the Americas will see considerable growth. Today, we have approximately 40 sites in North America, approximately 30 of which are in the U.S., ready to take advantage of any near or reshoring to North America. With that said, a lot of the world's supply chain is still very much embedded in Asia, and some of our most efficient factories are located there. As we sit today, we currently have capacity in place to support an excess of $30 billion of revenue. Over the near term in FY '25, we expect to carry higher than normal levels of excess capacity. We are doing this because we firmly believe many of the end markets we serve will recover. This underutilized capacity will weigh on core operating margins in FY '25 by 20 basis points to 30 basis points, even after the mainly headcount-related restructuring charges we disclosed this morning. Over the longer term, my team and I strongly believe we're well-positioned to capitalize on significant global trends in sectors such as AI, data center infrastructure, healthcare, pharmaceutical solutions, and warehouse automation, as Steve, Matt and Andy highlighted. As a result, Regulated Industries will grow 5% to 8% with longer lead times, while Intelligent Infrastructure will grow more quickly at 7% to 10%. Over the next several years, we believe Connected Living & Digital Commerce will grow low-to-mid single digits, driven mainly by double-digit growth in digital commerce and warehouse automation. Putting this all together, we believe our long-term enterprise growth rate should be in the range of 5% to 7%. Given this anticipated mix of business, we expect gross margins to be in the range of 9% to 10%. And when combined with operational efficiencies, our 6% margin target remains intact over the longer-term. And when you consider our strong free cash flow generation and consistent returns to shareholders, core EPS should grow between 12% to 15% over the longer term, all of which would continue to drive consistent ROIC north of 30%. In closing, one thing is for sure, it is our people who make us strong. Our people are resilient. So, I just want to take a moment to say thank you to all our employees for their unwavering commitment and dedication, not just to our customers, but also to our communities and to each other. Together, we will write the next chapter of the Jabil story. Thank you for your interest in Jabil. I will now turn the call back over to Adam.

Thanks, Mike. As we wrap up our prepared comments today and we move to the Q&A portion of our call, I want to leave you with one final thought from me. At Jabil, we build stuff and we do it really, really well. And as we sit today, I believe we're focused on the right end markets with the right capabilities and we have a global yet agile manufacturing footprint. And from an enterprise level, you can expect our focus to remain on margins, cash flows, core EPS growth and shareholder return. Thank you for your time today. Operator, we're now ready for Q&A.

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

Hi, thank you for taking my questions. And congrats to Steve, Matt and Andy on your respective assignments. For my first question, I'd like to ask related to the cloud and data center infrastructure segment. Your guidance for fiscal '25 suggests 11% year-on-year growth. Are you seeing any slowdown? I mean, what is the impact from consignment in fiscal '25? And is low-double-digit the right way of thinking about revenue growth in this segment? And if you can talk about what your plan is to expand revenues in this segment beyond your existing customers?

Hey, Ruplu, it's Mike. I want to start by thanking the entire team for their efforts today, especially with the hurricane outside. Regarding Intelligent Infrastructure, the year-on-year growth rate is approximately 12% if we exclude the legacy network customer we disengaged from, which we've mentioned in previous calls. It's worth noting that Intelligent Infrastructure includes 5G and a cyclical semi-cap business that performs well in up years and declines in down years. Overall, the long-term increase remains robust at around 7% to 10% despite the other components in this segment. Now, as for consignment, its impact is minimal. The data center infrastructure business is the area I'm most enthusiastic about, and I expect it to continue growing in double digits. Matt, feel free to take it from here.

Yeah. Hey, thanks, Mike, and appreciate the question, Ruplu. Let me kind of focus on the back half of your question around our plans to expand the segment beyond our existing customers. So, we are hyper-focused on executing the strategy that we've put in place over the past 18 months. And a good proof point of that is our silicon photonics business. If you think back to last November, we announced a transaction that brought in capability and capacity. And inside of the first 12 months, we've already seen that pay off, in that we have now landed business with two new hyperscale accounts, which we're currently shipping product into. So, we're hyper-focused on executing there. We believe that our roadmap moving forward on the qualification of 800-gig parts as well as 1.6T, coming in calendar year '25, will allow us to continue to expand our customer base there. We're also super-focused on executing our power and cooling business in the data center. We're currently beginning to ramp our ability to help customers retrofit data centers, which today are air cooled, need to be retrofitted to go from air to liquid, and soon will be liquid to liquid. So, we really feel like the capabilities we've built over the past 18 months in these spaces is going to allow us to continue to expand the customer base. And we've already seen some really nice proof points of that to date.

Okay. Thanks for that, Matt and Mike. For my follow-up, I'll ask a question on healthcare. Again, looking at the growth rate for next year, 2% year-on-year seems a little low. Is the market itself growing low-single-digits right now? And can you talk about what you're seeing in terms of the various end markets within healthcare? Mike, I think you talked about GLP-1. Can you talk a little bit about that? What does that add in terms of revenue margins? And is there a likelihood of another J&J type of deal going forward? So, just any details on the growth rate and what you're seeing in the markets?

Hi, Ruplu, this is Steve. Let me address that question. The overall healthcare market is expanding by approximately 3% to 4%. We have faced challenges this year, particularly due to the impact of GLP-1 drugs on our medical device segment, mainly because of a decrease in gastric bypass surgeries. However, looking ahead, our healthcare business is in an excellent position. The growth of GLP-1 drugs and our recent successes with the injectors we manufacture are quite promising. Despite the global challenges in diabetes care, we have secured notable new contracts with continuous glucose monitors, growth in minimally invasive devices, and a rising need for autoinjectors due to the increasing prevalence of biologics and the complexities associated with various diseases. We've launched some exciting new programs, as Mike mentioned regarding fiscal year '26-'27, affecting both our pharmaceutical and medical device segments. These programs tend to be very stable and last for many years, providing us with great visibility with our customers. Additionally, it’s exciting that these programs are commencing in our new manufacturing facilities in the Dominican Republic and Croatia. As a reminder, the complexities associated with healthcare are linked to stringent validation requirements and the lead times needed for automation. Therefore, new projects usually take two to three years before reaching steady production. Overall, we feel optimistic about our healthcare business. Regarding your second question about J&J, we remain positive. We have observed a robust pipeline across various levels of discussions, which indicates that our healthcare OEM clients still see divestitures as a viable strategy for accelerating outsourcing. We'll monitor how this develops over the upcoming year, but the pipeline looks very strong.

Thank you for that, Steve. Mike, may I ask another quick question? Considering your global footprint, what is the current utilization? You mentioned an impact of 20 to 30 basis points. Do you believe there is a need for any restructuring of the footprint? Which end markets do you anticipate investing in over the next year? I appreciate all the details.

Hey, Ruplu. So, in my prepared remarks, I talked about how after the Mobility divestiture, our footprint is really well balanced, it's one-third in the Americas, one-third in Europe, one-third in Asia. Currently, our capacity is set up for a $30 billion-plus revenue run rate. We've got new facilities in Croatia coming up. We've got new facilities in the Dominican Republic coming up. So, there's a whole bunch of sort of capacity that was put into play. So, it was put in place to come up in '25. So, the utilization that we have today, normally, we run around 80% to 85%. Our utilization today is closer to the 70% level. And that creates obviously, a surplus capacity issue. One of the things we're not doing. And then again, I mentioned that in my prepared remarks, one thing we're definitely not doing is going in and restructure or reduce the number of sites, because we believe, and this is a very strong belief, that the end markets that we're in will come back. We feel EVs will come back. We know healthcare will be steady eddy. The growth that we're seeing in semi cap, the growth that we're seeing in the cloud data center infrastructure parts of the business, we're well-positioned for that. When that business comes back, by the way, there will be a decent level of leverage. So, 20 basis points, 30 basis points that I talked about, that is a headwind right now. So, we're not restructuring capacity. I think, we did disclose this morning that we're sort of restructuring some of the SG&A piece, the headcount piece. If you think of the $3 billion or $4 billion gap that we've had in our revenue, 3% of that is, around $100 million, in SG&A. So, we're trying to address some of that. At the end of the day, we're marching to 6%. If we can get our gross margins in that 9.4%, 9.5% range and get our SG&A down to that same 3.4%, 3.5%, you have a 6% margin. It's just pure math. So, that's what we're trying to do here, but we strongly believe that the businesses that we're in, they will come back. So, no restructuring of capacity at this stage.

Thank you for taking my question. I would like to ask about capital equipment. It's known to be cyclical, but a nearly 20% growth caught my attention. Can you elaborate on what is driving this? Is it a new win or just an easy comparison? I'm interested in understanding this strong double-digit growth in semi-cap for this year.

Yeah, I'll take that one. Hey, George, thanks for the question. Yeah, we're definitely seeing some mix shift occurring in the business in our automated test equipment space, because I think there is a pretty clear attach rate there to some of the GPU silicon required to drive AI. So, where customers are trying to get more capacity and more yield out the door for customers, we've seen an increase around demand for the ATE business. I think that's the primary driver. We're also seeing a bit of the recovery coming a little bit sooner than we expected on the WFE side. So, overall, I think that the ATE business and the attach rate to AI is a big part of that increase.

Okay, great. Just a quick follow-up. Can you kind of expand and talk about kind of margin for the AI business? Margin seems to be the focal point for investors, kind of, as you guys said high-grade portfolio, fast growing AI cloud business with higher margin. Just how you think about also kind of liquid cooling, kind of OSAT and silicon photonics, potentially higher margin? And quickly, just curious, since you guys re-segmented, not sure if we can still reconcile to this $6 billion AI revenue you guys talked about a couple quarters ago. Besides this cloud and DCI, maybe there's some in the AI networking. So, just curious whether does it still sort of a valid number we should look at kind of from grow by $1 billion to $6 billion this year, or should we just stick to a new sort of disclose of segmentation of $5.1 billion for the current DCI for this year? Thanks.

Yeah, no, thanks. Look, I think, in general, an easy way to think about margins is that we expect AI margins to be in-line to slightly accretive to the enterprise targets that we've laid out. We're currently, obviously, undergoing a number of ramps. And the way to think about the $6 billion is that it's spread across cloud and DCI, capital equipment and networking. So, as I just kind of illustrated, the ATE business as an attach rate there to AI, our networking business where we're helping customers transition from air-cooled to liquid-cooled switches has a clear attach rate, as well as, obviously, what we're doing in the data center for power and cooling. And so, I think the easy way to think about the $1 billion of incremental growth year-on-year is roughly half of it is being driven by our cloud and data center business, and then the other half is split relatively evenly between photonics and capital equipment.

Hi, good morning, and thank you for joining this call during a hurricane. Regarding the automotive and transport segment, the quarterly revenues were somewhat below expectations. The full-year guidance for this fiscal year has also decreased. I'm curious about the impact of this auto business on your negative leverage in the near term since I presume it still maintains high margins. Looking ahead, while it's reasonable to anticipate further growth in electric vehicles, there are various factors that raise questions about the company's position in the automotive sector. Could you clarify if these factors are favorable or unfavorable for Jabil in the long run? We are observing lower-cost vehicles coming from China, difficulties for global manufacturers in competing in Asia, and rising tariffs globally, among other issues. It appears that the auto industry is on the brink of significant changes, and I wonder if Jabil is well-prepared for this. I also have a follow-up question.

Thanks, Steve. This is Steve. We touched on this at a broad level, and I'm here if you need more details. As I mentioned in my opening remarks, the auto market is currently undergoing a transition or transformation phase. It has been affected by rising interest rates, reductions in government incentives, and the overall tariff situation, making it quite dynamic. We've seen some delays in programs we had anticipated for this fiscal year. Considering the general consumer challenges, including concerns about charging infrastructure and battery range, it’s clear that there are significant challenges ahead. However, despite these challenges, I remain optimistic about the EV market. Growth predictions suggest an expected range of 25% to 30% through 2030, which, while down from 48%, still indicates strong growth. Additionally, despite the current softness in the market, we have established new OEM relationships and have a strong pipeline of opportunities. The team has successfully introduced other products that are agnostic to vehicle type, demonstrating the strength of our OEM partnerships. I also want to highlight that we successfully launched a new OEM relationship in Croatia on time, which we are excited about.

Yeah, Steve, that covered pretty much everything except for the short term. I just want to dial it back and talk about the negative leverage this year as auto and transportation may be down a little bit.

Let me address that question, Steve. I believe there is certainly some degree of negative leverage involved. As you know, our factory in Croatia, which is starting operations this month or in October, was primarily established for automotive purposes. However, some of that production has been delayed. We are now shifting that facility mainly to focus on healthcare products, specifically GLP-1. This demonstrates how flexible and adaptable a company like Jabil can be. This model has its advantages, but there will indeed be some negative leverage. The positive aspect is that our revenue isn't declining significantly; it's simply not increasing. So, there’s a slight amount of deleveraging, but it's manageable. Additionally, there are newer capacities that are coming online but have experienced some delays.

Yeah. Hi, Steve, this is Greg. Yeah, we're very confident on the $1.2 billion guidance on free cash flow. As Mike spoke on in his remarks regarding free cash flow conversion of being 80% to 100% of core net income, we feel '25 is going to be stronger. A couple of things related to that. We are targeting to take another couple days of working capital out of the cash cycle. And CapEx, we're seeing CapEx being approximately $200 million down year-over-year as we're looking at 1.5% to 2% of CapEx of revenue this coming year. So, really do feel confident on that $1.2 billion.

Hey, guys, thanks so much. I hate to say it, but it seems like we're always running from a hurricane down here during your year-end calls. It'd be great if we could change that pattern. That would be fantastic. So, just to start, I love the new segmentation and all the detail that you're giving us. I think it gives us all much better visibility into the real drivers. So, thanks for that. Matt, you are the popular one on the call today, so I've got a question for you. Up and down the supply chain in the cloud and data center infrastructure supply chain, we've heard of increasing pricing pressure, both from Nvidia on their suppliers or attempts to protect the margins by the hyperscalers as the cost of these compute systems continue to skyrocket. I'm wondering if you're also seeing some pressure from your customers as they're more cost conscious when they're planning out their portfolios, or if this is actually an opportunity for Jabil as to maybe help consolidate the supply chain.

Yeah. Hey, thanks, Melissa, for the question. What I would tell you is that we're constantly under price pressure, right? It's part of the business. So, is it a little bit more so than typical? Maybe, but it's something that we have to deal with on an ongoing basis. So, does it afford us an opportunity? Absolutely. And we're constantly looking at ways to consolidate. Are there opportunities in the market that we see that would create more value for our customers? We're constantly looking at that. I don't think it creates an opportunity beyond the typical one, though. So, it's an ongoing effort to manage costs. We'll continue to do it. We'll continue to look for efficiencies that deliver value for our customers, but it's nothing we're not used to.

Thank you for the question, Melissa. Genomic testing continues to grow, allowing us to focus more on specific diseases and treatments, which is exciting for our diagnostic space. In terms of GLP-1, we are seeing strong growth in that part of the business. For other equipment areas like medical devices, we currently have a growth rate in the 3% to 4% range, particularly as we expand in the diabetes sector. We have strategically invested in robotic surgeries over the past few years, bringing in new customers and continuing to enhance our surgical equipment, which provides us with diversity and the ability to expand our capabilities for other uses. We are pleased with our position in this area.

Yeah, Melissa, there is a little bit of a wait-and-see approach, particularly as it relates to some of the end markets. I think most end markets are okay. I think once that stand out, obviously, are EVs and renewables, there is a little bit of a wait and see. I do think whichever party comes in, I feel good that we'll have a long-term sort of growth driver in both EVs and renewables. I'm not that worried about the election per se. Obviously, there'll be short-term impact, but I think Jabil has mitigated most of that.

Great. Thanks, again, guys, for taking everything, given the circumstances, and please stay safe. Maybe can I just start, maybe go to Matt, I know, Matt, you're answering a lot of questions, but I just want to get a better sense for not just on the cloud and data center side, but as it ties to networking and comms. Obviously, the networking and comms business ex the divestiture is still a little bit weak. How do we think about how those two different businesses kind of work together going forward in terms of demand drivers? And over the longer term, obviously, when we hear from a lot of investors, there's some concern or maybe some fear that there's a degree of digestion that could potentially happen over the longer term. I know you just gave '25 numbers, but just how do you think about your visibility across different programs and how that maybe plays into your long-term thinking about the segment? And then, I've got a couple more.

Yeah, let me kind of take them from the back forward. So, if you think about visibility, we have a pretty unique position because we have customers across the entire spectrum of the ecosystem. And so, we have a pretty good view of what's happening at the folks who make silicon for AI, at the folks who then transform it and consume it. And so, we feel pretty good about where things are going. Now, if you think about digestion and you think about near term, we're currently in the midst of helping customers move from air cooled switching gear to liquid cooled switching gear. And so, we can also see the consumption of that on the back end. I think it's going to continue to take off as we move out of fiscal '25. If I address the question on how comms and networking works together, I would tell you, look, artificial intelligence is driving this massive wave in the market, that's probably having more of an impact on our networking business and our comms. And with the 5G installations where they are, which is pretty well publicized, I don't think they're as adjacent as they used to be, but certainly as workloads evolve and new opportunities to drive synergy between those, we'll be able to take advantage of that.

Yeah, thanks. Good morning, and thanks for all the information so far. My question regarding that exit of your major networking customer. The first question is, is that revenue all out of the model? And in terms of balance sheet receivables and cash flow from that, was that mostly a Q4 or are we going to see some of that in Q1? And then, on sort of bigger picture, obviously, it's a big step for you to exit from a customer that you've had for 20-plus years. And I know the industry, a lot of your peers have also been disciplined walking away from major revenue opportunities, looking at returns and margins. So, question is, have you looked at other relationships in terms of your portfolio back to customers? And is this sort of giving you a little bit more leverage with customers in terms of pricing and returns as you look at forward contracts? Thanks.

Yes, Matt, we don't directly walk away from customers. Our focus for the past six years has been on margins, free cash flow, earnings, and returning value to shareholders. We attempt to negotiate pricing with customers, and if we can't reach an agreement, we disengage. So, while we don't abandon customers, there is definitely a disengagement happening. To answer your question about whether everything is finalized, it is indeed complete. As mentioned in our slide, there was about $700 million of revenue from the legacy network customer in 2024, which will not occur in 2025. Additionally, all balance sheet items have been resolved, so we have effectively separated after August 31st.

Thank you for that. I wanted to follow up on the end markets. It seems that in the renewable energy and infrastructure sectors, you are actually projecting growth. I understand there have been some challenges with demand, both for your company and your competitors. What is driving your forecast for at least modest growth next year?

Sure. This is Steve. Renewables have seen a slight increase as we've secured some new opportunities in the HVAC sector and battery storage. Additionally, the impact of the IRA and our strong position in the U.S. market has allowed us to launch new programs. That’s the source of our growth. As Mike mentioned, we are not expecting a rebound in residential or commercial solar for the fiscal year and are keeping that area flat, but our growth is primarily coming from these new achievements.

And there's some consolidation going on in that end market as well and we've been the beneficiary of that. And it's directly related to the IRA piece that Steve referenced.

Hi, thank you for taking my questions and for hosting the call under the circumstances. I wanted to start with a question about margins in relation to Mike's prepared remarks and the reaffirmation of the 6% margin target. I'm trying to understand the revenue scale needed to achieve that margin number. I understand you're projecting about a 20 to 30 basis point increase to the 5.4% for fiscal '25, which suggests you'll be around 5.6% to 5.7% if you reach a $30 billion capacity or utilization. I'm curious about what you would need beyond that $30 billion to reach your margin target. Thank you. I have a follow-up.

I believe reaching between $30 billion and $35 billion would achieve our goal. As I've mentioned previously, our gross margins are between 9% and 10%. Therefore, if we can mathematically reach a gross margin of 9.5%, that can be accomplished through product mix and operational efficiencies. We have previously achieved 9.5%, and just for reference, Q4 was 9.3% for the year.

9.3% for the year.

Yeah. So, 9.5% is not a target, that's out five, six years. We've done that in the past. And then, getting SG&A down to that 3.5% number, I think would get us to the 6% pretty fast. I'm not suggesting we'll get to 6% in the next one or two years, but I'm also not suggesting we'll get there in five or ten years. It's going to be somewhere in the 202X timeframe and we'll have a definite path to that 6%. I feel really good about that.

Okay. Got it. And for my follow-up, I guess, it's sort of probably a question for you, again, Mike, in terms of the strategy update that you provided, no major changes, focusing more on profitable growth. As you think about sort of your portfolio and the opportunity to sort of keep expanding margins, should we be expecting some level of portfolio rationalization sort of happening every year, or sort of a continuous look at the portfolio to sort of weed out some of the lower-margin businesses and continue to drive the mix higher, or is this the biggest chunk in terms of what's coming out in fiscal '25, and everything beyond that should be really immaterial in that sense? Thank you.

Over time, Samik, we normally have those sort of portfolio rationalizations anyways. The reason we call this one out was because it was a material one. We have smaller rationalizations going on all the time where we try and get a negative customer back into positive territory and then beyond. If it works well for both of us, we continue. If not, we help them transition somewhere else. But overall, I'm not expecting some big rationalization exercises to take place. I'm relatively happy with what I'm seeing today from a portfolio perspective. Don't forget, some of the customers that have a slightly lower margin have really good free cash flow. So, it's not just about margin, it's a mixed story between free cash flow and margin. And we're constantly working that. One thing I will say, over the last few years and especially since COVID, the value proposition that Jabil provides has gone up considerably. I think if you look at our engineering capabilities, if you look at our manufacturing facilities, particularly with all these geopolitical issues going on, and then you look at our supply chain, which came through very strongly during COVID, I think pricing is not that much of an issue, obviously, every customer will negotiate pricing, but I do think the value proposition that Jabil provides is extremely strong today, and I think that continues in the future as well. So, the portfolio rationalization will be there, but limited.

I understand. Let me ask a follow-up to David's question about the revenue progression throughout the year. It appears that revenue will remain fairly stable for the remainder of the year based on the implied annualized run rate. However, you're starting the first quarter with a 5.1% margin and will need to reach the high 5% range in the fourth quarter to achieve an overall margin of 5.4% for the year. What will drive this? I believe you provided some insights, but I didn't fully grasp what you meant. Is it a matter of product mix or is there another factor contributing to the margin reaching the high 5% level by year-end?

So, there's two or three things. First is the normal EMS seasonality. If you go back and look over the past few years, the second half, from a margin standpoint and an earnings standpoint, has always been stronger. Part of it is mix. I think the mix that we're working on today, particularly in some of the regulated pieces, you have businesses coming through six months, nine months, 12 months out. Second half is looking good. I don't have anything in the second half which is exploratory. Sort of this is booked business, this is confirmed. Will it go up and down a little bit? Sure, but it's not based off of an optimistic return of end markets perspective. It's a pretty conservative forecast. It's just the way the 40-60s working out. It's purely a seasonality, purely the way the bookings are, purely mix. That's how we're getting some leverage on that as well. And that's why you'll see second half is a little bit better than the first half.

Thank you. We appreciate your interest in Jabil. We look forward to getting back with you all over the next couple days, and we'll see you soon. Thank you. Bye.

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