Q1 2020 Earnings Call
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Greetings and welcome to the Gibble first quarter fiscal year 2020 earnings conference call and webcast.
This time off because that's really listen only mode.
A question answer session will follow the formal.
And if anyone's <unk> operator assistance during the conference. Please press star zero under telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Adam Barry. Please go ahead Sir.
Good morning, welcome to James first quarter fiscal 2020 earnings call.
Joining me on todays call, our Chief Executive Officer, Mark Mondello, and Chief Financial Officer, Mike does store.
Please note that today's call is being webcast live and during our prepared remarks, we won't be referencing slot.
Follow along with the discussion and view. This watch you will need to be logged into our webcast on cable dotcom.
At the end up todays call both the presentation at a replay of the call will be available on Jabils Investor Relations website.
During today's conference call, we will be making forward looking statements, including among other things that was regarding our outlook for business and expected second quarter fiscal 20, net revenue and earnings.
These statements are based on current expectations forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.
And extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31st 2019 and other filings.
Jamel disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise with that it's now my pleasure to hand, the call over to Mark Mondello.
Thanks, Adam.
Good morning.
I appreciate everyone, taking time to join our call today.
I'll begin by thanking our folks here Jay will for their continued hard work and commitment.
I'd also like to extend my sincere gratitude to each and every Jay will employ for making safety their personal priority.
And before getting into our results and the business at hand.
I want to wish all of you a safe and peaceful holiday season.
Now please turn to slide four.
Well, we'll look at our first quarter results.
Our team generated core operating income of $277 million on revenues of $7.5 billion.
Resulting in core earnings per share of one dollar and five cents.
And a core operating margin.
3.7%.
During the quarter.
We delivered to our plan of record.
With one exception.
This exception being our newly formed geocentric cloud services business.
Which came in well above our forecasted revenue.
This revenue upside was helpful for the quarter.
But for me, what's most valuable.
It's how our cloud solution is being accepted and adopted in the marketplace.
Overall.
Q1 gave us a favorable start to the year.
As is customary Mike will provide more detail around our Q1 results and speak to our forward guidance during his prepared remarks.
With the first quarter behind us the team is dialed in.
We're obsessed with providing first rate solutions to our customers, while also delivering for our shareholders.
We understand that financial results matter and matter a lot.
But how we go about producing these results is paramount to me.
Said differently I think often about our purpose and our conduct.
And when they think about our purpose and conduct.
I think about keeping our people say.
And ensuring a fully inclusive work environment.
I think about unmatched customer care.
And getting back to the communities around the globe.
As CEO I'm, just so appreciative that our team is squarely hitting the mark in all of these areas.
And if our conduct in behavior stands through the year.
As I expect it will.
We'll have a banner fytwenty.
Our year that will make us all very proud.
Moving on to slide six.
You will see a terrific picture.
A picture, which shows the composition of our commercial portfolio.
This picture underscores the effort and effectiveness of our team.
Over the past few years I've repeatedly address deliberate increase to our diversification.
And the positive impact it has on our business.
Diversification is key to our performance.
Furthermore, the makeup of our commercial portfolio is special.
In fact, intentional and unique when considering the full enterprise.
A bit of our foundational magic.
Which makes the portfolio so powerful.
Comes from our ability to efficiently and quickly share technologies across our various business sectors and do so with little friction.
With each passing year.
Our revenues become far less dependent on any single product or product family.
Improving the predictability of our earnings while enhancing our ability to execute.
Our performance suggests that our diversification strategy continues to excel.
And gives us tremendous confidence as we move to the back half of fiscal year 20.
And that brings us to our update for the year.
Please turn to slide seven.
Our company is well positioned.
As we highlighted in September were intensely focused on three financial metrics.
Margins.
Earnings and cash flows.
We anticipate revenues will be up roughly $1.4 billion year on year, when compared to fiscal 19.
More importantly.
We see the income coming through side by side with the increased to revenue.
Therefore core operating income will now be in the neighborhood of $980 million for the year.
Confirming our core margin target of 3.7%.
This improved income outlook for the year translates to $3.60 a share in core earnings up 15 cents from outlook, we offered in September .
Lastly, we.
We remain committed to delivering free cash flow in excess of $500 million for the year.
In closing.
I smile, when considering our total body of work.
Progress has been explicit and steady.
Strategy has been consistent and disciplined.
And our path forward is clear.
We're ushered ahead by our structure.
Our team and our culture.
Where the whole is far greater than the simple some of the parts.
I truly believe jabils, making the world just a little bit better.
A little bit healthier and a little bit safer each and every day.
And we value our role as a responsible and reliable partner to many of the best brands on the planet.
I want to once again offer a special thanks to our team.
And acknowledge there near perfect execution during this past quarter.
I feel strongly that our execution will continue.
As a team is carrying good organizational momentum into the back half of the year.
With that I'd like to wish everyone on the call a safe and peaceful holiday.
I'll now turn the call over to Mike.
Thank you Mark and good morning, everyone.
Q1 was an excellent quarter in many ways.
We saw good diversification and strong performances by both segments.
Net revenue for the first quarter was $7.5 billion, an increase of 15% year over year.
GAAP operating income was $153 million and our GAAP diluted earnings per share. It was 26 cents.
Core operating income during the quarter was $277 million, an increase of 9% year over year, representing a core operating margin of 3.7%.
Net interest and other expense during the quarter was better than expected.
Lower net interest expense during the quarter was driven by less intra quarter borrowing due to better than expected inventory levels during the quarter.
Our core tax rate for the quarter illustrating 7% inline with expectations.
Core diluted earnings per share was one dollar and five cents, a 17% improvement over the prior quarter at approximately 12 cents ahead of previous expectations.
They started three factors.
First we saw excellent operational execution across both segments as we successfully ram seasonal products and Dms and focused on operational efficiencies associated with lost his new product awards in MMS.
Second as Mark highlighted our cloud offering continues to resonate with Hyperscale players.
It's worth reminding everyone. Our cloud business is a bit unique and has been deliberately structured as a geocentric asset light service offering.
Our solution is highly flexible appropriately agile.
With this in mind during the quarter, we experienced an increase in both demand and content configuration that we were able to swiftly capitalize on.
Given the flexible nature of the model.
This compounding effect of increased volumes, coupled with higher materials, Frontend led to approximately $350 million and additional revenue.
And finally as I, just mentioned interest and other expense came in better than expected.
Now moving to our GAAP results.
As expected, we incurred $45 million in restructuring charges in Q1 largely related to the 2020 restructuring plan, we announced in September .
This plan continues to remain on track and as a reminder is expected to result in an incremental cost savings benefit of $25 million, mainly in the second half of Fytwenty.
Also during the quarter, we've got a non core charge of approximately $15 million associated with certain distressed customers and the renewable energy space.
Now turning to our first quarter segment results.
Revenue for our Dms segment was $3.1 billion, an increase of 3% on a year over year basis.
Core margins for the segment came in at an impressive 5.6%.
Our Dms segment performed very well driven by broad based strength in several key end markets, including healthcare and edge devices.
This is yet another proof point that our diversification strategy is working.
Revenue for our EMS segment increased by 26% year over year to $4.4 billion.
From an end market perspective, cloud industrial and automotive came in higher than expected offset slightly by slower Fiveg rollouts.
Goal margins for the segment came in at 2.4% as expected.
Turning now to our cash flows and balance sheet.
As I referenced earlier during Q1, our total days of inventory will better than expected coming in at 57 days a decline of one day sequentially, reflecting strong execution by our teams and the asset light nature of our cloud business.
This was in spite of closing occurred at a largest rave about strategic telco collaboration during the quarter.
Improved inventory levels during the quarter were offset by higher days of sales outstandings at the end of the quarter driven mainly by the timing of sales.
Cash flows provided by operations or $21 million in Q1, net capital expenditures totaled $207 million.
We exited the quarter total debt to quarter EBITDA levels of approximately 1.5 times and cash balances up $720 million.
During Q1, we repurchased approximately 2.6 million shares for $96 million as part of our Tulia $600 million authorization, we announced in September .
Before turning to Q2 guidance I'd like to review a new accounting standard we adopted in September .
During Q1, we adopted the new lease accounting standard S. U 201, Sakes Dash zero too.
Under the provisions of the standard companies in that required to report most leases on their balance sheet.
You will see the effects of this adoption as we recorded a rate of use asset and a corresponding lease obligation for the payments required under our lease arrangements.
We adopted the standard on the modified retrospective approach.
This adoption has no material effect on us statement of operations all our statement of cash flows.
Turning now to our second quarter guidance.
BMS segment revenues expected to increase 4% on a year over year basis to $2.35 billion, while that Fms segment revenues expected to increased 5% on a year over year basis to $4 billion.
We expect total company revenue in the second quarter fiscal 2020 to be in the range of $6 billion to $6.7 billion for an increase of 5% at the midpoint of the range.
Core operating income is estimated to be in the range of $155 million to $255 million with core operating margin in the range of 2.6% to 3.8%.
Core diluted earnings per share is estimated to be in the range of 62 cents to 82 cents.
GAAP diluted earnings per share is expected to be in the range of nine cents to 40 cents.
Next I'd like to outline our updated expectations for revenue in fiscal year 20 by end market.
Within Dms today's outlook suggests higher healthcare and packaging revenue driven by better than expected volumes associated with that strategic Eltek collaboration.
The transition is going extremely well and sets us up a strong results in F why 21 and beyond.
We continue to expect margins for Dms to be 4.1% on the year on revenue of approximately $10.2 billion.
Turning to MMS, given our strong start to the year, we now expect revenue to be higher for cloud.
Auto and semi cap and industrial and energy.
We continue to expect margins will SMS to be 3.5% on the year on revenue of approximately $16.5 billion.
In summary, I am pleased with a strong start to the year.
For the most Bob the year is unfolding as planned and it's worth noting that a high level assumptions remain unchanged from 90 days ago as does our focus.
For the year, we now anticipate revenues will be up roughly $700 million from prior guidance and core operating income has increased to $980 million.
This improved outlook translates to core earnings per share of $3.60 for the year.
We also remain committed to delivering free cash flows in excess of $500 million for the and expanding our core operating margin to 3.7%.
Importantly, our balanced capital allocation framework approach is aligned and focused on driving long term creation to shareholders.
As we move into our second quarter, we continue to build on the positive momentum underway in our business and expect future growth in both earnings and free cash flow to come through meaningful margin expansion and improve working capital efficiency.
I'll now turn the call over to Adam to begin Q anyway.
Thanks, Mike as we begin the Kunaev session I'd like to remind our call participants that per our customer agreements, we will not address any customer product specific questions.
We appreciate your cooperation operator, we're now ready for Q Annette.
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One moment, please while we pull for questions.
Our first question today is coming from Adam Tindle from Raymond James Your line is now live.
Okay. Thanks, and good morning, Congrats on a strong start to the fiscal year.
Mark I just wanted to start coming into this fiscal year I think the story for table with more about margin expansion on kind of more muted revenue growth, but now looks like you'll grow revenue at the upper end of mid single digits for the year, which is quite healthy.
I'll start by acknowledging that the updated expectations for the year implies just under a 5% operating margin on that incremental revenues. It looks like good accretive business that you're taking on but it's different than what we're seeing from competitors, who are calling their business not taking on more so maybe just update us on the willingness to take on more growth at this point.
Yes, Thanks Adam.
Since changed since 90 days ago I think.
We've got customers to serve first and foremost.
You know working and we're going to do everything we can to continue to to deliver for shareholders, but.
We've got we've got really good solutions and services.
I think Mike said in his prepared remarks.
Our Dms revenue came in squarely in line SMS was up.
Ill give or take 500 million threefifty that was from our cloud services business and about a 150 was kind of scattered across en masse, if I think about the scale.
Of our MSP business that 150 is is about a 3% uptick which I think squarely in the error rate of trying to figure out revenue topline with the business. So large and then on the cloud business.
As I said my prepared remarks, it's not just about the the uptick for the quarter, but how the how the services are being received in the marketplace I.
I think what I'm pleased about is is.
Unlike some some quarters.
In 19.
Income came through and came through nicely with the with the additional uptick in revenues. So I just take that 350 out and not to make light of the 350 I think things here are squarely, where we thought they'd be 90 days ago and.
Again, what we're driving for and I think is is a good portion of your of your context is.
Consistency I really like the consistency of the quarter relative to September .
Beginning in your outlook.
Okay, and maybe just as a follow up Mike I know, it's still early and I think we've got a good view of the full year, but just wanted to dig into some of the nuances as we shape. The back half of this fiscal year with that 25 million and restructuring does that have more weight to threeq or fourq, you and does enable dms operating margin to stay north of 3% in each quarter in the back half.
The year, I think thats kind of the with the implied model would suggest so really just any help on understanding expectations for threeq versus fourq. Thanks.
Yes, so the 25 million Adam dust coming in the second half multi year the savings do come in then.
We'll be closer to 3% in Q3, Q4, I think Q3 would be higher than Q3, and Q4 will be just around that 3% level.
Okay. Thank you.
Thank you next question is coming from Steven Fox from Cross Research. Your line is now live.
Thanks, Good morning couple of questions from the first.
On the revenue outside specifically with the.
The cloud services also ramping JNJ quicker what was the margin impact from that upside, especially given there was that you've mentioned material content with the cloud services et cetera. Thanks.
Hey, Steve Let me take a swing so I would characterize it a couple ways and let me let me let me maybe take it up a level and talk about the enterprise so.
Thank our center Centerpoint guide for the quarter was 260 million, we delivered to 77 uptick of about 17 million.
We've got we've got about.
$5 million to $6 million leveraging dms on on on revenue that was really spot onto to where our guide was that's a great tribute to our Dms team.
On the on the Threefifty uptick from cloud as well as the other 150 across the mess enterprise to call. It. The 500, we also got what I would characterize is acceptable leverage the net net effect of of Vms leverage, though Steve we saw some de leveraging fiveg.
And.
Again, we're still bullish on the Fiveg rollout there were some areas. During Q1, we saw a little bit of de leverage, but you shake all that up in.
Again, I'm really pleased with.
The income that came through on a net basis with the with the additional upsides of the.
Mr revenue.
Okay. That's helpful. And then just as a follow up on the Johnson and Johnson business again so.
Since its ramping a little bit better than maybe originally planned 90 days ago. I was wondering if you could sort of.
Put a little more color around that happened.
It sounds just like general execution was good and.
What is the implications in terms of their relationship with Jane Jane and as you look out maybe longer term 12, 18 months given what you've done.
Thank you.
Thanks, again, yeah, I don't want to get into too much details around it but again kind of overall speaking firstly with.
With our health care business, our health care business and that whole team continues to just do a really really nice job with services and solutions into the marketplace with the collaboration with JJ, Andy specifically I think what we said.
Multiple times last year was that revenue for this year would be in the range of 800 million to a billion.
And I think what Mike made of alluded to is.
I think that revenue for fiscal year 20 would be on the upper end to that and maybe slightly higher than a billion. So in terms of that business. It's it's going well and we're working really really hard to serve JJ MD and Steve I think now the September called we highlighted that that the.
To your collaboration as sort of a diluted effect.
For us in that Fytwenty Dms margins would be about 20 to 30 basis points higher.
If it wasn't for the for the full budget for the strategic collaboration ramp.
And that's still going to increase.
Thats correct Thats true Yeah, I think I think thats a good point is.
Oh.
In in.
Fine 19, I think Dms margins were around 4%.
In September we said there'd be about a 10 basis point uptick and Dms margins for F. White 20 for the year.
So pleased with with how things are going on health care overall, JJ MD, but again GMT still in what I consider kind of a semi transition ramp mode through F. Why 20, moving into 21, and if you. If you kind of exclude that Dms margins for the year would be close.
Sure to 4.3, so as Mike said up 30 basis points year on year.
And thats already baked into guidance, yes, thanks, Steve.
Thank you happy holiday you as well.
Thank you. Our next question today is coming from Jim Suva from Citigroup. Your line is now live.
Thank you very much and I will ask both my questions at the same time. So you can pick any order.
You had mentioned significant upside on cloud. This is kind of a new were initiative that many of us who's been following gibault for many years or used to really hearing can you extrapolate a little bit about that solution the offering in the importantly, the visibility.
Long term versus there so cloud providers, who could have a great quarter or two and then it completely.
As far as production and product, placing and is more like the public cloud companies were used to doing or more private colleges help us understand the cloud initiative a little bit better then my second question as you mentioned automotive oxide, yet globalstar has not been overly robust so I take it that would assume.
Maybe you won some more auto production or auto.
Content production.
And if auto gets stronger it seems like at this the auto side could even see more upside if you could comment on those two end markets. Thank you so much.
Thanks, Jim Okay that was a lot. So let me try to break that into a couple of pieces the.
The thing I think.
We've done a reasonably good job of is is we've been very very consistent in talking about the cloud business, if I think back to fiscal 19.
There was a couple of our earnings calls, where we actually had a specific slide at around the cloud solution.
As we as we understood that it can be a little bit confusing.
Our I would characterize this solution that we're providing as as a geo centric.
Asset light services business.
I don't expect the.
Cloud business to go away I think it's I think it's being very well received in the marketplace and I think we're solving.
A few different.
Tangential problems with the services and solutions that we're providing Jim.
The other part of it is the cloud solution that we have is is very much fulfillment model and so some of it has to do with reducing overall working capital.
Agility flexibility.
In in unit configuration so.
So we've intentionally step that model up unlike a business that might be.
A pure white box design.
Business that might be more aligned with some of the standard SMS businesses that are more asset intensive we've we've been very thoughtful and the team has been very thoughtful in setting up our cloud business in a very very asset light manner and so again.
The the costs and the.
Overall infrastructure can ebb and flow quite nicely with fluctuations in demand so I.
I don't have a lot of anxiety around.
Some of the demand fluctuations I think the nice thing is is we do anticipate.
If there is upside.
To the business a bit like there was in Q1 I do think that there'll be some level of income that'll come along with that fluctuation in terms of the automotive.
One of the things I think that.
Our team has done a nice job of is is going very very selective in which part of the automotive sector end markets were choosing to play in.
A significant portion of our automotive business is not relying on all.
Overall automotive sales. So if I think about combustion engines and legacy type of automobiles are automotive businesses more predicated on electrification.
The electronic nature of the vehicles and an overall increase in electronic con content as well as as well as sensing and sensors, so when I'm thinking about our business.
I think a better proxy then overall automotive sales would be what's going on around electrification of.
Vehicles in an overall electrical content. So I hope those answer your questions and Jim if I could just.
We did post some videos in September .
Our investor briefing.
I think if you want a little bit more color on cloud.
The Eni videos, a good luck to us.
Thank you so much for the details it was great. Thank you. Thanks, Jim.
Thank you. My next question is coming from both a chart from Bank of America. Your line is now live.
Hi, Thanks for taking my questions and congrats on the quarter.
First question for Mike.
How should we think about free cash flow for the year I think your original target was over 500 million is that still the case and then during the year, how should we think about the cadence of buybacks at this stage.
Yes, certainly could we continue to be committed to that 500, plus I think is a phrase we used was still low.
Prudent about that number side that I, just take that as a 500 plus.
As far as buybacks are concerned we didnt 96 million in Q1.
I think in September we talked about 600 million authorization 250 million of that was going to be in applied 20, 315 21, that's still stand. So we'll probably do the balance of the 250 over the next step three quarters. It applied 20.
Okay. That's helpful.
Maybe one for Mark.
You've raised the guidance that EPS guidance for this year by 15 cents. That's the that's great I.
I mean looking into fiscal 2001, any any thoughts on the $4 and as I mean should we think that theres upside to that as well.
Let's go slower flu I.
Okay, well, we've got a lot of work add to deliver this year I think I think for now I would.
I would stay firm with the $4 in the and the 4% margin and again the $4 is important for me. The 4% margin is is what we're all focused on so.
Whether next year in terms of EPS is three dollarsninety three dollarsninety five four box four or five for 10.
Well really dialed in on the on the 4% margin, but for now, let's let's keep it at the foreign four and as if.
If things change at all we'll talk about that more in the March calling the June call.
Thank you. Our next question is coming from Matt Sheerin from Stifel. Your line is now live.
Yes, Thanks, and good morning, just first question just regarding your outlook for the year Mark I'm use you. In addition to cloud you called out actually several segments, where you're seeing some some upside including energy.
And in semi cap could you give us more color there and then on the flip side, where youre seeing weakness you also talked about Fiveg and we know that the networking Oems have also been relatively weak so any color there would be appreciated.
Matt just to clarify you are you asking around Q1 or for the year for the year, yes. It will in near term too yes.
So for the year, if you kind of reference back to the Green Green Blue chart that might show I think we're showing.
Overall mobility roughly flat, we're seeing a nice uptick in healthcare and packaging.
Which a portion to that will be the J.J.M.D. collaboration.
Edge device and and lifestyle products.
If we look at where we were in September no change, but year on year, that's coming down a bit as we kind of reshape that portfolio you could think about and then that kind of covers Dms, Matt and.
I think I think about that as as we reshaped edge device in lifestyle.
Year on year that coming down four or $500 million whatever the number is.
It's being replaced by some healthcare in packaging business, which which we're pretty excited about I think about kind of puts and takes for Fms for the year.
We.
We've taken automotive in semi cap up year on year. So last year I think our automotive semi cap is in the $2 billion range, maybe just short of that and we've taken that up to about two and a half billion for the year.
Again into his question I talked about I'm kind of the catalyst for automotive and then we're still stand Pat on a semi cap recovery. This summer, which has been very consistent with what we said.
In in the September timeframe.
And then the other areas are a little bit of an uptick in industrial and energy.
Fiveg cloud again, starting off the year, we saw some.
Lumpiness in some softness in the Fiveg area.
We imagine that'll that'll come back we're still very bullish long term on fiveg, but again, I think it'll be with a little bit of Choppiness.
And then.
Mike talked in his prepared remarks about the the uptick for the quarter in the cloud business and again, we're early days in that but it's being well received in the marketplace and then lastly, we're seeing some some weakness on the.
On the legacy enterprise customers.
Okay, Great. That's very helpful. And then sort of a bigger picture question as Adam pointed out. His question earlier, we are seeing some of your competitors your walk away from deals, particularly in the data com.
Server storage and networking space.
Those opportunities for you as we're seeing share shifts or are you continuing it'd be disciplined just like your competitors.
In long term are we seeing some of the leverage shift perhaps from from the the customers to the mass suppliers.
I don't want to debate what leverage lies I think I think were heavy heavy heavily.
Customers and and I hope, we provide a great service for them in terms of I don't know why some of our competitors are walking away from business, if it's bad business I.
I think it's good for our industry if people walk away from things like that offer us I think.
We're kind of keeping our head down sticking to our needing if you will rolling out solutions and services that.
That seem to be well receive I think I would I would close my answer to your question with we are not chasing revenue.
And we are again really focused on margin and cash flow, we talked about that through 19, we talked about that in September so I.
I just want to be clear.
If we have customers that are walking away from business. That's not good business you can be 100% share, we're not going to put that sand in our bucket.
And again, we're we're kind of keeping our head down and being sure that.
We're doing the best job, we can to to grow, but but growing an area that continues to support our goal of driving 4% margins in 21.
Okay fair enough, thanks, very much and happy holidays. Thank you you as well.
Thank you My next question today coming from Andrew but from Wolfe Research Your line is alive.
Hi, Thank you.
I wanted to ask about the early returns you're seeing from the 250 million in growth Capex earmarked for at 20.
And then in terms of the breakdown by end market should we still be thinking about a similar breakdown as laid out in Q4 call with around 50% coming from healthcare.
No no major changes to the Capex.
Outlook that we outlined in September , yes, and half will continue to come from the outside.
Okay, and then maybe just a follow up on this share repurchase question.
If we kind of extrapolate the 100 million out.
You know that might imply that you might be keeping a lid on M&A and or debt repayment, how should we thinking about.
It was one or two categories going forward.
It's exactly as we as stated in September and will the talked about 600 million authorization.
We said was due to learn 50 in in applied 20, and 350 enough slide 21 on no change at all to that I think we'll just continue.
That 250 million in Fytwenty.
Thank you.
Thank you we've reached end of our question answer session, let's turn the floor back over to Adam pretty for closing comments.
Thank you for joining US this now concludes our call happy holidays.
Thank you with this concludes today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.