Q1 2021 Jabil Inc Earnings Call
Greetings and welcome to the table first quarter fiscal year Twentytwenty one earnings.
At this time, all participants are in a listen only mode and.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Adam Berry, Vice President of Investor Relations.
Good morning, and welcome to channel is first quarter of fiscal 2021 earnings call. Joining me on today's call are Chief Executive Officer, Mark Mondello, and Chief Financial Officer, Mike Destocking.
Please note that today's call is being webcast live and during our prepared remarks, we will be referencing slide to follow along with the slides. Please visit jabil dot com within our Investor Relations section at the cash.
Inclusion on todays call the entire call will be posted for audio playback on our website.
Before handing the call over to Mark I'd like to now ask that you follow our earnings presentation with the slides on the website beginning with the forward looking statements.
During this conference call, we will be making forward looking statements, including among other things those regarding the anticipated outlook for our business such as our currently expected the second quarter and fiscal year net revenue and earnings. These.
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 on.
August 31st Twentytwenty 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 turn the call over to Mark.
Thanks, Adam good morning.
I appreciate everyone, taking time to join our call today.
Well again, well free and my sincere gratitude to all of you hear a channel.
And thanks for hanging in there very and these trying times.
Well, making safety your number one priority.
And channel, we're fundamentally and the people business.
The manner in which we care for and except one another is truly what makes us who we are today.
And again thank you.
Let's please turn to slide five where we will look at our results.
For the first quarter.
The quarter came in well ahead of expectations.
As the team delivered core operating income.
$365 million.
On record revenue of $7.8 billion.
Resulting on a core operating margin of 4.7%.
The 4.7 per cent margin.
It's a 100 basis point increase year on year.
Q1, 21 to Q1 20.
Which as a reminder, was a pre koby quarter occurring September October and November of 2019.
Moreover, I'm really pleased with the financial make up for the quarter.
Well balance contributions from our E M S and Dms segments.
Supplemented with substantial upsides from our cloud computing can.
Connected devices and mobility sectors.
Do you want overall give.
Gives us excellent momentum.
So what looks to be another outstanding year.
And its customary Mike.
Michael provide more detail around our Q1 results during his prepared remarks.
Moving to slide six.
You'll see a terrific illustration.
Which underscores the effectiveness of our team.
When I look at the slide.
What gets me most enthused.
Is the fact that we get one plus one equals three.
And so many ways.
Across our two business segments.
One example of this.
The financial goals and objectives for each segment.
Our Dms segment focus is on expanding margins.
While offering reliable cash flows.
While our EMS segment.
Focus is on expanding cash flows while offering reliable margins.
Perfect complements that fortify our financial results.
These two segments play side by side underpin our resiliency.
Especially when an individual product or product family.
Is faced with a macro disruption.
Cyclical demand.
Or unforeseen market dynamics.
Speaking of a macro disruption.
Today more than ever.
I look at Jabil, as an essential business and a trusted partner.
Essential and trusted and a sustainable sense.
Knowing that Jay will is a primary manufacturing partner that supports a few trillion dollars of market value.
[noise] day in and day out we deliver high quality products, while solving and simplifying complex challenges for the customers we sell humbly Sir.
And to this collaboration embedded in our model.
What's the deep domain expertise and a long standing culture and always doing what's right.
It's a proven formula which stimulates progress.
And since we're on the topic of progress, let's turn to slide seven.
Where we see managements outlook for the year.
Not only is the company well positioned to exceed our financial goals around margins for the year.
But we are now predicting core earnings per share will be in the range of $4.60.
Up 15% compared to 90 days ago.
And up 55% to 60% when compared to fiscal year 20.
This meaningful increase to earnings.
It's largely driven by two catalysts.
The first being.
Our well diversified commercial portfolio.
Which gives us a from and steady foundation on which to operate our business.
And the second being the reduction of our net interest expense.
Driven by proactive steps, we've taken over the past nine to 12 months.
I'd like to offer another round of thanks to our employees.
Your stamina and collective efforts.
And placing the needs of the customer first has enabled and additional $1 billion of revenue for the year.
Wonderful mix of revenue and leverage.
Allowing us the opportunity to raise our core margin by 10 basis points to 4.1% for the year.
A clear reflection of our actions specifically when it comes to margin expansion and growth of earnings.
Furthermore, we'll give continued attention to core areas of differentiation and investment.
Areas like Mark.
Homogenous IP framework.
Factory automation and machine learning.
Back office data analytics and.
Specialized supply chain tools.
Oh, and the name of greater efficiencies and performance.
In closing this morning.
I do want to share a thought that encompasses our team.
Delivering per shareholders and serving our customers is a must.
But will only do so by respecting our environmental and social responsibilities.
Well also safeguarding jabils workplace.
To ensure every jabil employee can be there truesdell.
With acceptance of individual differences with that please keep safe and I wish all of you a peaceful holiday.
I'll now turn the call over to Mike.
Thank you Mark and good morning, everyone.
Q1 was an exceptional quarter the team delivered record results on three fronts revenue core operating income and core diluted earnings per share.
We saw broad based strength across both segments, which allowed us to deliver on financial results that came in above what we expected in September.
Our over performance in the quarter it was largely driven by three factors.
Let's start is a multi year journey to both diversify and reposition the company continues to pay dividends.
During the quarter on healthcare automotive and semi cap businesses, all performed at or near the high end up on expectations for the quarter.
Consequently, these results alone would have put us near the top end up our guidance range from Q1.
On top of this during the quarter on fuel up on highly regarded strategic customers and on mobility.
Connected devices and cloud businesses experienced unexpected high levels of demand in Q1, which caused revenue to come in and much higher than expected.
Clearly on value proposition across key end markets continues to resonate with customers as a result of a unique set of capabilities and design engineering and global supply chain and manufacturing.
And then finally on interest and tax expense came and better than expected.
The proactive steps we've taken over the last few quarters to bolster our balance sheet afforded us the flexibility to efficiently and access the debt capital markets and thereby reducing net interest expense during the quarter.
The compounding effects of higher than expected revenue and the associated leverage along with lower interest and tax expense allowed us to deliver a record revenue quarter operating income and core diluted earnings per share in Q on.
With that I'll now review on Q1 financial results.
Net revenue for the first quarter was $7.8 billion 800 million above the midpoint of our guidance range.
On a year over year basis revenue increased by $300 million on a 4% despite our strategic shift a consignment model within our cloud business.
GAAP operating income was $314 million and non-GAAP diluted earnings per share was one dollar and 31 cents.
Core operating income during the quarter was $365 million and increase of 32% year over year, representing a poor operating margin of 4.7% 100 basis point improvement over the prior year.
I am, particularly pleased to solid operating leverage as a result of our optimized cost structure and strong demand.
As I mentioned, a moment and go on net interest expense came in better than expected at $34.4 million, approximately 13 million better than expected and core tax rate was also better than expected at 25.7%.
Core diluted earnings per share in Q1 was one dollar and 60 cents, a 52% improvement over the prior quarter.
Now turning to our first quarter segment results.
And I mean, you put on Dms segment was $4.2 billion and increase up 13% on a year over year basis.
As I mentioned earlier, the strong performance and on Dms segment was extremely broad based.
Core margins for the segment improved 70 basis points over the prior year to 5.7%.
It's worth noting during Q1, we saw an abrupt and on anticipated intra quarter strength thing up the renminbi. This is the U.S. dollar, which weighed on on Dms coal margins by an estimated 50 basis points.
Nonetheless, an incredible performance by the team.
Revenue per I.E.M.S. segment also came in strong at $3.6 billion, reflecting robust demand and semi cap digital print and cloud.
Core margins for the segment came in at an impressive 3.4% hundred basis points higher than the previous year and well above expectations.
Turning now to on cash flows and balance sheet.
In Q on inventory days came in better than expected at 55 days.
Cash flows provided by operations was $65 million in Q1, and net capital expenditures totaled $242 million.
We exited the quarter with cash balance is a $1.1 billion.
We ended Q1 with committed capacity under the global credit facilities on $3.8 billion.
With this available capacity, along with the quarter and cash balance Jabil ended Q1 with access to more than $4.9 billion.
Total liquidity, which we believe provides us ample flexibility.
During Q1, we repurchase approximately 1.5 million shares for $50 million.
Turning now to our second quarter guidance.
Dms segment revenue is expected to increase 22% on a year over year basis to $3.5 billion. This is mainly due to strong end market outlook and a favorable year over year comparison.
M.S. segment revenue is expected to be $3 billion, a decrease of 8% on a year over year basis reflective of a previously announced transition to a consignment model and the cloud business.
We expect total company revenue of the second quarter of fiscal 21 to be in the range of $6.2 billion to $6.8 billion for an increase of 6% on a year over year basis at the midpoint of the range.
Core operating income is estimated to be in the range of $210 million to $260 million with core operating margin and the range of 3.4% to 3.8%.
Core diluted earnings per share is estimated to be in the range of 83 cents to one dollar and three cents.
GAAP diluted earnings per share is expected to be in the range of 60 cents to 82 cents.
Next I'd like to take a few moments to highlight a balance portfolio of businesses by end market.
Over the last several quarters, we repositioned the business is so critical and long lifecycle products, while also providing the foundation for predictable yet strong cash flows and margins.
As part of this journey, we've reshaped and we'll continue to reshape the portfolio from.
They are improving the mix of our business.
Our Dms business is an incredibly good shape today headlined by nearly 5 billion dollar healthcare and packaging business.
Which says many of the most critical healthcare medical device and consumer packaged goods companies and the world.
The convergence of technology and on daily lives expedited by five G and remote work and load and by men's continues to drive on mobility and connected devices business.
With over 50 years of experience, serving the automotive industry, including a 10 year partnership with the world's leading electric vehicle manufacturer, we are well positioned for continued growth.
Jay low has made an intentional and early shift what's supporting technologies that enable autonomous connected and electrified vehicles.
Our investments and expertise and these areas have allowed us to capture new business with some of the world's leading Oems and tier ones.
[noise] in M.S., we participate in the design product development and industrialization and manufacturing some of the most sophisticated tech products in the marketplace today.
Supporting these markets requires an ability to manage large complex material supply chains that sophisticated I'd systems that enable us to manage change and mitigate potential risks to our customer supply chain at a rapid pace.
Today, our EMS business serves a diverse blend up and markets and areas that provide us with confidence and future earnings and cash flow generation.
In summary, I'm extremely pleased with the robust out to the.
For the year, we now anticipate revenues will be up roughly $1 billion from prior guidance.
And core operating margin has increased 10 basis points to 4.1%.
This improved outlook translates to core earnings per share on $4.60 for the year.
And importantly, despite the stronger than expected growth and associated working capital, we remain committed to delivering free cash flow and excess of $600 million for the year.
We've been working extremely hard as a team to grow margins cash flows and positively impact our interest and tax.
I'm very pleased with our teams exceptional execution on the bus strategy on all fronts.
I would like to issue each and every one of you a safe and happy holiday.
With that I'll now turn the call over to Adam.
Thanks, Mike as we begin the Q and a session I'd like to remind our call participants that per customer agreements, we cannot address any customer or product specific questions.
We appreciate your understanding and cooperation operator, we're now ready for Q and a.
Thank you.
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Our first question today is from Adam Tindle of Raymond James. Please proceed with your question.
Okay. Thanks, good morning, and congrats on the strong results and outlook Mark I wanted to start on the outlook for 60 for the full year and go into this question with acknowledging you've done what you said you're going to do have a very good track record.
But I think that incremental 60 cents and implies an increase and in the back half of the fiscal year. I know you are getting some benefit and the first half, but still an increase from the back half of the fiscal year and just wanted to ask what gave you the confidence to raise that far out imagine we're going to get some investor questions with the context that you know mobility seems like an unusual potential cycle and.
Certain ending there's something different about this fiscal year level visibility that you had vs years past, where you know ending of the cycles hats has the price the supply chain.
I don't know that I don't know that I look at a time frame change I mean, we in September. We you know we talked about the full year at $4. So we felt compelled to to address the $4 or or change to it. So.
I don't think anything's changed in terms of confidence that the business relative to September if.
If I break the answer up into a couple of things one.
No. We we've been on this six seven year journey, where.
We've we've really focused refocused we focused a number of years on on driving the topline because our strategic belief and a business like us from where service business.
More diversified we become growth.
More resilient and the more predictable the better the company is and so it was all hands on deck.
And what's interesting Adam about that is you know the proust and the pudding.
One could say jeez you guys chased a lot of growth that's true, but we went through a period of time from fiscal 16 and.
I think even fiscal 19, maybe fiscal 15 to 19.
Where through and through a lot of the period of time, when we were diversifying the margins of the corporation and and enterprise level, we were around three and a half.
And I would contend that we must have done a pretty good job of.
The diversification not only diversifying a the different end markets, but the quality of the quality of revenue we brought into the company, which has allowed us largely to two.
To come into this year and offer $4 per share. The second part of your question in terms of the force 60.
I think what I, just said gives us confidence in the force 60, we [noise].
We had a midpoint of $1.25 for one in Q.
We delivered on $1.60. So you take a look at a spread on that to start the year and and that spread going from the Buck 25 do a Buck 60 was was really broken down I think into three parts one was.
There was a few areas of arm of our business that we saw very strong demand number. Two is is just the overall constructed a portfolio and number three is.
Debt store surgery on our finance team have done a wonderful job over the last six nine months or so work and the balance sheet and so we're starting to see some foundational.
Positive changes to our to interest expense.
See shake that up to start the year and then we I think with our Twoq guide.
I don't know a consensus was around a high eightys and and I think our midpoint is 90 to 93 cents. So we took in Q2 up and nickel.
And you know that that we're in the middle of Twoq do you now see we've got reasonable visibility to that.
And then as we look at the back half of the year Adam.
If I just think about revenue so back in September we start the year would be about 26, and a half billion, maybe 27 and now it's looking more like 27 and a half.
About eight 900 million of that is on the front half hundred to 200 is in the back half.
Which I think addresses your point in terms of.
You know, it's a reasonable blend throughout the year.
And again when I when I think about when I think about the 60 cents Delta.
I think about a combination of again the strong portfolio.
And then I also think about the foundational change to interest and tax.
Probably probably leaning more towards interest and tax.
I would I would say and going from $4 to force 60, 25, 30 cents is kind of foundational interest and tax which is a I think a huge positive.
And then the balance of that would be that portfolio itself.
Okay, that's very not something else I think is worth noting.
Yeah, we thought long and hard on how do we we felt compelled we felt compelled to update the year right and because we started with a a look to the year and September. So you know we've talked long and hard on.
You know how conservative do we want to be and we just kind of laid out the numbers and and we went over this multiple times and.
<unk> us for 60 feels like a good number but I think what's really really important for this call is.
Just suggest that as a leadership team.
For 60, and the 4.1% that we that we've now put out there as our outlook for the year I think a very important element of that is the force 60 and a 4.11%.
Our now kind of foundational for us to build off of for fiscal 22. So I think thats a I I don't think that point should be lost.
That's helpful. Yes, that's definitely doesn't stop there Mike I wanted to just on a follow up on on Capex mobility is upside and four cats are increasing in the past as this happened capex crept up over the course of the year. Just curious you talked on the last call about keeping capex flattish year over year I think you mean.
Take your free cash flow guidance. This year, what's enabling this up cycle to be different than previous cycles, where capex increased how can you maintain share if you don't increase capacity.
Adam that's a that's a good question I think weve been I'm I'm extremely pleased with the discipline that was showing up on the capex.
From a tad the entire team is being extremely thoughtful about capex and we're pushing back on customers, where we feel lab and the capex is not large itself a good discipline and.
And my I would I would sort of think of Capex at at at three Percentish rate Chow on revenue I think we've.
Being 2.9 between 3.1 Weve been Threep, what does that and last four or five years, but I think a 3% sounds like a good sort of gauge of capex going forward.
Hey, Adam and if I could if I could comment on something that I think you hit on that I also think.
I wouldn't want lost because there's a you know there's a lot of there's a lot of numbers big numbers on the on.
On this call or on the.
You know as we were growing the business as we are growing the business and focusing on diversification and I would now contend we're well diversified so it's a journey, but I think the company is very well diversified at the moment again result of a lot of hard work and effort but.
Two things happen when when you're in that type of mode number. One is we got a little bit fluffy in terms of headcount and overhead and and we dealt with a lot of that this past summer that's coming through on the results and.
Number two is.
Is the working capital management, and the working capital management I've seen out of our team and the last six to nine months has been absolutely Fabulous and I think on the fact that were.
Looking at our outlook reflects another billion dollars of revenue for the year and we're still keeping cash flows north of 600 million speaks volumes of that in terms of us be and very very intentional on working capital and and and working capital management.
Seems like a structural change appreciate the color. Thank you yeah. Thanks Adam.
The next question is from Jim Suva of Citigroup investment Research. Please proceed with your question.
Thank you very much Mark and Mike and congratulations on your team and would be in sales as well as delivering results.
My question is is again on your capital and disciplined and big upside. The question I have is any commentary you can give about like utilization rates or machine optimization rates are still buy back and it just seems like you are getting more and more efficiencies out of your plants and equipments.
I understand it correctly and it sounds like you're not having to really invest a significant more amount of capital and therefore, returning more cash flow can you comment a little bit on lock and can be might wonder are you maxing out and not able to fit more business and to your sites, whether it be health care, whether it be packaging whether it be.
Dms and any commentary would be great. Thank you.
Thanks, Jim.
I'll try a couple of different ways. One is is as Mike said.
You know I I think it's I think a good proxy for modeling going forward is.
His capex to be about three three points of of revenue plus or minus.
Some quarters it'll be less some quarters on to be more.
Here's what here's what here's what we can we can I think assure you on.
If capex goes up a bit actually look at that as a good thing because with.
With the disciplines, we've put in with the company being well diversified the pipeline that we have today and on an organic basis.
It's probably about a three and a half $4 billion of of topline, which by the way, where we absolutely will intentionally walk away from some of that.
So the gap to the kind of the purposeful nature of.
Bringing additional topline into the company I think is as high as its ever been if if if capex were to go up to 3.1 or 3.2% or something like that again, you can be rest assured that that's.
That's going to be accretive both to cash flows and margins going forward and by the way in a relatively short term.
Basis in terms of bringing the business on.
So.
But that's that's kind of one number two is getting back to your question specifically around factories.
What our operational people have done and and we the the Genesis and what we do for a living as we build stuff.
We have you know everybody is import and our finance group is important HR is important commercial but our operational people are at the very core and what we do Jim and what they've done in terms of navigating Cove, and keeping our factories up and running I said something and my.
My prepared remarks around the fact that you know cobot has proven to us to be an essential business, but I think of essential two ways. One is essential around cove, and but on a more sustainable basis. We're in essential business. Because you know when you sit back and think about our size and scale today and the fact that we kind of build a little bit of everything.
We really do we really do help support and partner to a few trillion dollars and market cap and and what our operational team did getting back to your question around factory utilization and efficiencies through Cove. It was miraculous and Oh by the way, we did that with a de minimis amount of.
Covert cases.
And by the way.
I want to be careful with that statement because those work scope. It did impact on was very binary, but but when I think about factory utilization through.
This pandemic a huge shout out to our operational teams as I look forward, Jim for the balance of the year.
Our factories are running at a what I would what I would call very normalized utilization rates and there's there's there's nothing there that gives me pause that says that capex is going to have to go to 4% or four and a half percentage of revenue because.
There's going to be some big step function in terms of additional capacity and the last the last thing I'd like to comment on relative to your question is is we've also been talking for the last three four or five years on the Opex investments that we're making in which our opex investments are probably higher.
100 million Bucks a year.
And and that's that's kind of what I would call progressive IP factory of the future and machine learning and data automation.
Much of which affects our factory floors in terms of productivity and efficiencies so and.
And it's a combination of all that stuff.
Thank you and my follow up and.
The past maybe on the supply chains and talked about component shortages, whether it be michael processors, or memory and or or capacitors and something like that has a component shortages completely worked itself out because I know now you have a strong position and cloud as well as.
Mobility any thoughts around component shortages and those on backlog and playbook fuel was and still some shortages out there that could actually give me more upside.
I'll give you a two part answer to that number one on give that's a great. That's a great opening and for me to give a shout out to our supply chain folks if you.
As you do Jim you knows around you know is around the industry.
We have the I think we have fundamentally one of the most respected supply chain global teams and the world and they do a fabulous job for us when markets get tight and otherwise with that being said.
UBS.
Of the 100 or 200 things that debt store and I worry about day in and day out with our team as we sit today.
No supply shortages and one of them.
Thank you so much and congratulations to you and your team and happy holidays.
Same to you Jim Thanks.
The next question is from Ruplu Bhattacharya Bank of America. Please proceed with your question Hi.
Hi, Thanks for taking my questions and congrats on the strong results and the strong guide.
I have two questions one on Dms and one on M.S.
Maybe on the diversified manufacturing side can you give us some guidance on.
Seasonality and margin progression during the year given that automotive is now part of that segment and and mobility. You know if we have if we continue to have two launches of phones every year.
Should we still expect that the third quarter would be the Lewis margin quarter for Dms or any any guidance on on a quarter to quarter seasonality and margin progression would be very helpful. Thank you.
Okay, Rubtwo, Oh, if I, if I don't give you a complete answer.
Back at me because.
There was quite a bit there and I was kind of thinking through it as you were talking I think I don't know what order a I'll get the sand, but let me try a couple of things.
I think I think foundationally fundamentally however, you want to look at it.
The thing and we talked a lot about diversification and and I know your question was largely around Dms, but if I could from moment.
You know the most and amazing thing today about the construct of the company is is if you extrapolate out the numbers that weve given today.
You could you know Dms will be in the range of about $15 billion for the year top line.
SMB and the range of about 12, and a half billion on top line.
And with that with the new model on on our on our cloud services business and.
And then you look at these complimentary segments Roop Lou.
You know Dms today and again this is and this is and this isn't hard and fast and guide posts.
But but it's directionally, how we think about the big business and behave.
Our Dms segment. So the $15 billion is the way to think about that is it's about expanding margins and and and and assuring good reliable cash flows and.
Complements it out on the Fms side.
Which is a 12 and a half billion is really about expanding cash flows while being sure that they focus on unreliable margins and those complements as I.
As I said in my prepared notes is I really think we got one plus one equals equals three.
More specific to your question when I think about.
Kind of the year overall I Q1, we saw some we saw in Q1, we saw strength across the entire business on it.
And maybe two or three pockets.
So say out of out of 10 to 12 pockets of business.
Let's say 234 were neutral to slightly down but it was just one of these quarters, where everything kind of any everything kind of connected whether it be mobility connected devices cloud.
Automotive transport health care packaging, and semi cap and even network and storage. So and then and then pockets of industrial as well and a again, it's just another illustration of.
The real price.
Promise of being diversified as I think about the year going forward.
I would think we'll continue to see.
Reasonable strength across most all of those end markets and unless there is a big macro disruption and we'll see what happens today with the.
Or this week with the stimulus plan, but.
And again I think that that leads us to why we have a degree of confidence and the in the $4 60, and then there was another part of your question I believe route flow specific to our mobility sector.
Yeah in terms of shape of the year for the company I you know I would say I would say, we just printed a 4.7% margin and one Q and.
I would say that Twoq, you and and and Threeq you.
Where I will probably be sub 4% and then there is an opportunity in the fourth quarter to get enterprise margins back towards the 4% yeah.
You shake all that up on a blended basis, you get the 4.1% a which is aligned with our guide today and then your question specific to Dms and because of the dramatic increase we've had and health care and packaging plus the contributions on connected devices automotive trade.
And sport, all combined with mobility and.
If I had to guess today a replay through you know, we just printed and Dms, a 5.7% core margin for one q. I think that and there's a good opportunity for both the second quarter and the third quarter to remain above 4% and then ER and then with investments and things like that and maybe fourth the flow.
Fourth quarter, just shy of 4% something like that.
Okay. Thanks, Thanks for all the details really appreciate it that was very helpful.
Maybe maybe I'll ask a different question from my follow up which is how do you think about uses of cash given where we are in the economic cycle is it.
Relevant and that would it be meaningful fourg able to look at acquisitions, maybe look at inorganic growth and how would you prioritize that against buybacks, maintaining the dividend and any debt Paydown and if you can just give us your thoughts on use of cash and and your strategy on on inorganic growth and thanks. Thanks, So much.
Thanks repurchase this is a debt store question, but let me jump and because you started with M&A and.
And then Mike and complement and if I if I if I don't get this all correct, but I think I think I think what I think what Mike did in September.
If I remember and he laid out kind of a.
Our capital allocation constructive as a single slide on remember all the details on the slide we reviewed that and talked about that a bit coming into this call that structurally hasn't changed and I think that and I've said this on a number of times before in my opinion and and opinion certainly defer I think we've been a very.
Reasonable and reasonably friendly and.
To shareholders in terms of our in terms of our capital allocation strategy, where because our belief and the company and where we were headed we've been we've been reasonably aggressive in our buyback since June 2016, which.
And a few months will be coming up on five years of that type of behavior. I think that'll continue for a period of time when I think about growth.
I mentioned earlier Ruplu that.
Right now or our organic pipeline a pipeline that will be at or accretive to margins is probably three and a half $4 billion again, we will selectively walk away from some of that but for sure organic growth is by far the most optimized growth for shareholders.
When we think about M&A, we do to it we typically by four to five companies a year its typically around engineering and engineering talent, what we pay for those is more on an asset basis.
It doesn't cost us much more and and at times, it's less expensive and just hiring the people.
And then ER and then we're always looking at strategic types of things like strategic patents that we like and whatnot. So.
As we sit today at least at least for the balance of 21, you know I don't I don't think theres going to be any behavior is a big acquisitions for the company's strategic or otherwise and Mike you got any net yet from from a buyback or basis Roop low low we have a 600 million dollar up on.
The transition out debt.
We'll continue to be thoughtful and will continue to be opportunistic that's.
Thats things started returning to normal once the vaccine takes hold and you might accelerate some of that purchase a that we did.
In Q1 is what we're taking it slowly right now, but we'll accelerate that if if if circumstances were.
Okay. Thanks for all the details and congrats again on the quarter. Thanks from clue.
The next question is from Steven Fox Fox Advisors. Please proceed with your question.
Thanks, Good morning, I had two questions.
First of all on the cloud business can you I understand that you know, there's a lot going on and stable specific and you know it's providing upside can you talk about sort of how much of that is reflected in you know what you did in the quarter and you're thinking for the rest of the year and also your ability to sort of diversify among service providers and then secondly, mark.
And you've mentioned a couple of times now some of the investments and machine learning and automation can you talk about how much of that is forget table stakes versus maybe creating other areas for you to generate some operating leverage going forward. Thanks.
Yeah.
So first part of your question.
I don't want to get into I don't want to get into a lot of details.
Steve on on on a on a on our cloud business you know I can say at a high level.
We started down this journey two years ago, two and half years ago.
Service that we provide again is asset light geocentric, we've been very consistent on that.
The the adoption and the acceptance of that model by.
That the end market has been very very good there's a little indication that thats going to change in the near term.
As we said before I think we I I think we continue we will continue to invest and that as long as we've got to service and a solution as well and braced I think we.
We de risk the downside to that business. So again overall I just that's all the detail I would like to provide at the moment because.
Again, I think we've got continued momentum in that space in terms of.
Our operational investments, so and machine learning I see automation flexible automation data analytics et cetera, I I would say.
I would say 30, 40% of investments are table Stakes, where technology is going and I would say.
50, 60%, maybe maybe little more is a is.
His differentiation and and.
And has to do with again, if you if you look at.
Fiscal 16, 17 18 throughout throughout fiscal year 20 with Cove it.
But you know, we're we're talking about uplifting margins on a.
On a 27 28 29 30 billion dollar based company, we're talking about uplifting margins by 60 basis points 70 basis points, we'll see with 22 holds.
[noise] immaterial contributor to that is is the methodology to which we've invested.
And I see and machine learning and different things to help us optimize our factory floors. I do think what is fact is is.
We have 50 plus million square feet and manufacturing space around the world. We have some of the most incredible systems in terms of supply chain.
Both of those areas. So when you think about the core of what we do as a living we build stuff the barrier to entry to building stuff is getting higher and higher because of the scale. The investments the global nature, the risks et cetera, and when I think about the two things that are that are most profound and our core one is building stuff to his supply chain.
And I would suggest that.
The investments we continue to make there are differentiated.
And and and one data point on that would be a I don't know of any other company of our scale.
In terms of the manufacturing and services and solutions World.
That has 50 million square feet and manufacturing space.
Connected on a holistic I T system and I would contend that one example gives us a a definitive competitive advantage and I I could go deeper, but I won't on I'm on the same thing on supply chain.
That's helpful Happy holidays.
You too thanks.
The next question is from Paul Coster of JP Morgan. Please proceed with your question.
Hi, guys its Paul Chung on for costs are thanks for taking our questions. So.
Your outlook and Dms is seeing raises and every segment is this kind of a function of pent up demand and a more market share gains or no expanding business with existing customers or all three.
And then you know has covitz structurally changed manufacturing strategy from many of your customers are.
Our day accelerating the shift.
From in house cash to outsourcing.
Yes, Thanks, Paul I think that.
I think it's all three I think that as we look and I think your question was specific to Dms, Although I I think I think part of my answer would be for the whole corporation inclusive of Dms.
But I would say again sums market share gains.
Some expansion.
Of growth and and and and be in side by side with our current customers participating and their growth. So we've got we've got market share gains for sure Weve.
We've got growth with our current customers for sure and then again as I as I mentioned earlier.
This robust organic pipeline and.
You know a decent amount of that is is is brands that we don't currently serve so I would say the outlook on Dms.
Again, I think and.
I think in fiscal 20, our Dms revenue was was just a hair over 13 billion I think this year it will be a hair over 15 billion and ER and all three of those things would contribute.
There was a second part of your question.
Oh, Yeah, just cove, it accelerate and shift yeah. So I.
Our observation would suggest that let's say February and March timeframe of this year through probably.
The spring of 21, I actually think co bid has has.
Has put a halt on most fundamental strategic shifts and decisions by many corporations in terms of.
What they want to do with their manufacturing structurally although.
Although my guess is and having participated in some of this theres lots of discussions but much like.
Our Mike debt store it was alluding to.
A lot of companies have have had have batten down the hatches in terms of preservation of cash.
Everybody kind of wants to see where Kobin goes does this vaccine work, what's the vaccine distribution look like what's the timing of the vaccine, taking hold et cetera et cetera.
If there is any good news and what has been a horrific pandemic, it's that as we get to middle of calendar 21 back half at 21 and into 22, I think what has been kind of a discussion points through coded ends.
Ends up converting to some actions once people feel like cobot has stabilized or some are behind us. So I think that'd be a good thing if if I can just to add I think moon and cool that the say if you look at the convergence of technology Ah that's been expedited by five G. Some of it some of it is expedited by the work and learn from home and.
And which probably extends beyond gold it as well I think God, that's driving this big push into technology and I think we're seeing now we're seeing a.
The benefits of that I think it's a it's a it's a very long leg sort of approach on that one and.
Think we're on the right spaces right now on a road and old right end markets and and I think we're seeing the the fruits of all of that.
Thanks, and then my follow up is on free cash flow all your metrics on on revenues and margins have increased but your free cash flow was.
Reiterated of exceeding 600, but I soon the magnitude of the Xcede is larger today than it was in Fourq you from.
First is that a kind.
Kind of a fair assumption and second what can swing free cash flow higher as we kind of navigate through fiscal year 21.
And he puts and takes you want to call out. Thank you.
We did have and we did see a bit of an increase in revenue that comes with some working capital we still feel strongly that our free cash flow will be about 600 million and I talked about discipline and Capex I think Bob and deliver to our working capital discipline and the team is fully engaged fully focused on.
There's a number of leave us that were focused on a and that free cash flow while bucket. So.
So to speak and I feel overtime and that just keeps getting better.
More and more attention that keeps getting a and a higher and higher and that's the so I think right now we feel good and the 600 Blas and I think I would highlight the plus their.
And I think that the focus that we have continues to bear fruit again.
Thank you great print.
The next question is from Shannon Cross of Cross Research. Please proceed with your question.
Hi, Thank you very much I was just wondering and your conversations with your customers and obviously covenants played into it but just in general how things changed in terms of their desire to on shore or diversify that the countries where they manufacture.
And I'm just wondering we obviously have a new administration coming and you know have pads things shifted at all in terms of the conversation over the year or do you think people are you know sort of remain on track thinking on that.
You know maybe on shorten a bit more as low as diverse and finance is the way to go. Thank you.
Thanks, Shannon I think the.
I think there has been lots of conversations over the last.
Two two and a half years between trade tariff and co, but I think and again lots and lots and lots and lots of discussions and the one thing is when you do what we do your and the middle of all those discussions.
Because where the primary manufacturing partner to so many outstanding on our customers and brands.
But when it comes to action and on those I just I don't think that I don't think there has been a lot of change there's we've talked about this.
Many times over on calls we've had.
Some customers that have wanted de risk mainland China, that's been the exception not the rule we've been there for them one of the benefits you have when you have a partner like Jay will is we have a really really optimized footprint all over the world.
You know if I add cove and on top of that again lots and lots of discussions but.
In the and.
I think that that the manufacturing and value supply chain ends up following the dollars and followings and.
And market consumption based on a on a product by product basis.
And and and largely I don't see that changing.
Okay. Thank you and then I'm, just curious and during the quarter in terms of linear parity, where there any or anything to point out within your segments. Maybe that you know improved during the quarter versus a week and toward the end of the quarter. Thank you.
No actually this quarter, a one Q had really nice linearity.
Thank you.
Thank you Shannon.
The next question is from Matt Sheerin of Stifel. Please proceed with your question.
Yes, thanks, and good morning debt.
Another question on on Dms, and and the upside to guidance and.
Chris So sectors, specifically and health care could you update us on how JNJ programs have been ramping and are you beginning to see that and as a contributor.
The strong operating margin expansion and you've seen a year over year and that in fact in that segment.
Thanks, Matt, Yes, I wont go too deep into the.
The J and Jay relationship, specifically JMB I'd, just say that.
We've we've talked about this at a high level. When we first engaged we kind of laid out a path forward.
What's been really nice is the path. We laid out is is a is the path that we've we've we've realized which is a which is a huge.
Acknowledgment, both to JNJ, and and our team and and yes, I think that the JJ and be relationship is getting to a scale, where where for sure. Its a contributor to our to our healthcare and packaging business and.
Through all this JJ and de has been a a a wonderful partner for us.
Okay. Thank you and then on the cloud business you talked about the strength that you're seeing from from customers there and I know you've gone through that transition to consignment model with with the largest customer is that largely and in the numbers now and Mike where there any and any near term debt.
Pack to cash flow is because of that transition.
I think its all part and parcel up our strategy a map we've been working on that for a while there.
There will be up Rosen guns to that I think largely pros, obviously working capital improves.
Improves margins improved so the the consignment bces strategic in nature and wasn't something that just happened to us it's something we've been.
Working on now for a while and now over the year over the coming few last quarter was a it'll it'll it'll hopefully get fully implemented.
Okay, but you're not quite there yet.
Not not fully.
We're still working on something that's okay, great. Thanks, so much.
The next question is from Mark Delaney of Goldman Sachs. Please proceed with your question.
Yeah. Good morning, Thanks, very much for taking the questions and congratulations on the good reports and.
Yes, Mark Thanks for all the comments, you made around and sustainability and gables efforts, there and as I've been and just better understand.
Gambles ability to offer more environmentally friendly manufacturing can you talk about some of the business implications from that and both in terms of what it may mean for some of the customer relationships and and your ability to sustain good market positions on but then to the extent there is any added cost to implement a cleaner manufacturing and and clean energy.
How did that impact margins and is that something customer pay for that and was that more of a share expense.
Yeah. Thanks Mark.
[noise] I first comment on kind of a macro level and then but maybe break it down a bit.
Ah you know I I.
Hi.
I tried to express either through these q. and a sessions or.
Or more on her prepared remarks basis.
You know the financial results are super important, they're really important to shareholders, but the to me the the.
The results themselves are really and output of of us taking great care of customers and obsessing around our customers and along with obsession around their customers.
And that drives these financial results, we also spend.
I think on a just a tremendous amount of time as a leadership team talking about approach because.
Results can be derived in many different ways and and when we think about approach inside the company.
No one is about and amazing culture that we have twos about kind of carrying about people and and and foundational beliefs around diversity and inclusion for all and then the other one certainly mark is more part of your question, which is around the SG.
Social and environmental I think jabil.
Best thing, we can do for for our customers our suppliers and lead by example, we made a comment I made a comment and September that said.
We're committed to reducing our gas how submissions in across the company and the next five to six years by 25, 30% and we're on a path to do that I would suggest that where.
Where people get I think gets confused is is gee, that's going to cost us a lot of money and reality.
It's it's it's the timing of the costs, but all of that ends up being a net pickup because running the company with a lower greenhouse gas emissions clean energy per has a really nice ROI to it so well.
One the best thing we can do is lead by example, bye bye walking the walk versus just talking about it.
We also said and the September call something like you know, we would like to lead our industry not only and financial returns, but also and approach in terms of.
SG in terms of areas of safety water usage hazardous waste and and then the other thing is is.
Jabil purchases like $20 billion and stuff every year and and we believe we can have a very positive influence on the entire.
Supply chain in.
In terms of leading.
By example, and also.
Kind of mandates that we put on on on our strategic and key suppliers.
And then if I broke that down even further mark.
Jabil is firmly and renewable renewable value chain.
And and if I had to guess today.
Ah depending on how we characterize that I would say I would say we're in the renewable volume value chain.
Well into the billions of dollars when I think about.
What we do for electric vehicles, what we do for when and what we do for solar what we do for smart meters. What we do for power efficiency, what we do around energy storage and another one that we're spending a lot of investment dollars on and attention is sustainable consumer packaging and then also when I think about three d. additive.
And all the investment dollars. There you know when you when you think about the additive process, especially with metals and then certainly with polymers.
You know that's also that's also something that's squarely and.
And he has she type category and then lastly, mark.
We have we have thousands of engineers and we have a whole subset of engineers that are focused specifically on.
Around SG type of stuff, One example, being.
We have a dedicated group of engineers are around power and power efficiency. So.
From a that's kind of how I see how we play in that whole market price.
Thank you that's that's very helpful and index for everything the companies do and with those efforts.
My follow up question was on on financials, and Mike and and Marqibo talked about something more structural savings you think are going to be sustained around interest expense and tax rates.
Is the right way to think about what those levels may mean is to use the.
The guidance for fiscal Twoq, you and expected those sorts of levels to continue or is is or a better way for us to be thinking about a interest expense and tax rate.
And second quarter. Thanks.
Yeah, I would doubt I would sort of estimate interest to be in that 40 Millionish range. I think we delivered about 35 in Q1 or feel better if a the the estimates going forward were in the 40, that's sort of a substantially lower than what we thought at the beginning on the quarter and similarly for attacks I think I'd go with it.
And there are 26, a share per cent that tax rate to again that is about a 100 basis points lower than we actually indicated debt at the beginning of the.
Thank you.
There are no additional questions at this time I would like to turn the call back to Adam Berry for closing remarks. Thank.
Thank you everyone for joining our call today, if you have any follow up questions. Please reach out to us on other than that please stay safe place to stay healthy. Thank you. Thank you.
[noise].