Q4 2019 Earnings Call
Greetings and welcome to the JBL fourth quarter, 2019 financial results and Investor briefing.
That's probably more participants really listen only mode.
Question answer session will follow the formal presentation.
I know what should require operator assistance during the conference. Please press star zero under telephone keypad.
As a reminder, this conference is being recorded its my pleasure to introduce your host Adam Barry Vice President Investor Relations. Please go ahead Sir.
Hello, and welcome to Jabils fourth quarter fiscal 2019 earnings call and Investor briefing.
Joining me on today's call, our Chief Executive Officer, Mark Bummed out loud and Chief Financial Officer, Mike Das door.
Today, Mike will begin by walking us through the fourth quarter results.
Following these comments, we will transition into the investor briefing portion of the day, we're both Mark and Mike will review our strategy and outlook.
Well then open it up for your questions.
The entirety of today's call will be recorded and posted for audio playback on Jamel dotcom.
Within the investors section.
Our fourth quarter press release slides videos and corresponding webcast are also available on our website.
In these materials you will find the earnings information that we cover during this conference call.
Additionally, at the conclusion of today's event, we will pose several videos to our Investor relations website in the events and presentations section.
These videos feature our business leaders and highlight the current state of the end market space there.
Before handing the call over to Mike I'd now ask that you follow our earnings presentation using the slides on the website beginning with our forward looking statement.
During this conference call, we will be making forward looking statements, including among other things those regarding the anticipated outlook for our business.
Those statements are based on current expectations forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.
An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31st 2018 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 Mike Das door.
Thank you Adam and good morning, everyone.
Begin today by reviewing our fourth quarter and fiscally a 19 result.
I'm very pleased without fourth quarter performance.
During the quarter, both segments executed extremely well and delivered strong consolidated results.
Net revenue for the fourth quarter was $6.6 billion, an increase of 14% year over year.
GAAP operating income was $189.7 million and our GAAP diluted earnings per share was 34 cents.
Core operating income came in slightly higher than the midpoint above guidance during the quarter at $246.1 million.
An increase up 16% year over year, representing a core operating margin of 3.7%.
Core diluted earnings per share was 88 cents, a 26% improvement over the prior year quarter.
For the full fiscal year net revenue was $25.3 billion up 14% year over year.
F. Why 19, GAAP operating income was $701 million with GAAP net income of $287 million.
GAAP net diluted earnings per share was one dollar an 81 cents Claudia.
Core operating income was $877 million, an increase of 14% on a year over year basis, representing a core operating margin of 3.5%.
Core diluted earnings per share for the year was $2.98 an increase of 14% over the prior year.
I'd like to call your attention to two items, which impacted our GAAP results during the quarter.
First we incurred a onetime charge of $6.2 million due to a distressed customer and the networking space.
And secondly, as we previously disclosed during the quarter, we exchanged $50 million up I call preferred stock associated with that divestiture of our opt to market services business in 2014.
The exchange and the preferred stock resulted in a onetime net non cash charge of $29.6 billion.
I would remind due in 2014, we recorded a net gain on the sale of discontinued operations net of tax of approximately $223 million.
Now turning to our fourth quarter, an airplane 19 segment results.
Revenue for our Dms segment was $2.4 billion up 2% year over year.
This growth was mainly due to the another strong performance in our health care business.
Core margins for the segment improved 20 basis points year over year to 2.9%.
Revenue for our MMS segment increased by 23% year over year to $4.1 billion, driven mainly by the Fiveg wireless cloud energy and automotive end markets.
Core margins for the segment were 4.3% during the quarter.
For the year I'd Dms segment revenue was $9.9 billion consistent with the prior year, while core operating income for the segment increased 25% year over year.
This resulted in core margins, expanding 80 basis points to 4%.
As an update the seasonal launch within our mobility business, which began in Q4 is going extremely well.
The mobility team's strong execution throughout the year and a focus on supporting our customer and tightly managing costs has contributed to a strong customer relationship.
However, we believe the overall mobility supply chain continues to be over Capacitized book current and future volumes.
Even though Dms margin grew by 80 basis points year over year, the overcapacity and mobility business has been a constraint on Dms margins.
Therefore, we're taking steps to proactively optimize our manufacturing footprint.
Reducing our capacity would allow us to more efficiently utilize our fixed assets and normalize our cost structure.
As we look forward to fly 21, we anticipate increased unit volume largely through market share wins.
We believe we'll be able to support higher levels of revenue across a more optimized footprint as a result of our ongoing automation efforts and manufacturing process improvements.
As such the non core expenses associated with our optimization activities are estimated to be $85 million.
Cash component is anticipated to be approximately $35 million.
Moving to Dms.
And F. Why 19 revenue increased by 26% year over year to $15.4 billion well above our original expectations for the as a value proposition has been well received in the areas of Fiveg wireless cloud energy and retail infrastructure.
Core margins for the segment declined 60 basis points year over year to 3.1%.
This decline as we have discussed throughout 2019 was mainly driven by the ramp costs associated with our new business awards and softness in semi cap.
Turning now to our cash flows and balance sheet.
As anticipated in Q4 inventory levels contracted sequentially without days in inventory coming in at 58 days, a decline of six days quarter over quarter.
Net capital expenditures for the fourth quarter was $165 million and for the full fiscal year came in slightly lower than expected at $787 million.
Our fourth quarter cash flows from operations were very strong coming in at $1.1 billion.
As a result, the strong fourth quarter performance and cash flow generation adjusted free cash flow for the fiscal year came in stronger than expected at approximately $503 million.
Core return on invested capital for Q4 was 21.3% and grew by 210 basis points on a year over year basis to 21.4% for the full fiscal year.
We exited the quarter with total debt to core EBITDA levels up approximately 1.5 times and cash balances of $1.2 billion.
As we wrap up fiscal 19, I'm very pleased with our strong fiscal 2019 performance core earnings per share growth of 14% adjusted free cash flows of $520 million with returns to shareholders via dividends and share repurchases in the fiscal year in excess of four.
Hundred million dollars.
Moving forward, we hope to build on this but positive momentum and expect future growth in both earnings and free cash flow to come through meaningful margin expansion and improved working capital efficiency.
Before I turn the call little bit tomorrow for additional color on our 2019 results and outlined the strategic drivers of our business in fiscal 20.
And beyond we would like to share a brief video about up people.
Let's take a look.
I appreciate everyone, taking time to join us today.
I can't help but smile when I see that video.
For me the video speaks volumes.
Seeing comments from our folks.
Like true self.
Differences unite and diversity of thought.
As CEO I love it.
The two we are and it's what Jay will is all about.
You see diversity and inclusion is core to our value system.
Diversity is about having a seat at the table.
Inclusion.
Is about having a voice.
And belonging.
As a sharing your voices heard and respected.
This certainly rings true here at Jabil.
Our belief system makes a difference.
In fact, a huge difference.
Thanks to all of our employees.
Thank you for just being you.
Thanks for keeping each other safe each and every day.
And I appreciate all you do.
With that.
Please turn to slide 11.
Where we see our financial results for fiscal 19.
Another exceptional year.
In fact, a record year in terms of revenue and income.
As Mike highlighted.
Our team generated core earnings per share of $2.98.
A 14% increase over fiscal 18.
On top of this.
The team doubled free cash flow year on year.
While returning roughly $400 million to shareholders through buybacks and dividends.
During the year.
Healthcare.
Cloud.
Wireless.
Energy and retail.
For our top performing sectors.
Another really nice year, all the way around.
Moving to slide 12.
I thought it worthwhile to highlight our four year track record.
The fact is.
What we're doing is working.
These three bar charts, taking collectively.
Provide a fantastic backdrop to our ongoing story.
A catalyst to our performance.
Is the balance in blend of our income.
But as I've said previously.
Being diversified for the sake of diversification.
Isn't all that special.
What is impactful to me.
Is the composition and makeup.
Of Jabils commercial portfolio.
Our portfolio comprised of a broad range of exciting products.
Used over a multitude of end markets.
I'd now like to turn your attention to where we're headed.
Beginning with slide 13.
To start our team is carrying positive momentum into fiscal year 20.
Our strategy is continuous and remains unchanged.
Our path is well understood by our leadership team.
And our financial outlook is sound.
During the past three to four years.
Substantial revenue growth drove earnings.
While reducing our dependence on any single product or product family.
For fiscal 20.
We plan to expand margins, primarily through operating leverage and network efficiencies.
Consistent with our strategy and squarely within our control.
As I was preparing for today's session I asked myself.
How do I judge success for our team in fiscal 20.
As we ready ourselves for fiscal 2001.
For me success will be keeping our people safe.
Assuring remarkable customer care.
Achieving near perfect execution.
Delivering on our financial commitments.
And giving back to the communities in which we work.
If our team can accomplish all the above.
It'll be a banner year.
Our year that will make us proud.
Moving to slide 14.
You'll see the three key areas that have management's attention for fiscal 2000.
Optimise execute and deliver.
Let's break down each area starting with optimize.
To lead in our industry, we must be thoughtful in our planning yet react quickly.
Simplifying complexity for our customers.
With this in mind we.
We continue to optimize data transfer and information flow across the network of our factories.
Around the world.
This advancement this possible due to our unique architecture and digital supply chain analytics tool.
I believe this to be a real differentiator for example.
While I'm on the topic of optimization.
We're driving further simplification of our fixed assets and factory network.
In essence, assuring investors and accurate reflection of future earnings.
As Mike noted.
The charge associated with this proactive action.
Is $85 million.
And we'll be largely concentrated around our China footprint.
For me. This is an excellent use of both time and funds.
A complement to our optimization efforts comes in a way of execution.
Inside the four walls of our factories.
We pride ourselves on doing the ordinary extraordinarily well.
Operationally.
We obsess about keeping fix things fixed.
We do so by leveraging our tenured in Ohio and experience.
Utilizing machine learning.
And.
Employee in the power of predictive analytics.
The touch and feel within all of our factories as much the same.
Making us consistent site to site.
And across our divisions.
Enabling Jay able to offer solutions, unlike others in our industry.
As we endlessly pursue our factory of the future.
We're continuing to make investments.
In the areas of automation.
Robotics.
And additive manufacturing.
So that brings me to managements outlook for fiscal 2000.
We plan to deliver a core operating margin of 3.7%.
On revenues in the range of $26 billion.
A 20 basis point margin expansion year on year.
This translates to $3.45 in core earnings per share.
15% growth when compared to fiscal 19.
On top of this we plan to deliver a free cash flow in excess of $500 million for the year.
Michael provide more information on fiscal year 20.
During his follow on comments.
We're also offer details on our two year capital allocation framework.
All in all I feel good about where we've been.
But I feel even better.
About where we're going.
If you'll now please flip to slide 19.
You'll see managements outlook for fiscal 20.
And 21 side by side.
The company is well positioned to delivered solid financial results over the coming 24 months.
Whether year vantage point.
Is based on an absolute scale or relative scale.
Today's outlook for fiscal 21.
Shows core earnings per share in the neighborhood of $4.
And.
Our core operating margin of 4%.
A 30 basis point increase relative to our outlook for fiscal year 20.
And a 50 basis point expansion.
Relative to fiscal year 19.
Now turning to slide 20.
I'll address.
Our structure.
Our team.
And our unique Jabil culture.
The strength of structure plus team.
Plus culture is paramount.
And far greater than the simple some of the parts.
Our market facing divisions are where it all comes together.
And were solutions are so neatly package for our customers.
As a team we load mediocrity.
We're constantly asking ourselves.
Do we have highest standards inside a jabil.
In the solutions and services, we provide our customers.
The amazing solutions, our team brings forward to customers are derived in one or two ways.
Either through deep domain expertise found vertically within each division.
Or what I think about.
As horizontal solutions.
Which are sewn together via insightful unselfish collaboration and cross talk if you will be.
Between the divisions.
This part isn't easy.
But after many years weve mastered the art of non parochial intercompany sharing.
And our debts incredibly important to jabil and serving our customers.
Another hard to replicate dimension of our model.
Is the intimate working relationships each divisional team.
As with our leaders and employees throughout the company that work outside the divisions.
Those folks that run the plumbing.
Assuring the corporation run smoothly each and every day.
This is so fundamental for example.
And with this group there are simply too many leaders to acknowledge individually during this session or I would.
So to our entire leadership team.
Thank you for making Jabil jabil.
I encourage everyone listening in and participating in todays session.
Please watch each of the divisional videos.
As Adam said at the opening.
The videos will be posted on our website.
There are informative.
And illustrate what we're doing.
And how we're doing it.
In closing.
Our team has tested and proven.
Our people are awesome.
Customers and shareholders remain at the forefront of our actions.
And I believe Jay will is making the world just a little bit better.
A little bit healthier and safer each day.
We have the team and ingenuity.
To become the most technologically advanced manufacturing solutions company in the World.
Thank you I'll now turn the call back over to Mike.
Thank you Mark.
I am excited with the momentum underway within the business and I believe it will carry through to our next to fiscal years as we continue our natural progression towards margin and cash flow expansion.
Over the next few minutes I plan to provide you with a framework that highlights how we will execute on our strategy and deliver on our financial commitments.
First fully focused on expanding margins.
To position the company to deliver higher margins over the last few years, we've targeted growth in Asia as a pump business that have higher return profiles and offer accretive margins and strong cash flow streams.
At the same time, we're focused on optimizing cost to ensure will position to deliver SDMA leverage across the worldwide global footprint.
Secondly, core earnings per share has gone from $1.86 cents in fysixteen to a projected $3.45 and fytwenty thats, a 17% compounded annual growth rate.
And finally, we're focused on generating strong free cash flow through optimization of working capital and disciplined Capex management.
These priorities are aligned and focused on delivering long term value creation.
Outperformance in Fynineteen gives me confidence that our strategy is working and positions us to deliver on our commitments and fytwenty and beyond.
Next I'd like to outline our expectations for revenue and Fytwenty by end market, along with our expectations for core operating margin by segment.
I'd first like to discuss what's going on and on Dms business and Fytwenty.
We are expecting 10 basis points of margin expansion on low single digit revenue growth.
The key takeaway this year is the considerable mix shift underway in this business.
And Fytwenty, we anticipate adding $800 million of healthcare and packaging revenue to replace $700 million of mobility as devices and lifestyle revenue.
The decline in our edge devices and lifestyle business is being driven by three factors.
Technology changes needing to put on transitions end of life of certain products and our decision not to pursue other products that do not meet our margin and cash flow profiles.
The strong performance in healthcare and packaging is being driven by continued growth in our base business.
And the continued ramp up previously announced strategic healthcare collaboration.
It is worth noting excluding the ongoing ramp in health care, we estimate that are fytwenty dms margins would be closer to 4.3%.
With all that said, it's also worth noting beyond fiscal 20, we anticipate all come the end markets to resume growth.
We're excited about a diversified and balanced portfolio. We are building now Dms segment, and we feel our improving mix will drive more sustainable earnings and cash flow.
Turning to MMS.
Following two years of tremendous growth as part of our diversification efforts, we expect SMS revenues to increase by 4% and Fytwenty as we intentionally shift our focus towards margin expansion and cash flow generation.
Within automotive the strong year over year growth you see is driven by our customers desire to leverage our capabilities and autonomous driving and electrification.
And semicap during the slowdown the team has done an excellent job of aggressively managing our cost base to current market realities and is focused on the diversified expansion of this business, winning new customers and programs that should position us for a strong equity 21 once the market recovers.
Yeah.
In wireless in Fiveg, we continue to see growth in Fiveg that is being offset by fourg as the market transitions to new and technology.
The Fiveg market will continue to expand over the next two to three years as the Fiveg infrastructure continues to rollout worldwide.
In cloud, we've seen significant growth over the last two years, our cloud team continues to be focused on units hyperscalers as well as tier two cloud providers and is well positioned to take advantage of the ongoing shift from OEM to Dms companies, which provide a better value proposition through why.
Capabilities.
Today, our Dms business serves a diverse Glenn up end markets in areas that provide confidence in future earnings and cash flows due to longer lifecycle of these products be it industrial or in regulated markets like energy.
We have deep domain expertise complemented by investments being made and capabilities.
All of which we believe will result in lower volatility and more predictable earnings and cash flow.
Putting it all together NMS, we expect to help the 40 basis points of core margin expansion in fiscal two NT.
As I mentioned earlier, we're focused on expanding our overall core margins through cost optimization and targeted group.
As a result, we are well positioned to deliver 20 basis points of core margin expansion in fytwenty.
This expansion will be driven mainly by two factors.
First as you recall, we've seen tremendous growth over the last two years, adding in excess of $6 billion in revenue to our consolidated results.
This growth was driven by our diversification strategy up to now and targeted at end markets that offer more attractive margins and sustainable cash flow profiles.
These wins manifested in strong revenue growth as we ramp these complex engineering, let programs.
And Fytwenty and beyond the maturation of these awards begins to contribute to improved profitability.
And then as I mentioned earlier in my Q4 remarks, we've taken steps to proactively optimize our manufacturing footprint.
We anticipate these restructuring costs will result in net benefit the consolidated core operating income of $25 million or 10 basis points of core margin expansion and fytwenty and $14 million in Fytwenty one.
We anticipate the benefits to flow through mainly during the second half of the fiscal year 20.
This is an important consideration as you shape your quarterly earnings expectations for fiscal year 20.
Turning now to our Capex guidance for fiscal year 20.
Net capital expenditures are expected to be $800 million consistent with fiscal year 19.
This will come through a combination of both maintenance and strategic investments for future growth.
Let's talk about a maintenance capex for a moment.
We now have hundreds sites in 30 countries.
At this scale, our factories require approximately $550 million in annual maintenance investments.
This is inclusive of investments in areas, such as IP automation and factory, Digitization, which will drive optimization across our footprint and position us to deliver higher profitability.
We're also investing in strategic growth in targeted areas of our business that will deliver strong margin expansion and free cash flow.
Strategic growth Capex will be targeted in end markets, such as healthcare Fiveg wireless energy and industrial automotive retail and packaging.
Turning now to free cash flow.
And then Fytwenty, we will continue to generate strong cash flows as a result of earnings expansion, along with our team's ability to execute and efficiently manage working capital.
Working capital improvements will come mainly through improved inventory levels as growth moderates and the competitive market continues to normalize.
These factors coupled with our disciplined Capex gives me confidence in our ability to deliver adjusted free cash flows of more than $500 million in fytwenty.
Turning now to our capital allocation framework.
Over the next two years, we expect to generate significant free cash flow.
Given this dynamic I thought it would be appropriate to walk you through our capital allocation framework and had a high level, how we plan to deploy our capital over the next two years.
Our capital return framework beyond organic investments will prioritize our commitment to our dividends share repurchases and the combination of targeted M&A and optimizing our capital structure.
With the 600 million dollar authorization, we announced this morning, we're on track to return more than $2 billion to shareholders in the form of buybacks and dividends.
So what is on this mean.
We remain comfortable with our ability to generate strong cash flows which will afford us the ability to return capital to shareholders maintain investment grade ratings and ensure we maintain an optimal capital structure.
Turning now to our first quarter guidance on the next slide.
Dms segment revenue is expected to increase 3% on a year over year basis to $3.1 billion. While Dms segment revenue is expected to increase 11% on a year over year basis to $3.9 billion.
We expect total company revenue in the first quarter of fiscal 20 to be in the range of $6.65 billion to $7.35 billion for an increase of approximately 8% at the midpoint of the range.
Core operating income is estimated to be in the range of $235 million to $285 million with core operating margin in the range of 3.5% to 3.9%.
GAAP operating income is expected to be in the range of $128 million to $206 million.
Core diluted earnings per share is estimated to be in the range of 82 cents to one dollar and four cents.
GAAP diluted earnings per share is expected to be in the range of 14 to 58 cents.
The tax rate on core earnings in the first quarter is estimated to be in the range of 26% to 28%.
Turning now to our assumptions for Fytwenty and apply 21.
In order to provide better clarity on our view of the business and market environment over the next few years, we started be helpful to provide some high level assumptions that are embedded in our targets.
As we transition to my final Slide 31, you can really begin to see the earnings power of a diversified and balanced cable.
We believe we are well positioned to deliver core margin expansion as a maturing new business awards continue to scale.
We believe this focus together with our working capital efficiencies position us to deliver 4% in core margins and Fytwenty, one along with $4 employee BS and 600 million plus and free cash flow.
And importantly, our balanced capital allocation framework approach is aligned and focused on driving long term value creation to shareholders.
I'd like to thank you for your time today and for your interest in general.
I'll now turn the call back over to Adam.
Thanks, Mike we will now begin our Q in a session I'd like to remind our call participants that per our customer agreements, we will not address any customer or product specific questions.
We appreciate your cooperation we're now ready for Q1 Act.
Thank you will not be conducting a question and answer session. If you might be placed into question Q. Please press star one under telephone keypad, a confirmation tone will indicate your line is in the question Q.
You May press star Q, if you'd like to remove a question from the Q.
Participants using speaker equipment, and maybe necessary to pick up a handset before pressing the star.
Once again that is star one place in the question Q1 moment, please what we pull for questions.
Our first question today is coming from Adam Tindle from Raymond James Your line is now lives.
Okay. Thank you very much and good morning, Mark I just wanted to start off with the fiscal 21 EPS target of $4 I think that implies similar EPS growth as fiscal 20 mid teens year over year, hoping you can touch on the composition of that growth from 20 to 21, because we think about from 19 to 20, there's some identifiable things.
Driving EPS growth like JNJ getting at full run rate Dms cost burden last year, not repeating and now you've got 85 million of cost take out when you thought about guiding fiscal 2001 for the same EPS growth one of the drivers of that growth that gave you the competence to guide that far out as we sit today.
Hi, Thanks, Adam.
So I think you touched on a few of them the.
For US is as we look at going from 19 to 20.
And 20 to 21.
Certainly normalization in our health care business with.
With what's going on with Jane Jay I think Mike also Sheraton in his opening remarks on has assumption set that.
We believe we'll see or start to see recovery in semi cap.
In calendar summer 2020, so we believe that will carry us into into 21, and then I also believe that.
Across a number of our business sectors Adam.
The fiveg.
Enablement.
We will start.
I think for real as we get into early to mid fiscal 21 and that will be beneficial as well and then if I touch on.
The 85 million that Mike talked about.
I think the timing and.
And the use of those funds is quite good at the moment when I think about.
Our business inside of China sets. So all in all I stack, all that up and Thats why we decided to.
To give you guys look see at fiscal 21.
I'm pretty pleased with the outlook now we got to execute but.
It's it's squarely right in front of us.
Okay. That's helpful. Maybe just as a follow up from Mike you had obviously very strong performance in free cash flow exceeding your original goals for fiscal 19, and I know this has been a focus so if you could maybe just touch on some of the discipline you put in place to achieve this and it does sound like you're expecting kind of the same level of free cash flow in fiscal 2000, but growth is attenuating. So are there.
Offsets or is this just kind of more taking a conservative approach like you did last year and if you want to wrap it up with the capital allocation and buyback decision, which is the largest authorization never that'd be helpful.
So you add im extremely pleased with our cash flow performance in Q4 consistent with previous years.
Some of the disciplines, we put in place on inventory on a our IP all of those.
Our coming through working capital efficiencies are improving ability puts and takes as we go forward obviously, when we do have strategic collaboration.
Since the inventory levels go up a little bit than they come back down.
Throughout fly up fly 20 asset as a there is there's a lot of there's a lot of efficiencies taking place in working capital side and I feel I feel really good about the 500 million plus that we put out for.
Free cash flow, maybe there's a little bit of conservatism in there, but it includes all the other pieces.
On the optimization side on some of the cash I think we've mentioned about 35 million of cash.
We'll go out on the optimization side as well so feel good about that capital allocation I think the the basis I think it lays out a clear path on what we're trying to do over the next.
Two years and I think the starting point is our free cash flow number.
And the the share buybacks and dividends of approximately 60%.
We feel as a is a good target to to try and had over the next two years.
Okay.
This is mark again, while listening to my talk on another thing that popped in my head to your question around 21.
Is.
Adam alluded to it I think I mentioned it somewhere in my prepared remarks I think.
For both sell side by side and anybody interested in the company.
Taking some time in looking at.
The videos that were posted or will be posted right. After the call will be extremely beneficial in terms of.
Activities that'll that'll also contribute to.
20 and 21.
Appreciate it and congrats on a strong year, yes. Thanks.
Thank you next question today is coming from Steven Fox from Cross Research. Your line is now lives.
Thanks, Good morning, I had two questions first off can you talk a little bit more about the the process that went into decided to take some capacity out on the wireless side, if I heard.
Some excess capacity concerns, which I think where they're a year ago. But then also you were talking about growth when you get out to fiscal 21. So is it just a mismatch capacity.
Different types of programs that came up made the decision happen.
Color on that and then they had a follow up.
Yes, Steve let me take a swing in it and then maybe maybe Michael had some commentary.
Well, we felt is if we if we look it if we look at them the leadership team we have in.
Jim on Green point today, the work they've gone in the last 18 months is fascinating to me and.
The fact that we're taking out some capacity is no indication around health the business lack of health of the business.
Where we're positioned it is good today is we've ever been.
Market shares in good shape.
The team has just done a tremendous job.
For lack of better word.
Getting more water through a smaller pipe and.
And so we looked at all of this and said.
The timing feels pretty good too to take out some capacity.
There's a small subset of that capacity that.
Needed to be taken out regardless.
But the vast majority is is we really wanted are kind of our back half of 20 in certainly 21 financials too.
To be properly reflected if you will for again lack of a better Tom So I think it's a really good decision and.
I think the timeliness of decision is appropriate.
You are guiding add Mike and so some of the automation and manufacturing process improvements that we've put into place of the last 18 months.
That makes us that gives us confidence that we can put in more incremental revenues through a reduced capacity.
And leave it was sort of we feel really good about market share. There is no loss of market share in fact, we're gaining market share. So overall I think it's the right decision to tell it contributes to Dms margins.
That's very helpful. Thank you for that and then just as a follow up the message came through loud and clear in terms of improving margins and optimizing what you have in terms of programs, but how do you manage the customer relationships going forward.
As you execute that maybe they want to add more to the table pipeline.
That doesn't seem to be in the cards in the next.
12, 18 months thanks.
Well I'm not so sure is not in the cards.
I think I think there's two elements for for for Mike and I think one is.
We continue to we continue to improve.
The overall portfolio.
Both in terms of our right to play in certain markets.
Selection of certain markets that.
We think are a bit more stable a bit more predictable at times longer product Lifecycles and then.
In addition to that one of the things that we've done a really nice job. So Steve you know well the last three four years.
Our has been on fire a bit in terms of overall growth for a number of of well thought strategic reasons.
Taken our foot off the gas I think is healthy.
For a lot of pressure on the factories a lot of pressure on the team.
So now it's time to slow the car down just a hair.
Refinance Polish it up.
But in terms of.
If we've got good opportunities.
I think the way we look at that is.
Reset and hurdle rates for each of our business sectors in business Division. So what you could expect is is if revenue if we do take on opportunities in revenue creeps up I think theres a high probability that additional earnings will come with it.
Without any attenuation of margin.
Either either in 20 or 21.
That's very helpful. Good luck going forward, yes, thanks, Steve.
Thank you. Our next question today is coming from Jim Suva from Citi. Your line is now lives.
Thank you very much guys.
If my math is right and it might be wrong I think the full year fiscal 20 sales growth rate is slightly under 3% around 2.7, but the Q1 outlook is up about closer to 8% maybe my numbers are wrong on that but it seems like you're would expecting a strong.
Wind down or tail off of growth as the year progresses is that due to exiting the business it looks like.
This category called edge device in lifestyles is the biggest challenge there can you walk us through kind of the linear already is my math right and kind of what's going on there. Thank you.
Hey, Jim.
Thank you are mass right I think.
The Q, if you look into Q1 kind of growth rate.
The Q1 growth rate is is going to be kind of double digits year on year Q1 to Q1 on the Dms side.
And then normalizes throughout the year.
I think thats debts twofold, one is is.
Q1 of last year was a little bit of abnormality, because we had ramped any.
Any of the new businesses yet.
So it sort of so that kind of the denominator in the growth rate was a little bit distorted I think if I think about.
Q2 in Q3 in Q4.
We end up with kind of tougher comps with growth towards the back half of the year based on the timing of the new business ramps and how they laid into 19, so part of it is.
Kind of the overall comps year on year comparison for 19, and then as well as.
The first half of of fiscal 20, which is really kind of the back half of COVID-19.
There's also an area, where we're completing ramp so.
Overall, your math is correct and I wouldnt.
I wouldn't take anything away from that other than it's really about how the the comps are measured.
And I am I correct that the biggest challenge is the.
Subdivision or sub segment, you called edge device in lifestyles, it looks like year over year going to be down about half a billion dollars is that right and help us just understand that a little bit.
I would say in our Dms segment.
Where edge devices place, that's that's a fair observation and I would say that.
Overall on.
On edge device, what we call edge device in lifestyle Jim.
Theres three theres three items that are playing there so I think on our.
For our for lack of a fancy your term our green Blue slide that Mike spoke to on on end markets. It shows edge device lifestyle for the year on year.
Going from about three and a half billion to 3 billion I remember the exact numbers, but call it down four or $500 million year on year, that's for our best for a few different reasons number one is.
There is a significant number of products in that bucket. So a number of those products are going through technology changes things prepare for Fiveg number two is certain products or just plain, we going into life.
And number three is.
Management's just made some decisions not to pursue a follow on products based on those products not meeting either a margin structure cash flow priorities. The nice thing about that Jim is repeal.
Four or $500 million out of edge device.
And it gets replaced by really healthy outlook from healthcare in packaging. So I think the swap is quite good and really sets a nice platform for us as we move into fiscal 2001.
Great and then quickly can you just update us on the Johnson and Johnson transition is it.
I'm sure it's still transitioning its not fully done would be my assumption, maybe either number of sites or amount of revenues are just just where we think about the phase or anything of that transition. Thank you. So much yes sure the.
When we first announced the wonderful collaboration with JMP.
There was there was some noise out there about GM.
You guys going to be able to execute this is this is like other big deals done in the industry that maybe didn't turn out so well.
I think I said in our June call that.
Wave, one and wave two.
Work completed and completed to plan those those waves had five factory sites and we welcome to all the employees from those sites wave three Jim is coming along as planned it will be it'll be.
Integrated and closed on time in fact.
The plan is for the end of this month. So all in all really really pleased lots a hard work but.
I think it's.
A win win for both.
Johnson and Johnson enjoyable and as I said I think in the June call.
Revenues from the transaction still look to be in the 800 million $2 billion range for fiscal 2000.
Thank you so much for the details and clarifications its greatly appreciate it yes. Thanks Jim.
Thank you next question today is coming from Matt Sheerin from Stifel. Your line is now live.
Yes, thanks, and good morning, and thanks for all of it the details on the sub sectors very very helpful. In your outlook you talked about.
Growing the auto in semi cap segment fairly significantly is that mostly on the auto side you talked about continued weakness in semi cap until basically the end of your fiscal year.
Where's that growth coming from.
Sure.
Thanks for the question Matt the.
Again, and Mike's prepared remarks, and his assumptions as we sit today and it's been a moving target.
Unfortunately, it's been a target thats moved on as a couple of times to the right, but Alex Barron belly and his team will oversee that part of our business.
Has kind of put a little bit of a more stable guide post in thinking that our semi cap recovery at least as applicable to jabil.
We should start seeing.
Recovery in in summer of of calendar 2020.
And we think that recovery carries through.
Beyond the end of our fiscal 2000 and into 21, and then on the automotive side.
Michael Parco his team Chad morally all the folks that were on our automotive business have this really well positioned specifically in areas.
Rectification and sensing around the on around the vehicle, so that's where the gross coming in both of those sectors combined.
Yes, I guess, despite the fact that the auto production continues to be week is that just incremental program wins basically.
Well, it's two things one it's always great to have huge wins at your sale in terms of market growth, but.
When we take a look at where we're positioned in the marketplace. It's it's not just all about vehicle production, it's about content per vehicle and.
Again, where we've chosen to participate strategically content per vehicle for us.
It is quite good.
Okay, Great and then on Dms could you talk about the packaging area I know Thats has not been a big contributor to our profits I know you've had some management changes there.
Had some more optimistic outlook. So can you talk about that business and how that contributes to the or your op margin increases over the next couple of years.
Yes, I, Chuck will because I remember sitting here not that long ago talking about the drag on the accompanying from our packaging group and happy to say that.
The packaging business continues to.
Grow double digits in terms of topline.
The drag on the on the on the company is now gone in and.
I said in my prepared remarks, I made some comment around one of the things we pride ourselves on is.
Keeping fix things fixed and.
Lady that we hired out of the packaging industry has.
As turnover.
The vast majority of our packaging leadership team.
What she's dove into with her team is.
A service offering now in a solutions offering now in the packaging space.
From a company that has a massive scale great capabilities in terms of miniaturization.
Precision machining coatings.
Electrical and electronic assembly, and combining that with a pure packaging molding background, and we think our service offerings quite good so.
Certainly.
Our packaging business is is planned to be a.
A material contributor as we move into fiscal 21, and certainly a contributor in helping us get the company to the 4% margin outlook that we talked about for for fiscal 2001 as well.
Okay, great. Thanks, a lot Mark Yep.
Thank you. Our next question is coming from Mark Delaney from Goldman Sachs. Your line is allies.
Yes. Good morning, Thanks for the detailed presentation and fights.
As for something to better understand your your manufacturing plant and as the company constructed at Capex plan for fiscal 2000, I'm curious, if you're contemplating any increased manufacturing and different geographic locations because the tariffs or maybe just more broadly are you seeing.
Yes from customers or potential new customers and moving out and manufacturing factoring locations.
Thanks Mark.
So there was a couple of different questions there in terms of.
Trade tariff issues I said back I think it was the June call that as we sit today.
No big material impacts to us as we're sitting as receding now in September .
Again, very little materiality in terms of.
Actual business moves I think I mentioned something around the fact that.
You know there continues to be a deep rooted supply chain in China.
A lot of our customers when they when they look at the analyses.
Don't see a great payback in terms of moving existing business and then theres a decent amount of our China revenue.
Thats concern consumed in other Jews other than the U.S.. So so kind of not applicable with all that said mark.
One of the things that we have taken a hard look at in the last.
70, 590 to 100 days is is we do think with all the growth we put into the company.
General footprint expansion is.
Is essential and so.
From a capex perspective, we're going to continue to expand our footprint and a lot of that expansion is largely.
Outside of China. Most of that expansion is is in support of our SMS business and then there's probably an opex component to that Mark.
As I think about the overall.
Margins.
And somebody else earlier in the conversation today was asking about it.
Our Fms margins are always the last number of years stronger in the back half of the fiscal year versus the front half.
This year our margins will also be later in the front half versus the back half and a small subset of that is we've planned about 10 $12 million of Opex in the first half of the year in terms of Vms as far as footprint expansion strategically so.
I hope that answers your question and by the way that's all built into our model in our and our outlook.
Yes, that's all very helpful. Thank you for that my follow up question was the outlook for the enterprise business, So lower revenues and the guidance for this year is that just more end market weakness or anything around programs are jabils tied to that we should be thinking about thank you.
I think the answer is yes, we.
We've been participating in that space literally forever.
We're very well positioned in the space with our service offerings, we understand it inside now and.
Overall, if I, if I think about the enterprise space collectively if I sit cloud aside.
We're not going to see big gross in that in that.
Sector of our business, but it's still a very important part of our business has lots of critical scale I think the numbers Mike showed on on.
Our sector chart is still a $4 billion business for us.
Really good in terms of stable cash flows so all in all pleased with the business.
But yes, your your your thesis or or understanding around the end markets I think is correct.
Thank you.
Thank you. Our next question today is coming from rule about the chart from Bank of America Merrill Lynch. Your line is now live hi, Thank you for taking my questions.
First one just to clarify the focus on footprint optimization.
Are you actually going to Useighty 5 million to report we purpose the factories from one area of Dms to another or are you actually closing factories and related to that you know you've gotten mobility revenues declining 200 million in fiscal 20. Some people think that the next year fiscal 21 can be a strong year for fiveg related mobility.
Would you have enough capacity to support that and put mobility revenues and grow in fiscal 21.
A replay of smart Lilly It let me take home you take a swing in let Mike AD.
So on the mobility side I.
I think our anchor outlet 19 to 20 write down 200 million.
I don't think thats overly material.
But directionally it's down.
I think we're being somewhat conservative this year in a mobility business, it's not an indication as we said earlier in terms of how we're positioned it's not an indication of.
That whole sector for us in terms of market share.
We are quite bullish on.
On mobility for 21 again based on Fiveg. So.
As I as I also alluded to earlier, it's really about the incredible job our team's done.
Our around Greenpoint, we're just getting we're just getting.
Better water flow through smaller pipe and and that's due to factory optimization layouts efficiencies automation robotics.
And again some of the Capex. We spent the last couple of years is really.
Starting to pay good dividends for us on the factory floor.
So again I wouldn't read anything into it in terms of.
How we view the mobility market or how we view.
The relationships, we have in that area.
Quite frankly, it's all it's all in relatively good shape.
Thank you getting that no I think.
The biggest staff factor is that the ability to drive more revenues could reduce debt capacity that we're putting in place.
Hi, Bob talked about automation robotics, all of Thats going to take that over the next year or sell we'll be able to.
Drive a lot more revenue through a much much reduced footprint.
Okay. Thanks for the clarification on that Mark.
Maybe the next question on MMS.
You've got the wireless Fiveg and cloud revenue flat the in fiscal 2000.
I would've thought that there would be some fiveg build outs and you would see stronger growth and you've done a great job with the cloud businesses here.
Can you just talk about what you see how you see that business is growing in the next year and why wouldn't we see more growth in that area.
Well, we might and I think we're you know the cloud business is relatively new to us.
Again, I think Alex in his whole team have done a really nice job there I think.
We're looking at going Okay, let's not get over our skis. So.
Take that as intended.
But the cloud businesses and really nice shape for us and and we think the outlook is going to be quite good I.
I think the other thing is is remember that the the 4 billion plus that we're showing is on a net scale. So one could look at intuitively Ingo G.'s why is the growth numbers not higher with with strong anticipation of Fiveg, a we're not going to see a lot of fiveg in fiscal 20, but also the biggest component to that is.
As we move in that 21, and 22 is going to be some count cannibalization of LTE in Fourg. So on a net net basis I think our outlook is relatively conservative, but thats, where the numbers look like they look.
Okay, Okay that makes sense and from my last question Mike.
On the 600 million authorization, what is the cadence for that I mean, how many years is that over and how should we think about the cadence of buyback. Thanks.
I think the 600 is over a couple of he is I think our full for modeling purposes I would.
Factor in about 50, plus I think we've said 50% to 60%.
Between share buybacks and dividends in the capital allocation framework side that factored into back to 54 fly 20, and 30 54, a flight to anyone.
Thank you so much.
Thank you. Our next question today is coming from Paul Coster from JP Morgan Your line is allies.
Hi. Thanks. This is Paul Johnson on for costs are thanks for taking my questions. So.
First.
Nice operating margin guidance here.
So the next years, but you're you're operating margins have been kind of relatively the three and a half range for the past.
Three fiscal years, what's giving you more confidence that we should see some acceleration here over the next two years.
It's more a function of product mix some cost efficiency.
Possibly more higher margins design work and then what kind of question are you baking in for variables you can't control, particularly as there is.
Global recession.
Sure.
So I think.
Jeez without.
Trying to sound overly promotional I think.
The last three or four years everything that.
Not everything I think I think lots of what we have talked about.
We've accomplished if we go back to two a year ago and what we said we would do in 19.
We largely accomplished those goals if we go back to fiscal 18, we largely accomplish those goals and.
And quite frankly, our focus the last three or four years has been on topline growth for a lot of the reasons, we've talked about for the last 10 to 12 quarters I.
I think in the last with where the growth has gone with the amount of growth in topline we've added to the company for all of the right reasons in my opinion.
We as a leadership team now again has taken our foot off the pedal a bit in terms of growth, we're still going to grow we're going to be a bit more selective and.
We're going to focus on on margins and cash flows. The nice thing about that is is sometimes growth isn't well within our control I can tell you that the company has a 50 year track record of operational excellence.
And.
With the investments we've made in the factories. The last two years. Thank Mike in his Capex slide broke out this year kind of an innovation engineering line item under Capex. He did so that so that you can see from a sustainability standpoint, and a technology standpoint in our factories were not under asked under investing in.
That area.
So.
The good news is for the next 12 to 24 months a lot of what we're working on in terms of margin and cash flow is squarely in our control and it's something we know how to do really really well I would also add to it a comment you made.
Another component of the margin expansion absolutely is the composition of the commercial portfolio, which we feel really really good about.
Okay. Thanks for that and then my follow up is on Capex levels longer term.
As you as you upgrade more manufacturing sites is more automation.
Do you kind of see structural change in some of that maintenance Capex does that 550 million kind of maintenance capex, a little come down over time.
Or should we just kind of think about 3% of sales as has it correct way to kind of model capex, but longer term. Thanks.
So I talked about where we stand today with US size is about 100 sites in 30.
Countries that that's a big footprint.
It will always requires some level of maintenance as we go through some of the the leasehold improvements some equipment change will up with keeping up with technologies battery in the future.
Automation et cetera, as I think looking forward that fivefifty initial or is that 2%.
Sounds sounds about right from a from a from a from a percentage perspective.
Thank you.
Thank you. Our next question today is coming from Andrew about him from Wolfe Research. Your line is allies.
Thank you good morning, taking look at Fms at 20 revenue growth the full year guidance from 4%. However, the one Q guide of 11% would imply a 2% year over year growth for quarters two through four so I recognize there is a tougher.
Comps in the middle ear, particularly but why is there such a sizable drop off and what sort of the linearity for the last three quarters could be potentially see a sequential decline one Q2 Q.
A sequential decline in Fms revenues CNS, yes.
Yes, I think I think for modeling purposes, it would be good.
Think about CMS is flat Q1 to Q2, but could there be a sequential decline there could I think in our models, we're thinking about Q2 being relatively flat to Q1.
And again as I mentioned.
A lot of that has to do with.
What you're measuring against last year. So one Q of 19 before we started layering in.
Revenues I don't remember the exact numbers, but one Q of Vms last year.
Revenue was around three and a half billion dollars I think and I think we ended the year well over 4 billion. So now again, we were ramping business through 19, those are the comps it will be compared against stronger comps Q2 through Q4 this year.
But all in all I feel I feel really good about rtms business this year.
Still going to end up growing.
Three 4% year on year, so around the 16 billion I think.
We gave you and more importantly is as we'll have we think.
30, 40 basis point pickup in margin year on year going from the 3.1% last year back into a more normalized range of 3.5%.
Thank you that's helpful. And then just one of the tax rate.
Tax during the quarter came in little bit below guidance and.
Last call Mark I think you meet a point to discuss that.
Overall at 90 tax rate it kind of come in higher than they would have been you'd have like than you would've liked.
You'd expect it to more normalized level sort of an at 21 at 21 was the f. for Q rates.
Sort of on at that normalized level was it sort of the beginning of the normalized level.
I think the tax rate depends a lot on where the revenues being generated like we've said in the past undersized steady countries a.
Little bit of a mix shift in from one country to another that can change the the tax rate debt considerably we feel good with the guidance going forward in that range of 26% to 28%.
That leave prescribed for fly 20.
Will it be on the lower end higher end don't know at this stage, but I think we feel good that it's moving in the right direction. It should continue to go down as we as the as we look out to our business mix going forward.
Thank you.
Thank you we reached end of our question answer session I'd like to turn the floor back over to Adam for any further closing comments.
That's it for us. Thank you for joining us the slides and videos will be on our website shortly and we look forward to talking with everybody soon.
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