捷普科技 (JBL) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Jabil's third quarter 2014 fiscal year earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn today's conference over to Beth Walters, Senior Vice President of Communications and Investor Relations. Please go ahead.

Thank you very much. Welcome to our third quarter of 2014 earnings call. Joining me today are CEO, Mark Mondello; and our Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website, jabil.com, in the Investor section.

Our third quarter press release, slides and corresponding webcast links are also available on our website. In these materials, you will find the financial information that we will cover during this conference call. We ask that you follow our presentation with the slides on the website beginning with slide 2, our forward-looking statement.

During this conference call, we will be making forward-looking statements including those regarding the anticipated outlook for our business, our currently expected third quarter of fiscal 2014 net revenue and earnings results, the financial performance of the Company, and our long-term outlook for the Company. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.

An extensive list of these risks and uncertainties are identified in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013, on subsequent reports on Form 10-Q and Form 8-K, and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Today's call will begin with opening remarks from Mark. We will then move on to the third fiscal quarter results and guidance on our fourth fiscal quarter 2014 from Forbes Alexander. We will then open it up to questions from call attendees. I'll now turn the call over to Mark.

Thanks, Beth. Good afternoon. I appreciate everyone taking time to join our call today. I'd like to begin by recognizing all of our people here at Jabil. Thank you for your commitment.

On to the quarter. The results were largely as planned. We delivered $45 million of core operating income on revenues of $3.8 billion, and ended the quarter with a strong cash balance. Forbes will provide more detail and discuss our Q4 guidance during his prepared comments.

As I think about where we sit today, a significant catalyst for future growth is the continued advancement of our capabilities. Our organizational structure intentionally houses our broad-based capabilities in an independent, standalone group led by our COO. Commercial leaders across our Company leverage these capabilities to best serve their respective customers and end markets. This approach drives valuable collaboration and minimizes parochial behavior.

I'd like to share a few examples of the solutions and activities ongoing within our capabilities group today: advanced planning and supply chain optimization tools, which combine proprietary business intelligence with big data. Our continued acceleration and implementation of advanced automation and robotics across a large percentage of our factory floors. Expansion of our advanced design services, such as enhancing the consumer experience by improving the interface with product packaging and/or product specific industrial designs.

The last example, specific to capabilities, is the advanced modification made to our ubiquitous SAP platform combined with virtualization of our IT backbone. This results in better security, higher flexibility, and faster information flow across our Jabil network. These limited examples are a modest illustration of the type of outstanding work taking place within our capabilities group. With that, let me shift focus to our independent operating units.

Our Nypro team has delivered ahead of plan. They are completing their integration into Jabil from a systems perspective, all while driving creative solutions for their customers. In addition, they're adding square footage in anticipation of growth -- growth in the areas of healthcare, big pharma, and consumer packaging.

Our Enterprise & Infrastructure segment continues to gain market share, albeit in a continued challenging environment. The team continues to deliver high complex, high technical products with near perfect quality. In addition, there's acute awareness by the team of the cloud-based transformation currently underway in networking and storage.

Our High Velocity segment has booked new revenue streams in the areas of automotive, consumer electronics, point-of-sale, printing, and digital home. The team's innovative solutions, combined with their optimized cost base, offer a value proposition that is well-aligned to the end markets in which they serve.

Our industrial division continues to grow while taking tremendous care of the brand companies they serve. The team delivers an endless number of products produced in a complicated, low volume, high mix environment. Inside of Jabil Green Point, our team is focused on engineering intensive, high-volume programs. The combination of technical expertise, massive scale, and operational excellence makes all of this possible. We anticipate a solid recovery in this area of our DMS business.

I'd like to move my prepared comments to share a few thoughts as I think about FY15. First and foremost, I'm highly energized and enthused by our outlook. I remain confident in our ability to deliver core earnings per share in the range of $1.65 to $1.95, as previously communicated during our March call. My confidence is reinforced by share of wallet expansion and new bookings which have occurred within our High Velocity and our Enterprise & Infrastructure segments, combined with the sheer magnitude of product ramps in process within our DMS segment.

These product ramps include areas in healthcare, packaging, mobility, industrial, wearable computing, and consumer lifestyle. As we enter FY15, it's my belief that our DMS revenues will recover and we will experience near double-digit leverage as the existing cost base is absorbed. Furthermore, our FY15 core EPS guidance includes approximately $25 million to $30 million of new OpEx investment.

This investment is focused on future growth as we look to expand into large non-traditional, non-EMS markets, markets which align with longer-term trends such as energy, aging population, environmental preservation and sensors. This organic investment carries manageable risk, and if successful, will deliver further diversification to future Jabil earnings. As I look across our broad range of commercial activities, I remain highly confident that the collective portfolio will deliver an ROI in excess of our weighted average cost of capital.

As I think about the next three to four years, I believe our portfolio strategy provides a solid foundation for the business moving forward. As I've stated previously, it's my belief that Jabil will deliver strong operational cash flows over the longer term. Relative core EPS will be determined by our capital structure, which I believe will improve over time; our tax rate;, and thoughtful decisions we make around capital allocation.

As a corporation, we are most fortunate to have unique combination of scale, innovative capabilities, and experienced leadership. This affords us a credible path to pursue many business opportunities in various end markets as we look ahead. Thank you. And with that, I'll now turn the call over to Forbes.

Thanks, Mark. Good afternoon, everyone. Before I begin with reviewing the results for our third fiscal quarter, I'd like to remind everyone that during the quarter we did finalize the divestiture of our after-market services business, and all results associated with this business are reflected as discontinued operations, and as such, our results for the third fiscal quarter of 2014 and all comparative periods in discussion reflect this treatment.

I'd now ask you to turn to slide 3 of the presentation deck. Net revenue for the third quarter was $3.8 billion, a decline of 10% on a year-over-year basis. Our GAAP operating loss was $1.6 million during the quarter, while GAAP net income was $188.3 million. GAAP net diluted earnings per share were $0.93 during the quarter.

GAAP net earnings in the quarter included $12 million of restructuring and associated charges, $6 million associated with the amortization of intangibles, and $15 million of stock-based compensation, along with a gain on the sale of our after-market services business of some $240 million. Core operating income, excluding the gain on sale of discontinued operations, amortization of intangibles, stock-based compensation, restructuring, and certain other expenses was $45.3 million and represents 1.2% of revenue. Core diluted loss per share was $0.06.

As anticipated, our core diluted earnings per share was negatively impacted by an elevated effective tax rate relative to historical levels. The core effective tax rate during the quarter was 188%, or $24 million in tax expense. As I discussed in our last call, a high rate, driven by geographical mix of our profits and losses during the quarter, is expected to continue into our fourth fiscal quarter. We would anticipate our tax rate to return to historical levels for the period of FY15.

If you'll now turn to slide 4 for a segment discussion. In the quarter, our Diversified Manufacturing Services segment increased 6% on a year-over-year basis, driven largely by solid performances by our Nypro, industrial and instrumentation businesses. Revenue for this segment was approximately $1.6 billion, representing 43% of total Company revenue. Operating income was 1.1% of revenue during the quarter, well below our targeted range, and reflective of the cost infrastructure in place within Green Point. As you will recall, we've chosen to maintain levels of cost infrastructure within this business as we prepare for a return to more historical levels of production in fiscal 2015 and beyond.

The Enterprise & Infrastructure segment decreased 3% on a year-over-year basis, reflecting continued declines in enterprise spending, partially offset by strength in telecom. Revenue was approximately $1.3 billion, representing 35% of total Company revenue in the third quarter. Core operating income for this segment was 2% of revenue.

The High Velocity segment decreased 35% on a year-over-year basis as a result of our BlackBerry disengagement. Revenue was approximately $850 million, representing 23% of total Company revenue in the quarter. Core operating income for this segment was 0.2% of revenue. On a sequential basis, total Company revenue increased 6% with all three segments showing modest improvements.

If you'll now please turn to slide 5. We ended the fiscal quarter with cash balances of $1.3 billion, and debt levels were consistent at $2.2 billion. Cash flow from operations through the first nine months of our fiscal year were $409 million. Core EBITDA for the quarter was approximately $159 million, representing 4.2% of revenue, while core return on invested capital was 3%.

During the third fiscal quarter, we repurchased approximately 3.6 million shares at a total cost of approximately $65 million. We have approximately $70 million available under our $200 million repurchase authorization. Year-to-date, net capital expenditures totaled $274 million. Consistent with our discussion of last quarter, we expect total capital expenditures to track to $350 million for the full fiscal year, as we look to bring on our first tranche of capacity in Chengdu and to support new Nypro ramps during early fiscal 2015.

If you'll now please turn to slide 6, where I'd like to give you an update on our restructuring activity. Our broad capacity alignment plan, announced in the third quarter of fiscal 2013, remains on track to deliver $65 million of benefit in 2015. As a reminder, our plan outlined $188 million of costs to be recognized over a seven-quarter period. Since its inception, we've recognized $122 million of those costs, with cash outlays to date of $67 million. The balance of $66 million of charges and $84 million of cash is anticipated to occur over the next two quarters.

The restructuring activity associated with our BlackBerry disengagement is anticipated to be concluded in the coming quarter. Total charges are now expected to be in the range of $42 million to $70 million.

I'll now ask you to turn to slides 8 and 9, where I'll discuss our fourth quarter 2014 guidance. In the fourth quarter, we expect revenue on a year-over-year basis to decline approximately 15%, and to be in the range of $3.7 billion to $3.9 billion, or at its mid-point, consistent sequentially. Consistent with our guidance of 90 days ago, core operating income is estimated to be in the range of $40 million to $80 million, and core operating margin in the range of 1.1% to 2.1%.

Interest expense is estimated to be $32 million, while tax dollars are estimated to be $30 million. Thus we estimate our core earnings per share will be in a range of $0.10 to negative $0.10 per diluted share. Net GAAP loss per share is expected to be in the range of $0.30 to $0.05 per diluted share based upon a diluted share count of 201 million shares.

Turning to our segments, and on a year-on-year performance basis, the Diversified Manufacturing Services segment is expected to decrease 6% to approximately $1.7 billion in revenue, an increase sequentially of 7%. The Enterprise & Infrastructure segment is expected to decrease 7% on a year-over-year basis, reflective of end market conditions. Finally, our High Velocity segment is expected to decrease 38% on a year-over-year basis, reflecting the wind-down of our BlackBerry relationship.

We're well-positioned as we move towards fiscal 2015. Our balance sheet is strongly positioned to provide both financial and strategic optionality; positioned to support the business with further investment; seek acquisitions, which will continue to enhance our capabilities in key areas; and return capital to shareholders via our ongoing dividend and stock repurchase programs. I'd now like to hand the call back to Beth.

Great, thanks, Forbes and Mark. Before we begin the question and answer session, I'd like to remind our call participants that in customary fashion, we will not address any customer or product specific questions out of respect for our customers and their specific products. Thank you so much for your cooperation. Operator, we can begin the question-and-answer session.

(Operator Instructions) Your first question comes from the line of Mark Delaney with Goldman Sachs.

Thanks very much for taking the question. I was hoping you could first, Mark or Forbes, you could elaborate on the outlook in fiscal 2015, and if you could talk a little bit more about the DMS segment? And if you could talk a little bit more about what gives you the confidence in those ramps, and if you could just give us a sense on the timing for some of those ramps and the view of when you can have the capacity more fully utilized?

Mark, I think, based on my prepared comments, I'd just tell you that the color we have around the ramps today, and it's a multitude of ramps, I'd leave it as, we just feel comfortable that the ramps are going well and we're comfortable with the guidance provided.

Okay, for a follow-up question, you mentioned some new OpEx investments for some new end markets -- I think you mentioned energy as one of those. Does that imply that the core business was actually tracking above your guidance for fiscal 2015 because of the incremental OpEx that you talked about today on the call, and this brings it back in line?

No, well, what I think it means is is that the business, the earnings are strong enough in 2015 to where we're going to have $25 million to $30 million of planned OpEx, which will take earnings down. So we'll still be in the $1.65 to $1.95 range, but we're going to make $25 million to $30 million in investments for the future, that's correct.

Okay, I'll turn it over, thank you very much.

Yes, thank you.

Your next question comes from the line of Amitabh Passi with UBS.

Hi, thank you. Mark, maybe if I could try this a slightly different way. I think if you look at the Street consensus estimates, everybody is assuming a pretty nice inflection in the November quarter with earnings, call it somewhere in the $0.35 to $0.40 range.

I'm not expecting you to give us guidance for the November quarter, but I'm just trying to figure out, is that the right way to think about how we should plan to get to the $1.80 middle point for EPS guidance for next year? Is it a more gradual ramp? Any help you can give just in terms of the trajectory.

Yes, I think what I'd rather do is provide a little more color on that come September.

Okay, and then, I wanted to just clarify on your $200 million buyback, can you remind us, and I apologize if you said this, how much is still left in the program?

Yes, there's $70 million left. We did use $65 million during the third fiscal quarter.

Okay, all right, thanks, I'll step back in queue.

Your next question comes from the line of Wamsi Mohan with BoA Merrill Lynch.

Mark, can you talk a little bit about the DMS guidance here for the next quarter? Down year-on-year, obviously, adjusted for the MS divestiture. But is that more about tough comps from last year in specialized services, or is it being driven more by a disproportionate decline on the industrial clean tech, or the non-specialized services area?

No, it's not industrial clean tech. It's just the overall product ramps we're going through heading into 2015.

Okay, thanks. And as a follow-up, can you talk about the DMS margin profile? Given your EPS guidance, we should probably still be expecting DMS margins below your longer-term range, at least for the August quarter. But is it fair to assume that as we go into the next fiscal year, we should start to think about DMS margins back into your long-term range?

That's a fair assumption, yes.

Thank you.

You're welcome.

Your next question comes from the line of Jim Suva with Citi.

Thank you very much. It sounds like, if I heard correctly, that we should wait for September. I just want to ask the question one more time. The step increase from basically break-even now to a linear year of next year of $0.45 per quarter, $0.40 per quarter -- you're saying just hold off until September? Because when we look at the restructuring, it looks like some of the benefits should start meaningfully kick in.

Can you just kind of help us a little bit around, if indeed, we should expect it to go up to that level, or is it going to be more gradual? Or the timing -- maybe you could talk about the timing of the benefits from restructuring?

Jim, this is Forbes. In terms of the restructuring, we're well down the path to execute on that front. And I'd ask everyone to follow the cash, if you will, rather than the GAAP bookings. So we formerly announced a closure of a site in the United States.

That will be closed in August, so we'll see some really positive results of that in our first fiscal quarter. And then as I look through the back half, it will be more linear as we take costs out of Western Europe. So we don't want to get into the particular quarter-by-quarter EPS guidance at this stage.

As Mark said in his prepared remarks, we've got a large number of program ramps, as we're moving into 2015, so we don't control when those products launch in the marketplace. We'll see how that pans out, and certainly feel very well-positioned to deliver a strong 2015.

And, Jim, one thing to help you maybe a little bit in your model is, if I had to guess, I'd guess that the earnings would have a shape to them similar to what we delivered in FY13.

That's very helpful.

On a quarter-on-quarter basis.

That's very helpful. And then, as we take a big step back, and this is strategically big picture of Jabil, you're really changing the character of your Company with Nypro and the acquisitions you've done.

Is it fair to say that that character, post the restructuring, once you come out, that the operating margins will be materially higher? Because if we look at a sales run rate of $16 billion to $16.5 billion, which I believe you guided to, and then your EPS, that is meaningfully below what you've done at $16 billion to $16.5 billion of revenues, and the EPS is kind of a disconnect. I assume it's masked by the restructuring, and you should come out even much stronger profitability because of Nypro and the other actions -- is that fair long term?

Certainly, that's what we're efforting towards. I think it's too early to tell right now, Jim, but, yes, that's what we're efforting for.

Great. Thanks a lot, guys.

Your next question comes from the line of Amit Daryanani with RBC.

Thanks a lot, guys. Two questions for me. One, I guess, Mark, on the fiscal 2015 guide that you're reiterating today, maybe just talk about, are you more comfortable with those numbers versus 90 days ago? And it almost sounds like the Enterprise and High Velocity segment revenues could be better than what you thought 90 days ago, but it's getting offset by this $25 million OpEx investment. Is that the [wide] reason, the change in assumption for the fiscal 2015 guidance?

We'll talk more about that in September. I don't want to be evasive, but it's hard to address that this far out. But let's have that conversation in our September call.

Fair. And then, I guess, if I just look at the August quarter guide, right, you're looking for flattish growth on a sequential basis, at least right now. If I look at the last few years when you had the big ramp with your customer, August tends to be up mid-single-digits for you guys typically; so what is the offset from historically August being up mid-single-digits to the guidance of flat? Is it that you don't have visibility, or are there any offsets to that?

Amit, it's Forbes. I think it's not that we don't have visibility. I think the offset is such that, as we talked about a couple quarters ago, unfortunately, the programs that we had geared up for this fiscal year didn't come to fruition in terms of sell-through. So it's really that impact more than visibility.

Got it. And we'll look forward to the September call. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Steven Fox with Cross Research.

Thanks. Good afternoon. First question, I was wondering, Mark, without getting into numbers, of course, if we look at what you're kind of looking at on the DMS business for the next couple quarters smoothed out, and compare it maybe to the ramp you've had in the last couple years in the back half of the calendar year, how is it different, how is it the same -- whether it's on the level of complexity you're doing to serve markets, new programs versus maybe just second generation programs? I'm just trying to get a handle on how different this is going to be and the challenges you may have, or may not have, for the rest of the calendar year with DMS?

Wow, good question. Challenges are comparable; none of this is easy. Better diversification, and -- I'd say better diversification, and maybe some tweaks to overall business terms from a ROIC perspective. Other than that, it's similar.

Okay, and then, secondly, just in terms of looking at the OpEx investments that you mentioned, obviously, aimed at, like you said, diversifying. If you invest a dollar on -- today in OpEx, like what kind of return are you looking at to actually see revenues? Is this something that could pay off in the next fiscal year, or is this something that is entering new markets and we may have to wait until maybe a year-plus out to actually see revenue?

Yes, I think it would be aggressive to think about this having a big impact in 2015. If it did, it would be a Q4-ish time frame, so think about it for future investment.

Okay, and is there a lot of real new markets that you're entering, or is it sort of doubling down on some of these diversified efforts that you made over the years?

The $25 million to $30 million I talked about is all new markets.

Okay, all right, great. I appreciate that, thanks.

Yes. Thank you.

Your next question comes from the line of Sherri Scribner with Deutsche Bank.

Hi, thanks. I just was looking at the E&I segment, and it looks like that was a little bit worse than expected. You mentioned server and storage, and the guidance suggests that we see a deceleration in growth or as the declines get worse. Can you give us a little bit of color on what you're seeing in that segment?

Sherri, the segment remains difficult, but I think what you're seeing in our results isn't about the difficulty in the market, because the team is doing a great job. It's about corporate allocation and the fact that we're slugging it through two tough quarters.

And would you expect those margins to start to improve in fiscal 2015, or would you expect them to improve this year, because you have sort of seen those coming down over the past couple quarters?

Yes, they won't improve next quarter, but we do anticipate they will improve in 2015.

Okay, and then, Forbes, a quick question. I think on the last call you said that you would finish the $200 million in buybacks this fiscal year; is that still your plan?

Yes, as we said today, we're methodically working our way through that at a pace of $65 million to $70 million a quarter. So we'll see how that plays out as we move through the coming couple months, yes.

Okay, thanks.

(Operator Instructions) And at this time, we have no further questions. I would now like to turn the conference back over to Beth Walters for any closing remarks.

Okay, thank you very much. Thank you, everyone, for joining us on the call today. As always, we will be available for any follow-up questions you have during the rest of the evening and the rest of the week, and thank you for joining us today.

Thank you for participating in today's conference. You may now disconnect.