Jabil Circuit, Inc. (NYSE:JBL)
UBS Global Technology and Services Conference
November 15, 2011 3:00 p.m. ET
Timothy Main - President & Chief Executive Officer
Thank you, good afternoon. Forward looking statements, please rely on our risk factors enumerated in our 10-K and other SEC filings. Jabil’s been in this business a long time. Founded in 1966, we have about 110,000 employees today, global company in all the major consuming regions of the world and very happy to be one of the longest tenured companies in the business. GAAP earnings in over one year in our 45-year history.
Great growth in fiscal 2011, 23% revenue growth. If you take a look at our fiscal year-end in August we operated most of our fiscal year, 9 out of 12 months in a really horrible macroeconomic environment, still put up 23% revenue growth. I am getting fewer and fewer questions about the macroeconomic environment because it’s clear that Jabil is not a cyclical company in a cyclical industry. That’s one of the misconception that investors historically had about our business.
Since going public in 1994, Jabil has a compound annual growth rate, revenue and EBITDA of 25%. And there are only five companies in the Fortune 500 to have done that. So, not a cyclical company. A great year for us in a bad economic environment.
We report today in three business areas, diversified manufacturing services, enterprise infrastructure and high velocity. High velocity is really, primarily about consumer electronics. Enterprise infrastructure, businesses like networking, computing and storage, and infrastructure areas. And within diversified manufacturing, three business areas, healthcare and instrumentation; industrial and clean tech; and then specialized services.
Phenomenal growth in diversified manufacturing services. Our long-term targets are 20% to 30%, we put up 40% growth in -- 43% growth in fiscal 2011. Core operating margins of 6.5%, that would lead the industry if that were a standalone business by a wide wide margin. Enterprise infrastructure exceeded our long-term growth targets as well as in high velocity. So very pleased with the performance and the improving portfolio mix of our business.
Long term, because of the long-term target growth rates diversified manufacturing services being 20% to 30% versus 5% to 10% in the other two business areas. That growth differential should drive diversified manufacturing services to approximately 50% of our business over the next 24 months, roughly, and that will fundamentally change the margin profile of the business as well given the margin differentials. So a very attractive margin mix in group of businesses for the company.
We are well on track to do that. This is the progress of those three business area since the first fiscal quarter of fiscal 2010. At that period high velocity was 40% of our business, diversified manufacturing services was 29%. And they have essentially completely flipped with diversified manufacturing services growing to 40% of our business and high velocity declining to 28%. So we are well on track to achieve the long term targets.
More importantly is the greater resiliency and sustainability of the business from an earning perspective. Jabil of 2011 is very different from the Jabil of 2006. If you take a look at 2006, over -- approximately 50% of our profitability was derived from the high velocity business area. We were highly dependent on that business are. Look at 2010 and 2011, market dependency in that area has fallen into the mid to low teens, while more than half of our profitability is derived from diversified manufacturing services. So better balance and growth from these very attractive high growth, competitively advantaged areas.
It’s a big market. I’ll talk a little bit more about diversified manufacturing services, why are we so excited about it. We have got a great business there. We have been in the business for a long time. Our growth is accelerating and it’s a big market. It’s $500 billion market. It’s lightly outsourced today, somewhere in the neighborhood of 10% to 15%. So we think really strong long-term growth opportunities on the horizon in this business area.
Most of the customers in this area, they want to access emerging markets. They enjoy the synergies that we can bring to them by our participation in areas like high velocity. Our order fulfillment capabilities, our IT infrastructure and our social and environmental responsibility, are all very attractive to these relatively risk averse buyers of our services where price of the individual product is lower and their order of priority -- higher on the order of priority is quality, safety, reliability.
Really, making a difference in the diversified manufacturing services area. Materials technology group, big group of PhDs, are doing a lot of work in metals, plastics, ceramics, glass and taking the combination of those materials and putting them into very attractive product areas. After market services, we are the strongest player in that business area today and we are diversifying into new geographies and markets every day.
In healthcare and instrumentation, we are well beyond printed circuit board assembly, full product systems. We do a lot of design work. We have hired a lot of industry experts from outside of our company and have a highly differentiated business solution today for customers in that business area where there is real barriers to entry that have been created and better pricing leverage for our company.
In industrial and clean tech, one of the expertise there or special things that our company does is that we are able to produce high mix electronics in low cost locations to a greater extent than most of our competition. For example, about 70% of Jabil’s overall production output is built in lot quantities of less than a 100. And those of you who know anything about manufacturing that’s a relatively small lot quantity build, $16.5 billion in electronics. So we are a very high mix company. Not a high volume commodity company, a high mix company. And that’s very important to particularly industrial companies that have very diverse requirements and are looking to Jabil to bring them special expertise.
And in clean tech, we are one of the largest, if not the largest, smart meter manufacturer in the world. We do pitch controllers, wind turbines, building solar panels. We have a broad participation in our growth of the clean tech area, and that’s a real key advantage for our company as we think the focus on renewable energy and smarter distribution and storage of energy will become increasingly important.
In enterprise and infrastructure, everything is moving into the cloud. There is consolidation to majors OEMs around the world. We make the world simple for these large scale customers to do business, in a world that’s becoming more and more complex for them. We do that through engineering intimacy, superb manufacturing, proprietary planning tools that help customers’ balance supply and demand in different regions of the world, plug and play systems, and frankly today more scale, more capability and more locations than our competition can deliver. There’s very few companies in the world today that can do that.
And in high velocity, a very hyperactive focus on cost, rapid development and employment of technology and approaches on locations. This area is very strategically important to us in terms of the synergy it provides the other areas. We have a healthcare customer, for example, that we helped developed a portable ultrasound machine that levers the skills developed in high velocity and that is the reason that that healthcare customer came to Jabil to help co-engineer, co-develop and then introduce that marketplace. So a very strategically important area. Operates frankly above its targeted margin ranges. In our fiscal Q4, at the high end of the range for the fiscal year ’11. Produces excess cash flow that we can than reinvest in areas of diversified manufacturing services. So this is actually a fairly attractive area.
None of this works without a continuous improvement culture. Jabil owns a lot of assets. 110,000 employees around the world. And one thing that we have learned over the last few years is that part of our solution really needs to be about having a continuous improvement culture. Some examples of that, 14,000 Blitz Kaizen Events in fiscal ’11 versus 100s a few years previous. We have 3000 people enrolled on the Lean Six Sigma education programs around the world. We have developed a number of proprietary global logistics and planning tools and we have continuously invested in our IT infrastructure. We run single instance of SAP around the world. That’s a key advantage of moving production around, coordinating multinational, multi-plant production. And we are one of the few companies in the world that can have that many employees, that many facilities, the kind of revenue that we have and do all of that under a single instance of SAP. So key competitive advantage for us.
Take a look at our industry. There’s a knock on the industry generally that, Jabil, I like your story but the EMS industry you guys take capital from shareholders and their providers and then you charge it off. And some of that happened around us. But Jabil is not part of that behavior and part of that story. Last ten years we have had GAAP earnings, nine out of ten years. The only year we didn’t was because of our (cane) accounting rules regarding goodwill. And most of our competitors, even the larger competitors rarely earn GAAP earnings. And we are the only large scale company, beside Foxconn that actually has accumulated retained earnings.
So our story is about fundamental quality of earnings, quality of growth and consistency over time. And that stands in stark contrast to some misconceptions investors have historically held about our company and our industry.
So thank you, very much. Great growth story. I think a story built on differentiation and something that’s sustainable under the future. So thank you very much.
Thank you, Tim. Why don’t we open it up for Q&A, if you have a question please feel free to raise your hand. Why don’t I kick it off, Tim. Perhaps you could just give us an update on the demand environment, how are things trending perhaps relative to expectations and then just order -- just also generally in terms of bookings. Are things fairly steady, are you seeing a lot of fluctuation in order patterns?
You know, one of the more remarkable things that I think investors came to realize in fiscal ’11 is how little the macroeconomic environment mattered to the overall performance of the company. I think growth, GDP growth, declined to less than a point from the March quarter. Was kind of lousy all year and yet the company put up 23% revenue growth. And if you look back overtime that not unlike the history of the company. Since 1994 the company has delivered revenue and EBITDA growth of 25%, compound annual growth rate. Since 2008, we are one of nine Fortune 500 companies that have grown at our rate. So really a phenomenal record of growth in spite of whatever macroeconomic environment might be there.
In the last 25 years, the company has only had two years of a year-over-year decline in revenue. And all but one year of 45 years we have had GAAP earnings. So, you know what, the macroeconomic environment is an influencer but not a determiner of our company's performance. And I think the current environment is not unlike what we have seen for the last six to nine months. I don’t see any big changes and no reason to think that Jabil can't continue to outperform overall macroeconomic environment. You got to remember, great organic growth in healthcare, organic growth in industrial, organic growth in clean tech, organic growth in aftermarket services., explosive growth in smartphone manufacturing. And whole diversified manufacturing services segment has very little to do with how macroeconomic activity fluctuates.
So I think investors have come to the EMS industry and looked at Jabil through the lens of how they looked at the EMS industry in the past which is really IT spend. And IT spend is mature so it’s really about where we are in the business cycle, it doesn’t matter. It doesn’t really matter. I mean it makes a difference between a 10% growth year and a 20% year but it doesn’t make the difference between making a quarter or not making a quarter. So we feel good about the current environment that we can continue to outpace the macroeconomic growth rate and continue to deliver consistent results to shareholders.
Just us your DMS segment, I think you guided for that segment to be up 3% sequentially, about 24% year-over-year. Would you be comfortable to hit that 20% to 30% long term again over the next three, four quarters? You are starting off fairly strong in the November quarter, so just wanted to get a sense of the outlook for that segment?
Yeah. DMS, we feel very good about the long term target of 20% to 30%. Quarter-to-quarter you’ll see variations in the sequential growth, so it’s not necessarily going to be 25% divided by 4. As programs ramp up, ramp down, and we go through variations in 90 day timeframes but on a year-over-year basis, I think when you end the year and you look back, we are very comfortable with the 20% to 30% long term growth rate.
I think there is a question at the back there.
Yeah, I would be curious on your thoughts on the effect of Thailand and the disk drives on some of your enterprise segments.
Yeah. You know we just don’t know yet. And I know that seems silly because the floods have been going on a long time but sorting through the secondary and tertiary effects, we are just not a point where we can fully comprehend what impact that may have. If that impact will be material or immaterial, minor or major. And I think we will have -- will hope to have more explicit information when we have our conference call in December.
If there is an impact, do you think it would be mostly in PCs or do you think it would extend possibly into storage and networking? If there is an impact from the disk drive disruption, do you think it would only be at the low-end or do you think it will be in higher- enterprise boxes like storage etcetera?
Yeah, that will go to the severity of the issue. Seagate’s in apparently in better shape than some of the other guys, but we just don’t know yet.
And may be one last one. If you could comment on the demand trends within the different enterprise segments, that would be helpful?
Yeah, I can't comment on any near-term demand trends. Again, I’d kind of open with the statement that variations in short-term demand have not impeded the -- or macroeconomic activity hasn’t impeded the company's ability to grow and prosper in this environment. I don’t think the present environment is all that much different then what we have had for the past 9, 10, 11 months. I get a lot of questions from investors, it’s a little odd, that what are we going to do if the macroeconomic environment falls downward, all fiscal ’11. The macroeconomic environment slowed down from where it was in calendar 2010.
And so this is not a -- this lackluster growth in the U.S., less than lackluster growth in Europe, very good growth in Asia and Latin America. You know that’s kind of like what we have seen for the last year. And so, may be it’d be a little bit worse in Europe, maybe it’s a little bit better in United States, we will how that all balances out. Still feel very good about our company's ability to have a great year in 2012, another record year. It will be our third consecutive record year, if we are able to print the kind of number that we expect, if we print the number that’s first call today for the company, wherever that first call is, we don’t provide annual guidance but if we printed that number that would be another record year, third consecutive record year for Jabil.
We have a question back here.
Tim, as the (make) funds are making its way, just on your specialized services segment. Is that a segment that’s still dominated by smartphone, tablet customers? Can you give us a sense how concentrated that customer base is and just opportunities in non-tablet, non-smartphone segments?
Specialized services has not really dominated -- dominate to me means more than roughly half, and we -- one of the things that I don’t think is as apparent, it might have to do something with us in the future because it’s becoming kind of an afterthought, is the aftermarket services business is big business. It’s well over a $1 billion. It’s, if not the, one of the highest margin segments that we have. Kind of outruns everything else in DMS. And we just made an acquisition of Telmar, which is a very interesting capability and in the telecommunications area that will build capabilities and broaden the industries that our aftermarket services business serves. So I am kind of excited about that area as well. And the MTG, the (map) manufacturing technology group that serves smartphones and tablets and that kind of stuff, they continue to do very well too.
Tim, I guess, within the last month you announced I think a 14% dividend increase in the second buyback. It’s a buyback that you announced in I think June, you used up in six weeks. This new one is smaller. But my question is, does this portend a bigger, I guess a more sustained and larger payout as a percentage of total free cash flow or do you view that, these sort of buybacks, I guess, opportunistic when you got some extra cash loitering around and then you may go fallow for a while and sort of hoard some more cash before paying out again?
Well, we set ourselves our aspiration whether we are there yet or not is up to all of you to decide but we certainly aspire to be a top decile performing company that provides sustainable consistent performance with periodic dividend increases and regular return of capital to shareholders. And that’s the way we see our self. In fiscal ’11 we produced $880 million in cash flow from operations, even though it was a fairly high CapEx year for us. We had about a 40% free cash flow yield on that cash flow from operations, and that’s supported a $200 million share repurchase along with roughly $60 million of dividends. So $260 million of capital of that $400 million of free cash flow return to shareholders.
So I think overtime we will develop a more metricized approach to what our free cash flow yields should be and how much of that free cash flow yield should be returned to shareholders. I think you will see us move from a share repurchase mentality that has historically been opportunistic to something that is more regular anti-dilutive and linier in application. And again over time we will look to increase our dividend as we grow the business. So we want to continue to pursue various shareholder friendly policies with respect to capital. We don’t -- philosophically we don’t think that it’s appropriate for us to accumulate a lot of excess cash.
We didn’t -- we did the Green Point deal in 2007, and then kind of didn’t do a deal until this one. So, yeah, it’s a couple of tough years in there. But, yeah, I think that we would like to do a deal or two a year of the Telmar size. We will look to do that in the diversified manufacturing services area. We are looking hard for the right healthcare opportunities. And I think we will continue to make acquisitions in aftermarket services. That tends to be an area that is not really approachable from an M&A standpoint. So I think the two areas that we would focus the most attention out would be the aftermarket services and healthcare.
Thank you. I will keep going here. Just in terms of your -- sorry, I just kind of blanked out here.
That’s okay. You can refer (inaudible).
Thank you. I remember my question but we will go there first.
Sure, Jeff, I mean it’s interesting as you go through DMS, the different competitors that we confront in aftermarket services is not really -- there are a couple of legacy competitors that have an AMS like business but we think it’s kind of apples and oranges. So it’s companies that are specialists in that area, they tend to be private equity companies or private companies. There are very few public companies that specialize in AMS. In healthcare, it’s a different set of customers. We have had some legacy competitors have done well. We think we hadn’t have better capabilities but they are building a business there are well.
In clean tech we have got a big, kind of a big lead. And it’s the OEMs capacity or its specialists in work. Because of our reputation down in the clean tech area, we are getting a lot of companies that we never heard of come to us and say we didn’t know anything about your industry and we looked you out because you heard you were doing the stuff with wind turbines or smart meters and you are really what we need. Now we want India manufacturing and we want to develop this technology and you guys have the scale. And so some great opportunities there. So it’s a little bit of a mixed bag, Jeff. It’s going to be a situation where I think we will continue to outpace the industry. Having said that, I put up a chart, $500 billion market, only 10% to 15% outsourced. There is going to be more than one winner. And the market’s capacious enough to accommodate more than just one successful company. So I think there will be a few of us that will make success out of that.
I will just ask the final question. Just bigger picture question Tim, as you look at the structure of the industry, from your vantage point is there any benefit from any further consolidation. If the number four, the number five player get together, the five or the six.
I might think on the margin consolidation we will be good. We are not interested in doing that on our own.
Okay. So cool. I think we have run out of time, we will head over to the breakout room.
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