Jabil Circuit's Management Presents at Bank of America-Merrill Lynch Tech Conference (Transcript)

May.11.12 | About: Jabil Circuit (JBL)

Jabil Circuit, Inc. (NYSE:JBL)

Bank of America-Merrill Lynch Tech Conference Call

May 8, 2012 2:45 pm ET


Forbes I.J. Alexander – Chief Financial Officer

Beth Walters – Senior Vice President, Investor Relations and Communications


Wamsi Mohan – Bank of America/Merrill Lynch

Wamsi Mohan – Bank of America/Merrill Lynch

Just want to thank you for joining us here today at the Bank of America Merrill Lynch Technology Conference. Delighted to have Jabil here with us today; we have Forbes Alexander, CFO, and Beth Walters from IR. The format is going to be Forbes is going to run through some slides, and then we’ll dive into Q&A.

So, with that Forbes?

Forbes I.J. Alexander

Okay. Thanks, Wamsi. It’s very nice to be here. Good morning, everyone. I’d just like to take a few moments today and tell you a little bit about the Jabil’s story. A little bit of history on really why we think we are a little bit different from others in our space and talk to you about some of our growth plans, differentiation, and why we think this is sustainable in terms of the next two, three years and beyond.

Before I do that, I will be making forward-looking statements today. So I would ask you and encourage you to review our SEC filings, in particular our Form 10-K that was filed late last year, particularly as relating to our fiscal year-end, August 31, 2011.

So with that formality out of the way, James and Bill founded Jabil back in 47 years ago 1966 Michigan is our roots. We are now one of the leading global manufacturing suppliers in the world with 23 million manufacturing square feet with some earnings 12 million, 13 million feet in Asia and continuing to grow there. A very long tenured management team is my 20-year with the company. I started in Scotland and grew my way into the CFO slot, and many of my colleagues have similar backgrounds and stories. So, great management team, well tenured and know most of the ups and downs in this particularly industry, and very excited about the future.

In terms of the past decade, I think you’ll agree our revenue growth has been pretty impressive, a CAGR of about 18%, over that timeframe, our EBITDA growth at 14%. This year, we expect to produce our revenues somewhere in the region of $17.3 billion, $17.4 billion and continuing to expand our EBITDA from fiscal 2011 through fiscal 2012, fiscal year ending the 31 of August of this year. We also see this revenue growth continuing over the medium to long-term, and I’ll talk to that in a moment or two.

At the last recession in 2009, we really stepped back and took a look at our company. We took a look at the marketplaces and the capabilities that we had available to us. And we reorganized our company into three segments, these being shown here on slide. The diversified manufacturing services segment, which is represented by the green portion of the pie chart here, enterprise and infrastructure, the blue area and the high velocity systems at read area.

And we’ll see here on this chart, the long-term growth rate and long-term core operating income targets that we presented at that time. We still stand by these today. As I said, this is 2010, the slide is from. But really, this is where our strategy and where we’re driving the corporation as we move forward here.

Diversified manufacturing services growth rate is 20%. Actually, it’s a pretty lofty number, but I’ll share with you why we believe that is very sustainable as we move forward here, with some examples of some of the capabilities that we have in a moment or two.

Enterprise and infrastructure, and high velocity growing at 5% to 10% a year; again these are traditional areas of marketplace in which this industry grew up and Jabil grew up. We did some great work there with some new wins across enterprise and infrastructure, and some really fantastic efforts in our high velocity systems arena in terms of lean manufacturing and capability expansion.

The desired revenue mix is that we grow diversified manufacturing services to 60% of the business and beyond. Remember, this was the goal in 2010. I’ll show you in a moment or two, as we move through fiscal ‘13. We’d expect our diversified manufacturing services to be close to that 50%. At this juncture, 47%, but there is opportunity during fiscal ‘13 in at least one quarter diversified manufacturing services will represent 50% of the revenue stream. So a little bit more detail on diversified manufacturing services; our revenue stream in fiscal ‘10, when we rolled out the segmentation was 32%. We expect that to be 45% going to 47% or 48% in fiscal ‘13.

The operating margin, we have expanded that during this timeframe within the range of 68% long-term goal. Certainly about 6% in fiscal ‘12 and we would expect to see that continue to expand during fiscal ‘13 as we lay down additional capacities, continue to invest in that particular arena, and gain both share and additional customers in that space.

So over this timeframe, a 35% revenue CAGR; our specialized services, which I’ll touch on in a moment, 25% of that revenue stream and as I said earlier, we’ll continue to invest in this area very heavily, and continuing to add engineering excellence, knowledge management, and real scaling and reach globally.

The secular area to support this growth rate is really very large, in excess of $500 billion in overall market. The specialized services area, which is an amalgamation of our aftermarket services business and materials technology, that marketplace somewhere in excess of $230 billion, and I’ll talk to that in a moment or two; the healthcare instrumentation arena of $150 billion, and then industrial clean tech of $120 billion.

So I think you’ll agree lots of scope, a broad array of customers, a broad array of emerging markets here, emerging deals as well, that our customers are targeting, and we’re very, very well positioned to meet their needs in all of these areas here, be it in healthcare with portable on and in body single use devices or running through industrial and clean tech in terms of power storage, controls, et cetera.

Touching a moment on our materials technology services organization; this is an area we’re particularly excited about and continuing to invest in the technologies there, both in terms of innovation, both in terms of capacity, and complexity of what we’re doing for customers here. Think of this as material sciences. Okay. This is where we have capability in plastics, metals, alloys, ceramics, glass, and on and on, and continuing to invest very much in our engineering capabilities here, as well as our footprint and capacities to meet the needs of the marketplace. The majority of our business today is focused in the mobile space, but we are seeing some great up tick and interest from customers as we’re moving into ‘13 and beyond and taking the technologies that we’ve been developing here and the know-how and applying that in areas such as healthcare, and I’ll show you an example of that in a moment or two.

Our aftermarket services business historically has been focused in terms of consumer electronics and depot-based repair. And we have made an acquisition in the last quarter of Telmar, which gives us an entree into the telecommunications space, again depot-based repair. But also gets us expansion geographically on a worldwide basis.

In terms of the service segments, as I said earlier, the roots of this business in depot-based repair, but we move that along over the last two or three years and we’ll continue to do so in terms of advanced logistics and technical support. This is a very, very fragmented marketplace and we are one of the leaders in this space and we continue to see opportunities in terms of market expansion and growth, both in consumer electronics, Telnet and other markets.

Customer segments, really quite interesting and it started with large OEMs, spanning that into the smaller areas, now also [carriers] and also some of the extended warranty organizations that are out there, so what’s the scope for growth as we move forward here over the next two to three years.

In terms of healthcare and instrumentation business, one of the key things that we see in this marketplace is not only capability, but it safe pair of hands. The margin in this space particular with FDA approval, longevity of product cycles, need suppliers with strong balance sheets, which Jabil does have, and also a safe pair of hands in terms of execution and ones ability to deliver in a global marketplace.

The way we think about this business is really into six areas, which are at the top of this slide in the green here in terms of patient bedside, portable on in-body, system, surgical, digital, analytical lab equipment, imaging and single use devices, and broad area of customers here that we’re very fortunate to do business.

As we move forward here, on our last earnings call, we talked about investments we’ve been making in design here. And we showed somewhere about 20 programs that we’re working with; some of these OEMs work across the six areas where we targeting. So that really gives us a strong pipeline of revenue as we move forward into ‘13 and ‘14, and as these designs are incubated and brought to market. So we feel very strongly that we’re going to see some real solid growth for many years to come here.

And remembering, in this particular area, life cycles are very, very different from some of the more traditional areas of high velocity systems and enterprise infrastructure. If you look at a smartphone or set top box or a printer, life for these products somewhere between six to nine months; some of these healthcare products, five years to 10 years. So a very sticky business and once approvals are in place, solid revenue stream and profitability as we move forward.

The other area of diversified manufacturing services is our industrial and clean tech business. And these are really the four areas or headings under which we’re targeting and arranging our engagements, energy generation, energy infrastructure, energy efficiency and what we call heavy machinery.

So again, some great customers here and this is a very, very complex business. A very, very large proportion of the products that we build are in lot sizes of 50 or less. So a very complex business on a global basis, and also enabling our customers to continue to grow in the emerging geographies, so very, very pleased here, and no real one dominant customer in this arena.

We’re seen some great growth this particular quarter and as we move forward into ‘13, there is many, many of these customers across broad way of that product set. Now we believe that within the energy infrastructure area we are certainly in the top two, if not the world’s leading provider, in terms of smart metering and technologies, and capability around that for these areas.

So turning now to more of the traditional manufacturing services area, so this would be our high velocity system and enterprising infrastructure businesses. If I can bind those in fiscal ‘10, when we set out on this journey, 68% of our revenue stream came from those two areas, and operating margin was 2.7%. [Operates] of ‘12, combined they’ll be about 55% of the revenue stream, and that operating margin has expanded 3.1% over that timeframe.

Key focus on the lean and efficient operations in this area, a global expertise, as you might imagine, producing these products in all continents. And our goal here is to really simplify the complexity for our customers, okay, in terms of execution, in terms of logistic, in terms of the marketplaces that they’re playing in. And we’ve added significant scale here during this timeframe, 40 percentages are dropping, the actual dollars are growing as the corporation has expanded over the timeframe.

So in terms of the overall marketplace for High Velocity Systems and Enterprise & Infrastructure, somewhere in the original $600 billion a quarter is the marketplace.

In the High Velocity area, we play in peripherals, predominantly printing set-top box automotive and mobility. So this is the electronic content of smartphones and point of sale systems, the large-scale systems you see in stores or some of the credit card type reader point of sale system.

Enterprise & Infrastructure as you might imagine, servers, work stations, enterprise, storage, telecommunications, and networking. So a good exposure across all these areas and some nice growth forecast ahead, line of sight around wins and storage, and telecommunications business as we move forward the back half of this fiscal year, calendar year, we’re into fiscal ’13.

It’s a very large marketplace, mid single-digit growth. If I take you back to one of the opening slides, we’re targeting 5% to 10% growth on a long-term basis, and this does currently represent somewhere around $10 billion of our revenue stream.

I wanted to share with you how we bring all these elements together, and tangible examples of the innovation we're bringing to product sets for our customers. So as we’re looking at this slide on the left-hand side, you’ll see a trolley-based ultrasound system that you’d find in any hospital in North America or the world today.

Wamsi Mohan – Bank of America/Merrill Lynch


Forbes I.J. Alexander

And the product on the right there is that same product, but miniaturized, essentially condensed. So what we did here was working with the OEMs and our engineering group, Jabil’s innovation, its ability to miniaturize products. If you think about how we’ve been playing in the smartphone market for so many years now, both in terms of plastics, metals, optics, lamination. If you see the product on the right-hand side, has a same functionality as that trolley-based system. What this is allowing the OEM to do is enter emerging markets.

If you imagine even in natural disasters are remote villages around the world where the medical profession can actually get out there and provide help through services with such a portable unit. This actual unit is maybe three kinds of, probably a cellphone and it’s not much better than that, and it really broaden our expertise in component consolidation, souring the component rate, high density mobile products and screen technology, and our mechanical design experience and material sciences.

So that’s a real tangible example that I think helps explain where we're headed as a corporation in our expertise. So all these benefits, we’ll leverage across all our markets in terms of our ability to deliver rapid product evolution as it’s just shown, help OEMs and our customers with the complexity of their business, cost trends in their business, a real focus on emerging geography.

We play in most markets in U.S. today, albeit in manufacturing technology or our ability to understand the logistics, the tax environments, the digital environment, the labor markets in those areas. Time to market is always important in profitability, obviously, for our customer base. Very sophisticated in terms of our management of customer supply chain, global footprint really goes without saying, we’ll continue to evolve that, continue to make investments in Vietnam, India, China, Eastern Europe, as we move forward with the team. And continue to develop the skill set and experience, not only in terms of manufacturing capability, material sciences know-how, and marketplaces.

And obviously, this side of the business generates cash. Okay? That’s the goal here that will allow us to continue to reinvest and diversify manufacturing services, which is where we’re focusing the majority of our investments, both in fiscal ‘12 and fiscal ‘13 and I’ll cover that in a minute or two.

Also this was an interesting chart, we shared this last Thursday. We had an Analyst Meeting in St. Petersburg in Florida, and this really looks at the content of revenues we have or growth – content of growth and revenue each fiscal year from new customer wins. And let me define the new customers. Definition of a new customer is, customers that have no revenue stream in the previous fiscal year.

So what this saying is, if fiscal ‘13, which we’ll enter in September of this year, 24% fiscal ‘13-ish revenue stream will grow between ‘12 and ‘13, which is somewhere in the region of $2 billion plus, 24% will come from customers that have no revenue in this fiscal year, okay.

So we’re making some great penetration across industrial customers, healthcare customer in particular in aftermarket services, okay. So lots of growth coming there, and what I’m finding quite interesting is, it seems to be around that 20% mark as we move forward. Fiscal ‘13, forecast revenue stream approximately somewhere between 16% and 20% of that overall revenue stream will come from new customers during this past full year.

Just recapping on the overall marketplace, as we see, it’s $1 trillion in terms of overall market. I've talked to some of these areas previously this morning. On the right-hand side here, you’ll see our expected growth by segment or area for fiscal ‘13. Okay. What this will do is generate, as I say, in excess of $2 billion of incremental revenue over fiscal ‘12 and plants us firmly in the long-term expectation of revenue growth of 10% to 15% in fiscal year.

When you apply this math to our fiscal ‘12 expectations, which drives in 12% to 13% growth year-over-year. High velocity, we're expecting to see relatively flat year-over-year. Handset exposure, I think in terms of electronics, you'll not see much expansion there, great position in terms of printing, great position in set-top box, automotives and point of sale. But we're taking a conservative view here, and saying that we don’t expect to see growth next year.

Our enterprise and infrastructure business growing at 10% to the higher end of long-term targets with limited storage, and wireless base stations and telecommunications. We’re not assuming much of a rebound in terms of our networking customers in fiscal ’13. So if we do see some up tick into ’13, then that's all for the good for us.

Industrial, clean tech healthcare instrumentation aftermarket services, a good line of sight about seeing revenue growth there of 15% in ‘13 over ‘12. And again, getting some of the background there, the customer lists where we continue to penetrate, and also an acquisition in aftermarket sales with Telmar in a year-over-year basis adds somewhere between $40 million and $50 million in revenue.

And then our materials technology area, somewhere that we're particularly excited about, where we expect to see growth of 25% over fiscal ‘12 within continued investments there in back half of this fiscal year.

With all that, we’re losing the strategy in action. If you recall at the beginning of presentation, we set out our strategy in ‘10, the goal was to expand its diversified manufacturing services 50% of the revenue stream. So doing the math in ’13, I guess 47%, Okay. In a relatively short timeframes, and as I said earlier, we should, certainly at least in one of the quarters in fiscal ‘13 be at 50% of revenue stream coming from diversified manufacturing services.

More importantly, we’re seeing an operating income shift, which is pretty dramatic. Fiscal ’11, 55% of income coming from DMS. Expect that to be 60% this fiscal year, and next year 65%. So this is really quite extraordinary, that we've been able to accomplish this in such a short timeframe. A broad diversity of customers that I’ve shared with you, and I think it really sets us apart, and differentiates us from other than the ENSPs, that really give us much a more diversity and sustainability.

If you think shifting product lifecycle, planting us capabilities in material sciences that we’re applying, not only in mobility space, but across healthcare and industrial, a broad range of customer that really allow sustainability in terms of (inaudible) income stream, and allows us customers to expand in those emerging marketplaces.

So starting to look perhaps more like an industrial organization than an electronic manufacturing company that many of you that may have been following this space have seen over the last decade. So really a shift away from electronics biases, if you will, so a very, very important part of our business, but looking more like an industrial.

In terms of our investments, we are very committed – I think those of you followed the company to the expansion of diversified manufacturing services. So in the first half of this fiscal year, we spend in terms of CapEx $180 million. On our last earnings call, about 60 days ago, I advised we spent $320 million in the back six months of $500 million for the year, somewhere in excess of 75% of those dollars are focused on diversified manufacturing services, Okay.

This excludes the acquisition of Telmar. And in fiscal ‘13 discussed last Thursday, on our Analyst Day, another $500 million that we continue to invest next year. So taking those numbers up from previous broad range discussions to support our revenue growth, but a great line of sight there and again continued investment in the diversified manufacturing services to drive that revenue stream towards that 50% and beyond on that income stream to 65% and beyond.

So with our cash flow projections for this fiscal year, which is August and four months from now, our cash flow from operations, we expect to be at $500 million, CapEx of 500 this is our neutral position for the fiscal year. The return on invested capital by 25%. As we make these investments the revenue stream will come off, probably quarter offset as we talked about in our earnings call.

For fiscal '13, so assuming that growth profile, revenue stream in excess of $19 billion, margin expansion, EBITDA expansion, CapEx of $500 million, we'd expect operating cash flow of about $1 billion next fiscal year. That assumes that we manage our working capital to 75% of our revenue stream, we’re capable of doing it. We've been running at about four points. So some margin of error allowed there, so even at that, $1 billion, leaving us $500 million of cash flow.

We are a dividend payer. We're committed to that dividend. In fiscal '12 we’ll be somewhere between $60 million and $70 million, so we expect that to continue as we move through ’13. We will be making acquisitions. Nothing imminent, but again, in terms of continuing our expansion in diversified manufacturing services, in terms of knowledge management, in terms of capability. Our focus will be in the healthcare and industrial area and our aftermarket services business.

And I characterize these investments or acquisitions as more a tuck-in, so no big blockbuster event. It’s certainly numbers ranging from in the $100 million, $200 million type range as much as we see in this past fiscal year with Telmar. And at the same time, we’ll see returns on invested capital expand by two basis points or 27%.

So overall, summarizing that, we do believe we have a very different business model than perhaps those of you who have followed DMS base believe historically. Continuing to expand in a broad base of customers, broad base of capabilities, technology, emerging markets expansion tailwinds and certainly well positioned for continued growth.

Let me be more transparent than ever we have in terms of the way we organize the company, I will continue to provide more clarity around line of sight, line of revenue growth and income growth, and hopefully had the opportunity to listen to our analyst call last week, if you didn’t I’d encourage you to take a moment or two to listen to some of the presentations there from each of our business leaders who run these areas, where there is much more debt provided in terms of our capability in knowledge management and execution abilities there.

And it will continue to grow our promise to investors, if one looks back over the last three or four years, we continue to certainly deliver, over deliver in terms of our guidance and we didn’t expect that to change as we move forward here.

And then we’ll encourage everyone to take a longer-term perspective on Jabil. And really – we’d be continuing to talk – we continue to talk and reference that as we move forward here, particularly as we continue to expand the revenue stream away from more traditional areas into the Diversified Manufacturing Services, and the continued expansion of that income stream to 65% beyond from these classified areas.

So with that, that’s the end of the formal part. I think once we move five minutes or so to take some questions.

Wamsi Mohan – Bank of America/Merrill Lynch

Absolutely. So maybe I’ll just kick it off here first Forbes, thanks for that detailed presentation. When you look at your growth drivers clearly strategically inclined towards DMS. It does requires significant amount of capital and you have been deploying that for all the good reasons of growth. How much longer do you need to sort of invest these high levels of CapEx clearly for some of the application, you have some co-investments, so the underlying capital intensity to broader business is quite high. How should we think about the steady state capital intensity of that business.

Forbes I.J. Alexander

Yeah, so as I showed there are no fiscal ’13, we talk about another $0.5 billion. A large proportion of that with the co-investment as you talked about, and it’s targeted at our specialized services area, materials technology and aftermarket obviously. So as we move to ’13, it’s difficult to say, where that will go, but I think a more normalized level of somewhere in the 350 to 400 type level, as you’ve seen historically it’s achievable. In terms of our capabilities in healthcare, industrial, that’s more traditional type levels of CapEx, in terms of surface line capabilities, testing, square footage, but I think modeling for ‘13 in terms of line of sight right now 350 to 400 is a reasonable number, but we’ll see where this goes.

We really very excited about our capabilities in aftermarket services in Materials Technology Group and what we’re focused primarily in the mobility side right now than materials technology, we do have line of sight around expanding that capability into healthcare. Didn’t showed our slides today or talk about it that much today, but this optics capabilities there, plastics, metals capabilities, that we can really expand that as move to ’13. ’14.

Wamsi Mohan – Bank of America/Merrill Lynch


Beth Walters

One thing, I think our business leader (inaudible) talked about last week at the Analyst Meeting, Wamsi was riding that technology, where they are making sure that sometimes the opportunity is there and you need to take it and that’s the one thing that our group is really good at doing, seizing where the innovation is and moving into those products win again.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay your DMS growth clearly shows that you’ve been able to sort of accomplish that result.

Forbes I.J. Alexander

I think it’s an important point, we’ve been proactive in that area whereas we have capabilities, we have technology. We have patents, we have IP where, we’re actively moving forward with OEM. Hoping you’ll apply this technology to your next product worked on rather than those sitting there as an incumbent waiting more traditional model waiting for that business to be awarded. So it’s very proactive number.

Wamsi Mohan – Bank of America/Merrill Lynch

So it’s much more designed than the earlier phases, bring your technology to design phase as opposed to engaging at a later phase.

Forbes I.J. Alexander

Yeah, absolutely. And the focus are on material science.

Wamsi Mohan – Bank of America/Merrill Lynch

Absolutely, okay great. Do you have any questions from the audience, here.

Question-and-Answer Session

Unidentified Analyst

I was just curious as you continue to build out the DMS portion of your business, where ROIC starts to have some methodically approach, in how that trends overtime. And in addition, along that same line, I’m curious how you all find the sales environment, how price sensitive is DMS as opposed to standard EMS, your legacy business. It seems like the pie is growing in such a prolific rate, I’m imagining it’s less $0.05 at this point, but maybe you come more so in the future years.

Forbes I.J. Alexander

Let me address the last question, first I may ask you to repeat the first part. Yeah, it’s very much less price sensitive than it’s in the previous traditional areas. We are not naïve to think that there won’t be price pressure at some point down the line, right. But certainly not seeing that particularly in areas of industrial, healthcare, I mean it’s healthcare for sure, you never hear that discussion. I won’t say never, but if an OEM is reading with that question is probably the wrong customer. Right. (Inaudible) going to execute regulatory improvements et cetera, et cetera.

So as products go through a life cycle, it become more price sensitive, but that’s where we’ve been capability lean abilities in there and new technology to bear, so longer term, over also that area, 60% in terms of operating margin seems very sustainable, and three, four, five years and beyond. I think the first part of the question was some again in terms of invested capital.

Unidentified Analyst

Yes (inaudible).

Forbes I.J. Alexander

My expectation I shared a broad framework last week with folks was that, we didn’t expect that to go to 30%, and certainly be able to deliver 30% as move forward to even with these level of investment.

Unidentified Analyst

Folks really quick on E&I, you laid out at your last call, how you expect margins to progress over the next quarter, and over the next three quarters, to get back to the 4% levels. How is that progress coming along? Are we going to see the 70 basis points of margin improvement sequentially that you alluded to in the last call, does it feel like that’s on track and the sources with which you were going to get there, do they seem like there.

Forbes I.J. Alexander

Yes, good question. Well, Ramsey's referring to is, we were disappointed last quarter our Enterprise & Infrastructure operating margins 1.7%, I’ve laid out a plan to expand that this quarter, but that’s on track there. We are seeing some of the storage revenue, telecommunications revenue, it’s the largest portion of absorption cost coming through, so we are on track this quarter, and I laid out a plan by November of this year, end of our first fiscal quarter to be back to 4%. So yes, very much on plan and we still expand by that plan we laid over there.

Unidentified Analyst

Okay, perfect. Might have time for one last question or actually we have one last question here.

Unidentified Analyst

I just wanted to get your take with the RIM consolidating their supply chain, what impact do you see on your businesses whether it’s the materials technology group or high velocity systems.

Forbes I.J. Alexander

Early we’ve really quantify that obviously, I think it’s well publicized in terms of their volumes and some of the difficulties they've been having with end market, but RIM is an important significant customer of ours both across actually three areas of our business; high velocity, aftermarket services and materials technology business. So I think we are well positioned with them as a customer. I think has a consolidated supply chain that would be both beneficial to themselves, as an OEM, and supply chain in terms of the stability and predictability around that. So I think we’re very well positioned and to say an important customer.

Wamsi Mohan – Bank of America/Merrill Lynch

Thanks a lot everyone for joining us here today and thanks to you folks. Thank you very much.

Forbes I.J. Alexander

Thanks, Wamsi.

Wamsi Mohan – Bank of America/Merrill Lynch

Thanks gentlemen.

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