Jabil Inc. (JBL) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Jabil Fourth Quarter Fiscal 2018 Earnings Call and Investor Briefing. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Adam Berry, Vice-President Investor Relations for Jabil. Please go ahead sir.

Good morning and welcome to Jabil’s fourth quarter and fiscal 2018 earnings call and investor briefing. Joining me on today’s call are Chief Executive Officer, Mark Mondello; and Chief Financial Officer, Mike Dastoor. Today’s agenda will begin with Mike, who will review our fourth quarter results and our first quarter guidance. Following these comments, we will transition into the investor briefing portion of the day where both Mark and Mike will review the strategic drivers of our business. We will then open it up for your question. The entirety of today’s call will be recorded and posted for audio playback on jabil.com, in the Investors section. Our fourth quarter press release, slides and corresponding webcast are also available on our website. In these materials, you will find the earnings information that we will cover during this conference call. Please note that during the investor briefing portion of our webcast, we will be showing videos. To view our slides and these videos live during today’s session, you will need to be logged in to our webcast at jabil.com. At the conclusion of today’s call, all of our investor briefing material including slides and videos will be posted and available. Before handing the call over to Mike, I’d now ask that you follow our earnings presentation with 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 business such as our currently expected first quarter and fiscal year 2019 net revenue and earnings. These statements are based on current expectations, forecast 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, 2017 and other 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. With that, it's now my pleasure to turn the call over to CFO, Mike Dastoor.

Thank you Adam, and good morning everyone. Thank you for joining us today. As Adam described, I'll begin today by reviewing our fourth quarter and fiscal year results. During the quarter, both segments executed extremely well, resulting in consolidated results that exceeded our expectations in terms of revenue, core earnings and core earnings per share. Net revenue for the fourth quarter was approximately $5.8 billion, an increase of 15% year-over-year. GAAP operating income was $134 million and our GAAP diluted loss per share was $0.34. Core operating income during the quarter was $212 million, an increase of 11% year-over-year, representing a core operating margin of 3.7%. Core diluted earnings-per-share was $0.70, a 9% improvement over the prior year quarter. For the full fiscal year, net revenue was $22.1 billion, up 16% year-over-year. FY 2018 GAAP operating income was $542 million with GAAP net income of $86 million. GAAP net diluted earnings per share was $0.49 for the year. Core operating income was $768 million, an increase of 15% on a year-over-year basis, representing a core operating margin of 3.5%. Core diluted earnings-per-share for the year was $2.62, an increase of 24% over the prior year. I'd like to call your attention to three items which impacted our GAAP results during the quarter; first, pursuant to the Tax Cuts and Jobs Act in Q4, we recorded a provisional tax expense of $111 million. This is comprised of an additional tax expense of $26 million related to the one-time transition tax and an $85 million accrual related to the foreign tax impact of the change in the indefinite reinvestment assertion on certain earnings from foreign subsidiaries. The net effect of these two actions allows us to more effectively return cash to the United States. As we are applying our analysis any changes to this estimate will be reflected in future periods. Second, we incurred a one-time charge of $18 million as a result of liquidity issues experienced by one of our networking customers. And finally, we recorded acquisition and integration related expenses of $8 million associated with the strategic collaboration in the healthcare market, which Mark will highlight later in today's call. Now turning to fourth quarter and FY 2018 segment results. Revenue for our DMS segment was $2.4 billion, an increase of 11% on a year-over-year basis, reflecting better than expected growth in our healthcare and mobility businesses. DMS represented 42% of total company revenue in the quarter. Core margin for the segment improved 20 basis points year-over-year to 2.7%. Our EMS segment also performed extremely well in the quarter growing revenue by 18% year-over-year to $3.4 billion. Core margins for the segment were 4.4% during the quarter. The strength in both revenue and income was driven by automotive, energy and wireless infrastructure businesses. EMS represented 58% of total company revenue in the quarter. For the year, our DMS segment revenue was $9.8 million, an increase of 23% over the prior year, reflecting our continued diversification efforts with broad-based growth across our businesses. As a result of these efforts, core margins for the segment improved 30 basis points to 3.2%. Our EMS segment revenue was $12.3 billion, an increase of 11% over the prior year. The core margin for this segment was 3.7%. Clearly, our EMS team delivered an exceptional performance for the year. Our value proposition is being well-received as we met this end-to-end engineering solutions and deep domain knowledge to expand existing relationships and renew customers. We expect this positive momentum to continue into fiscal 2019. Turning now to our cash flows and balance sheet, net capital expenditures for the fourth quarter were $114 million and for the full fiscal year came in as expected at $686 million. Our fourth quarter cash flows from operations were very strong coming in at $739 million, bringing total cash flows from operations for the full fiscal year to $934 million. As a result of the strong fourth quarter performance and cash flow generation, I am pleased to report that free cash flow for the fiscal year came in at approximately $248 million. Core return on invested capital for Q4 was 18.2% and grew by approximately 380 basis points on a year-over-year basis to 19.3% for the full fiscal year. During the quarter, we entered into a $350 million term loan facility and $150 million revolving credit facility. The additional liquidity improves our financial flexibility and will be used to fund near-term working capital requirements and future tuck-in acquisitions. We exited the quarter with total debt to EBITDA levels of approximately 2X and cash balances of $1.3 billion. Turning now to our capital return framework, as anticipated during the fourth quarter we fully utilized the $450 million repurchase authorization with 4.7 million shares repurchased in the quarter. Since the interception of our capital return framework in 2016, we had repurchased 33.3 million shares at an average price of $25 and $0.51 bringing our total returns to shareholders including repurchases and dividends to approximately $1 billion. In FY 2019, we intend to fully utilize the current repurchase authorization of $350 million as we remain committed to returning capital to shareholders. Before I review our first quarter guidance, I’d like to review two accounting standards. Beginning in fiscal 2019, we adopted the new revenue recognition standard, commonly referred to as ASP 606 on the modified retrospective basis. Also, in September we adopted the new Accounting Standard ASU 2016-15 which will impact the classification of certain cash receipt associated with beneficial interest on our asset back securitization programs. The effects of this change will be applied retrospectively and is not the result of any fundamental change in our underlying business. Turning now to our first quarter guidance on the next slide which includes the adoption of ASC 606. The EMS segment revenue is expected to increase approximately 5% on a year-over-year basis to $2.85 billion, while the EMS segment revenue is expected to increase approximately 13% on a year-over-year basis to $3.25 billion. We expect total company revenue in the first quarter of fiscal 2019 to be in the range of $5.8 billion to $6.4 billion for an increase of 9% at the midpoint of the range. Core operating income is estimated to be in the range of $215 million to $265 million with core operating margin in the range of 3.7% to 4.1%. Core earnings per share is estimated to be in the range of $0.79 to $0.99 per diluted share. GAAP earnings per share is expected to be in the range of $0.45 to $0.74 per diluted share. The tax rate on core earnings in the first quarter is estimated to be 26%. In closing, we are very pleased with our fiscal 2018 performance. Core earnings per share growth of 24%, free cash flows of $248 million with returns to shareholders via dividends and share repurchases in the fiscal year in excess of $500 million. Our strong fiscal 2018 performance has proved that our strategy is working and positions us extremely well to deliver on our commitments as we move into fiscal 2019. I’ll now turn the call over to our CEO, Mark Mondello who will provide additional color on our 2018 results and outline the strategic drivers of our business in fiscal 2019 and beyond.

Thanks, Mike and well done. Good morning. We have lots to discuss today and lots to share. But first, as I think about our day that makes me think about our people. Our people are special and our team makes Jabil, Jabil. So along those lines, I’d like to begin today with a short video. Let's take a look. [VIDEO PRESENTATION] [END OF VIDEO PRESENTATION] Our people make all the difference. They are real, real differentiator for Jabil. And as customary, I want to say thanks to all of them. Thanks for taking great care of our customers. Thanks for making safety our priority and certainly thanks for your dedication and commitment. Back in December, during our 1Q earnings call of 2018. I made mention of a quote from C.S. Lewis, and to me the quote is just so descript. It’s so applicable of where the company is at today You know and our team is executing and taking care of customers in the day to day, it’s really hard to see and feel the progress that’s being made. But for me, what we’re doing is working, and because it's working there has been substantial change, and it’s changed for the positive. Talking and briefing you on these positives today is what’s today is all about. So let's start with last year of fiscal 2018. From my perspective, it was another great year. We grew revenue north of 15%. Combine that with strong earnings and strong cash flows. And I’m pleased with the 3.5% co-operating margin as well. Especially given that we printed these results while dealing with an extremely difficult supply chain. Our components market is full of constraints and uncertainties. Well done by all, across our entire Jabil enterprise. Our team’s carrying positive momentum with them into fiscal 2019. I like the decisions we are making and the approaches we’re taking. If we look at this guide, I believe, core earnings per share will grow roughly 15% year-on-year. This puts us squarely in the neighborhood of $3 a share, while expanding free cash flow 40% up $100 million year-on-year. And one important and fundamental observation as we move into fiscal 2019. The separation between our EMS segment and our DMS segment it’s now become opaque, it’s become blurred. And this in terms of our approach, and our solutions offered in the marketplace. The historical bifurcation between the segments is gone and that's intentional. And I believe this is clearly reflected in our results and their outlook going forward. So with fiscal 2019 kind of being in the here and now, I think it’s worthwhile to talk about how we view the business over the coming two to three years. This particular slide reflects what I would consider the possible; our navigational beacon if you will. Our guidepost as to where we are driving the team and where we are driving the business. If we continue to make sound decisions, we continue to execute and we are fortunate enough to keep a little bit momentum at our back. I really believe we have the opportunity to see further expansion in cash flows. $4 a share in core earnings, while bumping up against 4% in core operating margin. And we’ll do so while preserving our core ROIC up 20% or greater. So that was a lot, and it was at a high level. So one thing I like to do now is kind of step back and bring it down and walk through a few building blocks, which backup our assumptions set. So if we start with fiscal 2018, again we delivered $22 billion in revenue, $770 million of core operating income and earnings per share on a core basis of $2.62. From there, if we move to fiscal 2019, our guides for 2019 has revenue at $24.5 billion, core operating income at $850 million and core earnings per share in the neighborhood of $3. And there's two really important components of fiscal 2019. One is, as what I would characterize is our baseline business. So if we simply take the results we posted in fiscal 2018 and you grow that business by 2.5% year-on-year, revenue goes from what we delivered in 2018 at $22 billion to roughly $22.5 billion to be realized in fiscal 2019. We also believe that based on our management, and discipline around overhead, as well as different components of the business coming to maturity, we think we’ll get about 20 basis points of leverage on that core business. So as shown on slide we think core margin on the base business will expand from about $770 million to about $830 million. Second component which is really important and it will be a topic for much of today's discussion is new business awards. So, in fiscal 2019 with the lot of the effort we put in fiscal year 2017 and 2018, we've made a conscious decision to bring about $2 billion of new business largely around new relationships into the company. That business comes with different timing around ramps to maturity as well as cost that kind of run out in front of realized revenue. So, from an assumption set, we believe that $2 billion of new business awards in 2019 will only deliver about a point of margin and it's intentional and I'll explain further. But if you sum these two components together, the $830 million of core operating income on the base business and the $20 million on the new business awards, it sums to the $850 for the year on the $24.5 billion. So, I'll wrap up this slide by taking it a step further and give you an idea of what might be as we move from fiscal 2019 to 2020 to 2021. So again, similar to the logic I just laid out for 2019, those three components for what might be in fiscal 2021. The first component is stepping back again and taking our fiscal 2018 printed results and growing those at a compounded rate from 2018 to 2019 to 2020 to 2021 at roughly 2.5%. That takes the realized revenue in 2018 of $22 billion, and we believe we should see revenue in the neighborhood of $23.5 billion to $24 billion. For this example we use $23.7 billion. And as part of our assumption set, we think it's realistic to maybe a little bit conservative. And again for sake for illustration on that base business we assume that from F1 2019 to F1 2021 we'll get no expansion, no leverage of margin. So again, for sake of illustration which is the intent. For FY 2018 business, as we believe we'll see it in 2021, will be $23.7 billion making roughly $885 million of core operating income at a margin of 3.7%. Our second component in 2021 is really an extrapolation of the new business awards I just talked about for 2019. So in these new business awards what we anticipate is as we ramp these new business awards the $2 billion will convert to close to $3 billion by fiscal 2021. And more importantly the operating income that we think will be around $20 million are for the base new business award business will expand closer to $120 million, so again about a $100 million expansion of operating income from fiscal 2019 to fiscal 2021. We also believe that how we have that business quoted? What the outlook of the business looks like? We believe the base and the bucket of the $2 billion of new business awards will deliver us a core operating margin in the area of 4%. And then lastly just to kind of round out the assumption set in 2021 and I don't this is much of a stretch. Today we have about $6.5 billion to $7 billion of new business opportunities in our pipeline. And I would acknowledge the fact that none of that business at the moment is close to being closed, but it will be as we navigate through 2019 and into 2020. So again, because of what might be in 2021 is purely and illustration and illustrative of what we're thinking and what we believe could very much be reality. We just assume that along with the FY 2018 base business that we believe will grow to $23.7 billion. The new business awards that we feel will grow into the neighborhood of $3 billion. We just added another billion dollars of growth and again that from the reality that our current pipeline is substantially higher than that. And much like 2019 we assume we'd make little or no income off of that billion dollars as we ramp those new relationships. I think another key takeaway from this slide that’s worth noting. As a management team and our leadership team we're intentionally not maximizing core operating margins today. And we're doing so for two reasons. Number one, we believe it best to prioritize our ability to capture this quality growth and capture it now. And two, we believe this decision is best in terms of expanding Jabil's valuation over time. So in describing our so called building blocks and important assumption was the $2 billion in new business awards. So I thought it might be wise to substantiate where the wins are coming from and the wins themselves. As you can see by the slide, we have about $1.7 billion of new business wins that cut across four distinct end markets, with another $300 million rounding out the balance sheet of the $2 billion in new wins. I believe these wins are favorable and they're right in our sweet spot. They're wins that can continue to help us diversify the company. They're wins that leverage our various investments that we've made. And there are wins that I think who offer dependable cash flows down the road. And most importantly, I believe these are wins which we believe we can execute on and deliver. And as I said prior these particular wins will ramp through fiscal 2019 and 2020. So for the past few years we talked openly about the importance of investing, strategic investments which enhanced our solutions, investments which increase where we kind of talk about as our domain expertise, and many of these investments also elevate the performance inside our own factories. One such investment is our investment in additive manufacturing in 3D print. I'd like to share a short video; a video which I hope will give you kind of keen sense of how we actually leverage our investments throughout the company. So with that let's take a look. [VIDEO PRESENTATION] [END OF VIDEO PRESENTATION] They're first-rate. One point to note is our 3D additive efforts cut across the entire Jabil ecosystem, this providing tremendous leverage of our investment dollars. Next, a complement to the new business wins and to our portfolio of investments is our steadfast goal to further diversify our earnings and cash flows. For me, diversification is key in our planning and our actions. We believe that the more diversify we become the more robust the company will be. So to put this in context, our goal is for no single product to product set to be more than 5% of our annual cash flows for annual income. We're making tremendous progress in this area and our financial results reflective. So I'm going to wrap up my presentation by sharing details on a really exciting new business award. To Jabil and Johnson & Johnson medical devices companies have entered into a long-term strategic collaboration. And this collaboration will significantly expand with currently our 12-year relationship and partnership with JJMD. This collaboration expands our healthcare portfolio significantly, and it certainly elevates our technical capabilities and leverages our CNC [ph] experience. Financially, this deal will be neutral to fiscal 2019 core earnings. Integration cost and charges directly associated with the deal will be in the range of $80 million. The real interesting part about this deal is that the cash outlay will largely be applied to working capital and inventory. We believe the annual revenue will grow to an excess of $1 billion annually. As part of the deal and based on the strategic nature of the deal, we'll be acquiring 14 sites from Johnson & Johnson, and we'll be supporting and protecting the J&J brands in areas of endo, surgical, spine, trauma and instrumentation. I feel this collaboration has wonderful potential. We also think its going to be truly transformational. And I want to thanks to all involved. So, in closing my portion of the presentation, I'll say again, what we're doing is working. What we're doing is reflected in our results and outlook. We're seeing double-digit growth, growth of revenue, growth of core operating income and growth of core earnings per share. With that, I'll hand the presentation over to Mike, where Mike will offer a bit more color specific to fiscal 2019. Thank you.

Thank you, Mark. I'd like to thank everyone again for your interest in Jabil. You just heard Mark described incredible growth in several end markets in the last few minutes, this growth we're seeing, it's almost like an episodic growth FY 2018 saw us adding $3 billion of revenues. We're projecting to add another $2.5 million in FY 2019. That's $5.5 billion in two years. That is unprecedented growth in Jabil history. Considering this growth, I though it would to be useful to sort of provided inside into the financial metrics that I, as CFO, am focusing on to the rest of the organization, the way we're driving the rest of the team. There's three metrics that are key to my level of detail. Operating margins, first, let me assure you the team is focused on operating margins, operating margins through diversification, operating margins through cost optimization. Diversification through targeted growth in selected end markets which will help us with cash flow streams and earnings which are predictable and lower volatility. Cost optimization and SG&A leverage across our worldwide print. So, overall those two areas of focus on operating margin. Secondly, earnings per share, earnings per share has gone from $1.86, $2.11 [ph] to $2.62 and we're projecting $3. That's a 17% CARG from 2016 to 2019. We will continue to focus on that EPS. Last but not least, free cash flows, free cash flow through optimization of working capital, discipline in CapEx management approach and cash allocation. I really feel we are on the right path and I'm confident that we will deliver on our commitments for FY 2019. Turning to revenue expectations for FY 2019, you heard Mark on why diversification was so important for the company. I'd like to provide you with the deeper look into this diversification, it’s a – the diversification shows our balance portfolio for FY 2019 as a result of deliberate actions in targeted areas of growth. Some of these areas that I'd like to highlight on this slide, areas that provide confidence in further earnings and cash flows due to long life cycle nature of products in industrial and energy and in regulated markets like healthcare and automotive. Areas that we have invested in capabilities, additive, 3D, the video that you just watched that gives us disproportionate advantages as segment leaders. Areas where we have deep domain expertise, complemented investments and capabilities such as RF, antenna integration and server platforms in markets like 5G and cloud. All this will result in lower volatility and more predictable earnings. While our diversification efforts are will manifested in revenues, it's taking slightly longer to show up in margins for real legitimate reasons. Let me try and explain why? Mark talked about 2 billion of new wins in FY 2019 with ramps across four main areas. Let me provide some color firstly on what we mean by ramp costs. Ramp costs are startup costs associated with operational inefficiencies and sub-optimal utilization of assets. In the very early stages of production in the form of lower yields and higher costs, some of these cost actually show up pre-revenues and I think Mark refer to that. Why our ramp cost so important suddenly? Two reasons. The sheer size of the new wins, we're to get, just $3 billion in 2018 and $2.5 billion in 2019, $5.5 billion stands out. It’s a complexity as well. We've gone from a build-to-print sort of model to end to end solution model where we provided number of services. This complexity adds to our ramp costs in the early stages of production. Let's look at the left side of these four boxes that Mark talked about. Healthcare is a good example. Our ramps in healthcare take much longer due to regulations and FDA qualifications. But once they qualified, it's an annuity like earnings. They go on for number of years much reduced volatility and the customer relationships are relatively sticky. Likewise automotive, where similar ramp time due to safety and quality controls lead to longer ramp times, these ramps do not expect any contribution in FY 2019. And I want to highlight that left side. We do not expect any contributions in FY 2019. Conversely on the cloud and the 5G side, the right side of the chart, due to our domain expertise it takes slightly shorter periods to ramp. How should one think about the timing of these ramps into quarter? We expect about $15 million to $20 million of cost, pre-revenues in the first half. So the cost will hit us before the revenues do and we expect that to be in the range of $15 million to $20 million in the first half of FY 2019. That would be offset by contributions in Q3 and Q4 net into a total of $20 million contribution in FY 2019. And I think that is important to shape first half, second half for the year. Moving on to cash flows. As I highlighted in my previous – in my prepared remarks, strong cash flows in Q4 of 2018 through working capital optimization, discipline in CapEx management and cash allocation led to about $50 million of free cash flows. Mark talked about the supply chain constraints in certain components. We expect those constraints to go on to the second half of calendar year 2019. So we don't that situation to improve till then. We do believe the tightness in the supply is a temporary phenomenon though and will elevate overtime. It is definitely not a structural change in our working capital demand. For FY 2019 we expect free cash flow to be in the region of $350 million with the CapEx of $800 million, which approximate to about 3% of revenues. For FY 2019, I would expect the free cash flow generation to follow a similar inter-quarter trend as FY 2018 did. One thing I'd like to highlight is one day of sales cycle is equal to about $60 million in working capital, so volatility inter-quarter can be relatively high depending on whether you take one or two days odd or you add a day or two on your working capital cycle. Beyond FY 2019 we expect a solid income growth and our discipline in working capital management and our CapEx management to lead to strong performance in cash flows. Core return on invested capital, earlier I mentioned focused targeted growth in end markets with higher returns, higher returns through operating margins or higher returns on invested capital. In FY 2018 we launched about $3 billion of revenue, quite a bit of that was in the DMS segment and we leveraged our existing infrastructure which not only let to better margins, I think it was a 30 basis point improvement in FY 2018, but it also helped ROIC to grow by 380 basis points in FY 2019 to – sorry, in FY 2018 to 19.3%. We expect our core ROIC to be around 20% in FY 2019 as we absorbed new business and continue our focus on all aspect of this critical financial metric. In closing I'm confident that we will deliver our commitments in FY 2019. As highlighted we're completely focused on diversification on strong management of cash flows and pre-cash flow conversion. I would now like to hand the call back to Adam.

Thank you, Mike. As we begin the Q&A session, I'd like to remind our call participants that per our customer agreements we will not address any customer or products specific questions. We appreciate your cooperation. Operator, we are now ready for Q&A.

Thank you. We'll now be conducting a question and answer session. [Operator Instructions]. Our first question today is coming from Adam Tindle from Raymond James Financial. Your line is now live.

Okay. Thanks and good morning. Mark, I just wanted to start on the new business awards. What has changed to drive the inflation in new wins? Is it market share gains? Is it customers moving more from insourcing to the outsourcing? Then I had -- have a follow-up on that?

We certainly have seen – we have certainly seen some customers moving to outsourcing, but I would think as I mentioned in my prepared remarks in the presentation, we're -- I really like our approach. Our approach is divvied up into very, very intentional sectors where over the last three, four years with the investments we've made both in capabilities and then just kind of this domain expertise with people, I think we were just taking better solutions to the marketplace. And I also think that the macro in certain areas right now is – has given us some help, so I would say its those three areas, Adam.

Okay. And I know you mentioned that there's going to be some cost in front of the revenue with the bulk being cloud customers in terms of the win breakdown. We've seen others in the supply chain get pressured on profitability by those customers at time. Can you just maybe talk about the contract structures and maybe any protections or guarantees on returns on the contracts?

I can't – I wish I could, I can't, but we're well aware of that. And again, I think we do a pretty good job overall and I think it applies to the new business wins in terms of commercial terms and contracts with customers. I think we got a pretty good track record there.

Okay. Maybe I can get one in for Mark real quick then. Mike, you've been through multiple areas. We've seen areas in Jabil with high CapEx and little free cash flow, but setting up a strong growth. We've seen areas of attenuated CapEx and returning cash to shareholders via the buyback. Can you maybe just reflect on those times and help us understand your capital allocation beliefs? Thank you.

I think our discipline on CapEx management has increased tenfold. We're totally focused on growth areas. I think one of the key things we're doing on diversification side is to focus on end markets where we're targeting high returns and that’s how we manage our CapEx flows as well. We do think working capital management is another area that we're focusing on and that's obviously helps our cash flow from ops. And now we feel really good about that.

Okay. Thank you.

Thank you. Our next question today is coming from Amit Daryanani from RBC Capital Markets. Your line is now live.

Thanks Mark and Mike. Your first half, when I look at the November quarter guide, I think the implication is operating margin is up about 20 basis points sequentially. Can you walk through -- is that expectation or expansions that are going to come out from DMS or the EMS side? And kind of what's driving that?

Hi, Amit, I'll take that. In my -- the ramp slide that I showed, I think I talked about some of those costs for ramps coming pre-revenue, so the costs are obviously – its production facilities, its pre-ramp costs, its things that we're doing in our sides before we even start manufacturing. So I indicated there's about $15 million to $20 million of those costs coming in the first half. So some of that is related to Q1 and some of it is Q2.

On the Johnson & Johnson engagement that you guys talked about, can you just talk about -- I think you mentioned the 14 sites you're taking over. Geographically, where are these sites located? And once you get past the initial ramp with Johnson & Johnson, what's the margin profile of this business that you're looking? Is it going to be like the long-term DMS target or something different, just the Johnson breakdown of the site and what do you think the margin profile once you passed the initial ramp? That will be helpful.

Yes. So, we'll be able to share more detail and I actually want to share more detail over time. For now we're in – as you'll be familiar with kind of applicable consultative processes. And once we get through all that then we'll come out and provide a bit more detail and scope of the entire collaborative partnership. But again it’s – in my mind a very, very transformational strategic opportunity.

Perfect. That's it from me. Thanks.

Yes. Thank you.

Thank you. Our next today is coming from Steven Fox from Cross Research. Your line is now live.

Thanks. Good morning. Thanks for all that great detail this morning. I had a couple of questions based on the slides. First off, if I look at just the base business that you've highlighted going into 2019 and eventually 2021, looks like the incremental margins you're getting off of that is low double digits in 2019 and then more like 6% to 7% if you look over three-year period? I was curious if you could just sort of explain those incremental margins? How they change? And what a normalized incremental margin you think is for the company going forward? And then I have a follow-up.

Hi, Steve, it's Mark. Maybe you can help me little bit with your question. I think when I was kind of going through and indexing through the slides I thought what I had communicated and maybe I didn’t do a very good job of it is, is that the base business from 2018 that we just printed was right at 3.5% core op margin. And as we just step that base business from 2018 to 2019 we have fairly modest growth assumptions around that base business of about 2.5%. And I think what the slide showed is, is margins would actually expand about 20 basis points.

Right. And so what I was wondering Mark is that the incremental change is dollar is about $500 million roughly. And you get $60 million of profit off of that next $500 million. But then if I look at the three-year slide you get $1.7 billion of incremental sales and you generate like a $150 [ph] million off of that. So I'm trying to understand how that leverage is coming out?

Yes, yes, but I didn’t understand question that way. That's just simply the product mix and where we at. There's a lot of dollars that we're ramping that aren't in the new business wins from years past. So that's all about time to maturity.

So, is the longer term incremental margin sort of a normalized -- what you could get on --the type of leverage you get normalized volumes?

Yes.

Okay.

Okay. I think – and by the way, I think that's a consideration when we are talking about what could be in fiscal 2021 with us driving to $4 a share and four points of operating margin.

Okay. That's helpful. And then just on the diversification slide, I might be pushing a luck a little bit on this one. But if you were to sort give us a sense for where some of the growth is most robust within all those different breakdowns that you gave versus where maybe its more normalized. There's like – it looks like there's like about 10 different categories, but maybe little more highlights on going forward how that growth looks like?

Yes. I think you're pushing your luck little bit. I think if you just referred back to – I think a good proxy for that is, if you saw and go back to both one of my slides and I think Mike duplicated the slide actually that kind of highlighted the four areas in terms of new wins and I would add to that, if I go back maybe 12 months to 18 months, we’ve also had some nice wins in the area of energy. So I’d say there's five to six end markets that are driving that.

Okay. Thank you so much.

Yes, you’re welcome.

Thank you. Our next question today is coming from Ruplu Bhattacharya from Bank of America Merrill Lynch. Your line is now live.

All right. Thanks for taking my questions and thanks for all the nice details. Mike you mentioned about component cost. I was wondering your guiding fiscal 2019 revenue to $24.5 billion, how much of that is impacted by component cost, like how much would you say a component cost are harming or are reducing revenue in the next year?

Hey, Ruplu this is Mark. So this is a topic that we’ve been queried down quite a bit. So I’ll start kind of fundamentally. Calendar, late calendar 2017 and certainly all of calendar 2018 and we think probably the first three, four, five, six months of calendar 2019. For those of us that have been around this business for a long time, it has been what I would think is the most highly constrained, complicated, difficult component markets that we’ve seen. And when you go through that, it’s just -- it's hard, it's hard to plan production. It's hard to run your factories optimally. It does, it does, it does shake up kind of product mix and revenue. What it doesn't do so much for us though is we don’t tend to absorb the escalating costs. We have really good commercial terms. We split those risks with our customers; with some customers we recovered 100%. Some customers we split 50-50. So, for me, the constriction of material, the difficulty and the supply chain, the difficulty that does in terms of I don’t know what we are shipping today. We’re probably shipping $80 million to $100 million of hardware out of the company every day. It just makes running the network factories more complicated and I think that's where I think that's where some of the additional cost come from, not so much from the from the escalating components.

Okay, okay and that’s helpful. My next question, I just wanted to ask you about the slide that has fiscal 2018, 2019 and 2021. When I look at the section for fiscal 2021, you've got fiscal 2018 baseline growing 2.5% and you also have the new wins from fiscal 2019 growing to $3 billion. And then I see the other line of $1 billion right? Does that include both the new wins from fiscal 2020 and fiscal 2021, and I guess my question would be, do you think the win rate slows down after fiscal 2018, 2019, because I see you’ve got fiscal 2018, fiscal 2019 wins and then you’ve grouped them into another category. So, does that include both fiscal 2020 wins and 2021 wins?

That's more just an illustrative plug. What I'm trying to show there is – as we index towards fiscal 2021 as the new wins from 2019 gets to maturity if you will, I just – we’re not going to be standing still, we are going to book new wins and that was nothing more than a plug number, the intention being that it doesn’t take a significant amount of new wins for us to make fiscal 2021 turnout, that’s all.

Okay, thanks for clarifying that. And the last question is, Mike you are guiding $800 million for CapEx for next year. Like you’ve invested significantly like two or three years ago in Greenpoint, so where do you think – can you give us a spread of where that CapEx spend will be in which segment or which end markets or which geographic region?

We haven’t broken that out, Ruplu but I think it’s all across, it’s not in any – it’s not in any specific segment, obviously the growth areas will be ones that we focus and like I mentioned the diversification in the end markets we are trying to deliberately take action in certain end markets, so CapEx is more targeted towards that.

Okay, thank you. Thanks for taking my question.

Thank you. Our next question today is coming from Alvin Park from Stifel. Your line is now live.

Hi, this is Alvin, speaking on behalf of Matt Sheerin. I think on the call you mentioned that you met the supply constraint shed expense through the second half of calendar year 2019. If you could give more details on if it’s a widespread phenomenon or if it still constituted on a certain past components? And secondly, if for fiscal year 2019 or fiscal year 2020 and beyond do you expect potential cash flow increases assuming that inventory would wind down since you don’t have to stock up much back up supply?

Yes, so I think what I said is – what I meant to say is the constraint component market would go through the back half of calendar 2018 and into the first number of three, four months if you will call it first half of calendar 2019. I don’t think it’s market will settle or abate completely as we get to the back half of 2019 that we’ll start seeing some relief we believe as we start moving through the spring and summer time of 2019 we think the market will get better. In terms of what was your second question?

So in terms of cash flows…

In terms of cash flows, right.

Yes.

Could you ask that again, because I’m not sure I understood you correctly?

So the cash flow guide takes into effect the potential benefits you might see from less working capital requirement specifically involving inventory.

Well I think what’s going to happen is, is actually think the working capital is going to continue to expand on an absolute basis based on the $5 billion, $6 billion of growth that we’re seeing. But in terms of days and inventory and what not as the supply chain rationalizes, as we can run our factories in a more normalized basis, as we can serve our customers with our planning tools in a more normalized basis, that will improve but yes, the information in terms of both EBITDA in terms of free cash flow and cash flow from operations that we anticipate for 2019 and then the model illustration we showed for 2021 does anticipate that.

Okay. And then in terms of the core EPS guide of roughly $3 for fiscal 2019 and the 20% year-over-year growth, how much – how heavily will that be constituted on overall sales and margin improvement versus share buyback programs that you have in place?

I’d just say that, I’d say the $3 a share again it’s a combination of both growth of the business, financial returns or op [ph] income tied to that business plus the share buyback and then of course tax and interest expense.

Thank you very much.

Thank you. Our next question today is coming from Jim Suva from Citi. Your line is now live.

Thanks very much. You both gave a lot of details on the financial model long term and the bridges which is great. On the Johnson & Johnson plant acquisitions, is that included in CapEx or cash flow and how should we just think about that from modeling versus on the financial metrics that you just gave out. I think you said neutral to EPS and then growing, is that correct?

Yes, Jim I said we anticipate the deal to be neutral to core EPS for fiscal 2019. And then in terms of the $800 million that Mike talked about in CapEx for 2019 the J&J deals included in that number.

Okay. And then near term this quarter, your revenues materially beat your guidance expectations but earnings, kind of really did not. Is that, due to like a pull-in of these investments you are doing in the future that kind of near term pressure things or was it something else like mix related that or inefficiency due to the complexity of the supply chain, because it seems like you are talking about longer-term pressures on margin the next year or so, but I just want to make sure this quarter the report of the disconnect from upside to sales to margins. Thank you.

Yes, if you’re talking about 4Q of 2018, if I think through the math on that Jim, we overshot the midpoint of revenue by about $350 million. And then our midpoint on the operating line was about $200 million of core operating income. I think we published about 212, so we got about $12 million of Op income leverage on the 350, I don’t know what the math is, it feels to me like that's like three 3%, 3.5%. And then, the only reason we didn't get more leverage is again because of -- because of some of the early expense that Mike talked about in some of these ramps. But all-in-all when I look at the addition of revenue and the upside to the midpoint of our operating income, the leverage wasn’t bad.

Okay, that makes sense. Thank you so much for the details and clarifications. It’s greatly appreciated.

Yes, thanks Jim.

Thank you. Our next question today is coming from Paul Chung from JPMorgan. Your line is now live.

Hi, thanks. This is Paul Chung on for Coster. Thanks for taking my questions. So, thanks for the end market diversification size, is very helpful. So just want to get a sense. Are you going to provide this level of detail moving forward? I know you mentioned the bifurcation of DMS and EMS doesn’t really make sense anymore. And also will you provide some margin profiles for each respective end market? And then which markets in your view are kind of driving most margin upside relative to your corporate average?

Okay, that was like four questions in one I think. So, in terms of how we are going to provide this going forward, I think what we’ll probably talk about Mike and I will talk about going forward is kind of on an exception basis. So we’re trying to use the depth that we shared today is as kind of foundational for 2019 and then on an exception basis it things have gotten way out of line, we’ll talk about it and address it. In terms of my comment on DMS, EMS I just want to be sure you’re clear, right. We’re still going to report our business in an EMS, DMS segment. I think if you look at what the teams have done in terms of taking their EMS margins from roughly 2.2% pumping into the high threes and towards four, our approach to all of our businesses today. Our original thesis around the nomenclature of DMS was really about giving investors, higher acuity, higher visibility to businesses that were no longer build the print, no longer EMS like and that was whatever it was six, seven years ago. Today, when I think about the nature of and the intent of diversified manufacturing, meeting new solutions to the marketplace, mechanics full product design, really us having products, expertise, us taking kind of a functional spec or conceptual ideas and being able to take that all the way through to design products, supply chain and delivering the product, that really cuts across the businesses today, whether it be in automotive or healthcare, whether it be in ARVR 5G Cloud, industrial etcetera. So, my commentary was really around our approach in terms of solutions in terms of how we go after the business, in terms of how we care for customers is not a big differentiation between our DMS and our EMS segments. What was the third question?

Just the margin profile and kind of end markets.

Yes, at this point we don’t intend to break out the margins by sector. We’ll continue to break out the margins by DMS, EMS segment through fiscal 2019 and then we’ll see what we decide to do as we move into fiscal year 2020.

Okay. Then if we take a step back at looking at fiscal year 2018, very strong revenues. How has the kind of pricing environment been with competition? And then moving into 2019, are you seeing some of those competitive pressures at all? And then anything you can mention on the tariff noise as well? Are you winning -- are you gaining share from some of those partners that are more affected by that?

On the pricing side, I wouldn’t say there's no relief in pricing. I would say that the pricing environment we live in today is -- is this will sound like an interesting word, but it is normal as it’s ever been. And normal for us is – we’ve got to be creative, we got to come up with good solutions. We’ve got to earn our pay. But when I cut across the dozen or so sectors in the business, there's nothing there that is suggesting that we have issues with pricing, I don’t think really and anywhere in our business, and I think we’ve been very cautious and select in the new business awards. One point, I think I failed to mention. And I think it's important, as CEO of the company, I’ve not sat in the last 12 months to 14 months, I've not sat in one meeting and asked people to drive topline growth, not a single meeting. And I think that's a reflection of I don't want people to be confused, we’re not out chasing growth for the sake of growth. For me, our whole objective is to make the company more valuable within a reasonable time window. And again, I think we've expanded valuation, but we certainly I don't think have expanded it enough. So these wins, these $2 billion of wins are a direct reflection of the quality of services and solutions that are being accepted in the marketplace, but by no means are we out covering the streets or the salespeople trying to grab topline growth not, not in our strategy at all. In terms of the trade and tariff issue, I think that it continues to be a moving target. It depends -- you wake up one day and there's a tweet you wake up 48 hours later something else is going on. So it is a very complicated issue in terms of what's going to be, how bad will it get. There is conversation that it's just going to be, kind of a little bit of a tit for tat. And then there's people that have the opinion that it could extrapolate to something much bigger. If the trade tariff issues, and now I’m talking specifically with China, if those were to escalate in a way that we don't anticipate, but if they were, it absolutely is going to affect our business, as it will affect everybody's business. If the trade and tariffs end up continuing to be some posturing, going back and forth and there's some reasonable resolution to them over time, I think that Jabil is really really well-positioned. We have a wonderful global footprint. We got great capabilities. We are the largest kind of pure manufacturing company that U.S. domiciled I think in the world. All of our factories are connected with a single incident around our IT solutions. So we moved product and inventory around seamlessly every day. So in terms of, as we sit today, we probably run, I don’t know a dozen or so sensitivity scenarios for our customers every month and are very appreciative of that. Some have acted on it, some have not, but I try not to -- try not to get too obsessive about how bad things can get. With that said, we do, we do kind of do planning scenarios internally on what we would do, but assuming this thing doesn't blow up in a big way, I think Jabil is really well positioned to serve the marketplace in terms of trade and tariff issues.

Okay, great. And then my last question is on free cash flow. It looks like ramp up cost, working capital investments, so probably weigh on 2019 as well. When should we expect kind of free cash flow to normalize? And what are those normalized levels in your view? Thank you.

Yes, you’re welcome. I actually like our free cash flow for 2019, I think in 2018 it was $250 million. It would have been greater than that if we weren’t dealing with the growth and weren’t dealing with the supply chain constraints. In 2019, I think what the slide suggested as we were going to expand free cash flow by about $100 million, or 40% year-on-year from 2018 to 2019, and then kind of the -- how it could be slide suggest the free cash flow could be something much greater than that in the $600 million range. So with all said and how we are running the business, all the different moving parts in terms of kind of what future cash flows could look like I'm quite pleased.

Thank you. Great job guys.

Thank you.

Thank you. [Operator Instructions] We have reached the end of our question and answer session. I like to turn the flow back over to Adam for any further or closing comments.

Thank you everyone for joining us today. This now concludes our event. Thank you for your interest in Jabil.

Thank you. That does conclude today's teleconference and webinar. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.