Ladies and gentlemen, thank you for standing by and welcome to the Jabil's second quarter fiscal year 2017 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn today's conference over to Beth Walters, Senior Vice President of Communications and Investor Relations. Please go ahead.

Thank you so much. Welcome to our second quarter of 2017 earnings call. Joining me today are CEO, Mark Mondello and Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website, jabil.com, in the Investors section. Our second quarter press release, slides and corresponding webcast links are also available on our website. In these materials, you will find the financial information that we will cover during this conference call. We ask that you follow our presentation with the slides on the website, beginning with slide two, our forward-looking statement. During this conference call, we will be making forward-looking statements including those regarding the anticipated outlook for our business, our currently expected third quarter of fiscal 2017 net revenue and earnings results, the financial performance for the company and our long-term outlook for the company. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016, on subsequent reports on Form 10-Q and on Form 8-K and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Today's call will begin with opening comments from Mark on our second quarter results. Forbes will follow with more detailed second fiscal quarter results and guidance for our third fiscal quarter of 2017. Following our prepared remarks, we will open it up to questions from call attendees. I will now turn the call over to Mark.

Thanks Beth. Good afternoon. I appreciate everyone taking time to join our call today. As always, a special thanks to our remarkable team here at Jabil. They do an outstanding job serving our customers while also keeping an intense focus on keeping our employees safe, each and every day. It's simple. Here at Jabil, safety is job number one across our entire global enterprise. I will begin today by addressing our second quarter results. The execution by our team during the quarter was exceptional. Nearly all of our business sectors performed at or above plan in terms of both revenue and income. These collective efforts resulted in $0.48 of core earnings per share on revenues of $4.45 billion. I am pleased with these results and believe they accurately reflect the effectiveness of our strategy, a strategy to increase the quality and diversification of our cash flows and our earnings. As customary, Forbes will provide more detail around our quarterly results and speak to our forward guidance during his prepared remarks. Before taking you through the business details, I would like to reinforce management's commitment and confidence in delivering $3 in core earnings per share for fiscal year 2019. Our confidence is underpinned by the following. First, we are now in year three of a true market facing divisional structure led by teams with incredible domain expertise. Second, each of our business sectors are becoming more and more diversified in terms of their respective cash flows and income. This is occurring as we thoughtfully expand our customer count with market leading brands. In fact, when I looked at our customer base, I have never felt better about the foundational balance and strength of our core business. And third, management remains committed to returning $900 million to $1 billion to shareholders through…

Thank you Mark. Good afternoon everyone. I will ask you to turn to slide three, where I will review our second quarter of fiscal year 2017 results. Net revenue for the second quarter was $4.45 billion, growth of 1% on a year-over-year basis. GAAP operating income was $83 million, while GAAP net income was $21 million. GAAP net diluted earnings per share were $0.11 for the quarter. Core operating income, excluding the amortization of intangibles, stock-based compensation and restructuring charges was $152 million and represented 3.4% of revenue. Core diluted earnings per share was $0.48. Turning to slide four on our segment discussion. Revenue for our diversified manufacturing services segment was $1.8 billion, an increase of 1% on a year-over-year basis and represented 40% of total company revenue. Operating income for the quarter was 3.1%. Revenues exceeded our previous guidance as we continue to see strong year-over-year performance from our healthcare, packaging and consumer lifestyle sectors. Our electronics manufacturing services segment revenue was $2.7 billion, also an increase of 1% on a year-over-year basis and this represented 60% of total company revenue. Operating income for this segment was 3.7%, an improvement of 50 basis points on a year-over-year basis. We ended the quarter with cash balances of $755 million. While net capital expenditures for the second fiscal quarter totaled $139 million, year-to-date, net capital expenditures totaled $302 million. Mark noted capital expenditures for the full fiscal year remained in the range of $500 million to $600 million. The second fiscal quarter tracked to expectations in terms of cash flows from operations and totaled $194 million. We continue to be very well positioned to deliver annual cash flows from operations of at least $1 billion and free cash flows of at least $450 million. The core return on invested capital for…

Thank you Forbes and Mark. Operator, before we begin the Q&A session, I would like to remind all of our call participants that in customary fashion, we will not address any customer or product specific question and thank you for your cooperation. Operator, we are now ready for the Q&A session.

[Operator Instructions]. Your first question comes from the line of Ruplu Bhattacharya, Bank of America Merrill Lynch.

Hi. Thanks for taking my questions. Mark, you have talked about the medical and packaging business growing double digits for the next few years. I was wondering if there is some seasonality to these businesses? Just directionally, which quarter is stronger, which is weaker? Any directional guidance?

I think I would layer that business in pretty equal across the year. I can't make much sense of it. Our business has a little bit more strength in Q3 and Q4. It has nothing to do with anything in the industry. It's kind of how our demand layers in. But I don't know, if I had to guess, I would guess maybe like a 40/60 weighting for that business, first half to second half. And I think that's probably a good call for the balance of this year and 2018.

Okay. Great. Thanks. That's very helpful. And then my second question is, I think in the past you have said on the mobility side your economic profile hasn't changed on a per unit basis. Based on what you know of the new launches coming up, is that statements still true? Do you still think that your economic profile is still the same?

Economic profile is kind of a broad term. But I guess I would answer it this way. We feel reasonably good about how our mobility business is performing today and the next number of quarters looking ahead.

Great. And sorry, the last one for me. You haven't changed your CapEx guidance. So I am assuming that, based on the forecast you have, you think your existing assets will have good utilization and will be sufficient for the launches. Is that correct?

That's a good assumption set.

All right. Great. Thank you so much. I appreciate all the color and congrats on the quarter.

Thank you.

Your next question comes from the line of Matt Sheerin, Stifel.

Hi. Yes. Thanks and good afternoon. Just a couple questions for me. Regarding your guidance for EMS for the August quarter, targeting 4.2% operating margin, that would be your best result in memory and certainly above most of your peers. In terms of getting there, how much of that is volume? In other words, are you expecting a return to year-on-year growth there? And how much is based on mix and the restructuring program that you have been doing?

Well, I think it's a combination of both. My guess is, is that revenue is tied directly to EMS. If you look at what we printed in 2Q, revenue in the fourth quarter will be slightly up and the balance of it will be mix. So I agree it's margins we haven't seen in a while. If you just go back about two, two-and-a-half years, we were running that business at to two points of margin and we have picked up whatever that is, 220 basis points of margin and great credit to the team. So I feel very good about that business. And one of things that give me confidence in the EMS business is the business is incredibly diversified today. So I don't know the exact customer count but I would guess in our EMS business alone we probably have 180 customers or so. And the income, the cash flows and the revenue are up spread across a really solid customer base.

Okay. Thanks for that. And then on the DMS business. It's sort of backing into margin assumptions given your target on operating income for the August quarter, it looks like that's going to be in the 3% to 4% range, which is obviously a big step up from where you are going to be in the May quarter. I know that as you ramp new products in the new cycle for your big customer, there are often costs and yield issues related to that. So it sounds like based on that target that you have relative confidence that you are going to be able to transition fairly smoothly with that product transition?

As confident as we can be. There is a lot of moving parts. We have, as I kind of alluded to in my prepared comments, our team has just tremendous capability. And I have a ton of confidence in our team based on the track record and we have great capacity installed and we intend to leverage that capacity. I think when I shake all that up and kind of figure out what that might look like as we sit today is I think the margin range for DMS for 4Q in the 3.3%, 3.4% range makes sense. But again, we have got a lot of work ahead of us. But as we sit today, that feels pretty good to us. And I would also remind you that other contributors to that DMS business in the fourth quarter, it has to do with healthcare and packaging as well.

Okay. Great. Thanks very much.

You are welcome.

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

Thanks very much and congratulations to you and your team there.

Thanks Jim.

Can you help me understand with DMS, I believe it was, if my math is correct, up about 1% this quarter year-over-year. How come operating margins came down year-over-year, you expect like with volumes and efficiencies? Or is it like investing in the future? Or how should we think about, typically the revenues going higher that margins should expand?

I think there is a number of variables, but I would tell you that the overwhelming variable in that, Jim, is, we have installed more capacity. So our infrastructure is bigger, depreciation is bigger. And again we have talked about this for a number of quarters, we could have made decisions not to put the infrastructure in place and the capacity in place. But we look to leverage that forward-looking. So that's the biggest catalysts to what you are alluding to. There is a few other variables in there but those knobs are fairly small.

Great. I fully understand it. Thank you so much for your details and clarification. Thank you.

Thanks Jim.

Your next question comes from the line of Mark Delaney, Goldman Sachs.

Yes. Good afternoon. Thanks very much for taking the questions. First question is a follow up on DMS margins. Mark, you commented about the potential for utilization rates to be at a high level in the coming quarters and you also are talking about some very nice earnings growth in the healthcare and packaging parts of the business. So if all of those factors play out, as we start thinking about later this calendar year or early fiscal 2018, how could DMS margins compare to some of the historical peak periods when it got into the high six range? It that achievable or even beatable?

I think I would think of it this way. I would take kind of the coaching I gave to Matt. I think it was on the comment on the prior question in terms of 4Q. So as we move into 2018, I think the long term range we have given for DMS in terms of margins is 5% to 7% and I think that's achievable as we move into fiscal year 2018.

Okay. So then a follow-up on the EMS segment on the revenue outlook for next quarter, revenue down about 1% year-over-year. I know profitability is improving but maybe you can just help us understand the reason for the slight decline in EMS sales. Is it sluggish macros? Are you guys walking away from business to improve the margins? Or any sort of specific products that are causing that slight revenue decline? Thank you.

Good observation. I don't think it's any of that. I don't have a good explanation for you other than to think about 2Q to 3Q revenue is up, whatever it is, $150 million or whatever. That business is in very, very good shape. Could there be some circumstances where the reason margins are going up is because maybe for some small accounts or whatnot, if we weren't able to get some decent ROIC or whatnot we walked away, there might be some of that, but overall, Mark, that business is in very good shape at the moment.

Thank you are much.

You are welcome.

Your next question comes from the line of Sean Hannan, Needham.

Yes. Good evening. Thanks for taking my question here. First think I wanted to see if ask about the $900 million that you folks have talked about in terms of returning to shareholders through the end of F2018, how much is actually remaining on that at this point?

So to-date, we have returned about $300 million, something in that nature. So we are about a third of the way through. So pretty much on track. Remember, that does include dividends as well as the stock repurchasing.

Okay. All right. So we just started simply for fiscal 2017 here. Okay. And then bigger picture question here. As you folks think about strategically plan for some of the changes that may influence business more coming out of Washington, thinking about footprint capacity here domestically, can you can you frame for us a little bit of context of, if there is a push or a little bit more of a requirement for you to support your customers more so domestically, what type of conversation have you had with customers around that? What that type of availability is there within your existing footprint today and available and/or qualified capacity? Thanks.

Hi Sean. It's Mark. So since mid-January, Forbes and myself and other management have probably have been on about 60 to 80 calls from customers asking, hey, could we run some simulations, can we run some models, what if, what if, what if? One of the things that we are not doing is, is we are not offering the customers positions or thoughts about what may or may not happen in terms of tariff, tax, et cetera. But I think we are in a great position to run a bunch of different what-if scenarios. One of things we have encouraged our customers to do is run three, four, five scenarios so they kind of get it into muscle memory and therefore depending on whatever happens in terms of DC and the U.S. government, we are ready to act swiftly. I think we are very well positioned on an absolute basis and a relative basis. If you think about business coming back into the U.S., Jabil has a significant amount of capacity in the U.S. and resource and headcount. We have also been building product in the U.S. forever. If you think about Jabil from a political standpoint, we are an NYSE U.S. domiciled company. So I think both practically and politically, we are in a very, very good position to help. And then I would supplement that by saying, our digital cloud-based analytic tools in terms of supply chain analytics are being exercised quite heavily at the moment running a bunch of these different scenarios. So for us, it's kind of being well prepared, helping our customers be well prepared and we will see what happens in the coming months out of Washington.

Okay. That's very helpful. Thanks so much.

Yes. Thank you.

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

Hi. It's Adrienne Colby for Sherri. Thanks for taking the questions. I was wondering if you could comment on what drove the upside in EMS sales versus expectations in the quarter? And along with that, what is driving the expectations for a decline in sales next quarter?

Hi. This is Forbes. In terms of the upside this particular quarter, it was relatively broad based. I think it's only about $25 million, $30 million to our expectations. So pretty broad based, certainly given the number of customers in the EMS segment that Mark discussed earlier. As we move forward into Q3, I would then 1% on a year-over-year basis, sequentially up 5%. So it's in really good shape. Again, we talk in percentage terms, but it's a little bit of rounding in the revenue on a year-over-year basis than what $30 million or something of that nature. So that business is performing well, really across all the business sectors, if you will. And with that a very nice sustainable margin profile.

Thanks. And as a follow-up, at your Analyst Day last fall, you talked about new market opportunities Jabil was looking to penetrate with 3D printing and digital supply chain tools. Just wondering if there are any updates you can share on those initiatives or any new customers you can talk about?

Can't talk about any new customers. We are, I think I would characterize both in digital world as well as 3D print as well as new markets, I would characterize it as in all cases we are either at or ahead of plan. So we feel pretty bullish about all those areas. And again, none of those will have an impact in the back half of 2017 and they probably won't have much of an impact in early 2018. I would guess that those type of businesses will start to be impactful at the back half of 2018 and moving into fiscal year 2019.

Thank you.

You are welcome.

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

Thanks. Good afternoon. Just first on the EMS margins. Maybe could you give us a sense for the 50 basis points improvement year-over-year? How much of that was from just cost down versus mix and volume? And then along similar lines on EMS margins, as you move towards the 4.2%, is there an assumption here that new businesses in general is being added at around 4% margin? Or is that not necessarily the case? And then I have a follow-up.

Thanks Steve. I don't think I would make that assumption. I think and I touched on this a little bit in the prepared remarks. The EMS team is just doing a phenomenal job in terms of asset utilization, execution. And then I hit on it quickly, but we are in our year three of our org structure changes and what I am observing is that all the different end markets and the different sectors we serve across EMS and again, it's broad based, we have got teams now that really, really understand the marketplace, can talk to customers in their language, whether it be automotive or energy or cloud data or hyper data or metering or whatever it maybe and it's making a big difference. So I think I would answer both your questions kind of saying, the uplift for this quarter and then the outlook for 4Q, it's all about the fact that that business, our approach is different. We are being very, very diligent on business that we are saying yes to and cumulatively and overall, it's a big book of business, it's $11 billion going to $12 billion. So what we are doing is working.

Great. That's helpful. And then just on the healthcare and consumer packaging business, in terms of the confidence around the 20% profit growth profile over the next couple of years, is there anything you can point to successes during the quarter just completed or things you booked for this quarter that give you more confidence around that number since you last talked to us?

What gives me confidence is, we have had our pick and our shovel hand-in-hand grinding in the healthcare and packaging business for the last two-and-a-half, three years. The team is awesome. Our value proposition has finally kind of framed out to where it's being really well received in both markets. And the last couple of years have been, to me, more of an investment phase. So we have added resource. We have taken away from some of the income through increasing OpEx and Steve Borges and his group and Erich Hoch in our packaging group, they have put together what I would characterize as pretty amazing teams. And our value prop in both of those areas has taken hold. So my confidence as I sit here today on the 20% CAGR from 2016 to 2019 is very high.

Great. Thank you very much.

Thanks Steve.

Your next question comes from the line of Amit Daryanani, RBC Capital Markets.

Thanks. Good afternoon guys. I guess two questions for me. In the last call, you talked about DMS revenues in August quarter this year would be roughly equal to what you saw in August 2015 quarter. Would you recalibrate that expectation? Or you still feel pretty good about that $1.9 billion bogie for Q4 for DMS?

Well, your observation is correct. Again Amit, you know this business as good as anybody on the call, right. And you know the variables, you know the catalysts, you know the puts and takes. It's a high bet business and I will just say that, again, I think our team does an amazing job. I think we are reasonably well positioned and we will see how it plays out. But I feel pretty good about what we said in prepared remarks and [indiscernible] after we get through the fourth quarter. But as we sit today, things look pretty good.

Got it. I guess my view is, again, you guys talked about the EMS segment being on 4% operating margins. Today you are talking about 4.2%. So you are modestly upticking there. I don't think you have changed your broader discussion around the company's profits. Does that imply that DMS margins are somewhat below what you thought it would be 90 days ago?

No, not at all. I think our DMS margins are exactly where we thought they would be for the balance of this year. I think that there was a question earlier that was around this topic and I think we have a good opportunity to get DMS margins back in the 5% to 7% range as we move into fiscal year 2018. You combine that with the EMS margins and things could look pretty good.

Fair enough. Thank you.

Thanks Amit.

Your next question comes from the line of Tejas Venkatesh of UBS.

Hi. I am filling in for Steve. But in case mobility surprises on the upside, I wanted to get an update on what amount of incremental revenue you can drive based on available capacity and within that $500 million to $600 million CapEx envelope?

Yes. I don't think the uptick in the mobility space is tied at all to the CapEx number. So the CapEx number as we play out the rest of the year with money that we haven't spent yet, I think CapEx so far first half of year is around $300 million. Very little of any CapEx for the rest of year is going into mobility. Our assets are largely in place and I would suggest that against everything you have heard today, we could take a bit of an upside on the installed asset base that we already have in place.

Got it. And then how did networking and storage do in the quarter?

They held their own. That's a bit of a broad based question, because storage today is legacy storage and also cloud-based storage. I would say the cloud-based storage, the hyper data is performing better than some of the legacy storage. But overall, I would say, it's holding it's own.

Thank you.

You are welcome.

Your next question comes from the line of Adam Tindle, Raymond James.

Okay. Thanks and good afternoon. Just wanted to ask on DMS. It looks like revenue is going to grow relatively consistently with your long-term goals of about 5% this year, but operating margin will be down to the low 3% range. So I am just trying to understand how we bridge the 5% to 7% DMS percent operating margin that you mentioned could be achievable in fiscal 2018, given it looks like revenues currently growing at plan?

Well, we haven't provided any outlook for FY2018 yet. So kind of everything you are looking at is truncated at the end of 4Q. So it's hard to extrapolate that out. I think you know we will see. I think will talk more about that in the June call, Adam. But again, do I think the 5% to 7% range for DMS is achievable in 2018? I do. And again, I have been very bullish on commentary around packaging and healthcare. There is also a significant amount of business in our overall DMS segment that is unrelated to handsets and you guys can make a judgment on how you feel about the overall handset market. But we have made some commentary around the fact that we have got a substantial amount of fixed assets in place and we feel like we will get some decent leverage on those assets in the first part of 2018.

Okay. And given I understand that much of the depressed margin issue is attributable to the fixed cost, what level of revenue do you think you need to achieve that 5% to 7% goal?

We will talk more about that in the June call, most likely.

All right. Fair enough. Thanks.

Thanks Adam.

Your next question is a follow-up question from the line of Sean Hannan of Needham.

Yes. Thanks for taking my follow-up here. My follow-up actually has been answered, but let me see if I can come up with another one for you folks while I have got the opportunity. So the EMS side of the business, it looks like at least the way that we are moving today, August should be up both sequentially and year-over-year. So I want to see if we can validate that, number one? And then number two, given that there has been a lot of portfolio optimization that's been occurring, as we get to the back end of this year, do you feel that the business should be in a better position to have more sustainable growth, albeit whatever that level is, but a little bit more consistency in being able to demonstrate year-over-year growth? Thanks.

Thanks Sean. I am not sure I understood your question. I think you made a comment, not so much a question but a comment that EMS kind of 4Q 2016, 4Q 2017, there is growth there. I think I said on my prepared remarks, we thought kind of 4.2% core op margin and the fourth quarter was a good place to kind drive models. If we were to achieve that, again, lots of work ahead, but if we were to achieve that I think that's about 40 basis point pickup from 4Q of 2016. So if that's what you are alluding to --

Mark, yes. Actually what I was looking to try and see if we can call out was really on the topline. I think that there is an opportunity where you can grow the EMS business in the August quarter, topline sequentially as well as year-on-year. So I wanted to see if we could validate if that's still an opportunity, even though we have been doing a lot of portfolio trimming.

Yes. I think that if I remember right, in 4Q of 2016 EMS was around $4.4 billion. I think next quarter, so 3Q of 2017, EMS will be about $4.4 billion and I think that as we move into the fourth quarter of 2017, for us to kind deliver a decent year relative to consensus, EMS revenues have to be up a decent amount. So I think a good estimate there might be for 4Q in the $4.8 billion, $4.9 billion -- excuse me, for EMS $2.9 billion range. So Q4 EMS $2.8 billion, Q4 2017 $2.9 billion, somewhere in that range.

Got you. And then since we have done a lot of portfolio optimization within the business, we are driving our margins up, there is some pieces that came out of the topline more near term, is this largely accomplished now? Does this continue to happen? And then do we get to a point where as we exit 2017 that we are able to have a little bit more consistency in terms of year-over-year growth for that segment?

How would I want to answer that? I think we are efforting our whole strategy around EMS is to grow cash flows and do it on a more predictable consistent basis. I think we will see if we accomplished that. I don't know that we are there yet. But I think one good proxy would be the last five or six earnings calls around EMS and our commentary around EMS forward-looking, we have delivered to that. So I think that's a pretty decent proxy. I think as we get into the June call and the September calls, we will give you better color kind of on an annual basis of where we think EMS will be.

That's all very helpful. Thank you so much.

Thanks John.

That does conclude the Q&A session for today. I would now like to turn the call back over to Beth Walters for any closing remarks.

Thank you everyone for joining us today on our earnings call. And we certainly will be here the rest of the evening and week for any follow-up calls with investors, analyst and the investment community. So thank you again for your interest and participation. Have a good night.

That does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.