Jabil Circuit (JBL) Q1 2018 Earnings Conference Call Transcript

Jabil Circuit (JBL) Q1 2018 Earnings Conference Call Transcript

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Jabil Circuit (NYSE: JBL)
Q1 2018 Earnings Conference Call
Dec. 14, 2017 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Jabil’s First-Quarter Fiscal Year 2018 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. If you would like to ask a question during that time, simply press *1 on your telephone keypad.

Thank you. I’d now like to turn today’s conference over to Beth Walters, senior vice president of communications and investor relations.

Beth Walters — Senior Vice President, Communications, Investor Relations

Thank you, operator, and welcome, everyone, to our first quarter of the fiscal year 2018 earnings call. Joining me today are our CEO, Mark Mondello, and our chief financial officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website, Jabil.com, in the Investor section. Our first-quarter press release slides and corresponding webcast links are also available on our website.

In these materials, you will find the financial information that we will cover during this conference call. We ask that you follow our presentation with the slides on the website beginning with Slide 2, our forward-looking statement. During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected second quarter of fiscal 2018 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, 2017, on subsequent reports on Form 10-Q and Form 8-K, and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Today’s call will begin with Mark, with his comments on our outlook for the business in fiscal 2018. Forbes will follow with comments on our first-fiscal-quarter results and guidance for our second quarter of 2018.

Following our prepared remarks, we will open it up to questions from our call attendees.

I’ll now turn the call over to Mark.

Mark Mondello — Chief Executive Officer

Thanks, Beth. Good afternoon. I always appreciate everyone taking time to join our call. I’ll begin by thanking our folks here at Jabil for their continued dedication and commitment.

I’d also like to extend my sincere gratitude to each and every employee here at Jabil for making safety their personal priority. You see, keeping people safe is Job 1 in all we do. And finally, I’d like to wish each of you a peaceful and blessed holiday season.

Now, let’s take a look at our first-quarter results. The quarter was excellent, as the team delivered $227 million in core operating income and revenues of approximately $5.6 billion, resulting in core earnings per share of $0.80. For me, these results further illustrate the strength and diversification of Jabil’s income, especially when paired with our outlook for the balance of the year. I’m pleased with the quarter and the nice start to fiscal 18.

As customary, Forbes will provide more detail on our results during his prepared remarks.

I’d now like to address current business at hand, starting with our EMS segment. Jabil’s EMS team is driving a progressive transformation, advancing their methods in which they serve a broad range of end markets, markets such as energy, industrial, print, and retail, automatic, semi-cap equipment, networking, telecom, and data storage. A key element of the transformation is the deliberate pivot toward higher-margin businesses as the team leverage engineering excellence and deep domain knowhow day in and day out. In short, this is what we refer to as EMS 2.0.

Clearly, our EMS value proposition has taken hold. Our team has done an outstanding job performing to plan, seen core operating margins approach 4% for the year while showing revenue growth of 3.5% year on year. It’s good news all the way around.

Next, I’ll move to our DMS segment, starting with our high-growth healthcare and packaging businesses. These two businesses continue to grow at a rate of 20% to 25% per year through fiscal 19, a true testament to our healthcare and packaging teams as they placed squarely in areas undergoing material disruption. Examples of the disruption being the urgent demand for affordable healthcare and the convergence of intelligent yet fully reliable consumer packaging, both examples being relevant to Jabil’s story. I feel good about the outlook we see across both of these businesses as our healthcare and consumer packaging teams create specialized solutions through the use of new technologies and digital innovation.

Lastly, but certainly not least, let’s talk about the remaining commercial sector within our DMS segment, Jabil’s Green Point business. Looking back at the first quarter, our team successfully supported numerous program ramps, demonstrating good execution and cost controls while navigating complicated processes at extreme scale. As we highlighted for the past 24 months, the income generated within our Green Point business is becoming more and more diversified, diversified across a wider range of technologies and hardware platforms. In concluding my comments specific to our Green Point business, we’re now seeing more and more intricate assembly in automation required as an integral complement to our precision mechanics expertise, resulting in solutions which are directly in Jabil’s wheelhouse.

I’ll now take few minutes and address the company at an enterprise level starting with second-quarter guidance. Our 2Q guidance suggests another strong quarter, a quarter of 25% core EPS growth year on year and a quarter which would complete a very solid first half of the fiscal year. Moreover, we anticipate the core EPS for the second half of fiscal 18 to grow 20% to 25% year on year when indexed against the back half of fiscal 17. The result, I believe, will be core earnings in the neighborhood of $2.60 a share for fiscal year 18.

As we focus on cash flows and earnings, our leadership team remains steadfast in their commitment to complete our two-year capital return framework while we remain on target to return $1 billion to shareholders by way of stock repurchases and dividends by the end of this fiscal year. If we widen our aperture and expand the view of our time horizon from two years to a three-year time window, encompassing fiscal year 17 through fiscal year 19, what we see is highly encouraging. Projected revenue growth of 45% a year, core EPS growth of 16% to 20% and cumulative cash flow from operations of $3.5 billion over this three-year time period, again fiscal year 17 through fiscal year 19.

On top of all this, we’re investing heavily in our future, investing in the areas of material sciences, additive manufacturing, automation in robotics, and various digital platforms just to name a few. These investments are planned and executed with a sense of purpose, underpinning our belief for success, a belief that, when successful, implies a compounded growth rate north of 15% for Jabil’s core earnings per share from fiscal year ’16 to fiscal year ’19.

Before I hand the call over to Forbes, a few parting thoughts. Shareholders remain at the forefront of our actions. To this end, we believe in what we’re doing and we have a credible plan based on sound assumptions and historical data, much of which I’ve shared in today’s prepared remarks. Our leadership team remains confident, confident because we continue to make a real difference as we strengthen our wonderful portfolio of businesses.

At Jabil, we’re helping make the world and the communities in which we work better, healthier, and safer. And today, we have the infrastructure, the ingenuity, and the talent which offer us a real opportunity to become the most technologically advanced manufacturing solutions company in the world. As I think about this ambitious goal, I think about an impactful quote from British novelist CS Lewis. Mr.

Lewis said, “Isn’t it funny how day by day nothing much changes but when you look back over time, so much is different?” Isn’t this so true in life? It’s certainly true here at Jabil, where our team is authoring change, change that I believe is proving to be quite positive.

Mark Mondello — Chief Executive Officer

Thank you and happy holidays to all. With that, I’ll now turn the call over to Forbes.

Forbes Alexander — Chief Financial Officer

Thank you, Mark. Good afternoon, everyone. I’d ask you to turn to Slide 3, where I’ll review our first-quarter fiscal 2018 results. Net revenue for the first quarter was $5.6 billion, a growth of 9% on a year-over-year basis.

GAAP operating income was $146 million with GAAP net income of $64 million. GAAP net diluted earnings per share were $0.35 for the quarter. Core operating income excluding the amortization of intangibles, stock-based compensation, business interruption, restructuring and related charges was $227 million and represented 4.1% of revenue. Core diluted earnings per share were $0.80.

Now, turning to Slide 4, I’ll discuss our first-quarter segment. Revenue from our diversified manufacturing services segment was $2.7 billion, an increase of 13% on a year-over-year basis and in line with previous guidance. This represented 49% of total company revenue. Operating income for the quarter was 5.2%.

Our electronics manufacturing services segment revenue was $2.9 billion, an increase of 6% on a year-over-year basis and represented 51% of the total company. Operating income for this segment was 3%. Net capital expenditures for the first fiscal quarter totaled $198 million. Net capital expenditures for the full fiscal year remained on track with our previous expectations of $700 million.

As anticipated, our first quarter was characterized by expansion of working capital. And as a result, cash flows used in operations were $54 million. Cash flows from operations for the full fiscal year continued to be expected in excess of $1billion. Our core return on invested capital for the quarter was 21%, an improvement of some 340 basis points on a year-over-year basis.

Core EBITDA for the quarter was approximately $412 million, representing 7.4% of revenue. Our total debt to EBITDA levels at the end of the quarter was two times. Our cash balances were $746 million.

I’d like to quickly address our capital return framework. This framework remains a key focus. Our plans to return 40% of cash flows from operations via dividends and share repurchases up to a maximum of $1 billion very much remains on track. In the first quarter, share repurchases were $93 million and since the inception our capital return framework, we’ve repurchased 20.3 million shares at an average price of $24.28, totaling $493 million.

At the end of the quarter, $357 million remains outstanding on our current stock repurchase authorization.

Turning to our restructuring plan. Our restructuring activity remains on track. During the quarter, we recorded approximately $11 million associated with this activity. We anticipate the conclusion of this plan and charges of approximately $35 million during fiscal 2018, and full-year savings associated with this plan of $70 million to $90 million continues to remain on track to be fully realized commencing fiscal 2019.

Turning to our operations in Puerto Rico. As I discussed on our September earnings call, our operations in Puerto Rico suffered significant damage as a result of Hurricane Mariah. Ongoing recovery activities continue and I’m pleased to advise that late in the first quarter we saw and we continue to see some limited operational activity taking place. In the first quarter, we recorded net charges of $7 million of recovery and repair offset by insurance proceeds.

We continue to await the final assessment of damage and we expect the majority of all such costs to recover from the insurance process during the full fiscal year.

Forbes Alexander — Chief Financial Officer

I’d now like to turn to our second quarter of fiscal 2018 outlook, which can be found on Slide 5. The diversified manufacturing services segment revenue is expected to increase approximately 25% on a year-over-year basis to approximately $2.2 billion, while the electronics manufacturing services segment revenue is expected to increase 1% on a year-over-year basis to $2.7 billion. We expect total company revenue in the second quarter to be in the range of $4.75 billion $5.05 billion or an increase of almost 10% at the midpoint of the range on a year-over-year basis. Core operating income is estimated to be in the range of $160 million to $200 million with a core operating margin in the range of 3.4% to 4%.

Core earnings per share are estimated to be in the range of $0.50 to $0.74 per diluted share and GAAP earnings per share expected to be in the range of $0.31 to $0.57 per diluted share. And finally, the tax rate on core earnings in the second quarter is estimated to be 23%. The rate for second half of the year is estimated in the range of 26% to 27%, thus the full fiscal year estimated to be 26% based on the current levels of forecasted income.

Thank you and I’d now like to hand the call back to Beth.

Beth Walters — Senior Vice President, Communications, Investor Relations

Thanks, Forbes. As we begin our Q&A session, I would like to remind all of our call participants that in a customary fashion we will not be able to address any customer or product-specific question. So, thank you very much for your cooperation in advance.

Operator, we’re ready for the Q&A session.

Questions and Answers:

Operator

Certainly, ladies and gentlemen, if you would like to ask an audio question, simply press *1 on your telephone keypad. Again, that’s *1 for a question. Your first question comes from the line of Adam Kindle of Raymond James.

Adam Kindle — Raymond James — Analyst

OK, thanks and good evening. Just wanted to start on your fiscal ’18 EPS guidance. It seems to imply a similar shape as last year in terms of first half versus second half percentage weights of total EPS. Maybe just help us understand how you’re thinking about the cadence of this year versus last year, because I think if we think about last year, about 75% of total DMS profit dollars came in the first half of last year and I think there was some hope that this year might be a little bit more linear.

So, any comments on the cadence of first half versus second half? Thanks.

Mark Mondello — Chief Executive Officer

Hey, Adam, thanks for the question. I don’t know if you’re speaking solely for the whole company or one of the segments. I think, if you looked, and I don’t remember the exact numbers, but in fiscal year ’17, our first half was about $360 million, I think, in profits and the first half this year was quite a bit stronger, over $400 million if we hit guidance as suggested today. So, kind of first half to first half ’17 to ’18 will probably be up in the ballpark of 15%.

And then second half of ’17 to second half of ’18, again, if you kind of take the $2.60, extrapolate out with the back half, it looks like second half to second half, I think, also will be up about 15%.

Adam Kindle — Raymond James — Analyst

OK, that’s helpful. I wanted to ask also, Mark, on the capital return program. I understand you’re committed to the two-year return program. You certainly delivered thus far.

You’ve also outlined some exciting growth opportunities ahead. So, as you think beyond the fiscal ’18 when this commitment ends, how are you thinking about the balance between investing in these new areas versus returning cash?

Mark Mondello  — Chief Executive Officer

So, I’m always bullish on investing and our cash flows. When we, I think, put this plan in place in June, 2016, we did so because we felt like over the two-plus years, we had enough cash flow to make investments required which, for me, is kind of the No. 1 priority, and still return a substantial amount of our cash flows to investors. We’ll have conversations with our board both in the upcoming January board meeting and then the April board meeting and as we move through the year, either on the March call or the June call you can expect additional color and detail around what capital returns might look like in fiscal year ’19 and ’20.

Adam Kindle  — Raymond James — Analyst

OK, just to clarify for fiscal ’18, I think, before you were talking about CAPEX in the neighborhood of $700 million but it’s annualized a little bit higher than that. Is $700 million still the right way to think about fiscal ’18 CAPEX?

Forbes Alexander — Chief Financial Officer

Hey Adam, it’s Forbes. $700 million is where we’re targeting. A little bit heavier in the first quarter but it’s following a similar pattern to last year. So, $700 million.

I think I’d just also add in terms of the overall cash flows, what we outlined on our Analyst Day just over a year ago was expectations generated by $3.5 billion of operating cash flow over fiscal year ’17, ’18, and ’19. So, that’s still very much in play. So, I think we have plenty of liquidity, plenty of cash generation as we move forward here to both support shareholder returns and investments for growth.

Adam Kindle — Raymond James — Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Steve Milunovich, UBS.

Tejas Venkatesh — UBS — Analyst

Thanks. This is Tejas Venkatesh on for Steve Milunovich. I want to ask about the Green Point and your efforts to diversify there. In our supply chain checks, we constantly hear there’s new Asian competition to deliver casings.

How concerned are you? And then maybe you could speak to the diversification efforts there?

Mark Mondello — Chief Executive Officer

We’re always concerned about competition but we have been for the last 25 years and that’s kind of across the whole company. I don’t know, I’d just be careful in kind of maybe what you hear and try to differentiate kind of fact from fiction but, as I said in my prepared remarks, I think we’re doing an awfully good job across our Green Point business in terms of diversification and I forget the words I used but that’s in technologies and different hardware products and platform.

Tejas Venkatesh — UBS — Analyst

And across customers and new customers as well?

Mark Mondello — Chief Executive Officer

Yes, new customers for sure.

Tejas Venkatesh — UBS — Analyst

OK. And, as a follow-up, could you talk about growth strength in the EMS this quarter? There’s a lot in there.

Mark Mondello — Chief Executive Officer

Well, we had good strength in terms of revenue. I would suggest that we had a slight weakness for EMS in Q1. We thought Q1 EMS would be in 3.1% to 3.2% range in terms of op margins. I think we printed 3.0 and that was due to, we’ve got a lot of moving parts, as you heard in my prepared remarks, and I didn’t cover all of them, but the end markets and the businesses inside of EMS encapsulate a large number of end markets and probably, I don’t know, 200-plus customers.

So, overall, really pleased with the quarter. We had a lot of product transitions, product ramps, I would say, that op income was maybe off by 10 to 20 basis points, which are $5 million, not overly concerning, and areas where we continue to see near-term strength are areas of automotive, energy, semi-cap equipment, and various areas of industrial.

Operator

Your next question comes from the line of Ruplu Bhattacharya, Bank of America/Merrill Lynch.

Ruplu Bhattacharya — Bank of America/Merrill Lynch — Analyst

Hi. Thanks for taking my questions. The first question is on packaging and healthcare. Mark, I think you talked about 20% to 25% growth over the next three years.

Is that an acceleration from what you’ve said in the past? I think last quarter you said 20%. So, are the revenues in healthcare and packaging growing faster than you thought? And then can you also comment on the margins in that space? Are they well within the 5% to 7% that you have for DMS?

Mark Mondello — Chief Executive Officer

Thanks for the question. So, just to be sure we clarify. What I commented on the last three calls inclusive of this call is that from, say, fiscal year ’16 through fiscal year ’19 we see packaging and healthcare growing at a rate of, say, at 20% CAGR. I think in my prepared remarks a few minutes ago I said it was 20% to 25% and that we have confidence in that through fiscal year ’19 and, again, it’s just the overall strength of the business, the disruption of both of those businesses and I think we continue to be very well-positioned.

In terms of margins, at this point we just don’t break that out, as my belief would be as healthcare and packaging continue to be more and more material, at some point we might break out those businesses or those sectors.

Ruplu Bhattacharya — Bank of America/Merrill Lynch — Analyst

OK, thanks for the color on that. You said your EMS margins are pretty much on the line to get to 4% this year. When you look at the overall guide for the next quarter, it would imply that the DMS margins are a little bit weaker. Is that related to the cost challenges you had in the September quarter? Any color on the DMS margins next quarter would be helpful.

Mark Mondello — Chief Executive Officer

No, I wouldn’t read too much into that. In my prepared remarks, I think I said something about EMS approaching 4%. So, for the year, I think we’re in pretty good shape to hit 3.94% for the whole fiscal year ’18. If you take our guide, we’ve kind of guided revenue but we haven’t really guided specific percentages but I would envision Q2 of 18 versus Q2 of 17 to be very close in terms of our op margin.

I didn’t talk about it too much on this call but the last call I talked about EMS kind of top line bottom line year-on-year 17 to 18, growing about 3%. We’re seeing revenue maybe slightly stronger than that. I think today I said revenue would grow closer to 3.5% and the shape of the year would be similar to last year and that still holds.

Ruplu Bhattacharya — Bank of America/Merrill Lynch — Analyst

OK, thanks for the color on that. That’s helpful. And the last question from me for Forbes. I think you’ve guided the tax rate for next quarter to 22% versus 26% guide for this quarter.

Anything happening on the tax rate and how should we think about the tax rate for the full year?

Forbes Alexander — Chief Financial Officer

Yeah. So, for the full year, Ruplu, I’d ask you to model 26-type rate, so not dissimilar to what I said 90 days ago. What we’re seeing is a shift in the mix of earnings from taxes on these areas quarter by quarter, a little bit different event than I expected at the start of the year. So, 23% in Q2 and then you’ll see a comeback up to that 26%, 27% in the second half of the year averaging out at 26 for the full year.

Ruplu Bhattacharya — Bank of America/Merrill Lynch — Analyst

OK, thanks and congrats on the quarter.

Forbes Alexander — Chief Financial Officer

Thank you.

Operator

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

Steven Fox — Cross Research — Analyst

Hi. Good afternoon. I was wondering if you could talk a little bit more about, you mentioned in your prepared remarks, Mark, about some specialized solutions that are helping growth in CPS and Nypro. Is there any other color you can provide exactly what you meant by that? And then I had a quick follow-up.

Mark Mondello — Chief Executive Officer

Well, it’s certainly around sensors. It’s certainly around the digital platforms were creating. It’s certainly around some material sciences and it’s certainly around the way that we’re running the factories both with packaging and healthcare. I think that one good news, Steve, on kind of a macro basis is our observations are that the overall healthcare wellness area is going through, again, a bit of a disruption where people are just adamant about a, what I would say, maybe fair healthcare services at a much better price point.

And that leads perfectly into the kind of, what we do for a living if you combine our capabilities with our cost structure and our solutions. On the packaging side, we’re seeing, again, a lot of disruption going on. If you think about somebody like Amazon coming into the retail space, you think about how millennials are acquiring just about everything, intelligent packaging, and then the way the exterior of the package looks, the shape of the package, the protection of the package, that’s all changing and I think, again, in large favor to what we do really, really well. So, again, for the last two, two and a half years, we’ve been banging the drum pretty hard and pretty bullish in those two areas and, again, that still holds today and we think will hold certainly through fiscal ’19 and hopefully through fiscal year ’20.

Steven Fox — Cross Research — Analyst

Great. That’s really helpful. And then just as a quick follow-up, a little bit embarrassed to ask this since I was so bullish on the EMS margins last quarter but despite disappointment in the EMS margins, you’re saying that’s nothing unusual during the quarter, it was just a little bit here, a little bit there and you want to call out anything specifically? Is that the right way to look at it?

Mark Mondello — Chief Executive Officer

Yeah, I wouldn’t worry about that. It’s 5-6 million bucks and not to make light of 5-6 million bucks but all of that business, if we kind of shake it up and look at it holistically, is in good shape for the year.

Steven Fox — Cross Research — Analyst

OK. Thanks so much.

Mark Mondello — Chief Executive Officer

Yea.

Operator

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

Matt Sheerin — Stifel Nicolaus — Analyst

Yes, thanks and good afternoon. Just a question regarding the DMS guidance for up to 25% or so year over year. That implies a better than seasonality if you look historically, and I know there’s a product cycle going on now. Just trying to figure out how much of that is due to specific product cycles or the diversification that you talked about, particularly at the Green Point where you’re seeing the opportunities across customers and product sets.

Mark Mondello — Chief Executive Officer

Yea. So, I think it’s a combination of maybe a change in what historically has been seasonality in parts of that business, and the other part of that is healthcare packaging and then kind of staggered overall program launches as well as the diversification. So, if I try to think about the strength, I think it cuts across all three or four areas. The DMS business today, and this is kind of tricky and may be frustrating for the investment community, is the business, it’s just so hard to kind of compare it even to two years ago because our DMS business, the way it’s shaped and looks today as well as the overall content of business, it’s changed significantly and I think it’ll change even more over the next two years.

Matt Sheerin — Stifel Nicolaus — Analyst

OK, that’s helpful. Just a follow-up for Forbes regarding the guidance of a roughly 260 in EPS for fiscal “18. Does that include our assumption for the buyback, the remaining $360 million or so in share repurchases?

Forbes Alexander — Chief Financial Officer

It does, Matt, yea, assuming that that $450 million is consumed by the end of August.

Matt Sheerin — Stifel Nicolaus — Analyst

OK, great. Thanks a lot and happy holidays.

Forbes Alexander — Chief Financial Officer

Thank you.

Mark Mondello — Chief Executive Officer

Thanks, Matt.

Operator

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

Amit Daryanani — RBC Capital Markets — Analyst

Thanks a lot. Thanks for taking my question, guys. I guess, two from me. One may be to follow up on Matt’s question.

The DMS guide that you are implying for Feb is down less than what it typically is. A lot of companies in the supply chain, I guess, that have Big Apple exposure talked about seasonality, kind of getting pushed out one quarter. I’m wondering, do you think there’s a point where maybe the May quarter numbers in DMS will be down more than what historical seasonal patterns are because of the push-out or that doesn’t seem to be the case in what you guys see so far?

Mark Mondello — Chief Executive Officer

Well, you’re right. The decline, if you look sequentially, Q1 of ’17 to Q2 of ’17 and you compare that to Q1 of ’18 to Q2 of ’18, our guidance suggests a much smaller decline. That’s true. I just think, again, when you think about our diversification, I think you’ve got to think through when you’re talking about market data, market data according to what customers, what products, what end markets.

Again, our DMS business overall continues to become more diversified. It does encapsulate healthcare and packaging. And then within, say, the mobility space and the consumer lifestyle space, our business again continues to change, both based on what we’re doing internally, products that we’re on, and then some external changes to the shape of the end markets. So, again, I hate to say this but it’s true.

It’s getting harder and harder to compare kind of year on year.

Amit Daryanani — RBC Capital Markets — Analyst

Fair enough. And I guess just on the EMS side [Inaudible], you mentioned a couple of times, I guess, the way you run the model is op margins in EMS will go from 3% in November to, call it 3.7 in Feb. I think you said it would be flat year over year if I’m not mistaken. Just help me understand, how do you get that margin expansion because I don’t think revenues are going to go up that dramatically for you guys in the Feb quarter on a sequential basis.

So, what enables this 60 to 70 basis points of margin expansion when the revenue tailwind isn’t there?

Mark Mondello — Chief Executive Officer

I’ll try to think through the math in my head. So, stick with me. I think we just printed a 3% in EMS for Q1. I said the Q2 of ’18 will be similar to ’17.

So, what we’d be looking at is 3.6%, 3.7% on the op margin line. If you compare what we just said in terms of our guide for Q2 of ’18 for EMS, the revenue looks awfully familiar to the revenue in Q2 of ’17. So, again, if you can imagine, our team’s running this large $11+ billion, $12 billion business, there’s a lot of moving parts in terms of cost and investment. So, that’s all it is.

In terms of the strength, the bullishness of the business, I bring you back to three, three and a half years ago we were running that business at 2%, 2.5% margins and this year we’re going to be bouncing right up against 4%. So, again, I wouldn’t read too much into the quarter-on-quarter numbers for the year. That business remains very healthy.

Amit Daryanani — RBC Capital Markets — Analyst

Got it. I guess, the final one, I’ll cede the floor. Forbes, how do we think about your tax rate with the potential positive tax reform at this point? Is there a way to think about what the structural rate could look like if this tax bill gets through?

Forbes Alexander — Chief Financial Officer

Yea. So, structurally little impact if we do see this change of [Inaudible] on the corporate rate of 21%. We’re not a big U.S. taxpayer.

Most of our operations are [Inaudible] the country. So, no structural change there. I think where the opportunity lies is when we look at cash repatriations on a forward-looking basis. So, clearly all in favor of that and a territorial system.

So, hopefully, we’ll hear more about this in the coming weeks.

Amit Daryanani — RBC Capital Markets — Analyst

Thank you.

Operator

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

Jim Suva — Citi — Analyst

Thanks so much. You gave a lot of details on the presentation and questions. So, I guess I’ll switch and not focus on DMS to rather on EMS. It looks like you had a better than expected quarter for the November quarter.

I think revenues were up around 6% year over year. Can you give any insights about kind of what end markets or where the strength in EMS came from? And then it’s interesting to note, if I read your slides correctly, it looks like the February outlook is for up 1%. So, a bit of a deceleration from this quarter. Can you kind of help us bridge the strength to a bit of a deceleration? Thank you.

Mark Mondello — Chief Executive Officer

Sure, Jim. So, again, so many moving parts, as I said before. Kind of hard always to put this in 90-day buckets. If I think about commentary for EMS the last couple of calls, been pretty bullish on the growth rate, both top, and bottom line.

Took the revenue number up a little bit higher. So, I think on the last call I said that EMS top line would be up around 3%. I think in today’s prepared remarks I said that might be closer to 3.5%. In terms of 1Q, it’s just the business performed extremely well.

Again, the reason we were up maybe 10 to 20 basis points on margin is a lot of product ramps, transitions, which drove the strength of revenue. And, you’re correct, I think 1Q of ’18 compared to Q1 of ’17, it was up about 6% and then Q2 of ’18, Q2 was ’17, it’s up, I would say, marginally to flat but if I take a look at kind of the first half of ’18 versus the first half of ’17 and you blend all that together, I think EMS will be up a little over 3% first half to first half and then the back half, I would imagine, would be about the same. And, again, aggregate all that up, I think revenue for the year will be up around 3.5% for EMS as a whole. In terms of where we’re seeing strength, I commented earlier, certainly automotive, energy, a bit across some of our industrial business and then semi-cap equipment and I could add three or four other sectors on to that but it’s fairly modest.

So, that’s right, I think some of the strength is coming from, if I look at it, on an annual basis.

Jim Suva — Citi — Analyst

Thanks so much for all the details and happy holidays.

Mark Mondello — Chief Executive Officer

Yea, you as well, Jim.

Operator

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

Adrienne Colby — Deutsche Bank — Analyst

Hi. It’s Adrienne Colby for Sherri. Thanks for taking the question. I was wondering within the EMS segment if you could comment on the trends you’re seeing in legacy storage and server business as well as trends in your club-related business.

Mark Mondello — Chief Executive Officer

I would say that we’re seeing areas of kind of neutral to softness across some storage platforms. In terms of overall kind of hyper cloud and cloud data storage, certainly stronger than in the areas of kind of legacy data storage, if that’s helpful.

Adrienne Colby — Deutsche Bank — Analyst

It is. Thanks. And as a follow-up, I was wondering in the quarter you talked about opening two new blue sky innovations, one in Singapore and one in Italy. Just wondering if you could talk about the strategy for those centers, how many you’re planning to have, what the start-up costs are and your expectations in terms of areas that these centers will be focusing on.

Mark Mondello — Chief Executive Officer

Probably won’t get into that detail. I would say that as a corporation, our blue sky innovation center for kind of the globe is in San Jose. We had such a great acceptance in reaction to what we’re doing in San Jose that various business sectors have opened up what I would call kind of working development centers in different geographies. So, that’s all that is, whether it be Italy, whether it be Spain, Singapore.

So, the main innovation blue sky center for customers that kind of holistically captures the theme and the pedigree of the whole company is San Jose. The other what we characterize as blue sky centers are really more working R&D labs and the work that they’re doing cuts across various sectors of the business.

Adrienne Colby — Deutsche Bank — Analyst

Thank you.

Mark Mondello — Chief Executive Officer

You’re welcome.

Operator

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

Sean Hannan — Needham & Company — Analyst

Yea, thanks. Good evening, folks. Really nice work on the results from the guide here. So, really just one question for me.

I think that Mark, you had referenced sort of expansion of services that you have in the Green Point business. So, wanted to see if there’s a way you can expand upon the nature of those services and the nature of the application.

Mark Mondello — Chief Executive Officer

I’ll try. So, I think the reason I put that in my prepared remarks, Sean, is differentiating Green Point from the rest of the DMS. I think that there is a lot of conversation going on around Green Point being maybe expert and heavily weighted toward mechanics and machining, precision mechanics to be specific, and that’s largely true but as we expand across different product platforms, as we expand across customers, as we expand across different end markets within Green Point, we’re seeing a lot more intricate assembly coming in to complement the precision mechanics and that’s really good for us. We’re very, very good at precision mechanics and but we have a long, long history of complicated, intricate assembly work.

So, the two of those complementing each other is a good story for Jabil.

Sean Hannan — Needham & Company — Analyst

OK So, from an application standpoint, though, can you expand on that a little bit more in terms of the relevance to, let’s say, handset market or further expansion into other types of markets and products?

Mark Mondello — Chief Executive Officer

Yea. So, I’ll just give you some hypotheticals. You know we play in the handset space and I won’t say anything more than that on the handset space, but you think about what’s going on with augmented reality, virtual reality, you think about what’s happening with the density and the package miniaturization with optics and cameras and then we have kind of a whole, people forget about, our consumer-lifestyles business and people also forget about the fact that there’s a lot of other mobile products out there other than handsets. So, that will give you kind of an idea of the different areas we’re playing in.

Sean Hannan — Needham & Company — Analyst

That’s very helpful. Thank you.

Mark Mondello — Chief Executive Officer

Have a great holiday.

Operator

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

Mark Delaney — Goldman Sachs — Analyst

Yes, good afternoon. Thanks for taking the questions. I guess the first question, I’m just trying to get a higher-level perspective, Mark, on what you’re seeing in terms of macroeconomic trends. I know you talked a little bit about what you’re seeing in EMS and maybe some broader industrial pickup, but if you could just talk maybe any differences geographically or if you’re seeing kind of improved global GDP type of environment, I’d just be curious about your thoughts there.

Mark Mondello — Chief Executive Officer

Sure, Mark. One thing I feel good about is whether global GDP is 2.5, 2.8, 3, 3.2, whatever the number might be, I feel really good about the fact that our earnings, if you go off of the basis when we delivered, whatever it was, $1.85, $1.86, extrapolate that to last year at $2.10, $2.11, our outlook for this year being to $2.60 and next year something greater than that, we’re probably at four, five times global GDP. I feel really, really good about that. In terms of overall macro, as we’re traveling around and we’re on the road a lot, it feels like the economy is getting better.

I would say that maybe not across the board, I would say we’ve got some kind of long-in-the-tooth legacy businesses that, based on technologies and things like that, are maybe slow to slightly declining but certainly across the U.S. in our travels, parts of Europe, a little bit in Japan, things just feel a little better. I think we’ll see what happens with this tax plan. I wouldn’t think of a significant step function up maybe an upward-slide glide past over the next couple of years.

It feels about right and if that happens, that would be outstanding because the last number of years we’ve been fighting some interesting headwinds, and getting a little wind at our back for the next couple of years, it would be great.

Mark Delaney — Goldman Sachs — Analyst

That’s helpful. And a follow-up question on inventory. I know it was up, and I think days are maybe similar, but I think inventory dollars were up and if you could provide some context for why inventory increased.

Forbes Alexander — Chief Financial Officer

Yea, you’re correct. It was up $250 million to $300 million. No particular reason. Just if you think about the way our quarter aligns with calendar quarters and suchlike and consumer buying season, if you will, we’ll see that correct itself as we move through to second quarter, i.e.

contract over the quarter and in November and then you’ve still got pull-through in sales in the December period. It’s not untypical.

Mark Mondello — Chief Executive Officer

I think another thing, Mark, if you just kind of step back and look at everything, certain parts of the component market have been tight. We see that starting to loosen up a little bit. So, we made some buys a little bit earlier to be sure that we had continuity of supply but if you take a look across the whole company, Q2 of ’17 versus Q2 of ’18, revenues are up quite a bit and if you just kind of index out to the back half of the year and you look at what our revenues might be relative to the back half of ’17, knock on wood, they’ll be up as well. So, I think all that plays into inventories being up a little bit fluffy at the moment.

Mark Delaney — Goldman Sachs — Analyst

[Inaudible] a third one. I know NAFTA has been under negotiation for a while. It hasn’t been renewed. Do you guys have any conversations about that with your customers and any kind of contingency planning? I’m sort of curious what you guys would do there.

Thank you very much and happy holidays.

Mark Mondello — Chief Executive Officer

Thanks, Mark. At this point, no. We’ll see if that becomes real. Let’s wait and see what happens there.

That would be an issue for a lot of industries and a lot of companies. So, we’ll see how that goes but at the moment there’s not a lot of real conversation going on around that.

Operator

Your next question comes from the line of Paul Coster, JP Morgan.

Paul Turner — JP Morgan — Analyst

Hi. This is a Paul Turner on for Paul Coster. Thanks for taking my question. Just one quick follow-up on Green Point.

So, given the ramp up costs are now behind you, can you quantify scaled benefits you expect as we move through the year and respective impact on margins and how that carries over to the next product cycles?

Mark Mondello — Chief Executive Officer

I would say that we addressed and talked about some of the cost and ramp issues we had going back to the July, August, and part of September. Those are all largely behind us and I think we’re in relatively good shape across both DMS and Green Point for the balance of the year.

Paul Turner — JP Morgan — Analyst

OK. And then just quickly on how should we think about the stock comp for the rest of year after a big step-up in 1Q and also your restructuring charges for the full year? Thank you.

Forbes Alexander — Chief Financial Officer

Yea, let me hit the restructuring charges first. $11 million in Q1, we expect about $35 million for the full year. So, $24 million. Probably, I would say, most of that would be the second half of the year based on current expectations.

In terms of stock comp, that’ll move back to a more normal cadence of around $15 million, $16 million a quarter starting in the second fiscal quarter.

Paul Turner — JP Morgan — Analyst

Thank you.

Operator

We have reached our allotted time for questions. I would now like to turn the floor back over to Beth Walters for any closing remarks.

Beth Walters — Senior Vice President, Communications, Investor Relations

Thank you so much, everyone, for joining us today. Please feel free to reach out with any follow-up questions on the financial results or clearly on the outlook of the company and I’ll just reiterate, Mark and Forbes’ comments of happy holidays to everyone and enjoy the season. Thank you.

Operator

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

Duration: 53 minutes

Call Participants:

Beth Walters — Senior Vice President, Communications, Investor Relations

Mark Mondello — Chief Executive Officer

Forbes Alexander — Chief Financial Officer

Adam Kindle — Raymond James — Analyst

Tejas Venkatesh — UBS — Analyst

Ruplu BhattacharyaBank of America/Merrill Lynch — Analyst

Steven Fox — Cross Research — Analyst

Matt Sheerin — Stifel Nicolaus — Analyst

Amit Daryanani — RBC Capital Markets — Analyst

Jim Suva — Citi — Analyst

Adrienne Colby — Deutsche Bank — Analyst

Sean Hannan — Needham & Company — Analyst

Mark Delaney –Goldman Sachs — Analyst

Paul Turner — JP Morgan — Analyst

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