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Jabil Inc. (NYSE:JBL)
Q4 2018 Earnings Conference Call
Sept. 25, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greeting, 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. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being is recorded. It is now my pleasure to introduce your host, Adam Berry, Vice President of Investor Relations for Jabil. Please go ahead, sir.

Adam Berry -- Vice President, Investor Relations

Good morning, and welcome to Jabil's fourth quarter of fiscal year 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 our a 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 questions.

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 into our webcast at jabil.com. At the conclusion of today's call, all of our investor briefing materials, including slides and videos, will be posted and available.

Before handing the call over to Mike, I now ask you 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 our business, such as our currently expected first quarter and fiscal year 2019 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 31st, 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.

Michael Dastoor -- Chief Financial Officer

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 $154 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 delivered 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. FY18 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 Cut 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 foreign tax impact of a change in the indefinite reinvestment assertion on certain earnings from foreign subsidiaries. The net effect of these two actions allow us to more effectively return cash to the United States. As we report in 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. 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 our fourth quarter and FY18 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. EMS represented 42% of total company revenue in the quarter. Core margins 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 billion, 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 leverage our end-to-end engineering solutions and deep domain knowledge to expand existing relationships, and win new 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 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 a $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 in 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've fully utilized the $450 million repurchase authorization with 4.7 million shares repurchased in the quarter. Since the inception of our capital return framework in 2016, we have repurchased 33.3 million shares at an average price of $25.51, bringing our total returns to shareholders, including repurchases and dividends to approximately $1 billion. In FY19, 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 ASC 606 on a modified, retrospective basis. Also, in September, we adopted the new accounting standard ASU 2016-15, which will impact the classification of certain cash receipts associated with beneficial interest on our asset-backed 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. DMS 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 by dividends and share repurchases in the fiscal year in excess of $500 million. Our strong fiscal 2018 performance is proof that our strategy is working and positions us extremely well to deliver on our commitments as we move into fiscal 2019.

I will 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.

Mark Mondello -- Chief Executive Officer

Thanks, Mike. 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. Our team makes Jabil Jabil. Along those lines, I'd like to begin today with a short video. Let's take a look.

You know, I'm smiling. I just love the spirit. I love the passion of our spirit. To me, our people make all the difference. They're a real differentiator for Jabil. As customary, I want to say thanks to all of them. Thanks for taking great care of our customers. Thanks for making safety your priority. And certainly thanks for your dedication and your commitment.

Back in December, during our 1Q earnings call of '18, I made mention of a quote from C.S. Lewis. To me, the quote is just so descript. It's so applicable of where the company's at today. When our team is executing, 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. Because it's working, there has been substantial change and it's change for the positive. Talking and briefing you on these positives today is what today is all about.

So, let's start with last year, fiscal '18. 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% core operating margin as well. Especially given that we printed these results while dealing with an extremely difficult supply chain, a components market full of constraints and uncertainties. Well done by all across our entire Jabil enterprise. Our teams are carrying positive momentum with them into fiscal '19. I like the decisions we're 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 $3.00 a share, while expanding free cash flow 40%, up $100 million year-on-year. One important and fundamental observation as we move into fiscal '19. The separation between our EMS segment and our DMS segment has now become opaque; it's become blurred. This in terms of our approach and our solutions offering in the marketplace. The historical bifurcation between the segments is gone, and that's intentional. I believe this is clearly reflected in our results and our outlook going forward.

With fiscal '19 being 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're driving the team and where we're driving the business.

If we continue to make sound decisions, if we continue to execute and we're 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, $4.00 a share in core earnings, while bumping up against 4% in core operating margin. We'll do so while preserving our core ROIC of 20% or greater.

That was a lot and it was at a high level. So, one of the things I'd like to do now is step back, bring it down, and walk through a few building blocks which back up our assumption set. So, if we start with fiscal '18, 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 '19, our guide for '19 has revenue at $24.5 billion, core operating income at $850 million, and core earnings per share in the neighborhood of $3.00. There's two really important components of fiscal '19. One is what I would characterize as our baseline business. If you simply take the results we posted in fiscal '18 and you grow that business by 2.5%, year-on-year, revenue goes from what we delivered in '18 ant $22 billion, to roughly $22.5 billion to be realized in fiscal '19.

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 the slide, we think core margin on the base business will expand from roughly 350 basis points to 370 basis points. Our core operating income on that base business will expand from about $770 million to about $830 million.

The second component, which is really important and it'll be a topic for much of today's discussion, is new business awards. In fiscal '19, with a lot of the effort we put in in fiscal years '17 and '18, 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 costs that run out in front of realized revenue.

From an assumption set, we believe that $2 billion in new business awards in '19 will only deliver about a point of margin. Again, 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 million for the year on the $24.5 billion.

I'll wrap up this slide by taking it a step further and giving you an idea of what might be as we move from fiscal '19 to '20 to '21. Again, similar to the logic I just laid out for '19, there's three components for what might be in fiscal '21. The first component is stepping back again and taking our fiscal '18 printed results, and growing those at a compounded rate from '18 to '19 to '20 to '21, at roughly 2.5%. That takes the realized revenue in '18 of $22 billion, and we believe we should see revenue in the neighborhood of $23.5 to $24 billion. For this example, we used $23.7 billion.

As part of our assumption set, we think it's realistic to maybe a little bit consecutive. Again, for the sake of illustration, on that base business, we assume that from FY19 to FY21, we'll get no expansion, no leverage of margin. So, again, for sake of illustration, which is the intent, the FY18 business, as we believe we'll see it in '21, will be $23.7 billion, making roughly $885 million of core operating income at a margin of 3.7%.

A second component in '21 is really an extrapolation of the new business awards I just talked about for '19. 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 '21. More importantly, the operating income that we think will be around $20 million off of that base new business award business will expand closer to $120 million. So, again, about $100 million expansion of operating income from fiscal '19 to fiscal '21.

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%. Then lastly, just to round out the assumption set in '21, and I don't think this is much of a stretch, today we have about $6.5 to $7 billion of new business opportunities in our pipeline.

I would acknowledge the fact that none of that business at the moment is close to being closed, but it will be as navigate through '19 and into '20. So, again, because of what might be in '21 is purely an illustration and illustrative of what we're thinking, and what we believe could very much be reality, we just assume that along with the FY18 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 comes from the reality that our current pipeline is sustainability higher than that. Much like '19, we assumed we'd make little to 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 a leadership team, we're intentionally not maximizing core operating margins today. We're doing so for two reasons. No. 1, we believe it best to prioritize our ability to capture this high-quality growth and capture it now. And 2, we believe this decision is best in terms of expanding Jabil's valuation over time.

So, in describing our so-called building blocks, an important assumption was the $2 billion in new business awards. I thought it might be wise to substantiate where the wins are coming from, and the wins themselves. As you see by the slide, we have about $1.7 billion of new business wins that cut across 4 distinct end markets, with another $300 million rounding out the balance 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 they're wins that I think will offer dependable cash flows down the road. Most importantly, I believe these are wins which we believe we can execute on and deliver. As I said prior, these particular wins will ramp through fiscal '19 and '20.

For the past few years, we've talked openly about the importance of investing. Strategic investments which enhance our solutions, investments which increase what we talk about as our domain expertise. Many of these investments also elevate the performance inside of our own factories. One such investment is our investment in additive manufacturing and 3D print. I'd like to share a short video, a video which I hope will give you a team sense of how we actually leverage our investments throughout the company. With that, let's take a look.

A quick shout-out to our additive team and our 3D print team. They're first-rate. One point to note is our 3D additive efforts cut across the entire Jabil ecosystem, thus 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 diversified we become, the more robust the company will be. So, to put this in context, our goal is for no single product or product set to be more than 5% of our annual cash flows or annual income. We're making tremendous progress in this area, and our financial results reflect it.

I'm going to wrap up my presentation by sharing details on a really exciting new business award. Jabil and Johnson & Johnson Medical Devices Companies have entered into a long-term strategic collaboration. This collaboration will significantly expand what's currently our 12-year relationship and partnership with JJMD. This collaboration expands our healthcare portfolio significantly. It certainly elevates our technical capabilities, and leverages our CNC experience.

Financially, this deal will be neutral to fiscal '19 core earnings. Integration costs and charges directly associated with the deal will be in the range of $80 million. The real interesting part about this deal is the cash outlay will largely be applied to working capital and inventory. We believe the annual revenue will grow to in excess of a billion dollars annually.

As part of the deal, and based on the strategic nature of the deal, we'll be acquiring 14 sites from Johnson & Johnson. We'll be supporting and protecting the J&J brand in areas of endo-surgical, spine, trauma, and instrumentation. I feel this collaboration has wonderful potential. We also think it'll be truly transformational. I want to say thanks to all involved.

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 our 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 '19. Thank you.

Michael Dastoor -- Chief Financial Officer

Thank you, Mark. I'd like to thank everyone again for your interest in Jabil. You just heard Mark describe incredible growth in several end markets in the last few minutes. This growth we're seeing, it's almost like an episodic growth. FY18 saw us adding $3 billion of revenues. We're projecting to add another $2.5 billion in FY19. That's $5.5 billion in two years. That is unprecedented growth in Jabil history. Considering this growth, I thought it would be useful to provide insight into the financial metrics that I, as CFO, as focusing on, to the rest of the organization, the way we're driving the rest of the time.

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, to $1.11, to $2.62, and now we're projecting $3.00. That's a 17% CAGR from '16 to '19. We will continue to focus on that EPS. Last but not least, free cash flows. Free cash flow from optimization of working capital, disciplined capex management approach, and cash allocation. I really feel we're on the right path, and I'm confident that we will deliver on our commitments for FY19.

Turning to revenue expectations for FY19. You heard Mark on why diversification was so important for the company. I'd like to provide you with a deeper look into this diversification. The diversification shows our balanced portfolio for FY19, 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 future confidence in future earnings and cash flows due to long lifecycle and 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 by investments in capabilities such as [inaudible] 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 well 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 FY19, with ramps across 4 main areas. Let me provide some color firstly on what we mean by ramp costs. Ramp costs are start-up 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 costs actually show up pre-revenues and I think Mark referred to that. Why are ramp costs so important suddenly? Two reasons. The sheer size of the new wins [inaudible] $3 billion in '18 and $2.5 billion in '19. $5.5 billion stands out. It's the complexity as well. We've gone from a build print model to an end-to-end solution model, where we provide a number of services. This complexity adds to our ramp costs in the early stages of production.

Let's look at the left side of the four boxes that Mark talked about. Healthcare is a good example. Our ramps in healthcare take much longer. New regulations and FDA qualifications. Once they're qualified, it's an annuity-like earnings. They go on for a number of years, much reduced volatility, and the customer relationships are relatively sticky.

Likewise, automotive, where similar ramp times due to safety and quality controls lead to longer ramp times. These ramps do not expect any contribution in FY19. I want to highlight that left side. We do not expect any contributions in FY19. 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 inter-quarter? We expect about $15 to $20 million of costs, pre-revenues in the first half. So, the costs will hit us before the revenues do and we expect that to be in the range of $15 to $20 million in the first half of FY19. That would be offset by contributions in Q3 and Q4, netting to a total $20 million contribution in FY19. I think that is important to shape first half, second half for the year.

Moving on to cash flows. As I highlighted in my prepared remarks, strong cash flows in Q4 of '18 through working capital optimization, discipline in capex management and cash allocation led back to $250 million of free cash flows. Mark talked about the supply chain constraints in certain components. We expect those constraints to go on through the second half of calendar year '19. We don't expect that situation to improve until then. We do believe the tightness in the supply chain is a temporary phenomenon though, and will alleviate over time. It is definitely not a structural change in our working capital demands.

For FY19, we expect free cash flow to be in the region of $350 million, with a capex of $800 million, which approximates to about 3% of revenues. For FY19, I would expect the free cash flow generation to follow a similar inter-quarter trend as FY18 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 off or you add a day or two on your working capital cycle.

Beyond FY19, we expect a solid income growth, and our disciplined 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 by in end markets with higher returns. Higher returns through operating margins or higher returns or higher returns on invested capital. In FY18, we launched about $3 billion of revenue. Quite a bit of that was in the DMS segment. We leveraged our existing infrastructure, which not only led to better margins, I think it was a 30 basis point improvement in FY18, but it also helped ROIC to grow by 380 basis points in FY18 to 19.3%. We expect our core ROIC to be around 20% in FY19, as we absorb new business and continue our focus on all aspects of this critical financial metric.

In closing, I'm confident that we will deliver our commitments in FY19. As highlighted, we're completely focused on diversification, on strong management of cash flows, and free cash flow conversion. I would now like to hand the call back to Adam.

Adam Berry -- Vice President, Investor Relations

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 product-specific questions. We appreciate your cooperation. Operator, we are now ready for Q&A.

Questions and Answers:

Operator

Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. Once again, if you'd like to ask a question today, please press *1 at this time. One moment, please, while we poll for questions.

Our first question today is coming from Adam Tindle from Raymond James Financial. Your line is now live.

Adam Tindle -- Raymond James -- Analyst

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

Mark Mondello -- Chief Executive Officer

We have certainly seen some customers moving to outsourcing, but I would think, as I mentioned in my prepared remarks and the presentation, I really like our approach. Our approach is divvied up into very intentional sectors where over the last 3-4 years with the investments we've made both in capabilities and this domain expertise with people, I think we were just taking better solutions to the marketplace. I also think that the macro in certain areas right now has given us some help. I would say it's those three areas, Adam.

Adam Tindle -- Raymond James -- Analyst

Okay. I know you mentioned that there's going to be some costs 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 times. Can you just maybe talk about the contract structures, and maybe any protections or guarantees on returns of the contracts?

Mark Mondello -- Chief Executive Officer

I can't. I wish I could; I can't. But we're well aware of that. 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've got a pretty good track record there.

Adam Tindle -- Raymond James -- Analyst

Okay, maybe I can get one in for Mike real quick then. Mike, you've been through multiple eras. We've seen eras in Jabil with high capex and little free cash flow, but setting up for strong growth. We've seen eras with 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.

Michael Dastoor -- Chief Financial Officer

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 the diversification side is to focus on end markets where we're targeting high returns. That's how we manage our capex flows as well. We do think working capital management is another area that we're focusing on. That obviously helps our cash flow from operations. Now, we feel really good about that.

Adam Tindle -- Raymond James -- Analyst

Thank you.

Operator

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

Amit Daryanani -- RBC Capital Markets -- Analyst

Thanks. First off, when I look at the November quarter guide, I think the implication is pretty much up about 20 basis points sequentially. Can you walk through, is that expectation that expansion is going to come from DMS or the EMS side and kind of what's driving that?

Michael Dastoor -- Chief Financial Officer

Amit, I'll take that. In 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, it's production, it's production facilities, it's pre-ramp costs, it's things that we're doing in our sites before we even start manufacturing. I indicated there's about $15 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.

Amit Daryanani -- RBC Capital Markets -- Analyst

On the Johnson & Johnson engagement you guys talked about, I think you mentioned 14 sites you're taking over. Geographically, where are these sites located? Once you get past the initial ramp with Johnson & Johnson, what's the margin profile of this business look like? Is it going to be a longtime DMS target or something different? Just the geographical breakdown of the site and what do you think the margin profile is once you get past the initial ramp? That would be helpful.

Mark Mondello -- Chief Executive Officer

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'd be familiar with, kind of applicable consultative processes. Once we get through all that, then we'll come out and provide a bit more detail and scope of the entire collaborative partnership. Again, it's in my mind a very transformational, strategic opportunity.

Amit Daryanani -- RBC Capital Markets -- Analyst

Perfect. That's it for me, thanks.

Mark Mondello -- Chief Executive Officer

Thank you.

Operator

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

Steven Fox -- Cross Research -- Analyst

Thanks, good morning. Thanks for all the great detail this morning. I had a couple questions based on the slides. First off, if I look at just the base business that you highlighted going into '19 and eventually '21. It looks like the incremental margins you're getting off of that is low double digits in '19 and more like 6% to 7% if we look over a 3-year period. I was just curious if you could sort of explain those incremental margins, how they change. And what normalized incremental margin you think is for the company going forward? And then I have a follow-up.

Mark Mondello -- Chief Executive Officer

Hey, Steve, it's Mark. Maybe you could help me a little bit with you requisition. I think when I was going through and indexing through the slides, it thought what I had communicated, and maybe I didn't do a very good job of it is that the base business from '18 that we just printed was right at 3.5% core op margins. As we stepped that base business from '18 to '19, we have fairly modest growth assumptions around that base business of about 2.5%. I think what the slide showed is margins would actually expand by about 20 basis points.

Steven Fox -- Cross Research -- Analyst

Right. What I was wondering Mark, is that the incremental change in dollars is about $500 million, roughly. And you get $60 million of profits off of that next $500 million. But then if I looked at the 3-year slide, you get $1.7 billion of incremental sales and you generate more like $115 million in incremental profit. So, I'm trying to figure out how that leverage is coming out.

Mark Mondello -- Chief Executive Officer

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

Steven Fox -- Cross Research -- Analyst

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

Mark Mondello -- Chief Executive Officer

Yes.

Steven Fox -- Cross Research -- Analyst

Okay.

Mark Mondello -- Chief Executive Officer

By the way, I think that's a consideration when we were talking about what could be in fiscal '21 with us driving to $4.00 a share and 4 points of operating margin.

Steven Fox -- Cross Research -- Analyst

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

Mark Mondello -- Chief Executive Officer

Yeah, I think you're pushing your luck a little bit. I think if you just refer 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 highlighted the four areas in terms of new wins. I would add to that if I go back maybe 12-18 months, we've also had some nice wins in the area of energy. I'd say there's 5-6 end markets that are driving that.

Steven Fox -- Cross Research -- Analyst

Okay. Thank you so much.

Mark Mondello -- Chief Executive Officer

You're welcome.

Operator

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

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my questions and thanks for all the nice details. Mike, you mentioned about component costs. I was wondering, you're guiding fiscal '19 revenue to $24.5 billion. How much of that is impacted by component costs? How much would you say component costs are harming or reducing revenue in the next two years?

Mark Mondello -- Chief Executive Officer

Ruplu, this is Mark. This is a topic that we've been queried on quite a bit. I'll start fundamentally. Late calendar '17, and certainly all of calendar '18, and we think probably the first 3-6 months of calendar '19. 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. When we go through that, it's hard to plan production. It's hard to run your factories optimally. It does shake up 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 recover 100%. Some customers, we split 50/50. For me, the constriction of material, the difficulty in the supply chain, the difficulty that does in terms of I don't know what we're shipping today, Ruplu, but we probably shipping $80 to $100 million of hardware out of the company every day. It just makes running the network of factories more complicated. I think that's where some of the additional costs come from, not so much for the escalating components.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful. My next question, I just wanted to ask you about the slide that has fiscal '18, '19, and '21. When I look at the section for fiscal '21, you've got fiscal '18 baseline growing 2.5%. You also have the new wins from fiscal '19 growing to $3 billion. Then I see the other line of a billion dollars. Does that include both the new win from fiscal '20 and fiscal '21? I guess my question would be, do you think the win rate slows down after fiscal '18/'19? Because I see you've got fiscal '18, fiscal '19 wins, and then you've grouped them in other category. So, does that include both fiscal '20 wins and '21 wins?

Mark Mondello -- Chief Executive Officer

That's more just an illustrative plug. All I'm trying to show there is as we index toward fiscal '21, as the new wins from '19 get to maturity, if you will, we're not going to be standing still. We are going to book new wins. 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 '21 turn out. That's all.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks for clarifying that. The last question is, Mike, you're guiding $800 million for capex for next year. You've invested significantly, like two or three years ago, in Green Point. Where do you think, can you give us where that capex spend will be in mid-segment or return markets or which geographic regions?

Michael Dastoor -- Chief Financial Officer

We haven't broken that out, Ruplu. But I think it's all across. It's not in any specific segment. Obviously, the growth areas will be ones that we focus on. Like I mentioned, the diversification in the end markets, we're trying to deliberately take action in certain end markets. Capex is more targeted toward that.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Thank you. Thanks for taking my questions.

Operator

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

Alvin Park -- Stifel, Nicolaus & Company -- Analyst

Hi, this is Alvin speaking on behalf of Matt Sheerin. I think on the call you mentioned that the supply constraints should extend to the second half of calendar year '19. If you could give more details on if it's a widespread famine or if it's still concentrated on certain past components? Secondly, for fiscal year '19, fiscal year '20 or beyond, do you expect potential cash flow increases, assuming that inventory would wind down, since you don't have to stock up much backup supply?

Mark Mondello -- Chief Executive Officer

I think what I said is or 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 3-4 months, if you will, call it first half of calendar '19. I don't think the market will settle or abate completely as we get to the back half of '19, but we'll start seeing some relief, we believe, as we start moving through the spring and summertime of '19. We think the market will get better. In terms of -- what was your second question?

Alvin Park -- Stifel, Nicolaus & Company -- Analyst

In terms of cash flow.

Mark Mondello -- Chief Executive Officer

Cash flows, right? Yeah, could you ask that again? Because I'm not sure I understood you correctly.

Alvin Park -- Stifel, Nicolaus & Company -- Analyst

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

Mark Mondello -- Chief Executive Officer

I think what's going to happen is I actually thin the working capital is going to continue to expand on an absolute basis based on the $5 to 6 billion of growth that we're seeing. But in terms of days in inventory and whatnot, as the supply chain rationalizes, as we can run our factories on a more normalized basis, as we can serve our customers with our planning tools on a more normalized basis, that'll 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 '19 and then the model or the illustration we showed for '21 does anticipate that.

Alvin Park -- Stifel, Nicolaus & Company -- Analyst

I see, OK. Then in terms of the core EPS guide of roughly $3.00 for fiscal '19 and the 50% year-over-year growth. How heavily will that be concentrated overall sales and margin improvement versus share buyback programs that you have in place?

Mark Mondello -- Chief Executive Officer

I'd say the $3.00 a share, again it's a combination of both growth of the business, financial returns, or op income tied to that business, plus the share buyback, and then, of course, tax and interest expense.

Alvin Park -- Stifel, Nicolaus & Company -- Analyst

Thank you very much.

Operator

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

James Suva -- Citigroup Global Markets -- Analyst

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

Mark Mondello -- Chief Executive Officer

Yeah, Jim. I said we anticipate the deal to be neutral to core EPS for fiscal '19. Then in terms of the $800 million that Mike talked about in capex for '19, the J&J deal is included in that number.

James Suva -- Citigroup Global Markets -- Analyst

Gotcha. Okay, then near-term this quarter, your revenues materially beat your guidance expectations, but earnings really did not. Is that due to a pole-end of these investments you're doing in the future that near-term pressure things? Or was it something like mix-related or inefficiencies due to the complexity of the supply chain? Because it seems like you're talking about longer-term pressures on margins 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.

Mark Mondello -- Chief Executive Officer

Yeah, if you're talking about 4Q of '18, 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 million. So, we got about $12 million of op income leverage on the $350 million. I don't know what the math is. That feels to me like that's 3% to 3.5%. Then the only reason we didn't get more leverage is, again, because of some of the early expense that Mike talked about on some of these ramps. But all in all, when I look at the additional revenue and the upside to the midpoint of our operating income, the leverage wasn't bad.

James Suva -- Citigroup Global Markets -- Analyst

That makes sense. Thank you so much for the details and clarifications. It's greatly appreciated.

Mark Mondello -- Chief Executive Officer

Thanks, Jim.

Operator

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

Paul Chung -- J.P. Morgan Securities -- Analyst

Hi, thanks. This is Paul Chung on for Coster. Thanks for taking my question. Thanks for the end-market diversification side. That was very helpful. I 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. It doesn't really make sense anymore. Also, will you provide some margin profiles for each respective end market? Then which markets in your view are driving the most margin upside relative to your corporate average?

Mark Mondello -- Chief Executive Officer

Okay. That was like four questions in one, I think. In terms of are we going to provide this going forward? I think what we'll probably talk about, Mike and I will talk about going forward, is on an exception basis. We'll use the deck that we shared today as foundational for '19. Then on an exception basis, if 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. We're still going to report our business in an DMS/EMS segment. I think if you look at what the teams have done in terms of taking our EMS margins from roughly 2.2%, bumping into the high 3s and toward 4, 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 built to print, no longer EMS-like. That was whatever it was, 6-7 years ago.

Today, when I think about the nature of and the intent of diversified manufacturing, meaning new solutions to the marketplace, mechanics, full product design, really us having product expertise, us taking a functional spec or conceptual ideas, and being able to take that all the way through to design, product, 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, etc. 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. There's not a big differentiation between our DMS and our EMS segments. What was the third question?

Paul Chung -- J.P. Morgan Securities -- Analyst

Just the margin profile and end markets.

Mark Mondello -- Chief Executive Officer

Yeah, at this point we don't intend to break out the margins be sector. We'll continue to break out the margins by DMS/EMS segment through fiscal '19 and then we'll see what we decide to do as we move into fiscal year '20.

Paul Chung -- J.P. Morgan Securities -- Analyst

Okay. Then if we take a step back at looking at fiscal year '18, very strong revenues. How has the pricing environment been with competition? Then moving in '19, are you seeing some of those competitive pressures at all? Then anything you can mention on the tariff noise as well. Are you gaining share from some of those partners that are more affected by that?

Mark Mondello -- Chief Executive Officer

On the pricing side, I wouldn't say -- there's no relief in pricing. I would say the pricing environment we live in today, is -- and this will sound like an interesting word -- it's as normal as it's ever been. Normal for us is we've got to be creative, we've 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 anywhere in our business. 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 to 14 months, I've not sat in one meeting and asked people to drive top line growth. Not a single meeting. 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.

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 with sales people trying to grab top line growth. 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. It's a very complicated issue in terms of what's going to be. How bad will it get. There's conversation that it's just going to be a little bit of a tit-for-tat, and then there's people who 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 well positioned. We have a wonderful global footprint. We've got great capabilities. We're the largest pure manufacturing company that's U.S. domiciled, I think, in the world. All of our factories are connected with a single incident around our IT solution.

So, we move product and inventory around seamlessly every day. 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. They're very appreciative of that. Some have acted on it; some have not. But I try not to get too obsessive about how bad things can get. With that said, we do planning scenarios internally on what we would do. 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.

Paul Chung -- J.P. Morgan Securities -- Analyst

Okay, great. Then my last question is on free cash flow. It looks like ramp-up cost, working cap investments should probably weigh on '19 as well. When should we expect free cash flow to normalize and what are those normalized levels in your view? Thank you.

Mark Mondello -- Chief Executive Officer

You're welcome. I actually like our free cash flow for '19. I think in '18 it was $250 million. It would've been greater than that if we weren't dealing with the growth and weren't dealing with the supply chain constraints. In '19, I think what the slides suggested is we were going to expand free cash flow by about $100 million or 40% year-on-year from '18 to '19. Then the "how it could be" slide suggested free cash flow could be something much greater than that, in the $600 million range.

So with all said and how we're running the business, all the different moving parts, in terms of what future cash flows could look like, I'm quite pleased.

Paul Chung -- J.P. Morgan Securities -- Analyst

Great. Great job, guys.

Mark Mondello -- Chief Executive Officer

Thank you.

Operator

Thank you. As a reminder, ladies and gentlemen, if you'd like to be placed in the question queue, please press *1 at this time. Once again, that is *1 to be placed in the question queue. One moment, please, while we poll for further questions. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Adam for any further closing comments.

Adam Berry -- Vice President, Investor Relations

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

Duration: 76 minutes

Call participants:

Mark Mondello -- Chief Executive Officer

Michael Dastoor -- Chief Financial Officer

Adam Berry -- Vice President, Investor Relations

Adam Tindle -- Raymond James -- Analyst

Amit Daryanani -- RBC Capital Markets -- Analyst

Steven Fox -- Cross Research -- Analyst

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Alvin Park -- Stifel, Nicolaus & Company -- Analyst

James Suva -- Citigroup Global Markets -- Analyst

Paul Chung -- J.P. Morgan Securities -- Analyst

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