Jabil Inc. (JBL) Q2 2022 Earnings Call Transcript

Jabil Inc.  (NYSE: JBL) Q2 2022 earnings call dated Mar. 16, 2022

Corporate Participants:

Adam Berry — Vice President, Investor Relations

Mark Mondello — Chairman & Chief Executive Officer

Mike Dastoor — Chief Financial Officer

Analysts:

James Dickey Suva — Citigroup Inc. — Analyst

Steven Bryant Fox — Fox Advisors LLC — Analyst

Ruplu Bhattacharya — Bank of America — Analyst

Matthew John Sheerin — Stifel, Nicolaus — Analyst

Mark Trevor Delaney — Goldman Sachs — Analyst

Melissa Dailey Fairbanks — Raymond James — Analyst

Paul Chung — JPMorgan — Analyst

Presentation:

Operator

Hello and welcome to the Jabil Second Quarter Fiscal 2022 Earnings Call and Webcast. [Operator Instructions]

It’s now my pleasure to turn the call over to Adam Berry, Investor Relations. Please go ahead.

Adam Berry — Vice President, Investor Relations

Good morning and welcome to Jabil’s second quarter of fiscal 2022 earnings call. Joining me on today’s call are Chief Executive Officer, Mark Mondello and Chief Financial Officer Mike Dastoor. Please note that today’s call is being webcast live and during our prepared remarks we will be referencing slides. To follow along with the slides, please visit jabil.com within our Investor Relations section. At the conclusion of today’s call, the entirety of today’s session will be posted for audio playback on our website.

I’d like to now ask that you follow our earnings presentation with the slides on the website, beginning with the 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 third quarter and fiscal year net revenue and earnings. 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, 2021 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, I’ll now turn the call over to Mark.

Mark Mondello — Chairman & Chief Executive Officer

Thanks, Adam. Good morning. I appreciate everyone taking time to join our call today. To begin with, our hearts go out to everyone impacted by the war in Ukraine. When I think about our team along with their families, what comes to mind our words like admiration, courage and heart. Please note, we’re in constant communication with those on the ground and we continue to provide resources and financial assistance as the safety and security of those in Ukraine is our top priority. At Jabil, we’re one corporate family with people located all over the world and despite the physical distance between us, we’ll always face difficult situations together. To all of our employees, thank you for being servant leaders, thank you for your spirit and thank you for looking after one another.

Let’s now turn to Slide 6, where we’ll take a look at our second quarter results. Q2 was another strong quarter both top line and bottom line, driven by double-digit revenue growth year-on-year and exceptional execution respectively. Altogether, the team delivered core earnings per share of $1.68 and revenue of $7.6 billion, resulting in a core operating margin of 4.6%, a 40 basis point increase year-on-year. All in all, I’m pleased with the quarter, as our performance during the first half of the year gives us positive momentum, as we push towards the back half of fiscal ’22 and into fiscal ’23. And I think about a key catalyst driving our momentum what comes to mind is the makeup of our commercial portfolio, which I’ll now address on the next slide.

Slide 7 is a wonderful picture, which shows the construct of our portfolio today. Jabil’s large scale diversification serves as a solid foundation from which we run our business. The team has built this foundation over the past five to six years, as we target new end markets and optimize our legacy business. The output of this effort is twofold. One, a higher level of resiliency across the company. And two, a substantial presence in secular end markets. Markets that include 5G, electric vehicles, personalized health care, cloud computing and clean energy.

If we dissect the pie chart a bit differently, with an emphasis on financial contribution and economic relevance. We see a terrific blend, a reliable margins and sustainable cash flows. Again, a real tribute to the diversified nature of our business today. Lastly, if we look at a third dimension of our portfolio, we find a library of essential capabilities, capabilities that allow us to simplify the complex for many of the world’s most notable brands and when done correctly, our unique set of capabilities offer Jabil a real competitive advantage, as we lean into a massive market where things need to be built and supply chains need to be developed or modified.

Moving on to Slide 8, you’ll see management’s outlook for the year. We’ve increased core earnings per share to $7.25, an increase of nearly 30% year-on-year. As for revenue, FY ’22 now looks to be in the range of $32.6 billion, up more than 10% year-on-year. In addition, we remain committed to delivering a minimum of $700 million in free cash flow for the year, while increasing core operating margin to 4.6%, a 40 basis point improvement year-on-year. For me, this is a positive testament on how the team is managing the business, as our strategy has been consistent and what needs to be done is well understood throughout our company.

With that let’s move to my final slide, where I’d like to start with the importance of our purpose. At Jabil, with purpose comes expectations, expectations around certain behaviors. Behavior such as keeping our people safe, servant leadership, protecting the environment, giving back to our communities and offering a workplace which encompasses tolerance, respect and acceptance.

Within Jabil, these behaviors have never been more important than they are today. I’m proud of our team as they fully grasp our purpose and in doing so, their conduct is exceptional. In closing, our improvement is steady, commercially, financially and operationally. Quite simply here at Jabil we build stuff and we do it really well. One factor that makes good companies great is having a value set, a culture if you will, that enhances the way in which they solve problems. As a team, we embrace this as we take on the challenges put forth by our customers each and every day. To our entire Jabil team, thank you for making Jabil Jabil.

I’ll now turn the call over to Mike.

Mike Dastoor — Chief Financial Officer

Thanks, Mark and thank you for joining us today. I’m really pleased with the resiliency of our diversified portfolio and the sustainable broad based momentum underway across the business, as several of our end markets continue to benefit from long-term secular trends. As Mark just summarized, our Q2 results were very strong. During the quarter, revenue, core operating income, core EPS and free cash flow all exceeded our December expectations. Given the higher revenue, I’m particularly pleased with our ability to drive an extra 30 basis points of margin improvement compared to our expectations in December, mainly through broad based strength in several key end markets benefiting from long-term secular trends, as well as outstanding execution by our business operations and supply chain teams.

For the quarter, revenue was approximately $7.6 billion, up 10.6% over the prior year quarter and ahead of the midpoint of our guidance from December. The additional upside was mainly driven by our 5G and cloud businesses, while our automotive, health care and retail end markets remained very strong. Our GAAP operating income during the quarter was $313 million and our GAAP diluted earnings per share was $1.51. Core operating income during the quarter was $344 million, an increase of 21% year-over-year, representing a core operating margin of 4.6%, up 40 basis points over the prior year.

Core diluted earnings per share was $1.68, a 32% improvement over the prior year quarter. Now turning to our second quarter segment results on the next slide. Revenue for our DMS segment was $3.8 billion, an increase of 4% on a year-over-year basis. The solid year-over-year performance in our DMS segment was broad based, with strength across our health care, automotive and connected devices businesses. Core margin for the segment came in at 5.1%. Revenue for our EMS segment came in at $3.8 billion, an increase of 19% on a year-over-year basis. The stronger year-over-year performance in our EMS segment was also broad based with strength across our digital print and retail, industrial and semi-cap and 5G wireless and cloud businesses.

Core margin for the segment was 4%, up 90 basis points over the prior year, reflecting improved mix and solid execution by the team. Turning now to our cash flows and balance sheet. In Q2, inventory days came in at 86 days. The sequential increase in days was driven largely by two factors. Firstly, the ongoing tightness in the supply chain continues to weigh on our inventory balances. It’s worth noting that we’ve offset a portion of these increases with inventory deposits from our customers and these deposits reside within these accrued expenses line item on the balance sheet.

Net of these inventory deposits, inventory days was 71 days in Q2. And second, at the end of the quarter, we experienced a timing difference on the sell-through of finished goods within our DMS segment. I anticipate this timing difference to reverse in Q3. In spite of these two factors impacting inventory, our second quarter cash flows from operations were very robust coming in at $246 million and net capital expenditures totaled $201 million.

From total debt to core EBITDA level, we exited the quarter at approximately 1.3 times and with cash balances of $1.1 billion. During Q2, we repurchased approximately 2.3 million shares for $145 million and for the year, we repurchased 4.4 million shares for $272 million, as we remain committed to returning capital to shareholders.

Turning now to our third quarter guidance on the next slide. EMS segment revenue is expected to increase 17% on a year-over-year basis to approximately $4.2 billion, while the EMS segment revenue is expected to increase 11% on a year-over-year basis to approximately $4 billion. We expect total company revenue in the third quarter of fiscal ’22 to be in the range of $7.9 billion to $8.5 billion. Core operating income is estimated to be in the range of $300 million to $360 million, representing a core margin range of 3.8% to 4.2%. At the midpoint, this is an improvement of 20 basis points over the prior year and down sequentially reflecting planned investments in our Q3 quarter.

It’s also worth noting, sequentially in Q4 we expect robust core margins driven by our scaling automotive business along with typical seasonality in our mobility and EMS businesses. In Q3, GAAP operating income is expected to be in the range of $276 million to $336 million. Core delivered earnings per share is estimated to be in the range of $1.40 to $1.80. GAAP diluted earnings per share is expected to be in the range of $1.24 to $1.64. The core tax rate in the third quarter is estimated to be approximately 21%.

Next I’d like to take a few moments to highlight our balanced portfolio of businesses by end market. Today, the outlook for our business is strong with end markets across both segments continuing to benefit from multi-year secular trends. We believe these markets will continue to drive our growth as we concentrate our efforts on long-term secular growth markets with strong margin and cash flow dynamics.

Markets such as electric vehicles, personalized medicine and healthcare, semi-cap clean and smart energy infrastructure, cloud, 5G infrastructure and the associated connected devices. Our electric vehicle business in particular continues to outperform in spite of global supply chain issues as the transition to EV accelerates. We’ve seen this rapid acceleration manifest in top line revenue growth in excess of 50% this year alone in our automotive end market.

We’re also expecting double-digit growth from the health care, automotive, retail, industrial and semi-cap and 5G wireless and cloud end markets. And importantly the broad-based growth associated with these secular trends is expected to drive solid year-over-year core operating margin and free cash flow expansion. All in all, our performance during the first half of the year gives us excellent momentum as we look to close out another strong year.

We’re now anticipating core EPS will be in the neighborhood of $7.25 per share on revenue of approximately $32.6 billion. Notably, this incremental revenue will improve mix and drive operating leverage, thereby giving us the confidence to raise our core margin by 10 basis points to 4.6% for FY ’22, as we continue to drive the organization to 5% and beyond.

Importantly for the year, we also remain committed to generating in excess of $700 million in free cash flow in spite of the higher revenue and associated working capital. We’ve been working extremely hard as a team to expand margins and drive strong cash flows. I’m very pleased with our team’s exceptional execution of our strategy on all fronts.

With that, I’ll now turn the call over to Adam.

Adam Berry — Vice President, Investor Relations

Thanks, Mike. Before we move into the Q&A portion of the call, I’d like to remind our participants that we cannot address customer specific or product-specific questions. Thanks. Operator, we’re now ready for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today is coming from Jim Suva from Citigroup. Your line is now live.

James Dickey Suva — Citigroup Inc. — Analyst

Thank you. Congratulations on the results and extremely strong outlook, despite all the uncertainty in the world. I was wondering if you could give us a little bit of confidence or conviction about the operating margins and sustainability, of course, your full-year guidance increase is so big, you have to assume the operating margins continue to see the strength. But I’m just curious, is that due to mix or the location and visibility from customer contracts that you’re getting or the value-added or maybe a combination of all. But if you could just pontificate a little bit on operating margins and your confidence in the sustainability of them? Thank you so much.

Mark Mondello — Chairman & Chief Executive Officer

Hey, Jim. I think the overall margin profile, if you just go back to let’s say pre-COVID to fiscal ’19, we were running the business at around 3.5% margins and our focus at that point in time was really about reshaping the overall portfolio and a big focus on diversification both top line, bottom line. I think the team did a really nice job of that over over a four, five year period.

And then starting in fiscal ’21, so last year we really started taking that portfolio at scale and focused in hard on the margin side of the business largely around cost and optimization, while still being what I think is very competitive in the marketplace in terms of our pricing. This year we’ve taken margins up, I think September we said margins would go up to 4.5% from the 4.2 last year. And then this morning, we’re taking it up another 10 basis points to 4.6 basis points for the year. I think the main catalyst driving it is our execution has been outstanding and I think sustainable. I think the overall platform around the operational network the tools, our IT systems also sustainable and the advances we made there are terrific.

And then lastly and maybe most importantly is, is just the overall portfolio that we have, Jim. When we think about our diverse, we are — when we think about the contributions of the business, we look at the blend between automotive and transportation, health care, connected device, mobility, digital print, retail, industrial, cloud, 5G networking, semi-cap etc. It’s just a — it’s just a wonderful wonderful book of business today. We think that will continue to scale and as I said at some point in the last 18 months or so, I really believe as this business continues to get beyond $35 billion, $37 billion, $40 billion. We’re going to effort internally to run the business at 5 points of margin on the operating line.

James Dickey Suva — Citigroup Inc. — Analyst

Thank you and congratulations to you and your team.

Mark Mondello — Chairman & Chief Executive Officer

Thanks, Jim.

Operator

Thank you. Your next question today is coming from Steven Fox from Fox Advisors, your line is now live.

Steven Bryant Fox — Fox Advisors LLC — Analyst

Thanks, good morning everyone. Two questions if I could. First of all just building off of that last answer, Mark. Can you help us conceptualize a little bit how you’re growing at scales so quickly, the challenges there given the global footprint that you have and managing your programs into like we’re talking about a 10% growth of $35 billion type of sales base. And then secondly, how is your global footprint, just maybe a better way to ask this. How is your — can you give us an update on your global footprint and how maybe it’s changing versus what you would have thought six or nine months ago. Thanks.

Mark Mondello — Chairman & Chief Executive Officer

Okay. It was a lot, let me try to break that out. So if I think about the growth at scale which I think was the first part of your question, I think I break that up to say one, the team, the team as we went through, diversified the company and really we’re able to step back once we got to what I maybe call significant scale.The team call it a little bit of luck, call it some good planning, call it a lot of thoughtfulness, we have really, really been fortunate to get into some like really substantial, very real secular markets. And I think in my prepared remarks I talked about things like electric vehicles, personalized health, cloud computing, clean energy etc. So, strategically, the way we run strategy in the company is not so much top down, but through each of our sectors and that’s where our experts are. So the last two, three, four years, we’ve done a really nice job of placing our bets from a revenue perspective into some pretty powerful secular trends, that’s number one.Number two is, we continue to pick up market share. So, sometimes it’s always difficult when people are trying to triangulate our numbers to current macro situation is because what ends up getting left behind is the market share gains. And I think in my prepared remarks today, I used I think I used a term like massive, there’s — the market is massive and there is always going to be a need for things to be built and supply chains to be reconstructed and we’re pretty good at both of those things.

And then lastly is just the continued growth that we’ve seen, what I’d say more of our core legacy business has been strong over the last 18 – 24 months. So I would say those are the catalyst. I don’t foresee the company as we get to $35 billion, $37 billion, $40 billion. I wouldn’t imagine the company is going to continue to grow strong double digits, but at least as we look at the horizon, I think the company is going to grow nonetheless over the next three to five years for sure.

In terms of footprint, our footprint is exceptional and whether we look at cutting Asia, Southeast Asia, China, Europe, Brazil, Mexico, US again when I — this common theme I know it sounds redundant, but this common theme around diversification, we just, we think about diversification in so many different ways in a subset of that, certainly our overall global footprint.

Today our big focus economics aside of course is our footprint in Eastern Europe and as I said in my prepared remarks, our hearts go out to everyone there at the moment on the ground, because what they’re going through is horrific and that’s where, that’s where a lot of our thoughts and time are spent over the last couple of weeks.

But I — of all the things I worry about or said differently, the things I feel good about our footprint, I feel very, very good about where a footprint is today, Steve.

Steven Bryant Fox — Fox Advisors LLC — Analyst

Great, that’s really helpful. Thank you.

Mark Mondello — Chairman & Chief Executive Officer

Yeah. Have a good day.

Operator

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

Ruplu Bhattacharya — Bank of America — Analyst

Thanks for taking my questions. Maybe I’ll build on some of the prior questions and say that Jabil’s performance this quarter is impressive and you’re raising the guide annual by $800 million, $0.70, is the impressive given what’s happening with the supply chain and logistics costs and oil prices and your political stuff. So, can I ask you maybe what gives you the most concern when you look into the second half of this year, fiscal ’22? And what happened in the past 90 days that is giving you confidence to raise the annual guide or was your prior guidance just too conservative?

Mark Mondello — Chairman & Chief Executive Officer

Yeah, I’m hesitating because I’m thinking. I’m always concerned about a lot of things all the time. There is a war going on. And obviously that’s a concern. And for me that concern is this would be the third time I’ll say it right is really about the well-being and the safety and security of our people. And I don’t know how to say this, but in terms of a pure financial economic perspective that doesn’t give me a lot of concern. Saying that though, I do want to emphasize, it’s a bit heartbreaking to me and very emotional with that situation over there and it has our full attention.

So I would say, supply chains we tend to navigate that as good as anybody at the moment, does that give me concern through the rest of the fiscal year, maybe a collapse in the macro in the very near-term, not so much inflation, I think we’re managing that quite well. And I would say, I don’t know, there has been a dust up here recently with some more COVID issues in Mainland China.

And Ruplu, I would say we’ve been dealing with that literally like first hand since the issues in Wuhan in January of 2020 and when I think about our campuses in places like Wuxi, in Weihai, in Yangpu, in Shenzhen and Shanghai, in Tianjin and Chengdu, we got a great team over there. We’ve been — we’ve been navigating that quite well. So as we, as we think about the balance of the year and may be first part of ’23, as I sit today, as we sit today as a management team, we got pretty good confidence in the guide for the balance of the year and the beginning outlook for ’23.

Ruplu Bhattacharya — Bank of America — Analyst

Okay, thanks for that, Mark. Can I ask about maybe if you can give us an update on your capital allocation priorities, specifically when I look in the past you’ve focused on small tuck-in M&A, but given valuations have pulled back, do you see the possibility of any larger M&A and how would you contrast that to the possibility of a dividend increase or are focused on buybacks?

Mark Mondello — Chairman & Chief Executive Officer

Okay. I’ll suspect that into two, we’re always out in the market shopping. We do a very nice job I think in terms of small M&A. I would say our focus is going to be on maybe further transactions that look like a little bit like the JMD transaction in terms of big brands, getting out of manufacturing that would be one area, we continue to spend quite a bit of time on small M&A around capabilities.

I wouldn’t imagine anything too sizable in terms of direct M&A just because even with the recent correction in the US equity markets, the prices are still quite high. And then if I think of the other derivative of capital allocation in terms of buyback and dividend, we’re still — we’ve got authorization out to complete our billion dollar buyback. And if there’s any — if there is any benefit whatsoever in the recent equity market corrections is factor out in the market buying back our stock.

So I think today with the outlook for the business over the next couple of years, where I think we’re headed, what we could do in terms of margin, what we could do in terms of some continued growth, I think buybacks make a lot more sense than any type of change to our dividend. I do believe at some point in time that a well thought multi-year dividend plan will make sense just not now.

Ruplu Bhattacharya — Bank of America — Analyst

Okay, thanks for that. And if I can just squeeze one more a quick one in for Mike, looks like inventory was up 15% sequentially, but you are maintaining your free cash flow guide of $700 million plus on higher revenues and earnings. So can you just talk about your CapEx requirements for this year. I don’t know if you mentioned that on the call yet. And how should we — thinking about the cash conversion cycle and the cadence of free cash flow and thanks for all the details. Thank you.

Mike Dastoor — Chief Financial Officer

Thanks, Ruplu. So if you go back couple of years, we were in the 3% plus range for capex over time. We brought it down to about 2.6%. I feel pretty comfortable with that level. Obviously, revenues have gone up flow that at the start of the year, we said about $825 million, maybe that’s now 850-ish. So we’re still maintaining that 2.6% capex level. And our free cash flow yields is something we focus on quite a bit. We’re not where we want it to be and we’ll be taking it up slowly through the next few quarters and get in the 50% range at some point in time and that’s what the management team is focused on.

Ruplu Bhattacharya — Bank of America — Analyst

Thank you.

Operator

Thank you. Your next question is coming from Matt Sheerin from Stifel. Your line is now live.

Matthew John Sheerin — Stifel, Nicolaus — Analyst

Yes, thanks and good morning everyone. Mark, I had a couple of questions regarding your segments. If you look at your forward guide for FY ’22, it looks like you’re taking up the 5G wireless and cloud segment and industrial and semi-cap segment fairly significantly. Could you give us color there specifically on the 5G and cloud, is that from both segments? Are you still seeing a more strength on the cloud side versus versus 5G?

Mark Mondello — Chairman & Chief Executive Officer

It’s both. We are — I mentioned earlier in the last response about the good fortunate we’ve had with really, really smart people in our company at a sector level that really, really understand the end markets. And much like we did with personalized healthcare per se, much like we did with electric vehicles, our focus on the kind of the networking cloud, 5G wireless part of our business, got us integrated heavily into the 5G rollout. So that’s starting to pay good dividends in terms of growth.

And then I don’t remember the timeframe, but it was around the same timeframe when we did the JJMD deal because I remember talking about both of them together. Our team has come up or did come up and is executing to an asset light, cloud configuration type of service in region that is just been adopted and performing quite well. So I would say when you see, I don’t remember the exact numbers, but I think what we said at the beginning of the year was the 5G wireless business would be around $5.5 billion something like that last year, it was just over $5 billion and I think we’re now seeing, it will be bumping up against $6 billion.

It’s equally split and then I think your other comment was around industrial and our semi-cap business and again that’s just that’s very broad base. So again if I look at our industrial, semi-cap business, a couple of years ago was sub $3 billion and now that business to be bumping up against $4 billion. But I wouldn’t want to — I wouldn’t want to break that out just because the contributions are everything from semi-cap to solar to light industrial, heavy industrials sprinkled across that whole sector.

Matthew John Sheerin — Stifel, Nicolaus — Analyst

Okay, great, thanks for that color. And just as a follow-up, just regarding the supply constraints that everyone is seeing, Jabil seems to be managing it as well if not better than any of your peers. Are you seeing any signs of ease in terms of supply opening up particularly the legacy semi-conductor part that seem to be hard to get any signs of relief there?

Mark Mondello — Chairman & Chief Executive Officer

Let me start with your last part first. I think when it comes to what you would characterize or think about as legacy semiconductors, it’s still challenging. When I step back though and I look at the whole business in terms of Jabil. So this is in a proxy for the maybe the market per se, I’m talking about strictly what we use what we consume, our supply chain across mobility connected devices, EVs, healthcare packaging, digital print, retail the whole deal.

I believe that we started talking last fall that we thought with our team the supply chain issues might start showing some improvement in the spring time of 2022. So that’s kind of where we sit today. And I think — I think we’re starting to see some relief. I would say that overall supply chain challenges again whether it’s raw metals availability and I’m strictly talking about continuity supply have gotten moderately better.

I would probably take legacy semiconductors and still put that in a bucket of constraint, although with our relationships we tend to be managing that quite well as well. I would also maybe from a relativity standpoint or a contextual standpoint suggest that the current guide that Mike gave and the $7.25, I think we’ve done a pretty good job of contemplating all the supply chain issues and events in terms of weaving that into our guide for the balance of the year.

Matthew John Sheerin — Stifel, Nicolaus — Analyst

Okay, great. Thanks very much.

Mark Mondello — Chairman & Chief Executive Officer

Yeah, thanks.

Operator

Thank you. Your next question today is coming from Mark Delaney from Goldman Sachs. Your line is now live.

Mark Trevor Delaney — Goldman Sachs — Analyst

Yes, good morning. Congratulations on the good results and thanks for taking my questions. I was first hoping to talk about the inventory, can we talk about carrying some additional inventory and also taking some deposits from customers to help manage that, would you say that the extra inventory you’re holding, is some of that strategic buffer inventory that the customers are compensating Jabil forward to hold some extra stock or is this also partly an incomplete kind of issue?

Mike Dastoor — Chief Financial Officer

I think it’s all about the — all of the above, Mark. It’s obviously we have some gating issues that drives the inventory out, there is a little bit of buffering, there is a little bit of strategic hold and that’s where we offset it with inventory deposits. So depending on what — how we’re balancing our inventory numbers, the deposits do offset considerable amount. I think I talked about 86-days sounds like a very high number. But if you take the inventory deposits out, it’s about 70 days.

So I think overall I do — am I worried about the inventory not so much, I think we’re having a temporary tightness in the supply chain, which is causing some of this. I also talked little bit about, there was a little bit of a timing difference in our DMS business with launch of new products. I fully expect that to reverse in Q3 as well and that’s what gives us confidence to maintain our $700 million plus free cash flow number as well. So overall, a little bit of a challenge right now in inventory, am I concerned mid to long-term, the answer is no.

Mark Trevor Delaney — Goldman Sachs — Analyst

That’s helpful, Mike. Thank you. And then my follow-up was on the China region and the operational situation there given the rising COVID cases and you touched on it a bit already, but could you comment more about to what extent any of the Jabil facilities are having to take shutdowns and if so, do you have an expectation for how long those could last? And then on the related topic, to what extent are other companies that are either suppliers or customers, are you seeing any indirect effects from shutdowns in the region on your business? Thank you.

Mark Mondello — Chairman & Chief Executive Officer

Yeah, I think it would be and it could be neglectful to suggest that’s not a risk, again we’ve got — we’ve got a great global footprint, moving stuff in and out of China. We’ve done that efficiently as anybody, but in terms of in region or in Mainland China, it’s a risk. We and I don’t want to make light of the risk, but again it’s something that we’ve been handling in terms of quarantines, dormitory quarantines, campus quarantines, different province quarantine, city quarantines for two years. And at least as we sit today this time doesn’t feel any different.

I think where probably the biggest risk is when I think about the stringent protocols that Jabil uses on our own campuses, I feel very good about how we’re managing the situation. I think the bigger risk element would be the greater supply chain, getting materials in and out of campuses and/or logistics etc.

As we sit today assuming that there continues to be pockets of COVID and it’s not extensive in terms of timing shutdowns, all of that’s been considered in our numbers. If the COVID issues inside of Mainland China were to get maybe a magnitude more severe than — then again that’s certainly a risk for consideration. But as we sit today, we’re two years in got a lot of experience dealing with, they’ve got a great team on the ground there. And again if things stay kind of like-for-like as they sit today, we’ll be fine through the end of the fiscal year.

Mark Trevor Delaney — Goldman Sachs — Analyst

Thank you.

Mark Mondello — Chairman & Chief Executive Officer

Yeah. Thanks, Mark.

Operator

Thank you. Our next question is coming from Melissa Fairbanks from Raymond James, your line is now live.

Melissa Dailey Fairbanks — Raymond James — Analyst

Great, thanks guys. Congrats on the great quarter and guide. I was wondering if you could give a little more detail on expectations for core margin per segment? I think we all saw the press release on stepping up hiring in the healthcare business, just wondering how that’s flowing through margins or if that’s not yet expected to impact them?

Mark Mondello — Chairman & Chief Executive Officer

Sure. Well, I think on one of the slides today that was posted were shown during the call, if you look at the green box which we talk about is kind of our Diversified Manufacturing business. I think what we’re suggesting there is collectively that group of businesses will run on the core margin line around 5% and then the blue box on the — what we characterize our EMS business is running at about 4%. Both of those margin column goals, targets or guide both of those I think on an annual basis and again if I go back 15 years there is probably the strongest margins we’ve posted in terms of as we bifurcated the business EMS, DMS.

We don’t break out — we don’t break out margins in terms of I think both the green box, the DMS box and the EMS box, the blue box each of them have four sectors defined and we share the kind of the revenue trends there, but we don’t break out margins I would. And again, maybe at some point, we’ll start breaking those out, but today we don’t.

Melissa Dailey Fairbanks — Raymond James — Analyst

Okay, great, thanks. And then finally on inventories, you noted X deposits, your inventory days are running around 70 days. Can you give us a comparison, what that number was last quarter or maybe historically what that number is trended toward?

Mark Mondello — Chairman & Chief Executive Officer

Yeah, I would say — I would say all in all whether you look at the gross line or the net line, we’re probably, we’re probably 12 to 14 days of additional fluff with overall inventory. And as Mike just commented on, we’re not overly concerned about that, the balance sheet is in great shape and we think in the relative near term that corrects. And again I think our goal internally is at a minimum to take that down by 12, 14-days.

Melissa Dailey Fairbanks — Raymond James — Analyst

Okay, great, thanks. That’s it from me.

Mark Mondello — Chairman & Chief Executive Officer

Yeah.

Operator

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

Paul Chung — JPMorgan — Analyst

Hi, thanks for taking my questions. So just on the market share gains you mentioned this from more from Asian-based players or some of your domestic peers or both and then scale players versus more fragmented smaller players. And what are some key factors that are closing those deals for you?

Mark Mondello — Chairman & Chief Executive Officer

Again it will sound redundant, but it’s — it’s kind of, it’s across the board. And again I just think, I just think that the market is so sizable and we’ve just gotten pretty good at kind of pulling together the IT solutions, the product design solutions. The way we’re performing and executing on the factory floors, I think it’s been a testament to our supply chain folks the last two years in terms of how they’ve navigated the market. And I think all in all, I’d characterize that as people see Jabil as a safe pair of hands and I also think there’s not much good that’s come out of COVID, but one of the things COVID has done is really have companies sit back and give much deeper thought to their overall supply chain strategically, forward looking and I think all in all that’s what’s generated a lot of the conversations in terms of market share gains.

I wouldn’t want to sit and handicap whether its Asian-based store, domestic based or European base, I think it’s across the board.

Paul Chung — JPMorgan — Analyst

Okay, great, thanks for that. And then just on the strong free cash flow guide, most of the strength there from earnings, which is great. So how big of a drag in your view is working cap for the fiscal year, just wanted to get a sense for more normalized free cash flow which hopefully reverts later this calendar year and into your kind of next fiscal year?Thanks.

Mike Dastoor — Chief Financial Officer

So, Paul, when we started the year, I think we guided $31.5 billion of revenues, we took that up to $31.8 billion and now we’ve taken it up $32.6 billion. So there has been a decent amount of growth in our revenue numbers, that obviously drives a higher level of working capital. We’ve managed, we’ve worked out how to manage working capital really well as a team. We feel confident with our $700 million free cash flow, in fact I think we might be able to deliver a little bit more than $700 million. I think the inventory probably normalizes, not fully by the end of the year, but little bit I think I mentioned is 3 or 4 days of inventory due to timing differences.

I expect that to reverse completely in Q3. And overall our collections, our AP payments, etc give me Paul confidence in the $700 million plus free cash flow.

Paul Chung — JPMorgan — Analyst

Thank you.

Operator

Thank you. We reached end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Mark Mondello — Chairman & Chief Executive Officer

Thank you. Thank you for your interest in Jabil. This now concludes our call.

Operator

[Operator Closing Remarks]