Jacobs Solutions Q3 2024 Earnings Call Transcript

Morning, Mike.

Thank you.

Sure. Mike, maybe I'll address both. I'd say yes, the gross profit and backlog is definitely being positively affected by two elements. One, our service mix; and second, the end market sector mix. And so on the service mix, mentioned a couple of times, we are really seeing a fundamental shift in our profile with regards to higher end science-based consulting and advisory services. And that's not only showing up in our results from a burn profile, but also in the backlog. The profile of the backlog is right now, as a point in time, heavily weighted towards water, as well as in advanced facilities, predominantly life sciences. And those two have a higher margin profile as well. So both are having a positive effect on that. With regards to FY '25, we're looking forward to potentially another strong Q4 backlog performance, booking and backlog performance, leading to confidence in our revenue growth in FY '25. So definitely, some nice tailwinds there.

Hi. Good morning, Andy.

Good morning.

Yeah. Go ahead, Venk.

Yeah. Andy, yeah, thanks for the question. So I'd say a few moving parts as it relates to the EBITDA performance. So obviously, from the standpoint of EPS, we came in kind of the midpoint of the range as we guided to. Now as far as the EBITDA is concerned, we did allude to the fact that there were a couple of segments that were weaker than we expected. One was obviously the CMS, the sci-tech loss that was announced in the prior quarter, and then some of the devious delays that Bob alluded to in his earnings script. But I would say at a higher level, when you look at the difference between the EBITDA performance and the EPS performance, clearly, we had a little bit of a tax benefit that helped us on the EPS front. And then obviously, as you also know, we reported a pretty significant stock buyback. So that reduced the share count as well. So I'd say the difference between the EBITDA and EPS is primarily due to those two items. But what I would also point to is that if you look at the PPS backlog, we feel pretty good about where our profile of that business is heading towards, both from a revenue growth standpoint, as well as a margin standpoint.

Yeah. So maybe the first one with regards to confidence going into FY '25, Andy, there was a reason why we put the plus. Clearly, some moving parts right now with regards to the separation. So timing was another element that we wanted to consider. Performance has been solid. So I would just -- I'd characterize it as some tailwinds that we've got going into FY '25, and we'll be really clear about that as we move into the next phase. But for confidence overall. Andy, remind me again in the second half of the question.

Yeah. Sorry about that. So yes, good visibility there. During the quarter, we -- strong tailwinds in water and advanced facilities in the areas where there was a little bit of maybe some slight, not decay, but pause, I'd say in the U.K. with regards to transport and the election and then a reprioritization of some shifts in the Middle East, specifically in Saudi. Those haven't gone away. And now with the election in the U.K., as well as some clarity on programs moving forward in Saudi, those also serve as some positive tailwinds on a mix standpoint going into FY '25.

And if I could, I would say that in terms of just what we see ahead, clearly, from a Q4 booking standpoint, there's still some good confidence about the strength of those bookings. But in terms of specifics, we'll obviously provide you fiscal '25 guidance in the next earnings call. And then we look forward to providing a much more long-term guidance both in terms of the revenue growth, as well as our profitability profile when we have the Investor Day in February. Thank you for your questions.

Yeah. I think it's early, Steve. We're going to go through all of that in some details, but we're really excited about the tailwinds that we see for FY '25, specifically in all subsectors of the infrastructure market and advanced facilities, but we remain very positive.

Well, look, Steven, I think it's clear that we're going to have a different reporting structure as Venk highlighted, once the transaction closes. So the numbers that you will see in the corporate line will start to change. And we're working through all the reporting segments and all that kind of information for the full year reporting. So you may not see exactly the same number going forward, but you will fundamentally, on an apples-to-apples basis, that $60 million, we expect will trend down to $50 million over time. It may embed it into a consolidated result for the company, and so you may not see it broken out separately, but that's going to help drive towards that 13.8% EBITDA margin that was just asked going forward. So we feel good about it. Some of that cost will have to be targeted after separation because we still have two businesses to run, so -- or three, I should say, with PA and so more to come on that, but we feel confident about the necessary cost reductions that allow us to get to the 13.8% EBITDA margin.

Yeah. A couple comments. Let me start kind of with the U.S. and then work my way around. I'd say in the U.S., the flow of bid activity and pipeline across infrastructure and advanced facility. That hasn't slowed. I'd say the burn rate of some of our U.S. transport work has been a little slower from a burn standpoint, but the level of opportunities have been there. In water, I'd say globally, we have seen some real positive momentum, both on bookings, as well as burn, and that's across all geographies, U.S. Europe, to include the U.K., Middle east and our Asia Pac and ANZ area. So water has been in that realm, as well as advanced facilities really driven by life sciences.

So I'd say that just the two areas that we saw as a part of the election in the U.K. pause was transport. Water kept going in the U.K. and then a reprioritization in Saudi with regards to some of the event-driven cities-oriented work moving more towards the time-based work, like the expo or the airport or infrastructure that's going to be needed with a time element to that in 2026, leading to the expo and the FIFA World Cup. So these are things that we're continuing to add optimism as we move into Q4 and beyond.

Sure. So as far as what's driving it, clearly, the aging infrastructure is a big piece. The other piece is around combined sewer overflows and what's happening with regards to climate and some of the natural disasters that we're seeing. So I'd say that's accelerating what's going on as well. In the drinking water component, we are seeing an increase in PFAS -- in addressing the PFAS regulations, specifically in the U.S., but also in Germany and in other locations, too. So that's all kind of driving that. Just to quantify it. Sabahat, our pipeline in the water sector is up nearly 2 times as it pertains to this time last year, and we are winning a majority of the work that we're going after, hence the real attention and focus on the growth.

Andy, maybe just -- I'll let Kevin kind of clarify the nuance within the backlog and then I'll talk about kind of the profile as it pertains to the various end markets and we'll talk about the profile.

Yeah. Look, so what we're seeing is we've been talking about the growth profile in People & Places topline wise and it being a little bit more muted because effectively we're seeing more consulting, science-based technology, technical and consulting work that's happening. In the backlog and the book to bill, very strong book to bill, is some other types of projects which include lower margin work, which will at the same time create accelerated top-line growth. So it'll be a little bit of a reduction in mix relative to the consulting piece versus our current levels. And at the end of the day, it's going to be quite positive because we'll still see, I think, incremental margin over time in People & Places because we've proven our ability to do that. And we're going to see some accelerated growth as well associated with some of these larger, I'm going to call it, projects that involve program management and extended dollars being spent, which will include a little bit greater percentage of pass through revenue, which has more limited margin than the high-value consulting work that we do.

Yeah. And Andy, maybe I'll just extend on that last thought that Kevin had. So then if you break that, you cited the consolidated numbers on the 6% and the 5.5% in gross profit. If you then translate that into P&PS, which relates to the last comment that Kevin made, that looks like more like 10% on the top line and 9% on gross profit. So you can kind of see the dynamic leaning towards P&PS is growing at a much higher rate.

Yeah, absolutely. So we really looked at, in a consolidated company, what type of corporate needs are going to be needed on more of a homogenous corporate needs are a lot more synchronized across the world. So those movements to global business centers and real streamlining of process protocols and systematic enhancements, those have been taking place in real time. From a business standpoint, we've already started to transition into optimizing on a lot of our cross-cutting capabilities, program management, digital enablement and other strong sales, market-leading sales, functions that will cut across the entirety of the company. So the geographic nuance, client-facing entities with cross-cutting capabilities, that structure, it's almost like being in -- with the being the Olympic time right now, it's already in that zone where we're handing off the baton in that section, we're already off and running.

Hey, Bert. Morning.

Morning.

Sure. So specifically on semis, Bert, we've been working on this for a while. So clearly, we do, do a lot of work for Intel, and that work is fundamentally on that capex program that they highlighted three or four years ago. We had substantially worked our way through that. And so the news that's come out has got a minimal effect on us. The diversification of our services that we perform for Intel, those kind of ongoing sustaining capital work that we do around tool installs and retrofits and layout dependent type work, that will continue.

So -- but the good news is that our diversification into memory customers as well as other logic customers that are doing work in the U.S. and in Europe, that's continued, and we'll have, hopefully, some good news to share next quarter on that, as well as some of the geographic expansion that's going on in places like India. And so we have some really positive momentum going on on that front. So overall, we're still bullish on the sector, and we'll continue to accelerate growth.

And then on life sciences, yeah, that's really going well right now. And it's probably a lot of discussion around GLP-1. But what we're seeing is Alzheimer's and oncology drugs still making a really big play. So the two big players that are in the GLP-1 sector, that is a big part of our work, but the new awards that are coming through, whether they be in the contract manufacturing space or in these other players that are -- have got a really nice pipeline of drugs coming into oncology, as well as in Alzheimer's, those are -- that's really driving that optimism too.

And Bert, if I could, just having most recently come from the semiconductor sector, we do see this as a secular trend in terms of where the manufacturing footprint is and across different realms of semiconductors and logic and memory, as Bob alluded to, and there's also a geographical shift that's happening. So as we look at our portfolio, we have good confidence that we are pretty well diversified. And then just the scope of the opportunities in front of us are still pretty good. Now obviously, any given quarter, it depends on what happens to the market. But I think if you look at it from a secular standpoint, we feel pretty good about our semiconductor footprint.

That's on the existing work, Bert. What we announced goes past that. So we're already on site doing phase 1. What I -- so my comment was around phase 1. Phase 2 is now just starting.

Okay. So yeah, a couple of things. One, when we do the Q4 results -- the full year results, I should say, since we're closing in our -- before the fiscal year ends, effectively, we will report on an independent Jacobs for the Q4 results and the full year results and report it on a historical basis as such as well. And all of the business that's included in the perimeter, which will be merged into the Amentum business, that will be basically assets held for sale. So you won't see that information.

We have provided you guidance for the full year similar to how we've established it for the full year. So assuming that it closes at the end of the year, all of those numbers that we just quoted would effectively be met. But you're going to actually see a lower number in the results just because some of it is now going to be because it's being put into equity directly as assets held for sale and you're going to be seeing the independent Jacobs. So a lot of clarity we'll be providing to get you an understanding of what that looks like, Bert, when we do report Q4 results, but a lot of moving pieces, but kind of that's a very general view of how you're going to be seeing our financials reported in Q4.

And yeah -- sorry, Kevin. Just to add to what Kevin said, in addition to what you said about our businesses, obviously, Amentum is going to have their Capital Markets Day in August 13. So we'll have some more color in terms of their business. And then as it relates to ours, we'll provide guidance for all of fiscal '25 in our November earnings call and then we'll talk about not only the revenue and growth as well as the margin profile. And then later on -- during Investor Day, we'll provide much more color about our long-term growth and operating models.

Sure. Maybe I'll take the first one, Jamie, and then Venk can talk about going forward what free cash flow conversion looks like. Look, I think initially we got a lot of options, and our primary focus in the quarters that followed the separation is execution and performance and really driving that long-term margin growth profile. We like the positioning that we're in in each of the end markets, as well as geographies that we sit in. So it's not like there is an imperative that we need to do M&A in order to catalyze growth. We've got a great growth trajectory organically. And so proving that out, not even proving it out, executing on the plan that we have right now, we got a lot of confidence in. Past that period, we've got -- you said it yourself, we've got a great balance sheet and we've got a lot of options, and it's a great place to be. So much more to follow on that. On free cash flow, I'll let thank talk about that.

Yeah. And just free cash flow in just a second. But just to reiterate the point about capital allocation, just given what we see ahead of us in terms of the pipeline and the opportunities in front of us, I think from a capital allocation standpoint, we're strong believers in organic growth as the pursuit of capital. Clearly, from the standpoint of the free cash flow generation and the balance sheet that we have, we do have the ability, number one, we do want to continue to provide shareholders the opportunity to get dividends, but also, we'll be consistent in terms of buying our shares, repurchasing our shares. And then M&A, as Bob mentioned, is also an option. But the next few quarters, almost singular focus on execution.

Now, as it comes to free cash flow conversion, Jamie, you rightly pointed out we've been generating pretty decent free cash flow. We said we'll be at over 100% free cash flow conversion for the remainder of the year. And as you deep dive into the P&PS business, which is a big part of independent Jacobs, you can expect that free cash flow metrics to improve over time. Again, we'll quantify it as we get closer to the date, but we feel pretty good about where we are and where we're going.

All of the regulatory approvals on foreign investment and antitrust, all of those kind of things, we've already worked through and all has been approved. The only remaining item is the IRS ruling on our private letter ruling that we're looking for, which confirms a view that -- our view that the transaction is tax free to our shareholders. That's really what's driving the timing at this point in time. We've been having great discussions with IRS more to come, but we would expect to get that approval hopefully over the next month or so. And effectively, that positions for that second half of September close. We've got a lot of things to do with registration for SEC, distribution of shares and so on and so forth, but really the only thing that we are looking for is the IRS ruling, and we feel confident about it.

Thank you.

Morning, Chad.

Yes. The backlog perform -- the bookings and backlog performance, Chad, has been really, really solid. In fact, the 1.53 times, we had to go back to see if that was a record in itself. And so we're confident that we're going to be going into '25 with some really solid growth projections, which we'll be very clear about when we articulate. So that's kind of on the financial and the lagging indicator, the answer is yes. On the leading indicator on the pipeline, as well as where we sit in the markets where the pipeline is growing the fastest, water and advanced facilities being highlighted, that also gives us a lot of confidence, too. So short a long way of answering your questions, the answer is yes.

Yeah. So on the -- on our optimism around the P&PS margins and then how that will translate into go-forward margins for the whole company. I think on Slide 11, we did give some guidance on greater than 14.9%. So it probably highlights the optimism that we have on our current reporting structure with regards to that element. And then on Q4, similar to last quarter, Chad, I wouldn't make those comments unless we had already booked work in the first month of the quarter. So can't quite announce those right now. But you'll see that when we report out on Q4.

Hi, Jerry.

Yeah, Jerry, without giving any kind of quantifiable number on where that number is going, I'll say this, our pipeline, where we're positioned in the end markets that we sit in today and in the tailwinds with regards to our bookings performance on that gives us a lot of optimism. And so in November and when we report out on the full year for independent Jacobs, as well as going into February and along the way in between, we'll put a lot more clarity, as well as quantify what that means. But overall, I think hopefully you're hearing some real optimism in our voices and in our performance on getting to exceeding the performance that we had for the last five years.

Yeah, I'd say there's been an acceleration in the dialogue, right? And now those translating into those programs that we either paused or in anticipation of being put out to market. I think that's kind of the next phase. So over the course of the next six to 12 months, I think we'll see that. Interesting enough, Jerry, the water sector in the U.K. has not paused at all, and so that continues on. And then with PA, think about this, in the U.K. specifically, our -- as well as globally, PA has about a 50/50 private sector, public sector mix in their business. The public -- the private sector in PA this quarter grew 11% year on year. And the public sector was kind of in this election pause. We see that kind of coming out as well, which gives us optimism not only in the Jacobs business, but in the PA business, too, moving into FY '25.

Sure. Louie, thanks for the question. IIJA, I think these are industry numbers. So 60% appropriated, 30% spent. So yeah, there are -- there is work that continues to flow. Right now, I think that the hurdle is 2026. I said it before. That's probably going to continue to go past 2026, as well as discussions about a second IIJA, which we'll see where that goes within the congressional floor. But we are -- it is driving that backlog performance and our conversion rate on that as well. I will say this is that on the CHIPS Act -- I'm sorry, one more comment on IIJA. IIJA, the grant money, you can see, and that's some of the work that we're seeing, not just in transport but in water as well. CHIPS Act, those jobs that have received CHIPS Act money, we've been involved with those. Remember, those were pretty much designed and already in the field and then received the funds. This kind of next wave we're on the front end of. And so I think that CHIPS Act money will continue to flow and represent a nice tailwind for us.

All right. Thank you, operator. Thank you, everyone, for joining the earnings call. Look forward to providing further updates and visiting with investors and analysts in the months to come. Exciting times ahead and look forward to staying very open and transparent with the market as we move forward. Thank you.