Jacobs Solutions Inc. (J) Earnings Call Transcript & Summary

All right, guys, we're going to continue our program today. Thank you for sticking around for our anchor here. Dawne Hickton, who's the EVP and COO of the Critical Mission Solutions segment of Jacobs, formerly Jacobs Engineering, as you know. Dawne is going to start with some slides and kind of introduce CMS to the shareholders, and then we're going to sit down for some Q&A.

Sure.

Thank you.

Thanks, Gautam. So typical disclaimer, but let me -- I just want to jump right in and thank you for staying until the end of the day. It's nice to be here. And I will concede, this is the first time I'm having the opportunity to speak on behalf of Jacobs. I've actually only been an executive member of the team since June of last year, but I started at Jacobs back in 2015 as a member of their Board of Directors. So I have this kind of interesting segue, and I'm sure Gautam's going to ask me about it. So I won't dwell on it. But let me just tell you a little bit about global Jacobs. If you're not familiar with us, we are the company that delivers solutions on a global basis, really exciting opportunities. We've got over 50,000 employees. That's our main asset, is our employees. And as you can see, we do 90 -- over 90% of the work we do is reimbursable and lower-risk fixed price. 75% of it is U.S., 25% of it is an international mix. And we have a pretty interesting portfolio of cutting-edge, innovative solutions that we provide to our customers. We're doing things like building a water treatment facility in Singapore to renovating the Heathrow Airport. Here in LaGuardia. We're working on the LaGuardia Airport, and then multiple projects around the world. You can see our trailing 12-month revenue. At the end of December, $10.6 billion. And then we have a pretty significant backlog of over $22 billion. And let me just kind of jump forward, really been a major transition that has taken place at Jacobs. And I've got to see this from 2 different perspectives because as a Board member, I actually was on the Board as the Board brought in our new CEO at the time, Steve Demetriou. And I'm going to tell you personally, if you haven't met him, awesome person. I think he's done a fantastic job. And I wouldn't have stepped into the role when Steve asked me if I didn't think that highly of him. So really doing a great job in helping us transform Jacobs. Started really when he came on board, focusing on some operational improvements for the company. And then perhaps the biggest transformation occurred with the acquisition of CH2M Hill. And then moving on to reposition the company out of ECR, selling the oil and gas business over to WorleyParsons. And then as I came on board into management, making the acquisition of KeyW. And if you look and think about that, that was a really major transformation to take Jacobs from its traditional engineering services business to today a company that's truly a global solutions provider. We operate in 2 lines of business. And what we do in both of those lines of business is really focus on creating a more sustainable world as we look around some of the opportunities we work on. We have something we call PlanBeyond. We've aligned ourselves to the UN sustainability goals. And we're really focused on a climate action plan. We have incredible thought leadership in how we approach the business. We're not just responding to RFQs from the customers. We're working with the customers and saying, "What can we do differently? How can we approach whatever the project is or whatever the program is and take it to the next level?" So it's really these solutions in action. And on the right, from a global Jacobs standpoint, just highlighting 4 key recent opportunities. SuedLink is a wind and solar power transmission system in Germany that we just won that opportunity. That's part of the global team. And then in the UAE and the U.K., we have some high-speed rail projects that are going to decarbonize transport systems. At Miami Beach, we're working on the Rising Above climate resiliency project, and then a cloud flood service for on-demand scenario modeling that we use to work with our customers. But let me jump in because we do -- I started to say we operate in 2 lines of business. So a lot of what I just talked about, people who are familiar with Jacobs might be familiar with that because they think of Jacobs from that global standpoint. And what people know more about is what we call our People & Places Solutions line of business, growing business with over 35,000 employees, global projects around the world. But we have another line of business that's called the Critical Mission Solutions. If you follow Jacobs, you may have known it as the former Aerospace, Technology and Nuclear division. But we changed our name with our new branding because we really wanted to focus, when you say aerospace technology, what were you really doing? And what did it mean? And so Critical Mission Solutions really focuses on what we do within that predominantly government services sector, and we are mission-driven, and we are on the critical mission. So think of it as not only just national security, but also global security. So when we think of Critical Mission Solutions, we do have a pretty unique delivery model. So we're one of the largest diversified government services providers, and we have a track record of strong, long-term enterprise contracts with long-term customer relationships, where we receive very high ratings on an annual basis on our award fees. But also, we're transitioning ourselves using those opportunities with the customers to go after more of the, what we call, the IDIQ work, right, indefinite duration and indefinite quantity. And that provides opportunity for margin growth, shorter-term opportunities, but an opportunity for higher value with the customer. And we've positioned ourselves very well with the federal government and our federal customers as well as on an international basis, doing a lot of work. Again, I said global security. So when you think of global security, think of the 5 eyes around the world, those countries that -- where English is their language. So we do a lot of work in the U.K. and Australia predominantly, but some also in Canada and New Zealand. And then most recently, we've had cyber solutions embedded within our organization, and we recently -- as a result of the acquisition of KeyW, were able to take the new cyber talent from KeyW and cyber contracts, combine it with our existing opportunities, and we've formed our own stand-alone business unit out of cyber. Just announced recently the executive that's going to be running that cyber unit. And the focus, of course, is to grow that business with, not only our existing contracts or customers but new customers. If you look at it, the [ FUM ] chart here, a nice purple color if you can see the purple. So 38% of the business in Critical Mission Solutions is what we call civil. So think of that as a lot of our NASA work. We, today, are on 8 out of the 10 NASA sites. We are NASA's largest non-OEM solutions provider. And then you may -- if you -- those of you who followed us really closely know that we actually held our Shareholders' Meeting this year at the Kennedy Space Center, where we are key members of the Artemis team, a mission to Mars and the moon, and we had an opportunity to take some of you on a tour of that facility to show you some of the operations and maintenance work we do as well as the engineering services work. So 38%, that's NASA and DOE. And if you look at 20% and 22%, that's really the defense and the intelligence work we do, again driving national security solutions, and there's a little bit of commercial and then international. Our international work is also predominantly security work, working -- a large part of it is in the U.K. in things like weapons sustainment and other defense opportunities. A little bit of commercial work there. Backlog at the end of -- for fiscal year '20 is reported $8.5 billion. And I think I've kind of said all of what's -- the rest of it's on there. And let me just -- this just highlights our financial targets for the Critical Mission Solutions business. So you can see in 20 -- at the end of 2018 pro forma, we were $3.9 billion. We -- by the end of 2019, we had increased revenue by 14%. We've improved our operating profit also by 14%. And the operating margin stayed around that 7% number. We're moving that up, and we continue to grow that and move forward as you see what our -- or 2021 organic targets are as we list them here. End of the day, strategy for CMS is clear. So for our Critical Mission Solutions, we're going to continue to expand and use our government services as our core business and expand into some of those higher-margin opportunities. We will accelerate our cyber engineering, particularly with the acquisition of KeyW and the opportunities that brought us. Like the rest of the organization, we're focused on innovation and technology. And then ultimately, we will, of course, continue to look at M&A selectively. And if it's appropriate and can add capabilities or contracts, new customer opportunities, we'll take a hard look at that. I think this -- I think I probably said most of this. So maybe I should just jump right into the questions.

Great.

Well, let me just run through this real quick. So we operate in several business units, and this just gives you a relative size. So the first one listed here that you're seeing, annual revenue of $1.8 billion, this is what we call our Advanced Engineering Research Operations Group. They do call it AERO for short, but that's actually a bit of a misnomer because it's not aerospace per se. It is space. So it is within that business unit that you'll see the NASA work. You'll see some of our commercial work. We do some work with Ford Motor Company and some wind tunnel and testing work. And then we also have some missile defense operations there. Another line of business, hard to read the print on the bottom of the slide, but that's our Advancing National Security business unit, $1.5 billion, work with the Department of Defense and the various intelligence agencies. A large part of that organization provides mission, IT and telecommunications for national security operations, not only domestically but around the world. So if you think of that and you think of some of the recent headlines, there's a good chance that there was a Jacobs team behind the scenes providing the telecommunications that allowed some of the things you saw happening in the headlines. Then we -- I mentioned our cyber unit, today the revenue is approximately $300 billion -- or $300 million, pardon me, and growing. That's the unit I talked about. And then we have our international group, I mentioned that, revenue of approximately $500 million. So there, again, a lot of nuclear remediation, some nuclear newbuild as well as some work with weapon sustainment. A little bit of commercial work there, but we also do -- our Australia work is also included in that international. And I would comment that we have announced a Wood acquisition of the Wood nuclear business. It will fall within this international group as that moves forward. And then lastly, at the bottom, the nuclear indicated there is our North American nuclear business. That's the work we do today with DOE. So you'll find us on the Savannah River site, out in Hanford, in Paducah, Oak Ridge, just to name a few of the operations. And then we also do work with the NSA, about $800 million. We have a large base of large contracts. I'll leave you to look at that at your leisure. We also did look at the new defense budget. I'm sure Gautam's going to ask me about it. So this is our analysis of the opportunities, and we play in the nation's highest priority items. So where the budget is moving north, that's where we're playing. So very positive for our business. And our cyber engineering is driving scale. I again kind of mentioned that so I won't belabor it. Innovation is the heritage of Jacobs from its history as people who have designed, built and moved forward with new solutions for our customers. And then these are the 2021 financial targets overall as you look at this. So continuing to grow the business. With that...

Great. Thank you.

Time for questions.

Appreciate it, Dawne. That was a great overview. I guess the first question I had is, since taking over as the Head of CMS, what are the initiatives you're spending most of your time on? How has that evolved over the last 6, 7 months?

Sure. So when I first stepped into the job, the most important priority for me was really to truly learn the business because when you're sitting at a Board, you're sitting at a 30,000-foot level. And to be candid, you didn't hear a lot about the Critical Mission Solutions business at the Board level, and part of the reason why is because it's a pretty good business. They were meeting their targets, they were continuing to grow, and it was a really well-run organization. And at the Board level, we were looking at transforming with the CH2M Hill acquisition. And so one of the things that's important for me immediately stepping in was to find out what are we doing, what are we doing right and make sure I don't screw it up. So that was important. Not to step in like a new person and suddenly decide they should do things differently because the team within the Critical Mission Solutions group is a very strong team, and they have very good and strong relationships with the customer. So then the next step was to say, who are our customers and where are our customers? As I think most of you know with the solutions business, or maybe you don't, most of our employees are actually embedded on customer locations. So if you think about it, we've got 6,000 employees alone that are sitting on NASA sites in the United States today. And so I've gone down to the sites, met with employees to find out what they need, what more can big Jacobs provide for them. Are we providing them the tools, the training, the career development they need? So that's been a big part of my responsibility, but also then meeting with the customers. So I kind of mentioned in the opening, we hit really hard marks with our NASA customers. We do in the rebids. So we are long term on these enterprise contracts. But you never -- this is my philosophy, and Gautam, you've known me from another life, you can't rest on your laurels. You can't just assume everything is going well with the customer. And as the new executive, I wanted to meet with them and say, "Here I am. Here's my business card. Let me know if there's things -- more things we can be doing or things are going -- if things aren't going well, you have a number to call." But I'm going to tell you, the good news is they all love Jacobs, and Jacobs has a great relationship with the customer. And what I was finding is people are saying to me, "Don't screw up. We like what you're doing." And so that -- but it then also told me, so what more can we do? So that leads -- and by the way, I'm using NASA as an example, but I've done that last week, we do a lot of work with the FBI. So last week, we were in the Hoover Building, meeting not only with our employees who are on site doing really important work for our national security, but also meeting with the customer. And the same thing, customer says, "We like what you do." And so then I come back to the team and say, "Well, what more can we do now because this is -- these are great opportunities." And that's how we're really looking to continue to grow the business, not only with our current customer base, but then other adjacencies for it. So a lot of customer meetings, a lot of focus with the employees. As I think you also know, one thing about my background is I'm big on talent management. And it even is more so, I came from a manufacturing background, where assets were things like forging presses and rolling mills. Now our assets are people. And it's really important to make sure you're taking care of your people.

Right. And speaking of that, one of the slides mentioned a push towards more IDIQ kind of multiple award, big GWAC-type contracts. What -- did Jacobs not have a strong position in those historically? And what are you doing now to kind of augment that capability?

So I wouldn't say we didn't have a strong position. I would say it's a question of focus. So we are on several GWAC contracts, and we've continued to improve our position on them. And with the acquisition of KeyW, it's actually added some additional GWAC opportunity to us. But it's more a focus of going after more opportunities that are made available to you. Jacobs historically within the Critical Mission Solutions business was and is really good at putting together proposals and going after large enterprise contracts and winning them and then executing well on them. We had not done as much on the smaller, shorter, quicker reflex proposals. It's a slightly different approach. So what -- we've done it, we just hadn't -- it wasn't the biggest focus, right? And so we've shifted that right now because, number one, where we see the bidding stream, a lot of the large enterprise contracts are kind of -- they've been won. So now, where is your next growth opportunity? So we've been spending some time beefing up our business development approach. We've actually adjusted our approach to business development. We've added additional resources that have experience going after those shorter-term opportunities, if you will, and also positioning ourselves for how we go after them and making sure we have gathered all of the right, not to use a play on word, intelligence and information, if you will, market intelligence, to make sure we're well positioned to go after this work.

And is this done centrally like in a [ BMP ] tank? Or is that -- you've got employees in the field who are channeling up to -- how central [ that is ]?

It is -- so actually, it's a little bit of all of the above, and it's kind of like any organization over time, you start central, then you move into the organization, then you decide to go back central. We actually think we have a really good strategy right now. We do have a central business development team within Critical Mission Solutions that drives most of the very large enterprise. But then we do embed within each of the business units some critical talent that's targeted within the unit, and they work together. So there's really a lot of synergies in the way they're working together and going after it. And just to give you one example specifically now as we're building up the cyber business unit, we brought in a key new sales lead just for cyber. Now they'll coordinate with the larger sales team, but the focus is there. And I should add one additional comment. We're also -- as we look at one Jacobs, 2 lines of business, People & Places and Solutions, we have some collaborative opportunities. Historically, the 2 businesses operated very separately and were very discrete. But as time has gone on, we recognize there's some collaborative opportunities. Cyber, for example, some of the data analytics we have within our government services group can actually cross over and support opportunity projects we have in the other line of business. And so while Critical Mission Solutions has a high level sales team and People & Place boosts people, P2S, their sales team, we now are working to have those sales teams at a very high level do some cross collaboration. Some good opportunities there.

Is there any benchmarks you can give us on the percentage of sales or what have you that come from short-duration task order type revenues versus the enterprise? And maybe what your aspirations are a couple of years out?

Well, sure. Like today, it's 90-10.

Is it? Okay.

Yes. And so roughly 90-10. And you're not going to shift that immediately because we have very large contracts that are long term. So it's going to take a while to shift that percentage, but you should see in a very -- in a shorter period of time, we should be able to shift that to more of an 80-20. And then I think a better goal would be 70-30. I don't think you're going to see us moving to 50-50. That doesn't make sense for us and just the way the business is based and how we operate it. But 90-10 today, 80-20 in the near future.

And have you -- so you walked in, things are going pretty well, you've reached out to customers. Were there anything besides a task order waiting that you think need to be improved or opportunities?

Well, listen, it's a -- honestly, it's a great team of people. I think what we needed to improve is tell the story because even I coming into the job, and I've been on the Board, didn't really understand a lot of the really important work we do at Jacobs. And Jacobs -- so again, now I'm going to sort of speak as I'm still speaking as an executive of Jacobs. But if I can digress on a -- from a personal standpoint, my impression coming into that business is -- the legacy of Jacobs is they were a quiet company, did a really good job, but didn't really do a lot of marketing, didn't do a lot of branding and flew under the radar screen. Every customer has known Jacobs for a long period of time and loves Jacobs. I mean that's what I hear. But yet in the street on the world, people are like, "What do you do?" I mean I even had people say to me, "Jacobs, like aren't you aerospace? And what does Jacobs do? And aren't they an engineering company in oil and gas?" And so it was clear to me that we needed to do more. And that's what we're trying to do. We're doing a lot of that. Some of it is our new branding coming out and really telling the world that we have transformed and now we need to tell everybody. We are doing a lot of really exciting things. So that's not something that had to be fixed per se, but a story needed to be told. I think what this team does, what this team of 15,000 people do is pretty awesome. And I really do say from a standpoint of thinking about global security and some of the work they do, it's pretty important. And it's of high value to the shareholders.

Yes. Is there anything we should be following? So as that mix goes from 90-10 to 80-20 to 70-30, should we anticipate that the bid pipeline you guys are going to report out, does it need to grow at some level to support that kind of movement? So for example, should we expect the stuff you bid on in aggregate to grow 10%, 20% a year? In other words, at a much higher rate than maybe what it has in the past?

Yes. I think we're all -- you're already starting to see this if you look historically. So if you go back 2 years, our pipeline was more in the $7 billion to $10 billion range. So right now, at this tail end of December, we had a pipeline of $34 billion. And so we're still bidding about 20% to 25% of that pipeline. So the mere fact that the pipeline is growing and we're still bidding at the same rate, we're bidding a lot more. And our win rate is staying consistent. And so I think you'll continue to see that grow. I think if we look out over to the end of '21, think of the pipeline for this year is that $34 billion -- $34 billion to -- $34 billion, $35 billion to maybe upwards of $40 billion. Look out the next year, and you've got another $40 billion. And so as you look at that, that's a lot to be bidding, and that's a lot of growth, and that's great opportunities for the team.

And your point is you actually bid on the $34 billion, $35 billion or 1/4 of it you bid on? Those are qualified opportunities?

Yes. We bid on about 30% -- 25% to 30% of it. Yes, we look at that pipeline. And in this world, as I think you know, you kind of have that beginning game, you got a middle game, you got an end game. So there's a lot of work that needs to be done upfront. And that kind of harkens back to the IDIQ. You're on these GWACs, now we need to do a little bit more work than we've been previously doing kind of analyzing and saying, "We're -- what's out there, what can we bid," and be selective. You don't want to bid on everything. You may not have the capabilities to do everything. We want to go where our sweet spot is. And our sweet spot clearly is the C5 as well as the ISR. So I mean, what -- very strong in that national security DoD arena.

Can you talk a little bit about the margin structure of the business and how that might progress over time given the investments in BMP and this mix shifting?

So certainly, today, if you look at how we're -- the majority of our work, 90% is on a long-term 8- to 10-year enterprise, low-risk contracts. Great contracts with great cash flow, but lower margin, lower margin, recognize that. But that was -- that's the business, and we like that business, and we're going to keep going after that business. But we also want to bring out a margin. And that's where we're going to go after. When we go after these IDIQs, that is a higher-margin, higher-value profile. KeyW coming into the mix brought us capabilities to go after that higher-value opportunity, particularly in the intelligence, surveillance and reconnaissance world.

Sure. Is there any more of an appetite to buy product-oriented companies? That -- when you look at M&A, is there -- a lot of folks have been dabbling CACI and others and some hardware companies.

So when you -- so I think you're saying that because KeyW did have a product component.

Correct.

But if you think of -- the product component was actually relatively small within KeyW. It was the capabilities and the technologies that went into the product. And what do I mean by that? Some -- there's some product that's actually hard like you can touch it, feel it, it has metal, plastic. But it's really the guts of what's in that that's what we're really going after. Our concern for a pure product acquisition would be how good is that technology. Because in this world, this technology changes so rapidly. So we look at it more of the capabilities and the security clearances and the talents of the people that can actually provide the solution as opposed to provide a particular product. Now having said all of that, I'm not going to rule it out if the right opportunity came along that provided us certain capabilities and certain technologies and has a product component like a KeyW. That makes it -- I don't see us going -- I don't see us turning into a manufacturing company. Regardless of my backdrop. I've been there, done that.