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

All right. Well, thanks, everybody, for joining us for the first presentation post lunch. So my name is Adam Seiden. I'm the U.S. machinery and construction analyst at Barclays. We're pleased in this presentation to have Jacobs with us. Joining us from Jacobs is Steve Demetriou, the CEO; as well as Kevin Berryman, the CFO. Also from the company in the audience is Jonathan Doros, the IR. So the format of this, like the other sessions, will be fireside chat between myself and the company management. We will leave some time at the end for Q&A if the audience does have any. Just raise your hand and a mic runner will come your direction. Well, at the outset here, I'll pass it to Steve to give a little bit of an overview -- and Kevin to give a little bit of an overview about the company for those that are less familiar with the story. And then immediately post that, we're going to be doing our audience response questions, which is held via the gadgets in front of you on the table. So with that, I pass it over to Steve. Thanks very much for joining us again this year.

Thank you. So I think most of you know that Kevin and I joined the company in 2015. And together with the leadership, we've gone through a transformation of the company's portfolio. A lot of improvements internal to the company, but the big steps, we're acquiring CH2M. And then on the back of that, divesting our Energy, Chemicals and Resources business unit, about 1/3 of the company. And so we believe with that, with a couple of other initiatives, we really are poised for profitable growth tied to the secular trends that are profitable, higher margin going out into the future. And with the majority of our restructuring complete over -- from all of this effort over the last couple of years, we're also poised for nice cash flow going forward. Kevin?

Yes. I think the -- what's exciting about the transformation that's occurred is that through the portfolio transition, we now have a portfolio of providing solutions to customers and verticals where every single vertical that we -- that we're oriented around or focused on, whether it's water solutions or environmental remediation or nuclear remediation, cybersecurity, infrastructure, specifically transportation-related, all of these verticals of which we are focused against are all enjoying what we believe is to be secular long-term growth opportunities. And with the success of our company historically in terms of being able to make good margin in those verticals, we're excited about our ability to grow the business longer term. We have put together some targets that we established in our 2019 update to our strategy. We believe they're fundamentally focused on good solid growth, but importantly, more about margin profile and ability to become a more sustainable margin-enhancing company. And that translates into long-term sustainable cash flow generation. So we're excited about our future. We believe we've started our journey on the second phase of our strategy, had great results in 2019, and our expectation is that we're going to be able to continue to drive it going forward into '20 and '21.

Excellent. So I think that's a helpful overview on the business.

And maybe we'll shift to the audience response questions first. So question number one, do you currently own the stock? Yes, overweight; yes, market weight; yes, underweight; or no. Okay. Number two, what is your general bias towards the stock right now? One, positive; two, negative; three, neutral. All right. 50% positive. Question number three, in your opinion, through-cycle EPS growth for Jacobs will be: above peers; in line with peers; below peers. Above peers. Question number four, in your opinion, what should Jacobs do with excess cash? And there's a list of M&A, repurchases, dividends, paydown and internal investment. 60% on repos. Question number five, in your opinion, on what multiple of 2020 earnings should Jacobs trade? It's a band from less than 10 to higher than 25x. All right. Fairly evenly split. Question number six, the last one here, what do you see as the most significant share price headwinds facing Jacobs? Core growth; margin performance; capital deployment; or execution strategy. I get execution strategy. All right. So now with the overview on the audience response question, I think that level sets it quite nicely. And welcome back to Miami, guys. I know just a year ago, we had the Investor Day just down the road. And congrats you guys on the transformation that your business has undergone. And certainly, everything from the branding on downward, there's a lot that I think investors are noticing. So my first question would be a bit on the repositioning. There's been a whole lot of ins and outs over the last couple of years, restructuring and portfolio moves made across the broader company. So looking back on it, what's been the hardest to execute operationally in line?

Yes. I think the -- whether it's the hardest or the most important has been the whole cultural transformation of the company. We've talked about the acquisition of CH2M, the divestiture, which was probably even a -- more challenging to take 1/3 of the company and separate it out, restructured our G&A, we're putting new systems in, a whole host of things. None of that ends up with the success that we've had so far without matching that up with an emphasis on advancing the culture of Jacobs. And it started out with first couple of years around the culture of accountability, restructuring the company's approach to go-to-market with a line of business rather than as a free for all, every office spending for themselves. But the most important thing was winning the hearts and minds of employees, existing employees as well as acquired employees, to create a new Jacobs going forward. And I think that hard work, because that isn't an easy task when you're dealing with 50-plus thousand employees, has been critical to this first phase of this transformation, but even more, as we now take it to a new level of peers, raising the bar on margin and growth expectations, cash flow and capital deployment, is really taking that now to an even higher level. So -- and by the way, it's the one thing that's in our control is our culture. So that's why we spend a lot of time on it.

More so thinking also from like a broader industry viewpoint, this was Jacobs Engineering and is now Jacobs. You have streamlined your businesses into 2 particular verticals with some subsectors within. But would you say, when you're having conversations with the broader industry, would you -- does it feel like the industry treats you guys differently now given this direction of the strategy that you guys are on?

Yes. We're in the early phases of that. I mean I think the message is starting to get out that this is Jacobs, ultimately Jacobs Solutions, and that we are -- we're much broader than an engineering company. We don't want to get caught up in engineering, construction. And the main reason is that's not who we are. We're -- more than 2/3 of our business is strategic, technology, consulting. And the type of things that we do are much more technology-enabling, et cetera. So it's reshaping the brand of the company and getting that message out. I think by divesting our oil and gas, traditional E&C business, it's becoming clear that this is all about the infrastructure movement globally that's pretty robust, whether it's climate change, resilience, aging infrastructure, the digital movement, 5G, et cetera, or the whole national security side with our U.S. government services focus is that this is a much different company. But it's going to take time to get that out. And I think we're in the early stages of that. We've got to continue to put emphasis on our brand and getting that message out. I think as that happens, a lot of good things are going to occur with the future of Jacobs.

Great. So we certainly will dive into all the businesses and so forth. But I did want to touch on cash flow because I know, right or wrong, there are certainly some questions from investors. So when you think about, again, all these ins and outs, the transition services agreements, restructuring, et cetera, for investors, sometimes it's a little difficult to see what the underlying cash flow potential of Jacobs could be. So maybe, Kevin, if I pass the floor to you, how would you describe the underlying cash flow of the company? And also, are there any differences between the portfolio, within the segments? Like, should we think of any differences between CMS and PPS, et cetera?

So I think a couple of kind of contextual comments first about the transformation over the last couple of years and what has been a significant investment in our people and then ultimately the integration of CH2M into the company and the divestiture. There has been a significant cash investment to ultimately reprioritize where we're focused against and what we're not. And I think that, certainly, what's important for investors to understand on the divestiture of ECR, we actually had to create that company. We had to pull it out of a very integrated part of our entity to be able to fundamentally provide something to sell to Worley, which was a big lift. So we had a lot of people, a lot of resources focused on driving that. All of that has translated over the last 2 years specifically, our 2 last fiscal years, 2018 and '19, of a significant amount of restructuring. And what I think has occurred is that has masked to a certain extent some of the benefits of what this portfolio is really able to do. And actually, as a management team, we understand that. And we believe that our ability to now come out the other side of that major restructuring effort is going to start to translate into, on the first hand, a significant increase in our net income, GAAP net income. Now we report adjusted figures, for those of you that are familiar with that, to give you a run rate kind of view of what's going on. But now the restructuring is going to be coming to an end. So by definition, the net income is going to be rising. But I think what's most important really to understand is that's kind of, through the process, no surprises from our perspective in management, but what we do know is that it's time to start to deliver some of -- return against that from a cash flow perspective. So if we think about our ability to drive cash flow, we like the portfolio that we have now. We think it's a very cash generative portfolio, and we think that translates into our ability to obtain and get to a 1x conversion factor on our adjusted figures or GAAP figures, either one, but adjusted figures specifically, and we're going to get to that level over the course of 2021. And what that translates into as we enter into our 2022 fiscal year, that cash flow is going to be a reality. It's going to be clear to our investors what the cash generative nature of our new portfolios and both businesses. I don't see a fundamental plus or minus between those 2 businesses. Both are going to be able to do great things in terms of cash. So we think that's on the table. And I think that what will be a key driver to that from a company perspective is getting back to the basics. As it relates to now that we have more time to focus on driving the business versus the restructuring, it's going to be incremental improvements in working capital and probably more on the Peoples & Places side of the business versus the Critical Missions business. We think there's substantial opportunities there, and that's going to be a big driver to us getting to those -- that conversion factor I'm talking about. And that, combined with already the cash flows associated with the business as it currently exists, are going to be really positive in terms of starting to get that return profile that we think is necessary.

So getting to that place by year-end '21, entering '22, where you have that key number, does the company as it sits today have the systems in place to get to that good run rate on DSOs and to be able to meet those goals? Or is there some incremental investment that you think needs to be done as well just given the moving parts?

I think we do need to make some investments, but they're not substantive investments. We have the people. We have a base system that has been created through the integration and divestiture, which is basically there. There's going to be some minor investments but not of substance. And so I think the people, the processes and the systems are there, and now it's about us to have the accountability to make it happen.

Got it. So a year ago, at the Analyst Day, you guys spoke to a pretty robust pipeline in the CMS division. You're still reporting and discussing a pretty robust pipeline in the CMS decision -- division. So just trying to think about the level of confidence today versus the year ago period about winning those projects and where we stand.