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

Again, we appreciate everybody's time. Last but certainly not least is Jacobs. It's so tempting to say Jacobs Engineering, but it's Jacobs. And so we're very excited to have you guys. We have Kevin Berryman, who's the President and Chief Financial Officer. Kevin has been the CFO of Jacobs since 2015; and Bob Pragada, who is the President and COO of Jacobs. So as I walk over here, basically, I'll ask you, Kevin, I mean it's been 18 to 24 months of transformation here. So there might be people in this room who still think of you as Jacobs Engineering. So maybe you can talk about the transformation over the last 2 to 3 years and sort of talk about the new company and what's sort of driving the new company.

Thanks. Thank you very much, and it's great to be here, and thanks for everyone joining us for a quick briefing on what's going on with Jacobs. So a couple of things. Actually, I think the -- setting the context over the last 24 months is really about talking about the last 4 or 5 years. Because Steve and I -- Steve, Chair and CEO of the company right now, and I came 5 years ago. Bob joined us shortly thereafter. And there has been a fundamental shift in terms of what the company was focused on over that period of time, with a lot of the heavy lifting and some of the decisions that were made way back when in terms of our strategy kind of culminating in the last 24 months. So I think the first thing to talk about is really the fundamental shift in terms of the creation of a strategy, a strategy for Jacobs, which provided clarity on not only what we were good at, what we needed to improve at, but where we wanted to grow and focus our growth initiatives on and probably even more importantly, what do we not want to do. And I think our company, over an extended period of time, great legacy company, a leader in what we would call the old E&C business, had got to a point where we were willing to do anything for anyone anywhere in the world. So there was a strategy we put together back in 2016, took us a year to work through it. So it was a very deep dive in a lot of different areas. And what that allowed us to do is, I think, get back to some basics in terms of execution and then provide clarity relative to where we wanted to double down in terms of growth and where we didn't. That led to the acquisition of CH2M, which was aligned with certain growth sectors that we had identified during our strategy and then further led to ultimately the divestiture of our ECR business or oil and gas parts of our business. Those decisions on buying and selling weren't crystallized in our original strategy. It was ultimately done -- about an organic growth strategy, which then tied into clarity on what we wanted to be and which led to clarity on the CH2M deal and then the ECR deal, both of which were transformative in nature. So if you look at our portfolio today, it's aligned against secular long-term profitable growth trends. It is positioning us to be more digital in terms of how we offer our services and it becomes less about engineering. And it becomes more about solutions-based, which allows us to take our government services business and our transportation, environmental and water business, ultimately combining the capabilities of those 2 to become a company that's really fundamentally different than what it was. Really excited about that. We're excited about coming out the other end of a pretty heavy lift on the transformation. And I think we look forward to the clarity that we'll provide to investors in sort of what that's going to mean in terms of our cash flow, our margins and ultimately, a lot of good things going forward.

That's very helpful, Kevin. Maybe to ask Bob around sort of -- you've seen good backlog growth over the last several quarters. And the visibility on the business seems -- the new business seems quite high. So by looking at the numbers here, Critical Mission Solutions, up 4%; People & Places, up 8%. Your guidance for the long term is lower than that for both segments. So what are you doing right to win this work in this new transformed company and can it continue?

Yes, I'd probably characterize it in 2 fronts. One is that from a pipeline standpoint, what are we -- how are we looking at opportunities today versus what we did in the past is -- we are a new company. The mix of services that we have and the subsegments of the areas that we play, both in government services as well as in our infrastructure business, is fundamentally different than what it was before, which was kind of a classic client comes up with a challenge, client develops a solution, client packages up a solution 5 different ways and sends it out to the world. We're kind of now playing in a world where, with long-term relationships, we are actually working with our clients to define what that challenge is and then figuring out a uniquely differentiated solution for the challenge that we just came up with -- we just didn't come up with it, but identify it for the client. And so that's putting us in a kind of a different -- when we look at the pipeline. And we talked about it on the call, $35 billion pipeline of opportunities sitting in CMS, almost $25 billion in People & Places. That's a pipeline that looks very different than before. And that -- and our win rates have been pretty robust, leading to the backlog growth, Andy, that you just mentioned. That has been a little out of sync with what the guidance we provided only because of a timing element, right? Some of those have been -- if you look at CMS, those long-term, 5-plus years enterprise framework agreements that didn't have a lot of volatility on when they started, when they ended, have now turned into -- we still have those, but have now turned into some -- with the new skill sets, some real quick hitters on -- this is real, counterterrorism, intelligence applications that are the -- needed now, the solicitation process is a fraction of the time and we're uniquely positioned to address it. And so the timing then means that the revenue conversion becomes that much different. Same thing on the P&PS side. So there is a little bit of calibrating there, but we're pretty bullish about the prospects going forward.

So should we still think about these businesses, CMS, as a low single-digit grower and P&PS as a mid-single-digit grower? Is that how think about the businesses on a long-term basis?

So there's a couple of points, I think, that are really important to note. The first thing is that, I think, that the legacy of our company, and let's call it more E&C oriented, which we are not anymore, one of the downsides, the dark side of growth in that business is that there is too much focus on it. And the ability to execute the incremental complexity that comes along with that growth is real. And so when we talk about our growth aspirations, and we talk about these, let's call it, mid-single digits, low single-digit numbers, that's purposeful because we don't want to press ourselves to have growth levels that pressure us beyond the ability to manage it. And one fundamental difference in our company today versus 5 years ago is that -- and this is a little bit of an editorial comment, which is unfair, but I'll make the point just because it's important to note. The difference is almost any growth was considered good growth and an incremental level of gross profit was good gross profit. No, that's not the case. And what Bob and his teams are managing now is when we evaluate that pipeline and we go after businesses, margin is a critical part of whether or not it is considered to be a viable opportunity for us. And so by definition, we're self-selecting down to those opportunities, which we believe are the ones that allow us to win business, have the appropriate accretive margin profile over time, which then furthers the ability to invest back in the business and manage the complexity. And so it's top line second, profit first. And the margin profile is an important part of that. And if we're able to grow a little faster on the organic front, so be it, but it's going to be based on really good substantial margin improvement profiles. And so that means that you don't have to grow so fast to get the double-digit profit increases that ultimately is what we want to get to. And so I think that's an important element of kind of how you're seeing what the profile of our growth aspirations are and how that translates into what we're really interested in, that's profit growth.

So maybe just one more in end market growth in the context of -- if I look at businesses that are used to being kind of slow growing like NASA, like it's been pretty interesting and strong for you guys. Now we've got a space force, whatever that means. The budget had a lot of money for NASA. So like if I think about the drivers of growth for your 2 businesses, I'm going to put NASA high in the pecking order. But like is there other things that you'd point me to? So maybe talk about NASA and any other bigger drivers.

Yes, kind of stay on that same train of thought, Andy. NASA, clearly a big growth driver, but why? I'd probably characterize more as space because what NASA is also doing is, whether it be SpaceX or whoever comes in as a private partner in that mode, it's expanding what we're doing in space. So whether it be Artemis or the next man and woman on the moon, all these different things are driving a different type of offering for NASA. And everything space, that's serving as an incubator now for skill sets that we have that deal with these space intelligence, which is also serving as an incubator for things that we're doing in the hypersonic world with regards to missile defense, et cetera. So these are now enabling that growth to kind of put that in the category of space on the Critical Mission side. On the People & Places Side, with those end markets that we talked about at the end of '16 that we really wanted to focus in on, we've got a lot of tail on that path. It's -- there's a lot of growth to come. But what's an interesting dynamic that's happening on that front is that now with the skill sets we have, we're seeing not only the digital connectivity piece of it, so technology-enabled solutions, which are again margin differentiating as well, but also the convergence of our end markets. So what would historically have been a transportation solution for a new highway or a rail or an airport, we're seeing the convergence of what is an airport. It's a smart city, right? So the water needs, the utility needs, the transportation to the airport, the environmental concerns, the PFAS regulations that are now going to hopefully come through as well, so that connectivity is extending the tail. So I'd kind of lump all of that infrastructure as a long-term growth opportunity.

That's helpful to understand, Bob. And then like if I think about it by geography, obviously, you're bigger in the U.S. than anywhere else. You do have a big U.K. business and then everything else is smaller, right? So like I don't have to worry about China for you guys, correct? And then I do worry about the U.K. a little. So maybe you can update us on U.K., Middle East, U.S. We know the U.S. is pretty strong.

Sure. Let's start with the U.K. And Andy, you appropriately said, the narrative right now, there is a bit of a gap between where the U.K. aspirationally wants to go and what's happening today, especially prior to this budget appropriations or approval that comes out in March. And so there's a bit of kind of a pause that's happened, and we do have a very large presence there. Now so that, I would say, is near term. We're still bullish on the long-term prospects in those public agencies getting back to the levels. A lot of those projects are in situ right now. What we've done as a result is, again, back to the global deployability and kind of global aspect of our delivery model. Our top rail experts in the world sit in the U.K. If you were to go to any major rail program that we have going on anywhere in the world, you'll hear all kinds of accents, one, but you hear a lot of British accents to boot. Because that's where we're able to globally deploy a lot of the folks while we wait for HS2 and network rail and all these things to come through. So I'd say, near term, wait and see, longer term, bullish on the U.K. Middle East is really happening for us right now. Remember, our concentration in the Middle East from an infrastructure standpoint is heavily weighted towards the Emirates and Qatar. And right now with the Expo coming up in the fall, we're right in the middle of all of that and all of the adjacent infrastructure affiliated with that. And FIFA 2022 in Qatar, which we're right in the middle of that, again market connectivity. Those businesses are growing right now at a double-digit rate and we see that for at least the next 2 to 3 years. And then going forward, we'll continue to be a major player there. The U.S., you talked about, very robust, and we feel very bullish about the U.S. The other area, and maybe a slight -- and I wouldn't say it's a pause, it's kind of a mini pause with just some concern, is Southeast Asia. And our infrastructure presence in Southeast Asia, not only from what we call a global delivery center in Philippines and Malaysia, but in Singapore, our business is really on a good track. And that's really driven around the resiliency and the sustainability work that we're doing specifically in water. So really good geographies for us.

Bob, if we put that all together, we haven't really seen any weakness in backlog or revenue, even though the U.K. is big. Is that fair? We haven't really seen it because the U.S. is sort of trumping everything or...

That's true. No pun intended, but yes.

Sorry. I meant to do that. But let me ask you, Kevin -- it's a good transition to talk about profitability. Because one big contrast between you and your big U.S. competitor is they have very low international margins. And they first disclosed that this last quarter, whereas you guys have had margins holding up very, very well in your PPS. So is that kind of what Bob is talking about is that the utilization of the U.K. is never that "low" because you have all these people doing other things basically?

I think that's clearly part of it. I think the infrastructure business, if you think of the client base, it's fundamentally local. And most companies over time develop local capabilities to deliver those capabilities. Well, what that creates is a little bit of a feast and famine kind of dynamic. So you win the airport job in country X, you scope up, you ramp up, you do it and then you leave. And so that creates a volatility in your workforce. It creates a lot of challenges on a variety of fronts. And what Bob and his team have created is fundamentally a global delivery model. And so that probably originally started about a cost play to a certain extent and leveraging off of our large capabilities in Poland and India, Malaysia, Philippines. But that's transitioned over the last few years not as a cost play, but actually more of a capability play. Some of our best now are housed in some of these global design centers. And it's -- we would throw in the Northwest in the United States as being part of that team. So you have some of the best that are executing on that basis. And when you have this global platform, it allows you to ebb and flow your profile and your resource pool at a higher level, which eliminates the volatility. And now that you're actually located in these facilities and these locations around the globe, it might be less expensive. But actually, what it really is doing, you've got this capability set that's global executing around the globe on all projects. And so while you may have a project being executed in, I don't know, wherever it is, Los Angeles, you've got 10 offices around the globe that are fundamentally integrated into the delivery of that program. It just creates such a -- more cost-effective. And you're creating a capability set that's even more powerful because you're not going through this plus and minus in terms of the volatility of how the projects come into play. So that's been a really powerful part of being able to have good margin profile.

That's great. And so I want to open it up to the audience in a second, but let me ask you a bigger picture margin question based on what you just said. So at the Analyst Day last year at this time, you talked about the 125, 175 basis points. Are you happy with the progression in each segment? I mean I'll just ask you simply like that. I mean let me just ask you simply like that without trying to answer the question myself.

Yes. Look, I think that both of our lines of businesses, both Critical Mission Solutions and People & Places Solutions, both have similar margin aspirations in terms of improvement, certainly above 100 basis points, 100 to 150 in that range for both of the lines of businesses. And we fundamentally believe that both of those businesses -- and this was 100 to 150 basis points over the period 2018 to 2021. We fundamentally believe both lines of businesses are on track to be able to deliver those. I would say that our Critical Missions business has some greater lumpiness associated with these enterprise contracts, how they come in and out as the case may be. But that doesn't give us any concern or pause relative to our ability to deliver against those overall margin profiles. And by the way, once we get to 2021, our next version of our strategy, we'll figure out what the next version is going to be. And I can pretty much assure you it's not going to be down.

I'm confident of that. So before -- I lied, I want to ask one other question, and then we'll open it up. So on cash, obviously, you get the question all the time. Let me ask you too simply. Why do you think cash conversion has been at least a little slow to improve?

I want to put 2 concepts in the response to that question. The first one is all of that that was set in motion when we developed that strategy in 2016, which has been executed largely in 2018 and '19, the restructuring and cash spent on the integration and the divestiture have not been inconsequential. It's been a significant investment in cash. And I think that that has translated into a masking of an underlying improvement in the portfolio and the cash generative nature of that portfolio. And I think the other point that I would say is the '18 and '19 kind of restructuring that we were going through in a material way was not an easy lift for us organizationally and our people. And I think that what that has translated into is while we were incredibly successful in bringing CH2M and Jacobs together, and we decided that we were going to do that as quickly as possible because we saw the portfolio alignment and the capabilities to come together as 2 teams, that we forced it to go as quickly as possible. Probably missed a few things on system enhancements and whatnot along the way, but we've got our people together, and that's why we got the pipeline and backlog and accelerating potential growth opportunities longer term. But I will say that the lift has resulted in us, I would say -- and we wouldn't have forecast this, you wouldn't have been hearing me talk this way, but with hindsight, I can talk about it. I think we did break a little bit of China is my term. And so while we did an amazing job on integration and we did an amazing job on carving out the business, which was a heavy lift, DSOs didn't perform exactly as we would have wanted. And if you guys looked at our proxy, we didn't get paid very well on DSO last year and we're not happy about it. So I do believe in 2016 and '17, before we went into this big restructuring period of time, we did see some really good improvement in DSOs. And our expectation, we're going to get back to that in a material way in 2020 and 2021 and we'll get it back and then some. I think what that translates into is our ability to get to a onetime conversion factor for our adjusted net income figures kind of in the -- over the course of 2021. So we would expect to see some really good numbers in 2022 and beyond.

That's very clear, Kevin. So let me just ask, the company obviously has changed since '16 and '17, and you did do a good job in '16 and '17. So is there anything that you need to do differently now to make sure you get to that target you basically just set?

I think it's a little bit about execution. It's up to us to be able to do it. I think we know we can do it. We've proved to ourselves we can do it. I do think the next stage of our transformation continues to be important though, and we haven't really talked about it. It's that next phase of the digitization, us recognizing the value proposition in these consultative arrangements with our clients, which are pretty powerful. And let's be clear that we don't want to price that in a way where we're giving reimbursable, billable hour kind of contract in front of our clients when we do this work. We are reinventing their ability to make better margin, be more sustainable and to satisfy the needs of an ever-changing world. And I can tell you that our competitors are going to be changing. And I can guarantee you, some of those competitors are going to be charging a lot more than us. And so we have an opportunity to ensure our people understand that, continue our cultural transformation where they're comfortable in saying, "Well, wait a minute. We just provided that service, and that's not a billable hour reimbursable rate. We should do a fixed price service contract." Perhaps that has incremental margins of -- pick your number, but it's going to be a lot higher than what we are at right now.

Any questions from the audience? All right. I will continue. So let me focus on digitization because I think it's -- to your point, it's really important, right? Because everybody sort of talks about it. And so it means different things to different people. And people always wonder, is it just everybody has to do it, do you get competitive advantage from it. You've actually started talking about digitization literally almost when you and Steve first came in. So like I remember that. It's been several years now. And I would consider you early, but I don't even know what that means, I guess. So tell me what it means in terms of, to the extent you can, numbers? Is it better organic growth? Is it better margin? Like how does it equate over the next few years?

You want to...

Yes, I think it's -- let's talk about the external benefit and then the internal benefit. I'll start with the internal. When we talk about the disruptive technologies that are out there, that can be not only an enabler for top line growth but also margin expansion. Think about disruptive technologies like autonomous design or machine learning. So today, if we look at what do we do that is digitally enabled internally and look at the overall, what percentage of the portfolio it is -- I don't know if you remember, Andy. Last year, we had to do a notional graph because we actually -- what's conventional today might not be conventional tomorrow. And so it's all kind of mixing into each other. We believe that that's somewhere between 30% to 35% of our work. How we execute our work has some digitally enabled component to it. And that is creating some of the efficiencies that's leading to margin growth. It's also making us more efficient externally and allowing us to -- maybe there are pricing pressures. So everybody -- every one of our clients is trying to extend their capital dollar further than they ever had before. And we're able to offer those types of services, be price competitive but make more margin as a result of that. So that's kind of the internal when we say digitization. We're talking about technology solutions to make us more efficient. And there's even machine learning as well. That's a part of that. Externally, it really is taking our deep domain expertise and using technology to further enhance that offering. So the buzzwords today in the marketplace are autonomous vehicles, smart cities, smart plants. In fact, for the Air Force right now, at Tyndall Air Force Base, we're doing a smart military base. All of that comes from our decades upon decades of domain knowledge around those transportation systems and those buildings and those utility systems, et cetera. So that part, I'd say, within the next couple of years, it's going to be a majority of our work that we do. And so that's kind of a journey that we're going on right now.

Bob, so like I cover some of those companies that build those buildings, for instance, or make products that go into those, and they all talk about digitization of service and stuff. So like how do you differentiate yourself as a service company versus those product or building guys who claim that, "Well, I've got domain knowledge because it's my building"?

And when you say those the general contractors or are you talking about...