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

All right. Hello, everybody. My name is Adam Seiden. I'm the U.S. Machinery and Construction Analyst at Barclays. Thanks, everyone, for joining us for this session at our Barclays Select Conference. Joining us in this session is Bob Pragada, COO from Jacobs; as well as Jonathan Doros; and Ayan Banerjee for the Jacobs IR team. So just some quick administrative stuff here. Since we are virtual, we are continuing actually our trend of doing these audience response questions that we would be doing in person if you're down in Florida. You'll see on the side of your screen, I believe it's on the right for most folks, there should be a list of -- a list of questions, 1 to 6, that we hope that you could find the time during this presentation and fireside chat to complete. Before I pass it off to Bob just for some opening remarks on Jacobs, I did want to just remind folks that if you had some questions regarding -- that you wanted me to ask Bob or the team here, please just shoot me an email at adam.seiden@barclays.com and we'll go ahead and ask them for you. So Bob, maybe -- thank you very much for joining us. And maybe I'll pass it over to you just for a quick intro on who Jacobs is for the new joiners in the audience.

Yes, absolutely, Adam. Thanks for having me. It's great to be here. So just from an overview perspective, Jacobs is a professional and technical services firm, operates in 2 primary segments around the world: Government Services, we'll talk about in a second; and our People & Places business, which is predominantly our infrastructure and our built environment business. From a size standpoint, 55,000 employees spread over 40-plus countries, about $14 billion in the top line and with growth prospects that continue to be very, very robust. The end markets or the verticals that we support in the government world, predominantly in the cyber, intelligence, enterprise and mission IT as well as mission -- weapon sustainment and in the nuclear remediation space. In the infrastructure and built environment, exactly that, transportation, water, environmental, the built environment, life sciences, semiconductor and all the advanced facilities components, too. Just a couple of notes on kind of where we've been and where we're going. A lot of you might have heard of Jacobs years ago as the predominant E&C company that was very focused in on the process chemical industry as well as kind of in government services, we were well-known for the work that we did within the space in the space exploration work. We've really transcended from that. Those are still -- not necessarily oil and gas, we've now departed that business, but over the last 5-plus years, been through a pretty dramatic transformation. In 2015 and '16, in the prior, Jacobs spent a bit of time working on focusing in on our key markets, key geographies and services that brought value. It did a bit of fixing. We had done some acquisitions in the past that maybe we didn't integrate quite effectively as we wanted to. And so really honed in on optimizing the skill sets and the platforms that we had. From '17 to '20, just a real -- '16, '17 to '20, a real transformational period where not only from a portfolio standpoint, exited the oil and gas business, doubled down on the infrastructure business, and really honed in our skill sets in the cyber and intelligence world with regards to government services. But even more important, a strong, strong focus around inclusion and diversity and ESG from a cultural shift. And now as we look forward in capitalizing on everything digital in the digitization of the world, that technology-enabled solution, whether it be in our critical mission solutions, government services, or our People & Places business, [ REIT ] infrastructure and advanced facilities, that strong, strong drive to use technology to continue to bring world-class solutions to some of the biggest challenges that face us in the world. So really excited. We just had our earnings call last week, Adam, as you know. It's strong performance in Q1. We've been able to really weather the pandemic solidly, you could say. And the tailwinds in the business right now coming out of the pandemic really look good, and we're very optimistic.

That's great. And I think that's a nice transition. And so where I wanted to start is, I feel like in the environment that we're in, we have to talk about the pandemic, and you guys had a very successful year, given the circumstances. You picked up the COO responsibility for the global business entering 2020, and you were dealt with this. So congratulations. So I guess where I wanted to start here is now being a year later what are some of the learnings that you've had from the pandemic? Where were some of those bottlenecks? And where do you think the business was a bit more agile than you expected?

Yes. Absolutely. It's interesting, Adam. Some of the learnings from the pandemic -- by the way, you're right, my timing seems to be excellent. But I remember, this is a quick side note, my first really big promotion within Jacobs to running an operating unit, one of the larger operating units back then, was 2008, right? So my timing is perfect. 2008, 2020, I just had it all down. The learnings have been just the real resiliency in the business. We walked into the pandemic, 55,000 employees, about 15 of those -- 15,000 actually go to job sites day in and day out, whether it be defense sites or operating utilities or whatnot. 35,000 work from an office environment. And our ability to pivot into a remote working environment, with all of the potential headwinds of productivity concerns, logistical concerns, IT concerns, the business completely outperformed from that perspective. And the resiliency, I'd say, of the business came through even in areas, probably more so on the government services side, where we weren't allowed to get to the site. So the use of technology in order to enhance that was fantastic. The second is around the importance of client intimacy. And this is something I've talked about the last 5 years. But this is something in Jacobs that we've had for -- well, since Dr. Jacobs, 70 years ago. And that all played forward. And I remember folks like Dr. Jacobs and Noel Watson, talking about the importance of that, understanding your clients' issues and your clients' challenges and your clients' opportunities and getting intimate with the science of your clients' business. That came through in a huge way over this period of time, and it really paid dividends. And then the last thing is around the power of the culture. We worked hard on this over the last 5 years, as you know, Adam, but we tested it in a big way. And so the speed by which we could pivot, whether it be from cost leadership and things that we had to do while the external markets were kind of figuring out their way or binding together during some of the mental health topics that faced us. It was pretty spectacular on that power of the culture and what it did for us.

Yes. No, that's very helpful. And you guys certainly weathered it fairly. So I guess -- but the new thing I just learned here is that we have the Bob promotion indicator. [indiscernible] where all the crisis is. We'll move forward. Maybe -- what I want to do here is, recently, you guys announced an acquisition, or that you have an agreement to form a partnership with PA Consulting. And that business is a bit more service-y consulting type work. And at least how I look at it, is I think you could potentially be a third leg to the stool, and raise the value proposition of the overall business. So what I was hoping you could do -- could you help qualify and potentially even quantify what PA means to you guys? What the potential cross-selling opportunity could be? And then maybe we'll go from there.

Yes, absolutely. So just maybe a couple of precursor comments on PA. If you remember, Adam, and you were there. In February '19, we unleashed our kind of the extension of our strategy, talked a little bit about it before. Within P&PS and also in CMS, we talked about the digital connectivity and bringing digital solutions to our business. And even then -- even you and your colleagues have asked about, hey, kind of what are those new markets, and we talked about this market called digital engineering from a consultancy standpoint. So the gestation period of us looking to see, hey, it's not the classic consultancy. We're already on value trajectory with regards to our clients and using technology to enable the solutions that we can provide what's out there. PA was on that list. So we looked at a lot, we looked at a lot of kind of the classic -- you think Cognizant and Infosys and those that are really centric in IT, but really IT outsourcing from that perspective. And then there's the management consultants that have standard schemes around whether they're pyramid models or 9-step processes, but it's kind of a standard road map for management consulting. PA sits kind of in the unique spot where they have a deep domain knowledge in the markets that they serve, in those markets we've talked about before, some of them are same markets that Jacobs is in. But the solution is really an innovation-led solution that capitalizes on a wide variety of skill sets. Digital skill sets, everything to break down from cyber, Internet of Things, even manufacturing technologies. And so when we looked at that, we said, wow, this could be -- this is where we want to go, first. Second, there -- if we were to take that and couple it from a synergy standpoint, with our domain expertise on that, how to actually build, design or build these types of capital programs, projects, that bring value to our clients' business, that could be a really, really strong, strong model. So from a qualification standpoint, that synergy -- those synergies are there. Really right now between signing and closing, we're actually pulling our people back and only prioritizing those that are going to have the maximum model. Because from a quantitative standpoint, PA's business independently is a strong one. And we want to use each other as a catalyst to grow each other's business and the beneficiary ends up being all of us. So we -- just to put -- you might have to go back -- go back and look at what we said back 3 years ago, if we were to flash forward 3 years from now, I would say that the synergies with PA could be in the same realm as what we've done with CH2M.

Interesting. Okay. So that's a good bogey right there. And so that gets a little bit to the dollar amount of the revenue synergies. But then even when it comes into molding the PA model into the Jacobs business, is that possible? Is that something that's going to take a while over time? Or what's like the gestation period there that you think would be required for something like that?

Yes. So just wanted to clarify a few things. One is we are not integrating PA. And one of the things that we want to be sensitive to is that though, we see a strong amount of cultural alignment between the 2 companies, the identity and where PA sits, we want that to be independent. Now as we move forward, and we're growing together, there is like a Venn diagram, the classic Venn diagram. That shaded area of the Venn diagram is where we really see the uniqueness of this model, and where the client is going to be the benefactor of what we have both to [ make ]. Now we don't want to make PA Jacobs, and PA doesn't want to make Jacobs PA. But this new entity that we're moving towards could get really, really exciting. Would I handicap it with a timeline right now? Probably premature to say, Adam, but I'd say that we will see some immediate traction right after close.

Okay. Got it. And then...

We're already collaborating on it right now.

Got it. Maybe then could you help us a little bit about understanding the PA business in terms of the markets where you feel like they have a true competitive advantage? And then when -- one of the areas where you've talked about regionally that you feel like, from a revenue synergy perspective, where you could grow as in North America how successful do you think you could be there and using the platform that you -- and the relationships that you already have with your existing customers?

Sure. So let me talk about the markets first, and then I'll talk about kind of the geography and where those markets and the geography collide -- or not collide but come together. In priority order: life sciences and health care; the consumer goods world, and I'll come back to why on each of them; energy and utilities; transportation, these 2, we didn't even announce in the Investor Day, we talked about defense and security and public services. But now with the -- not now, but now as these relief and stimulus programs come out, both in the U.S., U.K. and around the world, that is becoming a bigger and bigger piece. These are all growth areas that we see collectively, we're going to be able to really bring our skill sets together, and I'll give a couple of examples there. And yes, the sweet spot will be the U.S., around the private sector. And so why did I select those? If you think about life sciences and health care, today, yes, myopically and holistically, we are focused in on, from a Jacob's perspective, continuing to drive the production of vaccines and our deep client relationships there. PA has been involved with the life cycle of the pandemic, all the way back to unique ventilator designs through manufacture, clinical trials, training the medical staff and now is heavily involved with NHS in the test and trace and the digitization of the deployment model and program management of how do you take a multi variable transmission rate, population densities, need, all of those together and deploy vaccines. We're now taking that model here to HHS as well. But then on the other side, there's a pent-up demand that's now growing for non-COVID related therapeutics and vaccines. PA right now has been innovating around the scale-up for some of those start-ups that end up becoming the BMSs and the Pfizers and -- of those molecules today in their innovation center in Cambridge. Tying that together with Jacobs, and what we know how -- once these things are -- once these molecules are scaled up, how does that go into a production environment, that's going to be pretty powerful. And we've already tested that with our client and already seeing that. Consumer goods, all around, clean manufacturing -- or green manufacturing, I'm sorry. And so single-use plastics in working with big chemical companies on how, from an ESG perspective, we can start -- they can start to work with manufacturers on getting out consumer goods in a much more sustainable way. PA is involved with that entire -- that entire cycle, life cycle. We historically have sat at the manufacturing side of that. And the list kind of goes on. From a public services and defense and security standpoint, once we get a stronger U.S. establishment for PA in the U.S., those technologies that are currently being deployed with [ MOV ] and others in the U.K., those are going to have some real synergies with what we're already entrenched in, whether it be intelligence or DoD agencies too. So overall, I can talk forever on it. It's a really exciting story.