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

Hi. Good morning, good afternoon and good evening, everyone. My name is Chad Dillard. I'm the lead analyst here at Bernstein for the U.S. machinery and the engineering and construction sector. And today, I'm very pleased to have Jacobs Engineering here. And with me, I'm joined by Steve Demetriou, the Chairman and Chief Executive Officer; as well as Jon Doros, the Head of Investor Relations. And so the format today is going to be a fireside chat. We're going to kick it off first by Steve just saying a few words, and then we'll dive into a Q&A session. And I highly encourage all of you out there to join in as well. [Operator Instructions] So without any further ado, let me pass it over to Steve to say a few words.

Thank you, Chad. Welcome, everyone. I'm sure many of you have followed Jacobs over the last several years, but maybe I can just sort of kick it off by reconnecting you to sort of where we've come from over our -- what we call our transformation period in the last 5 to 6 years. So back in 2015, the company changed out both the CFO and the CEO. So Kevin Berryman, CFO, and myself joined in 2015. And Jacobs, which have been a very high-quality company for 70 years, was relatively unknown, had hit a wall, had stopped growing and really didn't make the transition from a small company to a big company, as we've grown now to being a Fortune 200 company. And so what we ended up going on was a pretty transformational chain starting with our culture and our organization. And we spent the first 12 to 18 months just basically changing out leadership, changing the organizational structure of the company, moving from sort of a "go after any business everywhere" to very focused global lines of businesses. But most importantly, we put a big effort on our culture. And the culture, which I can talk more about today, has, I believe, been the main reason why we've achieved significant success. And what I get excited about is we're still in the early stages of that culture transformation, and so we believe it's going to take us to greater heights as we move forward. The other major change in the company has been a massive portfolio change. The big step we took was to divest about almost 40% of the company with exiting our oil and gas and mining and chemical business, which was the legacy of Jacobs, and recognizing that, that business was -- the trend of that business was cyclical, low margin and under threat from climate change, et cetera. And we redeployed that capital to a major investment at CH2M that doubled down on infrastructure and then a series of acquisitions that have moved us up the value chain around being a more innovative digital company in -- especially in the area of things like cybersecurity, but also more recently, a major step in a strategic consulting investment with PA Consulting to really sort of now get to the point of an end-to-end solutions player that continues to move up the high value chain. We're very much tied to global infrastructure, advanced facilities in areas like life sciences, semiconductor, electronics and government services with a big part of that being in the U.S., but also supporting other governments that are aligned to sort of the U.S. standards and again, a very high-growth, high-margin business. So with that, Chad, I'll turn it back to you.

Yes. Thanks, Steve. So Steve, I actually wanted to start this question session just talking about culture. You talked about in your prepared remarks that you're in the early stages of that whole journey. But what does the drag look like from here? How are you planning to continue evolving it? And maybe you can touch on just sort of like the emphasis on ESG that you're placing within your business.

Sure. I can't say enough of how important culture is and the fact that when people ask us why we've had such success over the last several years, I always first go back to culture. All of our competition have decent talent and good intentions. But if you don't get your employees aligned, inspired, focused and understanding the strategic connection to the company, then most companies fail and especially when you get into M&A activities as well. So what we did going back 5 or 6 years ago was we totally changed the makeup of the company from the leadership side. When I'm talking about leadership, I'm talking about the top 50 in the company out of our 55,000. And diversity and inclusion was clearly started much before it became the trend, before all the different movements. And we've massively diversified the leadership. My executive leadership team is completely diverse now, including 50% female. And what's that allowed us to do is to make better decisions, better instincts and we believe drive better financial and shareholder performance. The other big piece is if you go back to 6 years ago, if you look at that top 50 in the company, there's only 3 or 4 people that were here 6 years ago. And so -- and when I talk about diversifying, I'm also talking about upgrade the leadership. And the 2 areas that I think the most of as far as upgrading leadership is around business commercial acumen. We have great technical expertise, great engineers, great scientists but what we needed was better business and strategic acumen. And that's been a big investment in our leadership, but also to have a strategic mindset with a drive that just continues to want to improve no matter how successful we are. So it's almost managed by paranoia that the better we get, the more we're leaning in to relentlessly think about how we move to the next level of staying ahead of our competition. We also did things like significantly tie our compensation to performance. And I think we have a best-in-class way that we do that. At the bottom line, it's all driven to the things that our shareholders are looking for. If we boil our culture down to really 3 things that we expect our leaders to emulate and visibly drive and that's inclusivity, inspiration and innovation. And it's the makeup of a very deep dive training that we're now cascading through the organization. And then I'll finish by saying we did a massive brand reshaping for the company. And it was important because Jacobs was his -- when I arrived, it was relatively unknown and pretty amazing because of the things that we do for the world. And we've created a new brand, and that brand is helping us unleash the culture and the benefits of -- that we'll talk about today of Jacobs. Look, when it comes to ESG that you've talked about, Chad, the -- that's what's exciting. When we -- I talk about the portfolio change we've made, we are now a huge end-to-end player and solution provider for all of our clients' ESG objectives. But it starts first with our own house, in-house capabilities, and I'm pleased that we achieved 100% renewable energy from our operations last year, achieving net zero carbon, and we have aggressive goals to be carbon negative over the next 10 years. The -- on the external side, the key thing around the ESG is, is we're now measuring and demonstrating what we're doing. Our ESG, we have calculated, is now greater than $5 billion of our total revenue, which means it's 1/3 of our revenue and growing fast. And as I said, it's because we're now applying ESG solutions to almost everything we do as we win new business and start executing those for our clients going forward.

So yes, actually, just to continue on the ESG theme, so you mentioned that about 1/3 of your business is now very like ESG-focused. How do you see that business evolving? Are clients explicitly starting to seek you out to put together strategies to actually improve their ESG scores? Like what's that dialogue like?

Yes. Well, it's a great dialogue because when you go back to the question about culture, it's really been the culture of change of the way we approach our clients now. 6 years ago, we were a billable hours company. A lot of our peers are still focused on how do I get out there and drive billable hours. For us, it's a mindset of we're providing solutions, and ESG is a solution that every client is now looking for around the world. Different stages, some are pushing harder, but everyone is thinking about it and positioning for that wave. The -- and so when we get RFPs, we actually turn it around and proactively go back to the client and talk about how they need to modify their RFPs and really adjust to climate change, the digital movement and really bring all that together. And so the dialogue with clients is let's not just build a road or a highway, let's have a greater purpose and a sustainable solution purpose. So we're connecting infrastructure to disadvantaged communities. We're helping drive smart technology, smart city solutions rather than looking at one-off infrastructure that is going to -- you do something great here, but you haven't solved the problem on the connectivity side. And so it's a great dialogue that is leading with our end-to-end capability, with our consulting front-end capability, the largest design player in the world and all the solutions that we do along the way of that sort of end-to-end chain is really helping clients proactively now go after their ESG opportunity. It's evolving quickly. When we look at markets, one of our biggest markets are in the U.K. and Australia, for example, that's table stakes now. Everything is ESG-driven. All the wins that we're doing in transportation, water, buildings, smart cities is all accelerating. And so as far as now, what we're doing when you look at sort of the ESG, how do our clients get funded, the thing that we're doing is we're bringing the social value element of it. We acquired and made an investment in a company called Simetrica a few years ago. We've now expanded that globally. We're able to, on the front end, help the clients value it more than just the financial side, but the social side of what it does to the community, the benefits for the people, how it creates diversity, et cetera, in their cities. And that helps them get things funded in their communities with their governments, et cetera. And so it's a tremendous opportunity that we see as one of our highest growth opportunities in the company.

And actually, speaking of growth, so can you just like lay out what components make up your ESG business? Where are like the biggest growth opportunities? And overall as a whole, I mean, how should we think about the growth trajectory of that $5 billion?

Yes. It's wide-ranging because it's covering so much of what is out there that needs to get done. Obviously, decarbonization is a big piece of what we help provide our clients. And when I talk about clients, I'm talking about our state, local, federal clients, I'm talking about our private clients in life science, electronics, advanced facilities, critical manufacturing. But some of our examples of work that we've been doing for the last couple of years and big pipeline of opportunities is coastal resiliency, sea-level rise. The Embarcadero in San Francisco, a $20 billion initiative that San Francisco is doing, we're a major player with the city there. Environmental remediation, that is covering all remediation. Of course, we're big in nuclear remediation, but we're the leading player globally now in providing all of infrastructure and advanced critical manufacturing environmental solutions. The energy transition to renewable energy, hydrogen, we're becoming a critical player in the whole hydrogen solution that's out there, energy storage, battery storage. But then you even extend that when we're talking about ESG, and I could go on, by the way, on the climate change side, PFAS, big player in PFAS. But when you think of the ESG, it's not just the environmental, it's the social side, it's the governance side. And the things that we're doing to help be a leader in the reshaping the world around equality and diversity because how infrastructure plays a big part of that, but then the education side of -- we're #1 player globally on education with the facilities and innovation and digitization of education sector and on and on and on. So it's a pretty wide-ranging market, Chad, that creates a tremendous growth opportunity for the company.

Great. And moving over from growth, just thinking about just profit contribution, can you just talk or give us a flavor for how the margin profile of this type of work compares to your broader corporate average?

Yes. The -- what we're finding is it's margin-enhancing, and part of it is because of the thought leadership side of it. As we are doing more and more consulting around these solutions that are needed, the margin profile of that consulting piece is significantly higher. The digital transformative nature of achieving climate change solutions, it's not just things that anybody can go out and do, its differentiated solutions and therefore, the competition is less. So therefore, the margins are stronger. But the other piece is that, and it's a bit of a theme on anything we could talk about today around our infrastructure business whether it's climate change or stimulus or whatever, is that there is a tremendous pipeline of opportunities. And when I go back to our culture of strategic business commercial acumen, we're actually in the front end pursuing those opportunities that are higher margin, to some extent, cherrypicking those and leaving any of the lower-margin stuff to others to deal with. And when you put all that together, it's part of the reason why our P&PS business has seen significant margin improvement over the recent period, and then you layer on PA Consulting on top of that, which the margins are significantly higher on that side of the equation, it is clearly margin-enhancing.

Okay. So just to broaden the aperture, I think going back to your original comments about just like how much transformation Jacobs have done over these last few years, you sold off your commodities business, acquired CH2M, KeyW, it's a number of different transformational assets you've acquired. What's in store for the next 3 years? Can you lay out your strategic priorities?

Yes. And I'll be able to lay it out with the several of my leaders later this year when we have our Investor Day and lay out our new 3-year strategy. As you know, we launched a strategy in 2016. We met and exceeded all the expectations there, especially around margin improvement and some of the things that I've talked about. 2019, we've layered on a new strategy, which was an extension of the 2016 strategy, and that's gone extremely well. And now we're going to be coming out with our 2022 to 2024 strategy later this year. But what you should expect to hear is that we believe we're facing the best growth dynamics the company has ever seen. The -- we're aligned to multiple large addressable markets that are poised for transformational growth, decade-long growth. And so some of the things that I've talked about with you are -- starting with our CMS side, our hypersonics, we're front and center on hypersonic solutions with the Air Force, with NASA and other areas. Space, which is well funded even recently as we look at the DoD funding that just came out, and we're both in the largest player for NASA in space -- deep space exploration, but also space intelligence with the KeyW acquisition and some of the other initiatives that have high growth margin. Digital modernization is a big play in CMS. Intelligent Asset Management, we've had winning streak and demonstrating our new Intelligent Asset Management model across different domains in the government space. Because of the acquisitions of Buffalo Group and KeyW and some other steps that we've taken, we're now in a majority of the intelligence communities where in the past, we were in less than 50% of them, we're now a major player. Obviously, cyber is a big play for the company. We've become one of the top cyber players with our various acquisitions where we're a huge player in the 5G deployment across the globe. And these are examples of what's going to drive the CMS business. On the P&PS side, look, it's -- you've got to start with infrastructure stimulus everywhere. It's not just in the U.S., U.K. is -- we're seeing the early-on benefits of that, their major stimulus. Australia, Singapore, almost every government recognizes the need because of climate change, because of digitization needs and because of economic recovery coming out of the pandemic. It's a major opportunity. So when you think of P&PS business, climate change, stimulus, infrastructure modernization, crumbling infrastructure and Western communities like the U.S. that need to get after it and then you layer on with that is what we're looking at as one of the best growth profiles over the next many years in our electronic, semiconductor and life sciences, advanced facilities, critical manufacturing businesses. That electronics business, semiconductor, the need for automotive chips and all this future work that is massively changing, that we're seeing a tremendous opportunity right now and the pipeline of multiyear opportunities is tremendous. And then on the life sciences side, with the pandemic and all the focus on COVID and therapies around COVID and vaccines, et cetera, there's a pent-up demand to get back to the gene cell therapies and some of the other critical needs that the world has around pharma, life science technology, which we're the #1 player globally. And then on top of all that, you lay PA Consulting. And PA Consulting is just that entity, and we showed it in the last earnings call already in the first quarter we owned them, is a tremendously high-growth business because of what they positioned themselves in. But they're still narrow. The majority of their business is in the U.K. They've been initially now growing in the U.S. We're going to bring a massive growth opportunity to PA Consulting in places like the U.S., Asia Pacific, Middle East because of our decades-long of domain capability that they want to consult in. And we're now seeing early-on stages of synergies between PA and our Jacobs legacy businesses. We just had a major win in the U.K. where the margins on that win are double the traditional P&PS margins. And so the opportunity to basically remix the portfolio, drive higher-margin opportunities is really going to -- you're going to be hearing that as a major play for our strategy that we'll roll out at the end of the year. And then the other big piece, which I won't get into the details are, but you've heard it over the last several earnings calls, is our Focus 2023 initiative, which is really Jacobs for Jacobs. It's how do we take all this transformative things that we do for our clients and continue to transform the inner workings of Jacobs. And it really is a combination of significant cost efficiencies, but also recognizing we need to change the whole operating model of the company, the agility to be a company that is able to win in this new dynamic disruptive world is we need to do that in parallel. As we've been doing with our culture, it's also to do it with our operating model and our -- the way we go to market and execute for our clients. And so it's a very exciting combination that leads to higher margins and double-digit growth -- double-digit profit growth going forward.

So Steve, I think you may have listed out maybe at least 10 different kind of massive opportunities, right? How do you prioritize? Like what are like the top 3 things you need to get right, which markets?

Well, clearly, the infrastructure stimulus in the U.S., if you want to just take one in particular, is to execute on what we believe is the best-positioned player to scale up quickly and to be able to provide the resources to that opportunity because of our global integrated delivery, unparalleled ability to access resources around the globe that are high-value engineering resources. Our contract structures with our infrastructure clients had allowed us to quickly scale up to get early-on wins as that stimulus rolls out. And the fact that, that stimulus that we're hearing about, that is going to get done and will either be bipartisan or reconciliation. It covers -- we cover 90% of what's in that stimulus as we've analyzed it in depth. Climate change. And the third one on P&PS is the advanced facilities. That's here and now, by the way. We're now like going to throw to that one, and that's going to benefit us probably even earlier than the infrastructure stimulus because that's here and now. And then on the government services side, I think the big priority there is we are a proven player in the large enterprise recurring revenue, nuclear remediation, NASA and now these Intelligent Asset Management wins. The key is really to now layer on top of that these IDIQ, high-margin, mission IT, data, innovative data, infrastructure modernization, et cetera, for the U.S. government initiatives.

So just going to your comment about double-digit EBITDA growth over these next couple of years, can you just lay out the roadmap in terms of revenue versus margin expansion? And particularly on the margin expansion, maybe you can touch on just like how much more room is there for a large expansion in your 2 businesses, CMS and P&PS?

Look, I think the CMS side, the margin expansion is what I just touched on in the last comments around what we have -- we've layered a very nice foundation in -- of 5- to 10-year contract-type businesses that have very high return on invested capital, but modest margins on these recurring revenues for these large enterprise contracts with the federal government. What we have now is the portfolio to layer on top of that these IDIQ fixed-price -- low-risk fixed-price projects that will get us up the margin chain. And we're well underway. If you look at what's happened this year already in the first few quarters, you can see the margin expansion happening on CMS and we're going to continue to drive that. We'll lay more details around that with -- in the Investor Day. On the P&PS, it's exactly what I just talked about, the climate change and digitization. It's going to require things that very few competitors can do and move -- and we moved up the consulting chain around that. The margins are -- you've been seeing the track record of doing that. We believe that has significant runway to drive further margin improvement. And then the pure-play PA Consulting work that we're doing, which has significant growth both organically and inorganically, then you move into a whole another layer of margin opportunity. So it's the reason why we're comfortable to get out there and say double-digit profit growth with higher margins moving forward.

Okay. So you talked about how you're kind of transforming how Jacobs goes to market, right, going from kind of like an enterprise contract company to more mission IT like IDIQ. I guess what gives you the confidence that Jacobs has the right skill set to approach these new types of -- this new type of work? And what have you done internally to, I guess, transform the core competencies of Jacobs to actually win at the same win rate as you did in those, I guess, the prior types of projects?

Yes. It's part of the transformative culture and strategy that I've been talking about so far today. It's -- everything you just said is what we've massively changed in the company. First of all, the capital deployment that we've executed, which I think has proven to be very successful, is we've acquired a transformative talent to be able to drive a lot of what I'm talking about, but match that up with the legacy Jacobs delivery model that I mentioned before is unparalleled. Our ability to access resources from all over the world to wherever the local opportunity is, is something that we've spent years developing and is unparalleled in the industry and is going to be critical as we scale up to this next level to go after this massive growth total available market that I've been talking about. But we've organically invested in this as well with -- through the organization. As I mentioned, we're still early on in this whole culture change and leadership revamp. We've done a great job at the top of the company with the first couple of hundred people, but we have thousands of leaders out there that drive our 55,000 talented people. And so this ability now to cascade that is where we're investing capital significantly. The tools that we've upgraded has been massive when we've talked about it in earnings calls of redeploying as we've gained a lot of these wins and we've redeployed internally in the company. And the partnerships that we have added to the company, when you talk about ESG and innovation, just example of one that is very exciting is this Biomimicry 3.8 where it's all about nature-based solutions for buildings, products and other applications. And it's a partnership that we just recently added. And I could bring off several others that the whole partner mentality is much different now going forward because it's got a business acumen, it's got a commercial acumen, it's got a strategic acumen that didn't exist in the past. And you just put all that together, we're very confident that we have the operating model and the tools and the resources with proven history to go out and win the hearts and minds of our clients to select us for these innovative solutions.

Got it. Okay. So Steve, now I want to dig into sounded like the specific opportunities that you've looked at off as growth areas. I think one of the first things you mentioned was hypersonics. And I mean, historically, I wouldn't have associated Jacobs with hypersonics, but it seems like that's a new path that you guys are going into. So I guess where does Jacobs play within hypersonics? And can you talk about how you guys are differentiating yourselves from a competitive standpoint relative to some of the incumbent players that you're going to be facing there?

I think -- a couple of things, I'll say. Where we play is very much with the U.S. government around this. And specifically, I previously mentioned the Air Force and NASA are a couple of real-life examples of what we're doing there. But we've built up to this with adjacent recent transformational wins and proven capabilities around our missile defense work with the U.S. government, which the hypersonics is an adjacent market to that. And so -- and what we've been doing is demonstrating with the government as they look to really change their whole model around overly depending on the big OEMs and really taking back some of the technical thought leadership and having more agnostic solutions, not sort of whatever that OEM is really trying to push, at a more efficient cost structure, and that's -- this whole sort of rapid solutions capability that we brought as we've combined different acquisitions and our organic strategy. And I now have won hypersonic initiatives with both those, for example, federal government agencies that I mentioned and have an excellent pipeline. And it's a market that just, when you look at the recent budget that just come out from the DoD, is prioritized by the U.S. government, is a high-growth market over the next several years with funding. So it's an area that we're pretty excited about.

So moving on to your Intelligent Asset Management. That's been a relatively new area for you guys. Can you talk about the opportunities ahead, the value proposition that you're bringing to your customers? And how are you different?

Yes. The Intelligent Asset Management is really everything that I've talked about is to be able to take past proven success like NASA Langley. Excuse me for a second. So NASA Langley, several years ago, we transformed NASA Langley into a smart R&D site with -- around sensors and digital connectivity, et cetera. And we -- as we recognize the capabilities we have in the company to do something like that for NASA, we put together -- NASA Langley -- we put together this Intelligent Asset Management strategy to be able to go in and help large government sites -- whether it's the military or intelligence community and others, massive available market to us -- to go in and to drive significant efficiency around labor, CapEx, maintenance, predictive analytics, data algorithms to help turn these sites into intelligent lower-cost digital transformative sites. And we focused with the U.S. Navy. We -- when they came out with 3 RFPs, we won all 3. We've announced them, the Navy in Mayport in Florida, the West Sound one in Washington and in Kings Bay in Georgia. And all -- each one of these are 8-year type contracts, $400 million revenue over that period and higher margin than our traditional business that we were going after in these large enterprise opportunities. And so the opportunity now exists to continue to drive that with Navy. And the Navy, there's a nice pipeline of opportunities over there over the next 5 years, but then you got the Air Force showing some early on interest, we got the intelligence community, and now we're going to translate that across other federal government sites.