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

Hello, everyone, and welcome to the KBCM Industrials and Basic's Conference, ESG-related infrastructure presentation with Jacobs. My name is Sean Eastman. I cover Jacobs for KeyBanc, and I'll be your host for the discussion. We're joined by CFO, Kevin Berryman; Senior Vice President, Global Strategy and Solutions, Jan Walstrom. Thank you both very much for connecting with us today. The Jacobs team has some prepared remarks. I have some questions prepared. Investors are welcome to submit some questions using the Q&A feature. We've got about 30 minutes. With that, I'll pass the floor to you, Kevin.

Yes. Thanks, Sean, and welcome, everyone. Really excited to be able to spend a little bit of time this morning or afternoon, depending upon where you are talking about a lot of great stuff that's going on at Jacobs. I thought for the interest of those who may be a little less familiar with Jacobs, talk a little bit about, overall, what Jacobs is all about. Some of the transformation that's been going on. And specifically, some of the things that are really exciting relative to some of our ESG-related initiatives, which we're going to be talking about specifically today. Just as a way of starting up, we just reported our results a little bit ago for our Q2 results ending March 30, really excited about the performance that we were able to put on. And I think it's a function of a lot of different things, which we'll talk about in a second, but I'm not going to go through each one of these numbers, but you can see that, generally speaking, our net revenue showed significant growth in the second quarter. We had adjusted EBITDA well into the double digits, actually almost reaching 30%, good backlog growth and fundamentally, a new addition to the team, PA Consulting, which we just invested and finalized a partnership with PA. Their underlying Q2 revenue growth was up 28% year-over-year, and we own 65% of that organization. So have put together some pretty strong numbers. It is fundamentally a company with 55,000 employees, about $12 billion in net revenue at this particular point in time. And it's been actually through a pretty significant transformation over the last several years. You can see some of the things on the lower left-hand part of this chart, which I'm not going to go into in detail, but effectively, very, very strong performing organization at this point in time. Maybe going to the next slide, talk a little bit, I think, about why we are able to put up some of those numbers. And new executive team came in place over the course of 2015, myself, Steve and Bob Pragada; Steve Demetriou, our CEO; Bob Paragada, our current CEO and put in place the first ever strategy for Jacobs. And I've called it a fix and focus theme for that first few years, which was really about getting back to basics and actually starting to make some choices relative to which businesses we wanted to be in and really double down and support in which we did not. And ultimately started a culture, culture change in the organization, leveraging off of some very strong heritage that Jacobs had always had in place, but we doubled down on those things, which are most important. In 2017 and '20, we started to execute against that strategy in a material way. We bought a CH2M organization, which is provided a foundation of excellence in the environmental space, which we're going to be talking a lot about today. We actually divested what was considered maybe the legacy of our company, which is the energy, chemicals and resources business at the same time, which was not an interesting or easy trick to pull off, but we have great people that was able to do that. We've done series of other acquisitions, which have accelerated our position into higher value-added efforts. And so as we now are looking at 2021 and embarking upon the established of another version of our strategy, it's really about a continuing doubling down on our culture enhancements, which is really focused on inspiration. It's talking about our culture of inclusion and diversity and becoming a company like no other, as it relates to it being a place where everyone in Jacobs wants to stay, and everyone outside of Jacobs wants to come in. And certainly, that's aspirational in nature, but we feel like we're well positioned to continue to drive that. If you think about where we are now because of this transformation, we are basically well positioned against, I'll call it, 10 general verticals. You can define verticals however you want, but I'm going to call fairly large verticals of cybersecurity, space intelligence, space exploration, information, technology transformation in the government services space, environmental remediation, transportation and other related infrastructure matters, remediation and all of that leading to what we believe is an opportunity for us to be positioned against each one of those verticals. All of them with potential long-term double-digit potential growth opportunities for the company longer term. Long-term, sustainable, decades-long growth opportunity. So we're very, very excited. And really what we're going to be talking about maybe going on to the next slide today, which Jan is one of our key leaders here, and I'll kind of turn it over to you, Jan, as I talk about this. We have fundamentally, through that transformation, now have nearly $5 billion of that $12 billion revenue, which is really focused against what I will call environmentally related opportunities of substance. And you can see this chart which talks about the net zero economy becoming one of more substance and the role that we can play in that. And clearly, if you think about the current administration in Washington, leaning forward as it relates to ESG-related manners. And so we're very excited about everything that we're doing and everything that we can do into the future to help support our clients' ability to be better in this regard and ultimately helping change the world as it relates to becoming a better place to live from an environmental perspective. So Jan, let me take it and hand it over to you to take it from here, really excited about being here to be able to talk a little bit more about this.

Well, thanks so much, Kevin. Really appreciate the opportunity to be here. Jon, if you'd advance to the next slide. We'll talk about Jacobs' journey around focusing on sustainability, resilience and where the world is going to now with a focus around ESG. And for us at Jacobs, sustainability means ensuring long-term business resilience and success while positively contributing towards the economy, society and the environment. We do this in alignment with the 17 UN sustainable development goals, which are shown on the left-hand side of the bottom portion of this slide because they provide us with a framework around how to think about a sustainable future. As a purpose-led company, we recognize that we play an integral role in creating a more connected and sustainable world. And we do that by leading in on sustainability and ESG through living our company values. If we do things right, we challenge the accepted. We aim higher and we live inclusion. Now PlanBeyond, which you showcased in the middle of the slide. PlanBeyond is Jacobs' sustainable business strategy. It provides us the focus for our global workforce to fully operationalize sustainability across our entire company, both within how we run our operations and throughout the development and delivery of our range of client solutions across all of our market verticals. And PlanBeyond aligns profit with purpose. More formally integrating sustainability and ESG into the heart of our company strategy and decision-making. To that end, we are evolving our PlanBeyond strategy and have identified 6 priority sustainable development goals to develop further as our sustainable business objectives that are most material to the operation of our business. If we move to the next slide. Today, we're shining a light on one of those SDGs, SDG 13, climate action. This is arguably the greatest challenge for our generation -- our generation of leadership and for the leadership generations to come throughout the rest of the century. From an overall market perspective, Bloomberg estimates that the global energy transition required to move our global economy to net zero by 2050, will require between $78 trillion and $130 trillion of new infrastructure investment in clean electricity and green hydrogen alone. And the Environmental business journal estimates that the value of the global climate change market in and of itself was about $3 trillion in 2019 and will grow at a CAGR of at least 3% annually into the foreseeable future. To be credible with our employees, with our clients, with you, the investor community, Jacobs must first walk the talk. And so we have focused on becoming one of the first firms in our industry to achieve carbon neutrality and 100% renewable energy for our operations as well as publish approved science-based carbon reduction targets already. And we have worked to further our ESG commitment at the global level with the United Nations, the World Climate Foundation and other leading organizations playing in this space. As the global leader in design and construction and program management, we are uniquely positioned to help clients address their climate action challenges today and going forward. If we move to Slide 8, we focus on our Climate Action Solutions framework that touches every aspect of the decarbonization and adaptation challenge that the world faces. And Jacobs intends to lead from the front in 4 broad areas: adaptation and mitigation, energy transition, carbon footprint reduction and natural resource stewardship. This involves all of Jacobs end markets and all of our enabling market solutions focused around our major verticals, advanced facilities, built environment, energy, health, transportation, water and the broader global government services verticals that Kevin mentioned earlier as well. As I'll showcase in the following slides, Jacobs is fully engaged with our clients. Planning, designing and delivering solutions that positively alter projected climate change effects and provide a new way forward towards ultimately achieving a 0 carbon economy by the end of the 21st century. Jon, if you move to the next slide. We'll begin our global project tour in Germany, where Jacobs -- where the evidence of the energy transition is in full swing. The government of Germany has committed to a target of generating 65% of its electricity from a combination of wind and solar sources by 2030 and 80% by 2050. Jacobs is providing program and contract management services to our 2 transmission system operator clients who are together investing $11 billion in total to install 2 high-voltage direct current underground transmission lines along a 700-kilometer route that runs the length of the country. This will enable wind power generated in the north of Germany and solar power, which will be generated in the south to be distributed via this new power grid scheme. In addition, interconnectors sectors will be installed to provide cross-border energy resilience, enabling hydro power generated in Norway to be distributed throughout the country when wind or solar sources might be insufficient to meet the country's demand. If we move to Slide 10, Western Digital has been a client we've worked for, for years. Western Digital designs, manufactures and sells data technology products, including storage devices, data center systems and cloud storage services. Western Digital was amongst the first companies to adopt an integrated management system approach as an industry best practice for managing corporate quality, environmental and health and safety standards. And Western Digital is particularly focused on the effects of global climate change. Since 2010, Jacobs has worked in partnership with Western Digital staff to continuously improve their overall company performance through efforts of their global energy and resource management program office to reduce energy, water, material consumption and associated greenhouse gas emissions. The goal is to minimize the effect of global climate change across all of Western Digital's research, development and manufacturing facilities, across the globe. If we move to Slide 11, we can shift our focus to the transportation market in the United States. King County Metro awarded Jacobs a contract to provide architect and engineering and related services in support of the agency's planning, design and construction of its $480 million South Annex Bus Base. Now Metro runs the eighth largest transit bus agency in the United States, and they serve nearly 400,000 passengers a day. They are leaving the U.S. transit industry in early adoption of battery electric bus fleets, committing to convert their entire fleet of more than 2,200 buses to 100% 0 emissions fleet powered by renewable energy, no later than 2040. The South Annex Bus Base will include operations and maintenance facilities, initially supporting hybrid bus general maintenance and operator and administration functions and it will transition to more than 250 battery electric buses over the course of time. The plan devised by Jacobs incorporates sustainability principles, including equity and social justice criteria as key project prioritization evaluation factors. If we move to Slide 12 and the United Kingdom, Jacobs water and environment and built environment teams are partnered with our colleagues at Simetrica to provide master planning and social value analysis solutions to our client, Enfield Council, a North London borough that currently supports a very large industrial base. Enfield Council has embarked on an ambitious $7.75 billion 20-year regeneration program to transform their entire economic base to attract a new mix of low-carbon employers as well as company headquarters for small to medium-sized enterprises. The sustainable and resilient Meridian Water community will provide affordable housing and a new employment hub planned and designed to meet the U.K.'s highest health and building standards. This mega development is targeted to be net zero carbon as early as 2030. And finally, to complete our global project tour, we move to Slide 13, and Tyndall Air Force Base. Jacobs led the development of a master plan refinement and implementation strategy to reimagine Tyndall Air Force Base as a resilient, sustainable and smart installation of the future. Tyndall sustained a direct hit from Category 5 Hurricane Michael in 2018, and 100% of the base's assets were impacted. A significant component of ensuring the future resilience of the base is to prevent or reduce the amount of marine water that floods onto the base during any kind of storm, and particularly a Category 5 Hurricane. As part of the base's $3 billion multiyear rebuild program aligned to that master plan strategy, Jacobs has explored a series of pilot projects that use nature-based solutions to reduce coastal flood risks, while also creating important social and environmental benefits. So that concludes our project tour and our major overview, and we look forward to chatting with you more and answering any questions.

Okay. Great. I mean that was terrific. Maybe just to start high level. What exactly is not "ESG-related revenue"? Per the definition, you've outlined around the $5 billion number. And just in the context of ESG, has Jacobs started to become more selective in the types of clients or in the types of end markets you want to be working in?

Kevin, do you want me to start? Or do you want to handle that?

So let me -- quick comment, Sean. Look, there are certain parts of the portfolio, which are clearly a little less ESG or sustainability related. We have cybersecurity, IT work that we do in our government services business, critical mission solutions. But the reality is that the embedded efforts, as Jan has highlighted here, are actually throughout most of our portfolio. So when we talk about that $5 billion number, it is specific efforts. I outlined here, as Jan was describing, that are very much about a sustainability-related initiative. Every time we're looking at an effort to support transportation or infrastructure or smart cities or whatever, there is elements. And a very important element sometimes relative to having a sustainability requirement associated with that. So when we talk the $5 billion, it's kind of specific relative to water resiliency or remediation or some of the things that Jan was talking about in terms of net zero kind of stuff, but there actually is embedded into much of our portfolio, the vast majority of our portfolio are there sustainability-related efforts. Maybe, Jan, you can augment that a little bit, but it really is embedded almost throughout the entire portfolio.

Yes. Very, very true, Kevin. Sean, I would couch the $5 billion number as a focused and conservative estimate of the portfolio. And Kevin is quite right, it's really focused on those discrete projects that we can wholly identify largely to our water, environmental markets, remediation, things that are related to clean energy efficiency, clean energy development, specifically green transport, those kinds of things. But as we open the aperture up and we start thinking about what this transformation that the world has to go through to achieve a net zero economy and ultimately a 0 carbon economy by the end of the century. Everything about how we approach solutioning to create sustainable cities, sustainable manufacturing to support the broader government services missions that we have. All of that has at its core sustainable and resilience elements to it and certainly social value elements to it as well. So it's something that really deserves some more focused efforts by all of us thinking about how do we couch this and count it into the future, which, as you know, many efforts are going on in the financial community.

Okay. That's helpful. And just as we think about the opportunity set developing around Jacobs' support for its clients' sustainability commitments and strategies. Thus far, has it been more of a push or a pull type of dynamic between Jacobs and the customer base? I mean are the customers coming to you saying, help us figure this out? Or are you guys saying, "Hey, here's what we can do. Let us help." I'm curious how that dynamic looks these days?

Go ahead, Jan.

Well, I would suggest that the world is going through and continues to go through a huge evolution in this space. And Sean, part of the answer to this question is actually where is that client headquartered and where are -- what's the regulatory environment within which we're actually operating? Because certain parts of the globe are actually much further in their mindset and thinking and actually requirement setting around this than other portions of the globe. But generally speaking, if we think about the last 10 years, in particular, we've moved from thinking about -- well, this is interesting, and we can bolt-on some solutions or bolt-on some elements of a solution and start getting some credit. Many clients over the past decade started in that space. They have moved into a space of -- this actually is a huge part of our business, and it's integral to our business. And so they're embracing those UN sustainable development goals, sustainability and resilience principles. And so they are much more open to what's going on to some of our clients have actually moved into the space of this is integral to how they're going to create a short list of companies that they even want to talk with and partner with and having those kinds of concepts be core, in fact, up to almost 50% of how a scoring scheme might even work in certain countries related to our selection to actually be a partner to our clients. We're seeing this because of the heightened awareness around the climate change. We're seeing it around the heightened rhetoric related to the Paris accord and now top 26 that's upcoming at the end of this year. We're seeing it because national governments administrations are actually taking it on as part of green stimulus and how that actually is meaningful to the recovery of the economy today and long into the future. And so I think we're seeing this, Sean, really, for some it's a pull, for some it's not the push that it once was, but I think everybody is recognizing that this dynamic is changing in a dramatic way. And if we think about how many clients are going through some of the climate-related financial disclosure exercises that are out there, including ourselves, the notion of what is the future going to mean if we have a 1.5-degree C rise in temperature versus a 4-degree C rise in temperature, those 2 scenarios actually put forward very different dynamics for our client base and for our industry to actually think about what that means to us and what that means to the world in terms of how we approach that. So I think this is just going to escalate more and more, Sean, and it will be a push or a pull. It will be a business as usual that we have to think about.

Okay. That's super helpful. And maybe a good segue into my next question, which is just that does this global sustainability agenda create more meaningful competitive advantages for Jacobs? How should we think about that? And is there any examples where we've seen that already help give J a leg up over the competitive set?

I think we have examples, Sean, over our many, many decades in this space. We can step back to something like the London Olympics, where we were an integral portion of the delivery partner with the Olympic Delivery Authority, to actually create the most sustainable set of infrastructure consumed for Olympics and actually helped transform the east part of London. Sustainability was wholly at the heart of thinking about how do we approach that. And I mean sustainability in its broadest context. So the social piece of how we brought those things to the 4 was hugely important. And it was a principal reason why our team was selected by the ODA to partner with them going forward. That heritage and what we bring in terms of our thinking every day continues to be a part of our differentiation. In addition to the phenomenal thinking we have in the various domains that we play this commitment of how we bring this aspect of solutioning to the floor really is a differentiator for us. And I think it will continue to be.

And I'm curious, as you work with your clients and sort of develop proprietary sustainability solutions with the client, can those carry -- can those carry over into future projects? I mean is Jacobs able to retain the IP around some of these proprietary solutions? How is that model set up?

I'll step into this, and Kevin, if you want to build on this from a broader commercial and IP perspective. But one of the key things, Sean, is that the Jacobs has always been focused on fit-for-purpose, best-in-class solutions that meet the needs and objectives of our clients. And many, many times, that means proprietary solutions that actually others have leaned in and develop themselves. But certainly, there are cases where we have our own proprietary solutions, we have our own proprietary business processes and ways of working, such as the symmetric tools systems -- tools and schemes that we use for social value analysis or our AI score or AquaDNA kinds of tool sets. We do bring those to bear, and we do retain the IP when we bring those things. From a monetization standpoint, in some cases, we'll license the technology. Other cases will use technology within a broader contractual scheme. But really, when all is said and done here, it's the insights derived from the data and the analytics that are actually the most critical to this whole process, and that actually is what differentiates our solutions. Kevin, don't know if you want to add to the IP and commercialization, please?