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

Okay. It looks like we're live. Welcome, everyone, to the next session of Baird's Global Consumer Technology and Services Conference. I'm Andy Wittmann. I'm the senior research analyst covering engineering, construction and consulting companies here at Baird. We're really glad that you would join us for this. This next session here today is with the management team from Jacobs Engineering. Today, we're joined by Jon Doros, who's the Vice President of Investor Relations; as well as Jan Walstrom, who is the Senior Vice President of Strategy and Solutions, specific to the People & Places Solutions segment. The presentation deck that Jacobs is going to be going through has an overview of the company. Jon Doros is going to take through it. But this one also has a bit of an ESG flare as well. At the end of the slide deck, we'll have some time for Q&A. And as you can see in the upper right-hand corner of your screen, there's a question button. That will be sending me questions to my e-mail, which I'll be monitoring throughout our discussion here for the next half hour. So I just thought I would turn it over to Jon for the presentation here on Jacobs.

Thanks, Andy, and I'm just going to give a quick overview on Jacobs. Jacobs is an $18 billion market cap company with approximately $11 billion trailing net revenue and over $1 billion of trailing adjusted EBITDA. We solve very highly complex challenges for customers across a variety of end markets. We do this by combining deep domain knowledge in our internal IP or leading third-party technology which we think is truly differential, which is a global integrated delivery model. We operate in 3 lines of business. First, our People & Places business unit is approximately $7 billion in revenue, and provide solutions for modernizing critical public and private infrastructure. And what now is a very ESG-focused world, and we're going to get into how important that is today in this presentation. Our second line of business is called Critical Mission Solutions. It's about $5 billion in revenue. And it serves customers such as Department of Defense, NASA, Department of Energy and other agencies, both in the U.S. and in the U.K. as well as Australia. And in this business unit, we're providing solutions around research, testing, development, cyber solutions as governments try to modernize both their IT and OT environments. And then finally, as you've seen, we recently completed an investment in PA Consulting, which provides digital modernization and sustainability consulting services. PA generates just under $1 billion in revenue run on a run rate basis. And what's really exciting is their operating EBITDA margins are north of 20%. So today, we're going to discuss our ESG strategy in greater detail. And this makes up about $5 billion of dedicated revenue for Jacobs and spans across all 3 lines of business. So now I'll turn the call over to Jan Walstrom, who's our SVP of Strategy & Solutions and Global Environmental Market Director.

Thanks, Jon. Appreciate the opportunity to be with you all today. Jon, if you go to the next slide. So sustainability at Jacobs 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 that are shown on the lower left of this slide, which provide a framework for 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 by leading in on sustainability and ESG, we live our company values. We do things right, we challenge the accepted. We aim higher and we live inclusion. Plan Beyond is Jacobs' sustainable business strategy. It provides the focus for our global workforce to fully operationalize sustainability across the company, both within our operations and throughout the development and delivery of our range of client solutions across all of our end markets, and it aligns profit with purpose. More formally integrating sustainability and ESG into the heart of our company's strategy and decision-making. To that end, we have identified 6 priority sustainable development goals to further develop as the sustainable business objectives most material to our business, and those 6 business objectives are shown on the right of this slide. Next slide, Jon. Today, we're going to shine a light on one of those objectives. SDG 13, climate action. This is arguably the greatest challenge for our generation and for the several generations of leaders to come. From an overall market perspective, Bloomberg estimates that the energy transition required to move the global economy to net zero by 2050 will require between $78 trillion and $130 trillion of new investment in clean electricity and green hydrogen alone. And the Environmental Business Journal estimates the value of the global climate change market to have been about $3 trillion in 2019 and growing at least a CAGR of 3% annually into the foreseeable future. To be credible with our employees, with our clients and with the investor community, Jacobs must first walk the talk. We were 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, 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 in this space. And as the global leader in design and construction and program management services, Jacobs is uniquely positioned to help clients address their climate action challenges. Next slide, Jon. On this slide, we show our Climate Action Solutions framework, which touches every aspect of the decarbonization and adaptation challenge. And Jacobs intends to lead from the front across the 4 dimensions of adaptation and mitigation, clean energy transition, carbon footprint reduction and natural resource stewardship. This involves all of Jacobs' end markets and enabling market solutions, including advanced facilities, the built environment, energy, environmental, health, transportation and water. As I'll showcase in the following series of slides, Jacobs is already fully engaged with our clients, planning, designing and delivering solutions that positively alter projected climate change effects and provide a new way forward toward ultimately achieving a 0 carbon economy by the end of the century. Next slide, Jon. We'll begin our global project Tour in Germany, where evidence of the energy transition is in full swing already. The government 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 investing together $11 billion to install 2 high-voltage direct current underground transmission lines along a 700-kilometer route that runs the entire length of the country. This will enable wind power generated in the north of the country and solar power generated in the south to be distributed via this new power grid scheme. In addition, interconnectors will be installed to provide cross-border energy resilience, enabling hydropower generated in Norway to be distributed throughout the country when wind or solar sources might be insufficient to meet the country's demand. On the next slide, we move to Western Digital. Western Digital designs, manufactures and sells data technology products, including storage devices, data center systems and cloud storage systems. It was the first company 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. Their goal is to minimize the effect of global climate change across all of Western Digital's research, development and manufacturing facilities across the globe. Next slide, Jon. We'll 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. Metro runs the 8th largest transit bus agency in the United States, serving nearly 400,000 passengers each day. They are leading 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 a hybrid bus general maintenance and operator and administration functions with a transition to support more than 250 battery electric buses in the near term. The plan devised by Jacobs incorporates sustainability principles, including equity and social justice criteria as key project prioritization evaluation factors. Moving on to Slide 10 and the U.K., where our Jacobs water environment and built environment teams are partnered with our colleagues at Simetrica to provide master planning and social value analysis solutions to our client and Field Counsel, a North London borough that currently supports a very large industrial base. And Field Counsel has embarked on an ambitious $7.75 billion 20-year regeneration program to transform the economic base of the borough to attract a new mix of low-carbon employers as well as company headquarters for small and 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 by the year 2030. And to complete our project tour, we'll go to Slide 11. We'll come back to the U.S. where Jacobs led the development of 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 back in 2018, and 100% of the base's assets were impacted. A significant component of ensuring the future resilience of the base is preventing or reducing the amount of marine water that floods onto the base during any storm event. 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 prepared remarks, and we'd be happy to go and answer any questions.

Great. Thank you for that, Jan. Appreciate the comments here. I guess, I'm trying to launch off some of the ESG themes here. In -- there's a lot. Any time you're having an ESG, you're talking about things well beyond the shareholder, but I want to bring some of this back to the shareholder and try to understand how the company is repositioning towards some of these larger-picture issues are going to drive growth in the near term. I mean what is the delta by positioning towards climate change, towards water scarcity in terms of the company's growth opportunity set? And I guess, I come from a perspective of for a long time, water investment has been seen as a growth area. There's been some really great opportunities in that and some less so. It feels like it's picking up more today, I would say the same thing on energy, in clean energy, in particular, but I was wondering if there's anything you can tell us about how this could positively affect your growth rate versus not being exposed to these things?

It's an interesting area to explore, Andy, because what everyone is seeing right now is the convergence of the rhetoric around climate change, climate action and then the additional rhetoric around how important is it for us to evaluate business risk related to climate risk. And so as we see those things, both as an entity, Jacobs, on to ourselves, where we're evaluating that for our own businesses, but we look at how climate change is such a pervasive issue that manifests itself on to 2 fronts. Really, 2 different facets. Obviously, there is the energy transition, where decarbonization in response to climate change effects focused on the sources of energy that we want to go move to, from fossil fuels to renewable sources, that directly impacts, obviously oil and gas companies, chemical companies and the like. And so there is a very material opportunity for us and everyone else to go lean into the clean energy space to provide a consulting in that space and the full spectrum of design, engineering, program management solutions, some of which we highlighted here for you, something like SuedLink, which is at a massive level. So from the start of an end-to-end solution capability of truly strategic planning, how does that fit with that provider to the conceiving of how do you programmatically source this, figure out how to actually install that to the length of a country and then do the planning, engineering and program management, construction management, Jacobs is involved in all of that. And so clearly, on that full spectrum related to clean energy transition, energy efficiency, we have a major play, and we're leaning into that very hard. The other facet of decarbonization that all climate industry -- or all client industries are actually faced with is how is that affecting our production, our operations, truly the core of our business, and it affects every client's industry in a material way. That set of issues has Jacobs practitioners, whether we're talking to our water utilities, whether we're talking to our data center customers, more broadly in the advanced life sciences space, into government installations like a Tyndall, that's where we have to actually explore with them strategically, what does this mean if the world goes to a lower carbon future faster, so we achieve the 1.5-degree C target that everybody would really like us to see by 2050 or do we not get there fast enough? Or do we overshoot the 2-degree C mark and we go to 4-degree C, what does that mean to our operations? So really, leaning in, thinking with them about where are they taking their business, what are their options for not just energy sources, but how they deal with their full spectrum production and issues that they're resolving, whether it's a water utility, again, whether it's a production facility. That full spectrum is available to us with all of our end markets and with all of our customer base. So we are seeing a material effect on opportunity as this gets better understood and how it's going to manifest itself going forward.

What's the specific implication from recent stimulus bills that have passed for these things as well. I mean, it appears -- there's a lot being talked about with the current one for decarbonization and stimulus for clean energy incentives. But I guess maybe my question is on the stuff that's already passed, whether it was the bill that passed at the end of last calendar year, the $1.9 trillion. I think it passed a couple of months ago -- a few months ago. Were there any monies in there that you are seeing benefit from, that Jacobs is seeing the benefit from here already today, either bidding on it, that will be more for your future or actual projects have been awarded?

So there are stimulus efforts that are already in place where, whether it's on the life sciences and providing vaccine, okay? So helping get that production capability up so that we can go keep that, which would be part of ESG because it's part of a social element that we actually need to go deal with. There were monies there that facilitated that on our clients' behalf. There are monies related to shoring up the economic base and dealing with environmental justice issues already that we're seeing come into play. But the bigger material element that's coming under whatever version the American Jobs Plan might actually make its way through here, obviously, leaning into the transport industry, so all the facets of transportation are going to see benefit under whatever is passed. I think there's great surety that moving towards renewable energy sources on the grid, greening transit fleets, greening the highway scheme, greening rail and transit, those kinds of things will be very material. And then on the water and wastewater side of the equation, certainly, getting more certainty around -- so that our clients, municipal clients can have more certainty from a revenue source perspective, will allow them to lean back in and restart some very, very important projects that will benefit their local communities. So we do see it. It's just -- it's not as quickly as everybody would like it to be, but we are very optimistic about that future.

Got it. And how -- and then your background, Jan, comes from your senior role at CH2M HILL, including on the Board of Directors, obviously here since the acquisition by Jacobs. But the PA -- of the company's investment in PA Consultants, I mean there is clearly a strategic angle by management to kind of cross-sell and bring PA's consulting abilities and make them available to your engineering capabilities and to cross sell those. Can you talk about what PA or how PA better positions you or differentiates you in the marketplace to capture some of these things that you're talking about?

We are so thrilled to have PA become part of the family and be able to really strengthen that end of the strategic consulting advisory capability that Jacobs has had serving our clients and our markets for decades. But certainly, with the cachet and the client base that PA brings and some of the methodology that they bring around innovation in the various sectors that they preferentially lean into, now we can lean in with this very, very strong innovation advisory-oriented expertise, combined with the strength of our domain expertise across all of those end markets I mentioned earlier and really lean in to solve some of the truly most complex challenges like vaccine manufacturing and distribution. Like issues related to how do you really put into play a renewable source backbone to service greening a highway scheme going forward. If we're going to lean into really aging infrastructure in this country or any country, how do we transition the sources of energy we're going to be relying on in our daily lives as fast as possible and change that grid over to be able to support that as fast as possible. There's just some great thinking that we'll be able to go do together and solutioning we'll be able to go do together.

Makes sense. I guess as you -- from an operational point of view on the P&PS segment, we've seen the margins expand for that segment over the last few years. I think there's been a bunch of restructuring, the 2 big acquisitions have been integrated. I was wondering, as you look at the business on that side, what are some of the other initiatives that you have -- are trying to execute strategically to improve the margins even further? Is there more opportunity on things like employee utilization, real estate savings or even just on the support function? Can you just tell me what you see in the segment in your ability to capture that to the benefit of shareholders?

Certainly. And I know that Steve, Kevin, Bob have spoken on earnings calls and made our investor community aware of Focus 2023, our true focus on taking ourselves to the next level from an effectiveness and efficiency perspective, enabling our workforce to the best of our ability to have the tools and systems, truly a digitized and digital transformation inside of Jacobs is happening to better enable our global connectivity of our resource base across the globe that has enabled us to make it through the pandemic in a fantastic way and really has connected us seamlessly throughout the globe. But it's also given us the tools and techniques to actually move more towards being less of a commoditized provider and more of a higher-end, higher-value solutions provider in the focus of the kinds of contracts, the kinds of engagements we're seeking to be able to have that be a bigger part of the portfolio. So those are a couple of the elements that we have in motion, and we'll continue to have in motion going forward through the next couple of fiscal years. Jon, I don't know if you want to add to that in any material way?

I think you said it great, but if I add a couple of things. Yes. I think, Andy, you're thinking about it the right way. There's going to be a productivity benefit. There's going to be a revenue mix benefit. There's going to be a back-end support cost benefit. And all that together, over time, will help improve the margin profile. And we're kind of wrapping that together in our Focus 2023 initiative. We're going to give even more details around that at the Investor Day that's coming up later in the calendar year. So should be an exciting time for us.

Just to drill in that a little bit more. On the mix benefit, this is a common way that we see engineering, consulting companies improve their margins over time. Is there ways to do that on an organic basis to mix your business higher? Or does that all have to be done through M&A to capture that type of opportunity?

Maybe I'll start off and then Jan can give us some more detail. No, it can be done, and it has been happening organically just naturally. We've been doing more consulting type of work, more technology-focused solutions. Any type of technology-focused solution comes with a much higher gross margin, albeit it's very small today. That's part of Focus 2023 is how can we deploy more software, more technology into the solutions that we provide, more recurring revenue? I don't know, Jan, if you want to add some thoughts around -- without doing any acquisitions, how margins could expand.

Andy, we have been laser-focused on that issue in every one of the markets. And an even bigger benefit is as the market teams actually connect to each other. As we start thinking about these bigger and more complex challenges, where you need subject matter expertise from across all of the domains that we serve. When you start thinking about the kinds of projects that were coming together to go help our clients solve as those become more integrated and more complex, you'll start seeing some of that integrated capability in a different way. Higher end consulting, but a bigger proportion of program management solutions actually helps us move up that value chain as well. So it is a mix not just of the kinds of clients, but it's the mix of contract vehicles. It's a mix of domain expertise that really enables us to go do that in addition to the technology portion that Jon described.

Got it. We Don't have a lot of time left, but maybe wanted to ask one other question. With so much of Jacobs focusing more on digital solutions, digital transformation, you guys are trying to invest in Cyber AI, all the kind of key technologies that are commonly talked about today, certainly -- I can certainly -- it's easy for me to understand how some federal government agencies really value that how even the private sector is trying to take forward on that. But sort of for the state and local government infrastructure people that also are an important client base for you are they ready for digital solutions? I mean, I have to imagine that you're leading them down this path that maybe they're not even asking for yet, but I don't know. So Jan, this is kind of where you live. And so why don't you tell me about how these kind of new innovative solutions are resonating in the marketplace.

It's a full spectrum, Andy. I mean some of our clients in the spaces that you described are leading their own industry and being very, very forward-thinking, want to partner very, very strongly with us to actually go -- lean in and go advance that from a technology perspective and a service perspective. They wanted it pre-pandemic. They certainly took the opportunity of the pandemic to learn more, and they want to lean in even further as we go forward. Others, I think, really felt from the pandemic the very need to actually up their game in a different way and see actually the benefit of leaning in, in this solution space. And so we're starting to get more inquiries from those folks who were more in the wait-and see approach, but now know that the future the pace is incredibly different. The scale of what they need to deal with is incredibly different. And so that has to be part of how they're leaning into those solutions. And they're recognizing that and asking us to assist them through that as well.

Got it. Okay, great. Well, we, unfortunately, are out of time. We're going to have to wrap it up here. And Jan, thank you so much. Jon, thanks for taking the time out of your busy schedules to spend with us here at Baird with our clients. For the clients who are watching, if you have any questions or if you need a financial model of Jacobs Engineering, feel free to reach out to our team. Obviously, we can put you in contact with the company representatives here. We can do that as well. Thank you again. Best of luck to you, and have a great day.

Thank you.

Thanks for the opportunity.

Goodbye.