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

Hey, good morning, everyone. Welcome to the Raymond James Industrial Conference. I'm Brian Gesuale, Senior Analyst covering the Industrial Technology Space. Delighted to have Jacobs here to present their story. This is one that really is attached to several key thematics that we think are going to be very big areas and very prosperous areas for at least a decade here or probably longer when we start to look at some of the tails that these themes have. And so we're delighted to have the company's President and CEO, Bob Pragada here to take us through the story. We're going to do this in a fireside chat format. So you'll be able to submit questions to me, and we'll try to work through those. But for the time being, I'm going to kind of launch into some Q&A here. Bob, welcome.

Thanks, Brian. It's great to be here.

Let's maybe jump right in. Let's level set the audience. Jacobs has undergone significant positive structural change over the last 5, 6, 7 years. I think it would benefit the audience really to talk about how the portfolio has evolved through divestitures, acquisition and really through organic means?

Sure. Yes, Brian, I've kind of got a unique perspective on that front in that I was with -- I came to Jacobs in 2005. And so we've kind of seen the company over the course the last 15-plus years evolve. And so maybe just to level set, Jacobs for decades was a premier company, squarely in the E&C space decades of success with clients. Really fundamentally based on the principle of strong client intimacy and understand our clients' business in order to figure out how we could best serve it. That tool that we would serve our clients with were in technical skills really around engineering and construction management, and that grew on the heels of decades-long chemical processing and actually the pharmaceutical industry as well. And so that took us all the way through to the mid-2000s and then we got to the recession that follow the customer and great things will happen. Really, you wake up out of the recession, and you see that you might have gotten into too many end markets and in too many geographies doing too many things. And so you talk about the transformation that's happened over the course of the last 5 to 6 years is -- was a bit of a reset. When Steve came in, actually, I had gotten frustrated with the company back in '14. Didn't think that anything was going to change, really was trying to push for change and kind of went up and ended up leaving for other ventures. And then within about 12 months of me being gone, I was asked to come back to the company when Steve came on board and see if, hey, those things that we have talked about, let's put them into motion, and sure enough, we did. First strategy -- first thing we did was we had a strategy, which we do great things for the customer and good things will happen, might have served us well for several decades, but it was time for some real focus on what we did grow well. And so that first strategy back in '16 was really around staying in markets that were growing and that had long secular tailwinds from a growth perspective, getting out of those markets that didn't. And honing in on those value-added services that we had have either direct competencies in or adjacent competencies in. And that's really what our first strategy was about. That led to a strong -- and if there were areas that we felt like had long-term growth prospects, but we didn't have a strong presence in, use M&A as a catalyst to drive a strategy rather than M&A as a strategy. And sure enough, within 1.5 years, 2 years after our first strategy and making progress on that strategy, we acquired CH2M, which I think was probably one of the most transformational things that we ever did and really went long into the infrastructure space, driven on the backs of a strong presence in water and transportation as well as one of the world's leading environmental firms. As well as getting up to scale on value-added services, more into that consultancy range and less about bulk engineering or design. With that, we realized that our portfolio was strong. We had a great oil and gas business, heavily focused in on sustaining capital and not these big projects around the world. And it was so strong that we saw that there was a real appetite for those that want to be a pure play in oil and gas and led to the divestiture of our oil and gas business. So that first 3 years of the 6-year strategy -- our 3-year strategy, we really hit it well, which led up to '19. And in '19, that strategy was continuing to now use digitally-enabled, technology-enabled solutions to drive, what I just said about, those focus markets. But then in our government services business, transform that portfolio to have a stronger presence in what we thought were growth trends within the defense and aerospace world, which was strongly centered around cyber and intelligence. And all of that was now in a world where intelligence and surveillance and reconnaissance in multi-domain was becoming a strong, strong trend. So from '19 to '21, we focused in on really enhancing what we had built in the first part of the strategy as well as continuing to enhance the balance of our portfolio, hence, acquisitions such as The Buffalo Group really strong in the multi-domain cyber and intelligence. KeyW, which put us squarely into the space ISR world as well as Wood Nuclear, which put us really on the forefront of energy transition and renewable forms of energy, too. So all in all, it's been a great 5- to 6-year run.

Yes, it's interesting. You've really hit the thematics and the tailwinds, right? And really the timing was almost perfect, particularly with the oil and gas side of things with the divestiture there. It sounds like you've built a business that's structurally much more consistent, much more rhythmatic with kind of a different margin structure and growth structure. Can you talk about maybe specifically with some numbers, how they were maybe 5, 6 years ago, where they're at today. and it doesn't sound like the Jacobs model is in a state of rest. It seems like there's some future thoughts that you have on what this model looks like. Can you maybe tell us what you can around those fronts?

Yes. It's definitely a dynamic model. We were kind of -- and if you go back probably 5 years ago, in that mid to higher mid single-digit margins, bottom line EBITDA actually [ OD ] margins. And so -- and strong cash flows have always been really strong. We've been a company that has had low leverage and very high cash producing type businesses, asset-light as well. And so as we were to kind of play back what I was talking about on the portfolio transformation as well as the service diversification that was going on at the same time, our infrastructure and advanced facilities business has now squarely gotten into almost the mid-teens from a margin standpoint. And as we were getting out of kind of large enterprise-wide where scale was the differentiator from a government services standpoint and more into that cyber intelligence, enterprise and mission IT modernization, rising our margins there into the high single digits, low double digits on that front, too, all the while our DSO and our cash performance has really, really been solid. So you can expect that to continue over the course of now our next phase of our strategy.

Great. Thanks a lot. Let's maybe drill down into some of the things that investors are talking to me the most about and hit a couple of these themes. I think a great place to start is on the infrastructure bill, seems like you're very well positioned to capitalize. How do you see that materializing? And what do you see as some of the biggest opportunities from that?

Yes. I think that we -- you said it before, Brian. The sectors that we chose in the early days and then over the course of the last 5 years enhanced our skill sets. They are dimension probably another very transformational and almost revolutionary type of acquisition we did. Well, investment was in PA Consulting, that put us even more into the higher-end consultative services bid. Those right now, from an infrastructure bill standpoint, put us almost in the point where 90% of that bill is targeted at skill sets and end markets that we have a market-leading position, specifically in transportation, all of that's ESG, and I'll come back to that in a second, and then the investment in water infrastructure, everything from generation to conveyance to treatment and some of the renewable sources with regards to replant. So we feel strongly that we're well positioned for where those monies are going to be flowing, but doing it in a way that is -- got some longevity to it. And what I mean by that is in a green way. And so if you look at our focus in on ESG and how that is playing such an incredibly important part of the future, that's kind of the overlay in everything we do with regards to focusing on those markets. So it's just not at the volumes that are going to be coming through, but it's how the money is going to be spent is probably where we're most positioned. And it doesn't matter what phase of those jobs there are. So back in '08, we were talking about shovel-ready type of programs and projects. Today, we're more focused on shovel-worthy and from a -- where we sit from a consultancy perspective, these are jobs that are going to take some studies and planning and new means and methods on how they're going to be delivered. And with the skill sets, we're in the right markets and the skill sets we have on the development and planning aspects of those jobs, we will definitely benefit from the beginning all the way through the life cycle of these programs.

That's great. It sounds like this is something that has years and years of follow-up work in building to occur. Let's maybe move on and I want to -- we've got so many of these to cover. Another interesting dynamic that looks quite interesting for Jacobs is potentially a new wave of capital expenditures in the semiconductor industry. Would you maybe just give people a little bit of a feel for the Jacobs' footprint in terms of size, what that competitive ecosystem looks like, how you serve clients and really how big of an opportunity that could be for the company?

Sure. So maybe just to put in perspective. So we, Jacobs, have been a market leader specifically in planning, engineering and design of manufacturing -- semiconductor manufacturing facilities for several decades, going all the way back to the early days of the 80s in that space. And so as technology nodes have advanced and the need -- the manufacturing complexity and needs of these facilities has also advanced, we've been side-by-side the world's largest integrated device manufacturers from the beginning. And those are just not U.S.-based, but also Taiwanese and Korean as well as Japanese as well. So we sit here today as either the engineer of record or a premier service provider to all of the large -- it doesn't matter if it's logic or memory chip manufacturers, coupled that with the onshoring and reshoring of large-scale manufacturing, we think this is a -- and then the demand driving that need for chips, everything from kind of on the less sophisticated side, I say less sophisticated, but even these have become sophisticated chips. Automotive industry, all the way through what's happening within autonomous vehicles. And then what now the pandemic, things like data storage and cloud computing, those are creating some long-cycle demands and the needs of these manufacturing facilities have become even more complex. And Jacobs sits right in the middle of all of that.

It sounds like a big opportunity. Can you maybe just give people an appreciation of the size of the business there and maybe how big of a cycle this could be? It seems to me like we've been kind of decades in the making for a new semi cycle.

Yes. So it's -- right now of our People & Places Solutions business, it represents about 15% of that portfolio. And that portfolio is I think, call it, mid $8 billion to $9 billion range. So it's $1 billion business now. And the growth potential on that double digit, probably double-digit growth from a percentage perspective for the foreseeable future. So I'd say that we've got a long tail on it. I will caveat this is that if you look at a manufacturing facility and you look at what is the facility spend versus the tool spend, that over -- if you were to go back 10 years ago, that was probably a 60-40, 65-35 kind of split, the complexity of the tools has also gone pretty high as these nodes and the chip sizes have continued to decrease as well as the complexity increase. So that has been though still complex and now the denominator is larger. It's about 30% of the spend. So as you see a $20 billion investment, a $10 billion investment that may be a large U.S.-based manufacturer throws out there, you can do the kind of the back math on that. And then our space in that is as the engineer, which is normally about 10% of that facility spend.