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

Hi. Good morning. My name is Jamie Cook, and I'm very pleased to have with us today Jacobs. Today, we have Kevin Berryman, who is the President and Chief Executive Officer (sic) [ Chief Financial Officer ]; as well as Jonathan Doros, who heads the investor relations effort. I'm sure all of you know, Jacobs has been on an incredible journey, at least in my -- in terms of how long I've covered the company over the past 20 years, transitioning the portfolio away from secular growth and more towards markets that have strong secular tailwinds, improving margins, better utilizing the balance sheet and upgrading their service portfolio. So with that, I will turn it over to Kevin. He will start off with a couple of prepared remarks, and then we'll begin the fireside chat. [Operator Instructions] So with that, Kevin, I'll turn it over to you, and thank you so much for being with us today.

Great. Thanks, Jamie, and really appreciate being able to participate in your session here. Maybe I'll -- my kind of preliminary remarks will leverage off of kind of your comments that you made relative to transformation. It's really been a very exciting time and I think will continue to be exciting for Jacobs. We've been in this transformation journey for effectively the last 6-plus years. And I think it's been three-pronged in terms of the things that we're attempting to drive, in terms of the change in the organization. And while it's not a financial metric, I think it's probably the basis for which we had been able to really drive a lot of success off of. And it's really our cultural shift in terms of an organization. And I think that we've been purposeful and know we've been purposeful in terms of driving an agenda, which is much more about inclusion and diversity into our organization. We have specific targets that we've established in terms of female participation and underrepresented portions of the population to be a more significant part of not only our leadership, but of our teams in general. So those are objectives that are firmly entrenched into our organization, and we are taking actions to make sure they become a reality. I think our efforts in ESG, which are as much about doing the right thing for the communities and the global sustainability of our world. Ultimately, it's about retaining talent and really attracting the best and the brightest, because the best and the brightest are excited about being a more sustainable company and helping drive the future of our globe. We've obtained an ISS Prime related to our ESG metrics. And we've changed our GICS code to research and consulting from engineering and construction, so very much part of the journey. The portfolio changes that have come as part of that have been impressive. We purchased CH2M. We divested our oil and gas business. We've entered into a strategic partnership with PA Consulting. And the end result is our portfolio is much more about solutions based now than it has ever been before. And so that portfolio adjustment is now creating an environment, as you suggested, where we are targeted against secular, long-term, and I say decades long periods of growth in terms of our major lines of businesses. And the final thing is the discipline and accountability of operational excellence. And I know that's an often used word and maybe overused, but it's really important. By making all these changes, it's allowing us to be more disciplined and aligning our processes around the globe, which allows us to better utilize our global talent, better execute against our programs and projects, and ultimately transition to more solutions based. Because we're spending less time administering our business and more time trying to drive value enhancements into the offerings to our clients. So very excited about what we've been able to accomplish and even more excited about what the future holds. So thanks for allowing me to give a couple of comments.

Okay. So can we just elaborate? I mean on the ESG efforts, I think you've talked about $5 billion in revenues associated with helping clients achieve their ESG efforts. Can you sort of break down what the composition of that $5 billion? And how you think about the underlying growth of the ESG revenues relative to the rest of the portfolio? And then I guess the side question to that would be, are there any businesses within Jacobs' portfolio that sort of detract from the ESG story as you think about it?

So let me focus on the $5 billion kind of numbers. If you think about -- these are broad buckets and general estimates. I would say, effectively, there's probably about $2 billion of water in that, which is we do a lot of work on wastewater treatment in terms of sustainability of water and resilience of our cities relative to water. Probably $2.5 billion of environmental and other offerings to help improve or protect the environment. And then probably another $500 million of what I will call specific projects, things like our efforts in SuedLink, where we're creating a capability to bring the solar and wind power from the North Sea down into Germany through tunneling and connecting of the grid. Similar efforts in the Marinus Link over in Australia. So those -- that $5 billion is a core part of our business, and we would expect that, that will grow faster than the rest of our portfolio, especially given the momentum that's being built around COP26 and the efforts that we just were involved in over the last couple of weeks over in Scotland. And so that was exciting to see. And so we see this as really being a big,, strong driver to our growth going forward. I think that there are certain parts of our portfolio, we do a lot of work with the U.S. government that helps protect our country. And so while it's not a big part of our portfolio, it's an opportunity for us to reflect on that and think about, is that getting in the way of any of our ESG recognition. Our estimates are that it's probably a couple of percentage points of our revenue. We actually think the business is entirely consistent with ESG principles. But we're not so sure that all investors feel that way. So as we work through and determine what that looks like, I think we would feel that if, in fact, it is a hindrance to really get the appropriate measure of value for our shareholders, then we'll have to be really thoughtful as it relates to those specific parts of our business that may get in the way of us really getting the full realization of the value proposition that we're delivering to the globe.

Okay. And then just sort of building on sort of the portfolio. Are there any businesses that are underperforming on an organic growth basis? And historically, you've talked about CMS people -- the people business -- sorry, PP&S (sic) [ P&PS ] and PA sort of having the ability to drive sort of organic revenue synergies across the business. Does that -- do you still see sort of opportunity for revenue synergies across those 3 segments?

Yes, specifically. And two, your comment kind of -- your initial comments were about, are there pieces of the portfolio that we think are less able to show what we would call consistent, long-term, sustainable growth with margin enhancing. And actually, the answer is probably not, is no to that question. We actually feel really good because of the strong portfolio we have done, work we've done over the last several years to position ourselves really, really well against, I would say, high priority growth spend areas of federal governments. And ultimately, those areas that are going to be important for our private clients as well. So if you think about space, you think about cybersecurity, you think about environmental spend, you think about the Infrastructure Bill that just got passed in the U.S. and you -- there's further discussions about the Build Back Better plan, which also has pieces which are very much oriented around sustainability, telecommunications, there really is a big chunk of business that we have, which is well positioned. So we love the organic picture in front of us. We talked a little bit about that on our last earnings call and the sustainability of that, which is, we think, pretty exciting.

And I guess just to build on -- because you did bring up the Infrastructure Bill. How do you think the Infrastructure Bill has changed Jacobs' top line growth trajectory over the next couple of years? And sort of what you're hearing from customers in terms of spend and when we should expect Jacobs to benefit?

Yes. It's early days relative to the spend levels. Probably there's a variety of impacts that will occur in terms of different phases. There's a certain portion of the money that will be, let's say, mathematically determined through some of the existing funding mechanisms. Those monies will flow first out into -- and this is a specific U.S. comment, Jamie. And that probably represents, let's call it, 50% of the monies. But it still will take a little bit of time for state and local institutions to figure out where that money is going to go, what they're going to be executing against. And then there's -- the rest of the 50% has a little bit longer tail associated with it, which is associated with grants. And some of those grants can be leveraged under existing grant monies, which is a little bit faster. Some will require new grants and, obviously, that will take a longer time. All of this, I think, translates into the fact that we would expect the acceleration to occur in our second half, kind of beginning in Q3, accelerating into Q4 and into 2023 and beyond. And what's exciting to see is that the money now is understood, and now we're able to engage with our clients to say, okay, here's what's coming and we're going to be proactive in helping them understand, helping get access to that quicker as opposed to later. And so we're right in the midst of those discussions with our client base to figure out how it's going to be generated. There are certain parts, though, that are really exciting. 5G build-out, that's new money. There's other pieces that are new as well, which we're going to start to ultimately be able to flow a little bit faster. And the other piece that is actually here and now, which is maybe not so oriented around the infrastructure is on semiconductors, maybe a fallout of the pandemic. But we're well positioned there, and we're a leading provider of design and engineering services there. And I think every semiconductor company in the world is trying to figure out how to accelerate capacity build.

Yes. I mean that was one of my questions. If you could sort of build on how big the semi business is for you today? Which customers you're working for? And what that business could be like in sort of the next 5 years?

So we've been able to publicly disclose that we're working with Intel on their new fab in Arizona. It's a couple of large initiations there of capacity build in the Arizona fab. Largest, I think, industrial spend in the history of Arizona. So we're the engineering of record there, and really excited and honored to be a partner and helping them build that out. There are other ones that we are involved in as we are a leading player in this industry. Can't talk about all of those, but we're going to be busy here. I think that will help bridge the gap a little bit between when the rest of the infrastructure money comes in and where we are now. I think we're starting to see the build seem maybe a little bit of in Q1 and a little bit more in Q2, our fiscal Q1 and Q2. So that will help bridge the gap to when we really start to see some of the infrastructure money flow.

I guess -- and then another market that you're well positioned on, I guess, is EV. I think you've talked about you've doubled your book of EV business over the past year. So can you help investors understand what you're doing on that front, the competitive landscape? And just how you're thinking about the growth trajectory for that business going forward?

Yes. I would say that it's interesting. Because we're making some investments as we speak in start-ups and/or technologies that are going to allow us to position in these very, very forward-leading relative to what infrastructure needs are going to be needed to build out the EV infrastructure around the globe and whether that's charging stations or other opportunities. For example, there was a discussion that PA has been able to do. I think they positioned it very nicely in the recent COP26 session, where they've been designing a charging station, which can be used as a basis of ultimately the build-out of infrastructure around the globe. So we're involved in that through PA and, certainly, can be a vehicle to help the PA design become more well adopted across the globe as a matter of fact. And then, of course, we're very much involved with planning relative to whether it's electronic buses or rail infrastructures or whatever that facilitate an ability to have a more sustainable transportation infrastructure around the country and around the globe. So excited about these various pieces, and we're proactively involved in discussions to be able to do that with our client base.

And then just transitioning a little, I think the other thing we've talked about the transformation of Jacobs over the past under the leadership of you and Steve. And I was looking at your proxy or it was your 2020 proxy. The 2021 isn't out yet. But I was looking at -- thinking about where the company is going, transitioning to sort of a more consulting company with secular growth talents. And I'm looking at your peer group in the proxy and you're still sort of comping yourselves to sort of government IT solutions companies or even some not so traditional, but some of the E&C or professional service companies. And I'm just wondering, given where your portfolio is going and where potentially your margins and returns are going, is that still the best comp group? Or should we be rethinking the comp group that you guys are benchmarking yourselves against?

It's a great question, Jamie. And I would tell you that we have a set of peers that we think about internally, some of which are those that you see in the proxy. But there's also another set that we talk about, which are our aspirational peers in thinking about the journey of how we transform our company to be, let's call it, a more value-added consulting professional services organization. So companies like an Accenture or PA-type competitors, whether it's the big 4, whether it's McKinsey or whatever, these kinds of companies are able to position themselves, and certainly PA does it, where they set the standard and they're creating the RFPs as opposed to responding to the RFPs. And really having the thought leadership that allows for that discussion to be occurring with the C-suite. And certainly, that was a tenet and a strategic foundation of our investment behind PA. And it's interesting to see the amount of interaction that we're already seeing between our respective organization and the PA organization. And there's a two-way street that's occurring, which allows us, I think, to learn from PA and PA learn from us, which allows us to be really a more -- a better full-service organization. Which fundamentally, it allows us to help create the future and then maybe design, engineer, manage it and build it, ultimately through program management longer term. So if anything, the choices are too large. And so we have to really make sure that we keep our teams focused, both in PA and our organization. So we go after where the biggest bang for the buck is there, because there's a lot of opportunities. So we're really excited about that.

Okay. And I guess just building on PA, I think results in 2021 were -- they were at least better than my expectations, both from a top line and margin standpoint. I know some of the benefit in 2021 was sort of pandemic work that potentially might not be recurring. So can you help us understand how to think about growth or margins in 2022? And then I guess my longer-term question, when you first did the PA Consulting investment, you talked about opportunities to gain market share in -- or expand their footprint into the U.S. Sort of where are we progressing versus that target?

That's -- thank you. Look, the PA business has done really, really well in 2021. There are some parts of those business that have seen accelerated levels of growth, specifically related to pandemic-related work, whether it was ventilator work, testing regimes and other things that PA was directly involved with, with the U.K. government. We're optimistic that this amount of business -- and one could say it's not 10% of the business, but it's more than 1% or 2% of the opportunity that they've seen. We're optimistic that the pipeline shows that they're going to be able to offset that and then continue to grow into 2022. But PA has its work cut out for itself as it relates to that. We actually do believe that double-digit growth is going to be able to be sustained relative to their organization. I think some of that is relative to the synergy work that we're developing with them, which will help offset some of that business that was generated because of the pandemic. And some of it is just because the intimacy that we've learned that PA has with the C-suites of their top customers, clients has been really extraordinary and actually better than what we envisioned it would be. So we're really pleased with that. And so I think, driven that and the -- their ability to add this unique aspect of engineering and consulting and designing, which fits well into what we can provide as a greater Jacobs organization, it's coming together even better than what we would have thought. And so the deal model that we had versus what they performed in, in 2021, we're really, really very pleased.

Okay. And then I have to ask you a question on numbers, Kevin. So you put out the $10 EPS target in 2025 on your earnings call last week. So can you help us understand what the assumptions are to get there? Is it top line, cost cutting, margin? And what's driving it across the segments? Is it more PA or PP&S and CMS? And then the other thing, I think you said this doesn't assume you really need to utilize the balance sheet to get to that $10 number. So just confirm that and after which, I'll ask you about what's on in the M&A pipeline.

So let me start first with Focus 2023, Jamie, because it's a strong underpinning of our ability to continue to reinvest back into the business, whether it's training our people and upskilling, whether it is process enhancements with the capability of leveraging our global platform of talent around the world. So Focus 2023 is a big enabler of driving the ability for us to continue to reinvest back in the business. We think that there is well above $100 million, approaching $200 million of savings, which we actually will expect that we'll spend back against to facilitate our ability to continue to invest in the business. So it's a strong enabler. With that said, that allows us to have the degrees of freedom to spend back in terms of that transformation we've been talking about and support the business objectives of growth that we have across the 2 LOBs and the independent PA organization that we have. And because of that, we think that each one of them have strong growth profiles. You're getting ahead of our Investor Day a little bit in terms of that. So I'll just leave it there that we're excited about the growth of each one of the businesses. And you're right, the last piece of your question was what's assumed in terms of capital deployment relative to that. It really is an organic strategy, that we put forth an organic target. We've kind of communicated that we're going to be at a 10% plus EPS number organically. We still believe that that's going to be positive on both an EPS and EBITDA perspective. And if you just do the math versus kind of where we are now, we get there. And so I think that we've proven that we are very, very thoughtful stewards of capital, and whether that's share buybacks at the appropriate time or whether it's incremental M&A that further supports our M&A strategy, which is really our strategy itself to build capabilities and margin-enhancing organic growth opportunities in the future can even accelerate it further. But I'll leave it there, and we'll talk more about that when we talk at our Investor Day.

Can we just -- on the M&A side, I know you've made some strategic investments recently on HawkEye, Microgrid and BlackLynx. What are these investments do for sort of Jacobs? And then I guess, not to steal thunder from your Analyst Day, but when I think about M&A, is it more about sort of PA Consulting-type companies? Or is it more we're thinking about where spend is going, whether it's 5G or EV or semicon, semicap -- semicon CapEx? And it's better positioning yourselves versus the particular end market versus, I guess, a software service offering.

Yes. Look, I think they will tend to be technology-based. They will also be -- PA has had a history of doing small deals, which have built capability sets. And certainly, in the U.S. -- you asked that question earlier, which I forgot to really answer, that's going to be a focus of PA's growth. And by the way, in 2021, which they had a plan for of accelerating U.S. growth, they're ahead of that plan in the United States. And some of that is coming together because of us working with them to start to build the revenue synergies relative to that. So they're ahead of plan in the United States. And so we think U.S. focused in terms of opportunities there will be on the docket. And in your question about some of those smaller deals that we're doing, these are very technology-based and which are putting us at the forefront of edge computing, which is strengthen our capabilities to do data analytics, to interpret data, to manage data, to evaluate and take action relative to data. And that's certainly the case in some of the work that we've done on some of those that are more CMS-oriented. There are other investments we're making on microgrid and other things that are in the pipeline, which are helping us understand technologies that will allow the build-out of infrastructure, which is more sustainable and expanding the grid profile in communities around the country and the globe. So all of these things are going to strengthen our capability sets and allow us to offer more, not just expand our scale. I mean expanding scale is a little bit less exciting for us. It's really about capability base that allow us to be better and more value added to our clients.

And I guess just the last question before we have to hop, when you and I were talking in the prior, when we were talking about some of the changes you're making to your business to attract talent and allow people to have more sort of flexible working environments. Can you talk about what you're doing there? And to what degree are you concerned that given the strong -- like labor would constrain -- the lack of labor would constrain some of the strong, secular growth tailwinds that you see ahead?

One of the, I think, strategic competitive advantages of Jacobs is the global footprint that we've put in place and the technology that facilitates the ability to use it. We were just involved in a discussion on one of our large projects, and it's a project where we are utilizing 130 different locations around the globe to execute against it. And that is critical for our ability to mitigate the profile and the risk profile associated with gaining access to talent. Whether our talent's in India, whether it's in Poland or whether it's in Portland or whether it's in Dallas or whether it's in London, or wherever it is around the globe, it doesn't matter, and we're leveraging it importantly. And so that mitigates the risk profile to a certain extent. And when you augment that with our strategy on new ways of working, where we are actually encouraging virtual work when it makes sense for our employees, and we're kind of structuring our footprint of real estate, which becomes less about a place to have heads-down work and more about collaborative spaces. So we're going to have some portions of our population, which work virtually all the time and then come periodically into our footprint of offices around the globe to gain that connective tissue, training and culture-enhancing efforts. There's going to be some which are hybrid, going back and forth depending upon what their roles are. And there's going to be some that need to be in the office, whether it's a client office or whether our office, because of the unique aspects of what they do. What that is allowing us to do is a significant reduction in our footprint, a significant reduction of travel and a significant enhancement of work-life balance for our people. And all of that is really important for us. And I think that it will help mitigate some of the risk profiles. And I think it will help us retain our people to a stronger extent than, hopefully, our competitors. And attract people to a greater extent as well as they're seeing that this is a place where you can live the lifestyle you want and you can -- and manage those trade-offs that we're all attempting to manage in today's most interesting world. So I don't think we have it all figured out. But I do know we're agile enough to adapt and figure out what's going to be working for our people. And our people are giving us an initial reaction to what we're trying to do: very, very favorable. So we'll see how it goes, and we're excited about what it could mean longer term. And I know we're getting good grades so far with our people as it relates to what we're trying to get accomplished.

Well, you're clearly focused on the right things. I think we're out of time. So Kevin, Jon, I just wanted to thank you again for your time. This is a very exciting time for Jacobs, and I look forward to hopefully seeing you in person in March at your Analyst Day in 2022. So thanks, and well done as usual.

Very good. Thank you, Jamie.

Thank you.