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

Hey guys, can you hear me? Jon?

Yes.

Hello.

I don't hear you yet.

Can you hear us?

We got you. We got you now.

How are you doing?

Good. Thank you for joining us.

Glad to be here.

Very much appreciated. Hope you're doing well. So we're very excited to have Kevin Berryman with us, who is the President and CFO of Jacobs Engineering. We have Jon Doros, who's VP of Investor Relations. So look, we really appreciate the time, guys.

Maybe I'll just start off by asking you, Kevin. I asked you this actually. I think I ask you this every year, is where are you in the evolution of Jacobs now? And let me ask you in this context. It seems like by buying PA -- PA Consulting and StreetLights, you're moving sort of up the curve in terms of margins, recurring revenue, all that kind of stuff. So is that -- should we take that as what you're doing when you're going after these acquisitions and weave that in with the evolution question.

Yes, Andy. Look, thanks for having us. Really pleased to be here. Your commentary is right, spot on, relative to what we're trying to get accomplished. And through the transformation of the portfolio, not only organically in the steps that we're taking, but also through corporate development initiatives, whether that's acquisitions and/or divestitures. We've changed the portfolio to be very different than what it was 6, 7 years ago. And this is now going to be our third -- 3-year strategy that we're going to be announcing on March 4 that's coming up. And effectively, what we feel really good about is through that transformation, we now have a portfolio that is better aligned against growth opportunities. And so if you look at the full, let's call it, $12 billion in net revenue that we effectively have, almost every piece of that $12 billion is aligned with an accelerating market in which we participate, whether it's infrastructure, whether it's water, whether it's national security or whether it's semiconductors and the list goes on and on and on. And a big part of the portfolio is ESG related. And so clearly, with the accelerating discussion around that, that's going to be a growth multiplier as well. So we really feel very good about the portfolio. Having said all of that, we also think there will probably be opportunities to continue to build upon that. But I would say that to the point you made, the build, if we do further acquisitions, it's less about scale because we really do like that portfolio. And it's more about capability based, which translates into incremental margin, higher value-added solutions being provided to our clients. So I think that the idea that you embedded into your question is an accurate one. And we fundamentally believe that while acquisitions probably won't be necessary to continue to deliver against what we've got because of the organic profile of growth that we're facing, which in itself is robust, we do think there's going to be things and opportunities for us to even get better at that journey and provide higher margin solutions to our clients in future years as well. So we feel really good about it. And I would say, one other thing that I would just augment relative to the portfolio is the incredible amount of success we feel like we've been able to have building a stronger culture over these last several years, too. We feel like we have a more -- well, we know we have a more engaged group of 55,000 people around the globe. They're more excited. And I think that that's been a big part of not only our success to date, but our future. It will be a big part of our future going forward as well.

Kevin, that definitely seems obvious. So let me step back and ask you, we just talked to each other a couple of weeks ago with earnings. So I'm sure there's not too much more to update on that front. But obviously, there's some geopolitical headwinds out there now that we should talk about. Omicron, like, hit -- I'm sure you guys like it hit everyone. In January, maybe it's gone, gotten better in February. So maybe you can talk about that. And any sort of update on government spend, and you're seeing anything on that side? So any of those cross currents?

Yes. I think what we talked about a few weeks back when we did do our earnings, we were currently -- we had communicated at that point in time, we expected relative short-term resolution to the continuing resolution and that an omnibus budget would be passed. And I think we still fundamentally believe that although there's been some distractions and obviously, DC given what's going on in Ukraine and Russia. So I think that we still feel that, that's a likely outcome. We think that, that helps support a continuing momentum build in the organic growth profile of not only markets in which we compete, but obviously, our business as well. Given the stickiness will be unstuck relative to certain of the issues that come about with continuing resolutions. So we feel good about that. And the geopolitical piece where obviously, that's not a big part of our business, clearly. And we're less impacted by it. But at the end of the day, the unknowns really create an overall dynamic and mindset that, that I think will -- could have some impact, but we don't think materially. We do have business that could be impacted by this. We do a lot of work with the federal government and cybersecurity work that I think is probably going to be an urgent piece of making sure that things are being taken care of in that. And so there's probably some upside -- near term upside relative to that. And of course, we're involved in national security-related activities in general. But there are several contract structures that we have in place, which could be impacted positively actually by some of the most recent dynamics over in Ukraine.

Kevin, to the extent you can, could you give us a little more color there as to what you might do with the federal government to help or what's part of the contracts?

Yes, these are mostly cyber work that we are doing in terms of supporting various agencies in the government and certainly being sensitized to this, uber sensitized to it, I guess, given the current dynamics is really where we would see the potential benefits. And we have existing contract types that would allow additional funding to occur quickly if, in fact, there are needs there. And maybe I can just leave it there, Andy, to the extent going into any more details might be not a great idea.

I don't want to do anything with national security, Kevin. So totally understand. So let me ask you, just I've been asking all the companies. No, very small exposure to Russia-Ukraine itself?

Yes. Correct.

Easy enough. So another big topic you kind of hit on it is, everybody ask sort of when infrastructure is really going to ramp up, the bill itself. And obviously, we need to sort of take care of the CR. But you did mention you're seeing the beginnings of projects related to U.S. infrastructure hit your pipeline. So maybe you could talk about what those projects are? And do you have any more certainty around when they might actually flow?

Yes. We put together a very dedicated group of team that is working in conjunction with our clients in the state and local institutions and some of the federal entities as well, which are impacted by the infrastructure bill to really understand how the money is flowing, where it's going to go, what monies could be available at the local levels, which is where ultimately the decision is going to be made. And so through that process, we're gaining clarity as to have this $550 billion is being spent at the local levels. And now starting to work with clients to say, in this particular need that you have, this is an opportunity for us to do either you will have funds available because it's a more numerical process of where -- how the funds flow down or that there's an opportunity for grants that can be leveraged to be able to do that work. We're starting to see that right now develop into, okay, a specific idea or thought or opportunity or project. And so I think what will end up happening is, those will -- they're in the pipeline mostly at the particular point in time. And I think they'll start to get translate from a pipeline into backlog probably not now just because we're still earlier on in the process, but they'll be worked on to become more rigorous and understood as to what that pipeline ends up looking like and that they start to flow more materially in the backlog as we end our fiscal year would be my guess. And start to seeing -- maybe we'll see some beginnings at the end of the year, but I would say it's much more likely that the bulk of that will happen in 2023 and beyond, which means that you really start to see an acceleration in 2023. But I will say, our business, we're feeling is improving nonetheless, regardless of that as we're coming out of COVID and some of the stickiness associated with people getting back at it is being reduced. So In terms of the decision making. So I think we'll be able to see something. But really relative to infrastructure, probably more '23.

Kevin, can I follow up on that last comments you made, like as we come out of COVID here, hopefully, this is the last wave, we'll see. But as you come out, there's obviously still inflation around. So that sort of affects customer decisions. But are you seeing customers start to move on the infrastructure side? It seems like you just suggested yes, but maybe you could give us a little more color.

Yes. Look, I think it's -- everyone knows it's coming. And there are some projects which -- and we talked about this on the call, that are prompted in being executed already, for example, the Pacific Gas and Electric opportunity where we're undergrounding 10,000 miles of electrical power is in California is very much loosened up and available because of the clarity as it relates to investments behind sustainability and carbon reduction. And of course, this is sustainability 101 where you can protect the forests and the wildlife relative to the California area, to eliminate the risk of fires. So there are those examples, but there are one-offs as opposed to the big things that will start to build over time. I think the interaction we're seeing with our clients, though, we're helping them identify those things which are becoming real to them and saying, yes, that's something we should be doing thinking about. It's in our pipeline now. We're helping them form that in a more material and disciplined manner, which then translates into something that get into backlog in a real way. So I think there's not much more to say that. But I think with our interaction with our clients, they're starting to see way forward, which facilitates the discussion, which starts to unleash a little bit of the, I'm going to say, the hesitancy that we've seen during the COVID period when every state and local agency was worried first about revenue, safety. Now those things are kind of going away. Now they're starting to get a view of what it might look like going forward.

So Kevin, let me ask you about another sort of big driver potentially of revenue and earnings, advanced facilities. So you had mentioned on the call that advanced facilities profit was up over 20%. But maybe you can give us more perspective on how many of these types of projects are out there for Jacobs. What has been your win rate? And what's, if possible, the total TAM basically?

Yes. Look, our win rates in these areas are quite good because I would say that we have a leadership position, I'm going to call it, in pharma as well as semiconductor. And of course, we've all been hearing the stories about semiconductors. And it's very clear that some of the supply chain issues in general that are being felt in the global economy are being driven by the fact that there's a semiconductor shortage. And our position is, we're pretty much involved in many of the opportunities in different -- playing different roles, obviously. But certainly, I would say that there's opportunity for us there. We're limited and to some extent, what we can say, Andy, because of the sensitivity associated with our relationships, with our clients. But we do have an opportunity to really continue to accelerate growth over and above the numbers that we're seeing right now with ongoing expectations of further investments going forward. What's interesting is what we're also seeing is an acceleration in pharma spend. And what's happening is in the pharma companies, a lot of the pharma OEMs are kind of sitting there saying, they're looking to outsource some of their, I'm going to call it, manufacturing of their existing portfolio of products to contract manufacturers, effectively. And so there is -- we're seeing a lot of work that is being considered for not necessarily OEM pharma company, but the manufacturers agree that producing on their behalf. And then the pharma companies are ultimately looking to repurpose their investment profile for the next wave of opportunities. So it's kind of going to be a positive from that side as well for different reasons, obviously, but we like those. And look, this is a business that's important to us. It's a big part of our people in places business. It's a good margin business for us. And typically, we're playing a material role in these investment profiles. Sometimes, we get involved in the construction management, but really mostly it's the engineering and design and front-end work, which is the higher-margin stuff.

Maybe one thing to add on that, Kevin, would be the competitive advantage that we have in that semiconductor like scientist space, lends itself well with the electric vehicle manufacturing, which is starting to pick up. So again, can't talk about customer names, but that end market looks like it's pretty robust.

It's a good point, Jon.

Very helpful, guys. Maybe just one more question on that topic. Like is it possible to think about -- if I think about Semicon or pharma, bio or electric vehicles, are they sort of equal and their potential is one larger than the other for you guys? Any way to sort of think about the relative opportunities of those 3 buckets?

Well, look, our pharma business is a bit bigger than the semis, but semi is growing very, very fast at this particular point in time. But I think we'll start to see that developing growth profile on the pharma as well off a bigger base. So maybe not quite the rate on the semi side, but certainly seeing some incremental growth on the pharma side.

Got it. And so Kevin, if I shift gears, you've talked about the $10 of EPS by 2025, excluding M&A. And I know you're going to update us on something in a week or so. You've mentioned, though that you are focused on new growth opportunities that could provide upside. Any sort of hint or color as to what you're talking about there because those seem organic to me. Is it kind of like advanced facilities? Is this other stuff? What is it?

No, look, I think it's the -- we've been working on this quite a while. I'm going to call it the digitization -- the data utilization and digitization of what we do as an organization, both for ourselves and for our clients. And I think the ability for us to, let's call it, double down on delivering those offerings to our clients, which are obviously higher margin than our existing portfolio of stuff is really a great opportunity. And so if you think about the PA investment we made, they are digital, it's certainly a big part of what they do. It's not the only thing they do. But certainly, design and digital and strategic consulting are all important elements of that. And using that within the context of marrying up with our capabilities to really have more robust end-to-end with PA being kind of point of the spear, developing what the future looks like for companies because every company is, after 2 years of COVID, is trying to rethink their business model to make sure they compete efficiently, productively and well into the future because we all understand that's going to be different going forward. And so they provide us an ability to have that leverage point into that and of course, we can then follow up with the delivery -- more of the delivery of what that translates into. So PA is part of it in terms of consulting and then the digitization of the work that we've done in cyber and our recent acquisitions, we really feel that those are leverageable into our portfolio of offerings to our clients at higher value add. So there is certainly an organic play there for sure, Andy. But I'm sure there's probably some other opportunities to leverage additional capabilities that we may have -- not have by incremental more likely bolt-ons that would allow us to continue to build that capability set even further.

Yes. So Kevin and Jon, just so you know, I mean, we do have an audience here, and they are able to ask questions through our virtual format. So we do have a question, I'll get to that in a second. Let me ask you one follow-up to what I just asked you, and that is, to the extent that you want to say, Kevin, like, should we think about that you would give us sort of a new EPS range in '25, 3 years with acquisitions like you did $7, $8 back then?

More to come.

Okay. I had a feeling you might say that. All right. Let me ask the audience question now, and then I'll go back to my questions. Could you discuss pricing trends and ability to pass through cost inflation? Also, what is the split of your backlog between cost and fixed cost, lump sum and other types of contract types?

Yes. Look, it's a very timely question, and it's being asked a lot of, I think, professional services companies in general. Certainly, the inflationary aspect is something that we're paying attention to and whatnot. I will tell you that we have 2 things going for us, which translated into our ability to mitigate this in a material manner. The first point is that, look, we are still 70% -- more than 75% reimbursable on the work that we do. We're looking to change that over time with additional products being offered or more fixed price services, but fixed price services that we do tends to be very, very short in nature. So it's quick burn. So it's 3 to 6 months of business, which obviously doesn't translate into an inflationary risk profile like, unless you have things that are going on for years and years and years. So the primary drivers of our business continue to be reimbursable. So inflation is passed on to our customers to a large extent. The other dynamic, I think, is really important for our potential investors or current investors to understand is that our global footprint, which we have been aggressively building over the last several years is a competitive advantage. And so when we are offering up our products, we are not kind of building up at the local level. We're leveraging off of our kind of global footprint of talent around the globe, whether that's in Portland, Oregon, whether it's in LA, whether it's in Dallas, whether it's in Philadelphia, whether it's in London, Glasgow, India, Poland, Philippines, Malaysia or Australia. We are now oftentimes, when we're delivering a project depending upon the size, we can have 50 different offices participating in that. And with our tool sets that we're allowing for and the consistency of our process that we are driving through Focus 2023, we're not passing along and trying to deal with different systems or capabilities. We're dealing with one, which allows us to leverage this capability globally. So what that allows is for us to pull in those leverage points where people are less utilized, perhaps less inflationary pressure rate because of that dynamic and ultimately continue to drive a margin profile about a better utilization. Said it another way, we're not managing our talent at the local level. We're managing it at the global level, which allows us to mitigate the volatility at the local level. And it's really important and allows us to offset and mitigate and manage better against some of the inflationary aspects that may be out there.

That's helpful, Kevin. Let me follow up on your comment on Focus '23. How does that program factor into potential growth and margin appreciation as you go out? I know it's been more on the growth side and the margin side, at least in the -- so far, but you did take relatively significant real estate focused restructuring last quarter. Does that smaller footprints really kind of quickly translate into higher margin for Jacobs?

Yes. Look, what we are doing is and the way that I've characterized in the past, and I'll reemphasize it at least right now, is that the work that we're doing is not about ultimately taking those savings to the bottom line. It is fundamentally about reinvesting back in our people, our technology and our capabilities. And so it is an enabler to a large extent of what we talk about when you see the slide that's up when we talk about digitization and data analytics and these kinds of things, that just doesn't fall off the trees. You've got to work and you got to invest in it. You've got to rescale certain parts of our organization. And so what Focus 2023 is doing is providing the foundation of monies and funding that's going to allow us to invest as we continue to build the growth longer term. I do believe what it does is it will, longer term, create a better growth leverage off of our business because as we get better at all of this, as we continue to grow, we need less increases in people and head count longer term. And so it creates a greater operating leverage model longer term, and that's really what we're looking towards longer term. And I make that a longer-term comment, while in the short term, it's allowing us to invest back in the business.

Then I want to ask you one more question on the cost side. We've talked about on the call, relatively significant increase in medical costs that led to higher G&A. Do you guys still believe that it's sort of more of a blip as people sort of come back and start doing stuff again? Or like how are you guys looking at that?

Yes. We don't have enough trends to really say that for sure because there's been some volatility in our medical expenses, Andy. But it does look like there is some degree associated with the -- that year-end process associated with medical annual plan. People tend to go to the doctor more at the end of the plan because they've already used their deductibles. It does appear that there's certainly some of that going.

And I think I asked you this earlier, but you have seen more people are back to work. Omicron, not a problem in February compared to January?

Yes. I would say our trends are continuing to be positive. And so we're hoping that we quickly get to a point where we're endemic managing as opposed to pandemic managing.

Yes. Me too. Me too.

Maybe a quick question that we're getting a lot, is maybe just an update on PA Consulting, the revenue growth profile most of you're getting it as well. We got that a lot last couple of...

I like when you ask questions for me, Jon. That's good. Kevin, what about PA Consulting?

Extraordinarily great performance actually. So we're really pleased with the team. Bob and I just were on a Board meeting earlier today talking about the next steps for '22 and beyond. So really pleased that the growth rates in local currency well into the 20s, operating profit well above that year-over-year on their basis, not Jacobs basis and what's in our numbers are not over the course of the last year, but they are having some strong momentum. And look, we don't -- can't expect that, that will be sustained forever. But very, very pleased. The leadership team is engaged. We have great interaction with our teams, as I was describing, how we think about partnering going after business together. And look, they were involved in the PG&E win that we had. So we're really excited about this the first almost 12 months that we've had coming up on 12 months, and we're just as excited about what the future holds.

Kevin, has the sort of COVID response-related work sort of run its course yet. like if I look at pro forma backlog growth, it was still up double digits in Q1 '22. So the question that people ask me is, can you maintain sort of that double-digit growth even as you go against tough comps?

Yes. Look, I think the way that we're thinking is that, they're now going off this incredible base. So 2021, which was extraordinary and included this and included the benefit that we talked about in terms of the COVID work. And they're working very hard to replace that then some. Our expectations, which I'll communicate similarly to what we did in our earnings call was that we expect them to grow pretty nicely off of an unbelievable 2021 base. So that's what I'm saying. It's pretty exciting to see what they've been able to do and continue to grow off of those numbers is pretty impressive.

And Kevin, could you just remind me because I kind of forget like the margins started out really high, as you know, PA but sort of have settled and in which is low 20s range. Is that sort of the right margins to think about for PA?

Yes. Look, they were -- their EBITDA margins were in the low 20s. They've kicked up in 2021 to -- in the high 20s. I don't think that EBITDA number is sustainable well because the utilization factors associated with our partners and the consulting is just too high. And so that utilization number will probably come down a little bit, which puts a little bit of pressure on the margins. But I think we're still well into the 20s in terms of EBITDA, sustainability, in terms of the margin profile. So perhaps, better than where they were historically, but certainly not as high as when they were so red hot over in 2021.

And Kevin, I asked you about this on the call. So maybe just a clarification, right? So on CMS, you've mentioned sort of the underlying growth, 5% plus, right? And that you get past a tough comparison in Q1, and you can sort of go to that and Idaho ramps up. But as you know, there's been this question of government services companies in terms of funding, worries about cyber, all the time, so you just talked about upside potential in cyber, that's good. But what is it about your business that's given you more confidence in that underlying growth? What parts of the diversification are really growing nicely, assuming Idaho also is one of those things?

Well, you've mentioned some of it already. The underlying that we are seeing is that 5% number. So when we get past that ramp or the compare versus a year ago, you'll start to see a 5% number. So that's a real number. And we may not get to that full number in this quarter -- second quarter. But certainly, the rest of the portfolio is poised because of what's in backlog. And it's not all stuff that's associated with continuing resolution matters, right? Now we think that's going to be cleared as we suggested during the month of March, which would help accelerate. But even if that doesn't, there are other items and parts of our business, NASA, for example, which is -- has some plus-ups and other business that we do in terms of some nuclear work and some other work that we're doing in terms of national security work that we're doing. All of these things are being able to show some growth, we believe. So while there's pieces that could be a little bit less robust because of, if the continuing resolution doesn't happen, some of these other things are less impacted by that. And consequently, that's why we're calling for that second half to be higher than that 5% number and get into the double-digit year-over-year growth numbers.

Kevin, I think it's a good time to ask you about sort of this $500 million rapid solutions space ISR program that you've sort of talked about. Maybe a little bit more color into what the program is? And how quickly it can ramp up? Why you sound so confident about it?

Yes. This is a technology that we had talked a lot about when we purchased KeyW, and this is Space-Intelligence, low-earth orbit satellite intelligence capability sets. And so I can't really go into very much detail at all relative to this because of the confidential nature of our relationship with our client and what's in and what's out and so on and so forth. But we do believe that it's opened up the door for a lot of opportunities now to start to actually execute and make these things become a reality and be utilized in the infrastructure of security for the U.S. And because the technology has now played out and kind of worked through all of the processes, it's now getting into the execution mode. And I'm glad you asked the question because I didn't include that as one of those things that's ramping up. But this is one of those things that would be ramping up, regardless. And so we're really excited about it. It was a key tenet of some of the opportunities that we saw from KeyW. It's taken us longer than what we would have really envisioned back when we did that transaction. But this is now -- given the margin profile, what comes with that work, this is making the KeyW a very, very, very nice return deal.

And then, Kevin, you guys have mentioned few times actually the telecom business within CMS and that it's contributing to your growth. I know it's kind of small in a big context of CMS. But since you've mentioned it a couple of times, maybe I ask you about it.

Yes. Look, it's small, but becoming a bigger percentage without a doubt. And what we've seen is through our success and some of the work that's being done by the team is a leverage of the work that we've been doing with either existing companies or with additional other companies that are recognizing some of the good work that we're doing, we're being able to expand our reach beyond kind of some of the regions where we were originally starting. So it is a multiplier to our growth avenue, and that's certainly one that we'll see some benefits regardless of what's happening with the continuing resolution as well, Andy. So it's less than 10% of the business, but growing strongly.

So I only have a couple of minutes left. Let me just ask you about, you have BlackLynx. You bought BlackLynx, you got StreetLights, you just bought that. The one thing that I'm just intrigued by is that while these are similar businesses to stuff that you had, they're also very different, right? And maybe they require like a different sort of engineer, like a software engineer, so -- and different competitors. So as you thought about sort of this ramp-up of this type of business, what gives Jacobs the sort of competency to sort of do this because it is a little different, I think?

No, look, it is true. There are some pieces of these, which are actually, to your point, new skill sets. But we have the ability to utilize the core that we've been able to gain access to and our plan would be to augment that in addition to further leverage it through the portfolio. If you use StreetLight as an example, it is such a relevant data and data analytical tool set that immediately makes us a better infrastructure, designer, planner and forecaster, immediately. And the capabilities of that are -- this is a software sold, software-as-a-service, or you could call it data-analytics-as-a-service. And so we're going to be selling that to state and local companies, StreetLight was successful in doing that. We are obviously working with almost all the players in state and local universe. And so there's a great market to -- for us to allow them to gain access to. And the capability set is able to extend beyond analytics relative to transportation. This business and what they do is provide almost real-time analytics and how traffic patterns are behaving, how rail is behaving, how pedestrians are behaving, how people on bikes are behaving and how transport around communities and across communities is occurring. It's extraordinarily powerful and definitely leverageable in terms of the work that we do. And we will sell it as a service, and we'll sell it as becoming better designers and consulting as well, which translates into what we believe is better value to our clients and higher margins for our shareholders.

And maybe one thing to add on that is, BlackLynx and especially StreetLight data, we've been working with StreetLight for 6 years. So it's really like an extension of what we do, not really enough to be sent to be an addition from our core competency. Our people are experts in that. Just -- me -- plug one thing. So that we announced that we're going to be releasing our investor strategy materials. And next week, we're going to move that up a day, and we release it a little early. So on Thursday after the close on March 3, we are releasing those materials to get a full working day to kind of work through that. I just want to make sure I mentioned that.

We appreciate that, Jon. So anyway, thank you very much. I think we're out of time. Kevin, Jon, great to see you guys, hopefully, next year down in-person. And we'll see you actually soon. Thank you.

Great, Andy. Thanks. Thanks for having us. Appreciate it.

Bye-bye.