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

Good morning, everybody. Thanks so much for joining us. Great to see everybody in person. We're going to jump right into it. I'm not going to talk too far here just because we want to get into the meat of this. But very happy to have Jacobs here to present. Timing couldn't be better, given what's going on in the world. And the company released their strategic plan on a Thursday night, which I find very interesting. As you would expect, heavy on climate control, high-margin consulting and digitization of government. We've got the -- a big part of the team here to talk about the story, from the Chairman and CEO, Steve Demetriou; to Kevin Berryman, President and CFO; Bob Pragada, President and COO; and several other team members to take Q&A. It's going to be a bit of a hybrid format, where we're going to start with the presentation for 10 or 15 minutes and then move into questions. So think of your questions, and I'll get to you as those materialize.

Great. So thank you. I think we have the introductions. And what we'd like to do is really start, as we always do, at the company, with culture and why that's so important to us, and then get into the meat of the strategy. So we'll start with Shelie Gustafson, our Chief People and Inclusion Officer.

Good morning, and welcome. We're very excited to be here and to have the opportunity to tell our story, and part of that is around culture. So we start with culture in that it is critical in terms of our ability to attract and retain some of the world's greatest talents. So on that first slide, just a couple of points I wanted to highlight. Our purpose, our tagline of challenging today and reinventing tomorrow, really, is our north star for everything that we do. And it's surrounded by our values in terms of how we act. And this is all critical in terms of driving performance, driving accountability. And to do that, we start with inclusion, because we know the more diverse and inclusive our organization is, the better solutions and more innovative solutions we bring to our clients. But we've been on a journey. So on the next slide, these have been building blocks over time with purposeful, intentional effort, especially over the last 4 or 5 years, really, to establish this foundation. And we know that our journey on culture is never done. It's something that we will continue to do. And so on the last slide, our culture helps us to leverage our global talent around the world. We think of it as a talent ecosystem. So our 55,000 employees around the globe can be leveraged to connect the right talent with the clients' needs and with the right skills to leverage them around the globe. And so through our new strategy, we're able to leverage this ecosystem. We're able to put the right skills with the right needs and to continue to enhance and upskill and reskill our talent. So it's an exciting time for Jacobs because we know that talent is our differentiator, and the culture is what enables us to use all that global talent. And so with that, I'll turn it over to Steve. Yes.

All right. Steve Demetriou, Chair and CEO of the company. You know what's -- the reason why we started with that is when you go back and look at the success that we've had over the last 6 years, without this focus on transforming the culture. And culture is obviously a big topic, but it's everything from accountability and all the way to the way we engage, inspire and innovate with all of our employees, which is important, obviously, to retain and attract talent to the company. When you look at the history of the company, there's really 4 major steps that, in the middle of the slide from the bottom up, divesting our oil and gas chemicals mining business several years ago and redeploying that capital, first, to CH2M, which is a major doubling down of infrastructure and environmental. And then going on a series of acquisitions to really build up this digital data capability in the company that wasn't there 6 years ago, with the likes of KeyW, Buffalo Group, BlackLynx and, most recently, StreetLight Data. And then layering on top of that was our move into becoming a major consulting player with the acquisition of PA Consulting, which is off to a great start, basically hitting our 1-year anniversary this week and far exceeding in this first year what the expectations were from that business. As a result, you see the margin enhancement and the improvement on return on invested capital in the business. The important message here is that, as a result of that portfolio transformation and the way we've organically positioned the company on top of that, is that we are now aligned to secular trends that look like they're going to be decades long and tremendous opportunity, not only for growth, but for margin value-enhancing opportunity basically around things like infrastructure modernization, electrification, data solutions and consulting being major drivers. And as a result, as you go through our strategy, you'll see it all centers around 3 accelerators of climate response, consulting and data solutions. The top right-hand side of this chart is -- an important message is, with all that, our addressable market is now significantly higher, above 3% growth in our addressable market over the last several years, moving now to this new strategic period of more than 5% addressable market growth and then positioning as we exit this strategy into 2025, with even higher opportunities as we execute the strategy. The markets that we're focused on, whether it's infrastructure, national security space, et cetera, are all growing nicely. But we expect to exceed that market growth because of our unique capability of being able to bring technology with this portfolio that we've developed: data technology, digital capabilities, et cetera, with decades of domain capability in areas like water, environmental, national security, infrastructure, et cetera. And so as a result, we're excited about our growth opportunity. Bob?

Yes. So maybe if we slip -- if we'd go all the way to Slide 15. With that intro, so where we are today. And so I think a question that's probably sitting on everyone's mind is that, what exactly does the company do? And as Steve mentioned, we are in the technical services environment, think across multiple markets, and focused in on very stable geographies. And when we say technical services, it's broad. We started off years ago as an engineering company and really built our capabilities around core engineering and think client has an issue, client designs what the structure of the solution is, and then an engineer goes and designs to the solution that the client developed. And over time, the success criteria around that was be the best engineer in the world, and that's what we did for several decades. That knowledge of the client's business and understanding the science of our clients' business has now grown to a new success criteria in the marketplace. Being an engineer, being a great engineer is a right of entry. And now that we know the science of our clients' business in the markets that you see there on the slide, we're in the mode of helping our clients solve the issue that they have and the success criteria being in that solution to our clients' business. And so when we look at the strategy moving forward and we picked these accelerators is because those markets that we're in have long tails and are tied to secular growth trends that are happening in the world today, things like climate response and the entire energy transition. Getting deeper into our clients' businesses has built a nice platform for our consulting work and then the investment in PA Consulting has accentuated that. And now taking data. And data -- all of the data has to bring from an enablement standpoint and really putting some horsepower around solving our clients' issues in the most effective way is really what the core of our strategy is moving forward. So we're really excited. And I'll turn it over to Kevin to talk about the financials.

Yes. I wanted to move ahead to -- there. There you go. So look, given the portfolio changes that the company has made and now with the new strategy oriented around more higher value-added solutions, effectively, what we have come to understand is with these very, very strong growth rates and the ability for our team to ultimately deliver against client solutions that are more value added, we believe that there's an opportunity for this company to be growing organically. And this is specifically an organic strategy that we're outlining in the neighborhood of 7% to 10% organic growth over the next 3 years. And in 2022 is the first point of that period. So effectively, with all of the accelerators that we've outlined and the fact that our addressable market is doubling almost in its growth levels over the last several years, we're excited about our ability to deliver against that. Interestingly, consistent with our past practice, we believe that not only with the more value-added growth that we're seeing, but the ability to deliver against clients, we have the opportunity to continue to increase our operating profit margins and our ROIC consistent with that. So you can see the numbers here, where we're talking 7% to 10% in terms of net revenue growth and operating profit margins improving again 60 to 100 basis points, with most of that happening probably next year and in 2024 and, of course, double-digit operating profit growth and ROIC improvements. I think that's important to note. And as we sit here today in the current environment, I think it's important to understand that this is an accelerating process, which really is going to be seen in the second half of our -- of this year and ultimately into '23 and '24. And we're seeing a lot of preliminary and real evidence relative to that, which is our backlog is growing substantially. Our first quarter results, which we announced about a month ago, backlog was extraordinarily positive in terms of the growth dynamic. However, we are seeing that the buildup, with the infrastructure bill having been delayed, the continuing resolution actually is still a challenge relative to some of our clients starting to accelerate their spending plans. We would say this is going to be even more so a second half 2022 issue and into '23 and '24. So I think the reality is, if I think about what our second quarter looks like, it's probably a little bit closer to being flat versus a year ago versus kind of the consensus numbers, which is showing a little bit of improvement versus a year ago. But we're excited about the second half and -- specifically starting to build. The continuing resolution is important to understand because we think that, that's getting resolved actually this week. And we have a high degree of confidence relative to that. I would say, we are probably 70% to 80% a few months ago. Now we're probably 90% to high 90s in terms of the expectation on the continuing resolution. And once that occurs and we get an omnibus budget in place, that starts to accelerate our clients' understanding exactly what's going to be in front of them this year, and they're going to start to be acting. So we see this as being really a second half phenomenon right now building into '23 and '24. So if you think about all of those numbers, we think that -- and here's another way to kind of talk about the businesses that we have and how much they are aligned against those secular growth trends that Steve was talking about. And you can just see up there in terms of the current environment relative to the implications relative to COVID and the implications relative to national security that we have a lot of our pieces of our portfolio, which are going to support our ability to ultimately get to what we've characterized as a $10 EPS number by 2025. And ultimately, remember that, that $10 is really organic-based. With all of the hard work that's been done, that's really the ability and the outcome of it, which, with our strong execution capabilities, we're expecting we're going to be able to do. Now having said all of that, with all of that strong work, we now have a portfolio that is delivering strong cash flow as well. So organically, while we think we can get to that $10 with additional capital deployment, and our cash flow is expected to have at least a 1x net conversion versus net income, adjusted net income, that allows us to deploy that capital in an agile manner. So when it's appropriate, with disruptions in our share price to buy back shares and/or strategic acquisitions that are oriented and aligned with what we've outlined last week, we believe we can get to an $11 per share in 2025, more oriented around share buybacks. If in fact the strategic acquisitions aren't really as available at price levels that we think we can add value, or to the extent that we can get additional acquisitions embedded into the plan, obviously, higher levels of EPS because you get the accretion associated with that incremental EBITDA that gets purchased along with that, we would consider going up to a 3x leverage at that point in time and delever quickly thereafter because of the cash flow dynamics. But we think that's a pretty exciting scenario that we can outline, $10 organically and up to $11 to $12 by 2025.

All right. So that finishes up our prepared remarks, and we're open for Q&A.

Great. Thanks so much for taking us through the story. We do have a few minutes for Q&A, maybe I will kick it off. Could you talk maybe a little bit about the amount of business that's associated with climate in some of your key practice areas there around water and other areas? And then I'd also really like to hear you go into the Divergent Solutions business unit that you've stood up. I think there's a lot of really interesting meat on the bone around that.

Yes. So I'll start with climate. And then Bob, I'll turn it over to you for Divergent Solutions. The climate -- when we talk about climate ESG, our total revenue -- we estimate, today, to be about $6 billion of our total revenue. So it's pretty significant. And it's really cross-cutting, specifically on climate. It's everything from decarbonization, carbon mitigation, resilience. And when we talk about resilience, it's everything from sea level rise or bush fires, et cetera, around the world. And energy transition, renewable energy, and look at some of the major projects and programs, even some of the recent wins with like P&G in the West Coast; or over in Europe with SuedLink, laying one of the longest underground cable systems to move wind energy, renewable energy from the North to the South, and programs like that. But it's very cross-cutting. And even within the ESG side, we're working with our clients on the whole social aspect of infrastructure and quality and making sure it's more than just the typical financial returns of infrastructure, but it's the social side of what it does for the community and enhancing health, et cetera. Bob, on Divergent Solutions.

So Divergent Solutions is a really exciting piece of our business. We actually, over the years, have been developing, both organically as well as through acquisition, strong data skills and data offering. And it breaks down into 3 main areas, how that was built up over the years. And what, as an overreaching statement, Divergent Solutions is intended to really be the hub of our company for all of its data. And that hub has the ability to go directly to market with different platforms that we have as well as have spokes that are tied to, from a horizontal standpoint, in our 2 lines of businesses: People & Places Solutions and Critical Mission Solutions. So first, on the business units that we had brought on board and really have now become market leaders in their space, the first is around cyber and intelligence. So with the acquisition of KeyW, Blue Canopy, Buffalo Group and, most recently, BlackLynx, we have developed some strong cyber, everything from training to analytics to platforms for predominantly the federal government. We know -- and that business is a $1 billion business and continues to do great things for both the U.S. as well as the U.K. government. We also know that in our infrastructure business and in our private sector business, the need for secure intelligent systems is going to be a high priority. And so that horizontal cross-cutting ability now with a focus is the big piece of the business units that came over. On the other 2, these are the result of -- as I was talking earlier about solutions, we organically have developed predominantly around analytics, analytic tools, whether they be capture as well as the use of algorithms to solve our clients' problems. We've been developing those on a bespoke model in different parts of our business. And so with Divergent Solutions, we're bringing that expertise into one -- under one leadership team. Again, whether it be AI or ML, be able to sell those to our clients, those X-as-a-Service type platforms, but also now from almost in a manufacturing sense, product management and consultants and services around those platforms, be able to drive our solutions through our line of business through Divergent Solutions. And then the last piece is around some of the recent acquisitions we made and partnerships that we have in the marketplace: BlackLynx, which really has a deep expertise in edge computing for the federal government; as well as StreetLight Data, which takes everything around mobility analytics and drive solutions for transportation clients. Those 2 are software companies that we wanted to have an environment to where those product development skill sets could be accentuated, again, direct links to the end markets, but also great enabling capabilities for our lines of businesses. And our partnerships between venture capital investments that we've made over the last couple of years, in -- everything from Microgrid Labs to HawkEye 360 and other security platform, and now, just most recently, in Electreon, which is in wireless inductive charging for electric vehicles, coupled with our partnerships that we have that are strong partnerships, people -- or companies like Palantir and Hitachi and Microsoft and Google, where we're out in the marketplace in partnership with those platforms doing work. Again those -- they were on a bespoke model around the world, those now will be under common leadership, too. So those 3 areas is Divergent Solutions, and we're really excited about the opportunities it's going to bring.

That's great. Any questions from the audience? Let me share my mic so people can hear on the webcast.

On a net basis, do you view a tight labor market as being a net positive or a net negative for your business?

I think we -- look, I think we view it as something that was set up to deal with successfully, part of it is our own company, and when we talk about culture and the ability to retain better than our industry competitors, all the way to the way that we're able to access labor globally to deliver local projects. So it's a global integrated delivery model that we've been developing over the last several years that's now positioned to address tight labor markets globally.

Any more?

For those of us who knew Jacobs, say, 8 to 10 years ago, and you touched on this a little bit, but could you just briefly describe in layman's terms what the -- how the company looks like now is different from what the company looked like then?

Yes. It's a great question. And it's a really important part of this whole strategy of transformation that we've been executing, and this is now our third strategy to take it to a new level. We've moved away from being an E&C -- engineering and construction company to a technology-enabled solutions company. As part of the divestiture of our oil and gas chemicals business, we've shed about 10,000 construction workers, craft workers that we had. So we're not a construction company. That's sort of number one. Number two is the company back in '15 when I arrived was a billable hours-focused company. Today, we're working with clients on solutions. The company of the past was responding to RFPs. Today, we're in partnership with our clients, helping them think ahead. So it's our whole brand of challenging today and reinventing tomorrow. It's just a whole different model as a company moving forward. And then now, as we're getting into technology and these product element of our business, which started with KeyW, with the ISR capability and now the software capability that Bob talked about with BlackLynx and StreetLight Data, again, brings a whole different layer of what we're doing going forward and really helping deliver purposeful solutions for all of our clients globally.

Just to follow up on that. That [ E&G ] business was a substantial part of the revenue mix, if we went back in that [ time frame ].

Yes. Back, that was 1/3 of the company that we divested to redeploy into this solutions-based company moving forward.

Maybe just one more for me, kind of zoom back into the present a little bit. You talked about some of the challenges we've seen in the industry around the continuing resolution, staffing during a pandemic, kind of later passage of the infrastructure bill. How do you see that kind of matriculating, both in the present and in the second half of the year? Because you've been adding so much backlog and, really, a lot of it hasn't even come from infrastructure yet. So it seems like you're prime for a meaningful acceleration. But can you just maybe talk to those dynamics?

So maybe just a couple of comments. Relative to the continuing resolution in infrastructure, all of that has, I would say, dampened the certainty relative to when monies are going to be available and where they're going to end up flowing to as it relates to not only the federal institutions, which we do work for, but state and local as well. But we are very confident about the growth opportunity that's developing. And so as we sit here today, we're adding capability sets in anticipation of ultimately us being able to supply and drive the solutions to those clients, as they are -- and finally coming clear as it relates to the funds that are becoming available. We have a program management office we set up, which are working with our state and local, its clients around the United States, specifically. And we're helping them understand the monies that are going to come to them, when they expect to be able to see it, what should they be targeting and going after, not only from a perspective of execution against the monies that will come fastest, which are those parts of the infrastructure bill, which are going to be numerically determined by census numbers and whatnot. But then there's the additional part, which is probably a little bit more longer term going into 2023 and beyond, is the [ groundwork ]. And so all of that is becoming clear that the pipeline that we're starting to see relative to clients saying, "Okay, now I have clarity on x, let's start talking about what I should be thinking about." And so the pipeline is starting to develop relative to that. We don't see it necessarily as happening now in terms of getting into backlog, but that will happen over the back half in anticipation of developing further momentum in '23. In terms of the continuing resolution, our pipeline has new products or new projects that are not yet able to be funded because the federal government is kind of going on 1/12 at a time of the budget of last year. So they can't fit the funding in to be able to fund the pipeline that we currently have. And this is projects we have won, we're ready to execute against. So we see those, once the continuing resolution is taken care of, this week, again, hopefully. That will start to unleash a little bit of, okay, now we can start these new projects that have already been approved and won in our pipeline -- in our [ backlog ].

And if I just build on that, when you really think of moving past this short-term issue of continuing resolution, et cetera, when you think about our company, infrastructure funding globally is going to happen in a big way. Obviously, the U.S. is fully committed to -- the administration is fully committed to the IIJA, and that's going to start flowing second half and beyond. But even globally, most governments are in desperate need to upgrade infrastructure, enhance infrastructure, climate, et cetera. Then you have the whole advanced manufacturing side, led by our semiconductor business, which is going to be a decades-long opportunity for us. We're well positioned. And so that's going to be outsized growth. And then the whole defense side, that's -- was built into our organic growth even before we knew what was happening over the last 10 days. And so the defense side of it is, to some extent, unfortunately, for the world, is going to be something that's going to ramp up probably more than we expected in this strategy.

That's great. I mean, I really see this as a low-risk macro, free cash flow compounder with a social conscience. So I think it's right in the sweet spot of where we want to be. I appreciate you guys spending the time with us. They're going to be available in the breakout session, which is downstairs. And so thank you very much.

Thank you.

Thanks.

Thank you.