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

Okay. Good afternoon, everyone. I'm Jerry Revich from Goldman Sachs. I'm delighted to host Jacobs. Joining us from Jacobs are Kevin Berryman, President and CFO; Jonathan Doros, Senior Vice President, FP&A, IR and Treasury. That's a lot of hats, Jon. Kevin and Jon, thank you very much for joining us.

Great to be here, Jerry. Thank you.

We're going around the conversation in a Q&A format. And also, we have the Jacobs' slides available for reference. If anyone has any questions, please send an e-mail to me via the webcast, and we'll be able to address it during our conversation. Maybe as a starting point for the discussion, Kevin, Jon, you folks have spent a lot of time focusing on your ESG strategy and the company's culture specifically. Can you talk about what that means from an investor standpoint and the opportunity that, that creates to drive the bottom line?

Yes. Thanks, Jerry. Look, we've got a slide up here, which talks a little bit about what is important to us as Jacobs. You got a purpose statement, our values and an employee value statement, which is an important element relative to the transformation of our company. And look, we've been going through quite a bit of transformation over the last 6 years. And I will tell you, probably the single biggest ability for us to have accomplished what we have been able to do financially over the last several years is a fundamental change and dynamic in terms of how the culture has evolved in the company. And it really has been purposeful and deliberate in terms of things that we have done to further enhance the purpose of the company and reinforce the values which is centered around our people. And at the end of the day, we all know that to grow and to be successful longer term, there is a need for talent, and we are a people business. And consequently, while we don't often times hear perhaps companies talk about the values, it is a critical part of obtaining and getting the best talent in the world and, ultimately, facilitating our ability to keep that talent, get them excited, get them impassioned to ultimately drive the agenda going forward. So I think that this ability to talk about these values and then overlaying on top of it, the fact that we are focused on becoming a company like no other, which is supporting the efforts around the globe to become more carbon-friendly because of what we do in environmental consulting and also doing the right thing from a society perspective. And all of those things ring very, very powerfully with our teams. And to the extent that we are continuing to drive this agenda, we think it is a critical strategic advantage that we will need to have longer term to ensure that we're getting access to the best talent in the world. So I think it's been a critical part of our journey.

And sticking to the ESG theme, it's been really interesting how your company has done a range of really expanded capabilities from water to environmental cleanup and yet it's really under owned by ESG funds. I'm wondering as you think about the portfolio today, do you feel like you've got the key pieces that match the ESG profile as the company is positioned today, Kevin?

Yes. Look, we do feel very good about the portfolio in this regard, Jerry. And actually, we've characterized internally with our teams is that our expectation of every single project that we have in front of us, whether it's in government services or whether it's in infrastructure, is an opportunity to incorporate some element of either sustainability-related efforts or ESG-related ability. And we already, as we characterize our portfolio, we have approaching -- it's not quite, but approaching 50% of our gross revenue is really oriented around ESG opportunities. And we also think that the remaining 50%, probably a little bit more than 50% actually, has the opportunity to embed ESG-related efforts. So thinking about as we're approaching and responding to either RFPs or setting the agenda going forward through our strategic evaluations and consulting efforts to ensure that there's opportunities to embed into our offerings to our clients, something which enhances their sustainability efforts and improves their carbon footprint. You can look at some of the specific projects that we have on this, which are all very, very oriented around sustainability. But we think that, that's even a bigger opportunity longer term. So it is why one of our accelerators to our strategy that we just announced a month or 2 ago is really about the sustainability of our portfolio and how it can help drive an agenda which is helpful for our clients in terms of their efforts to become more carbon-friendly.

And in terms of the portfolio conversation, we've seen you over the past 7 years just continually high-grading the portfolio from a technology and margin standpoint. As you look at M&A opportunities from here, how optimistic are you on something else as significant as CH2M or PA Consulting versus more incremental opportunities as you look at the pipeline today?

So the first thing I would say, Jerry, is consistent with my earlier comment, we really do like the portfolio we have. Now that does not mean there aren't opportunities to augment it. But we think about our strategy. And we don't see that there is these huge gaps in the portfolio that would allow us to execute against it. And we did talk in our strategy that the fact that we expect to be in the high single digits in terms of our organic growth going forward because of our well positioning. So we don't wake up every day saying, "Oh my gosh, where is the next deal coming from?" Because of that portfolio comment I just made, I do believe it's more likely that there's going to be more kind of tuck-in related or bolt-on acquisitions, which allow us to take a capability or something that can be inserted into the portfolio and creates an ability for us to actually accelerate our organic growth going forward as opposed to a larger deal. Now that doesn't mean that there won't be a larger deal, but that's certainly not our focus relative to it. So I think M&A continues to be on the radar screen, but it really is an augmentation kind of to the portfolio as to wholesale changes in it.

And Kevin, you broke out Divergent Solutions. The revenue estimate for that line of business, which, to me, suggests a higher focus from an M&A standpoint to build out that portfolio. Is that a fair read as you folks scale the related businesses?

Yes. I think we have 3 accelerators, Jerry, which you're aware in our strategy. The first one is the sustainability piece, the climate change and whatnot. The other is consulting advisory and then the other is, I'm going to call it, data solutions, which is really aligned with the Divergent Solutions comment. So I think those are the areas where would be more inclined to be investing in because we do believe that there is an accelerated level of growth occurring in those particular areas. So those are probably the most likely areas that we'd be wanting to think about in terms of acquisitions.

Okay. And maybe on that note, can you talk about the decision to set up the Divergent Solutions stand-alone and what advantages will the business gain on a stand-alone basis? It looks like the businesses that flow through are largely from CMS. Can you talk to that, please?

Yes. Look, I think the idea of us -- and we effectively have 3 very, very important, I'm going to call it, capability sets. And there's an extraordinary domain knowledge that we have in both CMS and People & Places, whether it's water -- work in the water industry or in national security or cybersecurity or rail or airports or the list goes on and on and on. And what effectively the thinking is we can now combine that in a more robust and thoughtful manner through the creation of Divergent Solutions, which allows us to be coming and presenting to our clients a holistic capability that not only includes that domain knowledge, but includes the data solutions and then further is enhanced by the PA Consulting investment we've made. So when we are positioning ourselves from a holistic opportunity with our clients and we combine that domain knowledge with the digital and data capabilities that are housed effectively in Divergent and further enhanced with the consulting and advisory work that we do primarily in PA, that full spectrum of offerings we are competitively advantaged when we are talking with our clients. And when we have found our ability to combine that holistically and put an offer in front of the clients, we don't lose. And so we think it develops a competitive advantage. And Divergent Solutions, a big part of that is to accelerate that ability to scale all of that across the entire portfolio. So we're excited about our ability to approach our clients in a more holistic manner, which includes that domain knowledge, it includes the data solutions and it includes the consulting advisory.

Very interesting. And when you look at the profile of the businesses within cyber, intelligence being key verticals, can you talk about the organic growth profiles of those major platforms and the margin profiles of those businesses as well? I know it's not a reportable segment yet, but you folks can talk about the individual product lines.

Yes. Look, I think if you just look by the -- you're going to put that out, Jon, in terms of what we are doing in, let's call it, Critical Mission Solutions, we basically have cybersecurity, national security and what I would call space and space intelligence. These are all very, very important elements, especially given what has been transpiring in Europe over the last couple of months with the Ukraine situation -- unfortunate Ukraine situation. And so these are very, very large issues that national governments are having to deal with and we fundamentally believe that, that accelerates in terms of growth. And so while if you look at the major kind of DoD numbers, they may not be substantial in terms of year-over-year growth. But if you look at the subsegments in which we are operating, there are substantial growth opportunities, cybersecurity, national security, space intelligence, which is -- it's really being driven by our successful technology that we developed and announced to win a few months back relative to that. So there are so many things that if you look at the total DoD budget, you might be thinking 2%, 3%, but the unique individual spaces or the confidential parts of the government spend, which are classified, those numbers are growing much higher, and that's where we're playing. So consequently, we're feeling pretty good about the long-term outlook. The other thing that's important is we probably got, we continue to have one of the largest pipelines in the history of the company. It's been between 25% and 30% over the last few years. And we've got now $15 billion that is in source selection. Source selection being defined as things where the bid is out, and we're expecting some decision hopefully within -- we would have normally said 6 to 9 months in just normal course, but maybe it's a 9- to 12-month window on average today. But we're really excited about that pipeline. And there's a couple of large ones that we think -- we're feeling pretty good about.

And so it sounds like a pretty attractive growth profile and margin profile as well. Just to make sure I'm on the same page with you, Kevin.

Yes, absolutely. The backlog that we have in the pipeline -- both the backlog is higher margin that we are currently burning and the pipeline is also higher margin. So we have made a fundamental change in our company to focus on more value-added offering. So that's long term, something that we're working towards. The other piece if we go to People & Places is certainly infrastructure. Infrastructure is clearly a dynamic where incremental monies are being spent. You see here the kind of current baseline that's over the last 5 years and what the IIJA, the infrastructure bill that was recently passed by within the government. You can see the growth rates of that funding, which is extraordinary. Now to be clear, the federal government's spending is not the largest part of the funding mechanism for the state and local institutions relative to how they spend money. So state and local still got to find the money to ultimately utilize as well. But obviously, these growth rates in terms of the funding levels are pretty extraordinary. And we are starting to see the pipeline of infrastructure beginning to really significantly grow. It's not as fast as we would have originally hoped for, Jerry. But certainly, if we're looking at it through the lens of our program management office, which we set up to specifically go after, understand where the money was going to go, where it's coming from, where it's headed to by state and local community, we're now doing that. Putting that in front of our clients and working with them to ultimately start to deliver the kind of the plan of attack as it relates to going after that money. The other idea that we put in place is as part of that program management office is we've accelerated the recruiting and identification of grant-writing capabilities within our company. And so we're right now working on several grants actually, 30 to 40 grants of substance that are in place, and we're working with the state and local institutions to put those in front of the federal government, which then leads us to a lot of upfront work that, that will entail which positions us well for actually going after the project when it does actually get the grant money. And it...

Sorry, go ahead, Kevin.

Yes. The only other piece I would add to the equation, especially in the People & Places is effectively the business for semiconductors and pharma, which is seeing extraordinary growth both as a result of what occurred in COVID and catching up on some therapies, new therapies that are happening. There is -- given supply chain issues, there's in-sourcing back into various countries, which is creating opportunities. And you've got a fundamental change in what the pharma industry is looking at where -- they're thinking about their existing capacity as being used to create these and supply the new novel therapies, more biologics and whatnot. And then having contract source or manufacturers kind of supply the existing base of materials. So there's an extraordinary opportunity for that business to continue to grow. And we've called it a super cycle. It's playing out as if it's that. And certainly, while we don't have the specific numbers to be able to talk to, we're pretty comfortable that business is going to be pretty strong for the next 2 years and probably likely well beyond that.

Okay. So can we talk about PA Consulting? Really impressive growth in the business since you folks made the acquisition. Can you talk about what have been the positive developments from a cross-selling standpoint or otherwise that have contributed to the above-planned growth for PA?

Yes. Look, there is a really strong developing collaboration that is happening. We actually have had several fairly substantive wins over the last 12 months, but the momentum is even accelerating beyond that. And we've just had a couple of discussions with them and -- with the PA team and it's really about, okay, what do we focus on? Because there's -- we don't want to do too much and spread the organizations too thin. But there is a lot of positive alignment in terms of where they are going and where we are going as well is one of the really nice things about it. They've been growing at over 20%, which has been pretty extraordinary or close to 20%. We expect that probably not to continue forever, obviously. But they got EBITDA margins north of 25%, too. So really strong positive. And I'll just give you one example of a little bit of coming together, and it was a Defra contract with the U.K. government, which was really their definition of kind of the U.S. Department of Agriculture. And because of their exit from the Brexit opportunity, they were becoming -- the government was thinking about how do we support the ability to have access to food stuffs and ability to be less exposed to imports. And so they were thinking about setting up a government entity, how do they do that, then started to think about how you execute against that. Jacobs and PA came together and holistically [ sold ], we can do the soup to nuts as it relates to that, not only the consulting work on setting up the government institution within the plan of attack relative to some of the intelligence that we can do, radar scanning or space intelligence, which provides very, very clear views of what could potentially happen. And when we put that all together, U.K. government went to the other parties that were involved and said, what can you do here, and they couldn't get to the finish line? So we won that project, which was a really nice offering for us. There's been other things as well in terms of PG&E, the undergrounding of their electrical wiring through in California. PA has some unique technology on determining the viability and the weak points of an electronic or a power grid. And so coming together allowed us to win that one as well. And that's a big, huge, multibillion dollar many-year project. So pretty excited about us coming together. And look, I think that PA continues to be an opportunity for us to see good strong growth. And we're seeing that clients are really looking, too, with COVID and coming up with volatility in the world today. Companies and governments are trying to figure out what they're going to do to be successful longer term in this very volatile environment. And so PA is seeing a lot of work relative to that.

And Kevin, it's primarily a shorter cycle business compared to the rest of Jacobs. I'm wondering how are you folks framing the outlook over the next couple of years for the business. Certainly, as you said, you're modeling slower growth than what the business has been able to achieve. But what gives you comfort in double-digit growth in this business considering the shorter cycle nature of it? Can you just share some of those aspects of the plan?

Well, there's one thing, which is the capability set of the team, which has been extraordinarily great to see. We saw it during diligence, but clearly, they are winning their fair share and then some of -- a lot of work that's going on. And so that's certainly one positive. The other piece though that -- and was one of the key determinants of coming together in a partnership is PA has a great opportunity in the U.S., and they are underrepresented in the U.S. And of course, we are largely a U.S.-based company. And so the access that they are gaining now to the strength of our client base in the U.S. is strong. And so the highest growth market that is in not only their strategic plan, but this year's plan as well due to the combination of the 2 companies into a partnership is the United States, and we're hitting those numbers. And these are high, high double-digit numbers to be able to develop a level of scale in the U.S., which is warranted given the capabilities of the combined Jacobs-PA relationship. And so we're -- those 2 combined are doing some good things.

Okay. Very interesting. And in terms of -- from a headcount standpoint, obviously, PA Consulting is a people business. How is their open position profile look in terms of being able to staff up to deliver the type of top line that you're targeting?

Yes. It's been pretty extraordinary actually. They do -- they have an aggressive stance of growing their partner base. And I think that, that's going to be important to support their growth clearly. But there's -- part of their strategy, obviously, is also offering things that aren't people-related, whether that'd be products and other initiatives and software included. And so the interesting and unique thing about PA is that they will operationalize technology. So if you get a new idea and a thought, they could design it, help the client design it, engineer it and ultimately operate and design potentially the equipment that provides the product. And so there is kind of another element of their growth, which is relatively small now, but it's part of their strategy to actually create more recurring revenue types of things, which are less people-oriented. So both of those are going to be part of the agenda going forward. To the People & Places, they've grown their partners more than in this year alone. They're up to -- they're up more than 10% in the partners. And so clearly, they're attracting good talent. And the talent is impressive where it's coming from.

That's good to hear. And can we shift gears and talk about Critical Mission Solutions? So you now have $15 billion in source selection, which you folks in the past have spoken about essentially expected to be awarded within a year. Can we talk about what are the major components of that, Kevin, and timing?

Yes. Look, there is -- it is, I would say, primarily in national security-related items. We've gotten a couple of recent wins in nuclear, which are in the mix as well and some European opportunities on nuclear technology, which are in the mix, too. But I would say largely oriented around national security and cybersecurity initiatives. And the other thing that I would call out, while it's not a huge part of the business, is really growing quite quickly as telecom in the business. We're involved with a lot of the build-out of the technology and the infrastructure, not only in the public arena to ensure 5G access is there for both public and private clients, but ultimately, within the infrastructure of clients, hospitals and other large institutions where they're looking to beef up their capabilities internally within their locations. So pretty exciting stuff as it relates to these opportunities. And again, that $15 billion is higher margin than our current kind of margin profile that we're burning.

And Kevin, so a lot of different opportunities within there. Any particularly outsized ones? I mean it's just striking when in a single quarter, you move from $10 billion in source selection to $15 billion.

Yes. Look, well, that's maybe a little bit of the government kind of getting back into it, right, to effectively. They're starting to get off the floor, so to speak. The continuing resolution had some challenges, and so we're starting to see more activity come into play, which is great. But there are a couple of larger ones that are in that mix of the $15 billion. And I don't know how much we can talk about some of that, Jon, given the security aspects of it and the confidentiality. But there are a couple of 3 which are fairly large and represent a chunk of that, for sure.

Very interesting. Okay. And in terms of organic revenue cadence, so you folks had a relatively resilient quarter in Critical Mission Solutions given the continued resolution path. You're talking about essentially an acceleration in the back half of the year on easier comp. Talk to me, Kevin, about how that translated through fiscal '23. Is that stronger exit rate delivering -- or set us up in early '23 for pretty attractive organic growth in this business is based on the contract cadence?

Yes. Look, we're going to have to win some bids, obviously, that will be helpful for that. But we feel that '23 ends up, we're positioned quite well for a strong '23 in terms of overall growth. We've lapped now some of those lower margin contracts that are no longer in the portfolio. So you're going to see us have some numbers that are going to be double-digit growth year-over-year in the third quarter, certainly above 10%. And we think that, that will continue to be the case in fourth quarter, which leads you down the path of what we're going to be looking like for 2023. So we're feeling pretty good about the '23 picture developing. The only thing actually probably which we need to -- I probably should highlight a little bit, probably has an implication for both revenue and profitability is that clearly, FX is turning a little bit more negative even in the last week. And so that could put some dampening on growth rates relative to it. It's the first time probably you've ever heard me talk, Jerry, in a substantive way about FX. FX always pluses and minuses. But with the pretty significant drop in the pound sterling and Australian dollar continues to be weak, we are -- I guess, I would say I'm getting a little bit more concerned about both the revenue and profitability associated with that. But that's a translation issue. That's not an underlying growth number. So I think there's some things that as we think about both the second half of this year and into '23, when you'd be thinking about that relative to how we -- FX is going to be impacted in the portfolio. And of course, CMS has a big chunk of their business in the U.K.

And Kevin, just to reconfirm that last point. So it's purely translational, right? It's not as if you have people billing in a substantive way in regions where they're not based?

No. Look, it's really as you think about it, if we are sitting about translating our operations around the world into U.S. dollars with U.S. dollar strength, that's been substantive and even more so than we just recently announced in our earnings call, I'd say we're -- I'm getting a little bit more concerned on both the revenue and profitability versus what we had thought not that, that change is materially the revenue side because I think we're going to still see that big ramp-up that we've been talking about, just maybe a point or 2 lower than maybe what we were thinking.

Got it. Yes. As long as there's no impact on [ push-out ] margins, I think that's clear. And in People & Places, we've seen you folks really improve your capability set and margin profile over the past 5 years. What are the top 1 or 2 strategic priorities over the next 3 to 5 years for People & Places outside of growing the ESG-related business that we spoke about?

Climate Solutions, obviously, is going to be an important one. And I think that, that will be a driver to our portfolio. As we talked about, we got that $6 billion of revenue that's going to grow over time to become a bigger percentage of our total overall portfolio. And I think it's -- the awakening on global climate-related issues is strong and will continue to be focused on longer term. So we like that. Certainly, I made comments about the dynamic in pharma, in semiconductors. We're dealing with a lot of the major players there and significant work that's going on as we speak relative to that. And we see that continuing over the next couple of years. So really, really positive in that. And the other thing that's happening, and it's a little bit in our infrastructure business is this pivot from the U.S. military, which is, focus has been this Asia pivot, obviously, far eastern pivot that has been occurring over the last several years. And not that, that's going away, but it's not being augmented with a greater sense of urgency on what do we need to do in Europe given the current dynamic in Russia. And so we're starting to see a lot of traffic coming in from the DoD and the institutions they are talking about, okay, we haven't been paying as much attention to the infrastructure that we have in Europe. Now we've got to spend a little bit more time. So that's a piece that we're going to see some developing momentum as well.

Okay. Super. Well, that's all the time we have. Kevin, Jon, thank you so much for joining us. I appreciate the discussion. Thank you, everyone.

Very good. Thank you.