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

All right. Good early afternoon, everyone. Today we're very pleased to have Jacobs Solutions with us. We have Kevin Berryman, who everyone knows, who's the Chief Financial Officer; as well as Claudia Jaramillo, who's Executive Vice President of Strategy and Corporate Development. In terms of the format today, I'm going to hand it over to Kevin just to give a brief overview of Jacobs, and then we will open it up to Q&A. Similar to the other fireside chats, if anyone has a question, just raise your hand and we'll get the mic over to you. So thank you, Kevin and Claudia, for being here, and I'll hand it over to you.

Thanks, Jamie. It's always a pleasure to be here. Just going to make a couple of quick comments to set the context of Jacobs and -- before we go into Q&A. Look, we have been on a transformation journey over the last several years and really excited that as part of that transformation work, we focus on our culture. And as we think about the progress we've made as a company, it's resulted in 2 things. One that we believe we are making great headway in creating a purpose-led organization with people being excited about being part of our company. Not that we're at the end of that journey, but we're excited about the progress we've made. It's about being inclusive. It's about being focused on the things that are going to help the globe be more sustainable longer term. And our people feel that, and they're excited about being part of this organization. We think a competitive advantage they will need to have and continue to leverage better is our people and their excitement about being part of this great organization. The other piece that's been exciting to see in the transformation is that we've created a portfolio that really is aligned against businesses that are all facing what I would suggest to you are long-term decades long secular growth trends, which is exciting to have the opportunity to experience because even in today's world where there's obviously some volatility around the globe, which we all know and love these days, at the end of the day, we believe we are faced with long-term growth trends that are pretty exciting for our shareholders and us as a team. And our recent strategy, which I'll ask Claudia to make some comments on, and I'm very pleased she has joined the company, is an accelerant to really the portfolio of opportunities and businesses we have, which are all facing tailwinds, long-term tailwinds in terms of growth. So Claudia, maybe you can talk a little bit about our recent strategy that we highlighted in our Investor Day in March, and then we'll open it up to Q&A.

So thank you, Kevin. So I want to start with your comment on the tailwinds and the secular growth. And our strategy is basically focused on those spaces and the areas where we have competitive advantage and where we see strong returns on our invested capital. So those are focused on what we call the accelerators of growth and the accelerators of growth that we have in our strategy are 3: Our climate response, consulting and advisory and data solutions. And we believe those have multi-decades long market top line growth and strong profitability and margins. And the areas where we see our domain knowledge can make a difference and where we have big brand recognition. So with those, we -- the execution of our strategy, which is where we are now, we are combining not only the organic growth, we're also leveraging partnerships, and we are complementing that with acquisitions, which is one of the roles that I have is M&A, the corporate development and those partnerships and acquisitions are very important when we think about enhancing our domain knowledge. One of them that I find particularly interesting and very powerful when we think about the world today is the digital water and the partnership that we recently have completed with Palantir, where we are taking our domain knowledge and our huge presence in water, wastewater and we cover the full cycle of water. And we take that with our data expertise, our data scientists, and we combine it with Palantir's computer platform. And we take that and we translate into better energy consumption, all that to show our customers that we understand their problems and that we can deliver very effective solutions. So all of that, we will have a chance to go more into the details of our strategy, but that's basically showing that we understand the world's complex problems and that we understand our customers and are leveraging our long history with our customers.

Okay. Well, great. Thank you very much. And I do want to get into capital allocation, Claudia. But before we go there, Kevin, just because your 2023 guidance is hot off the press, right? Can you just talk to comfort level in the 2023 guidance and where given the macro concerns that are out there, where you see the biggest risk to your 2023 estimates relative to where the opportunities are? And given where 2023 numbers are laying out today, how do you feel about the medium-term targets that you put out there?

So look, I think we put out guidance just when we announced our full year earnings back in -- earlier this month. And so at the end of the day, we feel good about that guidance. Now there are some volatility in foreign exchange rates, and we actually provided very clear delineation between what our company would look like on a constant currency rate and what it would look like under probably more appropriate FX rates given that there's been a rerate, obviously, pretty specifically in the U.K. and Aussie dollar, which are 2 of our largest international operations. And so as you think about the guidance that we provided on, let's call it, a basis of recognizing current exchange rates, we feel pretty good about that guidance. And I think what ultimately it translates into is a very robust underlying business performance level in terms of not only revenue growth, but margin and profitability growth. So kind of double-digit approaching those kind of numbers. So we feel very, very positive about that. To your point about the risk profile, if I put the context back in front of us as it relates to the secular long-term growth trends, yes, there are some things out there that are a little less clear. The Ukraine-Russia dynamic is certainly putting some issues out there relative to Europe. U.K. has been in the news, I would say, the last 3 to 6 months, have not been inspiring relative to what's going on in the U.K. government. But actually it appears that they're getting together and in our interaction with U.K. government officials are indicating an increasing level of confidence and comfort that they're going to be starting to make some progress with the budget that they had just outlined. So we're feeling cautiously optimistic as it relates to the U.K. business, which is one of those areas that I know is out in the news, so I wanted to at least make a comment. I do think our business looks to be okay from that perspective. And especially I think there's questions relative to PA, and we actually feel very good about the PA growth dynamic. Our pipeline in PA has grown 50% year-over-year, and our actual backlog is up 20% year-over-year. And I would guarantee you that the growth profile that PA was experiencing 12 months ago was up double-digits. And so we feel that it's somewhat going to be not impacted as much because they're really being very, very specific in terms of the opportunities associated with the clients. And it's a little less kind of general consulting work and more specific about creating something for their clients. That's one of the reasons we are attracted to that investment profile back when we made that investment in March. And so we feel pretty good about that. As it relates to the U.S., I'll put that out there. IIJA is money is starting to come into play. We think that's more a second half '23 issue, opportunity, but still nonetheless our pipeline in the United States specifically in people and places is up 20% year-over-year. So we're feeling pretty good about that. And CMS is, I think, both margin-wise and growth-wise, going to start to be accelerating growth as we think into 2023 because we do believe the continuing resolution will be taken care of and that Omnibus will be reached and agreed on before the end of the calendar year. We believe fundamentally a couple of senators are really excited about making that happen. So we're hoping that will be the case. But even if it doesn't, I think it will impact our business less this year because the continuing resolution for those of you that may not know kind of limits you to last year's spend levels. And when the continuing resolution happened last year, 2021, which we are limited to, was the low port and spend. So we feel like it will be a better picture in 2023 because we'll be able to spend at the '22 levels.

Okay. And then, Claudia, just back to you, I mean, you're here, you're in charge of strategy and corporate development as we -- Jacobs is sitting with a very strong balance sheet. As we're thinking about where you want to deploy capital or potentially do M&A, which segment do you think has the biggest opportunity, whether it's CMS, P&PS or like more of the PA consulting like type investments? Like where is your area of focus? And what drives that?

That's a great question. And I really like how you phrased it talking about CMS and P&PS, mainly because our strategy is emphasizing how we amplify our impact by working together, working across and horizontally. So we talk about the accelerators. And when we deliver these very powerful solution to our customers is really when we come together. So the accelerators, again, the climate response, consulting and advisory and data solutions, that's the lens, the very first lens that we use for capital deployment. So we think of M&A and we think about what are those places where we see that faster growth and the return on invested capital, we think of is it climate response, where we can bring the consulting element or the data that we can amplify the value that we propose and that we deliver to our customers. And the better margins that we presented with our strategy. So that's the second qualifier is the consulting piece or the data solutions with those margins that we presented to the market and where we are moving. So when we put the 2 or 3 together, very often, you see those put together consulting with digital. We think about those opportunities as where do we bring the domain knowledge. This is our history. This is where we are recognized and where we can command premium prices and where we can bring more interest in solutions to customers. Very often we will bring those solutions to customers before our customers even know that they need them or that they have thought about those solutions. So we look at those companies in the sense that we have a pipeline all the time. And the most recent example is StreetLight Data, where we acquire a company that just sold this data. It can be data that is publicly available or our own data, it was the original market was DOTs, so mainly mobility transportation. Now by adding StreetLight Data to our portfolio is their market, the total addressable market is now expanded to the broader infrastructure market. So we're talking about the use of StreetLight Data and Giga-Projects where we are participating and where we're doing the program manager role. And then we use the advisory piece where we go way ahead of their markets that they had originally where we start helping the customer plan what they had in mind. So we start optimizing their solutions from the beginning of the conceptual phase. But that's basically the lenses are always the accelerators and then the second lens is the margin profile and the return on invested capital.

And not to jump ahead, but just because you're talking about the business more thinking about the accelerators, which is climate response, consulting and advisory and data solutions. Am I like envisioning, how do I say this, new segments? I mean like we're going to run our businesses now. Does it make sense to think about the businesses just because that's the way you go to market, like that's the way we should start to think about how you're going to talk about your business going forward? And does that lead to a segment change or rework or…

Well, look, we've already announced the fact that we're going to create a new reporting segment called Divergent Solutions, which is starting in our fiscal 2023. And this really is the digital side of the house, so to speak, and the data, the data leverage and digital leverage. And what we felt was important is that we put this all together to ensure that it scales in an appropriate way that then leverages across all of our existing business, whether it be CMS and/or People & Places and ultimately long-term PA as well. So we think that, that's important. Beyond that, we'll see. There's no plan to do that because we really need to stay focused and aligned against those particular clients in our respective businesses, and we've got to be there first and then bring the power of the greater Jacobs into that relationship.

Okay. And I'm sorry, does anyone in the audience have a question? No. Okay. I'll keep going. So just because you focused on digital, Kevin or Claudia, can you just talk in more detail about what you think the opportunity is with digital and Jacobs over the medium term?

So the way I look at it, which is really -- and I say I look at it being a new person in the company is there is huge opportunity that we have with the domain knowledge been amplify by data. So the domain generates a lot of data. At the same time, our customers have their own data and then publicly, there is a lot of data. So you combine all that, so let's say, transportation, mobility in general. So we can present better solutions to our customers. I mentioned helping them optimize their own solutions is that when you are designing transportation solutions, is this the optimal design for -- is it a highway? Is it the fleet, we can help reduce carbon emissions, which has been a very important value proposition, especially now that many companies and organizations have net zero pledges. So that's very important for the company's proposition. We can talk about the digital water that I mentioned before when you're running an operation that has -- is very complex, and you are going to reduce power consumption, which we have shown is reduced between 10% and 30% power consumption, where you have inflation and costs going up for the customers. It's a very compelling power -- a very compelling value proposition for our customers that is said initially, the request from a customer may be simply, run my operation or design this facility. And then we go back and say, have you thought about this? I can help you do this and reduce carbon emissions, reduce power consumption, reduced water usage, which is the other one that we have seen in our biotech customers asking questions, and this is going up on their agenda. These are where we position ourselves way ahead of the competition because we can deliver solutions that are more sophisticated and very often ahead of the customer's request.

Okay. And then I guess, Kevin, this question is for you. Just -- it sounds like you're optimistic that the CMS margins can improve from 2022 levels. But can you talk about -- I think on the call, you talked about $10 billion of in-store selection of new business and these opportunities had higher margins relative to the core business today. Any update on what's going on with wins there? And to what degree are these wins factored into the margin improvement in 2023?

Yes. Look, I think the margin improvement primarily as it relates to CMS in 2023 is things that are already in backlog. And so the new wins, which are out there would be augmenting what our guidance is. So I think that the reality is there's very little in that $10 billion in source selection because by the time it gets awarded, who knows whether a protest occurs, all of that dynamic, it doesn't impact '23 that much, it would impact '24 a lot ultimately. So we're feeling pretty good about that margin profile just because of what we've got and what we've won.

Okay. And then just because earlier, you did talk about divergent solutions, and obviously, you're going to start to split that out in the first quarter. Is there any way you can frame sort of the size of the business and what the margin opportunity is for Divergent Solutions relative to CMS over time? And right now, do they look more like or is there the gap?

So look, Divergent and by the nature of the fact that it's more digital data-oriented expectation is that, that will be long-term double-digit in terms of margins. We also think it will be an accelerated part of our portfolio in terms of its growth. As we look at the numbers today, a little bit less than $1 billion in revenue will be housed within that business. As it relates to the margin historically a little less than double-digit margins, but that's really driven by the fact that some of these digital and data capabilities have not yet scaled. And so they may have, for example, on the software pieces of the portfolio, they'll have 70% gross margins, but they just haven't scaled to the level where they're getting beyond that initial startup and investment phase relative to the capability set. So we would expect that to -- in 2023 to be the high single-digit number, but beyond into '24 and beyond be double-digits.

Okay. Any questions in the audience? Okay. So why don't we just shift over and I'm going all over the place, but we're getting a lot of questions today on IRA, on semi cap spending. So one, you're a big player in the semi CapEx spend. So sort of your positioning there relative to peers, what do you think the total addressable market is? And how big is this business today versus where it could potentially be in 5 years? And why -- I don't know if it's Intel, but why would they choose you versus one of your peers?

Well, I think they choose us because we're really, really good. But ultimately we are a partner with Intel and help support their efforts in terms of their infrastructure needs and capacity needs. And so at the end of the day, they've been very, very proactive in building capacity. There's a lot out in the public news relative to the investments that they're making. We've been very involved with them relative to that. And we're involved in discussing other things with them, which, for example, we were involved in the discussion relative to Ohio when it wasn't public, and we were helping support them in terms of the evaluation of that. So look, I think it has been a really strong growth for us over the last 18 to 24 months. There's been some indications. Some people are suggesting that the demand is starting to slow for semis and Intel may change their behavior -- we haven't seen it and they're going full speed ahead. Now I don't know that we'll continue to see extraordinary growth off of our current levels. But we still believe that even with the growth having been well over 20% over the last 12 months, that we'll continue to see growth just at more moderate levels. But what's interesting is what's happening in that business is we also -- the largest part of our Advanced Facilities business is our pharma business. And that is really starting to accelerate now as the big pharma companies are reflecting and now starting to transition out of thinking about COVID and vaccinations and ultimately, the new therapies that are coming to market and biotechnology offerings. And so they are being very proactive in building capacity, and we're very much involved in supporting them. So while semi is moderating in terms of its growth, we're really seeing pharma pop in terms of potential opportunities. And also playing into that is the in-sourcing as well relative to what's going on from their perspective. So anyway, a very, very interesting dynamic. And it kind of pays tribute to the diversity of our portfolio, where we really are seeing some things maybe soften a little bit in terms of the growth, still growing in terms of semis, but now you're really augmenting with another part of the portfolio in a material way.

And then just shifting over to PA Consulting, it sounds like you think, at least within the U.K., like the worst is behind you, it sounds like you're calling bottoming, things are getting better from here. I think you're targeting double-digit growth. But the other side of the -- when you first acquired PA Consulting, the other part of it was diversifying the business geographically, getting bigger into the United States. Can you help us provide an update on where you are with some of the targets to get bigger in the United States or just a geographic diversification?

Yes. Look, the -- to put the PA investment into context, when we made that investment, head count was about 3,000 for the PA organization in March of 2021 is now 4,000 people. There has been extraordinary growth in that company. We are very pleased with the profile of performance that we've seen relative to that organization. We're kind of 1.5 years in, and we are on year 3 of the model, the deal model that we use to justify the expenditure. So we're very pleased from that -- from an overall perspective. As it relates to the way forward and the margin profile, we believe it will continue to be above 20% as we are -- as we think going forward. And specifically, relative to the U.S., the U.S. is actually on plan versus what we had originally put in place strategically. What has really surprised us was the extraordinary growth in the U.K., which has been really, really positive. But the U.S. expansion plans are right on. And so we're feeling good about that ability to continue to grow. And actually, right now, PA's margin profile is a little lower in the U.S. because they haven't yet reached the scale that we want to reach in the U.S. So that will continue to help their mix profile longer term as it grows, their margin profile will grow, which will ultimately lead to PA's margin profile continuing to improve over time.

And then one of the -- I think the really positive stories behind Jacobs, in particular in the last quarter was the performance of P&PS. The margin performance has been very strong. And so as we think about that business, is there more margin opportunity relative to what you initially thought? Or as I think about that business, is it more we sort of like the margins where they are. They're fairly strong, and it's more about maintaining those margins, but growing the business organically because I'm trying to think about how that business too could potentially benefit from IRA, IIJA, the semi active just seems like it's got good growth, and I'm trying to figure out how you're balancing margins versus growth.

We think there's both.

Okay.

So there's both growth and margin. And so look, the strategy that Claudia outlined, all of that translates into what we believe is incremental margin, not only within CMS from where we are today, Divergent where we are today, but also in P&PS, People & Places. All of that, our demand and expectation is that all of those businesses will have margin profile. Probably the one that's best poised in the here and now is probably People & Places because of the IIJA money coming. And then you got the semi bill, which is -- will add some incremental investments there as well, to your point earlier. So we believe that the margin profile will continue to be positive for People & Places. Now fourth quarter margin was an extraordinary high level. And so it all came together in a perfect world. So I wouldn't necessarily assume that's what you're going to see every quarter going forward, but we do believe that the full year margin that we saw with People & Places last year, which was over 13, will continue to grow, approaching 14, maybe even over.

Okay. Any questions from the audience? So how do we say this? As you think about the CMS business, and I asked this to another company that was on stage. I think about PA Consulting, I think about P&PS, and I think it's a business where people would say, if you had some of the parts, maybe we give a higher multiple to that business versus CMS, like PA Consulting and P&PS is higher margin, higher multiple than CMS. Do you agree with that? Or -- and to what degree do you get worried that your CMS business like that multiple gets way down weighed down by the government IT solutions company. So you first wanted to be. Now we've evolved from that? Like how does that make you think about your portfolio? Or do you think your CMS business should trade at a premium to some of the traditional government IT solution companies?

Well, look, I think maybe I'll ask Claudia to make a comment because this is an important dynamic as we think about the scale benefits of Divergent and how that can impact both CMS and People & Places. So maybe you can make some comments in that regard. And then I'll add any additional comment there.

Okay. So I would start with that with the Divergent Solutions, as we started carving out all the data solutions pieces, cyber and intelligence and then the data solutions pieces that we had in the rest of the business, it's starting to give us more clarity on what is left in CMS. So then what are the other ones I talked about, the accelerators being our main lens for M&A. So it applies the same to your question on how do we see CMS? So one, just to illustrate that point, one that is very interesting is the nuclear new build. So that's part of CMS. And it's a topic that everybody is discussing at this very moment, especially in Europe. So we have this activity, which is we are involved, we get involved in the design of these facilities, the new builds in Europe. And so now it's something where very clearly fits into this accelerator of climate response is lower emissions is helping us in the energy transition. And how -- when we put it together with advisory and consulting, it's a completely margin -- different margin profile. So as we continue to evolve in our strategy, it's more about what is that granular view of CMS and how can we elevate those pieces of our portfolio. That being said, we have demonstrated in the company that we always take a very proactive approach. Looking at our portfolio, what else can we do from looking at it adding to enhance our value or if there's something that doesn't fit, we always remain very proactive in that respect. So Kevin, you wanted to.

I think you covered it well, nothing really to add. I think the only comment I would reinforce from Claudia's commentary is, look, we've shown that as a management team, we need to do that proactive evaluation of the portfolio at any particular point in time. We did it back in 2018 when we sold our oil and gas business, and that was 1/3 of our business. So we don't shy away from those tough decisions, but I wouldn't necessarily assume anything.

Okay. Well, that was like sort of -- it's not my last question. We have 4 minutes. But like I'm -- since covering you forever, I'm constantly trying to keep up with where the company is going, right? So you used to be an E&C company, then we are a government IT solutions company. 2 years ago, we were throwing out Accenture. Like I'm just trying to think about like when I think about the peer group and where you guys want to be when you grow up, understand you're fairly growing up, but there still seems a lot more. Who is the best group, Kevin or Claudia, as you guys think about where the market should comp you against?

Look, I think actually, as I think about our portfolio as it changes, the peer group changes along with it. So companies like an Accenture or there's a lot of private companies that are out there, which I also suggest are doing work similar to us relative to working with our clients. So it does become more consulting and more digital in terms of its peer group. And so Accenture fits into that mold a little bit, although there are pieces of Accenture that we wouldn't be involved in, obviously, but there are certainly pieces of that company, which are very much more like the type of work that we're doing.

Okay. Does anyone in the audience have a question? Okay. So I'll keep going. So another question I get a lot from investors is, as I think about the stock performance for Jacobs, let's say, over the next 12 to 18 months, do you see the stock performance driven more by executing against the numbers that you put out there in your medium-term targets? Or when investors are thinking about Jacobs, should we think about catalysts outside of achieving your margin targets? Like is there something else to be done with Jacobs? Probably unfair and you only have 2 minutes, but I got to try.

Well, look, maybe that was another way to ask the question about CMS. I'm not quite sure.

I'm asking it in every different angle, Kevin. Trust me.

Look, I think it's about execution. I think we've shown as a company the ability to execute over the long haul. And our performance over the last several years as indicated as such. And look, it's been a disruptive year. Let's all agree that it's been a most interesting year with everything going on relative to COVID now being augmented with Russia and the Ukraine dynamic and everything else in the world. So look, it's about execution. And I think that our ability to continue to do that will prove out that what we're talking about is what the future of this company looks like. So I'm confident that if we do that, it's going to be rewarded.

Okay. And then last question, probably because we have only a minute left. And I know people asked this on the earnings call, but I'd be interested in both your perspective and Claudia your perspective. Bob taking over CEO, does anything really change with Jacobs or is it more of the same, just nuance between him versus Steve?

Look, I think one of Steve's most powerful things he did as a leader of Jacobs is he was very inclusive in terms of pulling in the collective leadership team to engage, not only inspire the organization, but to come together and what does our strategy look like? And are we all in on it? And so I think I feel myself a big part of being the architect of the strategy just as Bob feels, being a big part. So I think it's -- look, I don't want to say more of the same because that sounds like we're not continuing to drive and become a better company. We are going to continue to drive. And I think that Bob feels really good about the work that was collectively done at the executive leadership team level. And I think he'll continue to drive that agenda. I'm sure there will be nuances, but I don't think you'll see those nuances from outside the company.

Okay.

I would say I agree. And it's execution, and I think Bob is quite strong in execution. So it's executing the strategy that we put out there.

Okay. Well, thank you very much for your continued support of the Credit Suisse Industrials Conference. And thank you. You do a great job.

Thank you.

Thank you.