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

Analyst covering government and industrial technology here at Raymond James. Thanks for joining us. Delighted to have Jacobs solutions here to present their story. We've got a -- we think the timing is really good to take a look at this name. You've got infrastructure spending past, plenty of geopolitical instability. And we think all of the business segments are going to have margin improvement over the next 12 to 24 months. We have the company's CEO, Bob Pragada, to take us through the story. Kevin Berryman, CFO; and incoming CFO, Claudia Jaramillo, that's going to be taking us through the story as well. First event with us. Claudia, so welcome.

Thank you.

We're going to do a lot of kind of fireside questions kind of go back and forth between Q&A and some slides to reference. If any of you have questions throughout, just raise your hand and I'll try to get to you. But Bob, why don't you take us through the story, level set the audience and maybe take them through what Jacob does for their clients and what the value proposition is.

Sure. Well, thank you, everyone, for joining us. So Jacobs, a long time standing company started back in the 40s. I'm not going to walk you through the last 75 years. But just as an overview, deep domain expertise started out as an engineering company focused in on originally the chemical process industry as well as the pharmaceutical world and over time, deep domain expertise and over time, kind of built the business on that core engineering expertise into government services, specifically in aerospace and defense as well as the infrastructure world kind of in the circa '90s and 2000s. Later post-recession, taking this engineering expertise, really went higher into the clients' value chain. Into now with long-standing domain expertise in those end markets into consultancy and advisory in those markets that I just described. Around the 2016, 2017 time frame, kind of looked at those end markets and looked at, hey, how do we really focusing on those end markets have got long secular growth trends to them as well as a little less volatility from a growth standpoint as well and made the decision, which a tough decision to depart the oil and gas industry, which great business for us. However, that market volatility and cyclicality was pretty tough. And it made the decision, which was a tough decision to depart the oil and gas industry, which great business for us. However, that market volatility and cyclicality was pretty tough. And then doubled down in our infrastructure business and in our government services business. So when we look at the business today, we're a 60,000-plus person company, globally deployed deep domain expertise in infrastructure and in advanced facilities in aerospace and defense, leading all the way up to last year. In fact, Brian, I think it was at this conference that we did our strategy release, is that expertise that we've talked about, coupled with digital technologies and digital enablement over time, too, kind of led us to the strategy that you see there on the screen. Number one, generational opportunity right now with the world's biggest global disruptor, which is climate change and all that's going on around climate response. And then using data platforms and data solutions in order to enhance this deep expertise within consultancy and advisory. And so that's where our focus has been. You kind of see the blend of where our business is, probably 65%, 68% in the U.S. The balance is outside the U.S. But 55% of our people are in the U.S., 45% outside the U.S. because of that global talent that we utilize in order to deliver locally. So we're really excited about the future and the growth rates kind of back up. I just took you through 75 years of history. So that's where we stand today.

Very efficient 75 years, I might add. Maybe if we just look at by sector here, you've got a lot of really fascinating end markets, infrastructure, energy and environment, national security, advanced facilities. Maybe take us through some of the underlying growth drivers, both longer term and really secular also some of the more near-term things that are driving the business day to day?

Sure. The longer-term drivers, I think, are pretty clear. We -- the world from an energy standpoint as well as mobility perspective and those necessities of life like water without stimulus, those are trends that are going to continue for a long time. And sadly, the global threats that we face from a geopolitical standpoint, you mentioned earlier, Brian, are not going away. In fact, they're increasing. So from a deterrent perspective, we believe that with normal hose are long-term trends. Add on to that, kind of the reshaping of the world right now with regards to stimulus or legislative actions that have taken place. We hear a lot about it in the U.S. It has already taken place in other geographies that we have a strong hold in as well as kind of the reshaping and reforming of the supply chain networks in the world. And for us, that really is core in the life sciences and semiconductor world. So these catalysts that we talk about here are taking what are longer secular trends and putting a real near-term focus on those right now.

That's great. It strikes me that you have decades, if not longer experience in many of these major markets. A lot of competitors are kind of coming into the market new without that expertise. Maybe just discuss how your go-to-market is and how you differentiate yourself and think about your competitive advantages when you talk about these very interesting markets.

Yes. So there are some that are coming in now. I'd probably segregated or describe it in 2 main categories. The first is long-standing relationships with our clients. We're not out looking for new clients in new geographies and new markets. These are clients that we've had for decades. And so as their businesses are growing, we're there with them assisting in that growth as well as some of the challenges that they face too. The second that we described is we are -- we call ourselves a science-based consulting, but we understand the science of our clients' business and have structured our company to make our clients business a better business. And those 2 really have been our focus, our global delivery, the digital enablement, all of those accentuate those 2 main areas.

That's great. When we think about some of these things that you're wrapping from kind of concept to implementation and bringing kind of a full suite of solutions from consulting to the actual technology. Maybe give the audience some real-world examples for some of those things that you've done for your clients, how you created value to them and how customers look at you during this engagement processes?

Sure. Maybe I don't know if it's on here, John. But maybe one that I know will probably resonate with the audience. And it just happened over the course of the last 3 years, which if you think about what we've gone through as a global society in the last 3 years, it's been around the pandemic. So maybe I'll use that as the example. mRNA technology comes into play. It's been around for a long time. The application to vaccines took place in late '19, early '20. That technology needed to go from a concept to a bed scale to production capacity to produce vaccines to save the world overnight. These were clients that we already had, that we were working on their programs and their projects for a decade. They came to us and said, "Hey, look, how do we take this bench scale formulation and now go to a production scale in a manufacturing environment. And we took that from concept all the way through to getting batches of vaccines out in record time and kind of the rest is a bit of history. From an -- probably the best one -- from an energy standpoint and from a -- what we're talking about with regards to climate response, probably point to the 1/3 on the screen there with regards to the U.K. and the environment agency. Right now, we are the technical adviser as well as the program manager for the U.K.'s very, very in-depth and broad program called TEAM2100, that looks at those affected areas, whether it be coastal resiliency or environmental damage or forms of energy transition for the entire country. And so that was from concept through how do you manage these different affected areas of the country through the implementation of delivering on those projects.

That's great. These are -- when I think about these businesses, can you help maybe size these. These aren't new businesses. Jacobs isn't new to water. They're not new to transportation. Can you maybe just give us a size for some of these vertical portfolios within your overall business?

Sure. Kevin [indiscernible]

Yes. Look, the business is roughly $15 billion of revenue at a gross level, probably $12.5 billion on a net revenue basis. The difference being sometimes we will have pass-through revenues when we're doing work for clients where we're procuring for them, and there's not a lot of margin with that business. So the $12.5 billion in revenue is really where we make the fundamental margin. The business of people in places is the single largest business. That's where our infrastructure, water and environmental work is, that's a $6-plus billion company in net. And then our CMS business, which is kind of the more national security is $4 billion, then we also have PA Consulting, which is $1 billion plus in terms of numbers. DBS is a newly formed business unit, it's about another $1 billion. So all of those, Water is a big part of our business, a couple of billion dollars of gross revenue, transportation and infrastructure is the biggest piece of the people in places. And then cybersecurity is another $1 billion. I think the interesting part is people talk about how we prioritize those. And what's interesting is we have access to long-term secular growth trends which means that we don't have to go over and after every single project. We go after those projects that make sense for us, have incremental margin availability so we don't necessarily need to do everything. We do what is most appropriate, how we can add value and ultimately drive margin, and that will still translate into high single digits in terms of organic growth numbers. So across the board, we have a lot of categories in which we are competing where they're all showing pretty significant growth. And we have the ability to then not to necessarily go after everything, but go after those businesses that have the higher margin.

Very helpful. Let's talk maybe about 2 of the newerVery helpful. Let's talk maybe about 2 of the newer businesses in the portfolio for different reasons, maybe how you go to market. If we think about PA, how you're pulling that capability through to sell through your -- the broader enterprise? And then if we -- and the margins are so positive there, over 20% EBITDA. And then also Divergent Solutions I'd like to maybe follow up with that and talk about how you sell those technologies through the enterprise and what that means to the margins going forward.

Yes. Maybe I'll talk a little bit about PA and then Clay can talk a little bit about Divergence Solutions. We've got a couple of slides to as well. So maybe just a couple of sentences overview on what PA is and PA is not. We tend to categorize [ Credigy ] consultants, management consultants into a single bucket. PA is very different. PA is in that -- in the strategy consulting world, but different from the perspective of utilizing product innovation and digital technologies as the vehicle to transform businesses. So the PA approach is, let me look at -- give an example in the life sciences world. I'm a start-up in Cambridge, Massachusetts that has an injectable type of business. So the syringes or the delivery mechanisms to get therapies into people. PA will come in and transform the business by looking at the tool, the actual product itself and then go back to its lab in Cambridge, U.K. in order to develop that approach. So PA's product and digital innovation-led model is the reason why we really like the business. The other piece, though, was they're in the same end markets that we are. So the value proposal here is think about a venn diagram, PA has a business that's independent of Jacobs and working at a very early stage of the client's business. We're kind of on the other end of that life cycle from a value standpoint on when of these -- when these innovations have happened, how do we go to market with them then CapEx side, and then there is the shaded part of the venn diagram where it's a real powerful offering to have both when clients are looking to grow their business or in the case of go back to client's response, in energy transition on when government agencies are looking to deal with the long-term sustainability of power or energy. And so that's kind of how we've structured the business, and it's been a powerful 1 just in the first 18 months, 24 months of our investment. And then maybe, Claudia, you want to talk about.

So divergent is mainly made up so you can see a few examples there of the products that we have. So divergents focused on data solutions and data solutions that cut across all the different businesses where we operate. So a big part of data solutions day 1, when we put it all together is cyber and intelligence. And then we have different solutions that either came through acquisitions like Black links and streetlight data. and others where we develop the products for our customers around the world. So some of the examples that we have, you can see intelligent O&M, which is a partnership with Palantir. So this has applications in water. So we took our water expertise with our data scientists and Palantir's computing power. And what you do with that is we have seen in the operations in water, for example, reduction of power consumption by up to 30%. We also reduced the use of chemical usage which is a very compelling value proposition when you think that in an inflationary environment, that can -- a significant impact on the bottom line. And also when you think about the power consumption, we have seen early feedback from our customers where they say, we have our own sustainability plans where you reduce power consumption, you also reduce your carbon emission. So that's one of those examples where we see significant growth potential when we put on the platform, and we go to market together with our infrastructure business, people in place solutions. So what is one of the areas where we see significant growth potential. The other one is transportation, and we see it with straight light data. In some cases, in the past, you would have people just humans with clickers to see traffic and record that to either plan and design as a cross roads or transportation and gene mobility, and with the straight light data, what we do is capture publicly available data, customer data and our own data, the one that is generated by domain experts. And what that does for us is First, we can optimize our own designs and planning. What we can also do with that, which is 1 of the new applications is starting to project what is the carbon emission of certain designs, which is something that we're doing. Exploring now with the new applications. So lots of applications, and that's where we see significant growth potential going forward as we put everything under one roof and divergent solutions.

It's going to be exciting to see that business grow over time. Maybe just kind of peak back into some of the things that are driving the business today. If you think about infrastructure spend, how would you start to see -- we're a few years in. So how are you seeing the funding progress from what types of projects? How mature is that spending profile today. And then I'd also like to -- I don't think people appreciate the advanced facilities business. Talk about chips Act, but also some of the other things that are happening within that business.

Sure. Maybe I'll kick it off, and Kevin can back me up here. So the short answer, Brian, is that we wish it have gone a lot faster. But unfortunately, the government process and continuing resolutions and the delays what we thought was going to happen in the last 18 months. We're now seeing it come to fruition today. So going from the pipeline into actual opportunities that the states are now putting out in the marketplace to actually showing up in our P&L. That we're in real time right now on that. And that's across the board in transportation, in water and in some of the energy transition work that we're seeing. I don't know how many baseball fans there are out in the crowd. But I would probably characterize it as very, very early innings on a tail that is pretty robust. You -- here in -- especially in the U.S. media about this is a 4-year program, a 5-year program, but I think we've all kind of dealt in wherever we live that infrastructure projects don't last 3 or 4 years. They last kind of 7, sometimes on the back end 10 years. So we see the tail going out for a while. And our engine -- our consultancy and advisory and our engineering expertise, kind of goes across that entire perspective. Do you want to talk a little bit about life sciences and semi-conductors?

Sure. And life science and semiconductors is a business that represents approaching not quite 15% in terms of our revenue. But you look at those -- the numbers the vast majority of the business is actually pharma. Semiconductors has been a big growth driver. And ultimately, we continue to believe, given the chips Act, we're starting to understand that some of the incentives that are embedded into that act are creating opportunities for incremental growth kind of as we exit this calendar year. And in semiconductors, where we are a very strong participant in that market is -- has been a real big growth driver. And actually, even off of substantial growth profiles of 10 to 20-plus percent, we still think we're going to be able to grow out of those numbers going forward. In terms of a Pharma has been a good business for us, as Bob talked about earlier in terms of what was going on with the COVID situation and vaccines. And now with reshoring and the next wave of therapies, biotechnology and whatnot. It is robust in terms of the outlook going forward in terms of the -- our long-standing decades on relationships where we are a market leader. They're going to be spending dollars to ensure that those therapies come as quickly as possible. And as you know, the biggest thing about getting that done is speed to market because of the margin profile associated with that business, they want to get to market as quickly as possible when they know that they something of imports. So those 2 businesses are -- will continue to be a driver for us.

Okay. So we've talked about all the things you're doing, the markets you cover. Let's kind of bring it back into consolidated enterprise a little bit here and talk about the financials. Maybe help the audience understand how they should think about overall organic growth. I'd like to certainly talk about constant currency and what FX has meant to the business over the last 12 months, margin structures, margin trends and also cash flow.

I'll take a crack. So look, in terms of -- because of the growth profile that the markets in which we compete are pretty robust. We see that as being organically a pretty strong mid- to single -- upper single-digit kind of organic growth profile. with margins improving as well. And that's relative to the fact that with the digitization, the data solutions, consulting and advisory, which continues to grow faster than the rest of the portfolio, mix and opportunities to enhance our business translate into a 50 basis point kind of margin improvement over time. Cash flow translates into a 100% conversion of net income. And we're getting to the point where we're going to be approaching $1 billion of free cash flow pretty quickly. So we're excited about the consistency of the portfolio, the breadth and scope of the growth opportunities facing us. And so we don't have to sit there and think about where the growth comes from what we want to do is get the right growth. With the right margin profile. And I think that's really important. Now look, over the last little bit, certainly in the last half of 2022 in the first half of 2023. There's been some headwinds that we've had relative to constant -- or excuse me, foreign exchange conversions with the U.K. pound sterling. That's our second largest market. So there's been some dampening in terms of our reported figures, but on a constant currency basis, continue to have the robust growth, as I've outlined. And now we're kind of getting to a point where we're anniversarying some of that. So our constant currency actually will continue to be robust, but now we could actually have some foreign currency tailwinds in the back half of 2023 as we start with the anniversary to those challenges we had in the back half of 2022. So all in all, we're driving the agenda from a constant currency perspective and the margin perspective, which allows for a consistency of performance quarter in, quarter out, year in, year out, which translates into a robust shareholder return longer term.

And it's my impression, certainly, that this business is very resilient to macro fluctuations. So as I think about the business and the visibility you have, maybe just elaborate on that element, the high visibility kind of micro agnostic footprint you've built.

Yes. So it's good that you highlighted that. So I'll try to go very high level and then a few specific examples. So when you think about the combination of our people and places solutions, so really infrastructure, energy transition and all that, you have a combination of the different sectors where we operate that have a lot of government money as well as public secular growth. We talked about life sciences. We talk about semiconductor. So you have the resilience coming from the different sources of funding as well as the duration of the contract. We have that combined with critical mission solutions where you have some of these multiyear contracts where you have the stability of the funding that comes from federal government and the different agencies. So you have the diversification of our portfolio, combined with some of the trends or the more, I would say, the challenges that the world is facing. And Bob talked quite a bit about it. When you think about the climate response, if in the past, we were thinking about designing a facility or planning for a city, we were thinking about, okay, we need to meet this -- deliver this program or this project. In today's environment, what happens is the challenges are just accelerating. So we go there and there's a lot more funding going into infrastructure, for example, and why is that we need to modernize our infrastructure around the world. It goes with population growth, together with how we need to respond to floods, how we need to respond to some of the changes around the world. So when I talked about that, I said I was going to mention a specific examples. Climate is one. The other one is national security. And national security impact things that we wouldn't necessarily think about is chips. Semiconductor. So a lot of the reshoring trend started before Chips hacked and all that it was the companies and countries that are realizing for all the outsourcing trend that happened in prior decades impacted us around the world. We couldn't deliver cars around the world because we were missing a chip or two. So all this trend started before, and it's very linked to not only these geopolitical elements that impacted the supply chain in general. It also started with what if something happens in Taiwan, but if something happens that is going to disrupt manufacturing general. So a lot of that, besides the diversification of our own portfolio is these catalysts and trends that we have.

That's fantastic. Claudia. Maybe just a last one for me. I'd like to kind of bridge together capital deployment and strategy together. How are you thinking about capital deployment? And where are there ways that you accelerate the strategy with the deployment of capital. Take us through dividends, buybacks, M&A, bring it all full circle for us [indiscernible]

So look, so we have a philosophy of a very strict adherence to what our strategy is. And so I'm going to talk about M&A activities. The first point I would make is that we really like the portfolio that we have today. It has good organic growth possibilities as we've highlighted already. And so as we think about abilities to augment our portfolio, it's really thinking about those kind of companies that can be brought into the organization and accelerates our ability to drive incremental organic growth throughout the portfolio. So it's more technology or consulting oriented, which allow the entire portfolio to leverage the capability. That probably translates more into bolt-on, I would say, kind of acquisitions doesn't exclude potentially larger ones. But certainly, the ability for us to drive an organic growth profile today is strong. So that leads you to share buybacks and dividends. We have a dividend, and we will continue to grow that in conjunction with our net income growth. So that will grow over time, and we continue to see the ability to do that. And share buybacks are -- we pride ourselves on being agile relative to that, where there's disruption in the value proposition to our shares, we will be more proactive in share buybacks as it relates to that. And we've proven as it relates to our ability to do that over time.

Great. Maybe just one answer or a one-word answer on receptivity to share buybacks, 1 to 10, 10 excited? Where do you fit on that spectrum?

Higher.

Perfect. That's all our time now for today. We'll be in the breakout room down in the Cordova Rooms. So we can carry the discussion there.