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

On to the Jacobs session here at the RBC Global Engineering Construction & Infrastructure Conference. My name is Saba Khan and I cover the industrial product space here at RBC. And I'm very pleased to be joined by Bob Pragada, Chief Executive Officer of Jacobs for a fireside chat here. Just for the audience sake, there is a screen -- on the right side of your screen, there's an option to submit questions that we can try to get to at some point through the session. But we will kind of go through a question list here.

So maybe just to kick it off, Bob. At a high level, you provided 2024 targets last year. Just wanted to get sort of with the ongoing transition with CMS, just some perspective on how should we think about the non-CMS-related targets to kind of the businesses that are going to stay as part of kind of the entity going forward? And how should we think about those targets? Is that something we revisit post separation, just some high-level thoughts to start.

Yes. So Saba, thanks for having me, and great for everyone that joined. With regards to our '24 targets, a few kind of introductory comments. One, we -- now with the portfolio move that we're making, we will be 100% aligned to the accelerators that we highlighted in that '22 to '24 plan, specifically around climate response, data enablement, data solutions and consulting and advisory. So that's -- it's going to be an exciting kind of next step in our company's evolution. On the actual KPIs that we put forward, the non-CMS component are what will look like, the independent Jacobs are still 100% aligned to those targets that we highlighted. So we're right on plan. In fact, I think in a couple of instances, margin is one of them with regards to our People & Places business. We're slightly ahead of plan. I think where -- we hit that mark this quarter and looking good for the balance of the period. We will be coming back out with, in fact, a new Investor Day strategic targets for the next phase, and that would be shortly.

Perfect. And I guess maybe just starting at a high level and just thinking through some of the funding that's in the system in the U.S. If you can maybe walk us through at a high level, where we are with the IIJA funding in terms of the rollout, from your perspective, given your vantage point in the -- as the U.S. domiciled firm. What do you expect the cadence to be? And then also, if you can just compare that to how do you feel Jacobs' end markets are aligned with some of the spending buckets within that broader spending...

Sure. And we'll stick just with IIJA first. And then there's other legislative actions that have had a positive impact on the company as well. I'd say we're still in the early stages. It's now flowing, which is the good news. This was passed in the fall of '21. And in '22 was a period where we thought it would be at a higher rate. And now in '23, we're actually not only seeing it build in our pipeline programs, projects that have been awarded and actually seeing it in our P&L. To quantify that, and I'll just talk internally and then go back externally for a moment. Our pipeline continues to grow year-on-year at a double-digit level in kind of mid-teens from a unfactored revenue basis pipeline, and pipeline just to define real quick is those programs and projects that are identified that we are well positioned to either bid/negotiate and win. I'd say that from kind of going to the next step of where we're seeing the spending, where is it a bit at a different pace than others? Clearly, the federal government sponsored by the state, DOTs, are indexing towards transport. And so the early programs that we've seen have been centered around highways, bridges and rail and these are larger programs. There was 2 parts of it. One was the grant side, the other was an increase in the formulaic component that goes to stakes. We helped company -- I'm sorry, companies. We helped states heavily during '22 on the grant component. In some states, we're a lot more aggressive than others on that grant money. Just to name a couple, California and New York, were a lot more aggressive than others. The other -- and this has kind of caught up a little bit in the political narrative. You might hear states talking about they're not accessing any of the IIJA spend that actually is not completely accurate. Every state is accessing that spend. So transport, good story. Jobs are coming through, kind of still see that in the early phases. Water was a bit sluggish in the '22, early '23 time frame. We're now starting to see IIJA-sponsored programs be funded, whether it be lead and copper treatment type of work or areas that are affected by water scarcity and drought. To name a few, New Mexico, California, in other areas, we're starting to see that as well. In fact, back in my pipeline comment, the highest growth of pipeline projects that we're seeing is around -- highest growth. Volume is still transport, year-on-year rate increase is in water. And so that's been a real positive, too. So overall, I'd say I think there's been some narrative out there around this -- the funding should peak in kind of the '25, '26 time frame. We don't disagree with that, but we also think that the tail is a lot longer than what was anticipated. I think this was originally anticipated to be '22 to '27. We see that kind of extending past '27. That's why I say it's in the early stages.

All right. Thanks for that. I guess you alluded to some of the other spending programs. I'd be curious, I know you guys are quite involved with the CHIPS Act as well. Just any color you can share on -- just broadly speaking, what are some of the bigger kind of other legislative programs that you see as favorable to you or the industry just broadly over the next few years?

Yes. I think the IRA is going to be -- we're starting to see some early spend around -- mostly around studies, renewables, alternate energy sources. And so I think that is -- that's got some legs to it that will come as a part of the whole energy transition base. The other piece on that is that, yes, there's a lot of study work that's being done sponsored by IRA in the generation world. But the grid modernization as well as just what to do about enhancing our transmission networks around the country. We're starting to see that as well. So I'd say IRA is on that list as well.

Great. And then I guess if we think about the last couple of years, we've heard quite a bit from investors around the impact of inflation on the industry. As you think about the impact that's had on the cost of building and so forth or even your own labor cost, has there been any impact of that just broadly on the industry in terms of volume, project size or things like that?

Yes. Short answer is yes, it has. That kind of splits into 2 parts though. Impact on us, Jacobs, impact on our clients. And my comment on this -- on the client piece is both for our private sector clients as well as our public sector clients. First, on us, we -- everybody is going through some element of wage inflation. We really haven't seen that materially impact the company. And I think a lot of it has to do with our global delivery model, right? Just as a statistic, 70% of our revenues are indexed towards the U.S. and 30% outside the U.S. Of the 70% that's either U.S. projects on U.S. soil or U.S. clients doing work outside the U.S., but centrally procured from the U.S. Our head count and our growth rates are actually flipped and that happened this year. So 45% of our employees are actually in the U.S., 55% are outside the U.S., global teams integrated with talent that we're seeing around the world, delivering programs, projects, engagements locally. And so there's clearly #1 reason behind that is talent. But the second is there's also a cost benefit as well. And we've been able to kind of move our -- the inflation impact, we've been able to mitigate that, excuse me. We've been able to mitigate that in a good way. With regards to inflation and the effect on our clients, these are projects and programs that have to get back, whether it be in the life sciences world, in the semiconductor world, manufacturing overall as well as these capital programs in the infrastructure world. It has led to some -- and this is where digital enablement and alternate means of delivering this -- the outcomes for our clients has helped, right? So the capital of dollar is now -- needs to be stretched further because of all of these other issues, whether it be supply chain or labor. So if you were to look at what we're doing in the transportation planning world, volume or capacity needs that are driving transportation programs, how do we get those more in line with what type of monies will be spent, driving the same outcome? That's all kind of fitting right within the Jacobs wheelhouse.

And I guess, as we look ahead, you alluded to it a little bit earlier on in your comment with the long tail of spending. Do you have a view on as the IIJA funding or some of the other funding is rolled out, when you look beyond these programs, what does the base level of funding look like when we maybe get to the other side of these programs?

Yes, I think the base level of funding will go up. I think this has had a net positive for the states. But these are -- and it was always intended that this was to stimulate the economy and advance our state of infrastructure in the U.S., but it was never intended to be a one and done. It was always intended to move forward. I think that the profile of the funding programs might be a little different. So formulaic incremental increase but then things like super fund treatment for potential PFAS applications for other civil works programs around resilience right, whether that be water resiliency, energy resiliency, just sustainability of our environment. I think we're going to see that be kind of the next wave of how these things continue to get special treatment at a federal level.

Well, that makes sense. And I guess maybe taking a closer look at some of your segments and just kind of the market outlook. Earlier this year, at fiscal Q2 reporting, you announced the planned separation of CMS. And then subsequently, you noted that there has been some outside interest in that business as well. From kind of a management's point of view, how do you think about that decision? What are the factors you're considering in terms of spinning it out versus selling that business to a third party?

Yes, shareholder return. To optimize shareholder return is our primary focus in considering these other opportunities. The second is around the longevity of that business. There is a -- that you can imagine, Saba, there is an emotional component to this separation. It's a great business, great people. These are Jacobs people that have grown up in the company. So we're being sensitive to what's going to be the best for, number one, our shareholders as well as our employees' ability to grow. So those are considerations that we're taking in real time. This is not a surprise. We know -- remember, the reason why we announced it as a spin is we knew that the activities that we would have to go through would be the same in any type of scenario, one. Second, we never ran a process. All of the work that we did was internal, right? So this was us being able to control the narrative. And also control kind of the outcome of where we wanted to go. And then as soon as we made the announcement, there was genuine interest.

Makes sense. And I guess thinking about the go-forward business, kind of the core of that is going to be P&PS. Maybe if you can talk about just broadly the demand environment for the business relative to 5, 10 years ago. And then -- when you think about the end market mix, you think about some of the spaces that you play in, how do you think about that mix versus where you might want to be? Are there areas you want to beef up on, others where you're like, look, we have a good presence, not really much focus here.

Yes. So it's strong. Number one, I'd say as far as the -- now the new Jacobs, very strong, extremely focused on digitally-enabled consulting, advisory and we're always going to be the premier engineer of the world. So that's kind of -- the equity story is exactly that. These are end markets that have got some strong tailwinds and secular trends that are not going away at all. And so all of those are very strong. I'd say that with a bigger pie right? So -- please don't take my comment as 1 part of the business is going to shrink and the other is going to index higher. Bigger pie, I would say that our today advanced facilities, specifically around life sciences and semiconductor manufacturing represents about 20% of our P&PS business. I would say that, that has the most likelihood to grow. And so could I see in the next couple of years a 50-50 balance between infrastructure and advanced facilities? Possibly. And that's a global business. Right? It's a global business that we are seeing the movement to the West with reshoring and supply chain networks all being reformed, but it plays right into our wheelhouse.

All right. That makes sense. And I guess on a similar note, how do you think about your regional mix as well? U.S. is obviously a big market, you're quite big in the U.K. But just broadly, as you look ahead to where this investment is going to be in infrastructure globally, how do you feel about the regional mix?

Yes. I think the tailwinds going on in the U.S. are sustainable where the U.S. will continue to be a predominance of our regional mix. The fastest-growing, there's 2 kind of areas outside of the U.S. that are growing at a really strong rate for different reasons. The first is the Middle East. The Middle East, specifically Saudi has got the highest rate of growth for us to date, really driven by the major Giga programs that you hear about, but also around infrastructure. And interestingly enough, energy transition in Saudi. And so that's really strong for us. And then the second, I would say, is India. India, for years, and you remember, even pre-separation of our Energy and Chemicals business, that global delivery model started in India and continues to grow. Our head count in India has doubled in the last 18 months. We nearly -- it's our third largest geography from a head count standpoint outside of the U.S. and the U.K. I'd say within -- I don't want to handicap it with time. It could be our second largest. 90% of the work that we do in India is for the rest of the world. Now those same very, very technically advanced and complex facilities that we've designed out of India are now coming to India. So we're positioned extremely well for tech manufacturing potentially coming to India, realizing that we've really got the one of the best service platforms in the world in India.

That makes sense. I guess between this answer around the head count addition and your comment earlier around adding folks outside of the U.S. As you look at the labor environment and sort of just the hiring environment, how would you describe just kind of the availability of labor? Generally, you have kind of wages kind of normalized? How are you thinking about that?

Yes. So the answer to your second part, Saba, is yes. I would say that normalized is a strong word because that infers that they're flat. I don't think it's not a bimodal thing. It's not either they're going up or they're staying stable. There's always going to be, I think, the rate of wage inflation has dampened but it's still going up. I would say that we -- to my earlier comment, we haven't had that dramatic impact on availability. We hire where the talent is available. And as we know, that's not specific to 1 location. And what we also accelerated during the pandemic is teams don't all have to be colocated in order to deliver locally. And that's enhancing our ability to attract and retain top-tier talent. And so that's going to continue as we move forward.

Great. And then at the last quarter, you called out some opportunities to optimize your P&PS business. Maybe if we could just maybe talk through, broadly speaking, what does that look like directionally speaking, to the extent you can -- are we talking a few quarters, few years? What kind of time frame are you directionally looking to put on something like that?

A few quarters. We're working on these things right now. We've already seen kind of the initial steps of that last quarter, but we don't want this to drag on. So we're getting after that kind of cost realignment and gaining greater cost efficiencies now. So I'd say a few quarters. Second is that -- and there's going to be -- there'll be some enhancements even the way we even talk about our business in a much more simpler form, right? So having lines of businesses, having corporate functions, it's 1 entity right now, it's Jacobs. And Jacobs is focused on infrastructure and advanced facilities. And so what used to be kind of corporate functions managing multiple lines of businesses will change. And so the integration of historically corporate and a line of business turns into 1. And there's cost efficiencies just from an integration standpoint that are there. And then technology enhancements, right? So these cross-cutting elements that we have in our business, sales, digital enablement, market leaders, all of those now will be even stronger aligned with the business in client facing. So how we report, how we talk about our business, all of that would be much more simple and direct to the end markets.

Okay. Great. One of the areas of focus that some of your peers have outlined over the last few years is shifting work more towards program management, advisory, more call it, front-end work versus design and engineering, how do you feel about your mix as it relates to sort of the front end versus core work? Are you where you want to be? Is that program management and that stuff a bigger focus over the coming years?

Sure. I would describe it this way, Saba. It will continue to be a big focus. We haven't inflected -- we've been the #1 player in program management and advisory for a decade. And so that will continue. It is a strong element to our value contribution to our marketplace. And we'll continue to put a high level of attention to that. So it's -- we see it more as an integrated component of our offering rather than a stand-alone vertical, right, which I think some of my competitors have talked about it as a stand-alone kind of a unique offering. For us, it's a part of that whole value contribution. I'll give you some examples. Large-scale program management, whether it be in Giga programs, cities and places, program management of tech manufacturing facilities, these are giant multibillion dollar projects, but you could read them as programs. We've been program managing in that world. In fact, 17 years ago when I came to the company, I led the program management group in North America. So it's not like this is something that's new. Now how we deliver is, I would say, we're continuing to go up that technical road map and technology enablement. So program management being exclusively -- the value differentiator, exclusively on the profile and experience of the individual is inflecting to what is unique with regards to digital enablement, domain knowledge of the actual science of what's being built, we're in background as far as going to the next level in program management and advisory.

That makes sense. And then maybe just switching over to PA Consulting. Given sort of as you think about the go-forward entity, can you maybe talk about, one, how does PA fit into sort of your broader platform as we think about the RemainCo? And secondly, you did announce a bit of a restructuring here for PA at the last quarter. Maybe just walk us through what that entailed and how that repositions the business?

So how we see it moving forward. And I'll go back to kind of how the last 2.5 years -- it's been 2.5 years since we made the investment. And so I'll talk about that second. But how we see it now today as well as moving forward is 1 enterprise, 2 areas of focus: Jacobs, PA Consulting, connectivity between the 2. We like that partner-based model. We like the fact that we can work at a Board level with PA Consulting and look at digital enablement and product enablement from a consulting standpoint as the tool for business transformation, that's what PA does. It's not your classic consultancy where you're going in on the front end with some kind of huge managed services play at the back end, right? 3,500 people very, very technically oriented. And we also like and it's played out in the investment thesis, they're in the same end markets that we are, right? So we go back to our initial conversation around energy transition, energy and utilities, life sciences, these are end markets that PA is in the middle of as well. The only one that we don't share is they're in the financial services world, predominantly around cybersecurity and consulting on kind of cyber networks. So that's one. So 1 enterprise, 2 organizations, cross-flow of people and collaboration of projects in full life cycle delivery of programs for the betterment of our clients' business. What happened over the last 2.5 years has been pretty spectacular on one end, but we probably get a little too far. We were running red hot in PA. If you remember those first 2 years, first 18 months, we had 25% year-on-year growth that was pretty high. A lot of that was on the backs of what was going on in the U.K. with regards to NHS and response to the pandemic and the digital enablement of vaccine delivery and everything that PA was involved with. As that continued to come down a bit, the plan was that we would be growing in the U.S. at a faster rate. So we actually staffed to those levels. And then with what you call prerecession or some softening of the economy and discretionary spend of our clients, that didn't go as fast as we had anticipated. And so we took actions to kind of balance out utilization. Right, utilization. Now margins have not at a gross level. Pricing has not changed at all. And we're indexing towards keeping that high 20-plus percent OP margin in the business, hence, some of the moves that we made.

That's helpful color. We've got about 3 to 4 minutes left. So I do want to spend a few minutes on the capital allocation side of things. Maybe you could just -- at a high level, how do you think about capital allocation post the CMS separation? And how much is that dependent on the route that you take with that separation?

Yes. I'd say the route is probably less of a factor. There will be an element of proceeds in any scenario. So we're definitely planning on that. The capital allocation strategy, it's risk adjusted. But we're not -- it's not that any one of us, myself, Claudia, our whole team wake up every morning saying, the M&A leg of capital allocation is absolutely critical for us to continue our growth pattern. It's not. And so we're very much focused on a risk-adjusted basis to shareholder returns. And so a balanced allocation process around share buybacks, reducing our floating debt, keeping with our dividend policy and investment in ourselves.

And then I guess within that context, as you kind of focus a lot more on P&PS, that sector is consolidating quite a bit. When you think about that as being your kind of primary business, how does kind of M&A at that point rank versus buybacks, like you said. Would you look to become -- you've been active on M&A over the recent years, built up quite a platform there. How do you think about M&A versus some of the other options for the go-forward business?

Yes. I would say it really depends on a risk-adjusted basis, how that looks. I'm not going to say that we would never consider it. It's always a consideration. But we would be very, very sensitive to -- if you look at some of the best acquisitions that we made or mergers, you hear a lot about CH2M and PA as well as now what's been done with StreetLight Data from a digital enablement perspective. We're going to be very honed in on that. And the learnings -- positive learnings that we got from -- hey, M&A is not a strategy. You have a strategy. And if M&A can serve as a catalyst or an accelerant to that strategy. We'll take a look.

Perfect. Well, that brings us to the end of the time that we have here for this session today. I want to thank Bob for taking time to share some thoughts with us this morning, and thank you to all of you for joining. And after this session, we will have the Parsons Corporation session starting at 11 a.m. Eastern. Thank you, everyone, for joining in.