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

All right. Hello, everyone. My name is Adam Seiden. I lead the U.S. machinery and construction franchise for Barclays. Welcome to the Industrial Select Conference. If this is your first session here. It is mine. We're pleased for this session to have the folks from Jacobs Solutions here. Joining us from Jacobs is Bob Pragada, CEO; as well as Jonathan Evans from the IR side. So the format of this session, of course, is a fireside chat with myself and the fellows to my right. We will be leaving some time for questions. If there are any, certainly, feel free and then Mike Renner will come get you. There -- one of the things that is unique about this conference is that we do invite audience participation in a more passive way as well, including with some of these clickers that you'll see on your tables in front of you. We'll -- at a point in the presentation here and the chat here we'll start going through a number of questions that we asked in all the sessions during this conference, and we're able to talk about some of the high-level thematic things that are out there. So with that, Jacobs team, thanks so much for being here.

Adam, thanks for having us.

And welcome back to Miami. So maybe to start, there's been a number of strategic things that the organization has been looking at. And one, of course, on the CMS side, you guys have announced the separation of the RMT. So maybe just to start at the highest level, if you could provide an update as to where we sit on the RMT, what are some of the milestones that folks like ourselves and investors should be looking at as we get closer to seeing that RMT come through here?

Sure. I think there's probably 3 main areas that good investors would probably have a high level of interest in. One is that when we announced the merger in the RMT with Amentum, we had highlighted the second half of '24 for completion from -- of the close. And there was 3 main milestones that we had. The acronyms that I think a lot of us are familiar with, the IRS, the DOJ and the SEC. Happy to announce that as of Friday, the DOJ component of that -- of those milestones, the HSR filing was complete. We just released an 8-K on that. So milestone 1 done and right on time. The second is the filing of the Form 10, which we believe will either be late this week or early next week. And so that will be public hopefully in the May-June time frame, which again, is right on time. And then the private letter ruling from the IRS has been submitted, I believe. I know we had the pre-meeting, but right now, we're on track for that. So that kind of our Q4 -- calendar Q3 is on pace. The second is around our performance. There was -- Adam, as you know, we had an incentive for an additional retained stake beyond the ownership structure. And so that performance after the first quarter, and it's based on the first 3 quarters of our fiscal year. The CMS performance in the first quarter and the cyber and Intelligence business is right on pace for the upper end of that retained stake. And just to clarify because in the 8-K, we did clarify that. Our retained stake was had a floor on it of 7.5% and a cap of 12%. Just for reference, the 12% component of the retained stake was actually tied to our EPS guidance. So our plan was if we hit the plan, we would hit the upper end of that. So we're on plan for that. In the 8-K, there was a little bit of a clarification, and this was part of the IRS submission is that -- it's still 12% for the total amount, but the cap for the company will be 8% and anything above the 8% will be returned to the shareholders. So 12%, but instead of the company taking the entire retained stake, we'll take 8% and the additional amount will go to the shareholders. So instead of 50.5%, it will be 50 -- 51% to 55%, depending on how we do, 55% at plan.

Got it. No, that's really helpful. So the time line stuff and more remuneration out there. So when you think about as far as from the business, whenever there's something strategic here and you announced a potential change in the structure, curious also, like what the reaction internally has been to that ultimately. And when you think through CMS with Amentum, what does that enable the business to do as a combined entity going forward?

Yes. So maybe the first part. The reaction internally has been positive. In full transparency, we were a little nervous about that. We're competitors in the marketplace, and each has their own view of each other on what's going on behind the [ veil ]. But we -- the more we learned about each other and the structure of the deal, if this was an acquisition, I think it would be very different. It is a merger of equals. And we will have a -- not just -- our shareholders will have a majority interest as well as we were able to negotiate a split forward. Actually, we'll have a majority of the Board members, and then a split governance, management structure -- sorry, the Board being governance. So I think all of that helped. And then our former CEO now Executive Chair, is going to be the Executive Chair and our President of CMS is going to be the Chief Operating Officer of the company. So that also helped and employee receptivity has been very good, very good, I think from an opportunity perspective as well. As far as what it means for clients, which I think is the second part of your question, excitement being generated right now with our clients, specifically DOE, NASA, I'm going over to the U.K. on Monday, the MOD in the U.K. realizing what the horsepower of this platform can really be. I mean we're talking about the largest services-based government services player in the industry with now a capability set that's second to none. So some good excitement that's been generated with our clients as well.

That's great. And if you think about what the portfolio has already today, you spoke a little bit about some of the excitement about what it could do going forward. But what it has today, clearly a number of long-term contracts. Where do you stand from a recompete standpoint, beyond '24? I think you've addressed a bit on '24. Just curious how the road map looks '25 plus?

Minimum. But both companies, both CMS as well as Amentum, have minimal recompete. In fact, Jonathan and I, on the trip over were kind of thinking about it, I think there's 2 for CMS within the next 24 months.

Is that right?

Yes. The MDA contract in IRES. And so those are the only 2. We did have a pretty significant recompete in '22 and '23, which we were successful in. So yes, minimum.

Got it. Maybe thinking about the growth profile of the business. In the past, you guys have commented around CMS pegging it in a bit at like that mid-single digit, high single-digit net revenue CAGR, about 25 to 100 basis points of margin growth. And I know that was over a defined time period that will have past us. But when you think about it on a go-forward basis, is that a good starting point as to think about how that business can grow both on top line and margins?

It is. I think the management team for the MergeCo will be coming out, like I said, when the Form 10 goes public. So in that May, June time frame, they'll be coming out with some more clarity around the numbers. But I think, Adam, those ranges that you highlighted still apply and maybe some couple of more bps on the margin expansion.

Got it. And then maybe last one before we transition to P&PS and PA. Just -- when you think about the business as a whole, since we're all going to get very familiar with it when the Form 10 comes out and so forth, the combined entity. But even if you just think about the CMS portion, how would you rack and stack the growth rates within the various different areas of intelligence, automotive, nuclear? Like where do they sit today? And how should we think about them going part?

Yes. I would say still very bullish on Space ISR as well as what we're seeing with NASA on deep space exploration as well, bullish on that front. The cyber and intelligence piece, the reason why I started off with Space ISR, that's really where we're starting to see a lot more activity. And then those 2 probably stand out the most. There has been a bit of transition with regards to what -- and I'm going to lightly speak about the Amentum business and then come back because it does have positive ramifications for the MergeCo is kind of the defense posture right now on what used to be called LOGCAP type of logistics work that Amentum in the predecessor companies were heavily into. The digitization of that work and now looking more into the individual war fighter and the equipment that's required in order to now go to battle in this digital world. And I think that's going to be an area that the new company can really excel at.

Got it. And transitioning to P&PS, if you think about your business is clearly very tied into what's going on in Washington and D.C. and then just broader governments across the globe. So it is, of course, an election year. Curious what, if any, shifts around spending Jacobs as this is an election year. I guess that's more on the P&PS side. And then relating maybe to both to a degree -- if you think about we're operating under a CR, what if any effects does that have for either side of this businesses?

Sure. Maybe I'll start with the second part and then go to the first part. On a CR, we've got sadly as an American taxpayer. We've gone through this too many times before. So I think we started talking about a 60-day, 90-day, 120-day CR. The business is resilient business and can weather that type of time frame. And that's really on our CMS business because we tend to be a little bit more insulated on our P&PS business. If it were to go beyond that period of time, not bad because you're tracking back to a year in '24 that had nice spend that went on. What we got in trouble was in '21 when there was a CR or '22 when there was a CR in attractive '21, which spend levels were already down, right, because of COVID and everything else. So I think that's kind of where we sit on the CMS piece. On P&PS, insulated from the CR, but to your first part of your question, we really have not seen in the U.S. any slowdown in funding as a result of it being an election year. Well, we have seen it, and I have been -- I've vocalized this is in the U.K. The U.K. being -- the election there has put a little bit of less decisiveness. Is that maybe a proper way of saying it in government spend. We do see that turning as potentially their election comes earlier in the year rather than later. And so I would say that's probably the area. We also have elections in India and Australia and pretty much everywhere. So we're watching very closely.

Yes. I think I saw some stats like 60% of world GDP has an election this year. So...

It's a lot.

When -- I think everyone in the audience is probably familiar with the alphabet soup of the different stimulus and initiatives that have been passed here in the U.S. Just curious if you can talk actually about what sort of KPIs are you tracking to see what type of momentum you're seeing in the business? And then racking and stacking the Jacobs, which areas have had the most profound effect today and then which ones could have more profound effect going forward?

Sure. Some of the KPIs that we track is growth in the pipeline. And I think we -- last quarter, we disclosed that, that was a sound nearly double-digit growth in pipeline -- over double-digit growth in the pipeline. And that's a global number, even with the acronyms, the alphabet soup in the U.S. So that's a KPI that we track pretty closely. And then another -- and we got to get better at this. So I know in our disclosures, we look at backlog growth from a gross revenue standpoint. What's actually been more of an indicator for us has been gross margin or gross profit in backlog because then we're picking up all of the consultancy work that's on the front end of a lot of the legislative stimulus that's put in place. That has been growing at a steady high single-digit rate for a few quarters. So those are the 2.

Got it. Maybe then within the basket of end markets in which you compete it in P&PS, in water transportation, semis, life sciences, some of those are positively affected, I'd say, by the stimulus and so forth. So how does the burn vary between, let's say, a water treatment facility or a rail project or something on the semis or life sciences?

Sure. Let me -- maybe let me rank them on the fastest burn to the slowest burn. The fastest burn clearly is life sciences and semi. From the time of an announcement to the time that we're actually materially involved and in those jobs, we get involved very early on, right, right when, for example, in life sciences space, if there's a novel therapy or a vaccine that's gone from being validated at bench scale and going to a commercial scale, we're involved at that point. And so that from the beginning and then the classic bell shape curve of how a technical services provider plays out, I'd say, high amplitude and then tight bandwidth, right? It goes up very, very quickly. And so that's probably the first -- I'd put semiconductor right in the same -- semiconductor manufacturing right in the same ballpark. Water would probably be next. The water engagements high-end consultancy and working with state and local governments on some significant issues that are facing us right now. So that's -- it's a faster burn but still kind of in that. If semi and life sciences are in the 2- to 3-year range, I'd say water is kind of more in the 3- to 4-year range. Some of the larger plants like where the designer and program manager on the largest water treatment plant in the country potentially outside of China in the world is in Houston, that's gone on now since 2016. So that's almost 7, 8 years, but it's gigantic. And then transportation is probably less.

Got it. And I guess, I guess to the point that some of these -- you've seen money start to go out the door and so forth from some of these large measures, but you'll be working on these projects for while...

It just kind of equated to even in our own home counts. When you see these projects start, you wonder when are they going to end, right? And so we're trying to get better at that with the use of analytics and whatnot, but they're long. The other stat on that, Adam, is an interesting one. Just talk about IIJA. Of the entirety of the bill, 54% -- 50-ish -- low 50 percentage has been appropriated. 25% has been spent. And on what was supposed to be a 5-year plan, we're in year 3, right, so you kind of see how that's progressed.

Yes. That progression is helpful. So on advanced facilities, and we talked about it just from the life cycle per se, when you think about FY '24, how tough are the comparables year-on-year for that business, just given some of the growth you've seen.

In life sciences specifically.

Yes. You don't even advanced facilities. Let's [ broaden ] It out.

Yes, sure. I'd say the -- let me back up a second. I'd say that the period between '20, so the start of the pandemic to '24 the business was red hot. I mean it was -- Intel announces a complete transformation of their business model, moving into both the device manufacturer and a foundry, life sciences, everything that was happening with the vaccine and with the therapy around the coronavirus. So it was high. We're talking kind of 20% year-on-year growth kind of high. That has decelerated into probably more of a high single, low double-digit growth. But now -- and I'll be able to disclose it after this quarter. But now we're starting to see the front end of yet another cycle, which is positive news just in the last couple of weeks. And that's how this business -- the advanced facilities business works. I mean we're -- clearly, we've got a market leadership position, a lot of these jobs that we are in the middle of. These are clients that we've had for 50 years. And so this isn't like we go when we're bidding on proposed -- requests for quotes that are coming out. These are negotiated, but they're on very short order. Lilly just announced facility in Germany. I can publicly disclose that. We found out about that within 4 weeks before we started on the job. So it's those types of jobs that we're talking about.

Yes. No, that's really helpful. And you certainly hear a bunch of semiconductor facilities and things like that, that may or may not get some funding here. So maybe shifting to PA. The company has had an interest, of course, in the asset for a number of years. And I think part of the deal logic I go back was to expand the business here in the U.S., but that did require a bunch of upfront investment. So, a, how is the expansion? How is that going here, growth here in the U.S.? And then when you think about some of the belt tightening that has been done in that business recently, does that alter the growth profile of the business at all?

Fair question. Next month, it will be 3 years on the investment. So it kind of split it into 18-month segments, first 18 months broadly for the organization, tremendous growth. And you saw that not just growth in the business, but growth in the margin expansion. A business that had operated historically between kind of 19% and 21% operating profit margins was now at 23%, 24%. I think 1 quarter was even 25%. And we did know that level of utilization, especially in that high end of the consulting world, probably wasn't sustainable. But we thought what was coming out of NHS in the U.K. and everything that was kind of pandemic bolstered we would make up for in the U.S. Year 1 and half of year 2, the U.S. business doubled, low base, about 200 people, it doubled. The growth from the 400 people north of back in the last 18 months has kind of softened a bit. And I think some of that is a result of -- think about this now be kind of circa '23. The discretionary spend of some of the clients has softened it. What was a positive was in the U.K., that business continued to operate at a high level. So it didn't necessarily totally compensate for the, call it, the pandemic boost, but it did soften it. But the reason for the U.S., not necessarily getting to where it needed to be is that horsepower, especially at the highest end partner horsepower on a global market basis, their ability to come to the U.S. and help facilitate that was a little bit straight. So that's kind of the background and -- but here's the positive. The positive is we also thought -- we also now know that the -- I always used to describe it as a Venn diagram. Jacobs has a business that's always going to be very Jacobs centric. PA has business. It's always going to be PA centric. But that shaded part of the Venn diagram was what we were putting a lot of attention to. Again, I wish it was the end of the quarter, a couple of really positive major programs that are now Jacobs PA in the U.S. will be announced. So we're gaining a nice amount of momentum. The belt tightening, it's just good business. It's the hygiene of -- look, utilization is down. You got to make some moves. And so we've been very sensitive to that.

I won't need you too much on those projects or the announcements per se. Just more of the question would be that gives you further line of sight to grow where you are today? Or can that give you some further growth in that PA business beyond where it's been growing?

Yes. I'd say later in the year, looking at '25, the answer would be yes.

Okay. Got it. I know the audience would kill me if I didn't ask about costs. So certainly, you guys have taken some actions there across the board. And -- in the most recent quarter, you talked about a bit of reallocating costs amongst the business and P&PS and corporate. So what type of ramp in margin should we expect in that P&PS business in '24? And then on the corporate cost side, how confident are you that you get back to the $200 million? Or you get to that $50 million a quarter run rate there?

Yes. So on the first part of your question, I think what we publicly disclosed before is that return to exceeding the margin profile of P&PS in '23 will be second half deal. A lot of that has to come with now that we're -- we've realigned our corporate structure around what the new business is going to look like. We've seen costs that we can directly apply now, which before we couldn't to the P&PS business and get a level of recoverability on it. So that's why that recoverability takes a bit of time, so we'll see a little bit this quarter, and then it would accelerate in the second half of the year. And remind me again, Adam, on the second part of the question.

Corporate costs.

Yes, the corporate cost. It would be good maybe just to calibrate also for the audience. We held a corporate structure for years with running 2 businesses that were -- they were different and they had different needs. And so that $200 million run rate, we've taken actions already. And so the short answer is, yes, we'll be at that level going into the fiscal year.

Got it. And this is a quick one just on the margins that you guys are expecting in the business on the RemainCo side, what type of growth are you factoring in on the top line for that?

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Okay. Great. So what I wanted to do here is actually shift into the audience response questions, if we can get those on the board. And you'll see there's a little dial on your tables there to participate with this. The first question, please? So do you currently own the stock, a bunch of yes answers or no. Fairly even split across the room with, yes, yes, overweight a little bit of an edge. Next question, please. What is your general bias for the stock right now, positive, negative or neutral?

Bias is the key...

There you go. That's right. 36% say positive. Next question. In your opinion, through cycle EPS growth for Jacobs Solutions will be above peers, in line with peers or below peers? Very split room today. We've got about split between above and below 35%. Next question, please. This one was very hard to split. In your opinion, what should Jacobs Solutions do with excess cash? Bolt-on M&A, larger M&A, repos, dives, debt paydown or internal investment. That one -- I don't know if that one jives with the questions there. So we'll move on to the next one. In your opinion, on what multiple of '24 earnings should Jacobs Solutions trade and there's various bands from less than 10x to higher than 21x. And for folks that haven't said in a meeting, these are all standardized ranges across every company. All right. That looks better. So a good amount of folks in the 19x to 21x can't. All right. Is that the last one, guys. One more. What do you see as the most significant share price headwind facing Jacobs? Core growth, margin performance, capital deployment or execution and strategy? Split. All right. Slight edge to execution of strategy, but very much split across all 4 answers. So with that, I think we'll wrap here. Bob and Jonathan, really appreciate you guys joining us, and thanks, everyone, for your participation really...

Thank you.

Thank you.