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

All right. Great. Thanks, everyone, for joining. My name is Adam Seiden. I lead the U.S. machinery and construction effort at Barclays. And thanks for being here for the Industrial Select Conference for what is the 42nd year. So for this session, we're pretty excited to have the folks from Jacobs. So Bob Pragada, CEO; Venk, the CFO; as well as Patrick, who leads one of their businesses' efforts, and the COO of sorts. For this session, it is a fireside chat. Within that, we will be doing audience response questions where we will ask your participation from the gadgets that you have in front of you. There will be a number of questions that you may have seen in other sessions. That's intentional. They are standardized, but we look forward to your participation out there. So with that, what I wanted to do in this session, just because the Jacobs folks had an Investor Day, just yesterday, I know there's a lot going on. So maybe I pass it over to Bob, maybe just a couple of quick words on the Investor Day, and take it from there. And thank you, Bob.

Sure. It's great times in here. And Adam, thank you, and thank you to Barclays for having us. Yes, exciting times. So we did our Investor Day presentation yesterday where we released our 5-year strategy and put out our financial targets for the next 5 years, and Venk can talk a little bit about that. But maybe just a little bit of history and kind of context setting for right now. For those of you who don't know much about Jacobs, Jacobs is a long-term engineering company, deep roots in the process industries, dating back to the 40s. And over the course of the last 75 years, has really delivered some real value solutions to multiple end markets around the world. Starting in 2016, we went through a series of real hardcore strategic focus and transformation in the business, where we effectively spun off about 80% of our revenues reinvested in the company over that period of time. And today, as a result of the last spin-off that we made last September of our government services business, which is predominantly in aerospace and defense, are now -- during that same period of time, some '16 forward, we doubled our EBITDA and doubled our EBITDA margin as a result. And so today, as we sit here, we are an infrastructure solutions business, big, big focus within the water transportation, energy and power world as well as environmental. And then in the Life Sciences and Advanced Manufacturing world, think pharmaceutical facilities, data centers and semis as well. As far as the go-forward 5-year plan, we've got some aggressive hurdles in front of us. We're seeing kind of generational growth in the end markets that we serve right now, probably led by life sciences and in the water market, and go into the detail on the why behind that. But a 6% to 8% top line CAGR over this period of time, margin expansion of about 300 bps to [ 16-plus ] percent EBITDA margins, as well as a free cash flow margin of north of 10%. So really exciting times, Adam, and we're happy to be here.

Excellent. So maybe let's touch a little bit on the margin target. So you guys gave a walk of [ 50 to 80 ] basis points of annual margin growth per year. And within that, there were a couple of key buckets. So could you talk through the ones that are not linked to operational leverage, maybe more so around delivery, around mix or even the commercial model? So what are they exactly? How do you execute on those? And how do those feather in over the 5-year window here with some -- is it an even cadence throughout or is some a bit more front-loaded than others?

Sure. Maybe the way I'll address it is I'll talk about some of the operational efficiencies that we're getting. And then I'll turn it over to Venk to talk about the cost leverage as well as the cadence of the margin expansion. So we run what's in our operating model, which we believe is unique, a global delivery model, where we have talent in 40 countries around the world and utilize that talent to deliver solutions locally. We're not a franchise operation and have operations in different countries that are segregated from each other. And what that global delivery model allows us to do is not only provide premier solutions for our clients, but also gives us a nice cost advantage as well and the ability to scale in record time. That global delivery model is probably our biggest driver of margin expansion moving forward. That, coupled with [Audio Gap] enablement. Today, we've been in the business for 75 years. So if you think about the end markets that we're in, the amount of data that we have and so -- is tremendous. And we're utilizing that data, developing digital proprietary software platforms to gain efficiencies in our own work, but also for our clients' work too. So I'd say those 2, coupled with more and more consulting and advisory work that we're doing with PA Consulting, big investment that we have with a strategic consulting business, is really -- is driving margins. You want to talk about the commercial models and the cost leverage?

Yes, absolutely. So as Bob just alluded to, the fact that we have 3 separate sizable buckets that allow us to expand our gross margins across global delivery and commercial models and then the mix piece of it. On the commercial model side, I'd say it's about what we call value-based selling. We provide a lot of value to our clients and how do we ensure that we also keep some of that value for ourselves. It's also increasing the mix of our fixed price services, we can improve the efficiency of how we execute on those projects, allowing us to also expand margins in a meaningful way. And then on the operating leverage piece, we started our journey maybe about a year or so back in terms of improving the operating structure and the model in a meaningful way. We'll see the full benefits of it in fiscal '25, but there's still [Audio Gap] coming 3 to 4 years. So when you put all of that in combination, in aggregate, you get about 320 basis points of margin expansion. And then, Adam, to your question about the cadence of how that gets rolled out, we ended fiscal '24 at about 12.8% EBITDA margin. And for fiscal '25, we guided for -- between 13.8% and 14%. So a lot of the annualization benefits happened in fiscal '25. And then thereafter, we see a steady cadence of margin expansion.

Got it. Okay. So maybe that actually touched a little bit on, Venk, where I was going to probably go next is the annual growth that you're pointing to over the 5-year plan is a little bit different than the one you're talking about for 2025. Still quite strong growth over that long run on margins, but it is a little bit lower. So maybe just to put an explanation point on what you just said there as far as why is margin growth supercharged in 2025 versus the next 4 years after?

Yes. And I'd say, from fiscal '25 standpoint, it's driven by the fact that we get the full year's benefit of the actions that we took. But we're just kind of scratching the surface from the standpoint of the other 3 drivers of it in terms of global delivery and commercial models and mix. So that's what plays out over the remaining 4-year period. And again, we said we will do 16% plus. So obviously, we think we have some room for continued expansion there.

[ Pluses ] give that long picture there.

It might be helpful for the audience, when we say cost optimization, the why behind that. So we were running, prior to the spin and subsequent merge of our, what we call our Critical Mission Solutions business, part of our government business. We had a corporate structure that had [Audio Gap] [ Structure & Advanced Facilities ] business, which was global in nature and had the ability to do business services, back office services centrally. But we also had a government services business that had to have all of its support functions in the U.S. because of U.S. security and U.S. national need. Now that, that's gone, we took those actions around the corporate group. And so those cost optimization efforts, that's what Venk is talking about, the annualization of those.

No, that's really helpful. And maybe if you think then on the end market side, so a lot of helpful commentary you guys provided yesterday across the different end markets and so forth. So similar question there. When you think about cadence of growth, there's some a bit more supercharged today versus as you look out and things like that.

Yes. I'd say that from an end market standpoint, the growth that we're seeing in life sciences and the water sector. And life sciences, predominantly U.S. and Europe; water, global. I don't know if supercharged would be the right word, but it's definitely charged. And I'll let Patrick kind of talk about it. We don't see those tailwinds easing. So I'd say those are the ones. The others, we laid out the CAGRs for the other end markets. But I'll put it this way. In my career, and I think in our career, the outlook in the pipeline growth that we've seen, I haven't seen that before.

It's a high-class problem. So if you -- maybe let's pivot to -- on the data center side. So you guys talked a bit about data center probably a little bit more than we're used to hearing. And I know it is very topical in the broader market. So we talked about doubling the NSR in that business. Can you talk a little bit about [ them ]? And then ultimately, if you could flesh out a little bit of the relationships that Jacobs has in that industry and how you're positioned to win?

Yes. So maybe I'll start with the second part first. So we've been in the data center world for about 20-plus years and have had a leadership position in what data centers have traditionally been is the complex design around the server room because 50, [ 150-megawatt ] data center with an IT load of that much could [Audio Gap] new requirements weren't massive. Now what we're seeing with AI data centers, that's absolutely leapfrogged over that. It represents about 10% of our Life Sciences and Advanced Manufacturing business today. And so what we're seeing -- and this is kind of what we're seeing across the board is this next [Audio Gap] water and the data center coming together with the hyperscalers, who we've had partner relationships with for years, doing a lot of studying on how this is all going to work, right? So they went ahead and they forward purchased a lot of the electrical equipment, hence, the Eatons and the Schneider Electrics and the Hitachis are basically booked solid for transformers and switch gear, while they stepped back and have now done some really, really in-depth study on what's the most effective way to deliver this with the microgrid, with potentially SMR technology, with conventional needs, but off the grid. And that's -- the study work we're doing right now is actually what's contributing to the growth.

Got it. Got it. Perfect. And so you were talking about -- and then -- I guess we touched on the relationships there. So maybe if we think about some of the other end markets here on power and water, 2 very high-growing markets over the 5-year plan here. So can you speak specifically to the role that you guys have in power and how Jacobs is positioned to capitalize on that? And particularly within power, maybe thinking, is it more renewable based? Is it traditional T&D? Like how should we be thinking about Jacobs' participation?

Sure. And then the same question on water as well?

Yes.

Patrick, why don't you?

So our power business is, one, it's global in nature. We've actually had a lot of power skills in the business for decades actually. But actually in the last 18 months, we brought it together as a cohesive outward-facing business unit, and it's been growing at over 20% year-on-year since we brought that together. In terms of the skills that we have there, primarily focused on transmission, distribution and generation. We see a great opportunity for growth in transmission and distribution in particular, often needing bespoke skills to connect green energy sources, to reinforce the grid, to meet the demand, like Bob mentioned, around data centers and things like that. On the generation side, it's the full mix of generation. A slightly different dynamic there because you do have the OEMs playing a key role in terms of providing wind turbines or solar panels where it might be. And so our role there is more as an adviser, [ owners ] engineer, balance of plant design, things like that. But we see the full energy mix being relevant there. And in particular, with energy policy sort of shifting around the world, with geopolitics at play and other things, the need to deploy all the full energy mix on the generation side, we see as being highly critical.

Excellent. So we talked a little bit about the business dynamic globally. And a lot of what was focused on yesterday was talking about the businesses by end market. So just curious if I could try and like peel back the onion a little bit on the regional split here, like how varied is the growth dynamic across those businesses by region?

Yes. I would say that right now, we are seeing a definite uptick in North America. Now that's not to say that we don't see growth in other areas as well. So I'd characterize it beyond a quarter or 2 as being relatively balanced with a bit of weighting towards North America, with one exception, and that's the Middle East and India. That part of the world right now. India, prior, it was for India for the world. Now we're starting to see a bit of a dynamic of India for the world and India for India. And so some of the jobs that we've announced on that front kind of point to that. And then in the Middle East, Patrick, I think -- we've double-digit growth?

Yes, we've seen very strong growth over the last probably 3, 4 years. In particular, we've seen a lot of [ investment ] in the transition of the economy in Saudi Arabia. And so that's been something where [Audio Gap] programs. We're seeing major events just being announced in Saudi as well with World Expo coming up in 2030, FIFA World Cup in the middle of the 2030s as well. And so those sorts of things will drive more and more investment off the back of what's already been really significant investment in the last few years.

Got it. So we spoke about the regions when it comes to the broader business. Now if we could drill down a little bit on PA. And in PA, there was a comment made yesterday about seeing tangible signs of an inflection of growth. So maybe could you extrapolate that on what are those tangible signs? And then ultimately, just given the business mix being a bit more U.K.-centric, how widespread is that across the regional profile?

Sure. So maybe I'll kind of dissect that into what markets are driving that pipeline growth right now, and then what's happening between the U.K. and their, other geographies, which is mostly the U.S. and the Nordics. So the end markets that are driving it, [ 2 ] predominantly, energy and utilities, what we call energy and power; and health and life sciences, ironically enough. And that's really -- PA's involvement in those sectors starts way early in the asset life cycle with regards to, in energy, in utilities, conversion of conventional assets into renewables, working with clients on business transformation as a result of large-scale [Audio Gap] going on, that's been growing. And in health and life sciences, it really has been redefining and getting deeper into pharmaceutical companies' clinical trials and digitizing that process, especially as more personal care comes about. So those 2 are what gives us excitement. The next is what's happening in the U.K. And so after probably 2.5 years of some softness in the U.K., predominantly in the public sector, we're starting to see that work come back as well. Government agencies like the home office, starting to continue on the path of digitizing government agencies, driving efficiencies within government agencies, and that's what PA is involved too. So I'd say that flatness, and all we really needed was flatness in the U.K. in order to drive growth in the business. And just for the audience, we have about an 80-20 split right now, 80% in the U.K., 20% in the U.S. in the Nordics. The U.S. is actually growing at double-digit rate right now.

So let's talk about the U.S. So I'm not sure if anyone checked their phone. There may be a new tweet or something that we have to talk about here. But in any case, there has been a lot of news, right? So we often get the question, is that causing any disruption? So I'm going to pass that to you. What are the client conversations that you're having today? And are those impacted by some of the [Audio Gap] on a daily or if not, hourly basis?

Sure. So there has been a lot of reactions. I'd say -- I think broadly, our clients have stayed relatively focused on their efforts and their capital deployment. We have been getting questions and queries on what happens to supply chain. How can you help us debottleneck supply chain if, in fact, we have this tariff here and that tariff there. Most recently, Patrick was on the phone with our Canadian colleagues at the -- maybe at the Toronto Airport and other places about, "Hey, what happens if the border shuts down?," those types of things. But they've been conversations, Adam. We haven't seen real tangible movement of cancellations of projects, pipelines contracting, all of the things that you would -- if it became law or became real, you'd see we have not seen that. The area that we've probably been focusing more on, though, is around some of the interpretations on employee policy and kind of that -- some of the social -- the social [indiscernible] that's been going on as well. And we've got [ 45 ] [Audio Gap] When you do get that, see that tweet or see this, it does cause a reaction. So we're staying very, very close to our people right now. And that culture of inclusion and culture of -- we're a U.S. company that operates globally, right? Or a global company that's headquartered in the U.S., I'm sorry. Global company that operates in the U.S., headquartered in the U.S. is really what we're continuing to stick by. We're not changing our culture because of the legislative act.

Fair. And maybe just for the broader audience, because I see a lot of times people do these screens where they look at anyone who's U.S. exposed, they're federally exposed and so forth. And Jacobs, there's been a nice transformation in the business here and where you sit today. So maybe just remind everybody where your federal exposure is today versus the state and local, et cetera?

Sure. So where we have a federal agency as a counterparty, I just want to be clear about that, is about 9.5% of our business. 80% of that is in the DoD infrastructure business. So this is water, buildings, transportation for U.S. military sites in the U.S. and globally. And we're actually seeing a pickup in that business, specifically in areas like Indopac and others. We -- so that's point one. Point two is that -- and I've said this repeatedly, but you're right, that screen is pretty tough, is we don't do U.S.A. work, and we're not affiliated with a lot of these agencies that have been in the headline. So it's either guilt by association or I don't know what it is, but we -- we're not.

Got it. Fair enough. Maybe this is a good time to switch over to the response questions here. Bob, you're a bet. You've seen these before.

Yes.

All right. So to participate in that, there's a gadget on your table there, and we certainly would appreciate your participation. So first question here is, do you currently own the stock? Yes, overweight, market weight, underweight? Or no? One year, we're going to [ see ] music.

Is it the jeopardy music?

That's what we need. All right. All right. 2/3 say yes, overweight. Next, what is your general bias towards the stock right now? Positive, negative or neutral? All right. We've got about 2/3 of the room positive. Own a stock and positive. Moving on to the next one. In your opinion, through cycle EPS growth for Jacobs will be above, in line or below peers? Sorry, just when that counter goes up. There you go. The clock is your clue. All right. It's about 2/3 in line. Next question, please. In your opinion, what should Jacobs do with excess cash? Bolt-on M&A, larger M&A, repos, [ divis ], debt paydown or internal investments? One second 'till that clock is gone. Okay. There you go. All right. About 70% repos. Well, Venk, maybe we should stop there before we go to the next 2. So yesterday, you guys talked about where you see your balance sheet, your capital structure, et cetera. So maybe let's talk about that repos. How do those fit into the broader Jacobs picture? And how should we be thinking of cash proceeds as they're received over time and where they could be deployed?

Yes. So very happy to note that our policy is very consistent with what this audience is suggesting as well. So just for context, we announced a $1.5 billion share reauthorization program last quarter, which is, by the way, the largest in the company's history. In terms of just our overall capital allocation, obviously, we want to invest in organic growth, that's the first order of priority. But a close second to it is returning cash to shareholders [Audio Gap] dividends. And we stated last afternoon in our Investor Day [Audio Gap] free cash flow in the form of buybacks and dividends. We're committing to doing at least as much. And as you've seen in the last quarter, we updated meaningfully from the prior year, and we expect to be at what we consider to be an aggressive pace of buybacks for the coming quarters.

And I think yesterday on the M&A portion of that question, you gave a bit of a view of like some of the key attributes you're looking for of an asset or whatnot. But when you think more about like from the business perspective, in the long term, as I think it was characterized, like what are some of the areas that scream most attractive in that sense as you -- if and when you get to that later on in the plan?

Yes. I'd say, I mean, obviously, from an M&A perspective, the first important thing is a strategic fit. But once we cross that hurdle, we specified some clear financial criteria in terms of it has to be accretive to growth, accretive to margins and so forth. But from the standpoint of the end markets, where we see the biggest opportunity is when we talk about our cross-cutting capabilities across multiple sectors, and that's where we think M&A could be an accelerant to our strategy.

So it goes back to that nexus. We are, for the first time in a material way, seeing the convergence of our end markets. We want to think vertically. We grew up and we learned vertically, and the world is turning horizontal, where these facilities and these outcomes were driving for our clients have capability sets across. So when Venk talks about cross-cutting, that's what we would look at. How to really catalyze that cross-credit capability, energy and power kind of rises to the top on that.

Excellent. That's really helpful. Maybe, Venk, if you like this one, you'll like the next one. So if we throw up the next slide, please. In your opinion, what multiple of earnings should Jacobs trade? Less than 10, all the way up to higher than 21x. And again, these are standardized ranges across the conference, but curious where you think Jacobs fits. We could start the clock. All right. So a bunch of answers towards the higher end of the multiple range. And I did notice there were some slides in your appendix around valuation there. So maybe going to the last question here. So what do you see as the most significant share price headwind facing Jacobs? Core growth, margins, capital deployment or execution strategy? Let me start the clock. All right. So it's core growth, about 80% of the room versus just a tiny bit on execution. So -- and that's interesting, right? Because just yesterday, you came out with quite a bit of core growth, at least on what you see over the next 5 years here. So maybe just to wrap up here, I guess, thinking that -- probably directed to both of you on CFO and CEO. So when you think about some of the things that have happened with Jacobs, Bob, as far as where the business came from to where it is today, I mean what to you do you think has been one of the single most important like learning points that you're taking with you as you manage the business here going forward as a more...

Adam, you've been along the journey with us along the way. If I go back in time, the '16, '19, '22 strategies and where we did really well and what we did, and it's interesting that core growth was there because in those targets that we placed on each of those strategies, we actually hit the target on our infrastructure business. And we didn't hit the targets on our CMS business, but it diffused the overall growth of the company. So clearly, we feel good about where we are today. But just to maybe answer the question with the question that I got yesterday as well. In this strategy, unlike those 3 other strategies, we built the model not just from a, okay, the market's a top-down, which historically what we've done is the markets are growing at x, so therefore, we're going to grow at y. And it was a top-down model. This time, what we did was we looked at our backlog growth, we looked at our historical performance and we looked at the pipeline from a bottoms up. And then we compare that to a top down. And so those metrics that you see there, they're backed by real financial KPIs that are in the business today. And so I think that's what gives us some real confidence that this is going to keep going.

Excellent. All right. Well, actually, I think that's probably a good spot to leave off right there, and we're out of time. So on behalf of Barclays, team Jacobs, thanks for being here.

Thank you.

Thank you.

Thanks, everyone.