Jacobs Solutions Q2 2024 Earnings Call Transcript

Sure. So maybe I'll start off with P&PS and then Kevin can talk about kind of the entirety. So in P&PS, Andy, a couple of things. One is timing. We've got -- let me first off by saying that as a gross number, the P&PS backlog represents a record backlog for the segment since we formed it nearly five years ago. So kind of point one there. As far as the growth, we've kind of got tied a little bit into some timing of some of the larger programs that drive the backlog. Our book-to-bill is still over 1 times, and in the second half with expected awards, some of which we've already received in the first month of the quarter, we're going to see a real acceleration in the backlog in P&PS. Kevin, you want to talk about the overall as well as Divergent?

Yes. Look, I think the dynamics associated with Divergent, and you're right, that part of the business is going to be part of the separation, so it's in the parameter of the separation transaction, Andy. And look, there was a change in funding strategy, whereby the technology and associated projects that we have are still considered viable and probably the best technologies to be utilizing going forward, but because of deciding how they were going to be funding it, DoD is handing over that responsibility to the intelligence community. So while long term, we have a reduction -- well, short term, we have a reduction in our backlog because the DoD is handing that over, we're starting to, right now, see immediate build back up in some of those projects being now embedded into the intelligence community. While it represents certainly a delay in some of the burn of that project, our expectation is longer term, that DVS will start to see that same backlog come back into their kind of backlog over the course of the next year-plus, and consequently, we'll have to build up the burn once again. And so if you think about those two dynamics, I think those are kind of short-term dynamics when you include People & Places. And when you see the outlook for the rest of the year, we're feeling pretty good about our backlog growth and book-to-bill over the balance of the year.

Yes. So on the first part, that allocation hasn't changed since we talked about it last quarter, so that's remained consistent. And we're not going to change that philosophy. Really, this quarter, the mix that we saw specifically around water and life sciences, when we think about it, those are two segments, Andy, that are growing at double-digit rates. And from a pipeline standpoint, I mean, both are nearly -- the pipelines are doubling on a year-on-year basis. So that mix of higher-margin work that's coming in is really driving that growth.

Thanks, Andy.

Can you say that again? I'm sorry.

Sorry, I didn't follow the question.

No. Look, I think at the end of the day, we feel as if we're being prudent in our guidance, and it still represents a 13% year-over-year kind of increase in EPS. So I think at the end, we're sitting here saying, that's a good ending result. We're being prudent in the establishment of that. And of course, it's offsetting some of the things that we know are already in our numbers, the inventory write-offs that we had in the first quarter. So I think it's quite actually a positive.

Yes. Project selectivity is, we've always had that. And that has become kind of a primary focus for us as the opportunities have increased. Talk a little bit about water and life sciences. In our transportation business right now, our win rates have been the highest, you could say, they're highest in the market. And they've been the highest that we've experienced, and a lot of that comes from because it's subjective evaluation from what we put our effort and our money behind on trending. Probably the biggest component of that is around long-term client relationships. We're not out looking for work. We've been with our clients for decades. And if you think about 3,700 clients around the world and over the course of the last 20 years, that's a 2% client turnover. And so when we're with a client, we're there for the long term.

Sure. So maybe I'll start with life sciences and then talk about semi, kind of the electronics world right now. I mentioned this before, Mike. Within our life sciences world, you've heard a lot about GLP-1 and everything that's going around the obesity drug. If you look at the two biggest ones that are in that space, our work that we do for them represents nearly over 50% of the capital that they put in place. So that work continues to be a big driver. But what's also happening is two other dynamics. One is around oncology. There are quite a few advances that are happening around oncology. And so timing on those was maybe a little slower than we wanted over the course of the last few quarters. But going into the second half, those jobs are right in front of us and we're well positioned for those. The last dynamic around life sciences is just sheer capacity. Here, the CEOs of life sciences companies and biotech companies talk about capacity as the biggest choke point. The contract manufacturing world is on the rise as well. So we'll have some good news here in the second half, actually in Q3, around what's going on in that contract manufacturing space. Semiconductor, a lot of stuff in the news right now about the ubiquitous world of chip manufacturing and how AI is driving not just chip manufacturing but also data centers. We're seeing that. The CHIPS Act money has now been delivered to the market and some of the largest players have benefited from that. So we're seeing projects that we've already been involved with talk about phase two of those. And so we'll have more to say as those become public in the second half. But it's really the entirety of the ecosystem of the chip manufacturing and semiconductor world, starting from the R&D facilities through manufacturing. And now you'll hear a lot more about test and assembly and those test and assembly facilities coming to the U.S. So we're excited about what's going on. And then in data centers, the power usage of these are creating opportunities for us with regards to power and cooling, the water requirements on now what could be 1-gigawatt data centers. So really, really positive story there.

Yes. Maybe I'll make a couple of comments on the opportunities and on backlog and then Kevin can talk about the margins. What gets embedded in is the PA backlog was actually up 8% year-over-year. And so we're starting to see that momentum of those opportunities and those collaborative opportunities come through. So that's exciting news there. And a lot around the U.K. macro has been driving the business with at least hopefully some clarity that there'll be an election in the U.K. in the second half of the year. We're already starting to see the pipeline grow. And the sales performance in the last month of the quarter kind of drove the business. So the momentum is there, and then Kevin will talk about the margin.

Yes. Look, I think the team has done a really good job, Mike, relative to right-sizing the organization, given some of the challenges in the overall consulting industry, which obviously is impacting PA to a certain extent. But they're very well positioned, especially in the U.K. market. And so we're feeling good about their ability to be delivering that 20%-plus margin in the back half of the year. And so longer term, I think that, that translates into numbers going on from there as well. And look, I think as we enter the end of the calendar year, we do have the dynamic of the U.K. election so we're going to have to watch that carefully to see what impacts there are. But what we have right now is pretty clear visibility on our Q3 and Q4 reported numbers in terms of the health of the PA business. Not substantial growth, but certainly, good, solid execution in the balance of the fiscal year for us.

Well, let me start on the first one. Look, I think 15.3% that we saw People & Places is a record, is at a high level. And consequently, I don't think we can assume that every quarter is going to be 15.3% just because of the factors associated with cost of mix and what actually hit us during a particular quarter. I will say that as we think about our margin profile, we're feeling better about it today than we felt last quarter. So I can characterize it from that perspective. It doesn't mean we're going to hit 15.3% in Q3 and Q4, but I think we're going to end the year at numbers that are going to be pretty darn attractive.

And then on the awards, Jamie, those are -- when I say are they part of the guide or not part of the guide, our guide incorporates a probability weighting for the award. But we're feeling optimistic about not just the award, anticipated awards, but the pipeline. The pipeline is looking extremely robust in P&PS.

Sure. So maybe I'll just talk about broadly, Saudi, and then specifically on NEOM. Broadly, Saudi, the pipeline of work continues. And for us, it's a diverse pipeline. We don't index towards a specific type of offering. We've got value-added services that we provide to the entire life cycle of these programs. And if you look at the pipeline, the infrastructure component of it, the transportation, whether it be in aviation or in rail as well as the water opportunities that we've had have been pretty robust. So we just announced a major expansion of the new Riyadh Airport that's going on that's in full force as well as the water infrastructure that we're putting in place. Our exposure on NEOM, even with the pullback on NEOM as far as the 170 kilometers, the work that's going on right now has not -- ours has not abated and continues to go on schedule for not just the personnel that we're dedicating towards the job but the growth that we see in the job as well.

Sure. So overall, solid. The work that we're seeing both in Southeast Asia, in Australia, New Zealand and in Europe, and Europe, clearly driven by the geopolitical kind of impact that it's had on energy transition, that continues. The interconnectors that we are, not just in the middle of in Europe, but the additional pursuits that we have in place kind of put some tailwinds there. I'd say in the U.S., it's been not just a market on its own but it's also been an enabling market. Our expertise around renewables and then taking that energy expertise and taking it to areas such as data centers and the EV ecosystem with regards to transportation, that's probably been a greater level of focus in the U.S. So kind of the diversity of our skill sets is really helping that energy and power group that we have. Again, it started off from a smaller base but it doubled in size just in a year.

Yes. So Chad, you probably heard this before, kind of the $200 billion that spans over the course of the next 25 years, that is across multiple end markets. And so we can see a direct time line to that over a long period of time as regulations continue to become more and more part of the law. The way PFAS -- within the DoD, DoD agencies, specifically the Navy and the Air Force as well as the Corps of Engineers, that's showing up as individual pursuits, and it's kind of in that $75 million to $100 million of annual revenue for us as an offering. What you don't see is probably the bigger piece of PFAS, which is in drinking water. And so the work that the PFAS remediation and PFAS consulting that we do within a water offering or within a -- whether it be water treatment or wastewater reclamation project, that continues to grow. So to look at this as an incremental is going to be a little cloudy, but to see it as a catalyst for scope growth on existing work is kind of how we're looking at it. And these are, like I said on the first question, these are clients that we've had for a long time and will continue to be a critical part of our offering.

Sure. Pipeline growth is there, probably more indexed towards the U.S. in what's the IIJA focus that's come through and you've seen that in some of our awards. So I'd say the larger rail opportunities we talked about last quarter, we talked about this quarter, those continue. The highways work is continuing to grow. And then in Australia and in the Middle East as well, we're seeing continued growth in transport. I'd say that the areas that as there's more stability that comes within the U.K., that we could see the growth coming in would be in the U.K. And then what's differentiating us amongst our -- not just our competitive pool, but creating more value for our clients is how we're enabling that with our digital platforms. So the use of StreetLight Data not just in our own work but how that's kind of almost revolutionizing our offering to clients is something that we've got it firmly embedded in the U.S. But we're now starting to see use cases come about both in the U.K. as well as in the Middle East and soon to come in Australia.

Yes, Justin, we did have a loss, one that was somewhat sizable, which impacts, I would say, the short term and I would call short-term Q3, Q4. While we have a lot of short-cycle awards that are filling in the gap, fundamentally offsetting and mitigating the impacts of that, it probably puts us in the short run, to be more flattish as opposed to seeing the growth of single digits, mid-single digits. So I think that's the dynamic at least in Q3, Q4. I would remind you that this is the business that is going to be transferred over. But I would tell you the team is doing an amazing job in filling in and positioning for as exiting 2024, putting itself back in a place to be seeing incremental growth in 2025.

And maybe just one thing to add. The operational efficiencies that the team has really delivered through, that double-digit bottom line growth for this quarter and we mentioned it last quarter as well, with operating margins that are now the highest that we've seen in the business is another real highlight for what we're doing within CMS.

And that's a good point, Bob, because we shouldn't be seeing impacts on the margin profile, even though we're discussing this one item. But the team has done a really nice job on the margin front.

That's correct.

No, it's kind of still trending to that. The trend on the new awards and how that money flows, '26, '27, I think we've mentioned last quarter that, that looks like it could be extended but that's not because it's slowing down right now, but it's because it started later than what was anticipated. But these awards that we've not just talked about today, but also what we've telegraphed for the second half of the year, those are really being catalyzed by IIJA.

Well, look, I don't have the -- we're not targeting a percentage. We're targeting an absolute number which we've communicated. There's a lot of moving pieces in that which I just want to highlight. For example, we're conveying cost of the new organization. Part of our corporate infrastructure is going to be conveyed. There is going to be TSA revenue that we will receive from the transition period. So there's a lot of moving pieces, but I think it's safe to say that we're going to be targeting that number to be at that $50 million net number at the end of the day as we go into 2025. Got a lot of work to be able to execute against that. And look, the amount of effort that's being expended in this company right now relative to ensuring that we're creating a stand-alone entity that's going to be able to, day one, look to accelerate its level of growth, given its effective focus on the government service side is not inconsequential. And I just want to reinforce that because it has impacts relative to the short-term ability for us to further reduce numbers. And at the end of the day, I can't tell you how pleased and proud I am actually of the teams, not only those that are actually dedicated to the separation and standup management office but the rest of the organization, which is getting pulled away from their day jobs to help support the separation. So we're feeling really good about it.

Yes and yes. It's our presence in Dubai on multifaceted infrastructure work, water, transportation and within transportation, aviation is reaching -- we've been there for a decade, and that will continue to be a primary area of focus for us within the Middle East. And so the answer is yes.

Yes. Jerry, if you look at data centers as a percentage of -- from a deployed capital perspective of a percentage of kind of call it the electronics universe, it is just -- this is not Jacobs. It just is a minority share of the billions that get put into chip manufacturing and then the entire life cycle of the chip delivery profile to the market. So that's kind of point one. But the rate of growth really driven by AI and the needs for these data centers is what's driving our business. So we see that growing. From a pure design perspective, these are not overall -- the facility itself is not the real complicated component. What's becoming more complicated are the power needs and the cooling needs, the water needs. So that's what our teams are really focused in on. You've seen probably some of the bigger power management companies, Eaton and Schneider and others talk about how it's driving their business that goes into the hardware that's going into data centers. But the consultancy piece, that power and water usage is going to be a bigger piece of how we kind of expand that value proposition there.

Water and life sciences. Those two right now, even as far as rates, at the point in time, Q2, that represents probably over 50% of that P&PS growth. And then when we look at the pipeline moving forward, those are pipelines that are, as I mentioned before, doubling in size, and that's global. So areas that might have some geoeconomic challenges such as the U.K., if you look at the water bookings and the growth in water in those geographies, that's growing. And of course, that's been a driver both in the U.S. as well as in Australia and the Middle East, too. So life sciences, Europe and U.S. Water globally.

Yes, it's hot all over. And as far as wage inflation, we still -- it's there, but our ability to kind of look at value-added solutions for our clients and looking on how we can continue to deliver at a price point that drives the capital deployment from our clients, that has not really changed as we continue to innovate in that space. What's really helped us, Josh, has been our global delivery model. If we look at the engagements that we have, whether they'd be smaller consultancy engagements or larger programs, these jobs and these engagements with our clients have literally got people from all over our global delivery platforms. And so -- and we're going to continue with that because it's not necessarily the cost arbitrage that might be an outcome, but it's the talent arbitrage, and our talent is literally in every geography that we have today. So it has not really been a big issue for us.

No. It's probably been focused around telecom, weapon sustainment, and then some scope growth that we see in our aerospace work as well.

Thank you, everyone, for joining our earnings call. We really look forward to providing further updates and visiting with all of you and investors and analysts in the months to come, and look forward to engaging firsthand. Thank you, everyone.