Q1 2021 Jacobs Engineering Group Inc Earnings Call
Thanks Steven.
Okay.
And.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Jacobs fiscal first quarter 2021 earnings conference call and webcast.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today, Jonathan <unk> Investor Relations. Thank you. Please go ahead.
Thank you.
During this presentation, we'll be referring to certain non-GAAP financial measures. Please refer to slides through the presentation for more information on these figures and in addition, during the presentation and they will discuss comparisons of current results to prior periods on a pro forma basis see slide two from more information and the calculation and these pro forma metrics for growth there.
And the comparison current and prior periods to include the results a bit with nuclear business, which closed in March 2000.
And in 'twenty and.
And Buffalo Group closed in November of 2020, we provided historical pro forma results the appendix of the Investor presentation.
Turning to the agenda on slide three.
Speaking on today's call will be Jacobs chair and CEO, Steve Demetriou, President and Chief operating Officer, Bob <unk>, Our President and Chief Financial Officer, Kevin Berryman, Steve will begin by updating the progress, we're making against our strategy and reviewing our commitment to ESG and sustainability solutions. Bob will then review our performance by line of business.
And Kevin will provide some more in depth discussion of our financial metrics, followed by an update on our focus 'twenty and 'twenty three integration efforts as well as a review of our balance sheet cash flow and finally, Steve will provide detail on our updated outlook along with some closing remarks, and then we will open the call for your questions.
I will now pass it over to Steve Demetriou Chair and CEO.
Thanks, Joe.
And thanks, everyone for joining us today to discuss our first quarter fiscal year 2021 business performance and strategy update.
It's been about a year since the pandemic started and we hope everyone is safe and healthy as COVID-19 continues to impact all facets of our daily lives.
Jacobs and addition to keeping our people safe, we're continuing to support national governments and industry and their production and distribution of critical vaccines.
Turning to slide four to discuss our first quarter results. It is important to review our strategy, which is foundational to an investment and Jacobs.
We believe the transformation that Jacobs has undergone over the last several years has created a compelling multi decade investment opportunity for our current and potential shareholders based on three key tenets.
First we have transformed our culture aligned around a common purpose of creating a connected sustainable world underpinned by strong values, but we do things right. We challenge the accepted we aim higher and we live inclusion.
This culture permeates through our more than 50000 people the solutions, we deliver for our clients and the engagement and our communities, where we live and work.
Our purpose driven culture has also enabled us to quickly adapt to changes and market conditions. While also staying focused on our long term vision of being a technology enabled solutions provider.
Second we have a portfolio of solutions align to a diverse set of global opportunities such as space exploration cyber readiness climate change and modernizing and digitizing our infrastructure.
<unk> growth areas, our global allowing us to address them efficiently effectively and competitively at scale through our integrated global platform of technology, our talented resources domain expertise and enhanced brand awareness.
Finally, our Jacobs management team has demonstrated the ability to strategically allocate capital, including successful execute successfully executing acquisitions.
Our continued focus on strategy and execution has resulted in a strong start to fiscal 2021, even while continuing to manage the headwinds from the global pandemic.
First quarter net revenue increased 3% year over year and adjusted EBITDA grew 8%.
Our backlog ended the first quarter up 11% year over year and up 7% on a pro forma basis.
Given the strong momentum we are increasing the midpoint of our full fiscal year of 2021, adjusted EBITDA and EPS outlook.
Our cash flow generation was strong during the first quarter and our balance sheet remains healthy and the near term, we do expect to deploy excess cash towards paying down debt.
Last quarter, we announced a strategic majority investment and consulting.
And we are happy to share that the transaction was overwhelmingly approved on February 4th with 99, 8% of <unk> shareholders voted in favor of the transaction.
Particularly exciting was the fact that the voluntary election from management rollover was fully subscribed and.
New partner hiring has also been very successful post announcement, indicating the enthusiasm and commitment of <unk> partners and employees about the future growth opportunity of this partnership.
Confirmation of the scheme of arrangement is awaiting regulatory approval by the financial conduct authority and the U K and.
And we expect to close the investment by the end of this current quarter.
<unk> performance for calendar 2020 exceeded our expectations and their pipeline of strategic and technical consulting work continues to grow.
This includes a new engagement with the UK Department of International trade advising on project defense and UK supply chain resilience to underpin economic and National security.
Along with reaching a key milestone with the National Institute for Health Research, where they completed a U K public sector first delivery of Google cloud search to upgrade research platforms.
Once we complete the transaction, we expect significant benefit for the clients of our firms driven by the complementary solutions offerings.
And Jacobs.
Now looking further into fiscal 2021 and beyond we believe Jacobs is a compelling organic growth opportunity.
And as appropriate we will further accelerate that growth through thoughtful and strategic acquisitions that offer a higher return versus our alternative of repurchasing shares with Jacobs.
Turning to slide five I'd like to review some recent ESG actions.
As a company we're committed to delivering results to all our stakeholders our employees our clients our investors and our communities deliver.
Delivering on this includes our commitment to our sustainability strategy called plan beyond.
And our climate action plan launch last year.
I am pleased to report that we achieved a net zero carbon including 100% renewable energy for our operations and 2020 and our carbon reduction targets have been formally approved by the science based target initiative.
The climate agenda, we will continue to be front and center and 2021 with the United States rejoining the Paris agreement and the 26th UN climate change conference of the parties are top 26 being held in November.
And support Jacobs to announced our pledge to action it.
Campaign, and biting our clients and suppliers around the globe to take measurable actions to tackle climate change before the opening of pop 26.
And we are also leveraging the power of our Jacobs people and making a positive impact.
We launched our climate Countdown challenge, where employees to enjoying a new mission each month to tackle the climate crisis.
For both of these initiatives, we hope to raise awareness inspire and motivate individuals and companies and demonstrate the collective power of organizations, taking actions now to make an impact for generations to come.
Moving to slide six and <unk>.
And we intend to lead from the front and the transformation to a net zero economy.
And combination with the COVID-19 pandemic climate change remains the major global driver Inc.
Ecological and social and economic disruption impacting every person community business and governments around the world.
It's also a major disruptor advancing technology enabled innovation and sustainable business models for addressing decarbonization, the global energy transition and resource scarcity.
Jacobs is uniquely positioned to support our clients and communities and developing and deploying solutions and technologies across the full spectrum of decarbonization efforts, including renewable energy and clean power carbon.
Carbon capture and storage energy efficiency and energy storage Green buildings sustainable transport circular economy carbon management mitigation and compliance consulting as well as adaptation and resilience for all facets of infrastructure.
This includes developing technology solutions like our recently announced launch of Jacobs travel service optimization solution, which transforms the home to school travel experience for special educational needs and disabilities children and young people.
This solution combines our deep domain knowledge with the latest advances and data analytics to determine the most efficient ride sharing experience, while supporting decarbonization and a long term transition to a net zero economy with that I'll turn the call over to Bob forgot to provide more detail by line of business.
Thank you, Steve and now moving on to slide seven to review the quarterly performance for critical mission solutions. During the first quarter. Our CMS business continued its strong performance. Despite the continued high levels of COVID-19 cases.
Our work force from clients that address the primary challenges of physical distancing and continued to execute on our contract regardless of work location at approximately 95% of normal operating levels.
CMS backlog of about $9 7 billion, representing a 14% year over year growth and up 4% on a pro forma basis.
<unk> strategy is focused on both revenue growth and margin expansion by aligning to our go to market strategy towards critical mission national priority of digital monetization strategic data utilization lower and lower orbit satellite hypersonic and cyber.
Discuss each and greater detail.
Beginning with digital modernization trend.
Our global government clients base, the current path to transforming their digital stack of information Communications and security systems in order to maintain their national security and.
We are on this transformation journey with their clients as we develop and operate their next generation digital systems.
In December we cleared the protest period on the Navy King day Intelligent asset Management Award and we were awarded another new digital modernization project for the Army intelligence and security command.
In addition to digital monetization a second key growth driver for our business is the Dod's increased focus on strategic data utilization.
The D. R. D is becoming a data centric organization, combining ex commuting computing with debt intelligence and analysis at Hyperscale and scale.
It is considered a strategic asset similar to the priority given to weapon systems and.
Is increasingly central to Warfighter advantage in and out of theatre.
As an example.
And intelligence surveillance and reconnaissance team was recently awarded a seat on the 10 year $950 million ceiling IV Q to provide various unmanned aircraft solutions and satellite payload services for the Air Force has advanced battlefield management system <unk>.
Pbms allows a joint force to use cutting edge methods and technology to rapidly collect analyze and share intelligence information and make decisions and real time.
Moving on to low Earth orbit satellites.
Satellites play a key role and advanced communications.
Military Recognizance intelligence and other imaging applications Jacobs.
Jacob began a new era and advanced base radar payloads with the successful launch of its mango, one patent life or.
Our approach enables government and commercial customers to proliferate space based sensors that fee.
And the dark and through clouds to provide near continuous monitoring gathering valuable.
<unk> actionable intelligence and the ground the air and space domain.
And now onto hypersonic.
Hypersonic offensive and defensive weapon technology is unquestionably one of the highest priorities for our government clients.
Jacobs through decades, and supporting the Air Force and naphtha as a clear leader and hypersonic solutions.
During the quarter CMS has awarded a hypersonic kaetzel contract from the Air Force at Arnold Engineering development complex to transform <unk> into a unique large scale clean air variable Mach number tested annuity with extended run time capability.
A final trend is.
Discuss diaper.
The recent solar wind and Thunberg advanced persistent attacks continues to make headlines given your sophistication and dwelling time.
In fact provide the administration has requested a $9 billion plus increasing spending for ciber and modernization.
And as mentioned on our call last quarter. The British government also approved its largest military investment increase in 30 years by $16 5 billion pounds or 10% per year over the next four years and defense areas, including cyber security and <unk>.
<unk> and cyber and intelligence business has grown over the past several years to more than 3300 professionals today.
Part of our growth strategy is to continue to add adjacent capabilities and customers.
The Buffalo Group acquisition, which closed in November posted strong initial performance and is a catalyst for achieving immediate scale and deep client access with a strong majority of the U S and total.
And combatant command.
In summary, we continue to see strong structural demand for our solutions.
<unk>. The theme is the sales pipeline remains robust with the net 18 months qualified new business pipeline remaining above $30 billion, including over $10 billion and source selection and and increasing margin profile.
Now on to slide eight.
Thus our people in place and solutions businesses.
Last quarter, we conveyed optimism around our balanced portfolio and our ability to remain resilient through economic and geopolitical volatility.
This is demonstrated by our strong P&L performance and the quarter as well as 9% year over year backlog growth.
After a steady pipeline and 2020 and momentum and government funding strategy timing remains uncertain and our focused geographies such as and the U S and U K.
We anticipate further improvement to our pipeline and governments solidify their budgets.
I will discuss four trends impacting the macroeconomic environment and our sectors all of which we are well positioned to capitalize on.
First climate change and decarbonization of the economy, driving sustainability and resilience.
Where public and private entities.
Second.
Economic dividends for long term job growth and economic relief through.
Third the pandemic and continued growth and health life Sciences, and cloud computing and for modernization of infrastructure and the digitization of the industry.
Beginning with climate change and the de carbonization and the economy.
The environmental sector is experiencing growth as government the investment community companies and fitness and confirmed our commitment to climate action.
And on their de Carbonization agenda, and increased focus on PFS and emergent and Cameron we.
We generated the largest growth and this sector year over year, and anticipate our investment and <unk> consulting to further strengthen our de carbonization solutions offering.
These solutions such as advising our clients on their climate action goals developing strategy and policy assisting and program implementation and providing intelligent asset management are embedded in all our geographies and sectors. A great example of this is our recent win and Orange County, Florida to develop innovative resilient and sustainable waste management system.
And to reduce greenhouse gas emissions from operations for cleaner electricity use.
Recent awards for the Meredith linked and electricity and Interconnector linking the state of Victoria, and Tasmania, and Australia, and a project connect one of the world's largest lithium ion batteries are key element supporting Australia's renewable energy transition.
And the Middle East, where we had a program manager to Expo 2020 Dubai.
<unk> ability to pavilion known as Terra premieres this month.
Leveraging our industry, leading sustainability expertise carriers designed to be a net zero carbon driving during full operations and provides a glimpse of what is to come when Expo fully opens later this year.
Next I'll discuss economic stimulus spend aimed at long term job growth and economic relief.
In the U S occurred administration and pursuing an aggressive agenda that aligns directly with the long term growth of our of our market.
We have every reason to believe that focus will continue as the administration and Congress address Covid relief climate change environmental Justice resilience and the need to create long term job growth and economic recovery through infrastructure modernization.
As activity on these issues progress, we anticipate funding to support our clients' project at the federal state and local level, which we are uniquely positioned to support through long term historical framework agreements.
And the U K, we are well positioned for stimulus and the leveling up agenda to rebalance the economy across the country.
And are supporting our clients.
With smart integrated solutions with tangible social environmental and economic benefits for the communities they serve.
And our Asia Pacific geography, particularly in India, Singapore, and Australia, we expect and infrastructure Med economic revival around transportation and Green recovery largely centered on large scale renewables and energy to catalyze the economy over the coming year.
Moving to the impact of the pandemic and continued growth and health Life Sciences, Inc, and the cloud computing supply chain.
Covid vaccine production is progressing to increase capacity and distribution as well as increased demand from contract manufacturing company with an acute focus on biotechnology and we expect our investment and P and consulting to strengthen our end to end delivery and this sector.
Demand for cloud computing continues to drive our data center business globally.
We remain agile and diversifying our client base to adjust to market trends and semiconductor manufacturer.
Moving on established relationships and industry, leading and leadership.
We are in negotiations for several new life Sciences and electronics project.
And the built environment sector, we are gaining momentum with our client focused on the global health care crisis.
We were selected to lead the programming and initial engineering efforts for our new campus for the California University of California Davis Health.
Center as well as the Royal Prince Alfred Hospital redevelopment and Australia.
We're investing in technology, and physical infrastructure support new trends and virtual care.
Finally, I'll talk about monetization of infrastructure and the digitization of the industry infrastructure.
Infrastructure monetization remains a priority investment across all sectors and geographies.
And for patient continues with a heavy focus on highways and rail.
We were awarded the engineering services projects through the Houston Metro <unk> bus rapid transit system as well as the new rapid transit project and southeast Asia that will enable the workforce to adapt public transport representing another example of how we support our clients with solutions that improve sustainability of our cities and places.
What are their current water sector trends are steady with implementation of digital technology and a focus on the water energy Nexus and resiliency.
Using replica Jacobs proprietary digital twin platform, we developed a digital twin of the watershed per loss per gene municipal water district in California for the <unk>.
<unk> of water supply scenarios, while balancing water quality and operations were $1 billion.
In summary, the foundation of our E&P business remained strong with our long term client base and framework in place to move rapidly when government funding and solidified.
Positioned extremely well for the near term secular trends, we expect a steady growth trajectory with profitability improving as we continued to move higher on the value chain.
I will now turn the call over to Kevin to discuss our financial performance in more detail.
Thanks, Bob and now turning over to slide nine.
First quarter gross revenue increased 1% year over year with pro forma net revenue flat.
Revenue for CMS increased 3% on a pro forma basis and Pmt's net revenue was down 3%.
The <unk> decline was mainly attributed to slower revenue burn, although the outlook for the business remains strong with backlog up 9% year over year.
And the near term.
<unk> reported net revenue growth to be flat to up slightly year over year, then gain additional momentum and the second half of fiscal 2021.
Adjusted gross margin and the quarter as a percentage of net revenue was 23, 1% down 110 basis points year over year.
The lower gross margin on a year over year basis was driven primarily by two factors a tough compare from Q1 2020 that benefited from a favorable impact from lower benefit costs carried and corporate and a higher mix of CMS revenue, which carries lower gross margins, but also has a lower G&A as a percentage of revenue.
Gross margin increased on a year over year basis by almost 100 basis points as we benefited from the mix zone.
And our margin revenue from acquisitions and new business wins.
<unk> gross margin saw some modest pressure in Q1 due to a higher amount of America's program management and O&M revenue.
Lower consolidated G&A as a percentage of net revenue of 170 basis points year over year to 13, 6% more than offset from gross margin and that's.
As it pertains to G&A and the first quarter continued to benefit from our ability to proactively manage our cost structure.
CMS mixed benefit previously stated and some focused 2023 savings from lower real estate costs, lower travel and vulva COVID-19 related employee medical costs. As we look forward, we will continue to be disciplined and the management of our G&A costs.
GAAP operating profit was $214 million and included $22 million and restructuring transaction and other charges. The majority associated with our recently announced focused 2023 initiatives and $23 million of amortization from acquired intangibles <unk>.
For these items and adjusted operating profit was $259 million up 10% with both lines of business posting double digit percent increases and operating profit.
As a result, our adjusted operating profit and net revenue was nine 5% up 60 basis points year over year on a reported basis.
GAAP net earnings and EPS from continuing operations were $257 million and $1, 96% 96.
Per share and included <unk>.
54, driven by Mark to market adjustments for our Worley equity stake and.
And <unk> 47, and benefit related to line Mark to market investment and AI software provider.
Provider <unk> AI <unk>.
<unk> per share of after tax charges, primarily related to focus 2023, and other restructuring costs and.
17 charge related to the impairment of our AWS manager management of investment and amortization of acquired intangibles of 13.
Excluding these items second quarter adjusted EPS was $1 41.
17%.
Let me provide some detail on our investment and AI software.
<unk> and.
And 2010, we made a small investment and the company, which recently completed an IPO.
Today, our investment represents more than 750000 shares and the company.
Due to our lockup requirements surrounding our ownership, we apply a discount to the quarter and value of our interest and the company.
<unk> and the investment valued at $85 million on our quarter and balance sheet and.
Todays price our interest represents a greater than 20 times return on our original investment.
Q1, adjusted EBITDA was $280 million and was up 8% year over year, reaching 10, 3% of net revenue.
Finally, turning to our bookings during the quarter, our pro forma book to Bill ratio was one two times for Q1, driven by strong book to Bill and Pete Pmt's.
From a pipeline standpoint will continue to grow the CNS pipeline, both on a pro forma and reported basis.
And the timing of when this robust CNS pipeline will convert into backlog is weighted more towards the second half of fiscal 2021, resulting in our projected backlog inhibiting year over year growth for the year.
The <unk> overall sales pipeline has increased as well driven by a pro environmental Buyten administration broader potential infrastructure stimulus and the U S and and improving economic outlook.
And the exact timing of when many of these new stimulus related opportunities will convert to bookings will become clear over the coming months and and will help support backlog growth for the year.
Regarding our MLP performance, let's turn to slide 10.
Starting with CMS.
Revenue was up nine 5% year over year and up 3% on a pro forma basis.
Operating profit was $110 million up 22% and up 15% year over year on a pro forma basis operating profit margin was up 90 basis points year over year to eight 5%.
<unk> was driven by our strategy to focus on higher margin opportunities such as our recent <unk> win which is now fully ramped and we also some additional benefit from favorable project Closeouts.
As we progress through fiscal 2021, we expect low single digit CMS reported revenue growth as we approach from one year anniversary of the wood nuclear acquisition and continue to ramp new wins.
More than offsetting the revenue headwind from fully transitioning up two large lower margin projects previously discussed which account for nearly $600 million headwind and annual revenue and 2021.
Given the strategy to capture higher value businesses.
Both acquisitions and organic efforts and continue to expect reported and pro forma operating profit growth to be up double digits year over year.
Moving to Pmt's Q1, net revenue was down 3%.
Year over year, driven by a lower short term burn rate as bookings growth remained strong and backlog was up 9% year over year with a one three times book to Bill and.
<unk> continued to see solid revenue growth and our Americas business offset by some timing related slowdown and our advanced facilities and Europe and middle East businesses.
<unk> operating profit was up 10% year over year and as a percentage of net revenue was 13, 7% for the quarter.
160 basis points year over year, driven by disciplined management of G&A costs.
Looking forward, we continue to protect <unk> revenue to be up low single digits for fiscal 2021 with improving year over year growth as we progressed through the year.
We expect operating profit margin and as a percentage of net revenue to moderate from Q1 levels, but still increase from fiscal 2020, driven by strong operating profit growth.
Our non allocated corporate costs were $47 million per quarter.
While this figure was supported by strong cost discipline.
Continue to expect our non.
And our non allocated.
Corporate costs to be higher year over year.
Is that were put on hold during fiscal 2020, and the first quarter.
Slide 11.
To update you on our focus 2023, and M&A and integrations.
We continue to make strong progress on our strategic initiatives focused 2023, and we believe well one lead to enhanced employee and customer experience to improve our ability to capture emerging high growth margin opportunities and three drive a more efficient cost structure through increased automation.
And process alignment for overall longer term profitability.
During the quarter, we incurred an additional $10 million charge and cash outflows of approximately $30 million related to our focused 2023 initiatives. These investments were mainly related to improving the utilization of our physical spaces, and deploying new tools and technology for better efficiency, and our business and strategically and leaning.
Out of the organization.
Turning to our recent acquisition of the bulk of our growth company had a strong quarter with double digit revenue growth continue to expect that the acquisition will deliver 8% to 10.
Adjusted EPS accretion during fiscal 2021.
Regarding consulting we are pleased with the preliminary results for calendar year 2020, which are tracking ahead of our expectations. We are also optimistic about the calendar year 2021 growth plan and after the transaction closes later this quarter.
And look forward to discussing our results and growth plan in more detail.
We continue to expect 52 to 57 of adjusted EPS accretion from <unk> consulting for fiscal 2022.
And final.
And when including all integration and restructuring initiatives.
As well as the AWP recharge, but excluding PAA consulting we now expect a total of approximately $100 million of P&L charges and $110 million and related cash outflows and fiscal 2021.
When including and additional non recurring headwind associated with the payment of 2020 related U K VA key tax payments and the current quarter. We expect a total of approximately $150 million of onetime cash outflows and fiscal year 2021.
We will update these estimates to include Ta consulting after we closed the transaction.
Now onto cash generation and the balance sheet on slide 12.
During the first quarter, we generated $96 million and reported free cash flow a significant improvement versus the levels seen in the last several Q1 periods, primarily a result of and improvement of three days and DSO versus a year ago.
The working capital benefits and less headwinds from cash restructuring.
The strong Q1 cash flow included a net negative of $44 million.
Of onetime costs associated with focused 2000, twenty's and restructuring and other items.
Regarding the balance sheet, and we ended the quarter with cash of approximately $837 million and a gross debt of $1 8 billion.
<unk> and 1 billion of net debt before checking and the benefit of the Bally and <unk>.
Great.
Trading and the warranty and see three AI equity as cash our pro forma net debt to expect that adjusted 2021 EBITDA is approximately <unk> four times and.
A clear indication of the strength of our balance sheet.
During our current fiscal second quarter, we finalized a new delayed draw term loan related to our <unk> consulting investments post close we expect our balance sheet to have continued financial flexibility. However, we will be prudent and deploy excess cash toward debt repayment over the short term.
And finally, given our strong balance sheet and free cash flow.
And they committed to our quarterly dividend, which was increased 11% earlier this year to <unk> 21 per share.
Now I'll turn it back over to slack, Steve for Slide number 13.
Thanks, Kevin and Matt.
And I'll, Let me review, our total company outlook for fiscal 2021, given our strong start to the fiscal year, we are raising the low end of our previous guidance ranges.
We now expect adjusted EBITDA outlook to be a range of $1 75 billion to $1 5 billion versus our previous outlook of 100.
5 billion to one 1 billion.
And we expect adjusted EPS to now be and a range of $5 30 to $6 versus our previous outlook of $5 20 to $6.
And it's important to note that our guidance does not include any benefit from the consulting investment.
We expect to close by the end of fiscal second quarter.
Looking beyond fiscal 2021, we continue to expect double digit adjusted EBITDA growth as we benefit from our focused 2023 initiatives as well as potential infrastructure related stimulus and a strong alignment to a diverse set of large secular growth opportunities.
Operator, we'll now open the call for questions.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star and the number one and your telephone keypad and the interest of time. Please limit yourself to one question. If you have follow up questions. Please press star one again can rejoin the queue.
Our first question comes from Joseph de Nardi with Stifel. Your line is now open.
Good morning.
And you talked a little bit about the mango launch can you just speak to kind of what that now allows you to do in order to maybe more effectively market and sell that capability and then can you just update us on the pipeline of opportunities.
Related to that technology.
From the government to the extent you can.
Sure Joe.
So on the first yes, we're really excited about what <unk> brings to us.
No.
Heavy payload.
The orbit satellite debt.
And Thats ours.
And and we we invested in there and.
And it's now in space and gather.
Gathering data it is kind of a right of entry to some of the higher and both intelligence agencies as well as other application platforms and.
And it's going to it's going to put us in a really unique position for for some of the not only ongoing pursuits, but even for offerings that come and the future. So I'd say that the.
And the programs and projects that we've talked about project and and.
All kinds of other tropical fruits that we referred to these.
Programs volume.
And it puts us in a very much differentiated position.
And to further strengthen our.
Our win ratio there is only a few that habit.
Our next question comes from Jamie Cook with Credit Suisse. Your line is now open.
Hi, good morning, and nice clutter and I guess my first question.
And it relates to the strong margin performance that you saw and PPE and asked so I'm just wondering.
How much of that is sort of project mix versus potential.
Short term lower discretionary cost how sustainable that is and then I guess my longer term question is.
Margins and CMS are improving and there's still a big gap between CMS and PPA P and PFS and I'm just wondering.
Over what time can the GAAP between the two segment margin narrow mark Thank you.
So Steve you want me to take that.
All right.
Yes look Jamie thanks for the question.
First thing is on the <unk> margin profile.
We actually saw good solid gross margin performance, but but really the fundamental margin profile driven primarily by the very disciplined management of our G&A costs of course, some of that has been driven already by some of the work that we did when.
And when we announced some of the day activities relative to our reduction and footprint on real estate. Some of the travel we've got you and that we've been doing but there's also been a fairly significant.
Actions proactive actions taken in terms of managing our labor costs appropriately relative to the current situation regarding the pandemic.
Closely monitoring GAAP and as we think about how our business starts to come back which is fully anticipated over the course of this year. Some of those costs will come back into into play as.
As it relates to the business, but that's going to be associated with higher gross profit as well. So ultimately margin profile will continue to be robust maybe not at the same level as Q1, but certainly well above what we would have expected to see and <unk> in 2020, what we did see in 2000 and <unk>.
And so feeling very good about that opportunity in terms of the margin profile between the two businesses. We've said that we believe actually margin profile can improve on both sides with both of the businesses and consequently, a big focus in 2021 is starting to business and a more.
But the way the margin profile difference between the two businesses and we've been communicating that CMS margin should be strong improvement. This year and I think you started to see that in the first quarter and we would expect that debt to continue to play out over the balance of 2021.
Our next question comes from Josh Sullivan with the Benchmark Company. Your line is now open.
Hey, good morning.
Hey, Josh.
Just a question on the free cash generation and congratulations on moving the needle there.
Just to the comments before about kind of the mix shift moving around I mean is there anything we should be thinking about them all and the Dsos and is there anything that we should be thinking about as far as the free cash flow profile, while you do that mix shift up to kind of more high value works.
And in general I would say that.
And opportunity for us to continue to drive DSO improvements from existing levels. We believe it remains an opportunity and it's tough work as I've always said.
Relative to the ability to continue to drive that number down very pleased with the work in Q4 of last year very pleased with where we ended Q1 of fiscal 2021, and we believe that there is an opportunity to continue to drive that down and debt our mix of projects won't necessarily ultimately result in net.
Underlying trend longer term.
So we still feel good about that still got a lot of work to do but we feel good about free cash flow generative nature of the portfolio going forward.
Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.
Yes, hi, good morning, everyone.
Good morning, Steve I'm wondering if you could talk about.
And your M&A pipeline.
As it stands today, considering the cost reduction.
Efforts and.
The upcoming and integration with consulting how active are you folks.
In terms of scouting for opportunities at this point and based on the lean work.
The cost reduction opportunities you might have.
Thanks.
Okay.
So.
And we're a company that Theres always active and making sure we're exploring all opportunities globally and we.
We're going to continue to do that we have.
Recently.
Executed on some acquisitions.
Below group and.
Peter and consulting most recently and nuclear.
Fairly new so for us our top priority is to.
To execute on those recent acquisitions and demonstrate continued success we feel free.
Loud and what we achieved with the major one of <unk> back in 2017 and and have some.
Successfully executed and exceeded expectations and so we want to focus on that breakdown as I mentioned and my remarks.
Over the next months, our primary capital deployment is W to pay down debt. However.
And when we look at the pipeline of opportunities and our strategy.
There are several bolt on opportunities even within consulting.
We think about what we have initiated there.
And coming together with Ta.
<unk> been a very successful firm and doing bolt on acquisitions that help them create value and we want to continue to support that and and together, we think that there's going to be some real interest in things that we can do and that whole consulting arena, which is higher margin higher value business.
And then of course anything that we can do to just accelerate our digital modernization and strategic data utilization as we have done.
With the series of cyber acquisitions, including most recently PWM and upload group.
And so we will continue to be active on the government services space and.
And any other bolt on acquisitions that can strengthen our <unk> business as well.
And the final thing I'll say is there's some.
Geographic.
Dance and opportunities when you looked at our mix of business.
And it really is still majority share.
The majority of our revenue comes from the U S and good Terry and and then it drops down significantly from there and so we think there is some some growth geographic expansion.
Initiatives over the coming years.
Our next question comes from Andy Kaplowitz with Citigroup. Your line is now open.
And good morning, guys.
Good morning, and.
And just trying to get a read on PFS, given the lower revenue burn, but strong backlog and Bob you talked about still seeing some funding and COVID-19 related uncertainty out there, but the trends you mentioned, especially more focus on climate change to digitization stimulus seemingly overwhelming that uncertainty at least and backlog. So maybe you can give us more color what.
Was the biggest driver of backlog growth and Q1, and especially if we do see from U S. Stimulus here is it possible to backlog growth continues at that high single digit range is or even accelerates from here.
Yes, and maybe maybe Andy I'll address that first and then go back to the year on year performance, we do it. So the short answer is yes.
The pipeline.
And that we capitalize on and Q1.
And the dialogue and anticipation of spirit continues with our clients and so where we sit and that value chain, where we would be and the initial concept work scoping.
Looking at what potential optionality are around and.
Objectives there'll be different structure project.
I see those continuing.
As well as the opportunity and we're seeing.
Driven by the pandemic, but and the health care and and the.
And this and the data center and semiconductor manufacturing world. So so I think those those remained strong.
What we see coming out of the funding I'd really.
The year on year piece, I'd really kind of point to.
And the sustainability of all of our work due to the.
And the framework and the positioning we have with our clients.
And yet there has been a bit of a revenue decline, but it wasn't a drop off the cliff.
And we were able to give a bit of a drop in Q3 of last year and we've been able to sustain it.
Remember comparison to last year quarter on quarter Im sorry year on year, we werent and the pandemic and so I think that flatness and what we're seeing as far as the revenue piece and looking to see looking to for that to turnaround.
And as.
And the backlog converts.
Our next question comes from Steven Fisher with UBS Your line.
Your line is now open.
Great. Thanks, and good morning, guys.
Can you just talk a little bit about the increase and in restructuring from I think it was $80 million to $100 million planned for the year why does it increase kind of what's the cadence from here.
I think it will certainly be a milestone when restructuring and generally becomes immaterial, but I'm just wondering if maybe that.
As long as there is going to be some M&A activity should there be some ongoing restructuring.
Yes. Thanks I appreciate the question look on the REIT on the the number going from the 80 to 100, that's effectively driven by the AWS items that is a noncash charge we highlighted debt.
And that there was a current evaluation that was occurring during our Q4 call you might recall.
And and so we basically had to write down our <unk>.
W and EW investment that was made several years ago.
So no real difference in terms of restructuring of course, we have not yet included any of the dynamics associated with Ta and there will be some costs, obviously there and.
That will be further clarified after we actually have come on into that into the full of hopefully expected by the end of this quarter. So no real fundamental change at this particular point and time other than the EBIT unique charge non cash charge.
Our next question comes from Chad Dillard with Bernstein. Your line is now open.
Hi, good morning, guys.
Yes.
Good morning, Ken.
So within Europe, greater than $30 billion project pipeline.
There are a couple of large projects and you guys talked about in the past on the weapon Sustainment and ISR side.
Can you give your latest thoughts on what's Cook award timing, if theres been any change and competitive landscape.
Listening.
And then also can you talk about to take a level and design activity that youre seeing globally.
And Mike gave you a private Pts business.
And where you're seeing accelerating growth versus maybe some stall and then recovery. Thanks.
So maybe I'll start here and bump.
And then.
Let's start on a ladder and when we talk about the <unk> business clearly.
Driving our pipeline are the things that Bob talked about initially and that is the whole digital modernization and strategic data utilization across but.
All of our clients and.
And buildings infrastructure advanced facilities.
Climate change arena, there's clearly going to be ramping up with the change in administration and the U S. But just a global priority that's going on there and looked at and what we talked about climate change.
The things, we're already doing and solar and wind hydrogen is kicking in and the energy storage with batteries.
The whole resiliency and.
The strength that we have which we've been doing from last several years from flooding and sea level rise and a whole host of other things too fast et cetera, and then.
Share of a whole opportunity around the advanced facilities business with regard to and what the pandemic has accelerated.
And.
And the life Sciences business and the electronics business because of the life science side Theres now a pent up demand on non COVID-19 activity, obviously, the priority is COVID-19 vaccines and therapeutics.
Oncology diabetes emerging cell and gene therapy, and also the fact that there's more need for capacity. So there is a huge contract toll manufacturing opportunity that's now presenting itself.
And then the whole health care side of the hospitals and what's going on globally there.
And then the electronics with the future of work with M.
Everything from $5 to the data centers too.
Semiconductor.
Clearly the wave of growth and that business as well so.
And then on top of all that is what countries are doing around the world starting with the U S alone.
Emulating their economies coming out and.
<unk>.
So clearly, we're seeing positive momentum and the U S.
We expect to see something soon with with this first COVID-19 relief package, but but we're anxious to see what comes out over the coming months and the.
Whole infrastructure stimulus, which will benefit Jacobs, it's upside this was 22 and beyond when we talk about infrastructure stimulus.
Beer is not dependent on it and.
And then from a from a standpoint of UK very positive momentum and many of the other countries are also kicking in with with their infrastructure initiatives economic initiatives. So real positive momentum on the P&C debt side, Bob you want to comment on the backlog.
CNS.
Within the next 12 months I think I mentioned that $10 billion and source selection specifically around I think the question was around ISR.
And in our pack on cyber to that now.
Now with the Buffalo group and with their kind of our positioning in that space now, both and cyber as well as intelligence.
Whether it be the and total demand or defense and <unk>.
And the joint demand co comps upon.
We're now and a majority of them with increased skill sets across multi domain. So we see those awards coming in their.
And there might not be.
Large and and.
Longer in duration.
<unk> traditionally not.
Now and the current form arent.
But we see those continuing to flow in from.
From Q3 and beyond.
With higher margin.
Our next question comes from Louie Dipalma with William Blair. Your line is open.
Great and Steve Kerr.
Kevin and Bob and John and good morning.
Good morning.
Good morning, and there has been a surge and investor interest for space exploration and face reconnaissance and are you able to quantify the.
Why is that.
Jacobs based portfolio as it relates to NASA and the intelligence community and.
And missile Defense agency and on this note and.
Can you review what role of Jacobs is expected to play for the arguments and wound program.
Thanks.
Yes spaces.
And there has been a legacy.
Strengthen and and important part of our revenue.
Going back to the through long history, we have with NASA.
And masses, leading.
And our solutions provider across essentially all of their sites.
And so Thats our foundation and then with the <unk> acquisition and some of the other initiatives that we've done both organically and bolted on.
First of all we'll work orbit space and intelligence, but.
Just talked about.
We're very excited about most of that very highly classified work so.
That's now going to we believe is going to be a very.
And high growth.
On to our holders.
Space initiatives so.
And then.
The adjacency work that comes with <unk>.
Our our intelligence work and.
Our relationship with the space community is the whole hypersonic area that.
And theres going to be something that is big for us starting in the field.
Sort of a consulting research development and then getting into some of the big programs, there so well over $1 billion today.
One that we expect our high growth going forward.
Our next question comes from Sean Eastman with Keybanc capital markets. Your line is now open.
Hi, Jamie.
Start through the year.
Just curious.
A lot of companies are talking about digital.
Data.
Just curious as we think about focused 23.
And what do you think Jacobs is doing better than the competition as we think about digital and data.
Effectively moving the company up the value chain.
Let me start with that.
And kind of how we've gotten to where we are because Jacobs has always been a.
A company that has been working on digital and smart initiatives and are going back to the work that we've done with NASA and others, but when you look at the last several years proceeds to M acquisition.
The combination has really accelerated our capabilities the things that <unk>, two and brought like digital twins, but we've talked about and several other pass.
And the capabilities and then we go into the whole strategy that we and <unk>.
<unk>.
Over the last several years around the Jacobs connected enterprise and the amount of growth picking up through <unk>.
And level and the culture that we've put in.
Talent attraction.
We've had a very focused talent attraction on making sure that we bring and all the best.
And subject matter expertise and digital capabilities.
It's been impressive.
Really tapping into the.
Some of the most innovative companies to bring some of their talents to Jacobs.
And then the last two big steps and have been the rebranding to really make our clients more aware.
And there are a lot of the stuff we were doing for certain clients and one part of Jacobs most of the rest of our clients through didn't really know that we have that capability and MF brand initiative that we launched last year was a key step and then Peter and consulting does.
It is now going to take up a whole new level around the end to end solutions.
We can provide and when.
And you look at the IP.
IP that we have.
It's pretty pretty impressive across the board and.
And the technology hubs that we focus on geospatial predictive analytics, cyber and things intelligent asset management and when you put it all together.
Differentiation for Jacobs and spirit.
We have.
<unk> per domain knowledge and decades of experience working on all of these things and.
And markets and <unk>.
Clients and we have that.
The state of the art technology skill set.
And bringing digital solutions and when you put that together, we feel like we're in a unique differentiated position.
Our next question comes from Michael Dudas with.
And research your line is now open.
Good morning, gentlemen.
Maybe this one for Kevin.
Wondering if you have any more 'twenty baggers and that asset portfolio viewers appreciate and know that but more seriously and.
Could you remind us when ta closes.
And the balance sheet metrics on net debt cash.
Cash.
Leverage ratios and how youre thinking about.
Current ownership of war and.
And C three AI relative to.
Youre deleveraging opportunities or your cash needs going forward.
Thanks, Thanks, Mike for the question.
With a lot of the work that Steve just alluded to and and our strategy over the last several years.
And that's been very very well from.
And from a balance sheet perspective to be able to execute against the PAA transaction.
Our actual net debt is <unk>.
Probably in the neighborhood once we close.
<unk> is probably in the area of two times, so scale quite quiet.
Nice in terms of our position, we still have substance of levels of cash at that particular point in time. So so we have some flexibility as it relates to them our gross debt levels will be a little bit higher. So our idea is that we will kind of and the very short term.
And some of that growth debt level with incremental cash generation that we're going to be seeing about we feel like we still have really good flexibility as it relates to how we will.
Look to deploy capital not and then necessarily immediate term, but that's certainly and as we progress through the next few months and.
And then two later 2021, well, we will be able to have some greater levels of flexibility, so really quite well positioned relative to our debt structure even after the.
And amount of fund debt or can it be paid out it's appropriately and it's approximately about $1 8 billion.
Well, we will be doing well.
Even with that in terms of our leverage connectors.
Relative to the other equity matters, we said that these are good strategic investments and and debt.
And we'll continue to think about what that means longer term.
Our next question comes from Michael <unk> with Bank of America. Your line is now open.
Yes, Thanks for squeezing me in and I'm, just curious on your mix and the growth prospects going forward basically over the next two three years do you think more of your growth is coming from PPS with the infrastructure and environmental and advanced facilities or is it is it mostly coming from from CMS.
And lastly, just to be clear do you need a big infrastructure package to pass to reach your double digit growth.
Objectives. In 2020 is that is that critical to hit that that 2020 and beyond target you guys laid out thank you.
So you want me to.
Guys first.
Yeah go ahead Scott.
Yes look.
The.
The guidance that we've provided.
It doesn't assume anything as it relates to a major infrastructure there there certainly seems to be some incremental momentum there.
And our view however is that we will start to see.
And the ability to start to see incremental momentum and the back half of 2021.
And certainly the sustainability comment that Bob had made is important because of.
The.
The particular stimulus package, that's being considered right now provides that opportunity and so I think if you combine it all together with focused 2023 and.
And our continued efforts to drive and effectiveness across the across the globe.
And with the continuation of and improving economic picture, we still think there is an ability to have.
Great.
Great growth from 2022, and beyond and that would that would be double digit obviously.
And if there is a large infrastructure bill that would be.
And entering some of those numbers I think as it relates to both CMS and PPS P and PFS, we feel good about the growth prospects.
And both of the business.
Long term both are aligned with really strong growth trends.
Critical mission areas as outlined by Bob and then of course people and places aligned with secular long term growth trends. So we feel pretty good about the growth algorithm net.
Facing us in terms of both of the businesses.
And as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Gautam Khanna with Cowen Your line is now open.
Yeah, Hey, guys. This is Dan on per GAAP and benchmark and then the question.
And just a quick one here you have the.
The CMS book to Bill number excluding the acquired backlog from Buffalo.
Yes, it's about.
Bill over one.
And 105 and put a stake through.
And to include word.
Okay.
Okay.
There are no turn of debt.
It's one time.
Yeah, and it's over one even without work I'm sorry.
There are no further questions in queue at this time I will turn the call over to Steve Demetriou for any closing comments.
Alright, Thank you and <unk>.
Conclusion, our Jacobs people drive our performance and this year more than ever their commitment and creativity and perseverance was our differentiator.
Chosen to honor their spirit and our integrated annual report from 2020, which we launched two weeks ago I encourage you to visit the Investor page of our website to read the report and explore some of their stories of accomplishment for our clients and our communities and and furthering our strong culture.
This concludes today's conference call you may now disconnect.
And then.
[music].