Q2 2021 Jacobs Engineering Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Jacobs fiscal second quarter 2021 earnings conference call and webcast. At this time all participants are in a listen only mode. After the season.
And there will be a question and answer session to ask a question. During the session you will need the press star one on the telephone if you require any further assistance. Please press star zero and I would now like to turn the call over to Jonathan <unk> Investor Relations. Thank you. Please go ahead.
Thank you good morning to all of our earnings announcement was filed this morning, we have posted a copy of this slide presentation on our website, which we will reference during the call.
During the presentation, we will be making forward looking statements, including with respect to the continuing effects of COVID-19 pandemic.
The central government stimulus programs and our financial outlook among others I would like to refer you to our forward looking statement disclaimer, which is included on slide two regarding these and other forward looking statements.
During this presentation, we will be referring to certain non-GAAP financial measures. Please refer to slide two of the presentation for more information on these figures.
In addition, during the presentation and we will discuss comparisons of current results to prior periods on a pro forma basis see slide two for more information on the calculation of these pro forma metrics.
The pro forma comparisons current and prior periods to include the results of that.
The nuclear business, which closed in March of 2020, and the Buffalo Group, which closed in November 2020 on.
Our reported results only include results from <unk> sulphate from the closing date of March 2nd 2021 through the end of the fiscal quarter.
Unless otherwise indicated pro forma comparisons discussed today do not include consulting and the prior comparable periods.
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, forgot and President and Chief Financial Officer, Kevin Berryman.
Steve will begin by updating the progress we are making against our strategy and the future ESG of Jacobs, Bob will then review our performance by line of business and Kevin will provide a more in depth discussion of our financial metrics, followed by an update on our focused 2023 and M&A initiatives.
As well as the review of our balance sheet and cash flow.
And finally, Steve will provide detail on our updated outlook along with some closing remarks, and we'll open the call for your questions.
And the appendix of this presentation will provide additional ESG related information, including examples of our leading ESG solutions with that I'll now pass it over to Steve Demetriou Chair and CEO.
Thank you John and thanks to all of you for joining us today to discuss our second quarter of fiscal year 2021 business performance of key initiatives.
As the pandemic lessens the impact here in the United States, it's vital to recognize the significant struggles that are still occurring throughout the world, especially in India.
Jacobs made an immediate donation to the amount of way and the Adobe for critical medical supplies.
And I'm, particularly proud of our company and employees, who together have donated $200000 through our internal giving platform collectively.
We have and will continue to support those that are still being impacted by the pandemic, including for example on our operations and the Philippines.
Turning to slide four.
Before discussing our second quarter results. It's important to continue to reiterate how we think about our business by aligning and executing against our long term strategy to drive superior value for our stakeholders.
We take a multiyear approach to a rigorous strategy formation.
This long term mindset involves proactively assessing and aligning our portfolio of toward large secular growth opportunities, where we can deliver sustained double digit profit growth.
The transformation of the Jacobs has undergone over the last several years has created significant value measured by relative total shareholder return.
As you have seen from our recent organic actions the P. A consulting investment and the acquisition of the Buffalo Group. We believe there's a significant opportunity to deliver differentiated digitally enabled solutions as the world accelerates its efforts to modernize infrastructure improved global supply chain and enhanced national security.
We have started the development of our new corporate strategy for fiscal year 2022 to 24, which we will present to the Investor community later this year.
As to our financial results I am pleased with our strong second quarter performance with net revenue, increasing 7% year over year and adjusted EBITDA growth of 27%.
<unk> ended the second quarter up 10% year over year and up 7% on a pro forma basis.
Our strategic investment and PAA consulting closed on March 2nd and demonstrated higher than expected results and the March quarter, with 19% revenue growth and Sterling up 28%, including the benefit of FX. We are also excited by the revenue synergies are joined Jacobs teams are creating resulting in a robust.
Pipeline in line with our deal model expectations.
Given the stronger performance across Jacobs and the early closing of the investment we are increasing our full fiscal year 2021, adjusted EBITDA and adjusted EPS outlook.
Looking beyond fiscal 2021, we see the potential for one of the most attractive periods for growth and our company's history activated through alignment of our portfolio to numerous secular growth opportunities and the expected infrastructure stimulus across the globe.
Turning to slide five.
Sustainability of Jacobs as reflected in our company's purpose of delivering solutions for a more connected sustainable world as well as through our values. We do things right. We challenge the accepted we aim higher and we live inclusion.
This is critical for our people to work for a company that believes sustainability is fundamental to what we stand for as an organization on.
And I am proud of our efforts over the last few years as we are now being recognized by various external governance groups.
And for example, ISS recently updated their ESG assessment of Jacobs, where we are now approaching top decile and both environmental and social category.
These results are of credit to our people and their focus on our purpose and values.
And of course on and external basis ESG is of significant growth opportunity for Jacobs.
Building on the success of our sustainability strategy launched in 2019 plan beyond two points of all reinforces our commitment to driving to a net zero economy through furthering our sustainable business offerings.
We are in the early stages of the significant business growth opportunity to partner with our global customers and communities to provide solutions with their net zero carbon commitments.
Now with our investment and peer consulting Jacobs is uniquely positioned the across the entire end to end the ESG opportunity.
For example, we're implementing the first bio geochemical react the pilot plant project for PFS remediation and the U S.
Supporting Germany's transition to significant net zero power generation and distribution by 2030.
We're teaming up with one of the utilities in Australia to support the carbonization working with industrial clients globally on their energy and resource management programs for advanced manufacturing facilities and many other projects, including those shared and the appendix to this presentation.
Altogether sustainable solutions is of high growth business opportunity for Jacobs today, comprising nearly $5 billion of our revenue, which by the way. It makes Jacobs one of the largest ESG solutions providers with that I'll turn the call over to bump borgata to provide more detail by line of business.
Thank you Keith moving on to slide six and review the quarterly performance for our critical mission solutions business during the second quarter, our Siemens and continued its strong performance and our workforce is executing at pre pandemic levels as COVID-19 vaccines are administered broadly across our operations here.
Total CNS backlog is at $9 8 billion, representing a 7% year over year growth and up 6% pro forma excluding the lower margin Hanford and classified procurement contract. We have previously discussed.
And the CMS strategies focused on revenue growth and margin expansion by offering technology enabled solutions align the critical national priorities that drive innovative outcomes similar to last quarter I will discuss four notable market trend positively impacting our CMS business.
Space exploration and intelligence all source of intelligence and.
Monetization and clean energy.
Beginning the space exploration and closings from idea to operations Jacobs deliveries and Knowhow and value to every stage of the spaces and the lifecycle for our civil and National Security space time.
NASA lead the global exploration and development of deep state with its Artemis program, but will carry astronauts to and from the Moon and beyond.
Now some of the largest service provider Jacobs and involved in many aspects of the argument submission, including the space launch system, the Orion spacecraft and the exploration ground systems based the Kennedy Space Center we.
We are proud to have expanded and our nascent support to the Wallops flight facility located in Virginia and are now providing full lifecycle of operations and testing the deployed expertise we have developed at other naphtha centers.
We remain heavily engaged and the NASA mission portfolio, including the recent support of the SLS Hot fire test and the design fabrication and full deployment of the calibration device on the perseverance Rover now exploring Mars.
The market continues to enjoy strong bipartisan congressional support with preliminary FY 'twenty two budget, including a 6% increase over 2021, we also support the Dod joint all domain Intelligence initiative.
Utilizing satellite connectivity and space and adding more capacity for Intel analysis, such as our successful mingle one launch earlier this year.
Overall defense base spending was up 28% and FY 'twenty, one and is expected to show strong growth in FY 'twenty two as well.
Moving on to all sorts of intelligence.
Today's threat levels required intelligence analysts to utilize and coordinate multiple sources, including human signal open force geospatial and measurement and signature to allow for better decision, making and real time.
The Buffalo Group acquisition greatly expanded Jacobs, all sorts of intelligent capability.
We were awarded two exciting wins from the Defense Intelligence agency in the quarter.
The Jacobs will provide counterterrorism analytical expertise for the defense combating terrorism centered DCT.
And integrated intelligent vendors and direct support of war fighters around the globe.
We were also awarded a prime seat on the $12 6 billion solutions for the information technology enterprise or stage, III and IV IQ to address the evolving IP requirement vital to the security of the United States.
All of those specific quantified budget details, we're not provided and the preliminary budget redirection of funds towards the emerging cyber and and clothing threats from.
Eight actors are anticipated.
Now turning to digital modernization and.
In order for government agencies to run the effectively and transform how they accomplish their missions. They require a full spectrum of digital enterprise solution, including engineering and operations digital services, such as cloud services dense tech ops, cyber and data analytics and.
Contact the obligations for digital monetization services have grown significantly over the past five years with strong continued growth expected of government agencies and upgrade their data networks.
Recently, our software engineering team when of 10 year contract the continued to develop and sustain terrain awareness and warning system software for the U S. Air Force C 17 fleet to help ensure pilot.
And final trend and clean energy or energy source of inspection and solar wind geothermal hydro power and nuclear energy all of which are critical to trend transitioning global economy the away from fossil fuel.
Across our CMS nuclear portfolio, our unique blend and depth of technical and program management capabilities allows us to provide lifecycle support to our clients such as the.
The delivery of Hinkley point C and large scale of nuclear power plant and the UK debt will provide low carbon electricity for approximately 6 million homes.
Developing small modular reactors and advanced modular reactors for delivering sustainable products, such as green hydrogen or synthetic fuels and.
Working with the global community.
Infusion power to commercial viability.
And typically in the U S. The Doe has been allocated a 10% increase and the preliminary FY 'twenty, two budget and decommissioning and new clean energy investments, including fusion.
In summary, we continue to see strong demand for our solutions from fiscal year 2021, and beyond under the by the administration.
The CMS sales pipeline remains robust with the next 18 months qualified new business remaining above $30 billion.
With over $10 billion, and post election, and and increasing margin profile.
Now on slide seven on <unk>.
Because of our people and place the solutions business.
And with an overview of the benefit of global stimulus.
We anticipate of direct investment and our key industry sectors and geographies that align the global trends and emerging governmental focused on climate change infrastructure modernization digital transformation and advanced facilities.
We are uniquely positioned to provide world class service to significant areas of stimulus.
Including the anticipated U S infrastructure Bill.
Our global delivery model connected across geographies and market combined with our digitized the delivery approach ensures efficient and seamless support anywhere in the world.
Our existing contract and framework with the primary recipients of the stimulus funding will allow us to unlock the capture these emerging opportunities.
As an example of our engagement we are hosting of global webinar with our water sector clients on May 12, and help them navigate and and access available funding sources through the U S stimulus legislation.
As we look to increase operating leverage through our focused 2023 efforts, we are accelerating growth in both core and new sectors, we've engaged and our partners from <unk> consulting the capitalize these effort by applying their business transformation expertise to further optimize Jacobs global delivery model <unk>.
Combining our subject matter experts with technology enabled tools for the full solution offering is the competitive differentiator and we look forward to sharing more of in the coming quarters.
Our continued financial resilience driven by our balanced geographic and market portfolio resulted in strong P&L performance and the quarter and 10% year over year backlog growth our pipeline remains healthy and the anticipated continued growth of <unk> infrastructure build materialize.
I will now discuss the key global trends and themes aligned with our <unk> business.
Climate change is the macro and multi decade driver per clients around the world much of the economic stimulus is focused on <unk>.
Green stimulus underpinning all infrastructure modernization private sector clients are accelerating their transition to a net zero of economy increasingly seeking solutions that embraced ESG principles.
We are a leading provider in the space from us and innovative solutions that support our clients' de carbonization and resiliency goals, such as mass transit and fleet electrification work that we are delivering across the globe.
And Great example, is the Cambria Shire autonomous Metro and the U K, where in collaboration with D. A consultant, we are delivering and end to end solution for the implementation of autonomous electric vehicle infrastructure.
Infrastructure and monetization and digital transformation is driving growth and the mid and long term our global program management team continued to deliver iconic program to clients across major metropolitan areas on five continents.
A clear demonstration of our efforts to modernize infrastructure by increasing mobility and improving journey time and nearly doubling road capacity is the recent award at highways, England lower terms across the program one of the Uk's, most ambitious and largest road project ever.
And the result of our leading expertise and the water sector are weak and win the St. Paul Minnesota water treatment plan demonstrates our ability to implement solutions per ageing infrastructure to maintain reliable service enhanced water quality and improve operations and maintenance and providing sustainable utility.
Additionally, we won the change the new water factory three project with the public utility Board and Singapore as a result of our technology efficient design that reduces operational costs.
First and service solution features reverse flow technology to maximize reverse osmosis recovery and exemplifies our solution and technology differentiator.
The global semiconductor chip shortages driving industry growth levels above historical averages. The shortage is being driven by a unique convergence of demand used and applications from areas such as smartphones cloud computing and data storage coupled with the rebalancing of the global supply chain, we are engaged with multiple clients the accelerated capital.
Project and increase capacity.
We continue to see robust spending and the life sciences sector, driven by our clients' redistribution of their product portfolio. Additionally contract manufacturing organizations are embarking on and unprecedented.
Amount of biologic and capacity to support global demand.
Leveraging our industry leadership and long standing client relationships, we have secured the fujitsu and <unk> bio project and the southeastern United States and other large confidential program globally.
In summary, our balanced portfolio of industry sectors, and geographies continue to strengthen our <unk> pipeline.
Turning to slide eight.
This was a very successful quarter for PAA consultant building on a strong full calendar year of 2020.
Revenue growth at 28% year over year.
And is involved and a wide range of digital transformation projects, including the <unk> rollout program globally.
Backlog was up 36% year over year.
And this positive sales growth as well as continued investment and partner hiring in 2020, and 2021 gives us increased confidence for the full year and beyond.
<unk> seen solid performance across all sectors with strong wins and life Sciences, and UK public services.
On the sustainability front, we built on our global delivery partnership with the innovative startup kolpak signing numerous new consumer clients to replace single use plastics and the products.
And they continued to secure a wide range of digitalization project programs, including the wind highlighted on the slide.
<unk> strategy is to focus on growth and the private sector with an acute focus and the U S and further diversification in end markets globally.
We are working in partnership with <unk> to accelerate debt strategy through joint engagements and key sectors, including energy and utility health and life Sciences and procured on.
I'll now turn it over to Kevin to speak to our financial performance.
Bob and turning to slide nine for a quick financial reviews.
And second quarter gross revenue increased 4% year over year and net revenue was up 7% the.
This was driven by solid underlying business performance offset by the timing of advanced facilities projects.
Physicians and FX benefits continued to grow to growth by more than offsetting the burn off of two lower margin previously disclosed contracts and Tms.
Including the pro forma impact from all acquisitions net revenue was up low single digits.
For the second half of fiscal year 2021, compared to 2020, we expect total reported net revenue growth to be up and the low double digits year over year.
On a pro forma basis for acquisitions, we expect second half revenue up low and mid single digits versus a year ago as growth from the acquisitions and Tms and <unk> growth from a weaker second half 2020 compare more than offset continued headwinds and CMS from the lower margin contracts.
Two on and.
The adjusted gross margin and the quarter as a percentage of net revenue was 25, 8% up 260 basis points year over year on higher gross margin on a year over year basis, really driven primarily by three factors improvements and CNS gross margin as we continue to remix the portfolio the.
Higher margin business.
Favorable impact from lower benefit costs, and the benefit from Ta consulting, which has a strong accretive gross margin profile versus the rest of the portfolio.
And from a line of business standpoint, Gms gross margins increased strongly on a year over year basis, as we benefited from higher margin revenue and the base business, new wins and improved portfolio mix.
PMT gross margin margin was up slightly year over year.
The adjusted G&A as a percentage of net revenue was up slightly year over year to 15% as we look forward. We will continue to be disciplined and management of our G&A and costs, but do expect and increase in G&A as a percentage of revenue as a result of and expected rebound and labor related medical costs.
Latest investments as we move to a flexible workforce and other investments to drive growth.
GAAP operating profit was a negative $41 million and was mainly impacted by a $267 million costs related to the closing of the <unk> consulting track and traction that we called out on our press release filed this morning, let me provide additional detail on the nature of this cost.
The $267 million represents a portion of the aggregate purchase price consideration for our investment and Ta debt per GAAP accounting is treated as compensation given the retention related requirements and distribution of this amount of post closing.
We still view of the total investment consideration unchanged at $1 4 billion pound Sterling.
I'll discuss the cash flow on patient of the $267 million later in my remarks.
In addition, we had $42 million and deal and other costs associated with the VA consulting investments $13 million of restructuring transaction and other charges, including the focused 2023 initiatives and $31 million of amortization from acquired intangibles.
Adjusting for these items adjusted operating profit was $311 million up 32% with both lines of business showing strong organic profit growth and.
In addition, PAA consulting posted strong double digit growth on operating profit during their quarter ending April 2021.
Our adjusted operating profit and net revenue was 10, 5% of 200 basis points year over year on a reported basis and was effectively 10% without the benefit from Ta and <unk>.
Record for the company.
GAAP EPS from continuing operations rounded to $0 per share and included 86% 86 cents.
Per share from the PAA investment consideration being treated as compensation previously mentioned net of the associated tax impact.
The 37 set costs related to the mark to market investment and Worley and AI software provider <unk> AI, which included the impact of monetizing a portion of our <unk> investment.
17, and deal and other consulting related costs.
And <unk> per share of after tax charges, primarily related to focus 2023, and other miscellaneous restructuring cost and 17th.
Of amortization of acquired intangibles.
Excluding these items second quarter adjusted EPS was $1.66 of.
19% year over year.
During the quarter PAA contributed nine tenths of accretion net of incremental interest we now expect 32% to 30 <unk> of.
2021 accretion from.
For modeling purpose, we fully consolidate the impact of the <unk> investment and are operating the results with a 35% minority interest backed out and noncontrolling interests.
Q2, adjusted EBITDA was $332 million and was up 27% year over year, reaching 11, 2% of net revenue on.
Our adjusted EBITDA calculation includes the burden of the 35% minority interest impact from Ta consultant.
Even excluding the strong double digit growth of PVA pro forma EBITDA growth was up 16% year over year.
And finally, turning to our bookings during the quarter, our pro forma book to Bill ratio was one six for Q2 with over one times book to bills across each business.
Regarding our LLP performance, let's turn to slide 10, starting with CMS revenue was up five 3% year over year on a reported basis, but down 2% pro forma when the acquisitions of wood and the Buffalo growth are considered.
As previously communicated we are transitioning off to lower margin contracts, which represented $115 million year over year revenue headwind during the quarter.
When excluding the runoff headwinds FX benefits and pro forma acquisitions.
Base revenue growth was actually up 6% year over year.
We expect approximately $200 million of quarter of year over year headwinds from these two contract roll off through the balance of this year and the first quarter fiscal 2022.
CMS operating profit was $114 million up 35% and up 27% year over year on a pro forma basis, even when factoring in the headwinds noted earlier.
Operating margin was up 190 basis points year over year to eight 7% the.
The improvement was driven by our strategy to focus on higher margin opportunities and the benefit from the higher margin Buffalo of group business.
From the second half fiscal 2021, we expect relatively flat CMS reported revenue growth from deferred to the second half of fiscal year 2020 as.
As we continue to ramp new wins tableau and combined with the benefits from the Buffalo Group acquisition are expected to offset the revenue headwinds previously discussed.
Given the strategy to capture higher value business via both acquisitions and organic efforts. We continue to expect reported operating profit growth to be up double digit year over year, and the second half versus the year ago period.
Moving to PPP NPS Q2, net revenue was up one 4% year over year, driven by continued solid performance and the Americas and the rebound and our international regions as well as benefits from FX.
And this growth is partially offset by year over year declines and our advanced facilities business due to the timing of contracts.
<unk> and announcing strong pipeline growth as both of our life Sciences and electronics customers move forward with previously paused projects.
Total <unk> operating profit was up 7% year over year and as a percentage of net revenue was 12, 9% per the quarter up 70 basis points year over year, driven by a slight increase in gross margin and disciplined G&A cost management and.
In terms of <unk> performance.
<unk> contributed $98 million of revenue and $28 million and operating profit for the stub period, which has been consolidated and our results.
On a pro forma basis for a full quarter of results revenue grew 28% on a reported basis and 19% year over year on local currency.
Full quarter adjusted operating profit for <unk> was also significantly up year over year, representing strong adjusted op margin as a percentage of revenue.
Our non allocated corporate costs were $33 million for the quarter driven by the continued strong cost discipline and favorable benefit costs for the second half of fiscal year 2021, we expect our non allocated corporate cost to be higher year over year, driven primarily by expected increase increases and metal medical.
Cost increased.
And other expenses, including travel and entertainment as we begin to the physician the company for developing growth momentum that is expected in fiscal 2022 and beyond.
Now turning to slide 11, I'd like to update you on our focused 2023 and M&A activities on.
And I'm excited to share that we accelerated our focused 2023 strategic initiatives by formally bringing on board a dedicated team from consulting.
The partner and our work streams.
<unk> 2023 again is the strategic initiatives that we believe will lead to enhanced employee and customer experience and prove our ability to capture of emerging high growth high margin opportunities.
And three drive a more efficient cost structure through increased automation and process alignment for overall long term profitability.
During the quarter, we incurred an additional $5 million charge and cash flows of approximately $12 million related to our focused 2023 initiatives.
Charges from previous acquisitions, and other items start to $13 million consistent with our guidance regarding these costs falling over the course of 2021.
Additionally, we incurred approximately $42 million and deal and other costs associated with the pega consulting and investment.
For the remainder of fiscal 2021, we expect another $50 million and P&L charges related to transaction integration and other one time costs consistent with our previous guidance.
From a cash flow standpoint for the second half of fiscal 2021, we expect approximately $65 million of cash flow.
<unk> with the early are noted items. Please also note that the $260 million of Ta price consideration.
Flow through cash flow from operations, and our Q3 period.
Even though this cash flow of represents effectively a part of our investment consideration NPA, which remains unchanged again at one 4 billion pound Sterling.
Now onto cash generation and the balance sheet on slide 12.
During the second quarter, we generated $209 million on a reported free cash flow and DSO again showed strong improvement. The strong Q2 cash flow included a $42 million repayment of the U K.
Tax benefit from fiscal year, 2000, and a net negative of $74 million.
The costs associated with Ta and focus 2023 restructuring and other items.
Please note that <unk> represented a net cash outflow of approximately $15 million and the stub period, given the timing of certain cash taxes paid and transaction related stamp duties. We continue do expect PAA on a standalone basis to deliver strong free cash flow to adjusted net income on a rolling 12.
Month basis.
Our transformation of the company is now delivering the expected improvements in free cash flow and as net debt.
Free cash flow of the company as total of over $1 billion over the last trailing 12 month period, even one including net onetime headwinds. We expect continued strong underlying cash flow through the balance of the year with full year cash conversion now expected the over 100% when excluding.
And the onetime items and the $267 million investment consideration now characterize as the P&L on P&L charge and included in free cash flow and the third quarter.
Regarding the balance sheet, we ended the quarter with cash of approximately $893 million and of gross debt of $3 5 billion resulted in $2 6 billion of net debt productivity and the benefits of the world and tea tree AI equity true.
Taking these items the cash our pro forma net debt to expect that adjusted 2021 EBIT da is approximately one seven times, a clear indication of the strength of our balance sheet.
Regardless, we will continue and the near term to deploy excess cash toward debt repayment and given our higher gross debt levels.
Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was the increased 11% earlier this year to <unk> 21.
Per share now lets turn it back over to Steve.
Thank you Kevin now, let me review of our total company outlook for fiscal 2021.
Given our strong first half performance and the benefit from the consulting investment, we're raising our full year guidance ranges.
We now expect adjusted EBITDA outlook to be a range of $1 2 billion to one to sort of it versus our previous outlook of one point of <unk> 5 billion to $1 $1 five.
We expect adjusted EPS and that'll be on a range of $6 to $6 30.
Versus our previous outlook of $5, 30% of $6.
Looking beyond fiscal 2021 with optimism building around a major U S stimulus package and significant opportunities related to climate change and digital modernization. We are positioned for strong revenue and double digit adjusted EBITDA growth and fiscal 2022 and beyond.
Operator, we'll now open the call for questions.
Thank you, ladies ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad withdraw your question press the pound key we ask the can you limit yourself to one question and then rejoin the queue for any additional questions. Your first question comes from Joseph de Nardi with Steve.
Your line is open.
I think the good morning.
Maybe maybe one for Bob or Steve on the infrastructure side wondering if you could just focus on two things timing and how quickly do you think you see it and your numbers, maybe what youre monitoring that will inform that and then competitively the industry. Obviously a lot more consolidated now than it has been it was in prior cycles.
Can you talk about the implications of that for your business and maybe the margin profile for PPS over this upcoming cycle. Thank you.
So maybe just start with the couple of high level comments, Joe is that.
The timing is something that we expect.
Not going to see the final decision and what this is all about until probably later this summer.
Could go into early fall and then and so we'll start to see momentum pick up.
Sometime in 2022.
The the real I think the strategic driver for us as that.
And whether you look at the buyback proposal or even the Republican proposal, which was somewhat watered down and we expect it to be somewhere between the two is the fifth.
The significant growth.
There's going to be a lot of opportunity for a lot of the companies out there and I think for us be on a margin focused company and seeing the evolution of what we've been doing over the last few years.
The two things for us as the as theirs.
Need for resources, we have the best global integrated capability to bring the resources to the right place and to really focus on the highest margin opportunities.
The unfolds and both businesses and <unk>.
And at CMS.
Yes, maybe the add on the on the competitive climate, So Joe where we did with regard the framework agreement that we've had metrics and the U S. The Cumulus is also affecting the U K and Australia and other locations around the world.
Our pretty ideal for where those monies would flow. So if you look at transportation frameworks water frameworks that we've been on for several years. He is going to position us extremely well and those are pretty secured for the money needs to flow pretty quickly. So coupled with the fact that we're in the entire and services and I think.
The competitive climate Luton standard of farewell.
Okay.
Your next question comes from Andy from pilots with Citigroup. Your line is open.
Hey, good morning, guys.
Good morning.
And then Bob maybe I can follow up and a sense Scott and during the 2019 analyst day lifted a 4% to 6% target for P and PSA constantly health at the time, but it's still on the shorter to move forward are you able to give us any color regarding the ballpark of organic growth Jacobs and they'd be able to deliver.
Above and beyond that and then if a <unk>.
Summarizing the stimulus.
It doesn't go through given all of these trends that you've been talking about ESG and sustainability.
And facilities the sort.
The 6% the base baseline and you can do more than that you think going over the next couple of years.
So maybe I'll just jump and.
But we're not going to provide any guidance relative to 2000 2022 at this point and time from work I think we're feeling pretty good about the developing momentum. So we certainly as we work through and I think it is important to note steves comments relative to.
And we're not going to go after everything and we're going to go after those things that ultimately give us the best margin potential. So so look I think we're excited about what 'twenty, two and ultimately look to and certainly I would suggest that's probably not gone down.
Okay.
Next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
As Jerry pointed Derrick.
And really outstanding performance from PAA consulting out of the gate for you folks I'm wondering can you talk about whether the.
$300 million quarterly run rate of the business was on in March.
Has that momentum translated into.
And to the second quarter and how.
How much variability is there.
And that business given the level of engagements that were.
Sure.
And now the business a bit more thanks.
And Jerry I think I think the client engagements and declined 15 of this call it.
<unk> is solid.
And so the size of the engaged and it might be different and we would have historically.
<unk> seen at kind of Jacobs, but.
The longevity with their clients really from a just from the technology and the value they are contributing.
Shows shows the the future.
And really bright and so we're feeling very positive.
And just to build on the other part of your questions areas.
Consulting does a really great job of positioning themselves to.
And to win and sort of COVID-19 solutions and bump.
Talked about that and and.
It's still got some some runway on it.
And what Theyre also announced and as several of our other markets picking up and.
And so that bodes well for us.
Some of the COVID-19 work starts to phase out of the workspace and yet.
Good to hear thank you.
Your next question comes from Josh Sullivan with the Benchmark Company. Your line is open.
Hey, good morning.
Good morning.
The question on the space exploration and intelligence vertical highlighted and the remarks can you just give us some color on the commercial dynamics.
The unique and that you are touching the very large of immediate launch, but also have exposure on the small set side the split with assets like mango and that you mentioned are you of leverage to one and of the market and the other large or small set.
How should we think about Jacobs fitting into the conversation of acute versus some of these larger opportunities.
Well just again, maybe to start with the broader space for us is pretty wide range of for us no.
As we have always been.
A major player with deep space exploration and NASA.
Being the major client for ours, and we are strongly positioned there around Artemis and the research and development work, they're doing around hypersonic and space architecture et cetera, now with the CW acquisition of ramping up very nicely.
The whole lowest orbit ISR rapid solutions, and then they'll be on there with missile defense and some of the other aspects of space.
And that's become a very major market force specifically, Bob on the commercial sector.
Yes, I think of the.
The adjacent and knock on effects of what we're doing metrics exploration of the habit deep into indulging the strong if you will.
Look at the Mengel, one launch the application centered around intelligent.
But also the the.
The application to <unk> and other commercial applications.
Is going to continue to broaden market debt.
We haven't had exposure to in the past so other things of the EBIT is really expanding that aperture on the applications.
Thank you.
Your next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning.
I guess two questions. My first question on sort of going back queue of potential infrastructure Bell Steve.
Are there any <unk>.
The investments that you think of our required from Jacobs, Daniel order and capitalize it do you feel like you have the right Labor force and the right and niche niche is or do you go back and sort of contemplate M&A again, so I guess that's my.
The first question and then my second question and I think you noted revenues from ESG are approaching $5 billion or so can you talk can you sort of what the underlying growth trends that youre seeing and that business and how to think about the profitability of the businesses that are more of ESG focus and thank you.
Sure.
Book.
We couldnt be better positioned from a standpoint of the M&A activity that's behind us.
Obviously, <unk> combined with Jacobs.
Positions us to be the the.
Major player here and.
And by the way the.
And we can't.
Forgetting to remind everyone one of the biggest acquisitions and our industry going very well when you look at what we paid for the.
Compared to what is generating today extremely attractive financially, but obviously, jamie position helps us positioned to be a big winter the vignette on top of that the <unk> consulting acquisition, which now provides and the end capability from front end consulting all the way through delivery and.
Ultimately things like O&M et cetera.
So from a.
From a climate change and so as far as other M&A.
We're going to continue to look at things that can move us up the food chain from from a margin standpoint.
Possibly from geographic expansion, but as far as the U S infra.
The infrastructure.
Stimulus opportunity I think we're extremely well positioned with the organic capability we have today.
And on the climate change side.
You look at the $5 billion.
The wide ranging of.
And what we're in but as the as you look at the growth going forward.
Going to be everything from how do we help our clients adapt and mitigate so whether its sea level rise of flooding of bush fires and.
The whole energy transition equation, moving away from fossil fuels and to clean.
Clean energy and Thats both.
Working with our government and M P.
Private clients.
Everyone's looking to reduce their carbon footprint, that's where we come in and around the whole de carbonization, and eliminating or reducing greenhouse gases and.
And then things like natural resource stewardship.
Which was critical across the globe, it's a global business.
Global opportunity with.
And we're positioned well.
And to and solutions provider and bringing some unique tools and the innovation because it's going to require digital transformation to achieve these type of climate change.
Prince formative expectations by our clients.
Thank you very much.
Your next question comes from Steven Fisher with UBS. Your line is open.
Thanks, Good morning, so at the risk of making this a broad question or may be jumping the gun on your Investor Day, and you could just run through some of your key margin initiatives and.
And where you see the most progress made and where you have the most upside potential here I know you've got with CMS, the margin mix and the future of or so on and few other things, maybe just kind of give us an update on the margin potential.
And when you're talking about margin initiatives.
And both organic and inorganic one of the things we're extremely proud of the around our critical mission solutions line of businesses, while the acquisitions. The recent acquisitions two W. Wood nuclear Buffalo group, they're all performing very well.
Strong first half versus last first half.
No former and and.
They are all margin accretive.
Two of our CMS line of business and so from that standpoint.
I think thats. The key addition.
To our to our margin enhancement.
Really goes back to what we were talking about earlier two of our.
And our whole global integrated delivery profile, the not only bring the best resources, but.
And be more efficient and certain aspects of the whole delivery model and.
And and much.
The much more around the whole business acumen, and commercial acumen side now versus several years ago, and really identifying where the margin opportunities are not just going after any business for the sake of growth book.
With us on that.
Yes.
It's been on the digital thing Steve.
We're looking at it both externally and internally so for example.
And rationalizing our internal platforms on how we transact our business.
And is going to have derivative benefits, Kevin has talked about it before with regards to operating metrics.
And then externally if you have to point to the one it really is around.
And the Digitization of of our of our offering so autonomous design machine learning and looking at the Digitization of the global delivery model and and how that can provide value solution and a more efficient way so that the bid.
The.
Your next question comes from Chad Dillard with Bernstein. Your line is open.
Focus on.
Some of the private securities.
The issue that we saw.
Okay.
And Thats.
The materialize over the weekend.
And we focused on the need to reinforce the infrastructure.
And I just wanted to get the point.
And how you guys are thinking about deploying on.
And more of a wall of.
Capital focused on the security initiatives.
For the private sector, and how you're thinking about it from the market strategy.
Hey, Chad I think we missed the first part of your question and it sounds like it's around cyber, but can you just kind of.
We ask it into summer.
Yeah, sorry, let's say of that you mentioned.
Yes, so I just wanted to get a sense for how you're thinking about the opportunity of on cyber security and given that there has been.
The pack on the critical infrastructure and you add some of the weekend and and then you guys of.
Our strong heritage and the the government side and.
And just wanted to understand how you are.
Developing opportunities on the private side and go to market strategy of there.
Yes, Chad.
Great question, we're actually in the middle of the right now and can't speak too much into the details, but the events I think that you were highlighting over the weekend.
And engaged on that to kind of the portal there on leveraging it and the private sector has been our strong heritage also and the private sector with the other portfolio offerings that we have.
Specifically, it fits and the hydrocarbon space.
We do quite a bit of environmental remediation and regulatory work and a next day.
And using that as the portal in order to bring in our cyber expertise, whether it be ot or.
Has been a strong initiative and we're seeing some traction there metrics and the emergency situation, but also as the part of cyber hardening.
Of these of the company.
And then and other private sectors that we have whether it be advanced facilities specialized manufacturing all of those things we do to the government the roadmap points to our ability to leverage our long standing private sector relationships and do the same so youll see youll see more of that coming in the coming coming months of coming quarters.
Your next question comes from Sean Eastman with Keybanc capital markets. Your line is open.
Good morning team.
Just wanted to go back to <unk> consulting.
I'm not sure if I'm looking at this the right way, but.
The <unk>.
Of accretion and the month of March, but if I take that out of the accretion update for the full year kind of implies they're doing or a month or and for the remaining six months of the fiscal year. So I'm trying to understand that and then also whether the previous expectation of 52% to 57% of accretion on a full year base.
In fiscal 'twenty, two is still a good way to think about it.
So a couple of a couple of comments Sean. This is Kevin. So as you think about kind of the pace of their profitability over the course of the of their quarters. They like US we have four four of five kind of months within each quarter and though the way they handle their fixed costs.
And how they amortize that over the months versus the amount of revenue they get and that last quarter third of excuse me of that last month. The last month tends to be the strongest month and the quarter. So so effectively don't necessarily take that <unk> and and assume that all of the other way through so I think that that's that's one thing.
Moving to two to recognize so if you look and takeaway of the <unk> and and kind of go to year of remaining kind of let's call. It <unk>.
On months for the remaining six months of.
It is basically that number we think that that is.
Really strong performance consistent with what we had and our in our deal model and ultimately we're hoping given the strong start that maybe there could be some opportunity to improve on that over the balance of the year, but so far they started strong.
And Steve mentioned the comment about their their current war being really really strong and the first quarter and but some of thats going to go away over the second third and fourth calendar quarters for four of their year and they.
They have to do a really good job and on replacing that over the balance of of the year. So we feel good about the guidance, we've provided and ultimately hopefully that pipeline will continue to translate into incremental backlog, which.
Could result, and potentially being a little bit higher, but I think we're being prudent in terms of our guidance for <unk> at this point and time.
Okay.
Your next question comes from Michael.
Michael vertical research your line is open.
And good morning, everybody maybe for Bob.
And maybe to elaborate a little bit more on life science and advanced manufacturing certainly the news flow and the supply chain issues, regardless of the electronics industry has been front and there are many of investors.
Okay.
Are we getting to a point, where theres going to be and <unk>.
It's getting the best Capex in a show up and went through your P and work in the next six to 12 months and has it and even on the life science side or is it more of a global opportunity and extremely yard globally position, but we've been hearing more about use of supply chain and here more going to be driven globally by the to the vaccine side of a biologics or some of the elektron.
Can you that you are looking at the clinic here.
Yes, Michael and you kind of unpack of both sides of debt on the semiconductor side.
Net <unk> is about that or life sciences. It is global and it's probably more focused in on the U S for us right now.
The U S U S clients as well as Asian clients that are building and the U S. On.
And even seeing it and the stimulus bill with the president of items efforts in order to increase the capacity here on <unk> and global supply chains have been.
And of Rejigger, and so we do see that having a positive effect on Jacobs I don't know if it necessarily six months, it's probably got a longer tail on that and eased through the next 12 to 24 months, but that's the.
But the strong trend and its growth not only on the logic side, but it's also on memory.
Chips and some of the lowering of chips that you're hearing from some of the automotive issues that are that are bringing around online sciences debt is probably more global as it pertains to us and that is the.
The rebalancing of the product portfolio all of the potential that's been placed on vaccines specifically around the coronavirus.
And Greg development, that's happening within the oncology world and and as I said and the remarks, that's driving a real need for contract manufacturing probably.
But nothing we've seen and history.
Because of the volumes that are needed and the speed the market around the around these the therapy. So overall really really solid picture.
For at least the next couple of years.
Thank you. Your next question comes from Michael Feniger with Bank of America and your line is open.
Yes. Thanks for taking my question can you just you mentioned on the call about increasing investments in SG&A and travel.
Travel and medical I understand the investments are for the debt our growth outlook. When we think about your tentative guide for double digit EBITDA growth and 2022.
Any leverage on top of that top line or or the initiatives around the margin.
And we also get to really expand Incrementals and in 2023 and beyond just curious how we should think about that trade off of the better growth outlook and some inflationary pressures that the building as we think of the double digit and beyond for 2022 and 2023.
So couple of comments, Michael first one on on the.
On the margin front or the percent of revenue that SG&A represents where scale and a good spot relative to historical numbers. So don't think of this as being something that's going to be.
A big challenge for us, but we do find it necessary to make these investments I think the next comment I would make is that's what focused 2023 is really all about to ensure that we get improved operating leverage through through the process and system enhancements that we're talking about which will allow.
Low us.
The growth dynamic begins to accelerate which we've talked about assuming thats going to happen in 2022, and that's going to be really important for two reasons. The wanted to get the operating leverage but I think the other way to think about it is if we can get that growth and afford ourselves of the same the ability not.
The higher at the same level that we've had two and in cash growth spurts, that's going to be really really strong for us. So there. Obviously is the war for talent and to the extent that we're going to be able to supply that incremental growth with less head count having to be added to support it that's going to be a big positive for us.
Okay.
Next question comes from the Caribbean with D. A Davidson your line is open.
Nathan and for taking my question.
First off one of our thinking about <unk> consulting and I know you get the the spoken to double digit EBITDA growth and about 12% revenue.
And.
So the deal here, but.
Regarding the strategic partnership how are you thinking about that going forward does that still feels the I come and comfortable why are there more opportunities now of the partnership is intact.
Yeah.
Debt.
Theres more than we intended and.
In fact, what we've done.
Let me take the headline is the.
The the level of engagement and the collaborative pursuits that we have.
And.
Is strong.
And just to quantify it we kind of thought that we would be and debt.
Maybe 40% to 50 type of collaborative.
<unk> that would have of 12 to 18 month gestation period to them and that numbers.
Double that right now and and we're we're getting heavily engaged and we see that getting even stronger as travel restrictions come down and we're able to jointly key clients together as well so.
Very strong and and I think it's contributing to our optimism as we look forward.
Okay.
Your next question comes from Andy Wittman of Baird. Your line is open.
Oh, great. Thanks for taking my questions guys.
I had just wanted to clarify two things here one on the guidance and one on the cash flow of probably both of the questions for Kevin, but I guess, just Kevin and I just want to make sure we understand the the new guidance correctly. If I look at about 10 months of contribution of the EBITDA numbers that you previously talked about with PGA.
Equates to about $130 million again, regardless of seasonality is kind of a rough and tough number of your guidance. The EBITDA side is up roughly that amount.
Is this a way of kind of saying like hey of the organic outweigh look and still good but it's largely unchanged with most of the EBITDA raise from.
From the acquisition.
And then on on the EPS side was there anything below the line.
That allows you to take up the lower end of that EPS range, a little bit more just maybe if you could talk about that and then just on the on the free cash flow of thought just worth clarifying the.
Cash flow from operations, there was of $230 million benefit in the quarter on accrued liabilities.
Guessing that might be associated with the 860 day or the 267, and that's going to be a cash outflow next quarter, but I don't know if I was wondering if you could just clarify that benefit to this quarter's cash flow from operations. Thank you.
Yes.
So let me go through the second one first and Youre exactly right the $267 million.
Is is the dynamic where the total consideration was the reduced by the $2 67, and now that $2 67 flows through the P&L ultimately and in the third quarter. So effectively that dynamic is occurring so youre.
Youre right relative to how that works total consideration doesn't change we're still at the one 4 billion top Sterling. So so note that I think that's important to note and the second point in terms of the guide now there is look the guide is effectively we took the <unk> and we felt like the guide that we previously provided.
And was was appropriate as I mentioned earlier on my comments, while the first quarter of their year was really strong they got of giddy up and go relative to the pipeline that some fundamental book in that and then burning that and so effectively we will see how that plays out over the balance sheet and let's hope that they do that.
And the fact that they kind of continue at that rate debt was in Q1, obviously, there is going to be some upside, but but I think we're being prudent relative to that remember this this business and.
As of book and burn business. So they got to always continue to drive towards that so that's.
That's one thing so back to the base business. Yes, we had we had good performance in Q2 and effectively that was the primary driver to our increase and the base business Sky is how I would characterize it and look I think at the end of the day given the the investments that I talked about on the G&A side debt.
We're looking at the balance.
I think that that will offset any potential pending momentum that we got on the top line debt that may come to fruition pipeline is looking good relative to our I would say our state and local and government clients.
And that's positive the pipelines building on the the advanced facilities. So we'll see how that all plays out but.
And we really see this coming together more and in terms of our late fiscal 2021, which positions us better for 2022, then 2021.
And our next question comes from Andy from Citigroup. Your line is open.
Hey, Good morning, guys again, and just wanted to ask you a follow up on the CMS in the sense that you guided and revenue flat all and I think for the second half of 'twenty, one given the higher headwind from the kidney and contracts.
But you do have easier comparisons and say if I look at and Q3 versus last year and of the pandemic disruption and so are you seeing any delay and seeing that project conversion there and CMS and then if you look at backlog growth of look solid in Q2. So do you see book to Bill continues to be at or above one and the second half of 'twenty one.
And I'll just.
We've talked about for several quarters.
And.
We're exiting two low margin large contracts the hanford.
Contract.
And the classified contract that we've spoken about before.
When you exclude those two are critical and you.
And you exclude the acquisitions.
Our base business is growing I.
I think it's somewhere in the <unk>.
The 8% range and then you add on top of the obviously the benefit of of the acquisitions.
And that are continuing the ramp up with that.
And all of the year over year basis work on and are some of them weren't on our numbers. So I.
I think the we're feeling good about everything that we've talked about with regard to the.
Where we're aligned with the growth trends, even though theres a flat defense budget.
The things like space intelligence of hypersonic from several of the other items that we mentioned are actually growing nicely and so theres a lot of shift and funding even the dodd of climate change on initiatives to modernize their.
The structure and the department of Defense that has helped us.
And so overall, we're very pleased with the revenue growth, but the critical mission solutions.
And there are no further questions queued up at this conference from the call back over to management for closing remarks.
Thank you so as I close the call our thoughts of what the people are people and India, including our Jacobs colleagues and we will continue to support them and dealing with the current significant challenges and depend on mix looking to the future. We're excited about our strong performance and our solid Foundation provides jacobs as we develop our new strategy and chart on the exist.
The future together the exciting future together.
This concludes today's conference call you may now disconnect.
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