Q4 2021 Jacobs Engineering Group Inc Earnings Call
In this presentation, we will be making forward looking statements, including the anticipated timing of the impact of the recently signed U S infrastructure Bill benefits of our strategic investment in PAA consultant 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, 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.
Our pro forma comparisons current and prior periods include the results of recent acquisition and the consulting investment.
We are also providing pro forma net revenue comparisons, which also exclude the impact of the extra week in Q4 fiscal 2020.
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 Borgata.
President and Chief Financial Officer, Kevin Berryman, Steve will begin by updating the progress, we're making against our strategy and the future of ESG Jacobs.
Bob will then review our performance by line of business, Kevin will provide a more in depth discussion of our financial results followed by an update on our focused 2023, and M&A initiatives as well as a review of our balance sheet and cash flow.
Finally, Steve will provide the detail on our updated outlook along with some closing remarks, and then we'll open the call for your questions.
In the appendix of this presentation, we provided additional ESG related information, including examples of our leading ESG solutions.
With that I will now pass it over to Steve Dmitry Chair and CEO.
Thank you for joining us today to discuss our fourth quarter and fiscal year 2021 business performance of key initiatives.
Turning to slide four before I review, our results I'd like to share that we are in the final stages of completing our new strategy.
We will be hosting an investor event the week of March seven for a deep dive of the next phase of our Jacobs transformation.
Three key initiatives have emerged first we're putting in place a purpose driven roadmap rooted in our values and strong culture to maximize our next stage of growth.
Secondly, we identified and have aligned investment resources to capture three multi decade growth opportunities.
Infrastructure modernization climate response, and the Digitization of the industry.
And third we're taking a transformational approach to executing against these opportunities as we are unlocking the innovation engine at Jacobs, expanding our technology ecosystem, while accelerating our trajectory of profitable growth and durable cash flow generation.
We look forward to eliminating this strategy at our upcoming Investor event.
Now turning to our financial results I am pleased with our strong fourth quarter and fiscal year performance with net revenue, increasing 7% year over year adjusted EBITDA grew 12% during the quarter and 18% for the full year.
Backlog ended the fourth quarter up 12% year over year and up 7% on a pro forma basis.
Consulting continued to post exceptional performance with 41% revenue growth.
More importantly, PAA delivered this growth while maintaining adjusted operating profit margins of 24%.
For the full year PAA revenue surpassed $1 billion far exceeding our deal investment model.
As we look at overall Jacobs growth going forward, we now have certainty surrounding the unprecedented U S infrastructure funding with the passage of the $1 two trillion infrastructure and jobs Act last week.
And more broadly global infrastructure modernization and national security needs are accelerating as our government and commercial clients address the challenges of climate change advancement of Digitization strategies and increasing cyber threats.
On top of that our advanced facilities business is expected to show significant growth driven by the need for additional semiconductor manufacturing capacity and post pandemic life Sciences priorities.
Given the strong growth dynamics, we are introducing fiscal 2022 guidance for double digit adjusted EBITDA growth.
Looking beyond 2022, we expect our strong organic growth to result in approximately $10 per share of adjusted EPS in fiscal year 2025.
Turning to slide five as we reflect on climate change. It is globally accepted that humanity is at a critical juncture in our efforts to limit global warming.
Jacob Suen PAA participated at the recent UN climate change conference of the parties Cop 26, and Glasgow to demonstrate our commitment to reinvent tomorrow with immediate and sustained action and the transition to a net zero economy.
We stood alongside other business financial and government leaders as well as activist and students to make sure our voice was hurt.
We engaged in activities to accelerate solutions to ensure the world stays on track to meet the critical one five degrees Celsius trajectory, while preparing to adapt to the changes already locked in from climate change.
As we move to slide six given the nature of our business, it's clear that Jacobs greatest opportunity to positively address climate change comes from a sustainable and resilient solutions that we co create and deliver in partnership with our clients.
To spearhead this effort we have established a new office of global climate response at ESG to ensure that sustainability is woven into all of our solutions across markets and geographies.
We are accelerating our established partnerships with the public and private sector to advanced net zero carbon outcomes climate resilience natural and social capital as well as ESG business transformation and alignment with the United Nations Sustainable development goals.
Annually, we generate approximately $5 billion of ESG related revenue and expect to grow significantly over the next several years driven by strong capability.
Transition decarbonization climate adaptation and natural resource stewardship.
Our culture is a competitive differentiator our people have the knowledge curiosity and the trust of our clients to achieve our purpose to create a more connected sustainable world with that I'll turn the call over to Bob forgot it to provide more detail by line of business. Thank.
Thank you Steve moving on to slide seven to review critical mission solutions during the fourth quarter. Our CMS business continued its strong performance total <unk> backlog increased 16% year over year, 7% on a pro forma basis to $10 6 billion.
Driven by our strategic new wins in cyber and Intel and nuclear and remediation.
Our CMS strategy is focused on creating recurring revenue growth and margin expansion by offering technology enabled solutions aligned to critical national priorities.
Three market trends that we see operating continued strong growth include cyber commercial space and <unk> technology for National security bigger.
Beginning with cyber and intelligence, we are seeing several major emerging threats to national security first cyber attacks on mission critical infrastructure, which are even more sales and as destructive as a traditional attack.
The speed and complexity of near peer threats, which requires real time coordination between space and other domains as the severity of nation state sponsored attacks continues to increase and.
And third the adoption of it.
Intensive AI based applications are dramatically increasing the need for real time data security and integrity.
The funding for addressing the threats are partially reflected in the unclassified federal government spending on cyber in FY 'twenty two.
Which is expected to be over $20 billion up 10% from prior year. Additionally, we expect the spending within classified budgets to be up higher.
During the quarter, we were awarded a $300 million seven year contract with the National Geospatial Intelligence agency to modernize the NDA the ability to rapidly gain in share insights from cross domain imagery, including top secret data classification.
And within the classified budget were awarded a $170 million five year, new contract to develop highly secure and hardened software applications that are leveraging the latest advances in AI and machine learning.
We recently closed the black links acquisition, which provide software enabled solutions for automating the collection of data at the edge and quickly gaining insights into extremely large volumes of structured and unstructured data.
Our strong presence across the Dod and intelligence community as well as our digital Enablement Center will provide the escape velocity for black links to commercialize and scale their solutions, resulting in highly profitable recurring revenue.
We also recently announced a strategic investment and distribution agreement with Hawkeye $3, 60, which will enhance our digital intelligence suite of technologies with their RF spectrum in analytics and collection automation offering.
Moving on to space with a significant amount of capital being infused into the commercial space companies. The affordability of space tourism is becoming a reality as well as other emerging opportunities such as acceleration of satellite based technologies and the need to understand the impact of space debris.
Today, we support commercial space companies with manufacturing process optimization system, and subsystem prototype work and test facility studies and projects.
As commercial space matures, we are positioning our solutions for these emerging opportunities.
During the quarter, we were notified of a significant increase to the ceiling of our contracted Marshall space Flight Center that also supports artemus nsls.
U S base for selected Jacobs for a five year contract to provide software and system support for its Patriot Excalibur system, which coordinates the scheduling training and status of U S based sports aircrafts.
Finally.
From clients like AT&T, Verizon Directv T mobile and dish network extension.
In addition, the new bipartisan infrastructure Bill includes $2 5 billion for <unk>.
Rollout at U S military bases and the Dod is investing heavily in <unk> technology and support of national priorities.
In summary, we continue to see strong demand.
For our solutions in 2022.
The CMS sales pipeline remains.
He is robust with the next 18 months qualified new business opportunities remaining above $30 billion.
Which includes $10 billion in source selection with an increasing margin profile.
Now on to slide eight I'll discuss our people in place the solutions business.
We finished the year with strong financial performance with a year over year backlog growth of 7% and annual net revenue growth.
I will discuss our results across the major themes of climate response pandemic solutions, Inc.
Infrastructure modernization and Digitization.
Starting with climate response as.
As the top ranked global environmental consulting firm Jacobs, who is leading the efforts to mitigate the impacts of climate emergency.
Advanced transition to a clean energy net zero economy and rapidly respond to natural disasters. This quarter Jacobs has awarded a multi year contract by the U S Army engineer Research and development center to integrate nature based solutions that grow climate resilience across defense Department facilities.
Jacobs has recently been selected to re imagine.
New York Riker's Island, taking the site through a full community revitalization with an equitable resilient multi use approach incorporating our innovative social value analysis.
As the first phase in a 20 year program across the entire city Jacobs plan, we will consolidate four aging wastewater facilities into a state of the art 1 billion gallon per day water resource recovery facility that includes a renewable energy hub in.
In the transportation market, our specialties have pioneered advanced charging technology that enables clients to transition to Decarbonize operation.
A key focus of economic stimulus packages.
Our transit team continues to win contracts that support clients with asset operational and technology shifts towards Green fleets. For example, we recently won.
And commenced a hydrogen rail facility study with Caltrans.
And our long term work with Brisbane Metro continues to showcase cutting edge Green transit solution.
With exponential growth forecasted in the electric vehicle market Jacobs has become the go to firm to support leading EV battery and vehicle manufacturing companies globally.
We doubled our EV bookings Microgrid labs, a provider of commercial fleet electrification.
In infrastructure solutions, including their proprietary SaaS platform.
The Green economy transition is driving increased investments in hydrogen and renewables and our team is delivering diverse solutions for a range of clients from our participation in the Bakken energy hub sorts them in the U K to energy transmission plans for a potential offshore wind development in the U S.
And additional contracts with <unk> renewables, Abilene solar farm and the Swan Bank waste to energy facility in Australia.
Moving on to the theme of pandemic response with ongoing impact to the supply chain health systems and semiconductor chip shortage Jacobs is gaining momentum with multiyear backlog across sectors with new wins in biopharma such as the next phase of a new $2 billion biotechnology facility.
Jacobs has successfully won several health opportunities in the U S Europe, and Australia as they rethink pandemic response operations.
The most significant aspect of the global supply chain disruption in both semiconductor shortages.
As the world's leading tech technical services provider to the semiconductor industry. We are poised for significant growth in the electronics sector. This year and expect our electronics business to further accelerate over the next several years in fact Jacobs engineering several major investments for large chip manufacturers.
<unk> life projects like Intel's, New Arizona, Fab, which is which Jacobs is designing are scheduled to be fully on manufacturer Intel's most advanced audio technology and represent the largest private investment in Arizona history.
Interconnected with climate response pandemic solutions infrastructure modernization and digital transformation are leading to long term from transfer transform it of growth with significant wins across all markets.
Globally, we are continuing to win pioneering transportation projects across all sectors in mode.
And highways, we were recently selected for transport for New South Wales, along with consortium partners to undertake the $1 2 billion wearing a freeway upgrade project to accommodate a third road crossings Sydney Harbour and.
Imports in Maritime we wanted to sustainable ports design and program management for King.
Dual port in demand in Saudi Arabia.
In an air Transportation, we were selected as the integrated program manager for the solidarity transport hub in Poland, a Greenfield airport and more multimodal, including a high speed rail network with an initial planned capacity of 45 million passengers.
The program is of national significance.
It will become the benchmark for zero carbon delivery and be a sustainable transportation platform for eastern Europe's future travel demand.
Our longstanding relationships in existing framework agreements supported major wins with U S state departments of transportation and transport for London, emphasizing our market leading position for solving our clients' most complex transportation challenges.
In summary, we see continued investment across the <unk> client sectors.
We are already experiencing exciting global wins in the first quarter of our new fiscal year, indicating that we are well positioned to develop and deliver unmatched value and capability to our clients as investment momentum builds from the U S infrastructure Act and other economic stimulus.
Turning to consulting on slide nine as Steve mentioned <unk> continues to exceed expectations.
Supported by an extension of Consultative service to Uk's National Health service Tas efforts.
Efforts have extended into longer term vaccine deployment testing trays and future pandemic preparedness planning.
Additionally, <unk> growth is being accentuated by recent digital solution wins for confidential U S. Biopharmaceutical clients in the areas of cell and gene therapy, and next generation patient care model.
We continue to progress our synergy growth and long term collaboration with.
The Jacobs team were recently awarded a biotechnology manufacturing plant expansion to provide an end to end lifecycle solutions, incorporating critical digitize clinical trial information into the process design and facility layout.
Additionally, we continue to receive joint strategic consultancy awards.
In the transportation sector globally, I look forward to our continued success with collaborative and integrated offerings to our customers.
At Cop 26, PAA displayed deep ESG expertise and successfully unveiled its innovative EV battery charging technology charge point.
Further <unk> gained and.
Ta received industry recognition for their jointly developed COVID-19 awareness and situational intelligence tool with Unilever.
The business exceeded talent expectation talent expansion targets for the year and is well positioned for continued out year growth I will now turn it over to Kevin.
Thank you Bob and good day to all listening on the call today, turning to slide 10 for a financial overview of fourth quarter results, followed by our fiscal year review.
As we have previously communicated our fiscal fourth quarter 2020 had 14 weeks compared to our normal 13 week quarters, which impacted our quarter year over year growth rate by 7% and our full year growth by 2%.
Fourth quarter gross revenue increased 2% year over year, and net revenue was up 7%, including the pro forma impact of all acquisition and adjusting for the year ago extra week net revenue was up 6% for the quarter.
Adjusted gross margin in the quarter as a percentage of net revenue was 27, 2% up 370 basis points year over year.
Consistent with last year year over year increase in gross margin was driven by a favorable revenue mix and both people and places CMS as well as the benefit from <unk> consulting.
Consulting, which has a strong accretive gross margin profile of nearly 50%.
We will continue to focus on increasing gross margins as we bring to market higher value solutions for our clients.
Adjusted G&A as a percentage of net revenue was up year over year to 17%.
Within G&A during the quarter, we incurred an approximate $20 million or <unk> 12 per share charge to a legal settlement cost, which burdened both GAAP and our adjusted results.
This charge was related to a CH <unk> legacy matter surrounding a previously completed product advisory arrangement.
GAAP operating profit was 252 million and was mainly impacted by $46 million of amortization from acquired intangibles.
Adjusted operating profit was $303 million up 17%.
Our adjusted operating profit to net revenue was 10% up 85 basis points year over year on a reported basis.
GAAP EPS from continuing operations rounded to 34 per share and included.
45, <unk>, primarily related to the UK statutory tax rate changes and other tax related items.
<unk> 40 related to the final mark to market of the world stock and related FX impact.
<unk> 23.
Net impact related to amortization of acquired intangibles Ken.
<unk> <unk> of transaction and other related costs and <unk> from focused 2023 and other restructuring costs.
Excluding these items fourth quarter, adjusted EPS was $1 58, including the <unk> burden from the previously discussed legal Marvin.
During the quarter <unk> continued strong performance contributing 23 cents of accretion net of incremental interest.
Q4, adjusted EBITDA was $310 million and was up 12% year over year, representing 10% of net revenue.
Finally, turning to our bookings during the quarter, our revenue book to Bill ratio for Q4 positioning us well for the developing growth momentum we expect over the course of fiscal year 2022.
Now turning to our regions.
Recap of our full year fiscal year 2021 on slide 11.
Gross revenue increased 4% and net revenue was up 7%.
Including the pro forma impact of all acquisition and adjusting for the extra week in the year ago period net revenue was up 3% for the full year.
Continue to enhance our portfolio to higher value solutions, which is evident as gross margin as a percentage of net revenue was 26% for the year up 235 basis points year over year.
We expect mid single digit reported revenue growth in the first quarter of fiscal 2022 with an acceleration in the second half of our fiscal year driven by U S infrastructure spending and the ramp up of New awards in our CMS business.
GAAP operating profit was $688 million was mainly impacted by the $261 million of purchase price consideration for the consulting investment and $150 million of amortization of acquired intangibles.
Adjusted operating profit was $1 188 billion up 23% and represented 10% of net revenues.
Adjusted EBITDA of one to four 4 billion was up 18% year over year to 10, 6% of net revenue and just above the midpoint of our increased fiscal 2021 outlook.
GAAP EPS was $3 12 and.
And was impacted by a $1 96 from the PAA consulting purchase price consideration and valuation allocation.
77, <unk> of amortization of acquired intangibles.
<unk> seven <unk> related to the UK statutory rate change and other UK related tax items.
35 <unk>.
Net charges related to focus 2023 deal costs and restructuring.
And all of this being partially offset by a net positive <unk> 48 from.
From the final sale.
Worley and see three AI equity Stakes.
Excluding all of these items adjusted EPS was $6 29.
Also above the midpoint of our previously increased outlook.
Of the 629 P. Eight consulting contributed 48.
To that figure.
Before turning to LLB performance I would like to highlight that we are currently working on a further optimization of our real estate footprint.
As a result, while we are still reviewing key components of the plan, we expect the potential land noncash impairment charge ranging from $60 million to $70 million in the first half of fiscal 'twenty two.
Our new footprint will facilitate virtual work options that leverage new technology, and more collaborative workspaces and our offices.
Regarding our outlook the performance, let's turn to slide 12.
Starting with CMS Q4, 2021 revenue was down 5% year over year.
When adjusting for the extra week in Q4, 2020 was relatively flat on a pro forma basis.
Let me remind you of the transitional dynamic impacting CMS revenue growth related to the transitioning off of two lower margin contracts. This represented a $175 million year over year revenue impact during the quarter.
When excluding the contracts on up and adjusting for the extra week, a year ago pro forma cm. Thus revenue was up double digits year over year.
In 2020 to Q1, we expect to we continue to expect an approximate $210 million year over year impact from these two contract rollout Rollouts and this will phase out in Q2.
As a result, we expected report we expect reported revenue in the first quarter 2022 to be down slightly on a year over year basis with underlying growth being much stronger.
We expect the CMS growth trajectory to improve over the year, resulting in a reported mid to high single digit full year, 2022% growth rate.
Q4, CMS operating profit was $115 million up 7%.
Operating profit margin was strong up 100 basis points year over year to nine 1%.
For the full year CMS operating profit was $447 million up 20% with eight eight operating profit margin the.
The improvement for the quarter and the year and operating margin was driven by our strategy to focus on higher margin opportunities across the business.
We expect operating profit margin to remain in the mid 8% range through fiscal 2022.
Moving to people in places Q4, net revenue was flat year over year when factoring in the impact from the extra week <unk> with net revenue of approximately 8% year over year from Q4 and was up 2% through the fiscal year 2021.
In Q4 total NPS operating profit was down year over year, driven by the $20 million.
Legal settlement cost I described earlier.
Adding back that legal settlement costs operating profit growth would have been up 8% in Q4.
For the fiscal year operating profit was up 5% or 8%, excluding the legal settlement.
In terms of <unk> performance PAA contributed $273 million in revenue and $66 million in operating profit for the quarter.
Q4 revenue grew 41% and 32% year over year in Sterling.
Q4, adjusted operating profit margin was 24% in line with our expectations.
On a full year basis, Pega consulting grew revenue, 33% 20.
24% in Sterling with adjusted operating profit margin of 23%.
Our non allocated corporate costs were $55 million for the quarter and $190 million for the full year.
These costs were up year over year and in line with our expectation.
This increase was driven primarily by the expected increases in medical costs and investments related to our new ways of working.
In fiscal 2022, we expect non allocated corporate costs to be in the range of $200 million to $250 million given continued increases in medical costs and other investments.
These corporate costs as well as focused 2023 CMS Pmt's investments will proceed are expected acceleration in revenue growth and profit later in 2022.
In summary, these increased investments ahead of our growth will likely result in our Q1 profitability and EPS being relatively flat versus our Q4 results with Q2, then showing improvement and further acceleration occurring in the second half of the year.
Turning to slide 13 to discuss our cash flow and balance sheet. During the fourth quarter, we generated $176 million in reported free cash flow and DSO again showed strong improvement.
The quarters cash flow included $22 million of cash related to restructuring and other items was $16 million related to a real estate lease termination as we take advantage of virtual working for.
For the year free cash flow was $633 million, which was mainly impacted by the $261 million of <unk> purchase price consideration treated as post closing post closing compensation that we discussed last quarter.
Regardless, our reported free cash flow represented 133% conversion against our reported net income.
For the whole year 2022, we will again target and adjusted free cash flow conversion of at or above one times.
As a result of our strong cash flow, we ended the quarter with cash of $1 billion and a gross debt of $2 9 billion, resulting in $1 9 billion of net debt.
Our pro forma net debt to adjusted the expected 2022, EBITDA is approximately one three times a clear indication of the strength of our balance sheet.
During the quarter, we monetized our quarterly stock for $370 million.
And executed a $250 million accelerated share repurchase program, we will continue to monitor for any material dislocation in our share price given the strong long term secular growth opportunities for our company and finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly <unk>.
Dividend, which was increased 11% earlier this year to <unk> 21 per share.
Now I'll turn it back over to <unk>.
So Steve Thanks, Kevin.
We are introducing our fiscal 2022 outlook for adjusted EBITDA to be in a range of $1 37 to 145 billion.
Which at the midpoint represents double digit growth.
Our adjusted earnings per share outlook for fiscal 2022 is in the range of 685 to 745.
We expect a multi year benefit from the U S infrastructure investment and jobs Act to support our growth for the second half of fiscal 2022.
As we look beyond this year, we see substantial opportunities for sustained organic growth driven by infrastructure modernization climate response of the digital transformation.
We anticipate approximately $10 of adjusted EPS in fiscal 2025 at our in person Investor March call further expound on our long term strategy of financial model Operator, we'll now open the call for questions.
And as a reminder to ask a question you may need to press Star then the number one on your telephone keypad. Once again that is star one to ask a question and please limit your questions to one and you may get back into queue for further questions.
And your first question comes from the line of JV <unk> of Goldman Sachs.
Yes, hi, good morning, everyone.
Good morning.
Steve.
Built the portfolio has clearly been our focus to.
Bring together.
Green businesses.
Because of the idiosyncratic ESG, scoring unfortunately, you folks aren't getting much credit for that ESG funds are 80% underweight Jacobs, how does that impact the way you folks view.
<unk> portfolio of portions of the CMS portfolio going forward.
Well.
Look there are some investors that.
Our holding back because of some of our work, which is really a very small portion probably less than 2% of our overall revenue that.
There is really focused around what I would call critical national security or for the U S.
Government.
We are reaching out to those investors to try to explain that we're not involved in.
Things like the manufacturing of nuclear weapons or whatever is holding them back, but I really think that as people understand.
Sort of the fact that we're probably the largest public company delivering ESG climate change solutions out there.
As they see that ramping up and get more clarity.
We are going to attract a lot more.
Investors that want to be part of the ESG story.
And Steve just a clarification is the divestiture of the 2% on the table at all.
Are you thinking about that.
Within the portfolio context.
But again, it's so it's so small that.
We haven't really thought about that but like anything else stereo over the next few years, you'll hear a little more about the start of the strategy, we're going to continue to.
Look at our portfolio and make sure we're aligned with all of the right growth dynamics.
And I think we've proven out up to now we will continue to.
So transform our portfolio in the right direction.
Okay. Thanks.
Okay.
And your next question comes from the line of Josh Sullivan of the benchmark company.
Hey, good morning.
Good morning.
Was curious if you could just give us some <unk>.
Perspective, just on global Capex expectations into 'twenty. Two you guys have such a large global portfolio and touch so many different markets from.
From your view what are customers generally planning for Capex heading into 'twenty two as they look to move out of the pandemic.
So look I think there's a couple of things that we need to point out specifically.
The customers that that Bob highlighted in the end is in his comments really about our advanced facilities.
Clearly very very very strong there.
And the semiconductor shortages is acute and we have many of our clients that are looking to build significant capacities over the next several several years I do think our private clients. Ultimately are now all thinking more robustly about spend as it relates to <unk>.
Rental solutions and thinking about how they can transform their their footprints in a way that are facilitating our ability to become a more sustainable global economy, and I think that that's clear and then I would augment that is with our government services side exactly the same comments. So I think that Capex is.
Is is very strong in that regard philosophies have I'd call out is our environmental business and energy transition business.
Is touching the oil and gas space as well, where we are working with them to ultimately.
Provide incremental capability sets that that will help them and then becoming a more viable sustainable.
A contributor to the to the global climate.
Actions being taken around the globe, So I think you're right.
They are worldwide.
Focused across a wide swath and actually a lot of them given the work. We do are very very strongly focused on these areas, which we think will encourage incremental capex longer term.
Your next question comes from the line of Jamie Cook with Credit Suisse.
Hi, good morning.
I guess.
First question the EPS target that you put out there for 2025 to $10.
I support.
Just like good growth there Kevin can you just talk about what are the costs Q.
Ah Kee the $10 in terms of restructuring our Oracle.
And then on the $10 can you provide some parameters.
Sort of topline margin do we need to utilize the balance sheet in terms of M&A or share repurchase too to help achieve 10 box.
So I guess, that's my first question I'll turn it back.
Yeah, Jamie Thanks, Thanks for that the $10 is really an organic number that we're alluding to and really doesn't involve capital deployment in any material fashion and so so I think clearly there could be potential upside to those numbers, but we're working through all of that with our strategy.
<unk>, which we will talk more about in March as Steve outlined so.
Some of your questions a little premature as we're finalizing all of that work for margins and one that rest assured that I think you can pretty much assume that the margin is not going down as it relates to what we're trying to get accomplished from an overall overall perspective as it relates to cost to get there, but we.
Think that most of the things that we're going to be able to do are going to be embedded in our normal course operational expenditures.
We did I did highlight the fact that we're working on a further optimization of our real estate footprint.
<unk> equity.
A potential impairment of 60 to 70, maybe maybe up to 70 in the first half maybe even in the first quarter and and then if I think about other things is that can be significant monies on top of that maybe 25% to 50 in 2022, and then 'twenty three and beyond TBD I would say and so.
We're really thinking that we like the portfolio and other than things that would occur relative to integration of acquisitions and deal costs and those kinds of things.
Probably somewhat de Minimis in terms of.
Restructuring costs outside of those.
And our next question comes from the line of Steven Fisher of UBS.
Great. Thanks, Good morning, one of the things I think the business and the stock really need this kind of a.
Breakout to the upside on the <unk> organic revenue growth and it seems like we started to see that this quarter, but I think Kevin you said, maybe 8% MSR growth.
Which is I think up from about one 4% for the last couple of quarters. So maybe just more qualitatively to what extent are you really seeing a breakout on that <unk> growth now or what's the organic assumption you have for the rest of fiscal 'twenty two because I think you gave us some color on Q1.
And what have you factored in there exactly four for stimulus as part of that growth. Thank you.
So let me let me take it.
And then Bob you can add any commentary you'd like to look we're in this period of time in our Q1, and Q2, primarily where the numbers arent really going to be impacted yet by the stimulus. We believe thats more a Q3 event, maybe we get a little bit in Q2, but likely not in there.
It's more Q3 and an acceleration into Q4 that we would expect the benefits associated with with the with.
With the stimulus and so we're excited about that having said all of that I do believe our incremental growth going forward in Q1, and Q2 is going to be more solid than what we've been seeing over the last few quarters.
So we're starting to see some of that benefit of the advanced facilities.
Certainly not as much in Q1, but in Q2, and so I do think we'll see some some good solid growth in Q1 and Q2 on people in places and then our accelerated again hopefully into the Q3 and Q4 numbers. So we feel good about the developing momentum I did make the comment that we're investing in front of that growth.
Two so we're not going to see a lot of incremental margin associated with that because we are investing heavily.
Yeah, what I'd add to that Kevin is that.
What's giving us optimism around berries, our bookings if we look at.
The way, we started out the year from a bookings perspective, it's been solid.
What the other part of that is that.
We have to we have to.
Think about the project lifecycle. So these bookings are starting off with consultative.
Services better on the front end of some of these programs and projects and then they go through the subsequent phases, where our services, we'll escalate. So overall very very good leading indicators.
Port or Kevin is back.
And your next question comes from the line of Andy Kaplowitz of Citigroup.
Hey, good morning, guys.
Good morning, good morning.
Could you give us a little more color into what's going on in CMS I think Kevin you said that CMS margin would stay in the mid 8% range in FY 'twenty, two but the margin annuity risen to over 9% in the last quarter. Despite still significant contribution from the lower margin contract. That's flowing through is there something else now impacting you in March.
And in FY 'twenty, two and then on the revenue side.
Is backlog up double digits seem to suggest that you can deliver the mid to high single digit guidance that you have but you need to see an acceleration of awards handler revenue burn, but <unk> been versus what <unk> been recording in Q4 to get there.
So CMS specifically.
As you May recall 234 years ago.
When we did have these lower margin large contracts we were in the five to six.
5% to 6%.
Operating profit margin.
And we've now built over over time that that mid <unk> number which is great and it's consistent with our strategy as we look about 2022, specifically will have ramp on some other lower margin business associated with Idaho and other nuclear remediation work.
But thats not going to dampen our margin is just going to hold it flat for 2022, and then in 'twenty three and beyond we start to see incremental margin above that as well. So it's a continuation of a long term margin play, it's just ebbs and flows of when the big contracts command and the margins associated with them. So 22 is a little limited in terms of incremental.
Margin and then you start to build again in 'twenty three and beyond.
Okay.
So for me.
Operator, there is there is some background noise I don't know if its sheer size.
After your opening it up for questions hopefully to double check that.
Yes, Sir and your next question comes from the line of Chad Dillard.
Hi, good morning, guys.
So just wanted to dig into <unk>. It seems like you have.
So many opportunities to have climate change to make it that Paris infrastructure.
How are you guys tightening your back.
Can you just talk about the relative ranking besides the opportunity and then just thinking through where do they stack up in terms of competitive dynamics.
Exactly.
Chad can you can you repeat the front the front part of that question again.
Broken.
Yes sure.
So I was just saying in PPS. It seems like you have so many different opportunities ahead from climate change to semi and <unk>.
Restructure designation.
I just wanted to understand just how you guys are citing a back across all of those opportunities.
If you could talk about the relative rank in terms of the size and opportunity and your relative competitive positioning.
Sure.
So as far as prioritization goes I would say that kind of if you were to segregate into two buckets one around climate change in the second round all of those things that are creating the supply chain disruption. Those are the ones that are coming to priority right now I'd say on the climate change piece and this is where the portfolio optimization is really helping us.
We're honing in on.
Those areas that we have a down market leadership at long term client relationships and where we can we can deliver immediate value.
And those are those are squarely around transportation water resiliency and and all of the environmental impacts that better affiliated with climate change.
So those client relationships that we've had have been pretty robust for several years and are supporting those opportunity around advanced facilities. This is this is a multi decade type of leadership approach that we've had specifically in semi.
But also in life Sciences.
Thats been our legacy business of ours for forever. So we.
We're seeing those opportunities again not searching for them. These are long term client relationships that we've had and we're kind of in the capital planning for those clients and so.
It's really gaining share with long term clients.
Setting the priorities.
And your next question comes from the line of Sean Eastman of Keybanc capital markets.
Hi, gentlemen.
So I'm just looking at the 2025 target I think that implies around 12% earnings growth CAGR over the next couple of years it.
It seems like at the midpoint of the fiscal 'twenty, two guidance youre going to outpace that and I just wanted to reconcile that considering the.
The way you described the cadence of fiscal 'twenty two earnings it seems like the exit velocity is going to be quite strong and that we should actually see accelerating earnings growth out of fiscal 'twenty. Two so I hope that question makes sense just wanted to talk through the mechanics, there maybe there's some conservatism.
Any commentary there would be helpful.
Look I think.
What we do when we put forth are are are indications of what we expect our business to do we think those are numbers that are obviously going to be able to be executed against and so yes. There is a lot of moving pieces and youre right we will.
Hopefully exit this year with a greater velocity than what we entered.
Clearly and so we'll see how that plays out but I think ultimately what's clear is that we've got whether it's 12% or 11% or 13% or four whatever it ends up being we're going to have a long haul.
Good solid margin enhancing growth in front of us.
Okay.
And your next question comes from the line of Michael Dudas of vertical research.
Hey, good morning, everybody.
Maybe Bob you can share a little bit of your thoughts on your recent acquisitions and other opportunities in the pipeline from CMS certainly increasing your cyber Intel higher margin business, but also on the PPS side I know you didn't put things out into your got long term guide on an acquisition, but how do you see that in there.
The company set to achieve these targets with the with the.
Employees and professionals that you have.
And as there are going to be some interesting opportunities to leverage some of that work as you get more collaborative to drive even further growth.
The client base.
Michael Let me, let me unpack that here a bit first on the on the acquisition piece.
We're excited now if you look at the last two that we did within CMS.
About a year ago with the Buffalo group and most recently with Black link.
These are right down the right.
The bullseye of where we're going in cyber and intelligence.
We're bringing in whether it be client diversification with Buffalo group and higher and advisory services.
And that has played out extremely well if you look at some of the we have code names for them, but some of the wins that we've had over the course of the last nine months that has played out perfectly.
And then black links.
It is getting us into those software solutions, coupled with advisory services on automation and collection of data with processing engines that are working at the at the edge all around security and so we're excited about both of those and coupled with long term advisory platforms that we've had in the AG.
<unk> that were already in.
That's going to service extremely well with regards to prospects in the <unk> World.
I've targeted more towards it's not too dissimilar than our cyber and intelligence prospects around technology.
We've got a strong position with our domain knowledge for several decades.
Within those end markets that we're talking about coupled with now technology enabled solutions is really what our acquisition strategy has been as accelerants to our to our strategy. So.
We're looking at the pipeline right now it looks really good and more to follow on that front as Steve mentioned at the Investor Day.
Employee base is something that we are acutely focused in on right. Now this is where <unk> really really helps us in that we are in multiple locations around the world with with high end talent that are delivering.
Global talent utilize to deliver local solutions.
And so our ability to scale you hear about some of the labor shortages that and labor topics that are that we're faced with in the western hemisphere. We're scaling in multiple locations for jobs that are all around the world and that's that's been a big piece of ours, and then that last part.
With regards to <unk>.
Mentioned, a couple of the collaborative opportunities, but where are where <unk> fits in.
In a lot of the same clients that we have in that C suite as well as in kind of the front end of technology as our clients are developing.
New innovative ways of delivering the global global topics.
Seeing the collaboration accelerate.
And hopefully.
Hopefully, we'll have some more wins to talk about the depo win in the UK last quarter.
This win came disclosed client in the biotechnology world.
As just shown that.
Having the ability to offer served to offer expertise.
Entirety of the of the lifecycle of a project a program or an issue is powerful and is one that is picking up some significant momentum. So we're excited on all fronts.
Yeah.
And your next question comes from the line of Gautam Khanna of Cowen.
Okay.
Good morning, guys I wanted to follow up on the outstanding bids I think you said $10 billion in source selection.
And just get a sense for.
What is sort of the phasing in terms of the adjudication timeline are you expecting a strong December.
Quarter in terms of bookings.
If you could talk to us about the continuing resolution and how that might.
Same as kind of the range of outcomes with CMS and Relatedly Recompete concentration over the next fiscal year.
Much of the business basis off to read that thank you.
Yes.
Look where we're pretty positive that the sole continuing resolution defense budgets all that well.
Play out over the next several months to get concluded.
Okay.
We're expecting a increase in the Dod budget, and we're pretty positive about space and cyber.
And the growth rates, especially in the classified work wear.
We are significantly aligned to.
And the hypersonic some.
Telecom.
And we feel very well positioned at places like naphtha and how the budgets played out there.
So really it comes down to the whole timing question that you asked there there has been some delay very modest delay.
As the government clients are waiting just to see the <unk> combo.
This budget and so as soon as that gets finalized we see a few of these near term prospects that we've been to two two.
To unleash whether that happens in December or the.
Second quarter, I think we're talking about sort of that kind of timing.
No.
That's why we're very optimistic about the upward trend of CMS revenue growth.
As we move through 2022.
Just a follow up on your question on <unk>.
There is at the end of the year a couple.
Larger re bids that we're going to have to be thinking through but as we all know rebid risk and.
Abetted into the 2022 year.
The substance.
And your next question comes from the line of Michael Feniger with Bank of America.
Hey, guys. Thanks for taking my question, Kevin just so we're not missing anything here to follow up on Sean's question. You guys. Just did the high end of your EPS range in 2021, and the midpoint is 14% growth. So just conceptually with infrastructure ramping up the CMS.
Incremental is really taking off in 2023.
Anything we should be aware of big picture of why earnings growth would not accelerate.
Would step down to 2025 is there as you were kind of alluding to that Recompete risk is it just higher level of SG&A or where the margins are just kind of help us understand I know youll flesh out more at the Investor day, when we see that $10 EPS and the earnings growth you guys are getting this year, which is backend loaded.
It just the bridge there just what are the things that would hold back that earnings growth.
Well look.
In 2025 here Thats four years from now.
We're still in the midst of the pandemic and I think it's prudent to put.
Some variability about what the world looks like four years from now so I think the most powerful message about the $10 as we're putting that number out there even if.
Economic situation is not a good place in 2000 2025.
Look I think it's prudent prudent to put out numbers that that are appropriate and we feel like we can get after and.
And by the way, it's four years from now so a lot can happen in four years.
Your final question comes from the line of Andy Kaplowitz of Citigroup.
Hey, guys. Good morning, again, I just wanted to follow up on VA consulting <unk> recorded almost 50 centers accretion in 'twenty one.
That's essentially double your original guide when you announced the deal I know you probably don't want to tell us what's embedded exactly in FY 'twenty. Two we know what your original guide was there, but maybe you can give us color.
What has at PAA exceeded your expectations by such a wide amount and what does that mean for Jacobs moving forward.
So let's do a couple a couple of things and maybe I'll turn it over to Bob for any additional color.
I think Andy the first thing is that the the.
The acceleration in their growth, which is really the driver to what's been happening in 2022, a lot of that a chunk of it is in and related to that specific work Bob was alluding to on.
On pandemic related and the work that they've been doing for the U K government really really strong really strong performance now there as we look into 2022 theyre going to be growing but it's not going to be at that same rate that we've been talking about they've got to figure out a way to recover and and get new busy.
<unk> to replace some of this business that's going to go away. So it's not a slam dunk as it relates to what's going to be happening in 2022 by any stretch so.
Having said all of that.
What they've done in 'twenty to 'twenty, one has been extraordinarily strong good margins and they've been executing well and and actually the exciting thing is the collaboration between Ta and and people in places and Tms as is very strong and we're seeing that develop into longer term growth.
<unk> for May BPA, but certainly Jacobs as well.
Maybe two areas that we knew about we probably didnt.
We give credit to the depth of the two things are Mclaughlin mentioned, one is the applied technology.
Ability that they have.
<unk> consulting firms that have kind of a.
A roadmap for a recipe or.
Our methodologies are utilized for different different.
<unk> and then proposing solutions.
It is applied applied technology to solve unique tissue and so that that has really paid dividends, especially with the new work, Kevin and I.
About the UK work, but this is now what we're seeing in the U S. And then the second is around the depth of relationship.
The depth of relationships that <unk> has.
And where to connect in the client organization and really hone that relationship through performance has been extremely impressive and as again, we knew about it it's exceeded our expectation.
And there are no further questions.
Okay. Thank you very much look forward to talking to you again next quarter.
And this concludes today's conference call. Thank you for participating you may now disconnect.
[music].