Q1 2023 Jacobs Solutions Inc Earnings Call

Across the entire organization and sectors we serve.

Speaker 1: consulting and advisory across the entire organization and sectors we serve.

Speaker 2: While we are in a leading position to capitalize on the mega trends and structural tailwinds, our relentless focus on long-term client relationships is driving sustained growth. Third, we will deliver long-term returns for our shareholders by driving further operational discipline across the business to accelerate cash flow generation with disciplined capital allocation. From a financial standpoint, our underlying business remains strong. Our People & Places Solutions line of business delivered strong performance with net revenue up 8% year-over-year.

Speaker 3: 13% in cost of currency operating profit of 20% year over year, 28% in cost of currency. And we continue to gain market share in both the global critical infrastructure and advanced facility sectors.

Speaker 4: In CMS, we continue to deliver a strong base of recurring revenue with a growing new business pipeline. We anticipate strong tailwinds and backlog growth with CMS moving forward.

Speaker 5: PA Consulting experienced lower than expected utilization, but we continue to experience double digit, top line, and backlog growth.

Speaker 6: We are seeing strong demand with robust opportunities and PA sales pipeline. The number of recent wins, underscores, our strategy and demonstrates our move of the value chain with our clients to higher margin consulting and advisory services.

Speaker 7: Across the company, we see exciting opportunities ahead of us, specifically in the areas of climate response and especially in energy transition. Our ability to deliver data-enabled solutions is enhancing our clients' resilience and sustainability.

Speaker 8: The establishment of divergent solutions enables J.C. to scale and deploy our domain-centric data platforms across multiple sectors and geographies.

Speaker 9: Further enabling us to deliver solutions to technically complex challenges.

Speaker 10: I will talk to these key themes further in the presentation.

Speaker 11: Turning to slide five.

Speaker 12: We remain steadfastly committed to our cultural transformation to create an inspirational journey for all.

Speaker 13: In 2015, we started our culture journey with the empowerment and accountability.

Speaker 14: incorporating inclusion, innovation, and inspiration into the very fabric of the company.

Speaker 15: I believe our emphasis on inclusion and diversity has been a critically important contributor to our success and provide a key differentiator in attracting and retaining the world's best talent as well as driving innovation for our client.

Speaker 16: A key benefit of being a company with a broad range of capabilities is our ability to provide multiple career and development opportunities.

Speaker 17: what we refer to as agile careers.

Speaker 18: When we learn and grow together, we activate empowerment and accountability, inclusion and diversity, and innovation. We lead, embrace, and anticipate change.

Speaker 19: To further demonstrate our commitment to inclusion and diversity, we have included a KPI in the refinancing of our credit facilities linked to female leadership representation. John will discuss further details in his remarks.

Speaker 20: Turning to slide six, our commitment to sustainability is core to our strategy and our significant performance is being recognized by many of the top ESG accredited institutions.

Speaker 21: Over the past five years, we have advanced to an industry-leading status.

Speaker 22: This culminated in our inclusion in the 2022 Dow Jones Sustainability World Index, ranking Jacobs among the world's leading companies with outstanding sustainability performance.

Speaker 23: While the scores themselves are impressive, what's even more significant is the public recognition of Jacob's positive impact on our clients, communities, and the world.

Speaker 24: As we turn to slide seven, we will focus on our key, our four key growth sectors of critical infrastructure, energy and environment, advanced facilities and national security.

Speaker 25: These growth sectors are driven by the following catalysts, federal government stimulus from the Infrastructure Investment Jobs Act, the Inflation Reduction Act, and the CHIPS Act.

Speaker 26: supply chain and technology investments in advanced facilities, and the emergence of increased global threats.

Speaker 27: Let's examine the legislative drivers first and our positioning in the market.

Speaker 28: I am proud that Jacobs has helped our clients secure over $1 billion in IIJA competitive grants since its passing, and the bill is only in its early stages.

Speaker 29: We supported our clients in securing over $350 million in IIJ competitive grant funding just last quarter, the largest quarter since the passing of the Act.

Speaker 30: This includes the largest grant awarded nationwide for subway station accessibility in New York City.

Speaker 31: a major port infrastructure development grant to a long-term client in Alaska,

Speaker 32: the first phase award of one of the largest water treatment plants in the US, and the design of a sustainable battery recycling facility.

With another four years of locked in and robust funding, the U.S. infrastructure climate is strong.

The coming months will also bring the first dollars of two other areas of focus for Jacobs.

The Inflation Reduction Act with $369 billion to fund the Green Economy Transition and the CHIPSEC for semiconductor investment, all in core Jacob Sector's.

Before the end of the calendar year, we fully expect to have all three bills firing at full strength and funding critical projects sponsored by local governments, the federal government, and the semiconductor industry.

This overlap of spending will continue for four or five consecutive fiscal quarters and drive growth across the infrastructure and energy markets.

In advanced facilities, we continue to see sustained capital investment in the semiconductor manufacturing space, biotechnology capacity expansions, and the electric vehicle ecosystem, all being driven by reshaping of global supply chains, technology advancements, and decarbonization efforts.

Turning to slide 8.

As evidenced by double digit pipeline growth in each of these sectors, our industry position continues to grow and we see this being a long-term secular trend.

In addition to previously discussed infrastructure wins, we have been awarded major programs in the semi-tecture space to include greenfield expansions in the US and Europe for a global chip manufacturer. We have been awarded major programs in the semi-tecture space to include greenfield expansions

In the biotechnology sector, we have won multiple expansions in the US, Europe , and Asia.

And we continue to see global growth in electric vehicle ecosystem driven by a favorable regulatory environment.

with project winds for battery and vehicle manufacturing and charging infrastructure in the US and Europe .

Within national security, we are seeing increased defense spending in the US, UK, and Australia due to continued global threats.

As highlighted as a future prospect last quarter, in the U.S. we were successful in winning a critical Cyber Intelligence Award for $469 million, five-year contract for a classified defense customer to provide secure data and network solutions globally.

In the UK, PA is leading the consortium that has been selected by the MOD to deliver CRENIC, a future force protection electronic countermeasures program.

It will provide the next generation of innovative solutions to counter the threats posed by a radio control and provides explosive devices otherwise known as IED.

And in Australia, we are supporting the acquisition and sustainment of military platforms for the Australian Defence Department, which has engaged Jacobs with increasing volumes of work.

Now, I'll turn the call over to Kevin to review our financial results in further detail.

Thank you Bob.

Let's turn to slide 9 for a financial overview of our first quarter results.

First quarter gross revenue grew 12% year over year and net revenue grew 8%.

Net revenue grew 12% year-over-year on a constant currency basis, an acceleration from our fiscal year 2022 constant currency growth of 8%.

Adjusted gross margin in the quarter as a percentage of net revenue was 26%, sequentially in line with the fourth quarter, but as expected, was down approximately 130 basis points year over year, primarily driven by one, the remaining year over year impact of the Idaho remediation plan.

and two, lower utilization in PA Consulting.

I will provide additional comments regarding our segments later in my remarks.

Both People and Places Solutions and Divergent Solutions gross margins were flat year over year. We expect total gross margins to remain plus or minus 26% of net revenue for the remainder of the fiscal year.

trending higher as we exit the year from a higher margin mix of revenue and new higher margin opportunities from our growth accelerators.

Adjusted G&As are percentage of net revenue was 15.5%.

slightly higher than Q4, but down 130 basis points year over year.

During the quarter, we benefited from lower employee benefit costs, which were mostly offset by miscellaneous other costs. During the remainder of the fiscal year, we planned to make additional investments in employee welfare programs such as higher 401k match and improved medical benefits.

as part of our continued investment in improving our culture and employee engagement.

These costs are factored into our full year outlook.

As a result, we are still targeting G&A as a percentage of net revenue to stay below 16% for the full fiscal year 2023.

Gap operating profit was $238 million for the quarter and included $50 million of amortization from acquired intangibles. A $28 million non-cash charge related to decreasing a real-state footprint aligned to our future so it works strategy.

And finally, other acquisition to deal related costs and restructuring efforts of $17 million.

actual restruction costs for less than half of these costs, and supported the creation of our new divergent solutions reporting segment.

The remaining costs are largely related to PA non-cash contingent equity-based agreements associated with our PA transaction structure.

Adjusted operating profit was $332 million, up a percent year over year. On a constant currency basis, adjusted operating profit was up 15% year over year.

We remain committed to reducing our restructuring related costs. Consistent with our previous comments, we expect $15 million of restructuring charges for the full fiscal year 2023.

We also expect another $30 million in non-cash real estate impairment charges over the course of Q2 and Q3 as we further execute our future work strategy.

Finally, we expect approximately $20 million of transaction-related expenses from deal-related integration and other costs.

most of which is performance-based incentives that were factored into our total purchase price consideration for these acquisitions.

It also includes the non-cash contingent based equity associated with our PA transaction structure.

Our just-set operating profit to net revenue was 10.6 percent, flat year over year. I'll discuss the underlying dynamics during the review by reporting segment.

GAP EPS from Continuing Operations was $1.07 per share and included.

A 26 cent impact related to the amortization charge of acquired intangibles.

A 16-cent non-cash impairment charge related to reducing our real estate footprint, a 9-cent adjustment to align to our projected annual tax rate.

and a nine cents from transaction restructuring and other related costs.

excluding these items. First quarter adjusted EPS was $1.67 up 7% year over year.

Q1-adjusted E-Bet-D-A was $339 million and was up 9% year over year, representing 10.8% of net revenue.

Finally, backlog was up 1% year over year and 2% on a constant currency basis.

The revenue book to bill ratio was 1.1 times with our gross margin and backlog as a percentage of net revenue up over 100 basis points year-over-year.

A book to bill ratios continue to be impacted by the burn of the approaching NASA Kennedy NASA rebid as the project backlog continues to fall until which time the rebid is awarded.

Regarding our LOB performance, let's turn to slide 10 for Q1.

Before delving into the details by segment, I would like to make some overall comments regarding the strength and diversity of the Jacobs portfolio.

As you all know, all aspects of our portfolio are aligned with long-term secular growth trends.

Our results in the quarter exhibit the strength of this diversity and its ability to deliver strong, consistent, operating profit growth.

In this quarter, our People and Places Solutions business led the way.

So let's start with them.

Overall, people and places delivered strong revenue and operating profit results driven by alignment to the secular growth trends that Bob discussed earlier. Q1 net revenue was up 8% year over year and up 13% in constant currency.

All business units contributed solid and often very strong constant currency growth.

Backlog grew 2% year over year and Grossmargin and Backlog was up double digits in constant currency with a book to bill greater than one.

Total People-In-Place Solutions Q1 gross margins were flat year over year with Q1 operating profit up 20% and 28% in constant currency.

Operating profit as a percentage of net revenue was 14.5% up over 140 basis points.

year over year driven by revenue growth and a discipline management of overhead costs.

We continue to expect year-over-year improvement in people and places operating profit margin, resulting in strong double-digit growth in full-year operating profit.

Our Advanced Facilities Unit, which benefits from investments in the life sciences, semiconductor, and electric vehicle supply chains, posted the strongest double-digit revenue and operating profit growth.

We continue to monitor the macro, demand trends across sectors that impact our advanced manufacturing clients and we continue to see robust demand from our life sciences clients which comprise two-thirds of our people in places business.

Our backlog and sales pipeline remains robust across a diverse set of customers and as a result we continue to expect our advanced facilities growth rate to remain strong during fiscal year 2023 despite the very solid and strong 2022 year over year comparisons.

Our Americas unit had an outstanding quarter with over 20% year-over-year operating profit growth driven by infrastructure-related monetization winds beginning to convert to revenue.

The backlog and sales pipeline provides us confidence.

As we are seeing many large programs mature for a late 2023 or early 2024 award, which should continue to support longer-term momentum.

Our international business Q1 Revenue and Operating Profit were up single digits year over year on a reported basis but grew double digits in constant currency.

Our international business will continue to be materially impacted by FX during Q2 with FX neutralizing over the second half of our fiscal year, assuming no large variation from existing current foreign exchange rates.

Moving to critical mission solutions, CMS benefits from highly recurring multi-year contracts that require limited overhead support. The business is aligned to national security, space exploration, and energy transition priorities mainly in the U.S.

Europe and Australia, as well as infrastructure monetization solutions such as US 5G telecom investments.

Q1 revenue was up 10% year over year and up 13% in constant currency, driven by the Idaho Nuclear Remediation Project contract that ramped up in Q2 of last year.

For the remainder of fiscal year 2023, we expect revenue growth in the mid-single digits for the CMS business as we now compare to quarters that include the Idaho project.

CMS Book to Bill was just over one time and continues to be impacted by the approaching NASA Kennedy Rebid, which we expect to be awarded soon.

Gross profit margins for down year over year do their revenue mix impact from the lower margin remediation project and the year ago close out benefits associated with our strong performance on several enterprise contracts.

CMS operating profit was $82 million, down 10% year over year and down 6% on a constant currency basis.

Operating profit margin was aligned with expectations. It was down 170 basis points year over year to 7.6%, but at 60 basis points sequentially from the Q4 figure.

We expect operating margins to improve in the second half of fiscal 2023, with the ability to expand margins as we convert higher margin opportunities in our sales pipeline.

operating margins to improve in the second half of fiscal 2023, with the ability to expand margins as we convert higher margin opportunities in our sales pipeline. Link the divergent solutions.

Gross revenue was up 11% year over year, and when excluding the impact from past years, net revenue increased 7% year over year.

We expect net revenue growth to accelerate materially in the second half of our fiscal year, as we start to see growth from our investments in sales, data solutions, and technology offering.

Gross margins and divergent are in line with our consolidated gross margin, which we believe provides us the ability to significantly expand DVS operating margins as we gain additional scale from our heightened growth investments.

Operating profit margins were 6% driven by early stage investments and well below our future run rate projections for this business as we begin to embed integrated data enabled offerings in our core markets.

We expect Divergent to finish fiscal 2023 with margins approaching double digits.

Turning to PA Consultant, the translation impact from a stronger US dollar from the year-ago period continued to impact reported revenue and operating profit growth.

Revenue from PA was down 3% year-over-year in US dollars, but up over 11% in British pounds.

PA had a solid book to bill of over one time.

We expect revenue growth in British pounds to remain near or above 10% during fiscal year 2023.

Turning to profitability during fiscal year 2022, PA aggressively fired ahead of an increasing demand from strong secular growth opportunities across energy transition, sustainable consumer goods and strategic and digital transformation opportunities.

While the sales pipeline remains robust and backlog continues to grow, the delayed conversion of these opportunities into burn continues to impact utilization.

As a result, Q and operating profit margins were 18%.

While actions have been taken to significantly improve utilization, we expect margins to improve incrementally approaching 20% as we exit the fiscal year.

Our non-allocated corporate costs were $40 million, down year over year as we made a strategic decision to move to a more flexible paid time off program in the U.S. and invest further enhanced employee welfare plans, including improved medical, 401k match benefits, and parental leave offerings.

We believe this strategic decision is key to further strengthening our culture and attracting world and attracting and retaining world-class talent.

While Q1 was lower than our previous quarter-run rate guidance, we do expect that our corporate cost for the year will increase to our previous estimate of 190 to 210 million. And we are monitoring a medical and other fringe costs closely, which can vary depending upon our revenue and delivery mix as well as seasonality.

of medical claims. Turning to slide 11 to discuss our cash flow and balance sheet.

We posted another strong quarter of cash flow generation, which is indicative of the quality of our earnings power and cash conversion capabilities.

Free cash flow was $270 million, and included an outflow of $60 million for payment of a CARES Act of Federal Benefit of payroll taxes.

and $6 million related to transaction costs and other items.

excluding the unusual payment associated with the CARES Act, our underlying free cash flow for the quarter was a very strong $330 million.

In the second quarter, we expect free cash flow to approximate the year ago figure driven by the very strong Q1 performance.

For the four year, we continue to anticipate 100% adjusted free cash flow conversion to adjusted net earnings.

Regarding the deployment of our free cash flow, we repurchased approximately $140 million a share during the quarter.

That's we previously have discussed.

or excuse me, as we previously announced, the Board of Directors has also approved a new three-year, $1 billion share of repurpose authorization.

We will remain agile and opportunistic in repurchasing shares if we see price dislocation in our relative valuation.

We ended the quarter with cash of $1.2 billion and a gross debt of $3.5 billion, resulting in $2.3 billion of net debt. Our Q1 net debt to 2023, expected adjusted EBITDA of approximately 1.5 times, is a clear indication of the continued strength of our balance sheet.

We remain committed to maintaining an investment grade credit profile. And given our commitment to inclusion and diversity, all of Jacobs Bank debt now has a sustainability linked KPR target of achieving a 40% female representation in our management team, as defined as our vice president and above population.

As of the end of Q1, approximately 60% of our debt is tied to floating rate debt, which includes our 500 million notional interest rate lock of 2.7%. As of the end of Q1, our weighted average interest cost was 4.6%.

For your benefit in the appendix of the presentation, we have included additional detail related to our deaf maturities, interest rate derivatives, and quarterly interest expense.

Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend.

which was increased 13% year over year and which will be paid on March 24th.

Now I'll turn the call back over to Bob. Thank you, Kevin. Turning to slide 12.

Our portfolio is positioned to benefit from multiple secular growth trends across our core sectors with the opportunity to structurally increase our long-term earnings power by executing against our growth accelerators of climate response, data solutions, and consulting and advisory.

We reiterate our outlook for fiscal 2023 adjusted EBITDA of $1.4 billion to $1.48 billion and adjusted EPS to $7.20 to $7.50, which incorporates recent FX rates.

In closing, I would like to reiterate my priorities as CEO to maintain an inspirational and inclusive culture that will capitalize on our growth accelerators and drives long-term returns for our shareholders.

Before we open up the call for questions, I'd like to take a moment to express my sincere condolences on behalf of Jacobs to all those affected by the terrible earthquakes that occurred in Turkey and Syria earlier this week.

Our employees have yet again demonstrated a culture of caring and practiced by raising their hands to seek ways to support those most impacted by this tragedy.

I'm proud to lead a company that rises to the calling in such challenging circumstances.

Operator, we will now open the call for questions.

Thank you. And as a reminder, please press star 1 if you'd like to ask a question. We will take one initial question and you may rejoin the queue for a follow-up.

Our first question is from Jerry Rebidge with Golden Sachs, your line is open.

Hi, this is Adam Bubis, one for Jerry Rebich today. Hi, Adam. Hi. Now that your leverage ratio has declined, can you provide an update on the M&A pipeline and if you'd care to comment on opportunity set by line of business? Go ahead.

So look, I think the M&A pipeline, we have a list of opportunities at every single point in time. There are things that are of interest, but ultimately I would suggest you that we really have nothing to comment on. Other than that, we do believe there's...

some things that are aligned with our strategy. And remember how we think about our deployment of capital against M&A is to be aligned with our accelerators. So that's climate response, that's data consulting, data solutions, and data are consulting and advisory.

So those are the areas we're continuing to focus on and certainly give them a strong cash flow that we continue to generate. We'll have degrees of freedom to deploy that capital as appropriate when we see value added opportunities. The next question is from Andy Whitman with Beard, your line is open.

Okay thanks Kevin I guess I just wanted to dig in a little bit to some of the comments you made about I guess some of the adjustments here so you previously said $15 million restructuring you reiterated that again obviously noting some real estate impairments that are non-cash but but I guess here you took the exclusion on focused 2023 expenses I guess I wasn't

or is any indications that are really related to the real estate impairment. It's part of our overall FOCUS 2023 initiative. So it's not over and above the kind of real estate impairments that I highlighted.

Might have been due to future of work. Yeah.

The next question is from Michael Dudes with Vertical Research, your line is open.

Good morning gentlemen Claudia.

Good morning gentlemen Claudia. Good morning.

Good morning. Good morning.

Bob, you talked about your drivers, the key drivers and in the end markets how they would be impacted. How comfortable do you feel as you're taking over here, how your position from a resource space is to drive that growth? What area is it be more tension paid upon?

And, you know, of the several different and markets that you see, you did touch on some of them and you're prepared remarks, but what one should we expect to see some more, you know, more better growth, better opportunities for Jacobs, not only just increase their booking, your bookings, but also drive the higher margin mix that you're anticipated.

Sure. From a resources standpoint, Michael, I'd say that we're feeling comfortable. And really it goes back to what we've talked about previously. Our use of global talent has really balanced our ability to deliver on our clients' expectations.

So, it's not where the capital is being deployed. It doesn't necessarily map to where we source talent and deliver the solutions that we were expected and can deliver. So, we're feeling really positive about the resources, Brian .

As far as of the areas that we're looking at, I'd say that specifically in infrastructure and even more specifically in energy transition is providing some real...

overextended growth opportunities and that that was very evident this quarter in our growth and pipeline. I talked about double-digit composite for the entirety of our infectors. The highest was energy transition and we've got a great base, great talent, great solutions.

And with work that we've already been doing in the renewable space for quite a while, it's serving us well. The next question is from Andy Kapilowicz with Citigroup. Your line is open. Hey, good morning everyone. Welcome, Claudia. Thanks for taking the time home and for your time.

Good morning, Andy. Bob, you mentioned four years of locked in funding for IIJ and that you expected funding from IIJ, IRA, and the CHIPS Act to be a strong run rate by the end of the calendar year. Maybe you could give us a little more color regarding what that could mean for PPS NSR. You're already growing. Blow them out of their back and you'll be seeing the rest of their soul is Edward words.

and it's already percent. So does it mean you could trend higher than that? And is there any risk that DC related budget noise can impact the infrastructure ramp up?

So let me answer the last part first. I think that the infrastructure ramp up is pretty locked in with regards to IJA. And then the effects that the IRA and the CHIPS Act will be supplemental to that. My comment about the end of the year is that those three will be in real time. So we're feeling comfortable about that four year timeline.

I think what's also important to understand is that when we, the difference between the appropriation, the deployment of the funds in capital, and then the duration of the projects, programs, and engagements, that has a tail on it that's six to seven years. And so, you know, you see...

Kevin talked about the backlog growth in revenue being kind of in that mid single digits, but the gross margin being in double digits on a concili-currency basis. That's really a function of where we are in the phasing of that work. So comfortable on that front as far as...

You know, could that mean incremental growth to what we've already projected in our out year plan? We're feeling strongly that, you know, it could really be a big part of the company. So we're optimistic. The next question is from Jamie Cook with Credit Suisse. Your line is open. Hi, this is Jigusa Kotoku on for Jamie.

Thanks for taking my question. So on CMS I was wondering if you continue to expect load amid a percent margins for the year. And is there any opportunity to look at sigesting under performing or non-core businesses in CMS and focus more on higher margin businesses in particular now with quality on board. Thank you.

So look, I think we are a proactive team that always evaluates what we believe is the right portfolio for our company, both now and into the future. We've proven that by the divestiture that we executed against in 2019.

with the sale of our Energy Chemicals and Resources business, which one could argue was actually the legacy of the company. So we are always proactive in that consideration.

So I'll leave it there. And so we can't really comment on anything other than, look, we always consider the opportunities. As it relates to CMS, we do believe that they are gonna be able to get up into the 8% margins over the course of the year. So we see improving, they're at a point in time where some of the wins that they've had.

which are a little bit higher margin or yet to kind of get into the burn and we would expect that that will be happening over the course of the balance of the year.

I just wanted to add one item to what Kevin said.

When we talk about energy transition,

Please keep in mind that that includes components of CMS that's around our nuclear new build and the AMR, SMR technologies that we have. And we're seeing some real opportunities and growth in Europe that will be contributing to the margin profile that Kevin mentioned.

And just to clarify as well, when we talk about the future, I think we're approaching 8% for the year, which means because we've started at the level we are, we're gonna have to be having in subsequent quarters margins that are gonna be above 8%.

The next question is from Michael Fediger with Bank of America. Your line is open.

Yes, hey everyone, thank you for just taking my question. On the potential DC lockdown or just headlines around a prolonged continuing resolution, just maybe Kevin you could walk through on, I know we talked on IJA, but even on the CMS side, anything that we should be aware of.

that could lead to BB orders being pushed out, rebidged being pushed out, are you hearing any of that based on some of the headlines we're seeing, gown DC, thank you.

Go ahead and then I'll back you up. So thanks Michael. I think the bottom line is we have an omnibus in place for 2023. So what we're really fundamentally talking about is a continuing resolution for 2024. Look, it remains to be seen how that plays out. Clearly there's some.

differences of opinion in the House right now relative to where we may end up. I would say the good news is, relative to this, if there is good news, is that we're kind of based off a strong omnibus program in 2023. It could impact Speech is asked to learn more about the 12

new items getting funded, but we're based on a 23 kind of

level, which is pretty straightforward. As it relates to the disruption relative to the debt and whatnot, we think our view is they'll come to some rational conclusion on that, but we'll see how that plays out. Yeah, and right now the programs, Michael, that we're looking at.

are not totally insulated, but we've got a strong view on those programs being funded here in the near term. I'm sorry, awarded. The next question is from Robert Connors with Stifel. Your line is open.

Hey guys, thanks for taking my question. Can you hear me?

Yep. Yes. Okay. Well first off Bob if I remember correctly I'm wishing your birds a good luck next weekend.

And I guess for my question, you know, you guys have a lot of tailwind going into the back half, you know, strong outlook on various end markets. Just sort of wondering what your thinking was with around sort of maintaining the guidance, especially with the currency sort of being a tailwind here.

Well, there's a couple things that are, we have to recognize, certainly, exchange rates are positive, but also we have incremental interest costs that are largely off-sending, offsetting that. So, there's gives and takes here.

I think given the dynamic of how we're playing out in DC, I think we're being prudent relative to our guidance that we've provided. And look, there's gives and takes here. FX isn't the only one. I would say certainly interest is some headwinds that we're facing and then the business is kind of now.

are seeing and it's materializing in the double digit pipeline growth, the backlog growth that we're seeing, and our bookings performance, all leading indicators to strengthen those markets. The burn of those bookings is something we continue to monitor very closely, but the stage that we're coming in.

Good morning Bob, Kevin, Claudia and John and congrats to everyone on your promotion and new position.

Thank you, Louis. Thank you.

As it relates to the exceptional strength for advanced facilities for this current fiscal 2023 on top of 2022, Kevin, I think you mentioned how difficult it comes. And I was wondering, should investors expect a consistent long-term...

upward trajectory for advanced facilities with all of the stimulus funding from the CHIPS Act or will it be lumpy in certain years as funding may be inconsistent.

Louis, I think if you go back over a decade ago, that lumpiness was in the time between cycles, whether it be semi or in life sciences, was a lot longer. We're seeing those cycles contract. Look at the current semi-cycle as well. We think that that long-term growth aspect...

versus what we used to see a decade ago. We've demonstrated that the diversity of our portfolio has been able to really sustain that. You mentioned 22, it was also 21 as well. So we're feeling really positive there. The other item I would highlight is that it's the reason.

What's driving these growth catalysts? The reason why we highlighted the supply chain disruption as well as technology Inventory is that in the past the lumpiness was driven by demand and so capacity was almost exclusively tied to demand and then you could just map it via economic cycle Today that that has completely changed in the drivers

are more driven around technology advancements, reshaping of supply chains from the east to the west, as well as innovations that are happening in, whether it be chip design or novel therapy. So the drivers also give us that level of confidence too. The next question is from Gautam.

and then just related to the continuing resolution risk around the budget next year. Are there any programs that

new programs that were counted were when you're in your prior guidance you were counting on growing but that might not be able to grow in such an environment. Anything that we should be thinking about it with potential headwinds in 24. Thanks.

Sure, maybe I'll talk first on the recompete outside of Kennedy for the next 12-18 month. I think that was the timeline that you put it at. Nothing of that size. You know, we have smaller recompete that are probably a little less under the radar, but those are well within.

you know, within the normal cycle of our business. You know, in the CR with new programs, Galpin, that's one where we continue to be very sensitive that, you know, from a repeat standpoint, those could end up being upside for us because we're on programs that are continuing to be determined. But I think the diversity of our portfolio has

lessened the impact of what we saw historically with CRs. And so I think that's where, I think it would not be wise of us to predict the effect of CRs, but I think the diversity is where we see the hedge and we feel confident about our business. The next question is from Josh Sullivan.

Our confidence is solid. We you know as whether it be NASA or other clients even outside the aerospace world, we've grown with our clients. So the

The intimacy that we have with the science of our client's business has allowed us to be their long-term advocate and long-term partner. So wherever the space industry goes, a movement to commercial, which we're involved with, or in other areas of exploration, we've been a part of that journey and a valued partner. So again, thank you.

We're feeling confident. The next question is from Chad Dillard with AB Bernstein. Your line is open.

Early on that today's

CMS margins. You said it'd be ending the year above 8% to give the...

to full year to 8%. But given the high margin projects you all have been talking about, is it safe to assume that we can expect that exit rate to be the prevailing rate going forward and for the margins, you can potentially approach?

people in places levels given all these projects. Thanks. Well, that would certainly be consistent with our strategy. I would say the margin burn that I was referring to is second half oriented primarily. So as we look to beyond 2023, certainly consistent with our strategy, we are always looking.

for an incremental profit improvement in terms of margin. So yes, that would be consistent with our execution strategy. The next question is from Alex Dwyer with Keep Make Capital Markets. Your line is open.

Hi guys, this is Alex from Prechon this morning. So my question, the backlog was very strong this quarter and it looks like all segments grew sequentially from 4Q. You guys had highlighted this gross margin and the backlog was up 100 basis points. Can you guys talk a little bit about what's driving this 100 basis point increase in margin?

Is it one or two segments or is it more broad based than all the segments? I can say it's broad based. Again, when we keep reiterating moving up the value chain with our clients, so this is the these are.

higher level technically complex as well as digitally enabled offerings that we have down the marketplace which is driving that higher margin in our backlog. And so it's not a cutely focused in in specifically one area. It's across the board. We have no further.

Have a great week. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.