Q2 2023 Jacobs Solutions Inc Earnings Call
Please standby we're about to begin.
Good morning, ladies and gentlemen, and welcome to the Jacobs solutions second quarter 2023 earnings call and webcast. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press.
Star one on your telephone keypad and if he would like to withdraw your question simply press Star one again.
And now at this time I will turn things over to Mr. Jonathan Evans, Vice President of corporate development and Investor Relations. Please go ahead Mr. Evans.
Thank you good morning.
Earnings announcement, and 10-Q filed this morning, and we have posted a slide presentation on our website.
We will reference during the call.
In addition, this morning, we published or at least announcing our intention to create two independent companies with the separation of our critical mission solutions business.
I would like to refer you to slide two of the.
The presentation material for information about our forward looking statements and non-GAAP financial measures.
Turning to the agenda.
Speaking on today's call will be Jacobs, CEO I forgot it.
So Kevin Berry.
We are also joined by our incoming CFO cloudy at Paramount.
Bob will begin by providing an overview of today's portfolio announcements then summarizing highlights from our second quarter results.
Kevin will provide a more in depth discussion of our financial metrics as.
As well as a review of our balance sheet and cash flow.
Finally.
Bob will provide details on our updated outlook along with closing remarks, and then we'll open up the call for questions.
With that I'll turn it over to Bob. Thank you Jonathan and thank all of you for joining us today to discuss our second quarter fiscal year 2023 business performance.
It gives us a story 75 year history of delivering value for our clients employees and shareholders. We have consistently strive to improve our company through a purposeful strategy of transforming our portfolio to capture higher value opportunities in our core and adjacent markets.
Turning to slide four.
Today's announcement marks a key inflection point as we progress on our journey of continuous improvement and value creation.
This morning, Jacobs announced our intent to separate our critical mission solutions business through a spin off.
The decision to separate CMS as a result of a comprehensive review and evaluation to identify opportunities that streamline our portfolio and maximize strategic focus and potential growth opportunities for both future companies.
We will sharpen both companies focus on their distinct strategies and.
The initiatives that are most relevant.
Industry in which they operate.
Each company will have a tailored capital allocation and structure that is directed toward their respective growth strategies as well as a strengthened ability to attract and retain top talent.
Moving forward in addition to our industry, leading position in core sectors Jacobs will be a higher growth higher margin technology enabled solutions provider continuing to address the world's most complex critical infrastructure and sustainability challenges.
Jacobs core skill sets and technical and consulting services, coupled with data science and technology enabled expertise will continue to differentiate us from our peers and allow us to provide end to end solutions to our global clients.
Our streamlined portfolio will include leading positions in critical infrastructure, such as water and environment energy transition transportation and the advanced manufacturing sectors.
Once the separation is complete we can focus our attention on building additional capabilities and expertise that matter most to our clients in these areas.
And importantly, we will achieve even greater alignment with our three key accelerators climate response data solutions and consulting and advisory.
The new CMS will be a leading pure play government services company that provides technical consulting applied Science research training intelligent asset management and program management services to federal government agencies.
<unk> generated approximately $4 4 billion in FY 'twenty to revenue.
Today's announcement is another step in Jacobs long record of taking bold actions to drive value creation and position our company, Brian even stronger future.
And as we grow and thrive our partners can achieve more as well.
I want to emphasize that this announcement does not change how we work with our clients.
As we work towards the separation it will be business as usual.
We remain committed to delivering world class service to our clients will be able to rely on our people they know and trust.
Turning to slide five.
The proposed capital structure governance, and other matters relating to the separation will be communicated at a later date.
Subject to satisfaction of customary conditions, we are targeting to complete the separation in the second half of fiscal year 2024 through a distribution that is intended to be tax free to Jacob shareholders for U S. Federal income tax purposes.
Turning to slide six I want to reinforce the importance of our inclusive and forward thinking culture.
Last quarter, we reinforced our commitment to inclusion and diversity by including a gender equality kpis and our sustainability linked bond.
Jacobs remain categorically committed to this goal.
Turning to Q2 in slide number seven.
I want to thank our more than 60000 global teammates for delivering a record second quarter as measured by both revenue and operating profit.
Notably our underlying business remains strong and we continue to drive growth organically.
We continue to invest behind and grow share in all key areas of focus against our three needle moving growth accelerators climber response data solutions and consulting and advisory.
Our people in places line of business delivered strong performance with net revenue up 7% year on year, 10% in constant currency and operating profit up 21% year over year, 25% in constant currency.
Our pipeline and gross margin in backlog increased further supported by strong legislative drivers materializing in federal state and local initiatives.
CMS remains a stable base of recurring revenue driven primarily this quarter by the NASA Kennedy Rebid Award.
<unk> Q2 revenue was 11% higher than the previous quarter and 5% higher year over year.
In terms of bookings this quarter BMS also achieved an impressive overall win rate and the outlook for FY 'twenty. Three continues to look strong with its pipeline up double digits year over year.
We continue to invest behind CMS opening our Japan office during Q2 our.
Our first organic hawkers opening since 2004.
VA consulting sales and backlog again increased year over year led by sales in the energy and utilities and defense sectors, demonstrating momentum and consistency I.
I am pleased to see margins improved in the quarter to over 20% supported by milestone incentive achievement ph.
<unk> continues to benefit from increased opportunities in Europe for.
For example, Ta won a mandate for a private Scandinavian renewable energy company that is currently active in renewable electricity generation and storage.
Ta is working with the client to create a market entry strategy across offshore and onshore wind and several new European markets.
Are diverging solutions.
Operating unit had a strong operating profit quarter with operating profit up 46% year over year.
During the quarter, we extended our collaboration with power and tier across multiple infrastructure applications.
Kevin will give more detail in his comments.
Looking across the broader market environment.
We continue to see tremendous opportunities for growth and primary response and energy and environment. For example, our approximately $2 billion water business continues to exceed expectation and reinforced our position in the water sector.
Water continues to be a pacesetter with pipeline growth up materially year over year.
During Q2, we were awarded the Donald Tillman.
Water purification facility by the La Bureau, sanitation, one of the largest potable reuse projects in the U S delivering a more sustainable drinking water source and a drought stress region.
Fittingly, we would like to call attention to drinking water week and opportunity to proudly celebrate the work we do with utility partners to provide safe drinking water to millions of people around the world.
Our cities and places pipeline also grew double digits, including key wins in the Middle East, where we are working to re imagine urban development addressing major environmental and quality of life challenges.
And predominantly powered by clean energy.
Globally, we're seeing significant energy transition opportunities last month, we officially launched a dedicated business unit in <unk> focus on significant opportunities in global energy transition to accelerate growth and address the ever expanding needs of our clients.
Turning to slide eight.
During Q2, we were awarded the Gold Medal award for International Corporate achievement and sustainable development.
World Environment Center.
Non governmental organization advancing sustainable development through corporate business practices.
<unk> annual Gold Medal award recognizes one international company, demonstrating a global vision and a commitment to sustainable development through innovative applications of policy economic environmental and social responsibilities.
Independent jury commended our thoughtful approach to sustainability, combining commitments with global initiatives and partnerships with positive and far reaching impact.
Turning to slide nine.
In summary, we remained well positioned with our industry, leading ranking across multiple sectors.
This is particularly evident in our advanced manufacturing business, where our long term pipeline increased double digits year over year.
Further in our infrastructure business legislative actions continue to provide visible growth opportunities. Despite continued political debate.
On broader topics.
For example, recent wins this quarter include three significant intelligent O&M programs in California, Florida, and Louisiana, which we secured through strong differentiation with the use of our digitally enabled platform.
We expect operating profit growth to outpace organic top line increases as we remain focused on quality backlog.
Now I'll turn the call over to Kevin to review our financial results in further detail.
Thank you Bob and good day to everyone turning to slide 10 for a financial overview of our second quarter results.
Second quarter gross revenue grew 6% year over year and net revenue grew 5%.
Net revenue grew 8% year over year on a constant currency basis, a continuation of healthy growth against a tough 10% year ago comparison.
Adjusted gross margin in the quarter as a percentage of net revenue was 26% sequentially.
Sequentially in line with the first quarter, but down year over year.
We will provide additional comments regarding our segments later in my remarks.
Adjusted G&A as a percentage of net revenue was 15, 6% approximately flat sequentially, but down 90 basis points year over year more than offsetting the lower gross margin percentage versus last year.
While we felt the impact from inflationary pressure costs were managed well overall disciplined cost management.
We are still targeting G&A as a percentage of net revenue did stay below 16% for the full fiscal year 2023.
GAAP operating profit was $290 million for the quarter and included $50 million of amortization from acquired intangibles.
A $10 million noncash charge related to decreased real estate footprint aligning to our future of work strategy.
And other acquisition deal related costs and restructuring efforts.
<unk>.
These deal related costs are largely incentive compensation that was considered part of total consideration and P. A noncash contingent equity based agreements associated with the P. A transaction structure.
Excluding these items adjusted operating profit was $356 million up 7% year over year on a constant currency basis, adjusted operating profit was up 11% year over year.
We remain committed to reducing our restructuring related costs consistent with our previous comments, we expect approximately $15 million of restructuring charges for fiscal year 2023.
We also expect a total of $50 million to $55 million and noncash real estate impairment charges over the course of the year as we continue to further execute our work future Horch strategy.
Finally, we expect $25 million of transaction related expenses for the full year 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.
That also includes the noncash contingent based equity noted earlier associated with our <unk> transaction structure.
These costs do not include expenses to be incurred in connection with the planned separation of CMS given the early stage of our process.
Our adjusted operating profit or net revenue was 10, 4% up 20 basis points year over year I'll discuss the underlying dynamics during the review by reporting segment.
GAAP EPS from continuing operations was $1 70 per share and included a 20.
26, <unk> impact related to the amortization charge of acquired intangibles.
<unk> non cash impairment charge related to reducing our real estate footprint.
<unk> from transaction restructuring and other related costs.
And a 25 cent adjustment to align to our projected annual normalized adjusted tax rate as a result of a large fin 48 reserve release.
Excluding these items first quarter adjusted EPS was $1 81 up 5% year over year.
As we look ahead to our full year forecast, Bob will provide an overview of our narrowed guidance range later in his prepared remarks.
We also note that our Q3 EPS is expected to be relatively flat sequentially to Q2.
I would like to highlight that the fiscal year 2022 third quarter adjusted results.
From a onetime gain on an equity investment.
Q2, adjusted EBITDA was $358 million and was up 5% year over year, representing 10, 4% of net revenue.
Finally backlog was up 4% year over year and 5% on a constant currency basis. The revenue book to Bill ratio was one two times with our gross margin in backlog again, improving year over year.
Regarding our lob performance, let's turn to slide 11 for Q2.
Our results in the quarter continued to demonstrate the strength of our portfolio and end market resiliency and enabling us to deliver strong consistent op growth.
People in places solutions continues to drive our momentum.
Overall PMT has delivered strong revenue and operating profit results driven by an alignment to the secular growth trends and legislative drivers <unk>.
Yes, Lee highlighted.
Q2, net revenue was up 7% year over year and up 10% in constant currency.
Growth was consistently strong.
Across almost all business units, although Europe continues to see some pressure.
Backlog grew 4% year over year behind the book to Bill of one one times.
Gross margin in backlog was up.
Nearly double digits in constant currency.
Q2, operating profit was up 21% and 25% in constant currency driven by strong growth in G&A control.
Operating profit as a percentage of net revenue was 13, 5% up over 160 basis points year over year again, driven by solid revenue growth and continued cost discipline.
We continue to expect year over year improvement in people in places operating profit margin, resulting in strong double digit growth in full year operating platform.
Our advanced facilities unit, which benefits from the investments in our life Sciences semiconductor and electric vehicle supply chain posted another quarter of double digit revenue 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 approximately two thirds of this business.
In semiconductors, the evolving macro backdrop has led some smaller clients to evaluate project timing, but we remain confident in the long duration opportunity has to Jacobs.
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 persist against very strong year ago comparisons.
Our people in places America's unit reported record Q2 profit with 30% year over year growth is a high quality backlog.
<unk> to convert to revenue at improving incremental margins.
We remain enthusiastic about our growth opportunities as backlog and sales pipelines remain robust as we compare to stronger year ago comparisons in particular, our water sales pipeline of opportunities continues to shine up double digits.
Our international business Q2 revenue and operating profit were up single digits year over year Asia Pacific and the Middle East continues to grow driven by strong pipelines and transportation cities in places and energy transition.
Moving to critical mission solutions <unk>.
<unk> benefits from highly recurring multiyear contracts that requires limited overhead support.
This aligns the space exploration National security nuclear remediation priorities and U S <unk> telecom investments.
Q2 revenue was up 5% year over year and up 7% in constant currency.
CMS book to Bill was just over one four times that upsetting from the Kennedy Award that we previously disclosed.
As a result backlog is up 8% year over year.
The sales pipeline also remains strong with $30 billion of new opportunities that we're pursuing.
In addition, we are awaiting award on $10 billion in new business opportunities that are in the end game select process.
CMS gross profit margins improved sequentially due to mix.
Operating profit margin were both up sequentially from Q1, consistent with our previous guidance, but down slightly versus the very strong year ago quarter.
We expect operating margins to improve in the second half of fiscal 2023 with full year CMS with margins expected to approach, 8% on a full year basis as we convert on an <unk> pipeline of higher margin opportunities.
Moving to divergent solutions net revenue declined 3% year over year as we focus on quality growth opportunities that will translate into higher margins.
We continue to expect net revenue growth to accelerate in the second half of our fiscal year as we start to see growth from our investments in sales data solutions and technology offerings.
Operating profit for the operating profit margin for the quarter was above our corporate average at 11, 1%.
During the quarter, we recognized a large license sale, which expanded the margin by more than 300 basis points.
<unk> of these types of solutions are now a longer term financial benefit of our different solution strategy and a core offering of the reporting unit.
Although deals of this size should not be expected to recur every quarter.
Even excluding the benefits of a license sale the underlying margin momentum seen in Q2 continued to improve sequentially per our previous guidance.
As a result, we expect the Virgin quarterly margins to approach, 10% as we near the end of the fiscal year.
Gail begins to further mitigate the impact of the continued investments for growth.
Turning to Pega consulting revenue from <unk> was up 1% year over year in U S dollars, but up.
Over 11% in local currency Ta.
Once again reported a book to Bill over one times.
We continue to expect revenue growth in British pounds to remain near or above 10% during the second half of fiscal 2023.
Turning to profitability Q2 operating profit margin for <unk> was 21, 8% up 370 basis points sequentially due to fixed price milestone achievements and lower incentive costs.
PAA continues to take actions to improve utilization, we expect <unk> margins to be around 20% in the back half relatively close to their year to date margin performance.
Our unallocated corporate cost was $60 million in Q2, an increase over our previous run rate estimate.
Driven by inflationary pressure in healthcare and digital investments.
For the full year, we now expect our quarterly run rate for the balance of the year and unallocated corporate costs to be in line with our Q2 level.
Driven by inflationary pressure in healthcare costs and incentive costs.
Turning to slide 12, let's discuss our cash flow and balance sheet balance.
Balance sheet.
We posted another strong quarter of cash flow generation, which is indicative of the quality of earnings power and cash conversion capabilities free.
Free cash flow was $97 million, resulting in approximately 100%.
Inversion of net income into free cash flow for the first half of fiscal year 2023. As a result, we are well positioned to deliver our anticipated, 100% reported and adjusted cash flow conversion targets for the full year.
Regarding the deployment of our free cash flow, we will remain agile and opportunistic in repurchasing shares.
We ended the quarter with cash of $1 2 billion and a gross debt of $3 5 billion, resulting in just over $2 2 billion of net debt.
Our Q2 net debt to 2023 expected adjusted EBITDA of approximately one four times is a clear indication of the continued strength of our balance sheet.
We remain committed to maintaining an investment grade credit profile.
As of the end of Q2, approximately 60% of our debt is tied to floating rate debt and our weighted average interest rate was four 8% in.
In February Jacobs completed the refinancing of existing debt.
Jacobs inaugurations issuance of a $500 million sustainability linked bond sub.
Bond was priced at a competitive fixed rates and includes a <unk> <unk> API aligns with Jacobs commitment to increase gender diversity in leadership positions.
To substantially reduce our greenhouse gas emissions.
For your benefit and the appendix of this presentation. We have included additional detail related to our debt 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 increased 13% year over year, and which will be paid on June 23.
With that I'll now turn the call back over to Bob.
Thank you Kevin turning to slide 13, due to our continued momentum across our business, we feel confident in our ability to reach our previously stated objectives and narrow our outlook for FY2023 adjusted EBITDA to a range of $1 42 billion to $1 47 billion.
And adjusted EPS to $7 25 to.
To $7 45.
Finally, with today's announcement, we are reinforcing our continuous commitment to take proactive actions to create greater shareholder value as well as strategic and value, creating benefits for both future companies and their respective stakeholders.
Operator, we will now open the call up for questions.
Thank you Mr. Borgata, ladies and gentlemen at this time do you have any questions simply press star one and again if you find your question has already been addressed you can't remove yourself from the queue by pressing star one again.
Our first question this morning from Jamie Cook of Credit Suisse.
Hi, good morning, and congratulations on a nice quarter I guess my first question just sort of related to the spin can you just sort of help us talk through.
Your your decision to spend versus <unk>.
Sell the asset and and or any sort of.
Synergies associated with spending the CMS business and then a follow up question after that.
So maybe I'll start off and then Kevin I'll turn it over to you.
With regards to the second part first Jamie.
We do not see dis synergies with the with the spin.
It's been specifically we were looking for the.
Optimal tax free benefit for our shareholders as well as our confidence in the business that it has the credibility and the horsepower to operate successfully as an independent and independent entity. So those are kind of the drivers were looking to obviously maximize shareholder value. Kevin as you pointed out yes look I think we are.
Evaluate at all alternatives and at the end of the day.
Given the facts and circumstances that Bob has highlighted.
We're excited about the announcement of the spin, but as circumstances change or anything comes to light. We would certainly have to consider that because we are interested in maximizing shareholder value.
And then I guess, just my my other sort of.
Now that we're sort of splitting the business is there any way you could sort of frame how you think about.
Longer term or medium term organic growth or our margin targets associated with the different businesses as they sit today. Thank you.
Yeah.
Yes, maybe ill answer the first part and then you talked about margin targets Kevin.
So as far as as far as our growth expectations for the business.
They're very strong and in line with what we articulated in our 'twenty two strategy for this segment reporting so we feel that the pipeline as well as the opportunities in front of us with the platform that we have.
It looks very very bright for for for the remain co post spin.
Yes look.
As we as we've talked in the prepared remarks, as we look at the two businesses and we talk about 2022 kind of pro forma if we had done something at a 12% margin for the people and places business operating profit margin and about 8% for CMS, we think that our spend will ultimately allow.
Our two incremental individual companies to focus on their respective opportunities and in a manner that allows for if anything an acceleration in growth I do.
I would like to say that.
In the event that the spin is able to be executed. We are we do realize that there will be some incremental CNS public public.
Public company costs that would have to be incurred but we will think will be able to offset and then and then some with our opportunities to streamline our two organizations.
That's very helpful. Thank you.
Okay.
Yes.
Thank you the next now to Andy Kaplowitz at Citi.
Good morning, everyone.
Hi, Andy Congrats on the announcement.
Backlog continues to rise and <unk>, obviously, there's some cross currents given concerns around private spend but state and local governments I think continued spending you've talked about funding ramping from the fiscal bill. So do you see backlog growth continuing there sequentially over time and can you sustain that 10% year over year constant currency growth that you have in the segment.
Yes.
So let me answer the <unk>.
<unk> growth right now the way our pipeline is.
Is lining up Andy the answer is yes, we do see consistent opportunity to increase our backlog and.
And grow the business.
Or is it the 10% constant currency growth on the top line I think that's going to be dependent on the phasing of the jobs. How these jobs come out, especially on the infrastructure side as well as on our private sector business. Those early phases of the job tend to be more steady and higher end consulting work and then as we move through subsequent phases kind of where the <unk>.
Larger revenue the revenue opportunities are so I wouldn't.
Want to go and say that thats going to be a consistent quarterly.
But definitely a target if you were to aggregate over a period of time.
And maybe a similar question with CMS.
It did get a backlog uplift from Kennedy and I think you mentioned that the pipeline is up double digits, but how are you thinking about backlog and CMS moving forward.
What is the risk that the debt ceiling debate could slow down bookings a bit for a couple of quarters.
Actually we see we see the backlog potential in CMS being strong.
The pipeline of work that we have and not just the rebid, but.
The new work, that's coming down the Pike.
They provide some some real opportunity for us to continue that backlog growth. So we feel good feel confident about that.
Great. Thanks, a lot.
Okay.
Thank you the next now to Michael Dudas at vertical research partners.
Hey, good morning, gentlemen.
Good morning, good morning.
So with regard to the spin.
Is there any of the businesses in CMS I guess, you highlighted five key maybe staying with the business to the automotive side anything from CMS that may stay with Jacobs and maybe vice versa give.
Given some of the demands for.
Security issues that have been.
Leveraged from CMS to your your customer based on the <unk>.
Yes, Michael just to clarify one point we didnt.
Actually <unk> in automotive are a part of the CMS segment, and that's actually what we're reporting today.
So I just wanted to clarify that point.
I would say as far as what stays what goes we're early in that process and so.
To be direct in the prior to provide clarity it is the CMS segment today.
Got it but could you still debating whether things could adjust between now and when you're shipping sector. Although I understand no. We're not we're not okay and so.
Just wanted to provide clarity on that.
Got it terrific question is.
<unk>.
It seems like again, the last couple of quarters, your new projects and new contracts in the backlog of coming in at better margin rates than prior.
I assume you anticipate that going forward in both in all the segments and how do you see the execution of getting that margin from the backlog to the bottom line is that something that we can see more acceleration as we can maybe track into fiscal year 2024.
Yes, so on the on the margins themselves.
Clearly, it's been a part of our strategy for <unk> 'twenty, two but 19 as well.
We are in continue to growing up the value chain for our clients and as we do that and we're getting more into the higher end consultancy work, we're seeing the incremental effect on our our booked margin bars, how that's dropping into the bottom line I think two parts Michael that you're highlighting one is.
That kind of excellence and project delivery, which has been a part of our DNA for decades that continues to be high on our list on delivering not only to our clients expectation, but within our financial expectation as we're booking these shops.
As far as the last part of your question on the timing of that dropping to the bottom line.
We're seeing a nice pace in the marketplace and this kind of goes to all segments of our business.
After a period of time I think in the beginning of Q1 and maybe in the back half of last year.
That was having an effect on our top line and some of our actuals to forecast that is reconciled back and hence the performance this quarter.
So all indications that we're getting from our clients.
We're going to continue.
Excellent Thanks, Bob.
Okay.
We'll go next now to Sean Eastman of Keybanc capital markets.
Hi, everyone. Thanks for taking my questions first one is kind of a high level.
Just rewinding to the strategy day from last year.
Got a vibe from that update.
Guys were kind of embarking on a deeper integration of the business units with the divergent solutions segment kind of being a bridge.
And today, we're kind of talking about a more exciting outlook.
Separate entities.
Curious what changed there I hope that's a fair question.
Yes, Sean we were constantly looking at our portfolio and doing an evaluation on how how we're executing externally with our clients and the effect that that is having on advancing our strategy. So.
It is it.
To reflect back on what we where we were before I don't think we're doing anything that's different from what we articulated in our strategy and so we feel confident in the decision that we made today.
Okay understood and then.
Relative to the divergent solutions dynamic between.
Investing in growth and kind of releasing margins any.
Dave post.
The review you guys did on how you are balancing those two things.
Very good.
Well look I.
<unk> think that we are continuing to invest in what we think is a great opportunity to enable divergent actually people in places MPA to benefit from some of the the overall investments being made in digital data capabilities for the total the total Jacobs and so those investments.
Because we believe there is strong rationale for a very large return relative to that so we're not making any choices relative to those investments will continue to make them and we are confident in the ability that the scale is growing as it did in the quarter.
And how we've communicated our sequential growth in terms of the topline which will translate into.
A gross leverage factor that translates into margin improving as we highlighted in our prepared remarks, nothing has changed we feel good about that we see visibility forward to be able to do that so investments continue and our growth is going to allow for us to get to the margin profile that we've communicated.
Understood I appreciate it I'll turn it over.
Yeah.
Thank you was the next now to Bert Susan at Stifel.
Hey, good morning.
So your updated earnings guidance range to contemplate maybe a slight hey, Bob.
Maybe a slightly more tempered growth path in the second half of this fiscal year can you just walk us through what you see as the potential positive drivers that could get you a little closer to the high end of 745 bps.
And then maybe highlight what your visibility is a little bit weaker.
Kevin why don't you start off from a market standpoint.
Yes look clearly as we look going forward.
I think theres a couple of things to highlight certainly got inflationary pressure on the medical costs and ultimately we're going to be able to pass that along to our clients, but in the short term certainly we're seeing some some pressure in that we saw it in first quarter.
First quarter is as you know the last year of our medical plan. So we wanted to get a better read on our second quarter, which now is in the next plan year, we continue to see that occurring in Q2. So.
We're projecting.
Projecting that that's going to continue through the full year. So so assuming that that didn't happen that obviously would be a positive but right now that's what our expectations are.
Our interest rates, obviously are higher year over year.
And we think we're at hopefully the top end of kind of what the interest rate scenarios are going to look like and that if anything we're going to be able to trend down.
That happens, we're not counting on it but certainly that would allow for us to be able to have some incremental performance in our etfs figures as as well I think the underlying business is actually quite strong and so absent some of these dynamics.
I think putting it into context, we don't really see a.
Situation, where our business is slowing.
Okay.
Okay.
Amit.
Okay, Great and maybe just a follow up to that.
CMS announcement now that Youre doing that portfolio rationalization, how should we think about capital allocation maybe over the next four quarters does the transaction not taking place for another year lead to maybe a more of a conservative view towards M&A and buybacks or do you go full steam ahead here now that you have the plan underway.
Okay.
Alright, Kevin correct somewhat.
Think that clearly we have in front of US a lot of execution that is really imperative for us to do well against whether that be on our business, whereas the actual execution of the spin of CMS.
So that is clearly job number one number two is because of that certainly I think there is.
Typically a high bar right now from a financial.
People gross margin perspective.
As it relates to to actually deploying additional capital in the M&A never say never but we think the bar is pretty high at this particular moment.
So having said all of that there is certainly as opportunities to invest back in our shares as appropriate and I think that.
You might want to think about that potentially happening over the course of the next several months.
Yeah, just wanted to add I think everybody's got it really we really like what we got.
Okay.
Awesome, Thanks, so much Bob and Kevin.
We'll go next now to Steven Fisher of UBS.
Thanks, Good morning, how should we think about the second half 'twenty for timing for the spin I think thats within the normal range for these types of transactions, but still seems like it's a bit long data is there any potential to accelerate that if it stays a spin.
And what are the factors there just curious if the debt ceiling discussions and continuing resolutions and federal but is that all a factor or is it more just the internal process.
No look.
It is certainly a process both internal but also external so.
As you as you may be aware the process of putting in place a structure and an organization that facilitates an ability on day, one to execute and manage a publicly traded company is not inconsequential and so we're not going to rush that process and I think that 12 to 18 months.
Sure.
Is actually a fairly aggressive.
Our stance in some respects. So I don't think we're gonna be able if in fact that continues to be oriented around the spend to do much better than that but of course, we'll do whatever we can to accelerate for sure.
Okay. Thanks, and then <unk> is going to really be the biggest contributor to profits.
<unk> been so theres going to be a lot of focus on that and particularly the margin. So.
Just looking at the sequential margins this quarter were down in Pmt's spin up a 150 basis points year over year. It sounds like you think we should focus on the year over year there.
But I'm curious about how we should think about mix within TMT and how might that affect margins on a quarter to quarter basis.
Yes, Steve a couple of things one is that we were pretty clear last quarter that on a quarter to quarter or at least Q1 that had some some projects incentive releases that debt.
That were onetime as far.
Another way of saying, we need to really take a look at the year over year comparisons and then b.
All of us to be aware that we put margin targets out.
At our strategy day, and just do kind of a midterm report on that we were actually a year ahead of where we said we were going to be on our margin profiles. So that's a look at it over.
Over the period of time.
Sure.
So with that clarifies that.
Okay. Thanks, a lot Bob So one thing.
Just to crystallize and make sure that you caught it correctly, our margins and CMS Q1 EPS of <unk>.
Yes, yes, I'm, sorry, yes, yes, I'm, sorry, and as far as that continuing Steve I missed one part of your question as far as that continuing.
Valuate, the based on our clients and trends that we're seeing in the marketplace and as we said in the script.
Those have been very very strong in the <unk> world. So we continue to have confidence in our business.
Great. Thank you.
Okay.
Thank you the next now to Chad Dillard of Alliance Bernstein.
Hi, Good morning, guys, just wanted to dig into the spend a little bit more.
With that I guess.
The remaining Jacobs business can you talk about like what the cash conversion profile looks like and how Youll think about capital allocation. Once the spin is done and if there is any potential gaps that need to be filled on the capability side once.
And once it's completed.
So we're early in our process Chad, we do know that people in place and CMS both have good cash flow characteristics.
Actually people in places has a lower DSO level than the current CMS organization. So we're working through all of that will provide incremental details relative to when we get to that space to really get greater clarity, but I think youre going to see both businesses being.
Robust in terms of their cash flow capabilities longer term.
Yes, Jed on the second part that you asked about the capability, we feel strong that we've got a we've got a strong platform. We feel strongly that we've got a really solid platform today.
In areas, where we continue to.
Alright.
To innovate.
Is around our digital platforms, and our digital enablement and the partnership that we have with volunteer and with others that is a bit.
Those are strong platforms in order to grow.
Without making huge investments so we're.
Really comfortable where we sit today.
That's helpful. And then second question on <unk> with respect to the margin that you guys talked about operating margins getting to like a 20% range in the second half.
But maybe kind of thinking a little longer term.
I'd like to understand what's the path to bringing it back to you I guess, what your target range a bit.
I would say that where we think.
Thinking longer term debt there is no cap ultimately at the 20% level some of our work to continue to drive with the management team and the ability.
To get back to margins that are north of 20 longer term.
Thanks.
Okay.
Yes.
And with <unk> now to Michael Feniger of Bank of America.
Hey, guys. Thanks for taking my question I'm, just curious there there's obviously headlines someone brought up the government shut down but there's also headlines.
House, Bill potentially trying to repeal the IRA clean energy tax incentives many thing that that's not likely but I'm just curious on the ground through the channel on field work or any of these headlines from the slow harvest activity as as these headlines pick up does it may be pushed some things.
To the right in the near term that we should be aware of.
So Michael the short answer is no.
Jay It's where he made specific commentary about that in the script.
Has really started to incremental lives.
In our business and we can see it not only in our pipeline, but in our bookings.
And it's realizing itself.
That's why we specifically called out <unk> Americas on the 30% year over year growth. So we.
We're not seeing that at all and just one other just a clarifying point on Jay its law right, so as far as it being repealed.
Okay.
They would have to be significant there have been a new law and so we feel confident about that on some of these other items those were actually in the early stages and we have not even had maxine.
<unk>.
The effective dose in in our.
And our pipeline or in our work. So the fact that there is a debate about those now.
It's not really happy about material effect on our business.
Good to know and just lastly, there was a comment about Europe it.
It seems that there is some mixed signals. Some positive. Some negatives are what are you kind of seeing in Europe . When we think of like the PAA in the TPS business.
Yes interesting kind of.
Separated between Ta and <unk>, our <unk> business in the UK specifically.
Is actually growing and it's been really really strong.
They're kind of a testament to no different than Jacobs, historically real strong capabilities in those areas of global priority and.
And national priorities and it's around the defense sector.
Has a strong relationship with MLD.
As well as in energy and utilities, which in fact is turning into a security issue in broader Europe . So that's where we're driving the business, what's driving that and the <unk> business is the energy security issue in the broader continental Europe as well as in Scandinavia, and I'll give you just one statistic.
A year ago, two years ago of our UK platform, which you know is really really strong, but 90% of our folks that were based in the U K worked in UK business today that that's about 60 40 is where we have growth we have our talent from the U K working on programs and projects and engagements all throughout Europe .
As well as globally and that goes into Kevin and I have been really vocal about that over the course of the last three or four years about tying that global talent. So it doesn't Toby dampen the effect of some of the economic headwinds in Europe , but our diversity has helped us in that front.
Thank you.
Yeah.
Thank you we'll go next now to Gautam Khanna at Cowen.
Yeah.
Yes. Thank you good morning and congrats.
Kevin and Claudio.
Thank you. Thank you.
Yeah, Hey, I just wanted to.
Go back to I think it was the first question in the Q&A on any sort of dis synergies and I don't mean.
Quantitative necessarily but are there any linkages that.
CMS NPA or CF medicines in PFS.
We're able to just be more competitive on bids because you did the broader qualifications of the entire enterprise that might be lost.
Also thinking just.
When <unk> was acquired I felt one of the.
The thrusts was to bring them outside of the U K, which you just talked about but into the U S and into some of the government customers does that potential opportunity maybe look.
Less optimistic.
<unk> is not under the same roof.
Thanks.
Yeah. So gautam, it's Bob what are the things that we looked at this really really hard and.
And as far as the dis synergies go.
We feel.
Pretty confident that thats not going to be of any materiality at all.
Now that said Jim.
To what we've done in the past our relationship post spin with CMS is going to continue to be very strong.
So our ability to work together collaborate and partner for the benefit of our client is going to continue to be there. So.
That's always going to be there in fact, we've demonstrated that in our history with with previous divestiture that we did we met relationship continues to this day to be very very strong on the PGA outside of outside of the U K really that that entrance into the U S, which were in real time and having success on.
It was around the private sector in the U S not that the government sector and more specifically around energy and utilities and health and life Sciences.
And those those opportunities have continued to buy and in fact today in the U S.
Probably 50 active pursuits.
A lot of cases bids in play.
With with PGA.
And we're feeling we're feeling very confident about that.
Yeah.
Thank you and if I might follow up just on the decision to spin versus an outright sale can you talk a little bit about <unk>.
What's the tax basis of CMS would be because presumably.
When you announce something like this.
Potential suitors would also be interested I would imagine so.
What does the tax basis of the enterprise.
Yes.
So we've we've evaluated all of the opportunities.
And depending upon if you were to do some type of other structure will ultimately determine what the tax base basis is but.
Clearly if we get some type of other transaction there would be some tax implications.
That that would occur so the fact that we.
Centered around executing against spend is a tax efficient way of addressing the opportunity to create two separate very strong companies and said look I think thats. How we are executing that's our plan at this particular point in time it takes a little bit of time, given some of the discussions that we've had in the past, but that's that's.
One of the reasons that we consider the spend.
Highly attractive option, but as we go through the process and determine if we get any additional facts or circumstances that could change that will we'll consider that.
Because we are ultimately interested in ensuring that we maximize shareholder value.
Yeah.
Thanks, guys.
Thank you and we'll take our final question. This morning from Andy Wittman of Baird.
Okay, great. Thanks, So I was going to ask here on some of the <unk>.
Capitalization I guess.
Newco and some of the cash cost the spinoff. So could you Kevin comment on what you think a realistic range for cash cost to effectuate, the spin would be as well as your thoughts on.
Where the debt would set.
I would guess that you would keep them ratable or similar leverage.
Based on the relative Ebitdas.
But I guess from a practical standpoint, I guess newco, probably gets spun out what with no debt and then wood.
Aro and then paid a cash dividend back to remain co two to achieve the capitalization so kind of a lot in here, but I guess, there's another aspect to it which is as you are ranging new debt in today's debt markets. What's the what's the net impact on.
And interest expense from having to recapitalize a new company.
Hello.
I'll make my first comment in response to your detailed questions is we remain committed.
Two the Jacobs remain code that it's going to be investment grade ratings. So I think that gives you a a ground posts that you can certainly evaluate what the potential options may or may not look like the second thing I would say is a little bit too early in the process.
We have kept this to a very small group of.
Of executives and team members up into this point in time and now we are as we publicly announced we're going to go through a very detailed thoughtful disciplined process that we will answer all of these questions I do think that that the way we would characterize.
The leverage factors theyre going to be appropriate relative to the businesses in which they are so.
I'll just leave it there and I think you can interpret what that may or may not mean, but we think ultimately that there is is an ability to have a standalone organization that will that is now CMS, which is going to be happy.
<unk> ability to be quite successful longer term and people in places.
And divergent as well as the remain co Jake Jacobs.
Got it and then I guess just for.
My follow up.
I think I heard.
On your revenue outlook for divergent that youre expecting good acceleration.
Maybe I missed it but did you have a comment on the second half revenue performance that youre expecting for CMS I think previously this business also was expected to see an acceleration I just wanted to make sure I heard your latest on that one.
Well.
We didn't really comment about CMS, although I think what I would focus on and CMS is really more about the margin sequential improvement, which we think is really important.
As we get.
The business back to that that level of 8% for the full year, which is what we characterized.
And so perhaps I'll leave it there because we didn't really talk about the CMS numbers.
Okay. Thanks, it's still growing.
Very much growth.
Okay.
Thank you and Mr. <unk> I'd like to turn things back to user for any closing comments. This morning.
Yes. Thank you it's exciting exciting times ahead, we're really looking forward to with future brings thank you everyone for joining the call and will be very brief.
Pretty close to the market as continue if things continue to develop.
And in progress Thank you everyone.
Thank you and ladies and gentlemen that will conclude the Jacobs solutions second quarter 2023 earnings call and webcast, we'd like to thank you all so much for joining us and wish you all a great rest of your day Goodbye.
Okay.
Yeah.
Okay.