Q4 2023 Jacobs Solutions Inc Earnings Call

Ladies and gentlemen, thank you for standing by my name is Sharon and that would be a congress operator today.

At this time I would like to welcome everyone.

To the Jacobs fiscal fourth quarter 2023 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

We would like to ask a question during this time.

Simply press Star followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star one again, thank you.

I would now like to turn the call over to Jonathan Evans, Vice President of corporate development Investor Relations. Please go ahead.

Thank you good morning.

Our earnings announcement was filed this morning, we have posted a slide presentation on our website, which we'll reference during the call are.

Our 10-K will be filed later today.

Like to refer you to slide two of the presentation material for information about our forward looking statements and non-GAAP financial measures.

Turning to the agenda on slide three.

Speaking on today's call will be Jacobs CEO, Bob forgot it.

CFO Claudio <unk>.

Bob will begin by providing an overview of recent activities and summarizing highlights from our fourth quarter results.

Audio will provide a more in depth discussion of our financial metrics 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 our CEO I forgot it.

Thanks, Jonathan and good day, everyone. Thank you for joining us to discuss our fourth quarter and fiscal 2023 business performance in 2004 2020 for outlook. Our team has shown remarkable strength adaptability and dedication to continuing to deliver outstanding results to our clients I am proud of our people for continuing to drive our culture of care.

Turning to new Heights.

Over the past couple of quarters, we have shared our intention to simplify our business model optimize our cost structure and accelerate profitable growth and margin expansion.

<unk> marks a key turning point as we boldly moved forward.

I wanted to provide an update on our previously announced intent to separate that CMS goodness on slide four before I move on to our fourth quarter results.

As we communicated following a robust evaluation of all opportunities. We are excited to announce the creation of a new leading government services player.

Jacobs will be separating our industry, leading government services businesses critical mission solutions, and the cyber and intelligence unit of diverging solutions by the way of a spin off to Jacobs shareholders, and then combining those assets with momentum through a merger, which has been structured as a reverse Morris trust.

This combination is intended to be largely tax free for Jacobs shareholders.

Turning to slide five.

The combination creates a combined government technology services leader within approximately $13 billion in revenue and approximately $1 $1 billion of combined adjusted EBITDA, including $50 million to $70 million of net synergies expected to be realized by year two.

Jacobs shareholders will own 51% and Jacobs will retain a stake equal to between seven 5% to 12% of the combined company based on achievement of operating profit targets prior to close.

Jacobs will also receive a $1 billion cash dividend subject to customary adjustments as well as an additional value through the disposition of our retained stake within 12 months of Coke.

As part of our continued separation efforts. We concluded it was the best It was best to include the majority of our debt burden solutions business, including the cyber and intelligence unit in the separation perimeter.

Owing to the strategic synergies shared costs and operational overlap with CMS.

We will retain the infrastructure related software assets of converged solutions, given their strong strategic fit with our critical infrastructure advanced facilities and consulting businesses.

We believe this combination of two premium industry leaders, who share strong operating platforms high performance culture, and a breath of expertise offers shareholders the best opportunity to realize long term value.

The combined business has the ability to drive significant innovation and growth with.

With meaningful cost synergies added scale and diverse end market exposure.

And is supported by secular growth trends.

After a comprehensive review of all inbound inbound inquiry, we believe the transaction is in the best interest of the company and our stakeholders.

Transaction has been unanimously approved by the Jacobs board as well as the financial sponsors of momentum and is not subject to any other shareholder approvals.

The transaction is expected to close in the second half of fiscal year 2024 subject to customary closing conditions and regulatory approvals.

For more details regarding the structure of the deal.

Might you to review the materials, we published earlier.

Moving to slide six which shows our multi year transformational as.

As part of this strategic separation, which results in a more focused Jacobs, we are concurrently announcing a cost optimization plan to be executed over the next 24 months.

During which time, we will target over 300 basis points of margin expansion as compared to our as reported fiscal year 2023 results driving expect driving an expected adjusted EBITDA margin of at least 13, 8% in fiscal year 2025 for pro forma Jacobs cloudy.

Claudia will share more details in her prepared remarks.

Post transaction Jacobs will be a well capitalized pure play a critical infrastructure and sustainability leader with a strong balance sheet and significant growth potential fiscal.

Fiscal 2023, Marc Records for revenue and free cash flow generation for Jacobs and we look forward to 2024 as we begin to chart our path forward as two leading independent companies.

Turning to slide seven in Q4 I am pleased.

To report another record quarter as measured by both revenue and operating profit.

I would like to once again reiterate that this growth is entirely organic.

Strong cash conversion remains a hallmark of our business model and remain robust in Q4 <unk>.

Allowing us to drive record fiscal year 2023 free cash flow in order to return capital to shareholders, while investing behind our growth accelerators climate response data solutions and consulting and advisory.

We recorded a 104% underlying free cash flow conversion to adjusted net income in FY 2023 on a record year of $837 million in free cash flow generation.

We expect to generate greater than 100% underlying free cash flow conversion again in FY 2024, before the impact of restructuring transaction and separation costs.

Our underlying business and outlook remains very healthy and we continue to be excited about robust growth opportunities in all our end markets.

Turning to slide eight.

Our people in places line of business delivered accelerating topline growth with adjusted net revenue up 11% year over year, and adjusted operating profit up 12% year over year.

Claudia will provide further details on the significant growth we're experiencing in our global business units.

We continue to see widespread positive indicators with a gross profit and backlog growth of 8% year over year. Once again, our pipeline continues to grow faster than our top line, which provides visibility and confidence in our expectation that growth can persist at mid to high single digits organically in FY 'twenty four.

Looking back at FY 'twenty, three I want to highlight the significant achievements of our <unk> business with double digit organic op growth in every quarter.

Water continues to be a pillar of our business.

Of the top 30 wins in the quarter nine were in the water sector of those wins, we wanted to highlight two that showcase our digital and data capabilities.

Firstly at the city of Farmington, New Mexico, wastewater and surface water treatment plant our data now.

Data enabled product awkward DNA is a key part of the solution to provide resiliency efforts and improved energy efficiency.

Secondly for Boston water and sewer Commission, we are leveraging our AI model that analyzes assets that are most likely to fail, helping our client create data driven maintenance and replacement plans.

In the energy transition space Jacobs has been selected as the program manager for the season crop $2 $85 billion effort to Decarbonize its steel mill in Duisburg, Germany.

With a new green hydrogen powered plant.

Site is Europe's largest steel mill and the effort represents one of the largest industrial de carbonization projects worldwide.

It is also a testament to the diversity of our expertise.

In transportation, our largest market, we continue to see broad based momentum from <unk> related funding.

Overall IAG related pipeline has increased approximately 20% year over year.

In Q4, we were selected to lead and manage the 10 year renovation of the Seattle Tacoma International airports International criminal emphasizing.

Upgrades to enhance mobility and energy efficiency to position Seattle, as a global tourism and business hub.

Internationally, we continue to see high levels of activity in the Middle East for example in climate response, we are providing program management services to the Saudi Arabia National Center for environmental compliance.

The work forms part of their ongoing environmental remediation program to repair damage to terrestrial and coastal environment.

Our environmental expertise is truly global and we continue to see a robust opportunity set related to our clients climate related challenges.

In CNS, we performed very well in Q4 to cap off a great year.

CMS Q4 revenue was 7% higher year over year and operating profit increased 26% behind 128 bps of margin expansion.

Pipeline and growth outlook remained robust with major reward prospects in FY 2024, and minimal forecasted recompete pursuits.

CMS was awarded a new project management resources framework contract with EDF nuclear generation.

License fee of eight nuclear power stations, which account for approximately 16% of the Uk's electricity output.

Consulting continues to post strong results with 13% revenue growth and nearly 21% operating profit margin, despite a very challenging macro environment.

While we remain cognizant of the weakness that some consulting peers are seeing we continue to be pleased with strong operational performance delivered by the <unk>.

Utilization has improved and during Q4 P announced the appointment of Kristian norovirus as its new CEO.

Christian formerly bad <unk> Life Sciences unit is a respected leader both internally and externally and has creative idea to take the Jacobs partnership with <unk> to New Heights.

For example, the power of our relationship is driving further opportunities as evidenced in our recent award to the Copenhagen Metro framework together with <unk>, we are bringing our enterprise digital tools AI solutions and deep knowledge of the rail sector to support the Copenhagen Metro.

As it continues to deliver modern future ready infrastructure to meet the city's fast growing population and urban travel demand.

Our diverse solutions operating unit delivered a strong quarter with 3% adjusted net revenue growth and 58% year over year growth in operating profit.

In divergent we are a leader in space innovation with the introduction of mango too.

A revolutionary radio frequency signal detection system that utilizes cutting edge AI and machine learning analytics emphasizing affordability.

An example of the leading IP portfolio reinforces independent CMS as a formidable player in the space Arena.

Turning to slide nine in.

In summary, we are extremely well positioned for growth across all the sectors. We serve building off our established leadership position and proven track record of operational excellence.

We are excited to turn the page on this next chapter and Jacobs history, where we will be creating two leading independent companies.

Flipping to slide 10.

Independent Jacobs is a leader in the majority of sectors in which we operate and a global leader in the overall industry.

With today's announcement, we are enthusiastic about the opportunity to further simplify our business structure optimize our cost base and accelerate growth and margin improvement in the quarters and years ahead.

Now I'll turn the call over to Claudia to review our financial results in further detail. Thank you Bob turning to slide 11 for a financial of Aneel.

Quarter results.

First quarter gross revenue grew 10, 5% year over year and adjusted net revenue grew eight 9%.

GAAP operating profit was $278 million for the quarter and included $52 million of amortization from acquired intangibles $47 million of IHS section separated relation related that structural cost.

And $11 million noncash charge related to decrease in our real estate footprint.

The other transaction separation related and restructuring costs of $43 million are primarily related to advisory and.

Costs associated with the separation of CMS.

As we go forward cost will now include expenses to be incurred in connection with the separation.

Looking to fiscal year 2024, we expect to incur approximately $275 million in one time costs related to the separation and associated cost optimization actions.

These costs are largely unavoidable and separation and transaction so the size but.

But I want to reiterate that post separation it will be a key focus of ours to minimize onetime adjustments inclusive of restructuring costs.

Our adjusted operating margin was 11% up 14 basis points year over year.

I'll discuss the underlying dynamics that reporting segment.

GAAP EPS from continuing operations was $1 25 per share.

And included a 27% impact related to the amortization charge of acquired intangibles.

So any sort of sense from transaction restructuring and other related costs.

5% noncash impairment charge related to reducing our real estate footprint and a pension adjustment to align to our annual adjusted effective tax rate.

I refer you to slide <unk> for a more detailed phone based adjustments.

Excluding these items fourth quarter adjusted EPS was $1 90.

Up 6% year over year.

Q4, adjusted EBITDA was $384 million and was up 10% year over year, representing 11, 1% of adjusted net revenue.

The company's U S GAAP effective tax rates for continuing operations is 21% for the fiscal year 2023.

Our U S GAAP and adjusted effective tax rate for the quarter and year includes certain tax charges or deferred tax valuation allowances and audit processes.

In the fourth quarter. These amounts to an EPS impact of <unk> <unk> per share and as a result fiscal year 2023 adjusted earnings per share from continuing operations reflects 21, 6% adjusted effective tax rate.

Finally backlog was up 4% year over year.

That revenue book to Bill ratio was just over one times with our gross profit and backlog, increasing 8% year over year.

Moving to slide 12 for a brief recap of our full year 2023.

Fiscal year gross revenue grew 10% year over year and net revenue grew 7%.

GAAP operating profit was $1 $1 billion.

<unk> significantly year over year, driven primarily by strong growth in gross profit flat hauled in G&A relatively flat.

GAAP EPS was $5.31 and adjusted EPS was $7 20.

Kevin.

And 4% year over year, respectively.

Adjusted operating profit grew 9% and was up 11% on a constant currency basis.

Both revenue and adjusted operating profit increased year over year, and all of our business segments.

Operating profit margins expanded 20 basis points to 10, 8% driven by a strong underlying performance.

Adjusted EBITDA was one point or $4 billion up 5% up 7% in constant currency.

As a percentage of adjusted net revenue adjusted EBITDA was 10, 8%.

We expect modest adjusted operating margin expansion in fiscal 2024, driven by a combination of the higher margin revenue mix and lower corporate G&A.

However, we expect an even greater uplift in margins post separation as we streamline our operating model and cost structure.

On a trailing 12 month basis fiscal year 2023 book to Bill was approximately one one times.

Regarding the performance of our lines of business.

Let's turn to slide 13 for Q4 performance and 14th portfolio performance.

Starting with people and places solutions.

The MTS continues to see solid momentum delivering strong revenue and operating profit results.

Q4, adjusted net revenue was up 11% year over year.

Northwest close system really strong across all business units.

Europe rebounded Boston definitely after being our weakest region year to date and we saw continued strength in the middle East Americas and Asia Pacific.

<unk> was relatively flat sequentially, although gross margin and backlog was up 8% year over year as we continue to focus on improving business quality.

<unk> Q4, operating profit was up 12% driven by strong growth maintaining healthy growth.

Margins and solid G&A management resulted in an adjusted operating margin of 15%.

Up 16 basis points year over year.

For the full year adjusted operating profit was up 16% and adjusted operating margins were 14, 6%.

Up 100 basis points year over year.

R. P. M. P S Americas unit, which is our largest by revenue benefited from legislative drivers in a healthy state and local budgets continuing to propel client spending internationally Asia Pacific and the Middle East continues to be bright spots in the portfolio supported by Giga cities.

And strategic pursuits.

Question.

Additionally, our European business showed a positive sequential growth.

Now moving to critical mission solutions.

Q4 revenue was up 7% year over year.

And backlog is up 8% year over year and the business continues to demonstrate a strong win rate against a very healthy pipeline and all of its core focus area.

CMS operating margins were up 128 basis points year over year.

For the full year margins were roughly flat, while operating profit increased 6% year over year.

Notably margins continued to rebound throughout the year as forecasted.

Moving to the right solutions adjusted net revenue increased 3% year over year in Q4.

We remain focused on portfolio instruction.

We expect growth to accelerate from year end levels as investments mature and lower margin contracts roll out of backlog.

Operating margins for the quarter was up 10, 1%.

10, 1% at 50 basis points sequentially personnel.

Turning to be a consult.

Revenue from <unk> was up 13% year over year in Q4, and increased 4% year over year in fiscal year 2023.

Based on booking trends, we expect revenue growth to show a positive trend in fiscal year 2024, while remaining cautious of the macro risk as the UK goes through an election cycle.

Q4 operating profit was.

26% up 122 basis points year over year, and up 21% year over year.

Utilization continues to improve and we expect operating margins to be over 20% for the medium term.

Our adjusted unallocated corporate costs were at $60 million in Q4, roughly flat sequentially and consistent with our guidance.

In conjunction with the CMS separation, we have initiated a comprehensive evaluation of our cost structure under a more streamlined business model.

However, despite the initial cost actions taken we will carry temporary costs associated with supporting the entirety of Jacobs.

Including the businesses to be separate.

We estimate that we are carrying approximately $40 million and temporary costs.

While this transition period.

This allows us the opportunity to reinforce our commitment to our clients and enhance business resilience.

We are confident that these efforts will contribute to a stronger foundation and continued excellence in serving our clients.

Two leading independent companies.

Turning to slide 15 to discuss our balance sheet and cash flow.

We posted a very strong quarter of cash flow generation.

And they could have all the quality of our earnings.

Operating cash flow was $219 million and free cash flow was $180 million.

As a result, we were able to deliver above our anticipated, 100% reported and adjusted cash flow conversion targets for the year with 104% underlying cash conversion.

During fiscal year, 2023 will return, 50% of our free cash flow to shareholders for a total of 418 million to both share repurchases and dividends.

So we were unable to repurchase shares in the quarter due to the CMS separation.

Utilized cash flow strategically pay down floating rate debt and ensuring a more robust financial position for the future.

This disciplined approach aligns with our commitment to long term financial stability and value creation for our shareholders.

We ended the quarter with cash of $927 million and gross debt of $2 9 billion.

Resulting in just over $1 $9 billion of net debt.

Our Q4 net debt to 2023 adjusted EBITDA of approximately one four times remains a clear indication of the continued strength of our balance sheet.

We remain committed to maintaining an investment grade credit credit profile, well today and I'll say more focused business, both are announced CMS separation.

In August we completed the offering of $600 million in senior unsecured notes due 2028 with a fixed rate of 635%.

This allowed us to repay a portion of the amounts outstanding are.

Under our revolving credit facility.

As of the end of Q4, approximately 35% so far that is tied to floating rates and our weighted average interest rate was approximately 5%.

We intend to opportunistically retire floating rate debt in the coming quarters.

For your benefit and the appendix of the presentation. We have included additional detail on our debt and quarterly interest expense.

Given our strong balance sheets of free cash flow, we remain committed to returning cash to shareholders.

On November 9th we paid at 26 cent dividend, representing a 13% year over year increase.

Finally, I wanted to highlight how our cost optimization plan shared on slide 16.

We recognize that our cost structure is fine.

And we see opportunities to optimize in the coming quarters and post CMS separation.

We have identified over 90 million in run rate savings, including lower corporate unallocated costs sort of specific measures that we are starting to action.

We expect to reduce our corporate unallocated costs from around $60 million per quarter to approximately $50 million per quarter, including full elimination of stranded costs post separation.

We are streamlining our operating model with an eye towards positioning us for growth and cost efficiency, while staying focused on our clients.

Well, we will not yet comment on long term growth and margin expectations beyond 2025 strategic plan. We believe we can deliver over 300 basis points of adjusted EBITDA margin expansion from fiscal 2023 as reported margins. So fiscal 2025 for Standalone Jacobs.

This resulted in unexpected adjusted EBITDA margins for Standalone Jacobs of at least 13, 8% in fiscal year 2025.

This is a bold undertaken us it is our longer term aspiration to deliver best in class industry margins.

In closing while there.

And I are committed to three things over the next few quarters first drive inefficiencies in our business and maximizing our profitability as demonstrated by the margin targets.

Second position in our business with the financial resources needed for a multi year free cash flow growth.

Third strengthen and discipline and deploying our shareholders capital.

Thank you and I will turn the call over to Bob. Thank you Claudia turning to slide 16, as we discussed throughout our remarks, we remain committed to accelerating robust growth opportunities ahead for all businesses.

Given today's global macro uncertainty that strength is more relevant than ever as we plan for the future as two independent companies.

It's crucial to emphasize that the underlying fundamentals of our business have never been stronger.

Turning to fiscal year 'twenty four outlook, we expect adjusted EBITDA of $1 $5 3 billion to $1 6 billion with an adjusted EPS of $7 72.

To $8 20.

Representing a 9% and 10% growth at the mid points respectively.

Outlook incorporates a full year contributions of the businesses to be separate we expect fiscal year 'twenty for effective tax rate of 22%.

This clarity of previously mentioned, we will carry temporarily elevated overhead costs needed to support CMS during the separation, including E and corporate support.

This coupled with historically historical seasonality will have an approximately 10% negative effect year over year on adjusted EPS in Q1.

We believe these costs are necessary to continue to support our clients as we progressed through this transition period.

This temporary cost is nonrecurring and should not be viewed as a reflection of a standard loan our Standalone company earnings power.

We are well positioned to accelerate profitable growth in the years to come as we seek to compound per share value for our shareholders.

We continue to be energized and excited about the future for Jacobs and CMS and remain confident in our plan for long term value creation.

Operator, we will now turn the call over for questions.

At this time I would like to remind everyone.

Order to ask a question press Star then the number one on your telephone keypad.

Please bear in mind, the one question and one follow up will be allowed for this session.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Jerry Revich with Goldman Sachs. Jerry Your line is open.

Yes, hi, good morning, everyone and congratulations on all the strong work here.

Can I just ask in terms of the margin.

Spansion targets can we just flesh that out a little bit and just talk a little bit more about the timing.

Backend loaded is that.

<unk> 24 versus 25.

If we just unpack the pieces a little bit more in terms of just the buckets of the 300 basis points relative sizes that'd be helpful. Thank you.

Hi, Jerry So Oh like too you have some of the details on this slide so let me just go over the details of this light. So you have first the component of the <unk>.

The stranded costs, so that one will happen after the separation so that's roughly $50 million that youll see that so.

So then you have one that I always thought it taken action, which is really the off the operating model and that will obviously accelerated top tier the separation, but we already have taken action on that so you'll see some of that over time.

And 20 for an accelerated and after the separation and then as I mentioned in my prepared remarks, you have the the overhead on the unallocated corporate that we normally hit you normally see it as a separate line and I talked about the $60 million down to 50 million, we will carry on.

Temporary cost to support CMS as we prepare it for towards the independent company or the combined company.

And that one as well you will accelerate in 2025, so and in summary, you'll see a little bit then 24 are accelerating towards the separation.

If I want to give you the nature of what of that is really the a lot of the support S. T. A.

The support layers and just in general it simpler management structure and support.

Okay Super and then you know the core underlying people and places a cadence.

That's embedded in that can you just.

Expand on how that looks versus what you folks laid out to us in the 2025 plan.

How what's progressing faster or slower than expectations relative to the segment margin ramp that you laid out just over a year ago.

Yeah, what we laid out over a year ago Gerry continues with regards to the.

<unk> I'm sorry <unk>.

Hum.

Our margin expectations and that the strategic time periods.

That hasnt changed.

Okay. Thanks.

Thanks, Bob.

The next question comes from the line of Chad Dillard.

C. J your line is open.

Hi, good morning, guys.

So I just wanted to continue on the margin question I was hoping you could bridge the 300 basis points how much comes from CMS. How much comes from I guess the decision to include diversified solutions.

The cost outs is there anything else that we should be thinking about when bridging.

Today versus 2025.

So Chad the 13, 8% as a standalone Jacobs of Edison.

It excludes a CMS and our cyber and intelligence.

And then the the nature of those costs is the three buckets that I mentioned before which are really corporate unallocated gloves on that 60 million run rates of 50 million run rate a pulse.

Post separation and then the operating model, which as you know $50 million and total run rate and then full elimination of stranded costs up to the separation.

Chad if you were to if you were to take if you were taken in two buckets Jed if you're taking two buckets.

Half is coming from the operating model of a cost structure. That's more in line with the type of business that we will have and half is coming from margin expansion.

And margin mix.

It's a higher margin higher growth business.

So think about it simplistically that word.

Got you Okay. That's helpful.

And then just a question for you on backlog was I appreciate that gross margin and backlog is growing by 8%, but I was hoping maybe you could frame.

Backlog growth, excluding the pass through revenues.

Just really trying to understand.

What were some of the puts versus the takes strength versus weakness that youre seeing underlying and our people in places.

And then maybe you can talk about just the size of the pipeline.

Yes.

Don't actually think Chad its a weakness so actually I think it's really strong in <unk>.

Right now.

It's really on project lifecycle, we measure that revenue growth based on.

Where we are in the project lifecycle right and so we're deep into whether it be advanced facilities jobs are large infrastructure programs, we're gonna be burning and booking and booking and burning a lot higher revenue kind of models, but as our business continues to profile more into a consult.

Seaworld were executing higher value services over the project and program lifecycle do you have.

Lower revenue higher margin opportunities come into backlog and it just depends on when that program lifecycle is so we've talked about it before which one is accelerating at a faster rate.

Tie that to where are we in the cycle of some of the expense.

Got it thank you.

Your next question comes from the line of Michael Dudas with vertical research Michael Your line is open.

Hi, Good morning, Claudia Bob.

Good morning, Good morning, Mike.

Bob maybe you could share maybe a touch of the pipeline and backlog.

As you're entering 2024 and <unk>.

So you touched on water in your prepared remarks, what are some of the other areas that you see some interesting opportunities for new project backlog growth and how much have you you mentioned about the change in mix of the type of service that you are going to be providing to your client base how quickly or how.

All in all this but will that be maybe.

Maybe on the project management consultancy side as we run through the for the revenue models over the next maybe two to three years.

So two parts one Mike Youre, asking about kind of what are some of the other.

And market.

Secular trends that we're seeing and then the second part of the question is around.

How do we see kind of revenue models as our consultancy business continues to grow consultancy type it yes, yes, yes.

You have to drive that the better mix that you were talking about over over you're sure sure.

The other the other verticals I mentioned of our top 30 wins nine or in water.

You take water in advanced facilities.

It's the half of the top 30 ones. We're in both of those sectors six big.

Advanced facilities.

The market's too so we continue to see.

Strong activity within the <unk>.

Within the advanced facilities World, probably driven more so now as we bottomed out.

From an end market standpoint, as far as sales goes within the semiconductor industry keep in mind, our clients continue to spend through there, but now with the <unk> one drugs going on in life Sciences, and all of the strength that we see with our clients we've had for years.

<unk> is going to continue to be strong and then the others I would highlight is energy transition.

I highlighted a specific job, but the whole grid modernization of everything that we're seeing and we're kind of in the consultancy component of that.

It's a strong piece, which is a segue to the second part.

I would say that that that that continued profile of our portfolio within now call. It independent Jacobs.

As we're kind of in the early innings of.

That.

So it's going to be a balance.

I would say over the course of the next two to three four years.

It's going to drive that margin expansion, even beyond with clarity you talked about.

Post 'twenty five.

With a cash conversion component to that.

Very high.

Perfect I appreciate that thank you.

Your next question comes from the line of Andy Kaplowitz from Citigroup, Andy Your line is open.

Hey, good morning, everyone again.

Good morning, So just sorting through Q4 results I know theres a lot of noise because of the announced deal, but EPS end up coming in below the low end of your previous guidance range could you give us more color into what exactly happened in the quarter.

Was below your expectations and you mentioned the $40 million of temporary costs that you're carrying and how that's impacting our results should we simply be padding that $40 million back to your 153 to $1 6 billion EBITDA for 2004 to get what guidance would have been if you weren't doing the RMT.

Yeah, So Andy so let's start with the first one which is the big one that explains.

Roughly half of all the got base the tax the tax piece and I had I included some of them in the in my remarks. So if I take you know its six cents. So it's more of the <unk>.

You have the one off in our allowance and this is something that happens with the deferred tax.

And so then the next one is going to be you know basically all overhead costs are unallocated.

One we call it the corporate unallocated <unk>, that's the other big piece and then the share count and you know I mentioned why we could see that the stock repurchases center and a fourth quarter event based on the transaction. So that's at a high level what that means than.

I added some of the commentary that is on the temporary costs that we're carrying as we prepare CMS and the cyber and intelligence units to operate independently so that Taylor.

Another piece of the affiliates.

But is it right to say that you know you can again, if you weren't doing the RMT you would add that $40 million back to EBITDA or is that not right to think like that.

Absolutely and that's C N O what Bob mentioned that towards the end that's really our earnings power excludes should exclude that are those temporary costs, we're very client centric as our clients' mission and we want to make sure you know way have quite a bit of value tied to to this transaction and the upsides that we incur.

<unk> you know in this additional value that we're going to.

To get into and the transaction and the new entity, we want the two entities to be very successful as temporary.

So make sure what.

We're preparing to.

Probably the leader that we want and that we continue to be.

Great and then for Andy just to clarify just to clarify so that EBITDA guidance that I gave at the end we're carrying it.

In that guidance.

Yeah, that's clear and then Bob just P. N. P. S. You know net revenue up 11% year over year in Q4, I think you said you have good confidence in mid to high single digit organic revenue growth.

Could you elaborate on that continent confidence do you see <unk> backlog growing at that rate in FY 'twenty for it and how are you thinking about sort of the balance between higher interest rates impacting projects centered geopolitical risks.

All the fiscal stimulus a J that you mentioned and so on.

Yes, I think in the backlog piece of the question Andy.

My answer is yes, I think that mid to high single digit growth.

We'll continue remember we've got a really nice diversity within <unk>. So if we think about.

Some of the political risk or what's happening with interest rates might be affecting some of our private sector clients.

Clients.

No there is not a full immunity right.

Our private sector clients continued to spend just because of the.

Whether they be technology base.

For global supply chain base University of technology based science based drivers or supply chain drivers that has continued and thats really been driving the performance.

As far as <unk>.

Or a larger infrastructure around energy transition outside the U S.

We have not seen that effect in fact, our pipeline continues to grow at.

Mid to high single digit percentages and this is on a base that's very high.

I appreciate the color.

Your next question comes from the line of Susan with Stifle Your line is open.

Hey, good morning, Bob and Claudia Thank you for the time.

Hey, Bert.

Bob maybe just taking that I think that was a more of a backlog question you said in your prepared remarks.

The outlook remains very healthy can you just walk us through how you're thinking about the organic growth profile for the company in this coming year.

Just for remain co I think the previous range for FY 'twenty four for <unk>.

6% to 9% organic CAGR with P. A consulting at 12% to 15%.

Do those remain intact and on the advanced facility side pretty positive comments. There do you think that can keep growing double digits.

Yeah. So the first part of the question Bert My answer is yes.

I think on advanced facilities.

I would say the underlying growth is strong.

Lot of these these these larger programs whether it be in the semiconductor space or in the life Sciences space.

Or are there are there are several impacts from from account standpoint, it's probably the highest that it's been continue to stay at a very high level. We're seeing now kind of the next wave of I mentioned GOP, one, but also other novel therapies run oncology and in some of the neuroscience.

Projects that we're seeing so.

The numbers will stay with far as numbers of opportunities will stay high.

Where they are in the project lifecycle.

We will kind of balance.

Theres two curves ones kind of coming down as far as the wave that we saw the others coming up which kind of leads to a 12% to 13, I'm sorry, 12 to 18 months kind of reach out there gathering.

Gather everything that I, just said your numbers work.

Got it okay. Thanks.

Just a level deeper into the <unk> side.

You mentioned some positive remarks on water and on the international opportunities you just sort of give us the viewpoint and how youre thinking about.

The regional disparity in FY 'twenty four is FX starts to become less of a factor do you think what you're seeing in Europe and other parts of the world can rival sort of the growth, we're expecting from IHA and leave us.

I don't know if it will it will get to that level.

It will be robust in the clarity I mentioned that our European business. Despite these these macro headwinds.

Space has done well and so I think.

Water transportation.

Energy transition that is that's driving the U S probably more pronounced is around energy transition in Europe.

Middle East is across all of our R. R.

PPS sectors.

In the Middle East and.

And then in Southeast Asia, and Australia, and New Zealand those have remained strong our business in APAC. This year grew at significant double digits and so smaller base than the rest of the world.

I'd say all in all the geographic diversity that we have in our business really really is a strong and helps us.

Thanks, Bob.

Your next question comes from the line of Steven Fisher with UBS, Steven Your line is open.

Thanks. Good morning, just wanted to follow up on the mix element of the 300 basis point margin bridge.

Bob when you were talking about the half before Thats makes like how much of that is related to just not having the lower margin CMS in there versus achieving better margins in <unk> I guess I'm wondering when all is said and done with your cost optimization through your segment level margins be.

Better or will that come out of some other initiatives over time.

Yes.

So Steven let me just make sure I understand so a recap what Bob said and then I'll address the segment margin. So the first one as you know the <unk> going up to 13, 8% roughly half is just the mix and by Max I mean, just what remains with us.

However, the cost optimization, the streamlining of our operating model and that is really a function of you know.

The remaining businesses removing costs and also to the addition of our digital enablement and all that so don't know that word to this segment.

Segment, I remain with us or the businesses are staying with us are going to increase their individual markets.

Does that answer your question yes.

Yes. It does so as part of the cost optimization there is segment level.

Efficiency initiatives as opposed to just sort of the corporate level element, yes, that's helpful.

Both separation that that's what the operating model, that's where it shows overall as a company.

Okay great.

<unk>.

Just trying to think about your debt position in about 12 months from now I'm not sure. If I missed if you frame this out or not but the $1 9 billion of net debt now.

<unk> dollars of dividend coming back.

From the separation to pay down debt.

Free cash flow looks like.

It would be about another $1 billion before whatever cash restructuring expenses, you're calling out.

I don't know how much that is but are you assuming close to sort of a net cash position exiting 2024.

Yeah. So so.

So all of the our decisions I are guided by a few principles. The first one is maintaining its investment grade rate and very important for us to maintain.

The strategic flexibility that we want so those.

Those decisions are guided by our conversations with the rating agencies.

Especially with this with this transaction and the other one is our commitment to return.

Cash to our shareholders. So as we go to the transaction I think one of the elements. It's also that elemental distributions to our shareholders and.

That's one of the reasons I highlighted how much we return this this quarter this year and that is unimportant.

Unimportant guiding principle for us is and on a risk adjusted basis to make the best decisions for our shareholders.

So I think that's an important element in being a question.

Thank you very much.

Thank you Sue.

Your next question comes from the line of.

Golfing them kind of with TD Cowen Your line is open.

Hey, good morning, guys.

Hi, Jonathan Good morning, Idaho.

Hey, I was wondering if you could characterize.

The growth profile.

Some of the projects, we've been putting in the backlog given the margin seem to be higher.

One allows.

Probably higher.

The mix of fixed price is there anymore.

Just how would you characterize it.

Yes.

Yeah.

Gautam, it's a great question, because it's where we're playing within the client's business I mean, we're talking about a level of of <unk>.

Scientific and <unk>.

In technical.

Offering that is at the highest part of the business of our clients business and so whether it be in our pure play.

Consulting work or in our B in our our science based.

Technical offering and the infrastructure and advanced facilities space.

That debt that garners, a higher level commercial model.

Part one part two is around the digital enablement right, we're actually offering outcome based solutions rather than the historical.

I'm going to get margin from a commercial model, that's either fixed or reimbursable and trade on a productivity gain.

We were able to get those types of margins.

With.

We'll get them in a reimbursable scenario or get them in a fixed price services scenario.

Because of the.

The level of impact that we're having with our clients business.

Okay and just one quick follow up you guys have talked about your <unk> technology I was just curious compared any commercial traction yet and if not when do you anticipate some of that.

Pizza is related to work out.

Yes. It has it has in the PFS work.

To segregate it out as an end market, we havent, where we're seeing the <unk> gain.

As in our water sector.

These wins that I'm referencing as well as some of the larger framework agreements that we have for water clients, whether they be federal state or local around the world.

That comes into play.

We're actually making P fast type of consultancy arrangements.

And that to the real P fast for <unk> sake across the industry.

It comes when you get to a superfund type of application and these these containment is being highlighted on public dockets. So.

We see growth, but I would look at that growth probably from a from a perspective of how it affects our end market sectors and then when you get kind of in the.

'twenty five 'twenty six 'twenty seven range and you start to get some compliance related.

Items that are even further driving those end market sectors that gets bigger.

Thanks Scott.

Your next question comes from the line of Saba Khan RBC capital markets. Your line is open.

Great. Thanks, and good morning, I, just wanted to get a little bit of perspective on maybe just the medium term even if it's directionally as you look at the 13, 8% in fiscal 'twenty five and maybe just think about your mix by end market and region.

I think moving on from that is there opportunity to whether to maybe look within <unk> for the lower margin businesses or.

While you expand geographically I'm, just thinking what the levers kind of going forward do you see for the <unk> margins.

Beyond just cost optimization to sort of get to that level in a few years.

So if you go into that so I'd say this is something that that we do.

We're doing currently and we do all the time, so I would say to bake. The levers are the our global delivery platform is one very important way.

One of the best platforms, if not the best and it's been for several years. That's the first one the other one is the digital enablement than you see at some of the projects that we highlighted today are you know the.

You see a clear differentiation that we have compared to our competitors, where we the digital enablement and the outcome based that Bob mentioned before.

Jives those those more profitable.

Projects.

Yeah, and just to add one more thing sorry, but on the on the kind of the what.

What we don't need we don't we feel really strongly that our our portfolio in the end markets that we're in is strong.

Claudia talked about our two biggest enablers.

Add a third which is our consultancy enablement as well, but it's not like we need to go search for new geographies.

Sure.

<unk> skill set and an end market sector is really the expansion through the digital and consultancy based enablement, coupled with access to global talent, which.

I would I would have been high agreement that we're the we're one of the best and are and how we deliver on that.

Okay, Great and then as you think about your guidance, what kind of extra kind of the numbers embedded in your three year plan you laid out the 6% to 9% for Pn in PFS and then even as you look at sort of maybe another year beyond that.

Of.

Price versus volume do you anticipate given some of the funding that's in the system right now and how should we think about that mix over the next couple of years, particularly in the kind of in for a space.

Yeah, I think that that's going to be.

Tied to this enablement component.

Our cone.

<unk>.

It kind of a different probably a different answer for different components of that infrastructure and advanced security space, Let's just hone in on infrastructure.

Our clients are kept with how much they can spend for the infrastructure needs. So what we do is as we come in with an offering where we're gaining margin with the enablement of of outcomes based solutions. So there is a.

A price component, but with a higher margin is what we're driving with our digital enablement. So we see that driving to the bottom line as we do all the things are Claudia you talked about is <unk>.

Creating a more simplified and streamlined organization.

Great. Thanks, so much.

Your final question comes from the line of Andy Wittmann with Baird. Andy Your line is open.

Oh, great. Thanks for taking my questions here I guess it would just be kind of helpful to understand the timing on the $275 million of costs associated.

With with all of these actions.

It sounds like there's going to be some here.

Ahead of the transaction, but some probably translate to after the transaction Claudio can you just talk about the timing of those cash items and the recognition of both on the income statement.

So this is a very closely.

Closely linked to the execution of the separation. So there will be you know more.

More towards the end you will have you will have more because of the elimination of a you know we've talked about this trend of course, then the advisors and all that.

Very much throughout your you're going to see it because of the advisory fees and all that that I mentioned before.

Sure.

Just align it with the timeline of the separation.

Okay.

And then I guess.

We're going to do next I guess, just on I guess on the on the <unk> you guys. I guess I just wanted to get a little bit more comfortable with that.

I don't think you're saying that the corporate unallocated cost run rate is going to be higher in <unk>.

It sounds like Youre, saying its going to be about the same I just wanted to confirm that and then when you talked about the seasonality I guess, there's always seasonality in <unk>.

In <unk> whats different about this year's seasonality is it just the fact that the items that were called out in last year's footnote that presents a tough comp that werent excluded and I guess maybe related to that if there are costs that are related to restructuring and separation why aren't those being excluded in the first quarter.

No I think we talked about there is the seasonality of the business. So yes.

I'd say, yes to that one and then the one that I mentioned of the 40 million just in at a high level. The cost that we have Karen to support the separation of CMS. So it's really linked to the transaction or the preparing CMS to operate and then you and then you environment. So those I would say that one.

Fist at sandbox.

I I didn't say it would be a higher on the 60 million is more what we carry an extra store.

Across the company to support CMS.

Okay.

Thank you.

And cyber and intelligence.

At this time there are no more questions I would like to turn the call back over to the team.

Yes. Thank you everyone. One we're excited about the future and we look forward to providing more updates.

As we progressed our exciting plan forward. Thank you everyone.

Thank you.

Ladies and gentlemen that concludes today's call. Thank you for all for Tony you May now disconnect.