Q3 2024 Jacobs Solutions Inc Earnings Call
Krista: Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs Solution Third Quarter 2024 Earnings Conference Call-In Webcast. All lines have been placed on mute to prevent any background noise.
Krista: Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs Solution Third Quarter 2024 Earnings Conference Call-In Webcast.
Krista: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I will now turn the conference over to Ayan Banerjee, Senior Vice President of Investor Relations and Finance. Ayan, you may begin your presentation.
Krista: All lines have been placed on mute to prevent any background noise.
Krista: After the speaker's remarks, there will be a question and answer session.
Krista: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. And if you would like to withdraw that question, again press star 1. Thank you.
Krista: Turn the conference over to Ayan Banerjee, Senior Vice President of Investor Relations and Finance. Ayan, you may begin your conference.
Ayan Banerjee: Thank you. Good morning.
Ayan Banerjee: Thank you. Good morning. Our earnings announcement was filed this morning and we have posted a slide presentation on our website, which we will refer during the call.
Ayan Banerjee: Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we will refer to during the call. I would like to refer you to slide two of the presentation material for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Turning to the agenda on slide three.
Ayan Banerjee: I would like to refer you to slide 2 of the presentation material for information about our forward-looking statements, non-GAAP financial measures, and operating metrics.
Ayan Banerjee: Turning to the agenda on slide 3. Speaking on today's call will be Jacobs CEO Bob Pragada.
Speaker Change: Special Advisor to the CEO , Kevin Berryman, as well as our new CFO , Venk Nathamuni.
Speaker Change: Bob will begin by providing an overview of recent activities and then summarizing highlights from our third quarter results.
Kevin Berryman: Kevin will provide a more in-depth discussion of our financial metrics.
Speaker Change: Venk will then provide a review of our balance sheet and cash flow and provide comments around our guidance and investor deck. Finally, Bob will provide closing remarks and then we will open up the call for questions.
Ayan Banerjee: Speaking on today's call will be Jacobs CEO Bob Pragada, Special Advisor to the CEO, Kevin Berryman, as well as our new CFO, Venk Nathamuni. Bob will begin by providing an overview of recent activities and then summarizing highlights from our third quarter results. Kevin will provide a more in-depth discussion of our financial metrics. Venk will then provide a review of our balance sheet and cash flow and provide comments on our guidance and investor data. Finally, Bob will provide closing remarks, and then we will open up the call for questions. With that, I will turn it over to CEO Bob Pragada. Thank you, Ayan.
Bob Pragada: Thank you, Ayan. Good day, everyone, and thank you for joining us to discuss our third quarter fiscal year 2024 business performance. I am joined today by my special advisor, Kevin Berryman, who acted as interim CFO into June and will therefore report out the financial results. I'm delighted to also welcome our new CFO, Venk Nathamuni, on his first earnings call for Jacobs. Venk joined us in June and will provide details on guidance. Venk brings a wealth of knowledge and expertise from his 30 plus year career, and I am excited to work in partnership with him moving forward.
Bob Pragada: With that, I will turn it over to CEO Bob Pragada. Thank you, Ayan. Good day, everyone, and thank you for joining us to discuss our third quarter fiscal year 2024 business performance.
Speaker Change: I'm joined today by my special advisor, Kevin Berryman, who acted as interim CFO into June and will therefore report out financials.
Speaker Change: I'm delighted to also welcome our new CFO , Venk Nathamuni, on his first earnings call for Jacobs.
Speaker Change: Venk joined us in June and will provide details on guidance.
Speaker Change: Venk brings a wealth of knowledge and expertise from his 30-plus year career, and I am excited to work in partnership with him moving forward.
Bob Pragada: Kevin will continue in his role as special advisor to me to drive a successful conclusion to the separation and merger of our critical mission solutions and cyber intelligence businesses. I'd like to extend my gratitude to Kevin for his ongoing support.
Speaker Change: Kevin will continue in his role as Special Advisor to me to drive a successful conclusion to the separation and merger of our critical mission solutions and cyber intelligence businesses with Momentum.
Speaker Change: I'd like to extend my gratitude to Kevin for his ongoing support.
Bob Pragada: Now moving to slide four. We continue to make progress on our strategic shift toward a simpler, higher value, higher margin portfolio and remain confident in driving margin expansion over the coming years.
Speaker Change: Now moving to slide four.
Speaker Change: We continue to make progress on our strategic shift toward a simpler, higher-value, higher-margin portfolio and remain confident in driving margin expansion over the coming years.
Bob Pragada: I am pleased to report significant progress on the previously announced plan spinoff of our critical mission solutions and cyber and intelligence business. Momentum will provide additional details during their Capital Markets Day on Tuesday, August 13, 2024. We ended Q3 with a strong book-to-bill of 1.53 times and record backlog. We achieved double-digit growth in our water and environmental markets, with two-thirds of our water-related business focused on high-value science-based consulting and advisory services driven by aging infrastructure and emerging PFAS regulations.
Speaker Change: Turning to slide 5.
Speaker Change: I am pleased to report significant progress on the previously announced planned spinoff of our critical mission solutions and cyber and intelligence businesses.
Speaker Change: An updated Form 10 was publicly filed yesterday with the U.S. Securities and Exchange Commission.
Speaker Change: This filing, made under Amazon Holdco Inc., includes important business and financial information about the intended merger with Momentum to create a leading publicly traded global government services provider.
Amentum: Amentum will provide additional details during their Capital Markets Day on Tuesday, August 13, 2024.
Amentum: The transaction is now anticipated to be completed in the second half of September 2024.
Speaker Change: Turning to slide 6 and Q3, I will now share our third quarter achievements highlighted by strong backlog growth, consolidated margin expansion, and PMPS record backlog and strong adjusted operating margin.
Speaker Change: This period saw a continuation of a mixed shift to higher-margin, science-based consulting and advisory services that offer significantly higher returns, contributing to an overall margin expansion notably led by PNPS and our partnership with PA Consulting.
Speaker Change: We are seeing an accelerating demand for critical infrastructure, particularly in water, environmental, and advanced utilities and markets, which are poised for substantial growth.
Speaker Change: Consolidated backlog increased 6% year over year, bolstering confidence that our business will accelerate profitable growth as we strategically shift our portfolio to higher value, higher margin solutions.
Speaker Change: Our consolidated adjusted EBITDA came in at $392 million, an increase of approximately 11% compared to the same period last year, and representing 11.5% adjusted EBITDA margin.
Bob Pragada: Europe, particularly the U.K., has shown resilience, posting a robust quarter in water-related awards. We continue to see a growing pipeline in transportation and energy and power supported by ongoing government stimulus. As an example, in transportation, we were selected to provide program management services for Broward County Transportation Department's first ever public transit expansion. Our partnership with PA continues to be a differentiator in our science-based consulting and advisory services.
Speaker Change: Europe , particularly the UK, has shown resilience, posting a robust quarter in water-related awards.
Speaker Change: Additionally, our partnership with Onondaga County, the Syracuse metropolitan area in central New York, which began in 2008, continues as they've chosen us to provide program management services for their efforts in controlling increased combined sewer overflow and utilizes our digital one-water solutions.
Speaker Change: We continue to see a growing pipeline in transportation and energy and power supported by ongoing government stimulus. As an example, in transportation, we were selected to provide program management services for Broward County Transportation Department's first-ever public transit expansion.
Speaker Change: Additionally, the quarter was highlighted by several key wins in the energy and sustainability space, as demonstrated by our appointment as Program Manager for the Arches Hydrogen Consortium and Master Services Agreement with Shell Energy in Australia.
Speaker Change: PA Consulting delivered an industry-leading adjusted operating margin of 21.8% with robust execution and cost discipline.
Speaker Change: Our partnership with PA continues to be a differentiator in our science-based consulting and advisory services.
Speaker Change: In Divergent Solutions, we are encouraged by the ongoing demand for our digitally-enabled infrastructure solutions that will remain with independent Jacobs post-close.
Speaker Change: CMS delivered 35 basis points of margin expansion, the highest in 10 quarters, and has a strong pipeline. Additionally, we're experiencing encouraging trends that support long-term growth as we approach the merger with Momentum.
Speaker Change: In summary, we remain confident in our ability to win higher-value, higher-margin solutions and deliver superior execution to meet our clients' expectations. Now, I'll turn the call over to Kevin to review our financial results in further detail.
Kevin Berryman: We now expect our total restructuring cost to be approximately $300 million for the fiscal year.
Kevin Berryman: Our adjusted operating margin was again a strong 11.3%. I'll discuss the underlying dynamics during the reporting segment review.
Kevin Berryman: GAP EPS from Continuing Operations was $1.17 per share and included.
Kevin Berryman: A $0.31 impact related to the amortization charge of acquired intangibles.
Kevin Berryman: and 49 cents from transaction restructuring and other related costs which again were materially driven by the separation transaction.
Kevin Berryman: Excluding these items, third quarter adjusted EPS was $1.96, marking an 11% increase compared to the previous year.
Kevin Berryman: Q3 adjusted EBITDA was $392 million and was up 11% year-over-year, representing an 11.5% adjusted EBITDA margin.
Kevin Berryman: Finally, consolidated backlog was up 6% year-over-year and the revenue book-to-bill ratio was 1.29 times, with our gross profit and backlog increasing 5.5% year-over-year.
Kevin Berryman: Starting with People and Places Solutions, Q3 Adjusted Net Revenue was up 5% year-over-year, with Adjusted Operating Profit up 12%.
Kevin Berryman: Our mixed shift, mentioned earlier, resulted in higher margins on lower revenue growth.
Kevin Berryman: Adjusted operating margin of 15.3% was up 95 basis points year-over-year. Our backlog grew by 10% year-over-year, while gross profit in backlog grew 9%.
Kevin Berryman: Nine percent. This quarter's critical wins underscore our strength in water, environmental, and advanced facilities, reinforcing our leadership position in these key markets.
Kevin Berryman: These wins translated into a book-to-bill of 1.53 times and a record backlog as previously mentioned by Bob.
Speaker Change: Moving to critical mission solutions, our Q3 revenue decreased 3% year-over-year while backlog was up 4%.
Bob Pragada: Excluding the announced contract loss mentioned in the prior quarter, our revenue would have been up slightly year-over-year.
Speaker Change: Our adjusted operating profit was at 1.2% year-over-year, while CMS adjusted operating margin rose by approximately 35 basis points year-over-year to 8.7%.
Speaker Change: The highest margin in 10 quarters as the business continues to drive operational improvements and margin-enhancing, client-facing projects.
Speaker Change: Shifting to Divergent Solutions
Speaker Change: Q3 saw an 11% year-over-year dip in adjusted net revenue and a 40% year-over-year decrease in adjusted operating profit driven by a one-time year-to-date government rate adjustment and the space-based ISR program delays that were mentioned in the prior quarter.
Speaker Change: Despite the strategic shift in funding with the DoD, we continue to see positive momentum in our space-based ISR technology adoption, leading to pipeline build and expected future backlog growth.
Speaker Change: Now let's turn our attention to PA Consulting. Q3 saw a modest increase in year-over-year revenue. However, PA delivered a strong adjusted operating margin of 21.8%, reflecting a 60 basis point improvement from the previous year.
Speaker Change: A margin results this quarter exceeded our expectations and reinforces our confidence in sustaining a strong margin profile as we continue to expect 20% plus margins in Q4.
Speaker Change: Backlog increased 4% year-over-year, and we expect improved growth as we enter fiscal year 2025.
Speaker Change: Our adjusted, unallocated corporate costs were $61 million in Q3, and we continue to make progress on simplifying and optimizing our operating model to drive costs down.
Venk Nathamoni: Finally, I am very excited to welcome Venk to the team. We've been working together closely and we have made great progress on ensuring a smooth transition. With that, I'll turn the call over to Venk.
Venk Nathamoni: Thank you, Kevin.
Venk Nathamoni: Let me begin by saying I'm very excited to be part of the Jacobs team and a special thanks to Kevin for his partnership and support.
Speaker Change: I'll now provide a quick overview of our balance sheet and cash flow metrics, followed by consolidated full year guidance.
Speaker Change: Turning the slides then.
Speaker Change: We posted a strong quarter of cash flow generation, which is indicative of the quality of our earnings and cash conversion.
Speaker Change: We generated strong quarterly free cash flow of $445 million.
Speaker Change: Year-to-date, our free cash flow conversion was well above 100%, leading to a full-year expectation of greater than 100%.
Speaker Change: Regarding capital allocation, we opportunistically repurchased $151 million of shares during the quarter, which is up $55 million compared to Q2, reflecting our commitment to delivering consistent return of capital to our shareholders.
Bob Pragada: which is up $55 million compared to Q2, reflecting our commitment to delivering a consistent return of capital to our shareholders.
Speaker Change: We have $528 million remaining under our current repurchase authorization, and as we've stated before, we'll continue to return capital to shareholders while remaining committed to maintaining an investment-grade credit profile.
Speaker Change: On the balance sheet, we ended the quarter with cash of $1.2 billion.
Speaker Change: and gross debt of 2.9 billion dollars and our Q3 net debt to adjusted EBITDA of approximately 1.1 times remains a clear indication of the continued strength of our balance sheet.
Speaker Change: Given this trend, we feel comfortable with a portion of our debt remaining current in the fiscal year.
Speaker Change: We have ample options.
Speaker Change: Refinancing, as well as using proceeds from the expected separation transaction for repaying the current amounts.
Speaker Change: As of the end of Q3, approximately 37% of our debt was tied to floating rates and our weighted average interest rate was approximately 5%.
Speaker Change: On the dividend front, we remain committed to growing our quarterly dividends.
Speaker Change: The board has authorized a quarterly dividend of 29 cents and 11.5% year-over-year increase.
Speaker Change: to be paid on August 23rd.
Speaker Change: Turning to slide 11.
Speaker Change: Given the solid execution thus far, we are narrowing our consolidated adjusted EPS outlook to a range of $7.85 to $8.05.
Speaker Change: representing 10% growth year-over-year at the midpoint.
Speaker Change: We expect fiscal 2024 adjusted EBITDA to be near the lower end of the $1.54 billion to $1.585 billion range.
Speaker Change: This guidance incorporates Q3 adjusted EPS of $1.96.
Speaker Change: and approximately 27% adjusted effective tax rate for the remainder of this fiscal year.
Speaker Change: Additionally, this represents 13% EPS growth in the second half of fiscal year 2024 versus the year-ago period.
Speaker Change: Our expectation is that the ongoing positive momentum in our business will lead to increased revenue growth in fiscal year 2025 compared to our current levels.
Speaker Change: Beginning next quarter, we expect our results for our continuing operations to reflect the new independent Jacobs.
Speaker Change: We look forward to sharing our long-term strategy as well as our financial target model with the investor community during this event.
Speaker Change: We are exceptionally well positioned to capitalize on the momentum in the critical infrastructure market and we remain confident in our ability to grow market share and fulfill the needs of our clients across key sectors. Operator, we will now open the call for questions.
Mike: Morning, Mike. Thank you.
Mike: yeah
Mike: Sure, Mike, maybe I'll...
Mike: I'll address both.
Mike: I'd say yes, the gross profit and backlog is definitely being positively affected.
Mike: And so on the service mix, I mentioned a couple of times, you know, we are really seeing a fundamental shift in our profile with regards to higher end science-based consulting and advisory services, and that's not only showing up in our results from a burn profile, but also in the backlog.
Mike: The profile, the backlog is, right now, as a point in time, heavily weighted towards
Mike: water as well as in advanced facilities predominantly life sciences and those two have a higher margin profile as well so both are having a positive effect on that
Mike: With regards to FY25, we're looking forward to potentially another strong Q4 backlog performance, booking and backlog performance, leading to confidence in our revenue growth in FY25. So, definitely some nice tailwinds there.
Mike: That's great, Bob. Thanks, sir. Thank you.
Speaker Change: Your next question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.
Andy Kaplowitz: Hey, good morning, everyone.
Andy Kaplowitz: Good morning, Andy. Good morning.
Andy Kaplowitz: So Bob, Venk, or Kevin, can you give us a bit more color into the guidance toward the lower end of your annual EBITDA range?
Andy Kaplowitz: You just said, what change versus the last quarter? Obviously, your margin has been very good. So you're seeing delays in backlog burning, which is hurting your revenue. Anything else that you could give us in terms of color?
Speaker Change: Yeah, Andy, yeah, thanks for the question. So I'd say in a few few moving parts as it relates to the EBITDA performance
Speaker Change: The SciTech loss that was announced in the prior quarter and then some of the devious delays that Bob alluded to in his earning script.
Speaker Change: Very helpful. And then...
Bob Banker: Bob, Venker, Kevin, you kept the 13.8% plus FY 2025 stand-alone margin guidance in tact for now, but obviously your people and places margin has been much higher than expected so far this year. So how do you think about that target?
Speaker Change: At this point, could there be considerable upside to that target? And then when you think about remaining co-sales, I know you said you expect a pretty good year next year, but any reason why you couldn't expect that sort of 6 to 9% growth for people in places at least that you've been talking about?
Speaker Change: Yeah, so maybe the first one with regards to confidence going into FY25, Andy.
Speaker Change: There was a reason why we put the plots, clearly some moving parts right now with regards to the separation.
Speaker Change: So, you know, timing was another element that we wanted to consider. Performance has been solid. So I would just characterize it as some tailwinds that we've got going into FY25, and we'll be really clear about that as we move into the next phase. But for confidence overall.
Speaker Change: Yeah, so I'm sorry about that. So, yes, good, good visibility there. You know, during the quarter, we...
Speaker Change: Strong tailwinds in water in advanced facilities. In the areas where there was a little bit of maybe some slight
Speaker Change: And if I could, I would say that in terms of just what we see ahead, clearly from a Q4 booking standpoint, there's still some good confidence about the strength of those bookings.
Speaker Change: Your next question comes from the line of Steven Fisher with UBS. Please go ahead.
Unknown Executive: Thanks. Good morning.
Stephen Fisher: Thanks. Good morning. I'm not sure if this one would be something you would say for that Investor Day, but really just trying to think about what's the right framework for profit growth year over year in PNPS.
Stephen Fisher: Bob, you mentioned that you're going to accelerate the profitable growth. I mean, is the framework here any different than sort of the mid to upper single-digit revenue growth, and then some of this margin mix gets you to low double-digit profit growth?
Speaker Change: is, you know, something more like mid-teens possible, given that, you know, you are accelerating these large awards and some of the mixed dynamics.
Speaker Change: Yeah, I think it's early, Steve. We're going to go through all of that in some details.
Speaker Change: but we're really excited about the tailwinds that we see for FY25.
Speaker Change: Specifically in
Speaker Change: Okay, fair enough. And then just to follow up on the corporate expenses, can you just give us an update on how much more clarity you have to the path of hitting the target rate that you have and maybe what the next couple of quarters that you have embedded in there in that trajectory?
Speaker Change: Well, look, Steven, I think it's clear that we're going to have a different reporting structure as
Speaker Change: as Venk highlighted, once the transaction closes. So.
Speaker Change: So the...
Speaker Change: The numbers that you will see in the corporate line will start to change, and we're working through all the reporting segments and all that kind of information for the full year reporting. So you may not see exactly the same number going forward, but you will.
Speaker Change: Fundamentally, on an apples-to-apples basis, that $60 million we expect will trend down to $50 million over time. It may embed it into a consolidated result for the company, and so you may not see it broken out separately.
Speaker Change: But that's going to help drive towards that 13.8% EBITDA margin that was just asked going forward. So we feel good about it. Some of that cost will have to be...
Speaker Change: targeted after separation because we still have two businesses to run. So, or three, I should say, with PA. And so more to come on that, but we feel confident about.
Speaker Change: The necessary cost reductions that allow us to get to the 13.8% EBITDA marking.
Speaker Change: Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.
Sabahat Khan: All right. Thanks and good morning. You know, you talked a little, you mentioned a bit of a
Sabahat Khan: You know, the ongoing is in the UK a little bit. Can you just maybe talk about...
Sabahat Khan: Just the flow of the projects you're seeing across some of the markets, maybe, you know, particularly kind of, you know, the U.S. and the U.K., obviously a lot of elections going on, other puts and takes globally, just, you know, is that trending in line with what you would have anticipated at the beginning of the year? Just any color there would be great.
Speaker Change: Yeah, a couple comments. Let me start kind of with the U.S. and then work my way around. I'd say in the U.S. the flow of bid activity and pipeline across...
Speaker Change: Infrastructure and Advanced Facility. That hasn't slowed. I'd say the burn rate of some of our U.S. transport work has been a little slower from a burn standpoint.
Speaker Change: But the level of opportunities have been there. In water, I'd say globally, we have seen some real positive momentum, both on bookings as well as burn, and that's across all geographies.
Speaker Change: U.S., Europe , to include the U.K., Middle East, and our Asia-PAC and ANZ area. So water has been in that realm, as well as advanced facilities, really driven by life sciences.
Speaker Change: So, I'd say that just the two areas that we saw as a part of the election in the UK, pause, was transport. Water...
Speaker Change: kept going in the UK. And then a reprioritization in Saudi with regards to some of the event-driven, cities-oriented work.
Speaker Change: moving more towards the time-based work like the Expo or the airport or infrastructure that's going to be needed with a time time element to that in 2026.
Speaker Change: You know, leading to the Expo and the FIFA World Cup. So, these are things that we're continuing to add optimism as we move into Q4 and beyond.
Speaker Change: Great, and then if you could maybe just follow up on the commentary around the water, you know, I broadly heard that
Speaker Change: The demand in that space has been growing. Can you maybe just talk about...
Speaker Change: your win rate in that space, any particular areas within the broader water market where you might have been winning an outsized amount of work, and if I could maybe just talk about the progress you've made with AppApe in terms of any opportunities there that you might have secured.
Speaker Change: Sure.
Speaker Change: So as far as what's driving it, clearly the aging infrastructure is a big piece. The other piece is around combined sewer overflows and what's happening with regards to climate and some of the natural disasters that we're seeing. So I'd say that's...
Speaker Change: That's accelerating what's going on as well.
Speaker Change: In the drinking water component, we are seeing an increase.
Speaker Change: in PFAS.
Speaker Change: in addressing the PFAS regulations.
Speaker Change: specifically in the US, but also in Germany and in in other locations too. So that's all kind of driving that just a quantified Sabahat, you know, our pipeline in the in the water sector
Speaker Change: is up nearly 2x as it pertains to this time last year and we are winning a majority of the work that we're going after hence the the real attention and focus on the growth.
Speaker Change: Your next question comes from the line of Andy Wittmann with Baird. Please go ahead.
Andy Whitman: Oh great, thanks for taking my questions. I guess I just wanted to give a little clarification on the gross profit and backlog. I guess your total backlog was up 6% year-over-year and your gross profit and backlog was up 5.5%.
Andy Whitman: I guess we've already established that the PNPS segment margin is up, so I was wondering what the offset and which segments they are, and if you could talk about the mix in those and what occurred there so we can understand the complexion there a little bit better. I think that would be helpful.
Kevin Berryman: Andy, maybe just, I'll let Kevin kind of clarify the nuance within the backlog and then I'll talk about kind of the, you know, the profile as it pertains to the various end markets and
Andy: I'm going to talk about that profile. Yeah, look.
Andy: So what we're seeing is, we've been talking about the growth profile and people in places top line wise, and it being a little bit more muted because effectively we're seeing more consulting.
Kevin Berryman: You know, science-based technology, technical and consulting work that's happening.
Kevin Berryman: In the backlog and the book-to-bill, very strong book-to-bill, is some other types of projects which include lower margin work, which will at the same time create
Kevin Berryman: accelerated top line growth. So it'll be a little bit of a reduction in mix relative to the consulting piece.
Kevin Berryman: And at the end of the day, it's going to be quite positive because...
Kevin Berryman: that involve program management and extended dollars.
Andy: Unknown Speaker Being spent, which will include a little bit greater percentage of pass-through revenue, which has more limited margin than the high value consulting work that we do. Unknown Speaker Yeah, and Andy, maybe I'll just extend on that last thought that Kevin had. So then if you break that, you know, you cited the consolidated numbers on the six and the five and a half and gross profit. If you then translate that into PNPS, which relates to the last comment that Kevin made.
Andy: Got it.
Speaker Change: Okay, yep, that actually makes sense. So, that's helpful. I wanted to also just get an update, Bob, just on...
Speaker Change: Some of the actions you're taking in preparation for the split. I know you're looking at how your organization works.
Speaker Change: , and the benefit centers are. Can you talk about any things that you've actioned to date that we should know about in terms of how you've changed your business model in anticipation of that forthcoming split, things that you're able to do now before you're able to actually effectuate that deal?
Speaker Change: Yeah, absolutely. So we really looked at, you know, in a consolidated company, what what type of corporate needs are going to be needed on more of a homogenous
Speaker Change: Corporate needs are a lot more.
Speaker Change: Synchronized across the across the world so those movements to global business centers
Speaker Change: and in real streamlining of process protocols and systematic enhancements. Those have been taking place in real time from a business standpoint.
Unknown Executive: I'm not sure if this one would be something you would say for Investor Day, but really just trying to think about what's the right framework for profit growth year over year in PNPS. Since, Bob, you mentioned that you're going to accelerate profitable growth. I mean, is the framework here any different than sort of the mid to upper single-digit revenue growth, and then some of this margin mix gets you to low double-digit profit growth? Or is, you know, something more like mid-teens possible, given that, you know, you are accelerating these large awards and some of the mixed dynamics?
Unknown Executive: Hey, good morning. Bob, maybe just to start with you, you had some comments on the advanced facility side. It sounds like life sciences continue to be really strong, and you mentioned AI data centers, which I feel like is more of a newer area for you guys in terms of that growth. I didn't hear about the STEMI side. Can you just give some context on sort of what the mix there looks like? I mean, Intel reported and said they're taking down their CapEx, so what the expectation is as we move through into maybe into 25 for advanced facilities and how it's performing today.
Bert: Hey Bert. Good morning.
Bert: Bob, maybe just to start with you, you had some comments on the advanced facilities side, it sounds like life sciences continue to be really strong, and you mentioned AI data centers, which I feel like is
Speaker Change: More of like a newer area for you guys in terms of that growing. I didn't hear the semi side.
Speaker Change: Sure. So, specifically on SEMI's, Bert,
Burt: We've been working on this for a while, so clearly we do do a lot of work for Intel, and that work is fundamentally on that CapEx program that they highlighted.
Speaker Change: 3 or 4 years ago. We had substantially worked our way through that.
Burt: And so, you know, the news that's come out, it's got a minimal effect on us.
Burt: The diversification of our services that we perform for Intel, those kind of ongoing sustaining capital work that we do around tool installs and retrofits and layout dependent type work, that will continue.
Burt: So, but the good news is that our diversification into memory customers as well as other logic customers that are doing work in the U.S. and in Europe .
Burt: That's continued, and we'll have, hopefully, some good news to share next quarter on that, as well as some of the geographic expansion that's going on in places like India. And so, you know, we have some really positive momentum going on on that front. So, overall, we're still bullish on the sector, and we'll continue to accelerate growth.
Speaker Change: I don't know their lifetimes.
Speaker Change: And then on life sciences, yeah, that's really going well right now, and it's probably, you know, a lot of discussion around GLP-1.
Speaker Change: But what we're seeing is Alzheimer's and oncology drugs.
Speaker Change: Still making a really big play.
Speaker Change: The two big players that are in the GOP-1 sector, that is a big part of our work, but the new awards that are coming through, whether they be in the contract...
Speaker Change: Contract Manufacturing Space, or in these other players that have got a really nice pipeline of drugs coming in to oncology as well as in
Speaker Change: And in Alzheimer's, that's really driving that optimism too.
Bert: And Bert, if I could, you know, just having most recently come from the systemic electric sector.
Bert: You know, we do see this as a secular trend in terms of where the manufacturing footprint is and across different realms of semiconductors and logic and memory, as Bob alluded to. And there's also a geographical shift that's happening. So as we look at our portfolio, we have good confidence that we are pretty well diversified. And then just the scope of the opportunities in front of us are still pretty good. Now, obviously, any given quarter depends on what happens in the market. But I think when you look at it from a secular standpoint, we feel pretty good about our semiconductor footprint.
Bert: That's very helpful. Just a clarification there. Bob, you mentioned the Fujifilm construction, the phase one would start to ramp down in the first half. Is that expected to have any meaningful impact, or is the award sort of backfilling that?
Bob: That's on the existing workbook. What we announced goes past that. So we're already on site doing phase one. So my comment was around phase one. Phase two is now just starting.
Speaker Change: Got it. Okay. Um, and just as a follow up, I mean, there's been a lot of questions on sort of the, the, the spinoff and sort of the dynamics there, you know, referencing unallocated corporate expense and some of the other things.
Speaker Change: I guess, Kevin or Venk, what are some of the dynamics we should be aware of, assuming that the spinoff closes?
Speaker Change: In September , and we're going into the final quarter of the calendar year, what are some things to be aware of just from a, you know, from a perspective on modeling that are going to change? Obviously, not looking for guidance or anything like that, but just some dynamics that maybe are not fully appreciated.
Unknown Executive: Okay, so yeah, a couple things. One, when we do the Q4 results and the full year results, I should say, since we're closing and are before the fiscal year ends, effectively, we will report on an independent Jacobs for the Q4 results and the full year results and report it on a historical basis as such, as well. And all of the business that's included in the perimeter, which will be merged into the momentum business, will be basically an asset held for sale. So you won't see that information. We have provided you with guidance.
Speaker Change: Okay, so, yeah, a couple things.
Speaker Change: One, when we do the Q4 results, the full year results, I should say,
Speaker Change: Since we're closing before the fiscal year ends, effectively, we will report on an independent Jacobs for the Q4 results and the full year results and report it on a historical basis as such.
Speaker Change: as well. And all of the business that's included in the perimeter, which will be merged into the Amentum business, that will be basically in assets held for sale. So you won't see that information.
Speaker Change: We have provided you guidance.
Speaker Change: for the full year.
Speaker Change: Similar to how we've established it for the full year, so...
Speaker Change: Assuming that it closes at the end of the year, all of those numbers that we just quoted would effectively be met.
Speaker Change: But you're going to actually see a lower number in...
Speaker Change: And the results just because some of it's now going to be because it's being
Speaker Change: put into equity directly as assets held for sale, and you're going to be seeing the independent Jacobs. So a lot of clarity we'll be providing to get you an understanding of what that looks like, Bert, when we do report Q4 results.
Speaker Change: But a lot of moving pieces, but.
Bert: That kind of, that's a very general.
Speaker Change: Kevin, just to add to what Kevin said, you know, in addition to what he said about our businesses, obviously, you know, Momentum is going to have their capital markets there on August 13th, so we'll have some more color in terms of their business.
Speaker Change: And then as it relates to ours, you know, we'll provide...
Speaker Change: guidance for all of fiscal 25 in our November earnings call and then we'll talk about not only the revenue and
Ayan Banerjee: and Ayan Banerjee.
Speaker Change: Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.
Jamie Cook: Hi, good morning. I guess most of my questions have been answered, but Bob, just, you know, thinking of Jacobs, you know, after the momentum spin,
Jamie Cook: You know, you're going to have a good balance sheet. Your cash flow generation has been, you know, fairly impressive. And I'm just thinking about the growth and the margin that you're seeing in PPS and PA consulting. So just sort of wondering.
Speaker Change: you know, what your appetite will be for M&A, you know, with Jacobs, you know, after the spin of
Unknown Executive: And then any help you can give us in sort of how we should think about, I'm just wondering if free cash flow conversion of the remain code is a better story than the market anticipates. Thank you.
Speaker Change: The, you know, attractive...
Speaker Change: dynamics that are out there. And then any help you can give us in sort of how we should think about I'm just wondering if free cash flow conversion of the remain code is a better story than the market anticipates. Thank you.
Speaker Change: Sure. Maybe I'll take the first one, Jamie, and then Venk can talk about going forward what free cash flow conversion looks like.
Ben: Look, I think initially we got a lot of options.
Speaker Change: And our primary focus in the quarters that followed the separation is execution and performance and really driving that long-term margin growth profile. We like the positioning that we're in, in each of the end markets, as well as geographies.
Speaker Change: that we said and so it's not like there is an imperative that we need to do M&A in order to catalyze growth. We've got a great growth trajectory organically and so moving that out
Speaker Change: Not even proving it out. Executing on the plan that we have right now, we got a lot of confidence in. You know, past that period...
Speaker Change: We've got a great balance sheet, and we've got a lot of options, and it's a great place to be. So, much more to follow on that. On free cash flow, let Venk talk about that. Yeah, and just free cash flow in just a second, but just to reiterate the point about capital allocation, just given what we see ahead of us in terms of the pipeline and the opportunities in front of us,
Venk Nathamoni: I think from a capital allocation standpoint, we're strong believers in organic growth as the first use of capital. Clearly, you know, from the standpoint of the free cash flow generation and the balance sheet that we have, we do have the ability, number one, we do want to continue to provide it.
Venk Nathamoni: Shareholders, the opportunity to get dividends, but also we'll be consistent in terms of buying our shares.
Jamie Cook: Repurchasing as Shares, and then M&A, as Bob mentioned, is also an option. But the next few quarters, you know, almost singular focus on execution. Now, as it comes to free cash flow conversion, Jamie, you rightly pointed out, you know, we've been generating pretty decent free cash flow. We said we'll be at over 100% free cash flow conversion for the remainder of the year.
Jamie Cook: And as you deep dive into the PNPS business, which is a big part of Independent Jacobs, you can expect that pre-cash flow metrics to improve over time. Again, we'll quantify it as we get closer to the date, but we feel pretty good about where we are and where we're going.
Krista: Your next question comes from the line of Sangita Jain with KeyBank Capital Markets. Please go ahead.
Speaker Change: Your next question comes from the line of Sangita Jain with KeyBank Capital Markets. Please go ahead.
Sandita Jain: Yeah, thank you so much for taking my questions. I guess most of them are answered, so I'm going to limit myself to just one.
Sandita Jain: Are there any discrete deliverables from your side to close the momentum spin of the second half of the year?
Sandita Jain: In the second half of September , or is it just mostly just the paperwork that's taking time? Just wanted to get a sense of that.
Speaker Change: All of the regulatory approvals on foreign investment and antitrust all of those kind of things we've already worked through and all has been approved.
Speaker Change: The only remaining item is the IRS ruling on our private letter ruling that we're looking for, which confirms our view that the transaction is tax-free to our shareholders.
Speaker Change: That's really what's driving the timing at this point in time. We've been having great discussions with IRS.
Speaker Change: More to come, but we would expect to get that approval, hopefully, over the next month or so, and effectively, that positions for that second half of September close. We've got a lot of things to do with registration for SEC distribution of shares, and so on and so forth.
Speaker Change: But really the only thing that we were looking for is the IRS ruling and we feel confident about it.
Krista: Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead.
Speaker Change: Go ahead. Thanks so much.
Speaker Change: Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead.
Chad Dillard: Hey, good morning, guys.
Chad Dillard: Morning, Chad.
Chad Dillard: All right.
Chad Dillard: So, my question has to do with the top-line growth rate of the PPSS.
Unknown Executive: I'm just trying to understand the trajectory of that, you know, as we exit 24 and go into 25. So you're starting kind of at a mid-single-digit rate in 2Q. You've got some pretty solid bookings that you brought in this quarter. And so I guess like, will that be enough for the top line to get back into that 69% target range in 25?
Speaker Change: I'm just trying to understand the trajectory of that, you know, as we exit 24 and going into 25. So you're starting kind of at like a mid-single-digit rate in 2Q. You've got some pretty solid bookings that you brought in this quarter.
Speaker Change: And so I guess like, will that be enough for the top line to get back into like that like 69% target range in 2025?
Speaker Change: Yeah.
Speaker Change: The backlog performance, the bookings and backlog performance, Chad, has been really, really solid. In fact, you know, the 1.53, we had to go back to see if that was a record in itself.
Speaker Change: And so we're confident that we're going to be going into 2025 with some really solid growth projections, which we'll be very clear about when we articulate. So that's kind of on the financial end.
Chad Dillard: And the lag indicator, the answer is yes.
Chad Dillard: You know, on the leading indicator, on the pipeline, as well as where we sit in the markets where the pipeline is growing the fastest,
Chad Dillard: Water and Advanced Facilities being highlighted, that also gives us a lot of confidence too. So, short and long way of answering your questions, the answer is yes.
Unknown Executive: Gotcha. Okay. And then just on that PP&S segment again, the operating margin, so I guess, on a year-to-date basis, you're running somewhere close to, you know, 15%. Any reason why that can't continue?
Speaker Change: Gotcha. Okay. And then just on that PP&S segment again, the operating margin. So I guess like at least on a year-to-date basis, you're running somewhere close to like, you know, 15%.
Speaker Change: Any reason like that why that can't continue and then one more question for you on
Bob: The 4Q bookings, I think, Bob, you mentioned that you're pretty optimistic about that, you know, pipeline for 4Q. Can you just give a little more detail, and do you think you can actually hit kind of like a greater than one times book to bill in the fourth quarter?
Bob: Yeah, so on the on our optimism around the PNPS margins and then how that will translate into
Speaker Change: and to go forward margins for the whole company. I think on slide 11, we did give some guidance on greater than 14.9% so it's probably...
Speaker Change: Highlights the optimism that we have on our current reporting structure with regards to that element.
Speaker Change: Similar to last quarter, Chad, I wouldn't make those comments unless we had already booked work in the first month of the quarter, so can't quite announce those right now, but you'll see that when we report out on Q4.
Speaker Change: We have time for one more question and our final question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Jerry Ravitch: Yes, hi, good morning everyone.
Jerry Ravitch: I want to ask, you know, people in places, hi, the profit growth that you folks have delivered in people and places over the past five years has been
Jerry Ravitch: 8% K year over the past three years, 11% K year. So as you folks think about the organic growth opportunity on a more focused Jacobs, can you just expand on that because the growth has already been really attractive in people and places. And so maybe give us a few threads that you'll expand on it.
Speaker Change: The panelists stay on your expectations to continue to drive that level of growth or if you think you can accelerate off of that level of really strong performance that the business has delivered.
Jerry Ravitch: Yeah, Jerry, we...
Jerry Ravitch: Without giving any kind of quantifiable number on where that number is going, I'll tell you this.
Jerry Ravitch: Our pipeline, where we're positioned in the end markets that we sit in today.
Jerry Ravitch: and in the tailwinds with regard to our bookings performance.
Jerry Ravitch: on that.
Jerry Ravitch: gives us a lot of optimism. And so, you know, in November , and when we report out on the full year for Independent Jacobs, as well as going into February and along the way in between, you know, we'll put a lot more
Jerry Ravitch: Clarity, as well as quantify what that means, but overall, I think hopefully you're hearing some real optimism in our voices and in our performance on getting to exceeding the performance that we had for the last five years.
Unknown Executive: And then one more question for you on the 4Q bookings. I think, Bob, you mentioned that you're pretty optimistic about that pipeline for 4Q. Can you just give a little more detail, and do you think you can actually hit kind of a greater than one times book to bill ratio?
Speaker Change: That's a high bar, right? And can I ask, in terms of just the moving pieces that you spoke about, Bob, around the UK election, have you started to see, now that that's resolved, have you seen an acceleration in activity levels, or what's the history lesson on UK elections?
Unknown Executive: That's a high bar, all right, and can I ask, in terms of just the moving pieces that you spoke about, Bob, around the UK election, have you started to see, now that that's resolved, an acceleration in activity levels, or what's the history lesson on UK elections and the lag between when we start to see a booking re-acceleration for your business?
Speaker Change: lag to when we start to see a booking reacceleration for your business.
Bob: Yeah, I'd say there's been an acceleration in the dialogue, right, and now those translating into those programs that were either paused or in anticipation of being put out to market.
Bob: I think that's kind of the next phase. So, you know, over the course of the next six to 12 months, I think we'll see that. Interestingly enough, Jerry,
Jerry Ravitch: The water sector in the UK has not paused at all and so that that continues on and then you know with PA You'll think about this in the UK specifically, you know are as well as globally PA has about a 50-50 private sector public sector mix in their business the public the private sector in PA this quarter grew 11% year-on-year
Jerry Ravitch: and the public sector was kind of in this election, in this election pause. You know, we see that kind of coming out as well, which gives us optimism, not only in the Jacobs business, but in the PA business too, moving into FY25.
Speaker Change: We have one more question from Louis DiPalma with William Blair. Please go ahead.
Unknown Executive: Thanks, Bob, Kevin, and Venk. What is your forecast for infrastructure stimulus in the US associated with the IIJA and the CHIPS Act? And is that contributing to your strong backlog? I know you highlighted recent winds with water and also
Speaker Change: Thanks Bob, Kevin, and Venk.
Speaker Change: What is your forecast for infrastructure stimulus in the U.S. associated with the IIJA and the CHIPS Act, and is that contributing to...
Speaker Change: your strong backlog. I know you highlighted recent winds with water and also
Speaker Change #100: A large multimodal transportation wind, but what is your general like expectations over the next few years in terms of the IIJA?
Speaker Change #101: Sure. Louis, thanks for the question. IJ, you know, I think these are industry numbers, so 60% appropriated, 30% spent.
Speaker Change #101: So yeah, there is work that continues to flow.
Speaker Change #101: Right now, I think that the hurdle is 2026, said it before, that's probably going to continue to go past 2026, as well as discussions about a second IIJA, which we'll see where that goes within the congressional floor, but we are, it is driving that backlog performance and our conversion rate on that as well. I will say this, is that on the CHIPS Act,
Speaker Change #101: Oh, I'm sorry. One more comment on IJA. IJA, the grant money, you can see. And that's some of the work that we're seeing, not just in transport, but in water as well.
Speaker Change #101: Chip FACT.
Speaker Change #101: Those jobs that have received ChIPSAC money.
Speaker Change #101: We've been involved with those, remember those were pretty much designed and already in the field and then received the funds.
Speaker Change #101: This kind of next wave, we're on the front end of, and so I think that chip sack money will continue to flow and represent a nice tailwind for us.
Speaker Change #101: And that concludes our question and answer session and I will turn the conference over to Bob for closing remarks.
Bob: All right, thank you, operator. Thank you, everyone, for joining the earnings call. Look forward to providing further updates and visiting with investors and analysts in the months to come. Exciting times ahead, and I look forward to staying very open and transparent with the market as we move forward. Thank you.
Speaker Change #102: And this concludes today's conference call. Thank you for your participation and you may now disconnect.