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spk07: Ladies and gentlemen, thank you for standing by and welcome to the Jacobs Fiscal Second Quarter 2021 Earnings Conference call and webcast. At this time, all participants are in a listen-only mode. After this week's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now turn the call over to Jonathan Dorff in Best Relations. Thank you. Please go ahead.
spk15: Thank you. Good morning to all. Our earnings announcement was filed this morning. We have posted a copy of this slide presentation on our website, which we will reference during the call. During that presentation, we'll be making forward-looking statements, including with respect to the continuing effects of the COVID-19 pandemic, potential government stimulus programs, and our financial outlook, among others. I would like to refer you to our forward-looking statement disclaimer, which is included on slide two, regarding these and other forward-looking statements. During this presentation, we'll be referring to certain non-GAAP financial measures. Please refer to slide two of the presentation for more information on these figures. In addition, during the presentation, we'll discuss comparisons of current results to prior periods on a pro forma basis. See slide two for more information on the calculation of these pro forma metrics. For pro-former comparisons, current and prior periods include the results of the Wood Nuclear Business, which closed in March of 2020, and the Buffalo Group, which closed in November of 2020. Our reported results only include results from PA consulting from the closing date of March 2, 2021, through the end of fiscal quarter. And last, otherwise indicated, pro-former comparisons discussed today do not include PA consulting in the prior comparable periods. Turning to the agenda on slide three. Speaking on today's call will be Jacobs Chair and CEO, Steve Dimitrio, President and Chief Operating Officer, Bob Fregata, and President and Chief Financial Officer, Kevin Berryman. Steve will begin by updating the progress we are making against our strategy and the future ESG at Jacobs. Bob will then review our performance by line of business. And Kevin will provide a more in-depth discussion of our financial metrics followed by an update on our FOCUS 2023 and M&A initiatives, as well as a review of our balance sheet and cash flow. Finally, Steve will provide detail on our updated outlook, along with some closing remarks. Then we'll open the call for your questions. In the appendix of this presentation, we provide additional ESG-related information, including examples of our leading ESG solutions. With that, I'll now pass it over to Steve Dimitriou, Chair and CEO.
spk05: Thank you, John. Thanks to all of you for joining us today to discuss our second quarter fiscal year 2021 business performance and key initiatives. As the pandemic lessens its impact here in the United States, it's vital to recognize the significant struggles that are still occurring throughout the world, especially in India. Jacobs made an immediate donation to the United Way in New Delhi for critical medical supplies. And I'm particularly proud of our company and employees who together have donated $200,000 through our internal giving platform collectively. We have and will continue to support those that are still being impacted by the pandemic, including, for example, our operations in the Philippines. Turning to slide four. Before discussing our second quarter results, it's important to continue to reiterate how we think about our business. by aligning and executing against our long-term strategy to drive superior value for our stakeholders. We take a multi-year approach to our rigorous strategy formation. This long-term mindset involves proactively assessing and aligning our portfolio toward large secular growth opportunities where we can deliver sustained double-digit profit growth. The transformation that Jacobs has undergone over the last several years has created significant value measured by relative total shareholder return. As you have seen from our recent organic actions, the PA consulting investment and the acquisition of the Buffalo Group, we believe there's a significant opportunity to deliver differentiated digitally enabled solutions as the world accelerates its efforts to modernize infrastructure, improve global supply chains and enhance national security. We have started the development of our new corporate strategy for fiscal year 2022 to 24, which we will present to the investor community later this year. As to our financial results, I'm pleased with our strong second quarter performance, with net revenue increasing 7% year-over-year and adjusted EBITDA growth of 27%. Backlog ended the second quarter up 10% year-over-year and up 7% on a pro forma basis. Our strategic investment in PA Consulting closed on March 2nd and demonstrated higher than expected results in the March quarter, with 19% revenue growth in Sterling, up 28%, including the benefit of FX. We are also excited by the revenue synergies our joint Jacobs PA teams are creating, resulting in a robust pipeline in line with our deal model expectations. Given the stronger performance across Jacobs in the early closing of the PA investment, we are increasing our full fiscal year 2021 adjusted EBITDA and adjusted EPS outlook. Looking beyond fiscal 2021, we see the potential for one of the most attractive periods for growth in our company's history, activated through alignment of our portfolio to numerous secular growth opportunities in the expected infrastructure stimulus across the globe. Turning to slide five. Sustainability at Jacobs is reflected in our company's purpose of delivering solutions for a more connected, sustainable world, as well as through our values. we do things right, we challenge the accepted, we aim higher, and we live inclusion. This is critical for our people, to work for a company that believes sustainability is fundamental to what we stand for as an organization. I'm proud of our efforts over the last few years, as we are now being recognized by various external governance groups. For example, ISS recently updated their ESG assessment of Jacobs, where we are now approaching top decile in both environmental and social categories. These results are a credit to our people and their focus on our purpose and values. And of course, on an external basis, ESG is a significant growth opportunity for Jacobs. Building on the success of our sustainability strategy launched in 2019, Plan Beyond 2.0 reinforces our commitment to driving to a net zero economy through furthering our sustainable business offerings. We are in the early stages of a significant business growth opportunity to partner with our global customers and communities to provide solutions with their net zero carbon commitments. Now with our investment in PA Consulting, Jacobs is uniquely positioned across the entire end-to-end ESG opportunity. For example, we're implementing the first biogeochemical reactor pilot plant project for PFAS remediation in the U.S. supporting Germany's transition to significant net zero power generation and distribution by 2030. We're teaming up with water utilities in Australia to support decarbonization, working with industrial clients globally on their energy and resource management programs for advanced manufacturing facilities, and many other projects, including those shared in the appendix to this presentation. altogether sustainable solutions is a high growth business opportunity for jacobs today comprising nearly five billion dollars of our revenue which by the way makes jacobs one of the largest esg solutions providers with that i'll turn the call over to bob brigada to provide more detail by line of business thank you steve moving on to slide six to review the quarter's performance for critical mission solutions business
spk10: During the second quarter, our CMS business continued its strong performance and our workforce is executing at pre-pandemic levels as COVID-19 vaccines are administered broadly across our operational sphere. Total CMS backlog is at $9.8 billion, representing a 7% year-over-year growth and up 6% pro forma, excluding the lower margin Hanford and classified procurement contract we have previously discussed. The CMS strategy is focused on revenue growth and margin expansion by offering technology-enabled solutions aligned to critical national priorities that drive innovative outcomes. Similar to last quarter, I will discuss four notable market trends positively impacting our CMS business. Space exploration intelligence, all-source intelligence, digital modernization, and clean energy. Beginning with space exploration intelligence. From idea to operations, Jacobs delivers know-how and value to every stage of the space system lifecycle for our civil and national security space clients. NASA leads its global exploration and development of deep space with its Artemis program that will carry astronauts to and from the moon's surface and beyond. As NASA's largest service provider, Jacobs is involved in many aspects of the Artemis mission, including the space launch system, the Orion spacecraft, and the exploration ground systems based at Kennedy Space Center. We are proud to have expanded our NASA support to the Wallops Flight Facility located in Virginia and are now providing full lifecycle operations and testing that deploy expertise we have developed at other NASA centers. We remain heavily engaged in the NASA mission portfolio, including the recent support of the SLS Hot Fire Test and the design, fabrication, and full deployment of the calibration device on the Perseverance rover now exploring Mars. NASA continues to enjoy strong bipartisan congressional support with preliminary FY22 budget including a 6% increase over 2021. We also support the DoD's Joint All-Domain Intelligence Initiative, utilizing satellite connectivity in space and adding more capacity for intel analysis, such as our successful Mangle-1 launch earlier this year. Overall, defense space spending was up 28% in FY21 and is expected to show strong growth in FY22 as well. Moving on to all-source intelligence. Today's threat levels require intelligence analysts to utilize and coordinate multiple sources, including human, signal, open source, geospatial, and measurement and signature to allow for better decision-making in real time. The Buffalo Group acquisition greatly expanded Jacobs' all-source intelligence capability. We were awarded two exciting wins from the Defense Intelligence Agency in the quarter. Jacobs will provide counterterrorism analytical expertise for the Defense Combating Terrorism Center, DCTC, and integrated intelligence centers in direct support of warfighters around the globe. We were also awarded a prime seat on the $12.6 billion Solutions for the Information Technology Enterprise, or CITE3, IDIQ, to address the evolving IT requirements vital to the security of the United States. All those specific classified budget decos were not provided in the preliminary budget. Redirection of funds towards emerging cyber and intelligence threats from state actors are anticipated. Now turning to digital modernization. In order for government agencies to run effectively and transform how they accomplish their missions, they require a full spectrum of digital enterprise solutions, including engineering and operations, digital services such as cloud services, DevSecOps, cyber, and data analytics. Contract applications for digital modernization services have grown significantly over the past five years with strong continued growth expected as government agencies upgrade their data networks. Recently, our software engineering team won a 10-year contract to continue to develop and sustain terrain awareness and warning system software for the U.S. Air Force C-17 fleet to help ensure pilot safety. A final trend is in clean energy or energy sources such as solar, wind, geothermal, hydropower, and nuclear energy, all of which are critical to transitioning global economies away from fossil fuels. Across our CMS nuclear portfolio, our unique blend and depth of technical and program management capabilities allows us to provide lifecycle support to our clients, such as the delivery of Hinkley Point C, a large-scale nuclear power plant in the UK that will provide low-carbon electricity for approximately 6 million homes, developing small modular reactors and advanced modular reactors for delivering sustainable products such as green hydrogen or synthetic fuels, and working with the global community to bring fusion power to commercial viability. Specifically, in the U.S., the DOE has been allocated a 10% increase in the preliminary FY22 budget for decommissioning and new clean energy investment, including fusion. In summary, we continue to see strong demand for our solutions in fiscal year 2021 and beyond under the Biden administration. The CMS sales pipeline remains robust with the next 18-month qualified new business remaining above $30 billion, with over $10 billion in source selection and an increasing margin profile. Now on slide seven, I'll discuss our people and places solutions business. Starting with an overview of the benefit of global stimulus, We anticipate a direct investment in our key industry sectors and geographies that align the global trend and emerging governmental focus on climate change, infrastructure modernization, digital transformation, and advanced facilities. We are uniquely positioned to provide world-class service to significant areas of stimulus, including the anticipated U.S. infrastructure bill. Our global delivery model, connected across geographies and markets, combined with our digitized delivery approach, ensures efficient and seamless support anywhere in the world. Our existing contracting framework with the primary recipients of the stimulus funding will allow us to unlock capacity to capture these emerging opportunities. As an example of our engagement, we are hosting a global webinar with our water sector clients on May 12th to help them navigate and access available funding sources through the U.S. stimulus legislation. As we look to increase operating leverage through our Focus 2023 efforts, we are accelerating growth in both core and new sectors. We've engaged our partners from PA Consulting to catalyze these efforts by applying their business transformation expertise to further optimize Jacob's global delivery model. Combining our subject matter experts with technology-enabled tools for a full solution offering is a competitive differentiator, and we look forward to sharing more in the coming quarters. Our continued financial resilience driven by our balanced geographic and market portfolio resulted in strong P&L performance in the quarter, and 10% year-over-year backlog growth. Our pipeline remains healthy, and we anticipate continued growth as U.S. infrastructure build materializes. I'll now discuss the key global trends and themes aligned with our PNPS business. Climate change is a macro and multi-decade driver for clients around the world. Much of the economic stimulus is focused as green stimulus, underpinning all infrastructure modernizations. Private sector clients are accelerating their transition to a net-zero economy, increasingly seeking solutions that embrace ESG principles. We are a leading provider in this space, delivering innovative solutions that support our clients' decarbonization and resiliency goals, such as mass transit and fleet electrification work that we are delivering across the globe. A great example is the Cambridgeshire Autonomous Metro in the UK, where, in collaboration with PA Consultants, we are delivering an end-to-end solution for the implementation of autonomous electric vehicle infrastructure. Infrastructure modernization and digital transformation is driving growth in the mid and long term. Our global program management team continues to deliver iconic programs for clients across major metropolitan areas on five continents. A clear demonstration of our efforts to modernize infrastructure by increasing mobility and improving journey time and nearly doubling road capacity is the recent award at Highways England's Lower Thames Crossing Program, one of the UK's most ambitious and largest road projects ever. As a result of our leading expertise in the water sector, our recent win, the St. Paul, Minnesota Water Treatment Plant, demonstrates our ability to implement solutions for aging infrastructure to maintain reliable service, enhance water quality, improve operations and maintenance, and provide a sustainable utility. Additionally, we won the Changhee New Water Factory 3 project with the Public Utility Board in Singapore as a result of our technology-efficient design that reduces operational costs. The first in-service solution features reverse flow technology to maximize reverse osmosis recovery and exemplifies our solutions and technology differentiators. The global semiconductor chip shortage is driving industry growth levels above historical averages. This shortage is being driven by a unique convergence of demand use and applications from areas such as smartphones, cloud computing, and data storage. Coupled with the rebalancing of global supply chain, we're engaged with multiple clients to accelerate capital projects and increase capacity. We continue to see robust spending in the life sciences sector, driven by our clients' redistribution of their product portfolio. Additionally, contract manufacturing organizations are embarking on an unprecedented amount of biologic capacity to support global demand. Leveraging our industry leadership and longstanding client relationships, we have secured the Fujifilm DioSense bioproject in the southeastern United States and other large confidential programs globally. In summary, our balanced portfolio of industry sectors and geographies continues to strengthen our PNPS pipelines. Turning to slide eight, this is a very successful quarter for PA Consulting, building on a strong full calendar year of 2020. PA's revenue growth at 28% year-over-year. PA is involved in a wide range of digital transformation projects, including the vaccine rollout program globally. PA's backlog was up 36% year-over-year. This positive sales growth, as well as continued investment in partner hiring in 2020 and 2021, gives increased confidence for the full year and beyond. We have seen solid performance across all sectors with strong wins in life sciences and UK public services. On the sustainability front, we've built on our global delivery partnership with the innovative startup Polpak, signing numerous new consumer clients to replace single-use plastics in their products. PA continues to secure a wide range of digitalization project programs, including the wins highlighted on the slide. PA's strategy is to focus on growth in the private sector with an acute focus in the U.S. and further diversification in end markets globally. We are working in partnership with PA to accelerate that strategy through joint engagements in key sectors, including energy and utilities, health and life sciences, and defense and security. I'll now turn it over to Kevin to speak to our financial performance.
spk08: Thanks, Bob. I'm turning to slide nine for a quick financial review. Second quarter gross revenue increased 4% year-over-year, and net revenue was up 7%. This was driven by solid underlying business performance offset by the timing of advanced facilities projects. Acquisitions and FX benefits continued to grow by more than offsetting the burn-off of two lower margin previously disclosed contracts in CMS. Including the pro forma impact from all acquisitions, net revenue was up low single digits. For the second half of fiscal year 2021 compared to 2020, we expect total reported net revenue growth to be up in the low double digits year over year. On a pro forma basis for acquisitions, we expect second half revenue up low to mid single digits versus a year ago. as growth from the acquisitions and CMS and P&PS growth from a weaker second half 2020 compare more than offset continued headwinds in CMS from the lower margin contracts coming to an end. Adjusted gross margin in the quarter as a percentage of net revenue was 25.8% of 260 basis points year-over-year. A higher gross margin on a year-over-year basis was driven primarily by three factors. improvements in CMS gross margin as we continue to remix the portfolio to higher margin business, a favorable impact from lower benefit costs, and the benefit from PA Consulting, which has a strong accretive gross margin profile versus the rest of the portfolio. From a line of business standpoint, CMS gross margins increased strongly on a year-over-year basis as we benefited from higher margin revenue in the base business, new wins, and improved portfolio mix. P&P gross margin was up slightly year over year. Adjusted G&A as a percentage of net revenue was up slightly year over year to 15%. As we look forward, we will continue to be disciplined in management of our G&A costs, but do expect an increase in GA as a percentage of revenue as a result of an expected rebound in labor-related medical costs, IT-related investments as we move to a flexible workforce, and other investments to drive growth. GAAP operating profit was a negative $41 million and was mainly impacted by a $267 million cost related to the closing of the PA consulting transaction that we called out in our press release filed this morning. Let me provide additional detail on the nature of this cost. The $267 million represents a portion of the aggregate purchase price consideration for our investment in PA. That per GAAP accounting is treated as compensation given retention-related requirements and distribution of this amount post-closing. We still view the total investment consideration unchanged at 1.4 billion pounds sterling. I'll discuss the cash flow implication of the $267 million later in my remarks. In addition, we had $42 million in deal and other costs associated with the PA consulting investment, $13 million of restructuring transaction and other charges, including the Focus 2023 initiative, and $31 million of amortization from acquired intangibles. Adjusting for these items, adjusted operating profit was $311 million, up 32%, with both lines of business showing strong organic profit growth. In addition, PA Consulting posted strong double-digit growth in operating profit during their quarter ending April 2nd, 2021. Our adjusted operating profit to net revenue was 10.5% of 200 basis points year-over-year on a reported basis and was effectively 10% without the benefit from PA, a record for the company. GAAP EPS from continuing operations rounded to $0 per share, and included 86 cents per share from the PA investment consideration being treated as compensation previously mentioned, net of the associated tax impact. A 37 cent cost related to the mark-to-mark investment in Worli and AI software provider C3AI, which included the impact of monetizing a portion of our C3AI investment. 17 cents in deal and other PA consulting-related costs, 9 cents per share of after-tax charges primarily related to Focus 2023 and other miscellaneous restructuring costs, and 17 cents of amortization of acquired intangibles. Excluding these items, second quarter adjusted EPS was $1.66, up 19% year-over-year. During the quarter, PA contributed $0.09 of accretion, net of incremental interest. We now expect $0.32 to $0.34 of 2021 accretion from PA. For modeling purpose, we fully consolidate the impact of the PA investment in our operating results, with a 35% minority interest backed out in non-controlling interest. Q2 adjusted EBITDA was $332 million and was up 27% year-over-year, reaching 11.2% of net revenue. Our adjusted EBITDA calculation includes the burden of the 35% minority interest impact from PA consulting. Even excluding the strong double-digit growth of PA, performant EBITDA growth was up 16% year-over-year. Finally, turning to our bookings during the quarter, our performer book-to-bill ratio was 1.06 for Q2, with over one-time book-to-bills across each business. Regarding our LOB performance, let's turn to slide 10. Starting with CMS, revenue was up 5.3% year-over-year on a reported basis, but down 2% performer when the acquisitions of Wood and the Buffalo Group are considered. As previously communicated, we are transitioning off to lower margin contracts, which represented $115 million year-over-year revenue headwind during the quarter. When excluding the runoff headwinds, FX benefits, and pro forma acquisitions, CMS-based revenue growth was actually up 6% year-over-year. We expect approximately $200 million a quarter of year-over-year headwinds from these two contract roll-offs through the balance of this year and the first quarter fiscal 2022. CMS operating profit was $114 million, up 35%, and up 27% year-over-year on a performer basis, even when factoring in the headwinds noted earlier. Operating margin was up 190 basis points year over year to 8.7%. The improvement was driven by our strategy to focus on higher margin opportunities and the benefit from the higher margin Buffalo Group business. For the second half fiscal 2021, we expect relatively flat CMS reported revenue growth when compared to the second half of fiscal year 2020. As we continue to ramp new wins, that when combined with the benefits from the Buffalo Group acquisition are expected to offset the revenue hindrance previously discussed. Given the strategy to capture higher-value business via both acquisitions and organic efforts, we continue to expect reported operating profit growth to be up double-digit year-over-year in the second half versus the year-ago period. Moving to PMPS, Q2 net revenue was up 1.4% year-over-year, driven by continued solid performance in the Americas and a rebound in our international regions, as well as benefits from FX. This growth is partially offset by year-over-year declines in our advanced facilities business due to the timing of contracts. P&PS is now seeing strong pipeline growth as both our life sciences and electronics customers move forward with previously paused projects. Total P&PS operating profit was up 7% year-over-year, and as a percentage in net revenue was 12.9% for the quarter, up 70 basis points year-over-year driven by a slight increase in gross margin and disciplined G&A cost management. In terms of PA's performance, PA contributed $98 million in revenue and $28 million in operating profit for the stub period, which has been consolidated in our results. On a pro forma basis for a full quarter of results, revenue grew 28% on a reported basis and 19% year-over-year in local currency. Full quarter adjusted operating profit for PA was also significantly up year-over-year, representing strong adjusted OP margin as a percentage of revenue. Our non-allocated corporate costs were $33 million for the quarter, driven by continued strong cost discipline and favorable benefit costs. For the second half of fiscal year 2021, we expect our non-allocated corporate costs to be higher year over year, driven primarily by expected increase increases in medical costs, increased IT, and other expenses, including travel and entertainment, as we begin to position the company for developing growth momentum that is expected in fiscal 2022 and beyond. Now turning to slide 11, I'd like to update you on our Focus 2023 and M&A activities. I'm excited to share that we accelerated our FOCUS 2023 strategic initiative by formally bringing on board a dedicated team from PA Consulting to partner in our work streams. FOCUS 2023, again, is a strategic initiative that we believe will lead to enhanced employee and customer experience, improve our ability to capture emerging high growth, high margin opportunities, And three, drive a more efficient cost structure through increased automation and process alignment for overall long-term profitability. During the quarter, we incurred an additional $5 million charge and cash flows of approximately $12 million related to our Focus 2023 initiative. Charges from previous acquisitions and other items fell to $13 million, consistent with our guidance regarding these costs falling over the course of 2021. Additionally, we incurred approximately $42 million in deal and other costs associated with the PA consulting investment. For the remainder of fiscal 2021, we expect another $50 million in P&L charges related to transaction integration and other one-time costs consistent with our previous guidance. From a cash flow standpoint, for the second half of fiscal 2021, we expect approximately $65 million of cash flow associated with the earlier noted items. Please also note that the $260 million of PA price consideration will flow through cash flow from operations in our Q3 period, even though this cash flow represents effectively a part of our investment consideration in PA. which remains unchanged again at 1.4 billion pounds sterling. Now on to cash generation in the balance sheet on slide 12. During the second quarter, we generated 209 million on reported free cash flow, as DSO again showed strong improvement. The strong Q2 cash flow included a $42 million repayment of the UK VAT tax benefit from fiscal year 20, and a net negative of $74 million of costs associated with PA and Focus 2023 restructuring and other items. Please note that PA represented a net cash outflow of approximately $15 million in the stub period, given the timing of certain cash taxes paid and transaction-related stamp duties. We continue to expect PA on a standalone basis to deliver strong free cash flow to adjust to net income on a rolling 12-month basis. The transformation of the company is now delivering the expected improvements in free cash flow. It is net worthy that the free cash flow of the company has totaled over $1 billion over the last trailing 12-month period, even one including net one-time headwinds. We expect continued strong underlying cash flow through the balance of the year with full-year cash conversion now expected to be over 100% when excluding one-time items and the $267 million investment consideration now characterized as a P&L charge and included in free cash flow in the third quarter. Regarding the balance sheet, we ended the quarter with cash of approximately $893 million and a gross debt of $3.5 billion, resulting in $2.6 billion of net debt for attributing the benefits of the World NC3 AI equity. Treating these items as cash, our performant net debt to expected adjusted 2021 EBITDA is approximately 1.7 times, a clear indication of the strength of our balance sheet. Regardless, we will continue in the near term to deploy excess cash toward debt repayment given our higher gross debt levels. Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was increased 11% earlier this year to 21 cents per share. Now I'll turn it back over to Steve.
spk05: Thank you, Kevin. Now let me review our total company outlook for fiscal 2021. Given our strong first half performance and the benefit from the PA consulting investment, we're raising our full year guidance ranges. We now expect adjusted EBITDA outlook to be a range of $1.2 billion to $1.27 versus our previous outlook of $1.075 billion to $1.155. We expect adjusted EPS to now be in a range of $6 to $6.30 versus our previous outlook of $5.30 to $6. Looking beyond fiscal 2021 with optimism building around a major U.S. stimulus package and significant opportunities related to climate change and digital modernization, we are positioned for strong revenue and double-digit adjusted EBITDA growth in fiscal 2022 and beyond. Operator will now open the call for questions.
spk07: Thank you, ladies and gentlemen. To ask a question, please press star, then the number 1 on your telephone keypad. To withdraw your question, press the pound key. We ask that you limit yourself to one question, then rejoin the queue for any additional questions. Your first question comes from Joseph Dinardi with C4. Your line is open.
spk01: Thank you. Good morning. Maybe one for Bob or Steve on the infrastructure side. Wondering if you could just focus on two things. Timing, how quickly do you think you see it in your numbers? Maybe what you're monitoring that will inform that. And then competitively, the industry is obviously a lot more consolidated now than it was in prior cycles. Can you talk about the implications of that for your business and maybe the margin profile for PPS over this upcoming cycle? Thank you.
spk05: So let me just start with a couple of high-level comments, Joe, is that, you know, the timing is something that, you know, we expect to, you know, we're not going to see the final decision and, you know, what this is all about until probably later this summer. Could go into early fall. And then, and so we'll start to see, you know, momentum pick up sometime in 2022. But, you know, the real, I think the strategic driver for us is that, whether you look at the Biden proposal or even the Republican proposal, which was somewhat watered down, and we expect it to be somewhere between the two, is that it's significant growth. There's going to be a lot of opportunity for a lot of the companies out there. And I think for us, being a margin-focused company and seeing the evolution of what we've been doing over the last few years, the two things for us is that as there's a need for resources, We have the best global integrated capability to bring the resources to the right place and to really focus on the highest margin opportunities as that unfolds in both businesses and PNPS and CMS.
spk10: Bob? Yeah, maybe the add on the competitive climate. So, Joe, where we sit with regards to framework agreements that we've had, not just in the U.S., but CMS is also affecting the U.K. and Australia and other locations around the world. are pretty ideal for where those monies would flow. So if you look at transportation frameworks, water frameworks that we've been on for several years, it's going to position us extremely well, and those are pretty secure because the money needs to flow pretty quickly. So coupled with the fact that we're on these higher-end services, I think that the competitive climate would stand to fare well.
spk07: Thanks. Your next question comes from Andy with the City Group. Your line is open. Hey, good morning, guys.
spk00: Good morning, Andy. Bob, maybe I could follow up in the sense that during the 2019 analyst day, you listed a 4% to 6% target for PNPS. It was called something else at the time. But if stimulus were to move forward, are you able to give us any color regarding the ballpark of organic growth? Jacobs may be able to deliver above and beyond that. And then if for some reason the stimulus doesn't go through, given all these trends that you've been talking about, ESG, sustainability, It's 4% to 6% the baseline. You could do more than that, you think, going over the next couple years?
spk08: So maybe I'll just jump in. Look, we're not going to provide any guidance relative to 2020-22 at this point in time. But look, I think we're feeling pretty good about the developing momentum. So we certainly, as we work through it, I think it's important to note Steve's comments we're not going to go after everything we're going to go after those things that ultimately give us the best margin potential so so look i think um we're excited about what 22 can ultimately look to and and certainly i would suggest it's probably not going down okay your next question comes from jerry rivets with goldman sachs your line is open uh yes hi good morning everyone good morning
spk03: Really outstanding performance from PA Consulting out of the gate for you folks. I'm wondering, can you talk about whether, you know, the $300 million quarterly run rate that the business was on in March, how has that momentum translated into the second quarter? And, you know, how much variability is there in that business given the length of engagements now that we're getting to know the business a bit more? Thanks.
spk10: Yeah, Jerry, I think the client engagement and the client stickiness, call it, is solid. And so, yeah, the size of the engagement might be different than we would have historically seen at kind of Jacobs, but the longevity with their clients, really just from the technology and the value they're contributing, you know, shows the future to be really bright. So we're feeling very positive.
spk05: Just to build on the other part of your question, Jerry, is, you know, PA Consulting did a really great job on positioning themselves to win in sort of COVID solutions. And Bob talked about that. And that's, you know, still got some runway on it. But what they're also now seeing is several of their other markets picking up. And so that bodes well for, you know, as some of the COVID work starts to phase out, this other work's phasing in.
spk03: Good to hear. Thank you.
spk07: Your next question comes from Josh Sullivan with the Benchmark Company. Your line is open.
spk04: Hey, good morning. Good morning. Just a question on, you know, the space exploration and intelligence vertical you highlighted in the remarks. Can you just give us some color on the commercial dynamics? You know, you seem unique in that you're touching, you know, the very large or immediate launch, but also have exposure on the small sat side with assets like Mango that you mentioned. Are you leveraged to one end of the market or the other, large or small set? You know, just how should we think about Jacobs fitting into, you know, the conversation over CubeSats versus some of these larger opportunities?
spk05: Well, just, again, maybe to start with, you know, the broader space for us is it's pretty wide-ranging for us now, you know, as we have always been. a major player with deep space exploration and, you know, NASA being a major client for ours and we're solidly positioned there around Artemis and the research and development work they're doing around hypersonics and space architecture, et cetera. And now with the PW acquisition ramping up very nicely, you know, the whole low Earth orbit ISR rapid solutions. And then, you know, you go beyond there with missile defense and some of the other aspects of space. You know, it's become a very major market for us, specifically, Bob, around the commercial sector.
spk10: Yeah, I think that the adjacent and knock-on effects of what we're doing, not just exploration, but to have that feed into intelligence, it's strong. If you look at the Mango One launch, the application centered around intelligence, but also the application to 5G and other commercial applications is going to continue to broaden markets that we haven't had exposure to in the past. So all those things that Steve said is really expanding that aperture on the applications. Thank you.
spk07: Your next question comes from Jamie Cook with Credit Suisse. The line is open.
spk06: Hi, good morning. I guess two questions. My first question, sort of going back to a potential infrastructure bill, Steve, are there any investments that you think are required from Jacobson in order to capitalize it? Do you feel like you have the right labor force or you're in the right niches or do you go back and sort of contemplate M&A again? So I guess that's my first question. And then my second question, I think you noted revenues from ESG are approaching $5 billion or so. Can you talk to sort of what the underlying growth trends that you're seeing in that business and how to think about the profitability of the businesses that are more ESG-focused? Thank you.
spk05: Sure. Look, we – We couldn't be better positioned from a standpoint of the M&A activity that's behind us. Obviously, CH2M combined with Jacobs positions us to be the major player here. And by the way, we can't keep forgetting to remind everyone, one of the biggest acquisitions in our industry going very well, when you look at what we paid for that, uh compared to what is generating today uh extremely attractive financially but obviously jamie position helps us position to be a big winner but then you add on top of that the pa consulting acquisition which now provides end-to-end capability from you know front-end consulting all the way through delivery and and you know ultimately things like onm etc um so from uh you know from a climate change stamp so as as far as other m a you know we We're going to continue to look at things that can move us up the food chain from a margin standpoint, possibly some geographic expansion. But as far as the US infrastructure stimulus opportunity, I think we're extremely well positioned with the organic capability we have today. And on the climate change side, when you look at the $5 billion, it's really wide ranging of what we're in. But as you look at the growth going forward, You know, it's going to be everything from how do we help our clients adapt and mitigate, you know, so whether it's sea level rise or flooding or bushfires and droughts, the whole energy transition equation moving away from fossil fuels into, you know, clean energy and that's, you know, both working with our government and private clients. Everyone's looking to reduce their carbon footprint. That's where we come in around the whole decarbonization and eliminating or reducing greenhouse gases and then things like natural resource stewardship. which is critical across the globe. It's a global opportunity. We're positioned well as an end-to-end solutions provider and bringing some unique tools and innovation because it's going to require digital transformation to achieve these type of climate change transformative expectations by our clients.
spk06: Thank you very much.
spk07: Your next question comes from Steven Fisher with UBS. Your line is open.
spk09: Thanks. Good morning. So at the risk of making this a broad question or maybe jumping the gun on your investor day, if you could just run through some of your key margin initiatives and where you see the most progress made and where you have the most upside potential here. I know you've got the CMS margin mix, you've got the future of work and a few other things. Maybe just kind of give us an update on the margin potential.
spk05: Well, when you talk about margin initiatives, You know, it's been both organic and inorganic. You know, one of the things we're extremely proud of around our critical mission solutions line of businesses, all the acquisitions that recent acquisitions, QW, Wood Nuclear, Buffalo Group, they're all performing very well, you know, strong first half versus last first half pro forma. And they're all margin accretive to our CMS line of business. and so from that standpoint where you know i think that's a a key addition you know to our to our margin enhancement but then it really goes back to what we were talking about earlier to our whole global integrated delivery profile that not only bring the best resources but but be uh be more efficient and certain aspects of the whole delivery model and uh and and much more around the whole business acumen commercial acumen side now versus several years ago on really identifying where the margin opportunities are, not just going after any business for the sake of growth. But what else on that front?
spk10: Yeah, I think it's just staying on that digital theme, Steve. We're looking at it both externally and internally. So, for example, rationalizing our internal platforms on how we transact our business is going to have derivative benefits. Kevin's talked about it before with regards to operating leverage. And then externally, if you have to point to one, it really is around the digitization of our offering. So autonomous design, machine learning, looking at the digitization of the global delivery model and then how that can provide value solutions in a more efficient way. So it's a big, big piece.
spk07: Your next question comes from Chad Dillard with Bernstein. Your line is open.
spk13: Focus on some of the cybersecurity issues that we've, I guess, that's materialized over the weekend. And we focused the need to reinforce the critical infrastructure in the U.S. And I just want to get a sense for how you guys are thinking about deploying what's been more of a government-focused cybersecurity initiative to the private sector and how you're thinking about your go-to-market strategy there.
spk15: Hey, Chad, I think we missed the first part of your question. It sounds like it's around cyber, but can you just kind of re-ask it and just summarize it?
spk13: Yeah, sorry. Must be a bad connection. Yeah, so I just wanted to get a sense for how you're thinking about the opportunities on cybersecurity, given that there's been a hack on the critical infrastructure here in the U.S. over the weekend. And I know you guys have had a strong heritage in the government side and just wanted to understand how you're developing opportunities on the private side and what your go-to-market strategy is there.
spk10: Yeah, Chad, great question. We're actually in the middle of it right now and can't speak too much into the details, but the events I think that you were highlighting over the weekend, we are engaged on that too. Kind of the portal there on leveraging it in the private sector has been our strong heritage also in the private sector with the other portfolio offerings that we have. Specifically, if it's in the hydrocarbon space, we do quite a bit of environmental remediation and regulatory work in that space. Using that as the portal in order to bring in our cyber expertise, whether it be OT or IT, has been a strong initiative and we're seeing some traction there, not just in the emergency situation, but also as a part of cyber hardening of these companies. And then in other private sectors that we have, whether it be advanced facilities, specialized manufacturing, all those things that we do for the government, the roadmap points to our ability to leverage our longstanding private sector relationships and do the same. So you'll see more of that in the coming months and coming quarters. Okay.
spk07: Your next question comes from Sean Eastman with KeyBank Capital Markets. Your line is open.
spk02: Good morning, team. I just wanted to go back to PA Consulting. I'm not sure if I'm looking at this the right way, but PA did $0.09 of accretion in the month of March. But if I take that out of the accretion update for the full year, it kind of implies they're doing four cents a month for the remaining six months of the fiscal year. So I'm trying to understand that. And then also whether the previous expectation of 52 to 57 cents of accretion on a full year basis in fiscal 22 is still a good way to think about it.
spk08: So a couple of comments, Sean. This is Kevin. So as you think about kind of the pace of their profitability over the course of their quarters, they, like us, we have four, four, five kind of months within each quarter. And the way they handle their fixed costs and how they amortize that over the months versus the amount of revenue they get in that last quarter, excuse me, that last month. Their last month tends to be the strongest month in the quarter. So effectively, don't necessarily take that nine cents and assume it all the way through. So I think that that's that's one thing to recognize. If you look and take away the nine cents and go to your remaining, let's call it four cents a month for the remaining six months, it is basically that number. We think that that is really strong performance, consistent with what we had in our deal model. And ultimately, we're hoping, given the strong start, that maybe there could be some opportunity to improve on that over the balance of the year. But so far, they've started strong. And Steve mentioned the comment about their current work being really, really strong in their first quarter. But some of that's going to go away over their second, third, and fourth calendar quarters for their year. And they have to do a really good job on replacing that over the balance of the year. So we feel good about the guidance we've provided. And ultimately, hopefully, that pipeline will continue to translate into incremental backlog, which could result in potentially being a little bit higher. But I think we're being prudent in terms of our guidance for PA at this point in time.
spk11: your next question comes from michael let's do this with vertical research your line is open good morning everybody um maybe for bob uh maybe to elaborate a little bit more on life science and advanced manufacturing certainly the news flow and the supply chain issues regard to the electronics industry has been front and center money investors um you know are we getting to a point where there's going to be a significant investment that's going to show up and run through your PM work in the next 6 to 12 months? And even on the life science side, is it more of a global opportunity, and certainly you are globally positioned, but we've been hearing more about U.S. supply chain, but is there more, are you going to be more driven globally, whether it's the vaccine side or biologics or some of the electronics opportunities that you're working with your clients now?
spk10: Yeah, Michael, let me kind of unpack both sides of that. On the semiconductor side, I'm not sure if you asked me about that or life sciences, it is global. It's probably more focused in on the U.S. for us right now, when I say U.S., U.S. clients, as well as Asian clients that are building in the U.S. You're even seeing it in the stimulus bill with President Biden's efforts in order to increase that capacity here on U.S. soil as global supply chains have been kind of rejiggered. And so we do see that having a positive effect on Jacobs. I don't know if it's necessarily... Six months, it's probably got a longer tail on that and ease through the next 12 to 24 months. But that's a strong trend, and it's both not only on the logic side, but it's also on memory chips and some of the lower-end chips that you're hearing from some of the automotive issues that are brewing around. On life sciences, that is probably more global as it pertains to us. And that is the rebalancing of the product portfolio. All of this attention has been placed on vaccines, specifically around the coronavirus. Great development that's happening within the oncology world. And as I said in the remarks, That's driving a real need for contract manufacturing, probably like nothing we've seen in history because of the volumes that are needed and the speed to market around these new therapies. So overall, really, really solid picture for at least the next couple of years.
spk07: Okay. Your next question comes from Michael Senninger with Bank of America. Your line is open.
spk12: Thanks for taking my question. There was a few mentions on the call about increasing investments and SMA and IT, travel and medical. I understand investments are for the better growth outlook. When we think about your tentative guide for double-digit EBITDA growth in 2022, is there any leverage on top of that top line or the initiatives around the margin? Is it really all set to really expand incrementals in 2023 and beyond. Just curious how we should think about that trade-off with a better growth outlook and some inflationary pressures that could be building as we think of the double-digit and beyond for 2022 and 2023. Thanks.
spk08: So, a couple of comments, Michael. First one on on the margin front or the percent of revenue that SG&A represents, we're still in a good spot relative to historical numbers. So don't think of this as being something that's going to be, you know, a big challenge for us. But we do find it necessary to make these investments. I think the next comment I would make is that's what Focus 2023 is really all about. to ensure that we get improved operating leverage through the process and system enhancements that we're talking about, which will allow us, as the growth dynamic begins to accelerate, which we've talked about, assuming it's going to happen in 2022, and that's going to be really important for two reasons. One, to get the operating leverage. But I think the other way to think about it is, If we can get that growth and afford ourselves the same ability, not to hire at the same level that we've had to in past growth spurts, that's going to be really, really strong for us. So there obviously is a war for talent. And to the extent that we're going to be able to supply that incremental growth with less headcount having to be added to support it, that's going to be a big positive for us.
spk07: Okay. Your next question comes from Zane Careyman with PA Davidson. Your line is open.
spk12: Thank you for taking my question. First off, when we're thinking about PA consulting, I know you guys have spoken to double-digit EBITDA growth and about 12% revenue prior to the deal here, but Regarding the strategic partnership, how are you thinking about that going forward? Does that still feel like something comfortable? Or are there more opportunities now that the partnership is intact?
spk10: There's more than we intended. In fact, what we've done, the headline is the level of engagement and the collaborative pursuits that we have is strong. And just to quantify, you know, we kind of thought that we would be in that maybe 40 to 50 type collaborative pursuits that would have a 12 to 18 month gestation period to them. probably double that right now. And we're getting heavily engaged and we see that getting even stronger as travel restrictions come down and we're able to, you know, jointly see clients together as well. So very strong. And I think it's contributing to our optimism as we look forward.
spk07: Your next question comes from Andy. Your line is open.
spk14: Great. Thanks for taking my questions, guys. I had just wanted to clarify two things here, one on the guidance and one on the cash flow are probably both the questions for Kevin. But I guess just, Kevin, I just want to make sure we understand the new guidance correctly. I look at about 10 months of contribution off the EBITDA numbers that you previously talked about with PA. It equates to about $130 million. Again, regardless of seasonality, it's kind of a rough and tough number. Your guidance, the EBITDA side is up roughly that amount. Is this a way of kind of saying like, hey, the organic outlook is still good, but it's largely unchanged with most of the EBITDA raise from the acquisition? And then on the EPS side, was there anything below the line that allowed you to take up the lower end of that EPS range a little bit more? Just maybe if you could talk about that. And then just on the free cash flow. I thought it's just worth clarifying the cash flow from operations. There was a $230 million benefit in the quarter on accrued liabilities. I'm guessing that might be associated with the $267 million that's going to be cash outflow next quarter, but I don't know. So I was wondering if you'd just clarify that benefit to this quarter's cash flow from operations. Thank you.
spk08: So let me go to the second one first. You're exactly right, the $267 million. is a dynamic where the total consideration was reduced by the 267, and now that 267 flows through the P&L ultimately in the third quarter. So effectively, that dynamic is occurring. you're right relative to how that works. Total consideration doesn't change. We're still at the 1.4 billion pounds sterling. So note that. I think that's important to note, Andy. Second point in terms of the guide, look, the guide is effectively, we took the nine cents and we felt like the guide that we previously provided was appropriate, as I mentioned earlier in my comments. while their first quarter of their year was really strong they they got a giddy up and go relative to the pipeline that's in front of them booking that and then burning that and and so effectively we'll see how that plays out over the balance year let's hope that they do that uh and in fact if they kind of continue at that rate that was in q1 obviously there's going to be some upside but but i think we're being prudent relative to that remember this this business NPA is a book and burn business. So they got to always continue to drive towards that. So that's one thing. So back to the base business. Yes, we had good performance in Q2 and effectively that was a primary driver to our increase in the base business guide is how I would characterize it. and look i think at the end of the day given the the investments that i talked about on the gna side that we're looking at the balance i think that that will offset any potential pending momentum that we got on the top line that that may come to fruition pipelines looking good relative to our i would say our state and local and and government clients i think that that's positive the pipelines building on the advanced facilities. So we'll see how that all plays out. But we really see this coming together more in terms of our late fiscal 2021, which positions us better for 2022 than 2021.
spk07: And your next question comes from Andy Capellas of Citigroup. Your line is open.
spk00: Hey, good morning, guys, again. Just wanted to ask you a follow-up on CMS in the sense that you guided revenue to flat all in, I think, for the second half of 2021, given the higher headwind from the two new contracts. But you do have easier comparisons. If I look at Q3 versus last year, you know, the pandemic disruption. And so are you seeing any delays in that project conversion there in CMS? And then if you look at backlog growth, it looks solid in Q2. So do you see book-to-bill continue to be at or above one in the second half of 2021? Yeah.
spk05: We've talked about it for several quarters. We're exiting two low-margin, large contracts, the Hanford contract and the classified contract that we've spoken about before. When you exclude those two and you exclude the acquisitions, our base business is growing. I think it's somewhere in the you know, the 8% range. And then you add on top of that, you know, obviously the benefit of the acquisitions that are continuing to ramp up with that, you know, on a year-over-year basis weren't in our – some of them weren't in our numbers. So, you know, I think we're feeling good about everything that we talked about with regard to the – where we're aligned, you know, with the growth trends, even though there's a flat defense budget. You know, the things like space intelligence and hypersonics and several of the other items that we mentioned are actually growing nicely. And so there's a lot of shift in funding. You know, even the DOD climate change initiatives to modernize their infrastructure and the Department of Defense, that's helping us. And so, you know, overall, we're very pleased with the revenue growth and critical mission solutions.
spk07: Thank you.
spk05: So as I close the call, you know, our thoughts are with the people, our people in India, including our Jacobs colleagues, and we'll continue to support them in dealing with the current significant challenges of the pandemic. Looking to the future, we're excited about our strong performance and our solid foundation that provides Jacobs as we develop our new strategy and chart an existing future together, an exciting future together. Thank you.
spk07: This concludes today's conference call.
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