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spk15: ladies and gentlemen thank you for standing by my name is brent and i will be your conference operator today at this time i would like to welcome everyone to the jacobs fiscal fourth quarter and full year 2022 earnings conference call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question at that time simply press star followed by the number one on your telephone keypad If you would like to withdraw your question, again, press star 1. Thank you. It is now my pleasure to turn today's call over to Mr. Jonathan Doris, Investor Relations. Sir, please go ahead.
spk05: Thank you. Good morning to all. Our earnings announcement and 10-K were filed this morning, and we have posted a copy of the slide presentation on our website. I'll do a reference during the call. I would like to refer you to slide 2 of the presentation materials for information about forward-looking statements and non-GAAP financial measures. Now 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 Vergata, President and Chief Financial Officer Kevin Berry. Steve will begin by reviewing our fourth quarter results and then provide an overview of our software and technology platforms. Bob will then review our performance by line of business and Kevin provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Bob will provide details on our updated outlook along with some closing remarks, and then we'll open up 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.
spk09: Thank you for joining us today to discuss our fourth quarter and fiscal year 2022 business performance and 2023 outlook. As I transition to Jacob's Executive Chair, I'm excited and confident about the next phase of our strategy boldly moving forward. This strategy continues to unlock and elevate our transformed high-performance culture to capture significant growth opportunities we've identified across climate response, consulting and advisory, and data solutions, while benefiting from the recurring nature and diversity of our core businesses. From a financial standpoint, we believe the rigorous execution of this strategy will result in enhanced long-term revenue growth and expansion in our profit margin profile. During our last two strategies, we maintained a focus on continuing to reshape our business through organic investments, acquisitions, and divestitures. And by doing so, we were able to deliver value for all of our stakeholders, including our shareholders. Since we started our journey together in 2016, we intentionally transformed our culture and our brand, grew revenue, and expanded profit margins leading to a total shareholder return of approximately 250%, almost twice the return of the S&P 500. We believe the next phase will be equally as transformative as we maintain our brand promise of challenging today and reinventing tomorrow. Let's now discuss our fourth quarter results. We're seeing strong demand with robust opportunities in our sales pipelines and a number of marquee recent wins, which underscores our strategy. During the quarter, net revenue grew 6% year-over-year and grew 11% on a constant currency basis, with another quarter of constant currency growth across each line of business. Backlog was up 5% from the prior year's quarter and 8% on a constant currency basis. Within People and Places Solutions, our advanced facilities business again posted double-digit year-over-year top-line and operating profit growth in the fourth quarter. and the remaining PNPS units in constant currency also experienced year-over-year growth. During the current quarter, Critical Mission Solutions is beginning to see previously delayed opportunities enter the final stages with a major cyber win last week and with another win close to clearing the protest period. PA Consulting and Constant Currency continue to show strong Q4 growth with revenue up 9% and backlog up 8% year over year. PA successfully won a large multi-year contract with the Ministry of Defense to secure the next generation soldier in what's proving to be a digitally-enabled battlefield. From a full-year standpoint, we finished the year within our original guidance range, even when recognizing the translation impact from the strengthening U.S. dollar, with double-digit net revenue and operating profit growth on a constant currency basis. Turning to slide five, let me discuss an element of our data solutions accelerator that's housed within the Divergent Solutions business unit, which we will formally break out starting in our fiscal first quarter of 2023. We have consolidated the majority of our software and data solutions into a single unit to gain benefits from consistent product management, marketing, and research and development. Our data solutions are aligned to three high-growth verticals. of transportation, water, and national security. A competitive differentiation of our vertical software platforms is access and integration of unique data sets and the ability to turn that data into actionable outcomes for our customers. For example, our Streetlight Data Platform is a SaaS solution that ingests a variety of mobility data sources into proprietary algorithms that provide data analytics for both traditional transportation clients and giga projects within the broader infrastructure market. Our geopod technology creates mapping data from multiple confidential customers as they plan for autonomous driving, precision agriculture, and other aerial surveillance requirements. In water, we continue to leverage smart algorithms developed by our domain experts to optimize our clients' operations and maintenance. Both AquaDNA and our intelligent O&M solution can save 10% to 30% in energy used for wastewater treatment. We continue to expand our water solutions across our clients' assets lifecycle. From a national security standpoint, our extreme search solution has proprietary algorithms and compute ability that can rapidly search large volumes of real-time or long data. One critical use case is quickly finding indicators of compromise to prevent cyber breaches. Given the significant amount of data that will be created and utilized in IT and OT environments, we believe the applications of these type of solutions are in the early stages of decades of robust growth. Before I turn the call over to Bob, first I'd like to thank the amazing people at Jacobs for living our values and progressing our culture over the last several years. Every single day, Jacobs is providing critical solutions globally. For example, most recently supporting NASA for the Artemis launch to the moon, or consulting on green hydrogen solutions for sovereign nations, delivering world-scale biotechnology manufacturing solutions, remediating harmful PFAS chemicals from our water, or planning autonomous transportation for the city of the future. It is truly our people that make Jacobs a company like no other. Now I'd like to congratulate Bob on his appointment to CEO. and say that I'm excited we have an experienced and dynamic leader who brings decades of industry domain knowledge and a proven track record to lead our boldly moving forward strategy into the future. Love?
spk03: Thank you, Steve.
spk07: I'm honored to take on the role of CEO early next year and advance the exciting work underway to further diversify our capabilities and offerings, increasing opportunities and value for our people, our clients, and our shareholders alike. I want to thank Steve for his partnership and guidance over the past seven years. He is an incredible leader who inspires all around and leaves a tremendous legacy at Jacobs. I'll begin on slide six, discussing our people and places solutions business, where we achieved strong top and bottom line results with backlog up 8% year over year and 12% in constant currency. With critical infrastructure priorities on the rise over the past year, our quarter results show that we've been successful in converting opportunities into accessible backlogs. This success is underpinned by our global workforce, which expanded 12% this year. For example, in FY22, our Advanced Facilities Unit operating profit grew by well over 25% on a constant currency basis due to our scalable multi-geography delivery teams. Overall, we see our quarter results as Jacob's strategy in action. It's proof that Jacob's deep domain expertise can transform client outcomes, replacing conventional infrastructure delivery with modern data-enabled solutions. I'll discuss results under the themes of supply chain diversification, infrastructure modernization, and climate response. Across these themes, I'll highlight how our technology and data solutions enable our success. First, Supply chain diversification has led to expanded delivery for clients with long-term investment profiles that continue through changing economic conditions. In life sciences, our clients are in the middle of a generational expansion of therapeutics and vaccines, as well as advanced healthcare impacting people on a global scale. Our confidential clients can accelerate production capacity for lifesaving medicines for the most widespread chronic diseases by leveraging Jacob's expertise in digital design to optimize delivery across multiple large-scale biotech campuses. We are also advising and delivering predictive analytics for point-of-care treatment, resulting in improved outcomes for a growing and aging population with clients such as New South Wales Health Infrastructure in Australia, Children's Hospital of Philadelphia, and the Centers for Disease Control in the U.S. Jacobs remains uniquely positioned across the entire electric vehicle ecosystem to address all aspects of this rapidly expanding market, from manufacturing capacity to EV charging infrastructure to advanced mobility implementation. With favorable tailwinds, an expanding list of automobile and EV manufacturing clients are seeking Jacobs' leading support to develop sustainable production capacity. Moving to climate response. Global demand for affordable green energy led to an increase of over 33% in bookings with wins across multiple geographies, including the UK's National Grid, US Department of Energy, All Energy in Korea, where we're developing a new green hydrogen production and import facility. In the US, IIJA supported pipeline is building momentum and projects are moving through the sales cycle into delivery. For example, there's a broad focus on transportation decarbonization with support for the National Electric Vehicle Infrastructure Program, NEVI, across multiple DOTs, charging infrastructure for the Navy, and in multiple states under the Low or No Emission Vehicle Grant Programs. For the Environment Agency in the UK, we're delivering a digital proof of concept, leveraging spatial predictive analytics to avoid extensive damage and human casualties due to flooding and other climate-driven disasters. At the same time, National Highways chose us to streamline their complex data landscape thanks to our cyber and digital capabilities, partnered with PA Consulting. With Streetlight Data's multimodal transportation insights platform, we've expanded opportunities for both traditional public sector transportation clients and new private sector clients to prioritize marketing and real estate investments water sector clients are investing in our new technologies such as aqua dna dragonfly and intelligent operations and maintenance these integrated ai and ml cloud-based technologies enable clients to provide reliable clean water access for all communities leading to expanded services this quarter from winds in puerto rico florida louisiana the uk singapore and Australia. These innovative platforms are driving new standards for asset management. In Hawaii, we are delivering a 20-year installation development plan to address climate adaptation for the Joint Base Pearl Harbor HICM. Under infrastructure modernization, mega program delivery trends continue as clients look for more efficient ways to deliver sustainable, livable places. In Scandinavia, we're designing the Nordhaven Tunnel to cross the harbor in Copenhagen, Denmark. And in Toronto, Metrolinx recently awarded Jacobs a multi-year extension to support their $85 billion regional transit expansion. In summary, People and Places Solutions is positioned for long-term growth, as evidenced by strong performance across all geographies and client segments. Clients are continuing to partner with Jacobs to deliver transformative infrastructure, advanced manufacturing expansion, and energy security projects with sustainable, lasting outcomes. Moving to slide seven, to review Critical Missions Solutions line of business. CMS delivered solid performance in fourth quarter, with backlog remaining strong at $10.6 billion, flat year-over-year, but gross profit in backlog was up 10% year-over-year and 12% in constant currency. Our CMS strategy is focused on creating resilient revenue growth and margin expansion by offering technology-enabled solutions aligned to critical national priorities. CMS's service and solutions offerings are delivered across our core customer markets, space, cyber, intelligence, defense, and energy. And we continue to see strong demand for our solutions across all of them. In space, Jacobs is a critical prime contractor to NASA's Artemis programs. including being the key integrator of the successful uncrewed launch last week of the Space Launch System rocket in preparation to send U.S. astronauts back to the moon by 2025. The Artemis I launch is historic, and we are proud of Jacob's role in the mission. Also, we were awarded contracts by the Scottish rocket manufacturer and small-sat launch service provider, Orbex, to help them build and operate a vertical launch site for satellites in the U.K., Several trends in other Jacobs Key Markets that we are seeing contributing to our continued growth include zero-trust architecture, hypersonics, and modular reactors. Beginning with zero-trust architecture, or ZTA, White House Executive Order 14028 mandates adoption of ZTA cybersecurity models across the federal government. Importantly, ZTA requires continuous verification of identity as movers as users move laterally through network systems. Jacob's cyber and intelligence team, which is now part of our new divergent solution operating unit, is the program manager for one of the intelligence community's largest directorates, responsible for identity, credential, and access management, ICAM. ICAM is a critical architectural component of effective zero-trust models, and Jacob's technical leadership in this area positions us to help clients across the federal government meet the White House executive order. Our Cyber and Intelligence Business Unit has a significant pipeline of opportunities requiring ZPA adoption. In Q4, our Cyber and Intelligence Team also won several new non-ZPA contracts, including an Agile Software Development and Sustainability Contract, or a classified contract, and one assisting the Navy to advance their radar sensing capability at the Naval Research Laboratories. We also recently cleared the protest period for a $470 million six-year IDIQ providing identity intelligence support to the DOD, which is not yet reflected in backlog. Moving on to hypersonics. With advances in hypersonic missile technology by China and Russia, the U.S. Department of Defense is developing missile defenses to defend against hypersonic weapons and other emerging missile threats. Because hypersonic weapons fly at speeds of at least Mach 5, roughly one mile per second, and can maneuver en route to their target, they are more difficult to defend against. Jacobs has decades of experience supporting the US Air Force and NASA, and has positioned itself as a leader in hypersonic solutions. And last quarter, Jacobs was awarded a five-year, $100 million IDIQ to help the US Navy design and operate an underwater launch test system for the Naval Surface Warfare Center. The contract also covers modernization, design, fabrication, and operation support for an in-air launch testing platform at the Naval Air Weapons Station, China Lake, in California. Finally, demand for modular reactors. Nuclear power is coming into favor as a clean energy alternative to fossil fuels. For countries to achieve their net zero carbon emission goals and ensure energy independence and security, leaders are realizing they need to include the always-on emission-free generation. Small modular reactors, or SMRs, are reactors with electric generating capacity of 300 megawatts versus traditional large reactors with generating capacity of one gigawatt or more. SMRs have numerous benefits, including lower initial capital investment, greater scalability through factory manufacturing processes, greater siting flexibility on smaller grids and isolated areas, and greater energy efficiency. In the UK, we are delivering engineering and technical services to the Rolls-Royce SMR program and licensing advice to GE Hitachi Nuclear Energy as they look to enter the UK market. There's also increased interest in new advanced modular reactors, or AMRs, that can be designed to provide specific benefits, such as producing high heat or green hydrogen production. We are supporting multiple AMR vendors in the U.S. and U.K. Jacobs is a leader in global nuclear solutions, building on our long legacy of organic capabilities and acquisitions of CH2M and wood nuclear. In summary, we continue to see solid revenue visibility for our solutions in FY23, with approximately 85% of CMS's portfolio consisting of large enterprise contracts with durations greater than four years and 88% from federal-level government funding. We are also pleased with the Government Accountability Office's recent guidance to have the U.S. Air Force reevaluate proposals for its Large Integrated Support Contract, ISC 2.0, in support of a new source selection decision. And therefore, this remains in our pipeline as a potential multibillion-dollar opportunity. The CMS sales pipeline remains robust with the next 24-month qualified new business at approximately $30 billion, including $10 billion in source selection with an expanding margin profile. Moving on to PA Consulting on slide eight. PA continues to deliver its strategy and is securing exciting and enduring work. PA's deep client insight, lasting relationships, and ability to assist clients through economic cycles is also generating consistent demand for its expertise. This quarter, PA was awarded marketing wins across its key markets. As Steve mentioned, in the UK public sector, where it's a major player, PA was selected as the lead systems integrator for Krennic, a multi-year contract providing next-generation solutions to counter threats posed by radio-controlled improvised explosive devices, IEDs. The contract leverages PA's extensive experience in major program delivery as they lead the delivery consortium. Team Protect. PA was also appointed to oversee the delivery of a once-in-a-generation program for social care reform in the UK, further cementing its position in government and public sector. Transport continues to be a major focus with additional wards, one at Schiphol Airport in the Netherlands, where the joint capabilities of Jacobs and PA continue to create further opportunities to include boardroom advisory and digitalization of airside operations. The Jacobs PA partnership is strongly positioned to continue to capitalize on substantial market opportunities. Jacobs' global footprint and broad-based domain expertise, together with PA's high-end digital consulting, creates a compelling value proposition in distinct areas of opportunity. Now I'll turn the call over to Kevin to review our financial results in further detail.
spk13: Thank you, Bob. And turning to slide nine for a financial overview of our fourth quarter results. Fourth quarter gross revenue grew 8% year-over-year and net revenue 6% and up 11% year-over-year on a constant currency basis. All lines of businesses grew fourth quarter revenues over 9% versus a year ago in constant currency. Adjusted gross margin in the quarter as a percentage of net revenue was 26% and improved slightly from the third quarter. but was approximately down 130 basis points year over year, primarily driven by one, our CMS line of business due to the newly ramped remediation contract, and two, investments in incremental employees and PA in advance of the large ones such as the UK MOD award that will ramp over the coming months. We expect gross margins to modestly improve from two, four levels during fiscal 2023, driven by recent wins in cyber, favorable revenue mix, the recent wins in PA consulting, and continued strong performance in our people and places solutions business. Adjusted G&A as a percentage of net revenue was 15.2%, down 40 basis points from Q3 and down 200 basis points year over year. During the quarter, we benefited from lower labor expenses as we managed our cost structure. We are targeting G&A as a percentage of net revenue to stay below 16%. for the full fiscal year 2023. GAAP operating profit was 309 million and was mainly impacted by 52 million of amortization from acquired intangibles and other acquisition deal related costs and restructuring efforts of 14 million with over half associated with integration costs of acquisitions. And finally, a positive benefit from third party recoveries of $27 million pre-tax which we excluded from our adjusted results. Adjusted operating profit was therefore 347 million, up 15% year-over-year. And on a constant currency basis, it was up 19% year-over-year. Our adjusted operating profit to net revenue was 10.7%, up 80 basis points year-over-year. I'll discuss the moving parts later when reviewing the line of business performance. Gap EPS from continuing operations was $1.75 per share and included a $0.16 benefit from the third-party recovery receivable, a $0.12 benefit to align to our effective adjusted tax rate, offset by a $0.27 impact related to the amortization charge of acquired intangibles, and $0.06 from transaction restructuring and other related costs. Excluding these items, third quarter adjusted EPS was $1.80, up 14% year over year, and up 18% in constant currency. Jacobs consolidated Q4 adjusted EBITDA was $350 million and was up 13% year over year, representing 10.8% of net revenue. On a constant currency basis, adjusted EBITDA was up 17% year over year. Finally, backlog was up 5% year-over-year and 8% on a constant currency basis. Sequentially, backlog was impacted by the strengthening US dollar at year-end compared to the end of the third quarter. As an example, the dollar strengthened 8% versus the pound sterling from the end of Q3 to the end of Q4. As a result, on a constant currency basis, backlog was flat sequentially. The revenue book-to-bill ratio was 0.94 times with our gross margin book-to-bill at 1.05 times, given the higher margin profile within backlog on both a year-over-year and sequential basis. Our book-to-bill ratios continue to be impacted by the burn of the approaching Kennedy-NASA rebid as backlog continues to fall until which time the rebid is awarded. Now moving to slide 10 for a brief recap of our full year 2022 performance. Final year gross revenue grew 6% year over year and net revenue grew 10% in constant currency. On a reported basis, we expect fiscal 2023 revenue growth in the mid single digits and high single digits on a constant currency basis. GAAP operating profit was $918 million up significantly year-over-year, driven by a material decrease in one-time items related to transaction and restructuring, as well as solid underlying constant currency growth in the business. Gap EPS was 498, and adjusted EPS was 693, up 10% year-over-year and up 13% on a constant currency basis. Adjusted operating profit grew 10.6%, and was up 13% on a constant currency basis. Operating profit margins expanded nearly 30 basis points to 10.4%, driven by revenue mixed benefits and lower support costs. Adjusted EBITDA was 1.36 billion, up 10%, and up 12% in constant currency. As a percentage of net revenue, adjusted EBITDA was 10.8%, up 20 basis points from fiscal of 2021. We expect modest adjusted operating profit margin expansion in fiscal 2023, driven by a combination of a higher margin revenue mix and lower employee-related costs. However, adjusted EBITDA margins are expected to be flat year over year as other income will be burdened primarily by unfavorable pension costs driven by the higher interest rate environment. On a trailing 12-month basis, the bill was 0.97% 0.97 times and gross margin book to bill was over one at 1.05. Regarding our LOB performance, let's turn to slide 11 for Q4 performance and slide 12 for full year performance. Starting with CMS. Q4 revenue was up 10% year over year and up 12% in constant currency. BlackLinks contributed approximately 22 million to the fourth quarter revenue. Fiscal 2020 revenue on a reported and constant currency basis grew 3% as the first part of the year did not benefit from the ramp of the Idaho nuclear remediation win. BlackLinks contributed $50 million in revenue for fiscal year 2022. For fiscal year 2023, we expect revenue growth in the mid-single digits for the CMS business and higher double-digit growth in our divergence solutions. divergent solutions unit. Q4 CMS operating profit was $95 million, down 17% year-over-year, and down 14% on a constant currency basis. Operating profit margins, as a result, were down 220 basis points year-over-year to 6.9%. Consistent with our previous outlook, Q4 operating profit and operating margin percentage were impacted by a rate true-up in our cyber and intelligence business. The rate grew up, which related to higher G&A costs over the course of the year, giving a slower ramp in the business during the continuing resolution. Looking forward, we have successfully been awarded a large new classified cyber win that was previously delayed during the continuing resolution, indicating developing momentum. Looking into fiscal 2023, we expect approximately 75 basis points of sequential operating margin expansion in Q1, turned by immediate rebound from the one-time rate true-up in Q4. We're also targeting further margin expansion through fiscal 2023 as we win and ramp new higher margin awards. Moving to people and places solutions. Overall, P&PS delivered strong revenue and operating profit results. Q4 net revenue was up 6% year-over-year and up 10% in constant currency. On a constant currency basis, each PMPS region demonstrated net revenue growth, and for the full year, PMPS grew 4% on a reported basis and 7% in constant currency. Looking deeper into our business units, our advanced facilities unit, which benefits from investments in the life sciences, semiconductor, and EV supply chains, posted another stellar quarter of double-digit revenue and operating profit growth. For the fiscal year, the business grew operating profit well north of 25%. We expect our advanced facilities growth rate to continue to remain robust during the fiscal year 2023 at approximately 10%, despite the strong year-over-year comparisons. The PMPS international business Q4 revenue and operating profit was essentially flat year-over-year on a reported basis, but grew double digits in constant currency. For the full year, international operating profit was up 10% year-over-year in constant currency. Our international business will continue to be materially impacted by FX during fiscal 2023, resulting in flattest reported revenue growth, but it's poised for full-year growth on a constant currency basis. Total PMPS Q4 gross profit and margins were up year-over-year, with Q4 operating profit up 31%. and operating profit as a percentage of net revenue up 275 basis points, driven by revenue growth and mix as well as lower labor costs during the quarter. Full year people and places operating profit was up 5.5% on a reported basis and up 10% in constant currency with operating margins of 13.2% of 20 basis points versus a year ago. In terms of PA's performance, PA Q4 revenue declined 7.7% year over year in U.S. dollars, but grew 9% in pound sterling. Q4 adjusted operating profit margin was 19.4% during the quarter due to continued lower utilization and investments in pipeline pursuits. As Bob mentioned, PA Consulting has been successful, winning the large Krennic Award with the MOD, for which we expect to show benefit later in 2023. We'll continue to target double digit revenue growth on a constant currency basis with operating margins returning to above 20% throughout 2023 driven by improved utilization. Our non-allocated corporate costs were $28 million down year over year as we benefited from lower incentive costs and to a lesser extent from a positive currency impact on our supported costs and other benefits. We now expect non-allocated costs, corporate costs, to be 190 million to 210 million for fiscal 2023, which is slightly higher than fiscal year 2022, as we expect higher incentives costs on a year-over-year basis. Now turning to slide 13 to discuss our cash flow and balance sheet. Cash flow generation continued to be strong. Free cash flow was $230 million in Q4 and included $12 million related to transaction costs and other items. On a full year basis, reported cash flow was $347 million, but included the net $475 million of cash outflows related to the previously announced INPEX settlement, the first $55 million repayment of a CARES Act payroll tax deferral, and a net $4 million cash benefit related to other items. Excluding these items, free cash flow conversion to adjusted net income was 97% for the year. For fiscal 2023, we expect two items to impact cash flow, an approximately net $15 million of further cash outflows from restructuring, transaction, and other related costs, and a final repayment of $60 million of CARES Act payroll tax deferral benefits. Excluding these items, we anticipate, again, to achieve 100% free cash flow to adjusted net earnings in fiscal 2023. We're also continuing to evaluate further real estate opportunities, giving our developing insight as towards longer-term needs, given the hybrid work environment. And we will update on our Q1 earnings call with further developments in this regard. During the quarter, we repurchased approximately $31 million of shares, and for the full year, we repurchased $282 million. After September, we have continued to be actively purchasing shares with approximately $135 million repurchased as of last week. As we have said before, we will remain agile and opportunistic in repurchasing shares as we see disruption in the markets. We ended the quarter with cash of $1.1 billion and gross debt of $3.4 billion, resulting in a $2.3 billion of net debt. Our Q4 net debt to 2023 expected adjusted EBITDA of approximately 1.6 times is a clear indication of the continued strength of our balance sheet. As of the end of Q4, approximately 60% of our debt is tied to floating rate debt, and as a result, we are expecting incremental interest costs going forward, which we have incorporated into our outlook. As of the end of the fourth quarter, our weighted average interest rate was approximately 3.6%. Early in the fourth quarter, we entered into a notional $500 million interest rate lock at a rate of 2.7% as related to a planned future fixed rate issuance. The mark-to-market benefit from the in-the-money interest rate lock is currently recognized in other comprehensive income, but will offset interest expense of our future expected fixed-income issuance. Also, in early October, we redeemed $481 million of private notes at par. In the appendix on slide 16 of this presentation, we included additional detail related to our debt maturities, interest rate derivatives, and quarterly interest expense. Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which we announced at the end of the fourth quarter of fiscal 2022 and paid on October 28. I will now turn the call back over to Bob.
spk07: Thank you, Kevin. Turning to slide 14. As we discussed throughout our remarks, through proactive portfolio management, we have aligned our business to sectors that that can demonstrate robust growth through multiple economic scenarios. We continue to enhance our overall growth rate with our climate response consulting and advisory and data solution strategic accelerators. Given the volatility of FX rates, we are providing our outlook under two FX scenarios. One, an outlook based on constant currency, which provides greater insight of underlying business performance, and two, an outlook based on more recent FX rates. Although we transact in multiple currencies, one example for reference is the pound sterling. The fiscal year 2022 average conversion rate for the pound sterling was $1.28, compared to $1.50 in early November 2022. As put noted in our earnings release and investor presentation, based on fiscal 2022 average rates, our outlook for fiscal 2023 adjusted EBITDA is $1.465 billion to $1.545 billion, and adjusted EPS of $7.60 to $7.90, up 10% and 12% respectively at the midpoints. Based on rates in early November, our outlook for fiscal 2023 adjusted EBITDA is $1.4 billion to $1.48 billion, and adjusted EPS of $7.20 to $7.50, both up 6% at the midpoints. On a net revenue basis, the difference between these two scenarios is approximately $430 million. Looking beyond fiscal 2023, we remain confident in achieving double-digit constant currency adjusted EBITDA growth consistent with our strategic plan. Operator, we will now open the call for questions.
spk15: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. In the interest of time, please limit yourself to one question, and should you have further questions, you may re-queue. Your first question comes from the line of Bert Subin with Stiefel. Your line is open.
spk17: Hey, good morning, and congratulations to both Bob and Steve.
spk03: Thanks, Bert.
spk17: Bob, maybe to start out with you, you ended there talking about feeling pretty confident and sort of double-digit growth. You guys had previously provided your fiscal 24 targets by segment on both a margin and a sales basis. If we exclude the impact of FX, do you still remain confident in those bands across each segment?
spk07: We do, Bert. You know, for the tailwinds that we see in the markets that we're serving, we stand by those commitments that we made on the 24 in the 24 strategic plan.
spk17: Okay, and just a quick follow up in terms of thinking about PMPS, you know, performed really well during the quarter. And you made some pretty positive comments on what you're seeing on the advanced facility side. Do we expect any sort of incremental softness just as your semiconductor clients, you know, slow their capex bend? And in terms of the infrastructure side of things in the segment, are you starting to see, you know, a material uptick from IIJA, or is that just a plan as you progress through 23? Sure.
spk07: So let me answer the first question. On the semiconductors, then, the industry as a whole from a demand standpoint is in a bit of a soft period. You know, the client base and the geography that we're working in, we have not seen that. And so the front-end work, the design work, the momentum that we've seen over the course of the last six to eight quarters, that has not slowed at all. And so we're, you know, we're feeling comfortable about where we sit in that ecosystem of consultants to that industry, specifically with our client base. So we're positive on that front. You know, on IIJA, we actually, we are seeing those projects that we have been tracking through the development of both grants as well as the formula funding coming to fruition. Probably the bigger element to that is that the release of those monies is actually unlocking the base funding that the states previously, specifically during COVID, had locked up, not knowing kind of what the future looks like. So overall, you know, the pipeline is up. On the U.S. basis in infrastructure, our pipeline is up 4% to 5%. I'm sorry, 5% without IHA, 18% with IHA from a pipeline standpoint. So we are seeing that.
spk15: Your next question is from the line of Louis De Palma with William Blair. Your line is open.
spk16: Good morning, Steve, Bob, Kevin, and Ken. I would like to echo congrats to Steve and Bob on your new roles.
spk03: Thank you.
spk16: Thanks, Louis. For Steve and Bob, you referenced several cyber intel awards. associated with your key W and Buffalo Group acquisitions. Are these awards margin accretive? And should the critical missions operating profit in 2023 be back to the 2021 level?
spk03: So both questions, Louis, the answer is yes.
spk07: The two awards that Steve and I specifically spoke about, are coming in through those two portals or through those relationships that we had in the acquisitions that we made during that period. We are seeing that. They are margin accretive. The flip side of this is that these are awards that we had expected in previous quarters. We talked about it a lot in previous earnings calls. The knock-on effect of the CR has now had an effect on when those things start. We do see margins going up, and these are serving as catalysts for that too.
spk13: The other thing, Louie, though, 21 was the high point. So I would say that the underlying business is returning. We had some other events in 2021 that accelerated the margin a little bit higher. We had some one-off closeouts, which were pretty strong. But I think in 2023, the underlying is getting back up well into the eights, I would say. So maybe not all the way back up to the, I think we are at 9% in 2021, but we're going to get underlying to be quite consistent with 2021.
spk15: Your next question comes from Michael Dudas with Vertical Research. Your line is open.
spk03: Good morning, gentlemen. Good morning.
spk08: Maybe for Bob or Kevin, you call out in your CMS the improved in the book-to-bill, but also the gross margin book-to-bill. Maybe you can talk a little bit about PP&S and PAC in a similar light, if you want to give out the actual numbers. And how much is, as you look into timing of awards and ramp up and some of the utilization issues that you were fighting through in 22, Is that more of mid to later 23 to show some much better, you know, stay for FX, better growth as we move towards the end of 23?
spk13: I'm sorry, Mike. You were breaking up. I was having trouble understanding you. I apologize.
spk08: That's what my wife says all the time. So first, Kevin, I'm just talking about like your book to bill. You talk about the CMS gross margin book to bill. Maybe you could highlight in PP&S and PAC similar. just the observations relative to what's in backlog, what do you anticipate in new orders, and maybe the timing of those orders relative to your outlook for 2023.
spk13: Yeah, okay. Got that. All right. Thanks, Mike. So, look, people and places continue to show good margin profile in backlog as well. So, I think that's obviously a very critical part of our strategy when we think about delivering more value-added solutions. The margin is got to come with it. So the backlog margin profile is better in people and places, and also it's better in PA as well. And the dynamic of PA relative to the Q4 number really was effectively the continued utilization. We had expected to get up to around 20, 20%. We fell a little bit short of that, but it's continuing to improve, and we would expect that we'll get back up to those more normalized levels that we saw over the course of early 22 relative to the margin profile there.
spk03: Your next question is from the line of Jamie Cook with Credit Suisse.
spk15: Your line is open.
spk00: Hi. Good morning, and congrats, Bob, and congrats, Steve. I guess first question, you know, Over the long term, can you just talk to, on CMS, can you talk to the strategic importance of CMS to the portfolio? And if, you know, margins continue to sort of underperform, you know, would you consider sort of, you know, other options? Or do you see a path over time to get to, I think, the, you know, margin improvement targets that you laid out in the 2024 targets? Like, how long before, you know, we get there? And then my second question, Kevin, the cash market, flow generation that you're implying for 2023, you know, is quite strong and your balance sheet is in good shape. So just trying to understand how you're looking at, you know, how you're thinking about the M&A profile versus a share repurchase.
spk09: Thanks. Yeah, it's Steve here, Jamie. So I can speak for both the board and management around that question is, you know, we first of all, you know, the whole strategy around divergent solutions was to break out the elements of CMS that are, you know, highly consistent, especially with the data solution side of our three accelerators. And so, you know, obviously, you know, we're off and running on that. We're excited about that. That's where we're really going to see accelerated margin growth, especially with these recent cyber wins that we've talked about, but also across the entire platform. And then when you get into the The remaining CMS business, just as an example, nuclear most recently has been surging with regard to becoming a clean energy transition solution. As you know, we're a major player in nuclear, not just in the remediation side, but the new build side, especially in the new technology of advanced small modular reactors. You know, we're excited about the future of those, and we'll continue to, you know, monitor the entire company as far as fit, et cetera, long-term, as we've done in the past. And I mentioned in my remarks, but, you know, we're very optimistic about the CMS business as we move into 2023.
spk13: Jamie, about the cash flow, yeah, we feel continued confidence continued strength in our cash flow is expected over the course of 2023. That provides us degrees of freedom to your point about how we will deploy that additional capital that's available. So look, I think we continue to monitor the M&A front. I think we were very clear during our strategy as to where we would probably be focusing those ideas and thoughts relative to the three accelerators that we outlined in strategy. And we're continuing to monitor those opportunities. There are things out there that are being evaluated. Obviously got to result in bid equaling ask where we feel like we can add an ROIC and a return profile to our shareholders that are appropriate. And so we'll see how that plays out. Of course, We also talked about during the prepared remarks the proactive stance that we've been taking on the share repurchases. And so we feel like we're well positioned to be able to act when appropriate relative to a potential strategic opportunity and or do share buybacks when there's market dislocation.
spk15: Your next question is from the line of Jerry Revich with Goldman Sachs. Your line is open.
spk14: Yes, hi, good morning, everyone. And Steve and Bob, congratulations. Thanks, Jerry. Bob, I'm wondering if you could just talk about your strategic priorities over the next three to five years, just from a high-level standpoint, anything that we should be keeping in mind.
spk07: Yeah, Jerry, I would say something that we've been, I've been thinking about a lot. Maybe a couple precursor comments and then directly to the question. The precursor comment was, and I tried to infer it, but it said almost explicitly, the way Steve has run the executive team and the company has been really very inclusive. And so when you look at our strategy, not just the one that we released last March, but even in 16 and 19, that's a strategy that was developed by all of us as a team. So it's not me coming in with a new strategy. feel very, very bought in and tied to with the strategy that we have. So the first big area around our clients, you know, the accelerators that we have are the national and global priorities that are driving the world. And so that's going to continue to drive our business as we come up with more technology enabled and client driven type solutions. The second is around investments in our people. You know, our people have delivered time and time again over decades. But if you look at the profile of our people, though our business is weighted towards the U.S., we have about a 55-45 U.S. versus outside of the U.S. profile of our people, really driven around that global delivery that we've touted for so long. And so, you know, those investments continue driving around inclusion and diversity and sourcing talent from all over the world is going to be really, really important. And the last piece I'd say is around resilience. Resilience in our business with regards to our systems and how we run the company, but also simplicity of our business. We've diversified the business and we've tried to have direct access to our clients, but to making that, having simplicity in the forefront is really key as well. So kind of segregated in those three main areas.
spk15: Your next question is from the line of Stephen Fisher with UBS. Your line is open.
spk19: Thanks. Good morning. So we have about a month left on the current continuing resolution, so I'm curious what you've baked into the guidance for continuing resolution. across your segments. And then I guess there's clearly a lot of cross-currents in the global economy at the moment. What do you see as any other big risks to your guidance and maybe what contingency plans you have in process to address those risks? Thank you.
spk13: Maybe I'll make some comments first and then have my partners here, um, add any additional commentary to think appropriate. So look, I think we feel pretty good about the continuing resolution, um, given the makeup of the, of the Senate and the house and how that's going to be coming together. And, and we just had a really deep dive review from a government relations team feeling pretty good about how things are going to play out over the course of this quarter. So we don't believe that there is going to be a continuing resolution that extends well into 2023. We're hoping that that will become resolved near the end of the calendar year. So I think that we're already starting to see, regardless of that continuing resolution, some momentum building relative to what Bob alluded to. And I made some comments on in terms of the cyber and intelligence business starting to get unlocked relative to bids being awarded and whatnot. So we think that the combination of those two things are embedded into our guidance, and so we feel pretty good about it, actually.
spk15: Your next question is from the line of Andy Kaplowitz with Citigroup. Your line is open.
spk12: Morning, everyone. Steve and Bob, congratulations. Thanks, Andy. So you mentioned you're still targeting double-digit constant currency revenue growth for PA Consulting, but I think constant currency growth in Q4 was in the high single digits. Does the recent large contract, when you mentioned, give you the visibility you need to be confident around constant currency double-digit growth for FY23, despite UK economic concerns? And does margin normalize higher, quite significantly, if PA's revenue ramps up toward your toward that 23% goal that you've given us before? Should we think about a gradual margin ramp up from here in PA?
spk13: So if you look at the ramp up of the year, certainly that large win is part of the equation, but it ends up kind of building over the course of 2023. And so it's less of a direct impact in 2023. What we do believe and our view on the UK is that we've, I guess, I would characterize us as being underwhelmed by the level of activity, productive activity in the government, which has actually put some pressure in the short-term relative to the UK. But with the recent budget that was announced and some of the activity of our clients is starting to look much better. So we're feeling like longer term into 2023 that we're going to start to see some incremental momentum versus kind of what we've been seeing over the last, I'm going to call it six months. So we're feeling that things will start to improve. The other thing is that the backlog and the pipeline of PA, we're seeing no challenges associated with that. Seeing a little bit of the of the burn profile as mentioned just earlier relative to the, I'm going to call it the unknown relative to the UK government. But we're starting to see that instance and that issue going away as we speak.
spk07: Just to put some, just to quantify Kevin's last comment, you know, the pipeline growth in PA alone this quarter was 52% year on year. So the pipeline continues to grow. And the way we evaluate pipeline within the PA world, since it's a pure play consultancy, are our projects, programs, engagements, where we already actually have started a bit of them too. So those are promising, as well as the programs that were announced in the budget that Kevin referenced. Those are programs that PA and Jacobs are actually partnered on right now. So that's the bit of positivity there, along with some some realism of the last couple of months on what's gone down.
spk03: Your next question is from Sean Eastman with KeyBank Capital Markets.
spk15: Your line is open.
spk06: Hi, guys. Thanks for taking my questions. I just wanted to confirm whether we should still anticipate Divergent Solutions to be broken out as a new segment starting in the first quarter. And perhaps in advance of that, Just try to get a rough expectation as to what that business line is contributing to this initial fiscal 23 outlook, maybe from an EBIT perspective.
spk13: So the business is effectively operational right now, and we will be executing against the promise that we made relative to reporting that as a separate business. segment on the financial. So, Sean, we're on track to do that. So, I think that we're going to provide additional color commentary because we're still working through all of the accounting mechanisms to make sure that our systems are reporting accurately and the controls are in place because it's a pretty large change. But I will tell you that it will be one of the highest growth areas that we're expecting in the company for 2021. And effectively, it'll be a margin profile that will be growing substantially over time, a little bit lower in 2023 than what we expect at the exit rate. But at the end of the day, we'll provide a lot of details in Q1 relative to that.
spk03: Your next question comes from Chad Dillard with Bernstein. Your line is open. Hi, good morning, guys. Good morning, Seth.
spk18: Good morning. So I was hoping you get to expand on just like the opportunities for increased wall chair on infrastructure work. Maybe you can weave in some of the recent acquisitions and some of the expanded digital capabilities and just talk about just what sort of margin we should be kind of thinking about for these new projects.
spk03: Sorry, Chad, you were a little broken up there. Can you repeat the question?
spk18: Yeah, so can you just expand on what sort of incremental wallet share opportunities you have in your infrastructure business? And maybe weave into it some of the recent acquisitions that you've had in terms of your expanded digital capabilities.
spk07: Okay. In infrastructure, did I catch that part?
spk18: Correct.
spk07: Yeah, got it. Okay. Yeah, in infrastructure, the opportunities continue to grow. I'd say, you know, broadly driven mostly in the U.S., but we're seeing this, and Steve talked about the international, I'm sorry, Kevin talked about the international business, but heavily geared towards transportation and water with a growing profile around energy transition. And so those are kind of the three main areas. Environmental continues to be robust. So, you know, we see those, I mean, the pipeline growth that talked about before has been really, really strong. On the acquisitions, you know, that's a business where Streetlight Data probably was the last, the one that we did. It was a smaller acquisition. And we are immediately seeing the fit that we had anticipated in the deal kind of thesis around Streetlight all around that data-enabled acquisition. use of data in driving a different type of solution for our clients. They had clients before, predominantly the state DOTs in the US, but that's been expanded with our relationships. And then we're seeing private sector utilization too, as private sector firms have looked at the use of data in order to cite different investments that they're making from a capital project perspective. Very, very positive news on that front.
spk15: Your next question is from Michael Fenninger with Bank of America. Your line is open.
spk01: Hey, guys. Thanks for squeezing me in. I believe you're guiding 2023 growth mid-single digit or high single digit on a constant currency basis. You're citing some really robust sectors, EVs, life sciences, reshoring, hydrogen, autonomous, So what isn't growing that fast in the portfolio? Does it just take longer? Is there momentum? The project dollars get going? Does organic growth profile actually re-accelerate further in 2024? And in 2024, you get just better operating leverage off that type of growth with higher utilization. How should we kind of think about that as we move forward into 2024?
spk13: Well, look, if you think about the high single digits in terms of constant currency growth, I think that's pretty strong, actually. And look, I think that the bottom line is, for example, Bob just quoted the pipeline growth in the United States of near 20% kind of growth in the pipeline. It just takes a while for that to kind of be won and then start to build the the burn associated with it. So you're relying on your clients as much as you are anything else to be able to execute against that, and they're sometimes not as quick as we are ready to execute. So, look, I think it's a growing momentum, and I think we're being prudent, assuming how that's going to build over the course of 2023.
spk07: If I could add, Kevin, while we're adding, on those... in markets that do have a quicker burn profile, all three of us today talked about the growth in advanced facilities where that has been a catalyst for growth. So though the top line might be in those numbers that were quoted, we did say on a constant currency basis, our bottom line growth would be double digits. So I think that there's some real optimism in the portfolio.
spk15: Your next question is from the line of Gautam Khanna with Cowan.
spk03: Your line is open. Hey, congrats, Steve and Bob.
spk02: Thanks, Scott. You know, just following up on some of the recent questions, can you frame recompete exposure in fiscal 23 and maybe even opine on 24 at CMS and wherever you think it's noteworthy? you know, percentage of sales up for rebid or if there are any lumpy, you know, individual contracts that are up and maybe the timing of those.
spk07: Sure. I, I'd say that, uh, the recompute exposure in 23 is, uh, is moderate to low. Um, we, um, you know, it's predominantly in our CMS business and we've already gotten some real positive indications of some of those larger ones that are, I'd say there's, there's only a couple. So I would not characterize that as a big exposure in 23.
spk03: Okay.
spk13: The only one that we've called out, the one at Kennedy, which is, you know, that's a big one, but we feel good about our position there.
spk03: Next question, operator. Your next question is from the line of Andy Whitman with Baird.
spk15: Your line is open.
spk04: Oh, great. Good morning. And, Bob, congratulations. Your promotion, Steve, yours as well. Kevin, I just thought maybe a question for you. I wanted to understand the fourth quarter results here a little bit clearer. I guess your corporate unallocated expense is $28 million. I think you were kind of suggesting it was going to be higher than that for the quarter, as well as your guidance for 23 is implying a run rate of about $50 million per quarter. So I was wondering, I guess you called out incentive comp. You also mentioned an FX impact, keeping that number down this quarter. So could you comment on the size of the FX impact, and was that what the nature of that was? Was that like a non-cash accounting thing for some hedge that you had on FX, or was there something – else in there that was driving that benefit to the quarter.
spk13: No, look, the dynamic, I don't have the FX dynamic specifically outlined, but certainly can follow up with you, Andy, on that. But if you think about it, our corporate related costs, that support costs are embedded around the world. And so effectively, if you have UK, for example, corporate related costs, they're getting translated into a lower rate, effectively. So the value of those costs go down. And that effectively had some benefits associated with us because it's all, it's effectively corporate costs and not corporate revenue. So if you get the difference between the two. And then, look, we have known that the constant currency dynamic was was still robust, but we knew that the reported currency continued to be a challenge, and we were very proactive in terms of taking steps to ensure that we reached the commitment levels that we had established for the company. So, you know, we pay attention to this and very, very proactive in terms of the management of our cost structure during Q4.
spk15: Your final question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open.
spk10: Great. Thanks and good morning. Just, I guess, the earlier commentary around how much the pipeline is building up, including the IIJA. Kind of if we think about that bill and the other ones starting to flow through, maybe some offset with pricing, maybe moderating. How do you expect, I guess, backlog just to trend over the course of next 12 to 18 months? Is it fair to assume with that extra government funding, it could continue to grow? Just want to understand what you have embedded in the guidance that you've provided today.
spk13: Well, I will tell you that, as you may know, backlog is one of our incentive metrics. And I can assure you that our incentives are based on backlog continuing to show very strong growth year over year.
spk07: Could you guys add one more thing just on what drives backlog, which is sales? We've put a tremendous amount – we've been a sales-driven company since inception. I think Dr. Jacobs probably started that mantra. Our sales-driven growth and the investments we've made, naming now our new chief growth officer as well, has been very, very specific, as our portfolio has developed over the most recent period of time. We're putting the full force effort on our sales effort as the pipeline continues to grow, so timing is good.
spk03: There are no further questions. I will now turn the call back to Mr. Bob Pregatta.
spk07: Yes, thank you. Thank you, everyone, for joining our earnings call. I'm looking forward to providing further updates on our progress and upcoming events and calls. For those of you in the U.S., have a wonderful Thanksgiving. Thank you.
spk15: Ladies and gentlemen, thank you for participating. This concludes today's conference call.
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