Jacobs Solutions Inc.

Q1 2024 Earnings Conference Call

2/6/2024

spk05: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs Fiscal First Quarter 2024 Earnings Conference Call and Webcast. Today's conference is being recorded. 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 during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I'll turn the conference over to Jonathan Evans, VP of Corporate Development and Investor Relations. Please go ahead.
spk10: Thank you, Audra. Good morning. Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to slide two of the presentation material for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. We have also introduced a new supplement that consolidates certain information, including our non-GAAP financial tables. Additionally, beginning with this quarter, the company will no longer apply an adjustment to adjusted net earnings from continuing operations and adjusted EPS, which previously resulted in the application of the expected annual tax rate to all quarterly periods. Prior comparable periods are also being presented on this basis. Turning to the agenda on slide three. Speaking on today's call will be Jacobs CEO, Bob Pregatta, and CFO, Claudia Jaramillo. Bob will begin by providing an overview of recent activities and summarizing highlights from our first quarter results. Claudia will provide a more in-depth discussion of our financial metrics, as well as a review of our balance sheet and cash flow. With that, I'll turn it over to CEO, Bob Pregatta.
spk02: Thank you, Jonathan. Good day, everyone, and thank you for joining us to discuss our first quarter fiscal year 2024 business performance. We continue to prioritize simplifying our business model, optimizing our cost structure, and accelerating profitable growth and margin expansion across our lines of business. Our team continues to demonstrate great resilience and dedication as we delivered better-than-expected underlying results in Q1, while also working to the added task of standing up to independent companies. At the corporate level, we are diligently working to create a leaner operating model that aligns Jacob's position as a global leader in delivering science-based, digitally-enabled solutions to our clients and allowing us to benefit fully from the broad-based strength that we see in global infrastructure and sustainability investment. We are confident that our actions we are taking are providing the foundation for multi-year improvement in profitability and margins. And we look forward to sharing more detail in the quarters to come. Turning to slide four, I want to provide a brief update on a few key milestones related to the spinoff and merger of our critical mission solutions and cyber and intelligence businesses with Amentum. We continue to progress toward closing of the transaction in the second half of fiscal year 2024, consistent with our previous expectations. Together with Amentum, we are making progress on preparing our Form 10 and private letter ruling request in keeping with the established timeline of the transaction. Additionally, we are progressing antitrust filings and regulatory approvals. Upon the public filing of the Form 10, we aim to offer more comprehensive information and look forward to introducing the combined leadership team to our investors and analysts later this spring. I would also like to briefly touch on the cost optimization plan that we outlined last quarter. Our transformation to a less volatile and higher value, higher margin portfolio is well underway. We continue to find new ways to streamline our operating model, and while it is too early to positively revise our targets, we are increasingly confident in our ability to enhance our long-term profitability. As we progress towards separation and optimizing our corporate cost structure, we now are able to better align costs to the applicable business units. As a result, we have made the decision to shift some corporate unallocated costs into the current PMPS segment, which will allow for greater long-term recovery of our corporate overhead. While this has the effect of temporarily weighing on our segment operating margins, this has no impact on our bottom line today. Rather, This will boost corporate profitability in the long run as we gradually recover costs from public sector clients, providing upside beyond the initial 13.8% adjusted EBITDA margin target set for standalone Jacobs post-separation that we shared last quarter. This adds to our conviction that our transformation will drive multi-year value creation. Turning to slide five, and Q1, I'm pleased to report a strong first quarter revenue driven by 9.5 growth and 7.9 adjusted net revenue growth that is entirely organic. Backlog increased 5% year over year, and growth margin in backlog improved 29 basis points year over year, boosting confidence that our businesses can continue their profitable growth trends. This quarter's results include a one-time, non-cash, $15 million inventory write-down. Excluding this item, adjusted operating profit would have increased versus the prior year period. We saw a continuation of strong organic growth in PNPS with 8.4% adjusted net revenue growth. We had a Q1 operating cash flow of $418 million, up 38% year-over-year. Strong cash conversion is a hallmark of our asset-light business model and remained robust in Q1 with $401 million in free cash flow, and we expect to generate greater than 100% adjusted free cash flow conversion in fiscal year 2024. The ultimate measure of our ability to create value is long-term growth of free cash flow per share, and that will continue to be our North Star. Turning to slide six. Our people and places line of business generated strong top-line growth with adjusted net revenue of 8.4% year-over-year marking the fifth consecutive quarter of greater than 6% organic growth. We continue to execute against our strategy of prioritizing profitable growth over absolute growth, as demonstrated by gross profit and backlog, increasing 7% year-over-year. Our pipeline remains robust, and we continue to expect PMPS organic growth of mid to high single digits in FY24. We anticipate full-year PMPS adjusted operating margins to increase year-over-year, inclusive of the previously mentioned increase in allocation of overhead costs. The water market remains to be a pacesetter within the company. In particular, water scarcity continues to trend across the globe, affecting millions of people. Decades of increasing population growth and agricultural demand have significantly depleted the quantity and quality of water resources. Jacobs is a leader in developing solutions to address water scarcity, including water reuse, groundwater management, and desalinization. In the Americas, California and Colorado have recently adopted regulations for direct potable reuse, and Arizona is making positive strides towards adopting similar regulations. Notably, the world's largest chipmaker, TSMC, is currently building a new semiconductor facility in Arizona. We've been selected for the first phase of the design and project delivery of the campus's industrial reclaimed water plants. In addition, multiple states in the U.S. are developing regional water supply plans to balance water availability and economic growth. As an example of such work, we were awarded a $191 million project in St. Johns County, Florida, for the design and project delivery of a water reclamation facility. This facility will treat 3.25 million gallons of water daily for beneficial reuse, with 13 miles of transition pipelines to deliver reclaimed water for residential irrigation. In transportation, we have a long-term relationship with Brightline West and have been awarded the design of the 218-mile high-speed rail linking Las Vegas to Southern California. Brightline West, through a partnership with Nevada, successfully secured $3 billion in grants from the Federal Railroad Administration as part of the IIJA funding. In life sciences, we're supporting LILIT, with permitting and conceptual design for their injectable manufacturing facility in Alzi, Germany, to support an increased demand for their medicines, including their diabetes and obesity portfolio. We continue to secure additional large engagements in the Middle East. For example, we've been appointed to provide preliminary and detailed design and supervision services for utility and road infrastructure, including major road upgrades for Wadi Safar and Dairy Gate 2 in Saudi Arabia. In CMS, we performed very well in Q1, continuing the profitability trend demonstrated in FY23. CMS Q1 revenue was up 5% over year, and operating profit increased 14% behind 63 basis points of margin expansion. Its pipeline and growth outlook remain strong, with major award prospects in FY24 and a light re-compete schedule. The CMS team is executing well and has great momentum as they prepare to be an independent company. PA Consulting continues to take share as demonstrated by an 8.5% revenue growth in what continues to be a choppy macro environment, particularly in the UK. Margins were light due to some softness in December. However, we continue to expect approximately 20% adjusted operating margins for the full year and have confidence in our ability to manage variable costs to achieve that goal. Together with PA, we celebrated new wins with the Office of Gas and Electricity Markets in the UK for program management services and regulatory practices that will advance the safe and secure supply of hydrogen. Our Divergent Solutions Operating Unit delivered a solid quarter with 5% adjusted net revenue growth. Profits were impacted by an approximately $15 million one time in connection with the merger. Underlying performance in the business was strong and excluded this write-down. Adjusted operating margins would have been approximately 700 basis points higher and exceeded our expectations for the quarter. In summary, we remain well positioned to grow while serving our clients with excellence and delivering science-based, digitally-enabled solutions for a more connected and sustainable world. And we continue generating strong free cash flow conversion, which will enable us to return capital to shareholders as we chart our new path forward as two independent companies. Now I'll turn the call over to Claudia to review our financial results in further detail.
spk04: Thank you, Bob. We are pleased with our Q1 results, which came in above our expectations. Our results illustrate our ability to deliver on our long-standing financial objectives, while at the same time generating strong free cash flow and returning a significant portion of our cash to shareholders. So let me begin by summarizing a few of the highlights for the quarter on slide seven. First quarter gross revenue grew 9.5% year-over-year, and adjusted net revenue grew 7%. GAAP operating profit was $204 million for the quarter and included $51 million of amortization for acquiring tangibles and $16 million of other transaction separation-related restructuring and other costs. This includes $51 million associated with the separation of CMS. Our adjusted operating margin was 9.8%. I'll discuss the underlying dynamics during the reporting segment review. CalPPS from continuing operations was $1.37 per share and included a $0.27 impact related to the amortization charge of acquiring tangibles, and $0.37 from transaction, restructuring, and other related costs. Excluding these items, first quarter adjusted EPS was $2.02, up 28% year-over-year. Our adjusted EPS included a $0.49 benefit related to a discrete tax item and a $0.09 hand win related to the non-cash inventory write-down. Q1 adjusted EBITDA was $328 million and was down 3.1% year-over-year, representing 10% of adjusted net revenue. Excluding the inventory write-down, adjusted EBITDA would be roughly flat year-over-year. The effective tax rate of 4.2% benefited from $61.6 million in discrete tax benefits related to the permanent reinvestment of capital gains associated with an overseas subsidiary. This tax benefit was incorporated in our annual guidance, and we continue to forecast the 22% annual effective tax rate in fiscal year 2024. We will no longer be adjusting our non-GAAP EPS to align with our full year effective tax rate expectations. With the entirety of the deferred tax benefits in Q1, We now expect quarterly effective tax rates to approximate 26 to 27% for each quarter of the remainder of the fiscal year. Finally, backlog was up 5% year over year. The revenue book to bill ratio was just over 1.12 times with our gross profit and backlog increasing 6.1% year over year. Regarding the performance of our last business in the quarter, let's turn to slide eight. Studying with people and places solutions. Juwan adjusted net revenue was up 8.4% year over year. Adjusted operating profit was down slightly, resulting in adjusted operating margins of 13.7%. However, excluding the impact of cost allocation changes previously mentioned, adjusted operating profit would have resulted in approximately 7% year-over-year growth. We continue to see solid momentum in both growth and profitability in the business and anticipate full-year PDMPs, adjusted operating margins, to increase year-over-year, inclusive of the previously mentioned increase in allocations of overhead costs. Moving to critical emission solutions. Our Q1 revenue increased 5% year-over-year, with backlog up 9%, continuing a consistent trend of high single-digit growth over multiple quarters. We also continue to find avenues to operational improvement, with CMS operating margins rising by 63 basis points year-over-year, shifting to divergent solutions. In Q1, our adjusted net revenue increased by 4.7% year-over-year. Underlying execution was strong. Adjusted operating profit was $8 million, including the $15 million inventory write-down. Excluding the one-off write-down, performance was above expectations. Now, let's turn our attention to PA consulting. Q1 saw an 8.5% year-over-year revenue increase. PA continues to deliver ongoing positive momentum in bookings and pipelines. However, the UK's ongoing election cycle introduces macro risks that we are closely monitoring. We remain confident in our ability to navigate these factors by managing variable costs and are targeting approximately 20% adjusted operating margins for the full year. In total, it was successful. trend quarter for each of our segments from an execution standpoint. Our adjusted and allocated corporate costs were $59 million in Q1. This quarter's costs excluded previously mentioned costs that are now being allocated to the PNPS segments. As we continue to enhance operational efficiencies and optimize our operating model, we expect this line item to trend towards $50 million per quarter or $200 million annually post-deprivation. Turning to slide 9 to discuss our balance sheet and cash flow. We posted another quarter of strong cash flow generation, which is indicative of the quality of our earnings and cash conversion. As Bob mentioned, we generated strong quarterly free cash flow of $401 million. As a result, We are well positioned to deliver our anticipated 100% reported and adjusted free cash flow conversion to adjusted net earnings. Regarding capital allocation, we opportunistically repurchased $100 million of shares during the quarter, reflecting our commitment to delivering consistent returns to our shareholders. We still have $775 million remaining under last year's repurchase authorization. And as we have said, we will remain dedicated to returning capital to shareholders in aligning with our overarching goal of compounding free cash flow per share. We remain committed to maintaining an investment-grade credit profile. We ended the quarter with cash of $1.14 billion and gross debts of $2.9 billion. Our Q1 net debt to adjusted EBITDA of approximately 1.2 times is a clear indication of the continuing strength of our balance sheet. As of the end of Q1, approximately 35% of our debt is tied to floating rate debt, and our weighted average interest rate was approximately 5.1%. Finally, our strong balance sheet and free cash flow will remain committed to our quarterly dividends. The board has authorized an 11.5% increase to 29 cents per quarter, and our quarterly dividend will be paid on March 22nd. With this, we have increased our dividends each year since 2018, driving a nearly 12% dividend CAGR over that period. Now, I will turn it back to Bob.
spk02: Thank you, Claudia. Turning to slide 10. We continue to be energized as interest in our science-based digitally enabled solutions remains robust as clients engage Jacobs to solve their most complex challenges. Internally, we remain focused on execution and continuing to deliver against our operational and financial objectives. We reiterate our outlook for fiscal 2024 adjusted EBITDA of 1.53 billion to 1.60 billion with adjusted EPS of $7.70 to $8.20, representing 9 percent and 10 percent growth at the midpoints respectively. This guidance incorporates Q1 adjusted EPS of $2.02, and as Claudia shared, a 26 to 27 percent adjusted effective tax rate each quarter for the remainder of this fiscal year. Though we expect a heavier-than-normal cost structure until separation, particularly in We anticipate accelerating EPS growth in the second half of the fiscal year. In closing, we maintain focus on standing up both independent, Jacobs and CMS, for success while streamlining and optimizing our operating model and positioning both companies for long-term value creation. Operator, we will now open the call for questions.
spk05: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up to allow everyone an opportunity to ask a question. We'll go first to Andy Whitman at Baird.
spk08: Oh, great. Excuse me. Thanks for taking my question. I guess for those who are unfamiliar, including myself to some extent here, on the SG&A reallocation into the segment, I think what you're saying there is in these reimbursable public sector customers that you have, if it's in the segment, you can get paid basically for those costs. I think that's the mechanism. I just wanted to clarify that. And maybe, Claudia, could you talk about what the dollar amount on an annual basis is on the reallocation from the SG&A line into the segment?
spk02: Yeah, Andy, it's a great question. It's actually a nice lead in. So your assessment of that recoverability is correct. And if you just kind of just moment for a moment, take kind of pre-planning for the separation and outpost. Pre, we had a lot of shared costs. And so the direct applicability to this segment was not as clear. And since we started this, we had a great opportunity to now have direct line of sight to where these are being applied. hit it right in the beginning of the audit cycle, the government audit cycle in Q1, and now have the full year of applying those costs. So that's correct. Now, in the full year amount, it would be the $17 million that we identified this year, I'm sorry, this quarter, multiplied by four. But remember, over each quarter, that goes down because of the recoverability effect. Does that make sense?
spk08: Yeah. Yeah, I guess it does. I mean, so I guess in the corporate unallocated reported at $59 million for the quarter, I guess what you're saying is unadjusted, that number would have been $17 million higher. In other words, that's 59 benefits from the 17 that was moved. I see.
spk01: That's correct.
spk08: So can you just talk about underlying that business thinking or underlying the underlying costs of, for the corporate unallocated. Were there any other costs that are notable in terms of separation or other things through the SG&A line right now? Certainly, there's been these efficiency initiatives, Bob, that you've talked a lot about, but is there anything else we should know about that wasn't excluded from that corporate unallocated line?
spk02: No. No, the $9 million of transition costs took it to $59 million, and then the $17 million that we were able to from a positive standpoint, move into PNPS and get recoverability on it was it. I will say, Andy, we are making progress on kind of our overall cost optimization or reductions that we started at the beginning of the year to where we'll be right on plan of what we identified last week. Okay, thanks.
spk05: We'll go next to Mike Dudas at Vertical Research Partners.
spk07: Good morning, Claudia, Jonathan, Bob.
spk09: Hi, Mike.
spk07: Good morning. Bob, maybe you can share a little bit more on PP&S relative to the pipeline as it stands today. You talked a little bit in your remarks about margin improvement of backlog. How does that track as we go through fiscal year 2024? Are you getting better share on higher margin projects, maybe early consulting advisory relative to design work in some of these projects? And And what areas do you anticipate some of the better revenue and booking growth in the PP&S segment as we move to 2024? Thank you.
spk02: Yeah, Mike, it's a great question. So the short answer is yes. We are starting to see that margin increase according to the profile in the mix. And I'd probably index more towards the water market right now on the mix. Just to give you a statistic, year-on-year growth in our bookings in water have gone up 30%. The other kind of notable one is what we call cities and places, but it's kind of our built environment business. It's been really driven by the Middle East. That year-on-year has been about 40%. And what's kind of positive about both of those, and I never thought that I'd say this before, but from a cash standpoint and a margin standpoint, we're hitting company-wide type of margin targets in the Middle East, which is a positive. And then the water sector has traditionally been our higher margin component of our business. So kind of two trends there.
spk07: Perfect. And what about for bookings and outlook as we move through 2024? Are those the areas you concentrated or other areas, you know, given your life science, semi work, reshoring, et cetera?
spk02: Yeah. So moving forward, we're starting to see some some pretty exciting developments happening within the life sciences world. As we've talked about it before, it's been red hot for several years. I'd say the last couple of quarters, we've seen it hasn't declined, but it hasn't been accelerating the way it was in the past. Just in the last six weeks, we've had some really deep conversations with, these are tier one clients we've had forever, that hopefully we'll be reporting some really good news next quarter on those jobs. I did mention the Lilly job in Germany. That portfolio, specifically around GOP1, has continued to be strong. Novo just announced the acquisition of Catalan. Those Catalan facilities are going to need to be retrofitted, and we were already in the middle of Novo's work. So that's a real positive, too. So I'd look to life sciences getting back. And then the chip manufacturing world has been kind of, as our design work continued, From an external semi-market standpoint, you know, we're now on the upswing of a new cycle. And so we're seeing more work around the tool OEM. So a lot of the R&D work in order to support these manufacturing facilities on higher power chips, really driven by AI, has been a nice early booking. So it's kind of concept work that's happening there. Thank you, Bob.
spk05: We'll move to our next question from Andre Kaplowitz at Citigroup.
spk00: Hey, good morning, everyone.
spk02: Hi, Andy. How are you?
spk00: Good. So, Bob, just following up on, you know, Mike's question, you mentioned water overall, the Middle East driving your overall people and places business, which is great, but are there any areas that you are worried about on that side? You mentioned the UK for PA, but not really for people and places. and your backlog was up nicely in the quarter, does it just continue to sequentially rise from here?
spk02: Yeah, I'd say the answer to the last part, Andy, is yes. And from a P&L margin perspective, we feel comfortable that our year-on-year increase that I mentioned in the script is real. And so year-on-year margin increase, year-on-year. If there were areas where I'd say soft might be too strong, but if there were areas that you know, we've got a high level of attention on. It is the UK. You know, we've been able to stay flat in the UK, which is a positive. But we did have the National Infrastructure and Construction Report just published here. I think it was Friday. And the UK government committing to the same level of spend, you know, 775 billion pounds, over the course of the next 10 years with some consideration for inflation. So that's an area that, you know, we're continuing to put some attention on to make sure that we continue to grow, but overall positive.
spk00: That's helpful. And then, you know, maybe just on Divergent Solutions, I know a piece of it is going to go with the RMT, but maybe a little more color on the inventory right down. Divergent's just, as you know, like, the underlying margin's good, but it's kind of been all over the place a little bit over the last several quarters. So what does Divergent look like as you go forward, you know, let's say post-RMT for Jacobs?
spk02: Yeah. So let me just clarify one thing, Andy. The inventory write-down has to do with the cyber and intelligence business, and that actually is in the perimeter and will be going. And it's really a part of the separation financials and inventory that, you know, we had to disposition. So that's not in the piece that we'll that will continue with independent Jacobs. You know, we see more of it and we're working on this operating model right now, transportation, water, and what we're doing in the built environment around digital enablement being a strong horizontal cross cutter through now the entirety of the business. So simplifying our reporting, as well as taking all those successes that we had within, you know, the transportation and water digitization and digital enablement, and integrating them into now what will be independent Jacobs. And so much more to follow on that. Appreciate the color.
spk05: Next, we'll move to Stephen Fisher at UBS.
spk09: Thanks. Good morning. Bob, you mentioned that you're on track with the cost expectations you identified at the beginning of the year. So does that mean the $40 million of temporary costs and 275 million of restructuring are still the numbers to keep in mind. And if so, how much of that has been incurred to date? Is that the 17 plus the 9? Or should the 40 million be lower now that you're going to be getting reimbursed for some of that?
spk02: Yeah, Steve, thanks for the question. That's good clarification. So the first part of your question is yes. Those 275 and the 40 are still very much in play. I'd say on the 40, that's not the – the $9 million was what was incurred in the first quarter. And so, you know, the balance would be over the course of the next three quarters, and we're indexing probably more in the first half than the second half. So hopefully that clarifies that. But, yeah, we're still on track with the numbers that we highlighted in the previous quarter. The 17 is not included in that. The 17 is our costs that are with us. They're recoverable. That's why we moved them into this segment.
spk04: And Steve, I'll add to the 275. We're also on track. And for that is the $51 million that I mentioned in my prepared remarks.
spk09: Okay. That's helpful. And then the 14.6% margin for P&PS. Is that on the same basis as the 13.7% in Q1? I assume it is. And if so, then how quickly do we get above that 14.6% to kind of deliver it for the fourth year given the lighter side in Q1?
spk02: Yeah, Steve, the answer to the first question is yes. And I'd say within the next few quarters.
spk09: Okay, so in other words, Q2, we should still be expecting it to be below that or?
spk02: No, no, no, no. It'll sequentially increase over the next few quarters to where Q4, you know, will be above where we were last year.
spk09: Okay, I'm just trying to… For the year.
spk02: For the year.
spk09: Yeah. For this year.
spk02: Okay. For this year. So this year will be higher than last year, year on year total.
spk09: Right. This year you're guiding to 14.6%, right? Do I have that right?
spk02: So better than 14.6. So last year was 14.6. Better than 14, right. And then this year will be better than 14.6. Right.
spk09: And if you're 13.7 for the quarter... You've got to start being better than 14.6. So I guess I'm just trying to figure out how quickly we get better than 14.6.
spk05: It will be a gradual increase.
spk02: Yeah, it'll index over the second half, and we'll see that within our reported financials. Steve, that's why I said a few quarters. Okay, gotcha.
spk09: Thank you very much. Yeah.
spk05: We'll take our next question from Jerry Revich at Goldman Sachs.
spk06: Hi, this is Adam on for Jerry today. Thanks so much for taking my question. Hi, how are you? Can you talk more about what drove the 280 plus margin decline in PA consulting, even with revenues higher sequentially, and then what drives visibility on the margin ramp through the balance of the year?
spk02: Sure. So I'll answer the second part first, Adam. The pipeline, as well as the, we call it stock of work in PA, but it's backlog, is driving the optimism there, as well as the team really does have their arms around the variable cost structure of the entity. Similar to Jacob's, it's a people business, asset light, and services oriented. The drop was probably driven a little bit by some volatility with our clients in December. And the discretionary spend of, and it was kind of more in the UK business and around what was going on within UK government, defensive security, as well as the public sector work. And so that kind of, if it stops on a dime, we can't make those variable cost actions. And so we We end up seeing that in the quarter. That has since kind of returned. And then we're managing our variable costs ahead of it, similar to what we did mid last year.
spk06: And then on the top line, solid growth this quarter, you know, high single digits, but the comps get a little harder from here. How are you thinking about the organic growth outlook and the balance of the year mid, you know, some of the things going on in the UK market?
spk02: Yeah. Yeah. I think we're still in that kind of mid-single digits to mid-high singles.
spk09: Great.
spk02: Thanks so much. The business for three years has been double-digit growth, and so we're still growing. I think we're probably kind of in that mid-single-digit growth now.
spk09: Great. Thank you.
spk05: And next, we'll move to Chad Dillard at Bernstein. Chad, your line is open. Please go ahead.
spk03: Sorry, I was on mute. Hey, good morning, guys. Hi, Chad. So I wanted to spend a little more time on just like what you're seeing from a booking standpoint in people and places. So first place is just like on the semiconductor side. So it sounds like there's a number of grants to be announced by the US in March. To what extent do you think that could potentially unlock more activity from a design standpoint?
spk02: then just like what are you seeing from like a domestic versus international uh perspective uh just for summit design yeah so um let me answer the first one uh chad just writing some notes on on on the uh on the grants that are coming out i i would probably uh similar to what i what i said to to mike dudas is that the those grants are being utilized predominantly in the R&D side, right, because these larger facilities need to get to full production. And so the larger IDM or the integrated device manufacturers are probably thinking more about the semiconductor bicycle, right, and timing their output or the startup of those large plants. So those grants then go to where technology advancements are happening, and that's happening at the tool OEMs. And so actually, that's kind of driving our bookings right now as well, those tool OEMs. The great thing about Jacobs is, you know, we're inside the technology of the tool and understand the facility requirements for them. So we've got a nice position there, and that's what's kind of driving the bookings within the SEMI piece. You know, right now, I'd say that predominantly it's domestic. We are seeing some activity in Europe around the EU CHIPS Act, but really the business is probably more indexed towards OEMs. towards the domestic piece. I would say that the country that we're really watching and are in the midst and was just there in December is the growth of foreign direct investment in India. And as chip manufacturing potentially pivots from China in India, so into India, and so we're kind of on the front end of that as well, both large-scale Indian clients as well as foreign companies that are non-Indian clients coming in India.
spk03: Got it. That's super helpful. And then just going back to the cost reallocation from corporate unallocated to people and places, just trying to get a sense for how long it'll take before you actually get a chance to hit the P&L. Do you have to go through a full bid cycle? So in other words, do you have to fully turn over the backlog before you see those benefits?
spk02: No, it's gradual. It's gradual. So the piece that actually starts the next quarter, I'd say from a full kind of... actualization of those costs that goes in, it's about a 12 to 24-month cycle. But just to reiterate, Chad, we're reiterating our year-on-year margin improvement, even with the gradual recoverability of that overhead.
spk03: Got it. Thanks, guys.
spk05: We'll go next to Sabahat Khan at RBC.
spk01: Great. Thanks, and good morning. Just to follow up on the PA conversation earlier, Obviously, we see the bookings number, but I guess as you're talking to your clients in that space, are you seeing a bit of a pipeline build up there? The business obviously a bit more macro impacted than the PNPS business, but just wondering what sort of the conversations are that aren't in the backlog right now for that business line.
spk02: Sure. I'd say that the two areas within PA that we're getting, you know, one actually is kind of ubiquitous in today's world as well as within the PA world. and then I'll go to an end market sector, is the use of AI and AI enablement in our client's business as a driver of business transformation. And so to kind of toggle here, it's good for PA, it's good for Jacobs, in that the AI enablement is the start of the conversation. I think some clients, now this kind of goes to how quickly does that get into an engagement, get into backlog, we realize in P&L, that's kind of where we are right now as far as... you know, where we are on the cycle. So AI is a big driver, but the timing and speed of how our clients are embracing it is driving some of the booking cycle. The second from an end market standpoint is life sciences. And so PA, you know, it's been able to take not just AI, but other knowledge and look at the transformation of the whole clinical studies program, and especially as that's kind of gotten more patient centric with different types of therapies for each patient. PA has been right in the middle of all of that. And so that's kind of got a tail on it as well. And then the last one that is really kind of starting to develop in our pipeline at PA is around the use of AI in early stage drug discovery piece. And it's real, real early stage. I mean, clearly the tier ones are way out ahead, but PA does it from more of a standpoint of how that's going to transform kind of the tier two and tier three clients. So, you know, some good stuff. I'd say just the timing right now of how quickly those get embraced while clients are thinking about, you know, their own business is causing some of that near-term soften.
spk01: Great. And then I guess on the PN and PS side, you know, there's been some discussion about when some of the larger funding packages really get going, but maybe if you could provide a little bit of color around, you know, your top line guidance for PN and PS and what assumption is in there from kind of contribution from the IIJA or the IRA and, you know, or how much of it is from kind of just, base-level business and how maybe the government funding is tracking relative to initial expectations. Thanks. Sure.
spk02: Yeah, I'd say that that guidance that we've been pretty true to, and I kind of mentioned a statistic there, that, you know, that 69% are mid- to high-single-digit growth. And for the last five quarters, we've been right there, you know, on the high end of that range is where we're seeing. The IIJA component of that is, you know, we just saw some statistics that, you know, we're from a timeline standpoint, halfway through, but on some of the larger rail and highways specifically, you know, we're 25% outlayed, 50% obligated and 25% outlayed on the actual monies. So it hasn't been a big piece of the growth, but the positive news is that, you know, it looks like that five-year cycle is definitely going to get extended.
spk01: Great. Thanks very much.
spk05: Our next question comes from Bert Subin at Stiefel.
spk11: Bob, just to follow up on that point, if we look beyond 24 and maybe into 25 and past that, it sounds like your visibility is generally improving, not just in advanced facilities, but in large parts of PNPS. If you think about potentially toggling above what your medium-term view is for the segment What would drive that? Is that more a function of winning some specific larger projects, or is it the flow of funding under some of these programs?
spk02: Yeah, Bert, and are you saying independent of advanced facilities, so the other kind of non-advanced facility sectors are too inclusive of?
spk11: No, I think inclusive of. I guess from what you were saying, Bob, in your earlier comments, it sounds like, you know, you feel like you're more on that upslope, and you're seeing sort of the path to some of that CapEx will be beneficial for you. So, Including that and thinking about what you just mentioned about IAJA and some of the other programs, it seems like your visibility is quite good. If you were to say several years from now, look at you and you were growing at 9% or faster than your 6% to 9% growth range, I'm just curious if that's more a function of winning some of those larger projects that are out there, or is that just the funding needs to flow sort of on time?
spk02: I would say it's probably more of winning those projects in the market that I would index towards is water. The pipeline growth in water, and I mentioned it last quarter, Bert, and it actually has continued this quarter. It's not as big as transportation, but if transportation continues at the same kind of cliff, even with the IAJA comment, but water continues at the rate that it is right now, and we're having this conversation six to eight quarters from now, you know, water and then water and environmental, because those two are kind of interdependent on each other, I'd say is the one where we're seeing not only the projects being announced, but the funding be applied. And a lot of that is being driven around water scarcity. And, you know, look at what's going on in California right now. It's either we got too much and we got to figure out where to put it, or we don't have enough and we got to figure out how to find it and treat it. I'm oversimplifying, but that's probably what I'd say.
spk11: Got it. Okay, that's super helpful. Maybe just a cost side question. You know, if we look at that bridge that you guys put in the deck, you know, going from 10.8 to 13.8, can you just help us think through, you know, how much of that is cost-cutting related and how much of that is just improved mix? Sounds like you're pretty bullish on the margin opportunity in PMPS. So is that a function of just you're getting better projects, or is it more cost-cutting, or is it sort of 50-50?
spk02: I'd say it's balanced, probably 50-50. There's a 50% mix, but 50% is a leaner organization with now, and we've started as a Q1, you know, a level of recoverability and optimization of our cost structure rather than, you know, this great variability of if you're busy, you spend, and if you're not, you cut, right? We want to get more of an steady state. Thank you, Bob.
spk05: And there are no further questions at this time. I would like to turn the conference over to Bob Fregata for closing remarks.
spk02: Yes. Thank you, everyone, for joining us on the call. A lot of exciting things happening in the business right now, and we look forward to giving you further updates in quarters to come.
spk05: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
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Q1J 2024

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