Jacobs Solutions Inc.

Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs Solution third quarter 2024 earnings conference call and webcast. 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 star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I will now turn the conference over to Ayan Banerjee, Senior Vice President of Investor Relations and Finance. Ayan, you may begin your conference.

Thank you. Good morning. Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we will refer during the call. I would like to refer you to slide two of the presentation material for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Turning to the agenda on slide three. Speaking on today's call will be Jacobs CEO, Bob Pregara, Special Advisor to the CEO, Kevin Berman, as well as our new CFO, Venk Nathamuni. Bob will begin by providing an overview of recent activities and then summarizing highlights from our third quarter results. Kevin will provide a more in-depth discussion of our financial metrics. Venk will then provide a review of our balance sheet and cash flow and provide comments around our guidance and investor day. Finally, Bob will provide closing remarks, and then we will open up the call for questions. With that, I will turn it over to CEO Bob Pregatta.

Thank you, Ian. Good day, everyone, and thank you for joining us to discuss our third quarter fiscal year 2024 business performance. I'm joined today by my special advisor, Kevin Berryman, who acted as interim CFO into June and will therefore report out financials. I'm delighted to also welcome our new CFO, Venk Nathamuni, on his first earnings call for Jacobs. Venk joined us in June and will provide details on guidance. Venk brings a wealth of knowledge and expertise from his 30 plus year career. and I am excited to work in partnership with him moving forward. Kevin will continue in his role as special advisor to me to drive a successful conclusion to the separation and merger of our critical mission solutions and cyber intelligence businesses with Amentum. I'd like to extend my gratitude for Kevin for his ongoing support. Now moving to slide four. We continue to make progress on our strategic shift toward a simpler, higher value, higher margin portfolio and remain confident in driving margin expansion over the coming years. Turning to slide five, I am pleased to report significant progress on the previously announced planned spinoff of our critical mission solutions and cyber intelligence businesses. An updated form 10 was publicly filed yesterday with the U.S. Securities and Exchange Commission. This filing, made under Amazon Holdco Inc., includes important business and financial information about the intended merger with Amentum to create a leading publicly traded global government services provider. Amentum will provide additional details during their capital markets day on Tuesday, August 13th, 2024. The transaction is now anticipated to be completed in the second half of September 2024. Turning to slide six and Q3. I will now share our third quarter achievements highlighted by strong backlog growth, consolidated margin expansion, and PMPS record backlog and strong adjusted operating margin. This period saw a continuation of a mixed shift to higher margin science-based consulting and advisory services that offers significantly higher returns, contributing to an overall margin expansion, notably led by PMPS and our partnership with PA Consulting. We are seeing an accelerating demand for critical infrastructure, particularly in water, environmental, and advanced facilities and markets, which are poised for substantial growth. Consolidated backlog increased 6% year over year, bolstering confidence that our business will accelerate profitable growth as we strategically shift our portfolio to higher value, higher margin solutions. Our consolidated adjusted EBITDA came in at $392 million, An increase of approximately 11% compared the same period last year and representing 11.5% adjusted EBITDA margin. From a cash perspective, we started the second half of the year by delivering very strong operating cash flow of $483 million and free cash flow of $445 million. We continue to expect exceeding 100% reported free cash flow conversion in fiscal year 2024 underscoring the power of our business model. Turning to slide seven. People and Places Solutions line of business reported another of solid top line growth, along with strong adjusted operating margins of 15.3% and adjusted operating profit growth of 12% year on year. We ended Q3 with a strong book to bill of 1.53 times and record backlog. Adjusted net revenue was up 5% year-over-year. Our pipeline remains robust, and we continue to expect solid PNPS organic revenue growth for Q4 fiscal year 24. I'm particularly pleased to report that during the quarter, we continue to deliver substantial wins in core sectors such as water, environmental, and advanced facilities, a testament to our robust market positioning, deep domain expertise, and long-term trusted client relationships. We achieved double-digit growth in our water and environmental markets with two-thirds of our water-related business focused in on high-value science-based consulting and advisory services driven by aging infrastructure and emerging PFAS regulations. Water continues to be a foundational element of our portfolio, exemplified by key wins across various geographies, reinforcing our global leadership in the sector. Europe, particularly the UK, has shown resilience, posting a robust quarter in water-related awards. In Asia, we were appointed by PUB, Singapore's national water agency, to engineer and program manage the new Cranji water reclamation plant, designed to enhance northern Singapore's water treatment capacity by 120 million imperial gallons per day. Additionally, our partnership with Onondaga County, the Syracuse metropolitan area in central New York, which began in 2008, continues as they've chosen us to provide program management services for their efforts in controlling increased combined sewer overflow and utilizes our digital one water solutions. This expansion will be critical in remediating aging water infrastructure and supporting industrial growth in the geography. We're excited by the continued momentum and pipeline build in our advanced facilities portfolio, predominantly driven by life sciences, semiconductor manufacturing, and AI chip driven data center expansion. Specifically in life sciences, we continue to see robust growth with our pipeline and revenue growing double digits year over year. Approximately two thirds of our life sciences related business is concentrated in high value science based consulting and advisory services. We were selected by Fujifilm DioSynth Biotechnologies to support the $1.2 billion expansion of their large scale biologics facility biologics manufacturing site in holly springs north carolina providing engineering procurement and program management services with the first phase of construction expected to complete in 2025. we continue to see a growing pipeline in transportation and energy and power supported by ongoing government stimulus as an example in transportation we were selected to provide program management services for broward county transportation department's first ever public transit expansion This $4.4 billion 30-year initiative will transform the county's transportation infrastructure into a multimodal transit system with a new light rail connecting Fort Lauderdale Hollywood International Airport to Port Everglades. Additionally, the quarter was highlighted by several key wins in the energy and sustainability space as demonstrated by our appointment as program manager for the Arches Hydrogen Consortium and Master Services Agreement with Shell Energy in Australia. PA Consulting delivered an industry-leading adjusted operating margin of 21.8% with robust execution and cost discipline. Our partnership with PA continues to be a differentiator in our science-based consulting and advisory services. Together with PA, we were selected in the Hertfordshire County UK to enhance the public highways network in the county, with services valued at approximately $22 million annually. This collaboration focuses on sustainability and aims to deliver long-term value over an initial five-year period with potential extensions up to 14 years. In Divergent Solutions, we are encouraged by the ongoing demand for our digitally-enabled infrastructure solutions that will remain with Independent Jacobs post-close. A testament to our capabilities is our recent selection by the City of Omaha to develop a data analytics and AI-enabled support system for its wastewater network utilizing Jacobs Digital One Water Solutions, AquaDNA. CMS delivered 35 basis points of margin expansion, the highest in 10 quarters, and has a strong pipeline. Additionally, we're experiencing encouraging trends that support long-term growth as we approach the merger with Amentum. In summary, we remain confident in our ability to win higher value, higher margin solutions, and deliver superior execution to meet our clients' expectations. Now I'll turn the call over to Kevin to review our financial results in further detail.

Thank you, Bob. We are pleased with our Q3 results leading to another solid quarter. Let me begin by summarizing a few of the highlights for the quarter on slide eight. Third quarter gross revenue grew 1% year over year and adjusted net revenue also grew 1%. GAAP operating profit was $260 million for the quarter and included $53 million of amortization from acquired intangibles, and $73 million of transaction restructuring and other costs, including $62 million associated with the separation transaction. We now expect our total restructuring cost to be approximately $300 million for the fiscal year, materially driven by higher separation transaction costs associated with our anticipated close now targeted during the second half of September 2024. Our adjusted operating margin was again a strong 11.3%. I'll discuss the underlying dynamics during the reporting segment review. GAAP PPS from continuing operations was $1.17 per share and included a 31 cent impact related to the amortization charge of acquired intangibles, and 49 cents from transaction restructuring and other related costs, which again were materially driven by the separation transaction. Excluding these items, third quarter adjusted EPS was $1.96, marking an 11% increase compared to the previous year. Q3 adjusted EBITDA was $392 million and was up 11% year-over-year, representing an 11.5% adjusted EBITDA margin. Finally, consolidated backlog was up 6% year-over-year, and the revenue book-to-bill ratio was 1.29 times, with our gross profit and backlog increasing 5.5% year-over-year. Regarding the performance of our lines of business in the quarter, let's turn to slide nine. Starting with people and places solutions, Q3 adjusted net revenue was up 5% year-over-year, with adjusted operating profit up 12%. Our mixed shift mentioned earlier resulted in higher margins on lower revenue growth. Adjusted operating margin of 15.3% was up 95 basis points year over year. Our backlog grew by 10% year over year, while gross profit in backlog grew nine. This quarter's critical wins underscore our strength in water, environmental, and advanced facilities, reinforcing our leadership position in these key markets. These wins translated into a book-to-bill of 1.53 times and a record backlog, as previously mentioned by Bob. Moving to critical mission solutions, our Q3 revenue decreased 3% year-over-year, while backlog was up 4%. Excluding the announced contract loss mentioned in the prior quarter, our revenue would have been up slightly year over year. Our adjusted operating profit was at 1.2% year over year, while CMS adjusted operating margin rose by approximately 35 basis points year over year to 8.7%, the highest margin in 10 quarters as the business continues to drive operational improvements and margin-enhancing client-facing projects. Shifting to divergent solutions, Q3 saw an 11% year-over-year dip in adjusted net revenue and a 40% year-over-year decrease in adjusted operating profit, driven by a one-time year-to-date government rate adjustment and the space-based ISR program delays that were mentioned in the prior quarter. Despite the strategic shift in funding with the DoD, we continue to see positive momentum in our space-based ISR technology adoption leading to pipeline build and expected future backlog growth. Now let's turn our attention to PA Consulting. Q3 saw a modest increase in year-over-year revenue. However, PA delivered a strong adjusted operating margin of 21.8%, reflecting a 60 basis point improvement from the previous year. A margin results this quarter exceeded our expectations and reinforces our confidence in sustaining a strong margin profile as we continue to expect 20% plus margins in Q4. Backlog increased 4% year over year, and we expect improved growth as we enter fiscal year 2025. Our adjusted unallocated corporate costs were $61 million in Q3, and we continue to make progress on simplifying and optimizing our operating model to drive costs down. Finally, I am very excited to welcome Venk to the team. We've been working together closely, and we have made great progress on ensuring a smooth transition. With that, I'll turn the call over to Venk.

Thank you, Kevin. Let me begin by saying I'm very excited to be part of the Jacobs team, and a special thanks to Kevin for his partnership and support. I'll now provide a quick overview of our balance sheet and cash flow metrics, followed by consolidated full-year guidance. Turning to slide 10, we posted a strong quarter of cash flow generation, which is indicative of the quality of our earnings and cash conversion. we generated strong quarterly free cash flow of $445 million. Year to date, our free cash flow conversion was well above 100%, leading to a full year expectation of greater than 100%. Regarding capital allocation, we opportunistically repurchased $151 million of shares during the quarter, which is up $55 million compared to Q2, reflecting our commitment to delivering consistent return of capital to our shareholders. We have $528 million remaining under our current repurchase authorization. And as we've stated before, we'll continue to return capital to shareholders while remaining committed to maintaining an investment grade credit profile. On the balance sheet, we ended the quarter with cash of $1.2 billion and gross debt of $2.9 billion. and our q3 net debt to adjusted ebitda of approximately 1.1 times remains a clear indication of the continuous strength of our balance sheet given the strength we feel comfortable with a portion of our debt remaining current in the fiscal year we have ample options refinancing as well as using proceeds from the expected separation transaction for repaying the current amounts after the end of q3 Approximately 37% of our debt was tied to floating rates and our weighted average interest rate was approximately 5%. On the dividend front, we remain committed to growing our quarterly dividend. The board has authorized a quarterly dividend of 29 cents and 11.5% year-over-year increase to be paid on August 23rd. Turning to slide 11, Given the solid execution thus far, we are narrowing our consolidated adjusted EPS outlook to a range of $7.85 to $8.05, representing 10% growth year-over-year at the midpoint. We expect fiscal 2024 adjusted EBITDA to be near the lower end of the $1.54 billion to $1.585 billion range. This guidance incorporates Q3 adjusted EPS of $1.96 and approximately 27% adjusted effective tax rate for the remainder of this fiscal year. Additionally, this represents 13% EPS growth in the second half of fiscal year 2024 versus the year-ago period. Our expectation is that the ongoing positive momentum in our business will lead to increase revenue growth in fiscal year 2025 compared to our current levels. Once we close the separation transaction, we anticipate an immediate shift in our company's growth profile, positioning us solidly for higher growth and higher margins. As Bob mentioned earlier, the anticipated separation transaction close date is now in the second half of September 2024. As a result, we expect Q3 to be the last quarter in which the results of the separated businesses will be included in our continuing operations. Beginning next quarter, we expect our results for our continuing operations to reflect the new independent Jacobs. Historical results for independent Jacobs will be available following the close of the transaction. And lastly, We're excited to announce that we will be hosting an investor day for Independent Jacobs on February 18, 2025 in Miami, Florida. We look forward to sharing our long-term strategy as well as our financial target model with the investor community during this event. Additional details will be forthcoming, and we look forward to your participation. And with that, now I'll turn the call back to Bob.

Thank you, Venk. In closing, we are invigorated as demand for our science-based digitally enabled solutions remains strong, with clients continuing to select Jacobs to address their most complex challenges. We are exceptionally well positioned to capitalize on the momentum in the critical infrastructure market, and we remain confident in our ability to grow market share and fulfill the needs of our clients across key sectors. Operator, we will now open the call for questions.

Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star 1. We also ask that you limit yourself to one question and a single follow-up. Your first question comes from the line of Michael Dudas with Vertical Research. Please go ahead.

Good morning, gentlemen, and welcome. Thanks. Morning, Mike. Thank you.

Yeah, maybe first to talk about your improvement in the gross margins in the P&PS backlog that you reported this quarter up 9%. Maybe a characteristic of the mixed impact. Is there any industries or end markets that have contributed more to that? And I guess as my follow-up, as you're looking towards fiscal 2025 and the pipeline you have and a very strong bookability ahead, how confident do you believe that you can show backlog and and net revenue and organic growth moving ahead into 2025, given where your position is today with your backlog and pipeline?

Sure, Mike, maybe I'll address both. I'd say, yes, the gross profit and backlog is definitely being positively affected by two elements. One, our service mix, and second, the end market sector mix. And so on the service mix, I mentioned a couple of times, You know, we are we are really seeing a fundamental shift in our profile with regards to higher end science based consulting and advisory services. And that's not only showing up in our results from a burn profile, but also in the backlog. The profile, the backlog is right now is a point in time heavily weighted towards water as well as in advanced facilities, predominantly life sciences, and those two have a higher margin profile as well. So both are having a positive effect on that. With regards to FY25, we're looking forward to potentially another strong Q4 backlog performance, booking and backlog performance, leading to confidence in our revenue growth in FY25. So definitely some nice tailwinds there.

That's great, Bob. Thanks, sir. Thank you.

Your next question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.

Hey, good morning, everyone.

Hi, good morning, Andy. Good morning.

So, Bob Venker, Kevin, can you give us a bit more color into the guidance toward the lower end of your annual EBITDA range? You just said, what changed versus the last quarter? Obviously, your margin has been very good. So, you're seeing delays in backlog burning, which is hurting your revenue. Anything else? that you could give us in terms of color?

Yeah, go ahead, Ben. Yeah, Andy, yeah, thanks for the question. So I'd say in a few moving parts as it relates to the EBITDA performance, so obviously from the standpoint of EPS, you know, we came in kind of the midpoint of the range as we guided to. Now, as far as the EBITDA is concerned, we did allude to the fact that there were a couple of segments that were weaker than we expected. One was obviously the CMS, the CITEC loss that was announced in the prior quarter. and then some of the devious delays that Bob alluded to in his earnings script. But I would say at a higher level, when you look at the difference between the EBITDA performance and the EPS performance, clearly we had a little bit of a tax benefit that helped us on the EPS front. And then obviously, as you also know, we reported a pretty significant stock buyback, so that reduced the share count as well. So I'd say the difference between the EBITDA and EPS is primarily due to those two items. But what I would also point to is that if you look at the PPS backlog, we feel pretty good about where our profile of that business is heading towards, both from a revenue growth standpoint as well as the margin standpoint.

Very helpful. And then, Bob, Banker, Kevin, you kept the 13.8% plus FY25 standalone margin guidance intact for now, but obviously, your people in places margin has been much higher than expected so far this year. So how do you think about that target at this point? Could there be considerable upside to that target? And then when you think about remain co-sales, I know you said you expect a pretty good year next year, but any reason why you couldn't expect that sort of 6% to 9% growth for people in places at least that you've been talking about?

Yeah, so maybe the first one with regards to confidence going into FY25, Andy. There was a reason why we put the plus. So there's some moving parts right now with regards to the separation. So, you know, timing was another element that we wanted to consider. Performance has been solid. So I would just, I'd characterize it as some tailwinds that we've got going into FY25, and we'll be really clear about that as we move into the next phase, but for confidence overall. Andy, remind me again of the second half of the question. you've got consulting what have you but how do you think about for the visibility toward the core infrastructure growth in 25 yeah so i'm sorry about that so yes good good visibility there you know during the quarter we um strong strong tailwinds and water and advanced facilities in the areas where there was a little bit of uh of maybe some slight uh not decay but but pause i'd say uh in the uk uh with regards to transport and the election And then a reprioritization of some shifts in the Middle East, specifically in Saudi. Those haven't gone away. And now with the election in the UK, as well as some clarity on programs moving forward in Saudi, those also serve as some positive tailwinds on a mixed standpoint going into FY25.

And if I could, I would say that in terms of just what we see ahead, clearly from a Q4 booking standpoint, there's still some good confidence about the strength of those bookings but in terms of specifics and we'll obviously provide you fiscal 25 guidance in the next earnings call and then we look forward to providing a much more long-term guidance both in terms of the revenue growth as well as our profitability profile when we have the investor day in february thank you for your questions your next question comes from the line of stephen fisher with ubs please go ahead

Thanks. Good morning. I'm not sure if this one would be something you would save for that investor day, but really just trying to think about what's the right framework for profit growth year over year in PNPS. Since, Bob, you mentioned that you're going to accelerate the profitable growth. I mean, is the framework here any different than sort of the mid to upper single digit revenue growth? And then some of this margin mix gets you to low double digit profit growth? Or is Is, you know, something more like mid-teens possible, given that, you know, you are accelerating these large awards and some of the mixed dynamics?

Yeah, I think it's early, Steve. We're going to go through all of that in some details, but we're really excited about the tailwinds that we see for FY25, specifically in all subsectors of the infrastructure market and advanced facilities. But we remain very positive.

Okay, fair enough. And then just to follow up on the corporate expenses, can you just give us an update on how much more clarity you have to the path of hitting the target rate that you have and maybe what the next couple of quarters that you have embedded in there in that trajectory?

Well, look, Stephen, I think it's clear that we're going to have a different reporting structure as As Venk highlighted, once the transaction closes, so the numbers that you will see in the corporate line will start to change. And we're working through all the reporting segments and all that kind of information for the full year reporting. So you may not see exactly the same number going forward, but you will fundamentally on an apples to apples basis, that 60 million we expect will trend down to 50 over time. It may embed it into a consolidated result for the company. And so you may not see it broken out separately, but that's going to help thrive towards that 13.8% EBITDA margin that was just asked going forward. So we feel good about it. Some of that cost will have to be targeted after separation because we still have two businesses to run, or three, I should say, with PA. And so more to come on that. But we feel confident about the necessary cost reductions that allow us to get to the 13.8% EBITDA margin.

Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.

Great, thanks and good morning. You talked a little, you mentioned a bit of the ongoings in the UK a little bit. Can you just maybe talk about just the flow of the projects you're seeing across some of the markets, maybe particularly kind of the US and the UK, obviously a lot of elections going on, other puts and takes globally. Is that trending in line with what you would have anticipated at the beginning of the year? Just any color there would be great.

Yeah, a couple comments. Let me start kind of with the U.S. and then work my way around. I'd say in the U.S., the flow of bid activity and pipeline across infrastructure and advanced facility, that hasn't slowed. I'd say the burn rate of some of our U.S. transport work has been a little slower from a burn standpoint. But the level of opportunities have been there. In water, I'd say globally, we have seen some real positive momentum, both on bookings as well as burn, and that's across all geographies, US, Europe, to include the UK, Middle East, and in our Asia pack in ANZ area. So water has been in that realm as well as advanced facilities, really driven by life sciences. So I'd say that just the two areas that we saw as a part of the election in the UK pause was transport, water kept going in the UK, and then a reprioritization in Saudi with regards to some of the event-driven, cities-oriented work, moving more towards the time-based work, like the Expo or the airport, or infrastructure that's going to be needed with a time element to that in 2026, leading to the Expo and the FIFA World Cup. These are things that we're continuing to add optimism as we move into Q4 and beyond.

Great. And then if you could maybe just follow up on the commentary around the water. You know, I've broadly heard that the demand in that space has been growing. Can you maybe just talk about your win rate in that space, any particular areas within the broader water market where you might have been winning an outsized amount of work? And if I could maybe just talk about the progress you've made with in terms of any opportunities there that you might have secured?

Sure. So as far as what's driving it, clearly the aging infrastructure is a big piece. The other piece is around combined sewer overflows and what's happening with regards to climate and some of the natural disasters that we're seeing. So I'd say that's accelerating what's going on as well. In the drinking water component, we are seeing an increase in um in pfas in in addressing the pfas regulations specifically in the us but also in germany and in uh in other locations too so that's all kind of driving that just to quantify it sabah you know our pipeline in the in the water sector is up nearly 2x uh as as it pertains to this time last year and we are winning a majority of uh the work that we're going after hence the um the real attention and focus on the growth.

Your next question comes from the line of Andy Whitman with Baird. Please go ahead.

Oh, great. Thanks for taking my questions. I guess I just wanted to get a little clarification on the gross profit and backlog. I guess your total backlog was up 6% year over year and your gross profit and backlog was up 5.5%. So that suggests that the overall backlog has a little bit lower margin in it. I guess we've already established that the P&PS segment margin is up. So I was wondering what the offset and what segments they are, and if you could talk about the mix in those and what occurred there so we can understand the complexion there a little bit better. I think that would be helpful.

Andy, maybe just I'll let Kevin kind of clarify the nuance within the backlog, and then I'll talk about kind of the profile as it pertains to the various end markets. And we'll talk about that profile.

Yeah, look, so what we're seeing is we've been talking about the growth profile and people in places top line-wise and it being a little bit more muted because effectively we're seeing more consulting, you know, science-based technology, technical and consulting work that's happening. In the backlog and the book to build, very strong book to build, is some other types of projects which include uh lower margin work which will at the same time create accelerated top line growth so um it'll be a little bit of a reduction in mix relative to the consulting piece versus our current levels and and at the end of the day it's going to be quite positive because we'll still see i think incremental margin over time in people and places because we've proven our ability to do that. And we're going to see some accelerated growth as well associated with some of these larger, I'm going to call it projects, that involve program management and extended dollars being spent, which will include a little bit greater percentage of pass-through revenue, which has more limited margin than the high-value consulting work that we do.

Yeah, and Andy, maybe I'll just extend on that last thought that Kevin had. So then if you break that, you cited the consolidated numbers on the six and the five and a half in gross profit. If you then translate that into PNPS, which relates to the last comment that Kevin made, that looks like more like 10% on the top line and 9% on gross profit. So you can kind of see the dynamic leaning towards PNPS is growing at a much higher rate.

Got it. Okay. Yep. That actually makes sense. So that's helpful. I wanted to also just get an update, Bob, just on some of the actions you're taking in preparation for the split. I know you're looking at how your organization works and where the real cost centers are and the benefit centers are. Can you talk about any things that you've actioned to date that we should know about in terms of how you've changed your business model in anticipation of that forthcoming split, things that you're able to do now? before you're able to actually effectuate that deal.

Yeah, absolutely. So we really looked at, you know, in a consolidated company, what type of corporate needs are going to be needed on more of a homogenous corporate needs or a lot more synchronized across the world. So those movements to global business centers and real streamlining of process protocols and systematic enhancements, those have been taking place in real time. From a business standpoint, we've already started to transition into optimizing on a lot of our cross-cutting capabilities, program management, digital enablement, and other strong sales, market-leading sales functions that will cut across the entirety of the company. So the geographic nuance, client-facing entities with cross-cutting capabilities, that structure It's almost like being in the Olympic time right now. It's already in that zone where we're handing off the baton in that section where we're already off and running.

Your next question comes from the line of Bert Subin with Stifel. Please go ahead.

Hey, good morning. Hey, Bert. Good morning. Good morning. Bob, maybe just to start with you, you had some comments on the advanced facility side. It sounds like life sciences continue to be really strong. And you mentioned AI data centers, which I feel like is more of like a newer area for you guys in terms of that growing. I didn't hear the SEMI side. Can you just give some context on sort of what the mix there looks like? I mean, I know Intel reported and said they're taking down their CapEx. So, like, what the expectation is as we move through into maybe in the 25 for advanced facilities and how it's performing today? Sure.

So, specifically on semis, Bert, you know, we've been working on this for a while. So, clearly, we do do a lot of work for Intel, and that work is fundamentally on that CapEx program that they highlighted earlier. three or four years ago, we had substantially worked our way through that. And so the news that's come out has got a minimal effect on us. The diversification of our services that we perform for Intel, those kind of ongoing sustaining capital work that we do around tool installs and retrofits and layout dependent type work, that will continue. But the good news is that our diversification into memory customers, as well as other logic customers that are doing work in the U.S. and in Europe. That's continued, and we'll have hopefully some good news to share next quarter on that, as well as some of the geographic expansion that's going on in places like India. And so we have some really positive momentum going on on that front. So overall, we're still bullish on the sector, and we'll continue to accelerate growth. I don't know the life sciences. And then on life sciences, yeah, that's really going well right now. And it's probably, you know, a lot of discussion around GOP1. But what we're seeing is Alzheimer's and oncology drugs still making a really big play. So the two big players that are in the GOP1 sector, that is a big part of our work. But the new awards that are coming through, whether they be in the contract manufacturing space, or in these other players that have got a really nice pipeline of drugs coming in to oncology as well as in Alzheimer's, that's really driving that optimism too.

And Bert, if I could, just having most recently come from the semiconductor sector, we do see this as a secular trend in terms of where the manufacturing footprint is and across different realms of semiconductors and logic and memory, as Bob alluded to. And there's also a geographical shift that's happening. So As we look at our portfolio, we have good confidence that we are pretty well diversified. And then just the scope of the opportunities in front of us are still pretty good. Now, obviously, any given quarter depends on what happens in the market. But I think when you look at it from a secular standpoint, we feel pretty good about our semiconductor footprint.

That's very helpful. Just a clarification there. Bob, you mentioned the Fujifilm construction, the phase one would start to ramp down in the first half. Is that expected to have any meaningful impact, or is the award sort of backfilling that?

That's on the existing work, Bert. What we announced goes past that. So we're already on site doing phase one. So my comment was around phase one. Phase two is now just starting.

Got it. Okay. And just as a follow-up, I mean, there's been a lot of questions on sort of the spinoff and sort of the dynamics there, you know, referencing unallocated corporate expense and some of the other things. And I guess, Kevin or Bank, what are some of the dynamics we should be aware of assuming that the spinoff closes in September and we're going into the final quarter of the calendar year, what are some things to be aware of just from a perspective on modeling that are going to change? Obviously, not looking for guidance or anything like that, but just some dynamics that maybe are not fully appreciated.

Okay. So, yeah, a couple things. One, when we do the Q4 results, the full year results, I should say, Since we're closing before the fiscal year ends, effectively, we will report on an independent Jacobs for the Q4 results and the full year results and report it on a historical basis as such as well. And all of the business that's included in the perimeter, which will be merged into the momentum business, that will be basically in assets held for sale. So you won't see that information. We have provided you guidance for the full year, similar to how we've established it for the full year. So assuming that it closes at the end of the year, all of those numbers that we just quoted would effectively be met. But you're going to actually see a lower number in the results just because some of it's now going to be because it's being put into equity directly as assets held for sale, and you're going to be seeing the independent Jacobs. So a lot of clarity we'll be providing to get you an understanding of what that looks like, Bert, when we do report Q4 results. But a lot of moving pieces, but kind of that's a very general view. view of how you're going to be seeing our financials reported in Q4.

Yeah. Sorry, Kevin, just to add to what Kevin said, you know, in addition to what he said about our businesses, obviously, you know, Amentum is going to have their capital market, say, on August 13th. So we'll have some more color in terms of their business. And then as it relates to ours, you know, we'll provide guidance for all of fiscal 25 in our November earnings call. And then we'll talk about not only the revenue and growth as well as the margin profile.

and then later on in during investor day will provide much more color about our long-term growth and community models your next question comes from the line of jamie cook with truist securities please go ahead hi good morning um i guess most of my questions have been um answered but bob just you know thinking of jacobs you know after the momentum spin You know, you're going to have a good balance sheet. Your cash flow generation has been, you know, fairly impressive. And I'm just thinking about the growth and the margin that you're seeing in PP&S and PA consulting. So just sort of wondering, you know, what your appetite will be for M&A, you know, with Jacobs, you know, after the spin of the, you know, attractive dynamics that are out there. And then any help you can give us in sort of how we should think about, I'm just wondering if free cash flow conversion of the remain code is a better story than the market anticipates. Thank you.

Sure. Maybe I'll take the first one, Jamie, and then Ben can talk about going forward what free cash flow conversion looks like. Look, I think initially we got a lot of options. And our primary focus in the quarters that followed the separation was is execution and performance and really driving that long-term margin growth profile. We like the positioning that we're in in each of the end markets as well as geographies that we sit in. So it's not like there is an imperative that we need to do M&A in order to catalyze growth. We've got a great growth trajectory organically. And so proving that out, not even proving it out, executing on the plan that we have right now, we've got a lot of confidence in. You know, past that period, we've got to, you said it yourself, we've got a great balance sheet and we've got a lot of options and it's a great place to be. So much more to follow on that. On pre-cash flow, let Venk talk about that.

Yeah, and just pre-cash flow in just a second, but just to reiterate the point about capital allocation, just given what we see ahead of us in terms of the pipeline and the opportunities in front of us, I think from a capital allocation standpoint, we're strong believers in organic growth as the first use of capital. Clearly, from the standpoint of the free cash flow generation and the balance sheet that we have, we do have the ability. Number one, we do want to continue to provide shareholders the opportunity to get dividends, but also we'll be consistent in terms of buying our shares, repurchasing our shares. And then M&A, as Bob mentioned, is also an option. But the next few quarters, almost singular focus on execution. Now, as it comes to free cash flow conversion, Jamie, you rightly pointed out, we've been generating pretty decent free cash flow. We said we'll be at over 100% free cash flow conversion for the remainder of the year. And as you deep dive into the PNPS business, which is a big part of Independent Jacobs, you can expect that free cash flow metrics to improve over time. Again, we'll quantify it as we get closer to the date, but we feel pretty good about where we are and where we're going.

Your next question comes from the line of Sandita Jain with KeyBank Capital Markets. Please go ahead.

Thank you so much for taking my questions. I guess most of them are answered, so I'm going to limit myself to just one. Are there any discrete deliverables from your side to close the momentum spin in the second half of September, or is it just mostly just the paperwork that's taking time? Just wanted to get a sense of that.

All of the regulatory approvals on foreign investment and antitrust, all of those kind of things, we've already worked through and all has been approved. The only remaining item is the IRS ruling on our private letter, a ruling that we're looking for, which confirms a view that, our view, that the transaction is tax-free to our shareholders. That's really what's driving the timing at this point in time. We've been having great discussions with IRS. More to come, but we would expect to get that approval hopefully over the next month or so, and effectively that positions for that second half of September close. We've got a lot of things to do with registration for SEC distribution of shares and so on and so forth. But really, the only thing that we're looking for is the IRS ruling, and we feel confident about it.

Thanks so much.

Thank you.

Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead.

Hey, good morning, guys.

Morning, Chad.

Morning. So my question has to do with the top line growth rate of the PPS business. Just trying to understand the trajectory of that as we exit 24 and then going into 25. So you're starting kind of at like a mid-single digit rate into Q. You've got some pretty solid bookings that you brought in this quarter. And so I guess, like, will that be enough for the top line to get back into like that, like 69% target range in 25?

Yes. The backlog performance, the bookings and backlog performance, Chad, has been really, really solid. In fact, you know, the 1.53, we had to go back to see if that was a record in itself. And so we're confident that, you know, we're going to be going into uh 25 with some really uh solid growth projections which we'll be very clear about when we uh we articulate so that's kind of on the on the financial end and the lagging indicator uh the answer is yes you know on the leading indicator on the pipeline as well as where we sit in the markets where the pipeline is growing the fastest water and advanced facilities being highlighted um that also gives us a lot of confidence too so Long way of answering your question is the answer is yes.

Gotcha. Okay. And then just on that PPNS segment again, the operating margin. So I guess like at least on a year-to-date basis, you're running somewhere close to like 15%. Any reason like that why that can't continue? And then one more question for you on the 4Q bookings. I think, Bob, you mentioned that you're pretty optimistic about that pipeline for 4Q. Can you just give a little more detail and do you think you can actually hit a greater than one times book to bill in the fourth quarter?

Yeah, so on our optimism around the PNPS margins and then how that will translate into go forward margins for the whole company, I think on slide 11, we did give some guidance on greater than 14.9%, so it probably highlights the optimism that we have on our current reporting structure. uh with regards to uh to that element um and then on q4 similar to last quarter uh chad um i wouldn't make those comments unless we had already booked work in the uh in the first month of the of the quarter so um can't quite announce those right now but you'll see that when we report out on q4

We have time for one more question, and our final question comes from Jerry Ravitch with Goldman Sachs. Please go ahead.

Yes, hi. Good morning, everyone. I wanted to ask, you know, people in place – hi. The profit growth that you folks have delivered in people and places over the past five years has been, you know, 8% CAGR over the past three years, 11% CAGR. So as you folks think about the organic growth opportunity – on a more focused Jacobs. Can you just expand on that? Because the growth has already been really attractive in people and places. And so maybe give us a few threads that you'll expand on it. The analyst day on your expectations to continue to drive that level of growth, or if you think you can accelerate off of that level of really strong performance that the business has delivered.

Yeah, Jerry, we, without giving any kind of quantifiable number on where that number is going, I'll say that this, our pipeline, where we're positioned in the end markets that we sit in today, and the tailwinds with regards to our bookings performance on that, gives us a lot of optimism. And so, you know, in November, and when we report out on the full year for independent Jacobs, as well as going into February and along the way in between, you know, we'll put a lot more clarity as well as quantify what that means. But overall, I think hopefully you're hearing some real optimism in our voices and in our performance on getting to exceeding the performance that we had for the last five years.

That's a high bar. And can I ask, in terms of just the moving pieces that you spoke about, Bob, around The UK election, have you started to see now that that's resolved? Have you seen an acceleration in activity levels or what's the history lesson on UK elections and the lag to when we start to see a booking reacceleration for your business?

Yeah, I'd say there's been an acceleration in the dialogue, right? And now those translating into those programs that were either paused or in anticipation of being put out to market. I think that's kind of the next phase. So, you know, over the course of the next six to 12 months, I think we'll see that. Interestingly enough, Jerry, the water sector in the UK has not paused at all. And so that that continues on. And then, you know, with the PA, you think about this in the UK specifically, you know, as well as globally, PA has about a 50-50 private sector, public sector mix in their business. The private sector in PA this quarter grew 11% year on year. And the public sector was kind of in this election pause. We see that kind of coming out as well, which gives us optimism, not only in the Jacobs business, but in the PA business too, moving into FY25.

We have one more question.

from louis d palma with william blair please go ahead thanks um bob kevin and vank um what is your forecast for um infrastructure stimulus in in the u.s associated with the iija and and the chips act and is that contributing to your strong backlog i know you highlighted um recent wins with water and also a large multimodal transportation win, but what is your general expectations over the next few years in terms of the IIJA?

Sure. Luis, thanks for the question. IIJA, you know, I think these are industry numbers, so 60% appropriated, 30% spent. So yeah, there is work that continues to flow. Right now, I think that the hurdle is 2026. Said it before, that's probably going to continue to go past 2026, as well as discussions about a second IJA, which we'll see where that goes within the congressional floor. But we are, it is driving that backlog performance and our conversion rate on that as well. I will say this, is that on the CHIPS Act, oh, I'm sorry, one more comment on IJA. The grant money, you can see, and that's some of the work that we're seeing, not just in transport, but in water as well. Chipsacked, those jobs that have received chipsacked money, we've been involved with those. Remember, those were pretty much designed and already in the field and then received the funds. This kind of next wave, we're on the front end of. And so I think that chipsacked money will continue to flow. and represent a nice tailwind for us.

And that concludes our question and answer session. And I will turn the conference over to Bob for closing remarks.

All right. Thank you, operator. Thank you, everyone, for joining the earnings call. Look forward to providing further updates and visiting with investors and analysts in the months to come. Exciting times ahead. And I look forward to staying very open and transparent with the market as we move forward. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.