Jacobs Solutions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2023

There are 12 speakers on the call.

Operator

Morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Jacobs Solutions Fiscal First Quarter 2020 3 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Jonathan Doros, Investor Relations, you may begin.

Speaker 1

Thank you. Good morning

Speaker 2

to all. Earnings announcement and 10 Q were filed this morning, and we have posted a copy of the slide presentation on our website, which we will reference during the call. I'd like to refer you to Slide 2 of this presentation materials for information about our forward looking statements and non GAAP financial measures.

Speaker 3

Turn to the agenda.

Speaker 2

Speaking on today's call will be Jacobs' CEO, Bob Regatta and Chief Financial Officer, Kevin Berryman. We're also joined today by our incoming CFO, Claudia Hamillio. Bob will begin by summarizing highlights from our Q1 results, discuss our commitment to sustainability and then provide an update on our strategy. Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Finally, I will provide details on our updated outlook along with closing remarks, and then we'll open up the call for your questions.

Speaker 2

In the appendix of the presentation, we provide additional ESG related information, including examples of our leading ESG solutions. With that, I'll now pass it on to Paul Pergotta, CEO.

Speaker 3

Thank you, John. Good day, everyone. Thank you for joining us today to discuss our Q1 fiscal year 2023 business performance, starting on Slide 4. I'd like to welcome to the call Claudia Jaramillo, who is currently our Executive Vice President, Strategy and Corporate Development. We recently announced her transition to CFO later this year.

Speaker 3

I'm excited to now lead Jacobs' CEO. Over the last several years, we have repositioned the company through a purposeful strategy of transforming our portfolio to capture higher value opportunities in our core and adjacent sectors. At this juncture in our strategy, strong execution and focus is pivotal to our success. There are 3 key priorities. 1st, we will maintain our inclusive and inspirational culture that fosters the creativity needed to live by our mission, challenge today, Reinventing Tomorrow.

Speaker 3

2nd, we'll focus on driving a higher structural growth rate across our core sectors by executing against the 3 needle moving growth accelerators of climate response, data solutions and consulting and advisory across the entire organization and sectors we serve. While we are in a leading position to capitalize on the megatrends and structural tailwinds, Our relentless focus on long term client relationships is driving sustained growth. 3rd, We will deliver long term returns for our shareholders by driving further operational discipline across the business to accelerate cash flow generation with disciplined capital allocation. From a financial standpoint, our underlying business remains strong. Our People in Places solutions line of business delivered strong performance with net revenue up 8% year over year, 13% in constant currency, operating profit up 20% year over year, 28% in constant currency and we continue to gain market share in both the Global Critical Infrastructure and Advanced Facility sectors.

Speaker 3

In CMS, we continue to deliver a strong base of recurring revenue with a growing new business pipeline. We anticipate strong tailwinds and backlog growth with CMS moving forward. PA Consulting experienced lower than expected utilization, but We continue to experience double digit top line and backlog growth. We are seeing strong demand with robust opportunities in PA sales pipeline. A number of recent wins underscores our strategy and demonstrates our move up the value chain with our clients to higher margin consulting and advisory services.

Speaker 3

Across the company, we see exciting opportunities ahead of us, specifically in the areas of climate response and especially in energy transition. Our ability to deliver data enabled solutions is enhancing our clients' resilience and sustainability. The establishment of divergent Solutions enables Jacobs to scale and deploy our domain centric data platforms across multiple sectors and geographies, further enabling us to deliver solutions to technically complex challenges. I will talk to these key themes further in the presentation. Turning to Slide 5.

Speaker 3

We remain steadfastly committed to our cultural transformation to create an inspirational journey for all. In 2015, we started our culture journey with the empowerment and accountability, incorporating inclusion, innovation and inspiration into the very fabric of the company. I believe our emphasis on inclusion and diversity has been a critically important contributor to our success and provides a key differentiator in attracting and retaining the world's best talent, as well as driving innovation for our clients. A key benefit of being a company with a broad range of capabilities is our ability to provide multiple career and development opportunities, what we refer to as agile careers. When we learn and grow together, we activate empowerment and accountability, inclusion and diversity and innovation.

Speaker 3

We lead, embrace and anticipate change. To further demonstrate our commitment to inclusion and diversity, we have included a KPI and the refinancing of our credit facilities linked to female leadership representation. Kevin will discuss further details in his remarks. Turning to Slide 6. Our commitment to sustainability is core to our strategy and our significant performance is being recognized by many of the top ESG accredited institutions.

Speaker 3

Over the past 5 years, we have advanced to an industry leading status. This culminated in our inclusion in the 2022 Dow Jones Sustainability World Index, ranking Jacobs among the world's leading companies with outstanding sustainability performance. While the scores themselves are impressive, what's even more significant is the public recognition of Jacobs' positive impact on our clients, communities and the world. As we turn to Slide 7, we will focus on our key our 4 key growth sectors of critical infrastructure, energy and environment, advanced facilities and national security. These growth sectors are driven by the following catalysts: federal government stimulus from the Infrastructure Investment Jobs Act, the Inflation Reduction Act and the Chips Act, supply chain and technology investments and advanced facilities and the emergence of increased global threats.

Speaker 3

Let's examine the legislative drivers first and our positioning in the market. I am proud that Jacobs has helped our clients secure over $1,000,000,000 in IIJA competitive grants since its passing, and the bill is only in its early stages. We supported our clients in securing over $350,000,000 in IIJ competitive grant funding just last quarter, the largest quarter since the passing of the Act. This includes the largest grant awarded nationwide for subway station accessibility in New York City, a major port infrastructure development grant to a long term client in Alaska, the 1st phase award of 1 of the largest water treatment plants in the U. S.

Speaker 3

And the design of a sustainable battery recycling facility. With another 4 years of locked in and robust funding, The U. S. Infrastructure climate is strong. The coming months will also bring the first dollars of 2 other areas of focus for Jacobs.

Speaker 3

The Inflation Reduction Act with $369,000,000,000 to fund the green economy transition and the CHIPS Act for semiconductor investment, all in core Jacobs sectors. Before the end of the calendar year, we fully expect to have all three bills firing at full strength and funding critical projects sponsored by local governments, the federal government and the semiconductor industry. This overlap of spending will continue for 4 or 5 consecutive fiscal quarters and drive growth across the infrastructure and energy markets. In Advanced Facilities, we continue to see sustained capital investment in the semiconductor manufacturing space, biotechnology capacity expansions and the electric vehicle ecosystem all being driven by reshaping of global supply chains, technology advancements and de carbonization efforts. Turning to Slide 8.

Speaker 3

As evidenced by double digit pipeline growth in each of these sectors, Our industry position continues to grow and we see this being a long term secular trend. In addition to previously discussed infrastructure wins, We have been awarded major programs in the semiconductor space to include greenfield expansions in the U. S. And Europe for a global chip manufacturer. In the Biotechnology sector, we have won multiple expansions in the U.

Speaker 3

S, Europe and Asia. And We continue to see global growth in electric vehicle ecosystem driven by a favorable regulatory environment with project wins for battery and vehicle U. K. And Australia due to continued global threats. As highlighted as a future prospect last quarter, In the U.

Speaker 3

S, we were successful in winning a critical cyber and intelligence award for $469,000,000 5 year contract for a classified defense customer to provide secure data and network solutions globally. In the U. K, PA is leading the consortium that has been selected by the MoD to deliver Krennic, a future force protection electronic countermeasures program. It will provide the next generation of innovative solutions to counter the threats posed by radio controlled improvised explosive devices otherwise known as IEDs. And in Australia, we are supporting the acquisition and sustainment of military platforms for the Australian Defence Department, which has engaged Jacobs with increasing volumes of work.

Speaker 3

Now, I'll turn the call over to Kevin to review our financial results in further detail.

Speaker 4

Thank you, Bob. Let's turn to Slide 9 for a financial overview of our Q1 results. 1st quarter gross revenue grew 12% year over year and net revenue grew 8%. Net revenue grew 12% year over year on constant currency basis, an acceleration from our fiscal year 2022 constant currency growth of 8%. Adjusted gross margin in the quarter as a percentage of net revenue was 26%, sequentially in line with the 4th quarter, but as expected was down approximately 130 basis points year over year, primarily driven by: 1, the remaining year over year impact of the Idaho remediation contract and 2, lower utilization in PA Consulting.

Speaker 4

I will provide additional comments regarding our segments later in my remarks. Both People and Places Solutions and Divergent Solutions gross margins were flat year over year. We expect total gross margins to remain plus or minus 26% of net revenue for the remainder of the fiscal year and trending higher as we exit the year from a higher margin mix of revenue and new higher margin opportunities from our growth accelerators. Adjusted G and A as a percentage of net revenue was 15.5%, slightly higher than Q4, but down 130 basis points year over year. During the quarter, we benefited from lower employee benefit costs, which were mostly offset by miscellaneous other costs.

Speaker 4

During the remainder of the fiscal year, We plan to make additional investments in employee welfare programs such as higher 401 match and improved medical benefits as part of our continued investment in improving our culture and employee engagement. These costs are factored into our full year outlook. As a result, we are still targeting G and A as a percentage of net revenue to stay below 16% for the full fiscal year 2023. GAAP operating profit was $238,000,000 for the quarter and included $50,000,000 of amortization from acquired intangibles, a $28,000,000 non cash charge related to decreasing our real estate footprint aligned to our future of work strategy and finally, other acquisition deal related costs and restructuring efforts of $17,000,000 Actual restructuring costs were less than half of these costs and supported the creation of our new Divergent Solutions reporting segment. The remaining costs are largely related to PDA non cash contingent equity based agreements associated with our PA transaction structure.

Speaker 4

Adjusted operating profit was $332,000,000 up 8% year over year. On a constant currency basis, adjusted operating profit was up 15% year over year. We remain committed to reducing our restructuring related costs. Consistent with our previous comments, we expect $15,000,000 of restructuring charges for the full year fiscal year 2023. We also expect another $30,000,000 in non cash real estate impairment charges over the course of Q2 and Q3 as we further execute our Future of Work strategy.

Speaker 4

Finally, We expect approximately $20,000,000 of transaction related expenses from deal related integration and other costs, Most of which is performance based incentives that were factored into our total purchase price consideration for these acquisitions. It also includes the non cash contingent based equity associated with our PA transaction structure. Our adjusted operating profit to net revenue was 10.6%, flat year over year. I'll discuss The underlying dynamics during the review by reporting segment. GAAP EPS from continuing operations was $1.07 per share and included a $0.26 impact related to the amortization charge of acquired intangibles, a $0.16 non cash impairment charge related to reducing our real estate footprint, a $0.09 adjustment to align to our projected annual tax rate and a $0.09 from transaction restructuring and other related costs.

Speaker 4

Excluding these items, Q1 adjusted EPS was $1.67 up 7% year over year. Q1 adjusted EBITDA was $339,000,000 and was up 9% year over year, representing 10.8 percent of net revenue. Finally, backlog was up 1% year over year and 2% on a constant currency basis. The revenue book to bill ratio was 1.1 times with our gross margin and backlog as a percentage of net revenue up over 100 basis points year over year. Our book to bill ratios continue to be impacted by the burn of the approaching NASA Kennedy Nassau rebid as the project's backlog continues to fall until which time the rebid is awarded.

Speaker 4

Regarding our LOB performance, let's turn to Slide 10 for Q1. Before delving into the details by segment, I would like to make some overall comments regarding the strength and diversity of the Jacobs portfolio. As you all know, all aspects of our portfolio are aligned with long term secular growth trends. Our results in the quarter exhibit the strength of this diversity and its ability to deliver strong, consistent operating profit growth. In this quarter, our People in Places solutions business led the way.

Speaker 4

So let's start with them. Overall, People and Places delivered strong revenue and operating profit results driven by alignment to the secular growth trends that Bob discussed earlier. Q1 net revenue was up 8% year over year and up 13% in constant currency. All business units contributed solid and often very strong constant currency growth. Backlog grew 2% year over year and gross margin and backlog was up double digits in constant currency with a book to bill greater than 1.

Speaker 4

Total People in Places Solutions Q1 gross margins were flat year over year with Q1 operating profit up 20% and 28% in constant currency. Operating profit as a percentage of net revenue was 14.5%, up over 140 basis points year over year, driven by revenue growth and a disciplined management of overhead costs. We continue to expect year over year improvement in People and Places operating profit and margin, resulting in strong double digit growth and full year operating profit. Our Advanced Facilities unit, which benefits from investments in the life sciences, semiconductor and electric vehicle supply chains, posted the strongest double digit revenue and operating profit growth. We continue to monitor the macro demand trends across sectors that impact our advanced manufacturing clients, and we continue to see robust demand from our Life Sciences clients, which comprise 2 thirds of our People and Places business.

Speaker 4

Our backlog and sales pipeline remains robust across a diverse set of customers. And as a result, we continue to expect our advanced facilities growth rate to remain strong during fiscal year 2023 despite the very solid and strong 2022 year over year comparisons. Our Americas unit had an outstanding quarter with over 20% year over year operating profit growth, driven by infrastructure related monetization wins beginning to convert to revenue. The backlog and sales pipeline provides us confidence as we are seeing many large programs mature for a late 2023 or early 2024 award, which should continue to support longer term momentum. Our international business Q1 revenue and operating profit were up single digits year over year on a reported basis, but grew double digits in constant currency.

Speaker 4

Our international business will continue to be materially impacted by FX during Q2 with FX neutralizing over the second half of our fiscal year, assuming no large variation from existing current foreign exchange rates. Moving to critical mission solutions. CMS benefits from highly recurring multi year contracts that require limited overhead support. The business is aligned to national security, space exploration and energy transition priorities mainly in the U. S, Europe and Australia, as well as infrastructure monetization solutions such as U.

Speaker 4

S. 5 gs Telecom Investments. Q1 revenue was up 10% year over year and up 13% in constant currency, driven by the Idaho Nuclear Remediation Project contract that ramped up in Q2 of last year. For the remainder of fiscal year 2023, we expect revenue growth in the mid single digits for the CMS business as we now compare to quarters that include the Idaho project. CMS book to bill was Gross profit margins were down year over year due to the revenue mix impact from the lower margin remediation project and the year ago closeout benefits associated with our strong performance on several enterprise contracts.

Speaker 4

CMS operating profit was $82,000,000 down 10% year over year and down 6% on a constant currency basis. Operating profit margin was aligned with expectations was down 170 basis points year over year to 7.6%, but up 60 basis points sequentially from the Q4 figure. We expect operating margins to improve in the second half of fiscal twenty twenty three with the ability to expand margins as we convert higher margin opportunities in our sales pipeline. Moving to Divergent Solutions. Gross revenue was up 11% year over year and when excluding the impact from pass throughs, net revenue increased 7% year over year.

Speaker 4

We expect net revenue growth to accelerate materially in the second half of our fiscal year as we start to see growth from our investments in sales, Data Solutions and Technology offerings. Gross margins in Divergent are in line with our consolidated gross margin, which we believe provides us the ability to significantly expand DVS operating margins as we to gain additional scale from our heightened growth investments. Operating profit margins were 6% driven by early stage investments and well below our future run rate projections for this business as we begin to embed integrated data enabled offerings in our core markets. We expect Divergent to finish fiscal 2023 with margins approaching double digits. Turning to PA Consulting.

Speaker 4

The translation impact from a stronger U. S. Dollar from the year ago period continued to impact reported revenue and operating profit growth. Revenue from PA was down 3% year over year in U. S.

Speaker 4

Dollars, but up over 11% in British pounds. PA had a solid book to bill of over one times. We expect revenue growth in British pounds to remain near or above 10% during fiscal year 2023. Turning to profitability, during fiscal year 2022, PA aggressively hired ahead of an increasing demand from secular strong secular growth opportunities across energy transition, sustainable consumer goods and strategic and digital transformation opportunities. While the sales pipeline remains robust and backlog continues to grow, The delayed conversion of these opportunities into burn continues to impact utilization.

Speaker 4

As a result, Q1 operating profit margins were 18%. While actions have been taken to significantly improve utilization, we expect margins to improve incrementally approaching 20% as we exit the fiscal year. Our non allocated corporate costs were $40,000,000 and invest further enhanced employee welfare plans, including improved medical, 401 match benefits and parental leave offerings. We believe this strategic decision is key to further strengthening our culture and attracting and retaining world class talent. While Q1 was lower than our previous quarter run rate guidance, we do expect We are monitoring our medical and other fringe costs closely, which can vary depending upon our revenue and delivery mix as well as seasonality of medical claims.

Speaker 4

Turning to Slide 11 to discuss our cash flow and balance sheet. We posted another strong quarter of cash flow generation, which is indicative of the quality of our earnings power and cash conversion capabilities. Free cash flow was $270,000,000 and included an outflow of $60,000,000 for payment of a CARES Act deferral benefit of payroll taxes $6,000,000 related to transaction costs and other items. Excluding the unusual payment associated with the CARES Act, Our underlying free cash flow for the quarter was a very strong $330,000,000 In the second quarter, we expect free cash flow to approximate year ago figure driven by the very strong Q1 performance. For the full year, we continue to anticipate 100% adjusted free cash flow conversion to adjusted net earnings.

Speaker 4

Regarding the deployment of our free cash flow, We repurchased approximately $140,000,000 a share during the quarter. As we previously have discussed or excuse me, as we previously announced, the Board of Directors has also approved a new 3 year $1,000,000,000 share repurchase authorization. We will remain agile and opportunistic in repurchasing shares if we see price dislocation in our relative valuation. We ended the quarter with cash of $1,200,000,000 and a gross debt of 3 point $1,000,000,000 resulting in $2,300,000,000 of net debt. Our Q1 net debt to 2023 expected adjusted EBITDA of approximately 1.5 times is a clear indication of the continued strength of our balance sheet.

Speaker 4

We remain committed to maintaining an investment grade credit profile. And given our commitment to inclusion and diversity, All of Jacobs Bank debt now has a sustainability linked KPR target of achieving a 40% female representation in our management team, as defined as our Vice President and above population. As of the end of Q1, approximately 60% of our debt is tied to floating rate debt, which includes our $500,000,000 notional interest rate lock of 2.7%. As the adds up, excuse me, the end of the Q1, our weighted average interest cost was 4.6%. For your benefit, in the appendix of the presentation, we have included additional detail related to our debt maturities, interest rate derivatives and quarterly interest expense.

Speaker 4

Finally, given our strong balance sheet and free cash flow, We remain committed to our quarterly dividend, which was increased 13% year over year and which will be paid on March 24. Now I'll turn the call back over to Bob.

Speaker 3

Thank you, Kevin. Turning to Slide 12. Our portfolio is positioned to benefit from multiple secular growth trends across our core sectors with the opportunity to structurally increase our long term earnings power by executing against our growth accelerators of climate response, data solutions and consulting and advisory. We reiterate our outlook for fiscal 2023 adjusted EBITDA of $1,400,000,000 to $1,480,000,000 and adjusted EPS to $7.20 to $7.50 which incorporates recent FX rates. In closing, I would like to reiterate my priorities as CEO to maintain an inspirational and inclusive culture that will capitalize on our growth accelerators and drive long term returns for our shareholders.

Speaker 3

Before we open up the call for questions, I'd like to take a moment to express my sincere condolences on behalf of Jacobs to all those affected by the terrible earthquakes that occurred in Turkey and Syria earlier this week. Our employees have yet again demonstrated our culture of caring and practice by raising their hands to seek ways to support those most impacted by this tragedy. I'm proud to lead a company that rises to the calling in such challenging circumstances. Operator, we will now open the call for questions.

Operator

Thank you. For a follow-up. Our first question is from Jerry Revich with Goldman Sachs. Your line is open.

Speaker 5

Hi, this is Adam Bubis on for Jerry Revich today.

Speaker 3

Hi, Adam.

Speaker 5

Hi. Now that your leverage ratio has declined, can you provide an update on the M and A pipeline? And if You'd care to comment on opportunity set by line of business?

Speaker 4

Go ahead, Jeff. So look, I think the M and A pipeline, we have a list of opportunities At every single point in time. There are things that are of interest, but ultimately, I would suggest to you That we really have nothing to comment on other than we do believe there's some things that are aligned with our strategy. And remember how we think about our deployment of capital against M and A is to be aligned with our accelerators. So that's climate response, that's data consulting data solutions and data or excuse me, consulting and advisory.

Speaker 2

So those

Speaker 4

are the areas we're continuing to focus on. And certainly, given the strong cash flow that we continue to generate, we'll have degrees of freedom to deploy that capital as appropriate when we see value added opportunities.

Operator

The next question is from Andy Wittmann with Baird. Your line is open.

Speaker 6

Okay. Thanks. Kevin, I guess I just want to Dig in a little bit to some of the comments you made about, I guess, some of the adjustments here. So you previously said $15,000,000 restructuring. You reiterated that again, Obviously noting some real estate impairments that are non cash.

Speaker 6

But I guess here you took an exclusion on Focus 2023 expenses. I guess I wasn't expecting that. Could you talk about what that was in the quarter? What you're hoping to achieve with that? And maybe what the expectation or the budget is for the year if there are going to be any further focused 2023 expenses?

Speaker 6

Thanks.

Speaker 4

The Focus 2023 to the extent that there is any indications that are really related to the real estate impairment. It's part of our overall focus 2023 initiative. So it's not over and above the kind of real estate impairments that I highlighted.

Speaker 3

Might have been viewed as future of work is delivered today. Yes.

Operator

The next question is from Michael Dudas with Vertical Research. Your line is open.

Speaker 1

Good morning, gentlemen, Claudia.

Speaker 3

Good morning.

Speaker 4

Good morning.

Speaker 1

Bob, you talked about your drivers, the key drivers and in and the end market to how they'll be impacted. How comfortable do you feel as you're taking over here, how you're positioned from a resource basis to drive that growth? What areas would be more attention paid upon. And of the several different end markets that you see, you did touch on some of them in your prepared remarks, but What ones could we expect to see some more better growth, better opportunities for Jacobs, not only just to increase your bookings, but also drive the higher margin mix that you're anticipating?

Speaker 3

Sure. From a resources standpoint, Michael, I'd say that We're feeling comfortable and really it goes back to what we've talked about previously. Our global our use of global talent has really balanced our ability to deliver on our clients' expectations. So it's not where the capital is being deployed It doesn't necessarily map to where we source talent and deliver the solutions that we're expected and can deliver. So we're feeling really positive about the resources front.

Speaker 3

As far as of the areas that we're looking at, I'd say that specifically in infrastructure and even more specifically in energy transition is providing some real over extended growth opportunities and that was very evident this quarter In our growth and pipeline, I talked about double digit composite for the entirety of our in sectors. The highest was energy transition. And we've got a Great base, great talent, great solutions. And with work that we've already been doing in the renewable space for quite a while, it's serving us well.

Operator

The next question is from Andy Kaplowitz with Citigroup. Your line is open.

Speaker 7

Hey, good morning, everyone. Welcome, Claudia.

Speaker 3

Thank you. Good morning, Andy.

Speaker 7

Bob, you mentioned 4 years of locked in funding for IJ and that you That funding from IIJ, IRA and the Chips Act to be a strong run rate by the end of the calendar year. Maybe you could give us a little color regarding what that could mean for PPS NSR. You're already growing NSR at 8%. So does it mean you could trend higher than that? And is there any risk that DC related budget noise can impact the infrastructure ramp up?

Speaker 3

Let me answer the last part first. I think that the infrastructure ramp up is pretty locked in with regards to IHA. And then the effects that the IRA and the CHIPS Act will be supplemental to that. My comment about the end of the year is that those 3 will be In real time. So we're feeling comfortable about that 4 year timeline.

Speaker 3

I think what's also important to understand is that when we The difference between the appropriation, the deployment of the funds and capital and then the duration of the projects, programs and engagements, That has a tail on it that's 6 to 7 years. And so you see Kevin talked about the backlog growth in revenue being kind of in that mid single digits, but the gross margin being in double digits on a constant currency basis. That's really a function of where we are in the phasing of that work. So comfortable on that front as far as could that mean incremental growth to what we've already projected in our out year plan. We're feeling strongly that it could really be a big part of the company.

Speaker 3

So we're optimistic.

Operator

The next question is from Jamie Cook with Credit Suisse. Your line is open.

Speaker 8

Hi. This is Chikusa Kotoku on for Jamie. Thanks for taking my question. So on CMS, I was wondering if you continue to expect low to mid 8% margins for the year. And is there any opportunity To look at divesting underperforming our non core businesses in CMS and focus more on higher margin businesses, in particular now with Claudia on board.

Speaker 8

Thank you.

Speaker 4

So look, I think the we are a proactive team that always evaluates what we believe is the right portfolio for our company, both now and into the future. We've proven that by the divestiture that we executed against in 2019, with the sale of our Energy Chemicals and Resources business, which one could argue was actually the legacy of the company. So we are always proactive in that consideration. So I'll leave it there. And so we can't really comment on anything other than, look, we always consider the opportunities.

Speaker 4

As it relates to CMS, we do believe that they are going to be able to get up into the 8% margins over the course of the year. So we see improving. They're at a point in time where some of the wins that they've had, which are a little bit higher margin, are yet to kind of get into the burn and we would expect that that will be happening over the course of the balance of the year.

Speaker 9

If I

Speaker 3

could add just one item to what Kevin said. Our when we talk about energy transition, Please keep in mind that that includes components of CMS that's around our nuclear newbuild and the AMR, SMR technologies that we have and we're seeing some real opportunities in growth in Europe that will be contributing to the margin profile that Kevin mentioned.

Speaker 4

And just to clarify as well, when we talk about the future, I think we're Approaching 8% for the year, which means because we've started at the level we are, we're going to have to be having in subsequent quarters margins that are going to be above 8%.

Operator

The next question is from Michael Feniger with Bank of America. Your line is open.

Speaker 5

Yes. Hi, everyone. Thank you for just taking my question. On the potential DC lockdown or just headlines around prolonged continuing resolution. Just maybe, Kevin, you can walk through I know we talked on IHA, but even on the CMS side, anything that we should be aware of that could lead to BB orders being pushed out, rebids being pushed out.

Speaker 5

Are you hearing any of that based on some of the headlines we're seeing down in DC? Thank you.

Speaker 3

Go ahead and then I'll back you up.

Speaker 4

So thanks, Michael. Look, I

Speaker 9

think the bottom line is we're we

Speaker 4

have an omnibus in place for 2023. Bottom line is we're we have an omnibus in place for 2023. So what we're really fundamentally talking about is a continuing resolution for 2024. Look, it remains to be seen how that plays out. Clearly, there's some differences of opinion in the house right now relative to where we may end up.

Speaker 4

I would say the good news is, Relative to this, if there is good news is that we're kind of based off a strong omnibus program in 2023. It could impact new items getting funded, but we're based on a 23 kind of level, which is pretty straightforward. As it relates to the disruption relative to the debt and whatnot, we think Our view is they'll come to some rational conclusion on that, but we'll see how that plays out.

Speaker 3

Yes. And right now, the programs, Michael, that we're looking at are not totally insulated, but We've got a strong view on those programs being funded here in the near term I'm sorry, awarded.

Operator

The next question is from Robert Connors with Stifel. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my question. Can you hear me? Yes. Yes.

Speaker 5

Okay. Well, first off, Bob, if I Remember correctly, I'm wishing your birds a good luck next weekend. And I guess for my question, you guys have a lot tailwind going into the back half, strong outlook on various end markets. Just Sort of wondering what your thinking was with around sort of maintaining the guidance, especially with currency sort of being a tailwind here?

Speaker 4

Well, there's a couple of things that are we have to recognize. Certainly, Exchange rates are positive, but also we have incremental interest costs that are largely offsetting that. So There's gives and takes here. I think given the dynamic of how we're playing out in D. C, I think we're being prudent relative to our guidance that we've provided.

Speaker 4

And look, there's gives and takes here. FX isn't the only one. I would say certainly interest is some headwinds that we're facing and then the business is kind of net off. And I think at the end of the day, we're, I think positioned for good results for the full year fiscal 2023.

Speaker 3

And then Robert, maybe I'll make a couple of comments on the markets. The reason why we highlighted those 4 sectors that we did is the tailwinds that we are seeing and it's materializing in The double digit pipeline growth, the backlog growth that we're seeing and our bookings performance, all leading indicators to strengthen those markets. The burn of those bookings is something we continue to monitor very closely, but the stage that we're coming in on those programs Are creating a higher level of utilization specifically in the U. S. For the Jacobs business.

Operator

The next question is from Louie DiPalma with William Blair. Your line is open.

Speaker 10

Good morning, Bob, Kevin, Claudia and John, and congrats to everyone on your promotions and new positions.

Speaker 3

Thank you, Louis.

Speaker 8

Thank you.

Speaker 10

As it relates to the exceptional strength for advanced facilities for this current fiscal 2023 on top of 2022. Kevin, I think you mentioned how it was difficult comps. And I was wondering, should investors expect a consistent long term upward trajectory for Advanced Facilities with all of the stimulus funding from the CHIPS Act or will it be lumpy in certain years as funding may be inconsistent?

Speaker 3

Yes, Louis, I think if you go back over a decade ago, that lumpiness was in The time between cycles, whether it be semi or in life sciences, was a lot longer. We're seeing those cycles contract. Look at the current semi cycle as well. And so we think that that long term growth aspect versus what we used to see a decade ago, We've demonstrated that we the diversity of our portfolio has been able to really sustain that. You mentioned 2022, it was also 2021 as well.

Speaker 3

So we're feeling really positive there. The other item I would highlight is that it's the reason What's driving these growth catalysts? The reason why we highlighted the supply chain disruption as well as technology advancements is that in the past, The lumpiness was driven by demand. And so capacity was almost exclusively tied to demand And then you could just map it via economic cycle. Today, that has completely changed and the drivers are more driven around technology advancements, reshaping of supply chains from the east to the west, as well as innovations that are happening in whether it be chip design or novel therapy.

Speaker 3

So the drivers Also give us that level of confidence too.

Operator

The next question is from Gautam Khanna with Cowen. Your line is open.

Speaker 9

Yes. Hey, I was wondering guys if

Speaker 2

you could talk a little bit

Speaker 9

about recompete besides the Kennedy contract over the next 18, 24 months. Do you have any big ones coming up? And then just related to the continuing resolution risk around the budget next year, are there any programs that We're counting new programs that were counting were when you're in your prior guidance, you were counting On growing, but that might not be able to grow in such an environment. Anything that we should be thinking about as a potential headwind in 2024? Thanks.

Speaker 3

Sure. Maybe I'll talk first on the recompetes. Outside of Kennedy, for the next 12 to 18 months, I think that was the timeline that you put it at, Nothing of that size. We have smaller recompetes that are probably a little less under the rate are a little bit more under the radar, But those are well within the normal cycle of our business. On the CR with new programs, Gautam, That's one where we continue to be very sensitive to that.

Speaker 3

From a recompete standpoint, those could end up being upside for us because we're on programs that are continuing to be determined. But I think the diversity of our portfolio has lessened the impact of What we saw historically was CRs. And so I think that's where I think it would not be wise of us predict the effect of CRs, but I think the diversity is where we see the hedge and we feel confident about our business.

Operator

The next question is from Josh Sullivan with The Benchmark Company. Your line is open.

Speaker 3

Hey, good morning.

Speaker 2

Good morning, Josh.

Speaker 9

Just to follow-up on that a little bit. As far as the NASA Kennedy rebid itself, Given so many changes in the space industry and emergence of a lot of commercial space interest, where is your confidence in retaining the work?

Speaker 3

Our confidence is solid. We as whether it be NASA or Other clients, even outside the aerospace world, we've grown with our clients. So The intimacy that we have with the science of our clients' business has allowed us to be their long term advocate and long term partner. So wherever the space industry goes, a movement to commercial, which we're involved with, or in Other areas of exploration, we've been a part of that journey and a valued partner. So we're feeling confident.

Operator

The next question is from Chad Dillard with AB Bernstein. Your line is open.

Speaker 9

Good morning, everyone. This is Brandon on for Chad.

Speaker 3

Good morning, Brandon. I wanted to

Speaker 9

follow-up on CMS margins. You said that we'd be ending the year above 8% to give the full year to 8%. But given the high margin projects you all have been talking about. Is it safe to assume that we can expect that exit rate to be the prevailing rate going forward? Could the margins even potentially approach people and places levels given all these projects?

Speaker 9

Thanks.

Speaker 4

Well, that would certainly be consistent with our strategy. I I would say the margin burn that I was referring to is second half oriented primarily. So as we look To beyond 2023, certainly consistent with our strategy, we are always looking for an incremental profit improvement in terms of margin. So So yes, that would be consistent with our execution strategy.

Operator

The next question is from Alex Dwyer with KeyBanc Capital Markets. Your line is open.

Speaker 11

Hi, guys. This is Alex on for Sean this morning. So my question, so the backlog was very strong quarter and it looks like all segments grew sequentially from 4Q. You guys had highlighted this gross margin in the backlog was up 100 basis points.

Speaker 9

Can you guys talk a

Speaker 11

little bit about what's driving this 100 basis point increase in margin? Is it 1 or 2 segments or is it more broad based in all the segments?

Speaker 3

I'd say it's broad based. This is again, when we keep reiterating moving up the value chain with our clients, This is these are higher level technically complex as well as digitally enabled offerings that we have now in the marketplace, which is driving that higher margin in our backlog. And so It's not acutely focused in a specific one area. It's across the board.

Operator

We have no further questions at this time. I'll turn it over to the presenters for any closing remarks.

Speaker 3

All right. Thank you, operator, and thank you everyone for joining our earnings call. Looking forward to future calls and providing further updates on upcoming events and on our further calls. So thank you very much and have a great week.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Jacobs Solutions Q1 2023
00:00 / 00:00