Jacobs Solutions Inc. (NYSE:J) Q1 2023 Earnings Call Transcript February 7, 2023
Operator: Good 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 2023 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 . Jonathan Doros, Investor Relations, you may begin.
Jonathan Doros: Thank you. Good morning to all. Our earnings announcement and 10-Q were filed this morning, and we have posted a copy of the slide presentation on our Web site, 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. Turning to the agenda. Speaking on today’s call will be Jacobs’ CEO, Bob Pragada; and Chief Financial Officer, Kevin Berryman. We are also joined today by our incoming CFO, Claudia Jaramillo. Bob will begin by summarizing highlights from our first quarter 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, Bob will provide details on our updated outlook along with closing remarks, and then we’ll open up the call for your questions. 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 Bob Borgata, CEO.
Bob Pragada: Thank you, John. Good day, everyone. Thank you for joining us today to discuss our first quarter 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. I’m excited to now lead Jacobs as CEO. Over the last several years, we have repositioned the company through a purposeful strategy of transforming our portfolio and 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 three key priorities, first, we will maintain our inclusive and inspirational culture that fosters the creativity needed to live by our mission, challenges today reinventing tomorrow.
Second, we will focus on driving a higher structural growth rate across our core sectors by executing against the three 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 mega trends and structural tailwinds, our relentless focus on long term client relationships is driving sustained growth. Third, 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 & 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.
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. The number of recent wins underscores our strategy and demonstrates our move of the value chain with our clients to higher margin consulting and advisory services. 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 typically complex challenges. I will talk to these key themes further in the presentation. Turning to Slide 5. 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. We lead, embrace and anticipate change. To further demonstrate our commitment to inclusion and diversity, we have included a KPI in 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. Over the past five years, we have advanced to an industry leading status.
This culminated in our inclusion into 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 4 key growth sectors of critical infrastructure, energy and environment, advanced facilities and national security. These growth sectors are 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 in advanced facilities and the emergence of increased global threats.
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 billion in IIJA competitive grants since its patent, and the bill is only in its early stages. We supported our clients in securing over $350 million in IIJA 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 first phase award of one of the largest water treatment plants in the US and the design of a sustainable battery recycling facility. With another four years of locked in and robust funding the US infrastructure climate is strong.
The coming months will also bring the first dollars of two other areas of focus for Jacobs. The inflation Reduction Act with $369 billion to fund the Green Economy transition and the CHIPS Act for semiconductor investment, all in core Jacob 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 four or five 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 decarbonization efforts.
Turning to Slide 8. 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 US and Europe for a global chip manufacturer. In the biotechnology sector, we have won multiple expansions in the US, 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 manufacturing and charging infrastructure in the US and Europe. Within National Security, we are seeing increased defense spending in the US, UK and Australia due to continued global threat.
As highlighted as a future prospect last quarter, in the US, we were successful in winning a critical Cyber Intelligence Award for $469 million, five year contract for a classified defense customer to provide secure data and network solutions globally. In the UK, PA is leading the consortium that has been selected by the MoD to deliver Crenic, a future force protection electronic countermeasures program. It will provide the next generation of innovative solutions to counter the threat posed by radio controlled and provides explosive devices, otherwise known as IEDs. And in Australia, we are supporting the acquisition and sustainment of military platforms for the Australian Defense Department, which has engaged Jacobs with increasing volumes of work.
Now I’ll turn the call over to Kevin to review our financial results in further detail.
Kevin Berryman: Thank you, Bob. Let’s turn to Slide 9 for a financial overview of our first quarter results. First quarter gross revenue grew 12% year-over-year and net revenue grew 8%. Net revenue grew 12% year-over-year on a 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 fourth quarter, but as expected, was down approximately 130 basis points year-over-year, primarily driven by: one, the remaining year-over-year impact of the Idaho remediation contract; and two, lower utilization and NPA consulting. I will provide additional comments regarding our segments later in my remarks.
Both People & 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&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 cost. During the remainder of the fiscal year, we plan to make additional investments in employee welfare programs such as higher 401(k) match and improved medical benefits as part of our continued investment in improving our culture and employee engagement.
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These costs are factored into our full year outlook. As a result, we are still targeting G&A as a percentage of net revenue to stay below 16% for the full fiscal year 2023. GAAP operating profit was $238 million for the quarter and included $50 million of amortization from acquired intangibles, a $28 million noncash 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 million. 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 PA noncash contingent equity based agreements associated with our PA transaction structure.
Adjusted operating profit was $332 million, 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 million of restructuring charges for the full year fiscal year 2023. We also expect another $30 million in noncash real estate impairment charges over the course of Q2 and Q3 as we further execute our future work strategy. Finally, we expect approximately $20 million 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 noncash 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 noncash 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. Excluding these items, first quarter adjusted EPS was $1.67, up 7% year-over-year. Q1 adjusted EBITDA was $339 million and was up 9% year-over-year, representing 10.8% 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 in 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 NASA rebid as the project’s backlog continues to fall until which time the rebid is awarded. 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 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 & Places Solutions business led the way. So let’s start with them. Overall, People & Places delivered strong revenue and operating profit results driven by an 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. Total People & 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 & Places operating profit and margin, resulting in strong double digit growth in 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 two thirds of our People & Places business. 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. Our international business will continue to be materially impacted by FX during Q2 and 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 multiyear contracts that require limited overhead support. The business is aligned to national security, space exploration and energy transition priorities mainly in the US, Europe and Australia as well as infrastructure monetization solutions such as US 5G 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 just over 1 times and continues to be impacted by the approaching NASA Kennedy rebid, which we expect to be awarded soon.
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. CMS operating profit was $82 million, down 10% year-over-year and down 6% on a constant currency basis. Operating profit margin was in line with expectations and 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 2023 with the ability to expand margins as we can 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.
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 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 enabled offerings in our core markets. We expect Divergent to finish fiscal 2023 with margins approaching double digits. Turning to PA Consulting. The translation impact from a stronger US 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 US dollars but up over 11% in British pounds. PA had a solid book-to-bill of over 1 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 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. 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 nonallocated corporate costs were $40 million, down year-over-year as we made a strategic decision to move to a more flexible paid time off program in the US and invest further enhanced employee welfare plans, including improved medical, 401(k) 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 that our corporate costs for the year will increase to our previous estimate of $190 million to $210 million. And 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.
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 million and included an outflow of $60 million for payment of the CARES Act deferral benefit of payroll taxes and $6 million 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 million. In the second quarter, we expect free cash flow to approximate the 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.
Regarding the deployment of our free cash flow, we repurchased approximately $140 million of share during the quarter. As we previously have discussed — as we previously announced, the Board of Directors has also approved a new three year $1 billion 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 $1.2 billion and a gross debt of $3.5 billion, resulting in $2.3 billion 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. 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 million notional interest rate lock of 2.7%. As of the first quarter, 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. 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 24th. Now I’ll turn the call back over to Bob.
Bob Pragada: 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 $1.4 billion to $1.48 billion 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. 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 a 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.
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