Jacobs Engineering Group Inc. (NYSE:J) Q1 2024 Earnings Call Transcript

Jacobs Engineering Group Inc. (NYSE:J) Q1 2024 Earnings Call Transcript February 6, 2024

J isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs Fiscal First Quarter 2024 Earnings Conference Call and Webcast. Today’s conference is being recorded. [Operator Instructions]. At this time, I’d like to turn the conference over to Jonathan Evans, VP of Corporate Development and Investor Relations. Please go ahead.

Jonathan Evans: Thank you, Audra. Good morning. Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we’ll reference during the call. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements, non-GAAP financial measures and operating metrics. We have also introduced a new supplement that consolidates certain information, including our non-GAAP financial tables. Additionally, beginning with this quarter, the company will no longer apply an adjustment to adjusted net earnings from continuing operations and adjusted EPS, which previously resulted in the application of the expected annual tax rate to all quarterly periods.

Prior comparable periods are also being presented on this basis. Turning to the agenda on Slide 3. Speaking on today’s call will be Jacobs’ CEO, Bob Pragada; and CFO, Claudia Jaramillo. Bob will begin by providing an overview of recent activities and summarizing highlights from our first quarter results. Claudia will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. With that, I’ll turn it over to CEO, Bob Pragada.

Robert Pragada: Thank you, Jonathan. Good day, everyone, and thank you for joining us to discuss our first quarter fiscal year 2024 business performance. We continue to prioritize simplifying our business model, optimizing our cost structure and accelerating profitable growth and margin expansion across our lines of business. Our team continues to demonstrate great resilience and dedication as we delivered better-than-expected underlying results in Q1, while also working to the added task of standing up 2 independent companies. At the corporate level, we are diligently working to create a leaner operating model that aligns Jacobs’ position as a global leader in delivering science-based digitally-enabled solutions to our clients.

And allowing us to benefit fully from the broad-based strength that we see in global infrastructure and sustainability investments. We are confident that our actions we are taking are providing the foundation for multiyear improvement in profitability and margins, and we look forward to sharing more detail in the quarters to come. Turning to Slide 4. I want to provide a brief update on a few key milestones related to the spin-off and merger of our Critical Mission Solutions in Cyber and Intelligence businesses with momentum. We continue to progress towards closing of the transaction in the second half of fiscal year 2024, consistent with our previous expectations. Together with momentum, we are making progress on preparing our Form 10 and private letter ruling request in keeping with the established time line of the transaction.

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Q&A Session

Additionally, we are progressing antitrust filings and regulatory approvals. Upon the public filing of the Form 10, we aim to offer more comprehensive information and look forward to introducing the combined leadership team to our investors and analysts later this spring. I would also likely — like to briefly touch on the cost optimization plan that we outlined last quarter. Our transformation to a less vulnerable and higher-value, higher-margin portfolio is well underway. We continue to find new ways to streamline our operating model. And while it is too early to positively revise our targets, we are increasingly confident in our ability to enhance our long-term profitability. As we progress towards separation and optimizing our corporate cost structure, we now are able to better align costs to the applicable business units.

As a result, we have made the decision to shift some corporate unallocated costs into the current P&PS segment, which will allow for greater long-term recovery of our corporate overhead. While this has the effect of temporarily weighing on our segment operating margins, this has no impact on our bottom line today. Rather, this will boost corporate profitability in the long run as we gradually recover cost from public sector clients. Providing upside beyond the initial 13.8% adjusted EBITDA margin target set for stand-alone Jacobs, post separation that we shared last quarter. This adds to our conviction that our transformation will drive multiyear value creation. Turning to Slide 5. In Q1, I’m pleased to report a strong first quarter revenue driven by 9.5% gross and 7.9% adjusted net revenue growth that is entirely organic.

Backlog increased 5% year-over-year, and gross margin in backlog improved 29 basis points year-over-year, boosting confidence that our businesses can continue their profitable growth trends. This quarter’s results include a onetime noncash $15 million inventory write-down. Excluding this item, adjusted operating profit would have increased versus the prior year period. We saw a continuation of strong organic growth in P&PS with 8.4% adjusted net revenue growth. We had a Q1 operating cash flow of $418 million, up 38% year-over-year. Strong cash conversion is a hallmark of our asset-light business model and remain robust in Q1 with $401 million in free cash flow, and we expect to generate greater than 100% adjusted free cash flow conversion in fiscal year 2024.

The ultimate measure of our ability to create value is long-term growth of free cash flow per share, and that will continue to be our North Star. Turning to Slide 6. Our People & Places line of business generated strong top line growth with adjusted net revenue up 8.4% year-over-year, marking the fifth consecutive quarter of greater than 6% organic growth. We continue to execute against our strategy of prioritizing profitable growth over absolute growth as demonstrated by gross profit and backlog increasing 7% year-over-year. Our pipeline remains robust, and we continue to expect P&PS organic growth of mid- to high-single digits in FY ’24. We anticipate full year P&PS adjusted operating margins to increase year-over-year, inclusive of the previously mentioned increase in allocation of overhead costs.

The water market remains to be a pacesetter within the company. In particular, water scarcity continues to trend across the globe, affecting billions of people. Decades of increasing population growth and agricultural demand have significantly depleted the quantity and quality of water resources. Jacobs is a leader in developing solutions to address water scarcity, including water reuse, groundwater management and desalinization. In the Americas, California and Colorado have recently adopted regulations for direct potable reuse. And Arizona is making positive strides towards adopting similar regulations. Notably, the world’s largest chipmaker, TSMC, is currently building a new semiconductor facility in Arizona. We’ve been selected for the first phase of the design and project delivery of the campus’ industrial reclaimed water plant.

In addition, multiple states in the U.S. are developing regional water supply plants to balance water availability and economic growth. As an example of such work, we were awarded a $191 million project in St. Johns County, Florida for the design and project delivery of a water reclamation facility. This facility will treat 3.25 million gallons of water daily for beneficial reuse with 13 miles of transitioning pipelines to deliver reclaimed water for residential irrigation. In transportation, we have a long-term relationship with Brightline West and have been awarded the design of the 218-mile high-speed rail linking Las Vegas to Southern California. Brightline West through a partnership with Nevada successfully secured $3 billion in grants from the Federal Railroad Administration as part of the IIJA funding.

In Life Sciences, we’re supporting Lilly, with permitting and conceptual design for their injectable manufacturing facility in Alzey, Germany, to support an increased demand for their medicines, including their diabetes and obesity portfolio. We continue to secure additional large engagements in the Middle East. For example, we’ve been appointed to provide preliminary and detail design and supervision services for utility and road infrastructure, including major road upgrades for Wadi Safar and Diriyah Gate 2 in Saudi Arabia. In CMS, we performed very well in Q1, continuing the profitability trend demonstrated in FY ’23. CMS’ Q1 revenue was up 5% over year and operating profit increased 14% behind 63 basis points of margin expansion. Its pipeline and growth outlook remains strong with major award prospects in FY ’24 and a light recompete schedule.