Jacobs Engineering Group Inc. (NYSE:J) Q4 2023 Earnings Call Transcript
Jacobs Engineering Group Inc. (NYSE:J) Q4 2023 Earnings Call Transcript November 21, 2023
Operator: Ladies and gentlemen, thank you for standing by. My name is Sheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs Fiscal Fourth Quarter 2023 Earnings Conference Call. 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. [Operator Instructions] Thank you. I would now like to turn the call over to Jonathan Evans, Vice President of Corporate Development, Investor Relations. Please go ahead.
Jonathan Evans: Thank you, 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. Our 10-K will be filed later today. I would like to refer you to slide two of the presentation material for information about our forward-looking statements and non-GAAP financial measures. Turning to the agenda on slide three. 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, then summarizing highlights from our fourth 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. Finally, Bob will provide details on our updated outlook along with closing remarks and then we'll open up the call for questions. With that, I'll turn it over to our CEO, Bob Pragada.
Bob Pragada: Thanks, Jonathan. Good day, everyone. Thank you for joining us to discuss our fourth quarter and fiscal 2023 business performance and 2024 outlook. Our team has shown remarkable strength, adaptability, and dedication and continuing to deliver outstanding results to our clients. I'm proud of our people for continuing to drive our culture of carrying to new heights. Over the past couple of quarters, we have shared our intention to simplify our business model, optimize our cost structure, and accelerate profitable growth and margin expansion. Today marks a key turning point as we boldly move forward. I want to provide an update on our previously announced intent to separate the CMS business on slide four before I move on to our fourth quarter results.
As we communicated, following a robust evaluation of all opportunities, we are excited to announce the creation of a new leading government services player. Jacobs will be separating our industry-leading Government Services businesses, Critical Mission Solutions, and the Cyber & Intelligence Unit of Divergent Solutions by the way of the spin-off to Jacobs' shareholders and then combining those assets with Amentum, through a merger which has been structured as a Reverse Morris Trust. This combination is intended to be largely tax-free for Jacobs shareholders. Turning to slide five. The combination creates a combined government technology services leader with an approximately $13 billion in revenue and approximately $1.1 billion of combined adjusted EBITDA, including $50 million to $70 million of net synergies expected to be realized by year two.
Jacobs shareholders will own 51%, and Jacobs will retain a stake equal to between 7.5% to 12% of the combined company based on achievement of operating profit targets prior to close. Jacobs will also receive a $1 billion cash dividend, subject to customary adjustments, as well as an additional value through the disposition of our retained stake within 12 months of closing. As part of our continued separation efforts, we concluded it was the best, it was best to include the majority of our Divergent Solutions business including the Cyber & Intelligence unit in the separation perimeter, owing to the strategic synergies, shared costs, and operational overlap with CMS. We will retain the infrastructure-related software assets of Divergent Solutions, given their strong strategic fit with our Critical Infrastructure, Advanced Facilities, and PA Consulting businesses.
We believe this combination of two premium industry leaders, who share strong operating platforms, high-performance culture, and a breadth of expertise offer shareholders the best opportunity to realize long-term value. The combined business has the ability to drive significant innovation and growth with meaningful cost synergies, added scale, and diverse end-market exposure, and is supported by secular growth trends. After a comprehensive review of all inbound inquiries, we believe the transaction is in the best interest of the company and our stakeholders. The transaction has been unanimously approved by the Jacobs Board, as well as the financial sponsors of Amentum and is not subject to any other shareholder approvals. The transaction is expected to close in the second-half of fiscal year 2024, subject to customary closing conditions and regulatory approval.
For more details regarding the structure of the deal, I invite you to review the materials we published earlier. Moving to slide six, which shows our multi-year transformation. As part of this strategic separation, which results in a more focused Jacobs, we are concurrently announcing a cost optimization plan to be executed over the next 24-months, during which time we will target over 300 basis points of margin expansion, as compared to our as reported fiscal year 2023 results driving an expected adjusted EBITDA margin of at least 13.8% in fiscal year 2025 for pro-forma Jacobs. Claudia will share more details in here prepared remarks. Post transaction, Jacobs will be a well-capitalized pure play critical infrastructure and sustainability leader with a strong balance sheet and significant growth potential.
Fiscal 2023 marked records for revenue and free cash flow generation for Jacobs, and we look forward to 2024 as we begin to chart our path forward as two leading independent companies. Turning to slide seven and Q4, I'm pleased to report another record quarter as measured by both revenue and operating profit. I would like to once again reiterate that this growth is entirely organic. Strong cash conversion remains a hallmark of our business model and remain robust in Q4 allowing us to drive record fiscal year 2023 free cash flow in order to return capital to shareholders, while investing behind our growth accelerators, Climate Response, Data Solutions, and Consulting & Advisory. We recorded a 104% underlying free cash flow conversion to adjusted net income in FY 2023 on a record year of $837 million in free cash flow generation.
We expect to generate greater than 100% underlying free cash flow conversion again in FY 2024, before the impact of restructuring transaction separation costs. Our underlying business and outlook remains very healthy and we continue to be excited about robust growth opportunities in all our end markets. Turning to slide eight, our People & Places line of business delivered accelerating top-line growth with adjusted net revenue up 11% year-over-year and adjusted operating profit up 12% year-over-year. Claudia will provide further details on the significant growth we're experiencing in our global business units. We continue to see widespread positive indicators with a gross profit in backlog growth of 8% year-over-year. Once again, our pipeline continues to grow faster than our top-line, which provides visibility and confidence, and our expectations that growth can persist at mid-to-high single-digits organically in FY '24.
Looking back at FY '23, I want to highlight the significant achievements of our P&PS business with double-digit organic OP growth in every quarter. Water continues to be a pillar of our business, of the top 30 wins in the quarter none were in the water sector. Of those wins, we wanted to highlight two that showcase our digital and data capabilities. Firstly, at the City of Farmington New Mexico wastewater and surface water treatment plant, our data-enabled product, AquaDNA is a key part of the solution to provide resiliency efforts and improve energy efficiency. Secondly, for Boston Water & Sewer Commission, we are leveraging our AI model that analyzes assets that are most likely to fail, helping our clients create data-driven maintenance and replacement plants.
In the Energy Transition space, Jacobs has been selected as the Program Manager for thyssenkrupp $2.5 billion effort to decarbonize its steel mill in Duisburg Germany, with a new green hydrogen power plant. The site is Europe's largest steel mill and the effort represents one of the largest industrial decarbonization projects worldwide. It is also a testament to the diversity of our expertise. In Transportation, our largest market, we continue to see broad-based momentum from IIJA related funding. Overall, IIJA related pipeline has increased approximately 20% year-over-year. In Q4, we were selected to lead and manage the 10-year renovation of the Seattle-Tacoma International Airport international terminal. Emphasizing upgrades enhanced mobility and energy efficiency to position Seattle as a global tourism and business hub.
Internationally, we continue to see high levels of activity in the Middle East. For example, in Climate Response, we are providing program management services to the Saudi Arabia National Center for Environmental Compliance. The work forms part of their ongoing environmental remediation program to repair damage to terrestrial and coastal environments. Our environmental expertise is truly global, and we continue to see a robust opportunity set related to our clients’ climate-related challenges. In CMS, we performed very well in Q4 to cap off a great year. CMS Q4 revenue was 7% higher year-over-year and operating profit increased 26% behind a 128 bps of margin expansion. Its pipeline and growth outlook remained robust with major award prospects in FY 2024 and minimal forecasted recompete pursuits.
CMS was awarded a new project management resources framework contract with EDF Nuclear generation, licensee of eight nuclear power stations, which account for approximately 16% of the U.K.'s electricity output. PA Consulting continues to post strong results with 13% revenue growth and nearly 21% operating profit margins, despite a very challenging macro environment. While we remain cognizant of the weakness that some consulting peers are seeing, we continue to be pleased with strong operational performance delivered by the PA team. Utilization has improved, and during Q4 PA announced the appointment of Christian Norris as its new CEO. Christian formerly led PA's Life Sciences unit as a respected leader both internally and externally and has creative idea to take the Jacobs partnership with PA to new heights.
For example, the power of our relationship is driving further opportunities as evidenced in our recent award to the Copenhagen Metro framework. Together with PA, we are bringing our enterprise digital tools, AI solutions, and deep knowledge of the rail sector to support the Copenhagen Metro as it continues to deliver modern future-ready infrastructure to meet the city's fast-growing population and urban travel demand. Our Divergent Solutions operating unit delivered a strong quarter with 3% adjusted net revenue growth and 58% year-over-year growth in operating profit. In Divergent, we are a leader in space innovation, with the introduction of Mango Two, a revolutionary radio-frequency signal detection system that utilizes cutting-edge AI and machine-learning analytics emphasizing affordability.
An example of the leading IP portfolio that reinforces independent CMS as a formidable player in this space arena. Turning to slide nine. In summary, we are extremely well-positioned for growth across all the sectors we serve, building off our established leadership position and proven track record of operational excellence. We are excited to turn the page on this next chapter in Jacobs' history, where we will be creating two leading independent companies. Looking at Slide 10, independent Jacobs is a leader in the majority of sectors in which we operate and a global leader in the overall industry. With today's announcement, we are enthusiastic about the opportunity to further simplify our business structure, optimize our cost base, and accelerate growth and margin improvement in the quarters and years ahead.
Now I'll turn the call over to Claudia to review our financial results in further detail.
Claudia Jaramillo: Thank you, Bob. Turning to slide 11 for a financial overview of our fourth quarter results. Fourth quarter gross revenue grew 10.5% year-over-year and adjusted net revenue grew 8.9%. GAAP operating profit was $278 million for the quarter and included $52 million of amortization from acquired intangibles, $43 million of other transaction separated-related and restructuring costs, and $11 million non-cash charge related to decreasing our real-estate footprint. The other transaction separation-related and restructuring cost of $43 million are primarily related to advisory and other costs associated with the separation of CMS. As we go forward, our costs will now include expenses to be incurred in connection with the separation.
Looking to fiscal year 2024, we expect to incur approximately $275 million in one-time costs related to the separation and associated cost optimization actions. These costs are largely unavoidable in a separation and transaction of this size, but I want to reiterate that post-separation, it will be a key focus of ours to minimize one-time adjustments inclusive of restructuring costs. Our adjusted operating margin was 11%, up 14 basis points year-over-year. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.25 per share, and included a $0.27 impact related to the amortization charge of acquired intangibles, $0.23 from transaction, restructuring, and other-related costs, a $0.05 non-cash impairment charge related to reducing our real-estate footprint, and a $0.10 adjustment to align to our annual adjusted effective tax rate.
I refer you to slide 30 for more details on these adjustments. Excluding these items, fourth-quarter adjusted EPS was $1.90, up 6% year-over-year. Q4 adjusted EBITDA was $384 million and was up 10% year-over-year, representing 11.1% of adjusted net revenue. The company's U.S. GAAP effective tax rate for continuing operations is 21% for the fiscal year 2023. Our U.S. GAAP and adjusted effective tax rate for the quarter and year include certain tax charges for deferred tax valuation allowances and audit assessments. In the fourth quarter, this amounts to an EPS impact of $0.06 per share, and as a result, fiscal year 2023 adjusted earnings per share from continuing operations reflects a 21.6% adjusted effective tax rate. Finally, backlog was up 4% year-over-year.
The revenue book-to-bill ratio was just over 1 times with our gross profit and backlog increasing 8% year-over-year. Moving to slide 12 for a brief recap of our full-year 2023 performance. Fiscal year gross revenue grew 10% year-over-year and net revenue grew 7%. GAAP operating profit was $1.1 billion up significantly year-over-year, driven primarily by strong growth in gross profit while holding G&A relatively flat. GAAP EPS was $5.31 and adjusted EPS was $7.20, up 7% and 4% year-over-year, respectively. Adjusted operating profit grew 9%, and was up 11% on a constant-currency basis. Both revenue and adjusted operating profit increased year-over-year in all of our business segments. Operating profit margins expanded 20 basis points to 10.8%, driven by strong underlying performance.
Adjusted EBITDA was $1.44 billion, up 5% and up 7% in constant currency. As a percentage of adjusted net revenue, adjusted EBITDA was 10.8%. We expect modest adjusted operating margin expansion in fiscal 2024, driven by a combination of a higher-margin revenue mix and lower corporate G&A. However, we expect an even greater uplift in margins post-separation as we streamline our operating model and cost structure. On a trailing 12-month basis, fiscal year 2023 book-to-bill was approximately 1.1 times. Regarding the performance of our lines of business let's turn to slide 13 for Q4 performance and 14 for full-year performance. Starting with People & Places Solutions. P&PS continues to see solid momentum, delivering strong revenue and operating profit results.
Q4 adjusted net revenue was up 11% year-over-year. Growth was consistently strong across all business units. Europe rebounded positively after being our weakest region year-to-date and we saw continued strength in the Middle East, Americas, and Asia-Pacific. Backlog was relatively flat sequentially, although gross margin and backlog was up 8% year-over-year as we continue to focus on improving business quality. P&PS Q4 operating profit was up 12% driven by strong growth, maintaining healthy gross margins and solid G&A management resulted in an adjusted operating margin of 15%, up 16 basis points year-over-year. For the full-year, adjusted operating profit was up 16% and adjusted operating margins were 14.6%, up 100 basis points year-over-year.
Our P&PS Americas unit, which is our largest by revenue benefited from legislative drivers and a healthy state and local budgets continuing to book client spending. Internationally, Asia-Pacific and the Middle East continued to be bright spots in the portfolio, supported by Giga Cities and strategic water pursuits. Additionally, our European business showed a positive sequential growth. Now moving to Critical Mission Solutions. Q4 revenue was up 7% year-over-year and backlog is up 8% year-over-year and the business continues to demonstrate a strong win rate against a very healthy pipeline in all of its core focus areas. CMS operating margins were up 128 basis points year-over-year. For the full-year, margins were roughly flat, while operating profit increased 6% year-over-year.
Notably, margins continued to rebound throughout the year as forecasted. Moving to Divergent Solutions, adjusted net revenue increased 3% year-over-year in Q4, as we remain focused on portfolio improvement. We expect growth to accelerate from year-end levels as investments mature and lower-margin contracts roll out of backlog. Operating margins for the quarter was up 10.1% -- was 10.1%, a 50 basis point sequential improvement. Turning to PA Consulting. Revenue from PA was up 13% year-over-year in Q4 and increased 4% year-over-year in fiscal year 2023. Based on booking trends, we expect revenue growth to show a positive trend in fiscal year 2024 while remaining cautious of the macro risk as the U.K. goes through an election cycle. PA's Q4 operating profit was 20.6%, up 122 basis points year-over-year and up 21% year-over-year.
Utilization continues to improve, and we expect operating margins to be over 20% for the medium term. Our adjusted unallocated corporate costs were $60 million in Q4, roughly flat sequentially and consistent with our guidance. In conjunction with the CMS separation, we have initiated a comprehensive evaluation of our cost structure under a more streamlined business model. However, despite initial cost actions taken, we will carry temporary costs associated with supporting the entirety of Jacobs, including the businesses to be separated. We estimate that we are carrying approximately $40 million in temporary cost throughout this transition period. This allows us the opportunity to reinforce our commitment to our clients and enhanced business resilience.
We are confident that these efforts will contribute to a stronger foundation and continued excellence in serving our clients as two leading independent companies. Turning to slide 15 to discuss our balance sheet and cash flow. We posted a very strong quarter of cash flow generation, which is indicative of the quality of our earnings. Operating cash flow was $219 million and free cash flow was $180 million. As a result, we were able to deliver above our anticipated 100% reported and adjusted cash flow conversion targets for the year with 104% underlying cash conversion. During fiscal year 2023, we returned 50% of our free cash flow to shareholders for a total of $480 million through both share repurchases and dividends. Though we were unable to repurchase shares in the quarter due to the CMS separation, we utilize cash flow to strategically pay down floating rate debt, ensuring a more robust financial position for the future.
This disciplined approach aligns with our commitment to long-term financial stability and value creation for our shareholders. We ended the quarter with cash of $927 million and gross debt of $2.9 billion, resulting in just over $1.9 billion of net debt. Our Q4 net debt to 2023 adjusted EBITDA of approximately 1.4 times remains a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment grade credit profile, both today and as a more focused business, post our announced CMS separation. In August, we completed the offering of $600 million in senior unsecured notes due 2028 with a fixed rate of 6.35%. This allowed us to repay a portion of the amounts outstanding under our revolving credit facility.
As of the end of Q4, approximately 35% of our debt is tied to floating rates and our weighted average interest rate was approximately 5%. We intend to opportunistically retire floating rate debt in the coming quarters. For your benefit, in the appendix of the presentation, we have included additional detail on our debt and quarterly interest expense. Given our strong balance sheet and free cash flow, we remain committed to returning cash to shareholders. On November 9, we paid a $0.26 dividend, representing a 13% year-over-year increase. Finally, I wanted to highlight our cost optimization plan shared on slide 16. We recognize that our cost structure is high. And we see opportunities to optimize in the coming quarters and post CMS separation.
We have identified over $90 million in run rate savings, including lower corporate and allocated costs to the specific measures that we are starting to action. We expect to reduce our corporate unallocated costs from around $60 million per quarter to approximately $50 million per quarter, including full elimination of stranded costs post separation. We are streamlining our operating model with an eye towards positioning us for growth and cost efficiency, while staying focused on our clients. While we will not yet comment on long-term growth and margin expectations beyond our 2025 strategic plan, we believe we can deliver over 300 basis points of adjusted EBITDA margin expansion from fiscal 2023 as reported margins to fiscal 2025 for standalone Jacobs.
This results in an expected adjusted EBITDA margins for standalone Jacobs of at least 13.8% in fiscal year 2025. This is a bold undertaken as it is our longer-term aspiration to deliver best-in-class industry margins. In closing, Bob and I are committed to 3 things over the next few quarters. First, driving efficiencies in our business and maximizing our profitability as demonstrated by the margin targets. Second, position in our business with the financial resources needed for multiyear free cash flow growth. Third, strengthening discipline and deploying our shareholder capital. Thank you. And I will turn the call over to Bob.
Bob Pragada: Thank you, Claudia. Turning to slide 16. As we discussed throughout our remarks, we remain committed to accelerating robust growth opportunities ahead for all businesses. Given today's global macro uncertainty, that strength is more relevant than ever as we plan for the future as two independent companies. It's crucial to emphasize that the underlying fundamentals of our business have never been stronger. Turning to fiscal year ‘24 outlook. We expect adjusted EBITDA of $1.53 billion to $1.6 billion with an adjusted EPS of $7.70 to $8.20, representing a 9% and 10% and growth at the midpoint, respectively. This outlook incorporates the full-year contributions of the businesses to be separate. We expect a fiscal year ‘24 effective tax rate of 22%.
As Claudia previously mentioned, we will carry temporarily elevated overhead costs needed to support CMS during the separation, including IT and corporate support. This, coupled with a historical seasonality, will have an approximately 10% negative effect year-over-year on adjusted EPS in Q1. We believe these costs are necessary to continue to support our clients as we progress through this transition period. This temporary cost is non-recurring and shall not be viewed as a reflection of a stand-alone company earnings power. We are well positioned to accelerate profitable growth in the years to come as we seek to compound per share value for our shareholders. We continue to be energized and excited about the future for Jacobs and CMS, and remain confident in our plan for long-term value creation.
Operator, we will now turn the call over for questions.
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