Hey, good morning, everyone. I'm Brian Gesuale, Senior Analyst at Raymond James. Delighted to have Jacobs here to present their story. Joining me is the company's Chief Executive Officer, Bob Pragada, as well as Jonathan Evans, who's the Vice President of Investor Relations and Corporate Development. Timing's great to hear this story today. We're gonna do a fireside chat format. Bob's gonna talk about the announced spin that is upcoming here in the second half of the year, as well as take you through the pieces of the business and the growth drivers of the company. Bob, Jonathan, thanks for joining us.
Thanks for having us, Brian.
Let's just jump right into this. It's really been a busy 14 months for you, since you took the reins as CEO. Last May, you announced the intention to spin or sell the CMS unit. Then in November, you agreed to terms with Amentum. Catch everyone up here on the transaction terms, the ownership and governance structure, and really the rationale for separating the businesses.
Sure. Brian, is it okay if I don't take them in necessarily that order?
Feel free.
Got it.
I'll give you creative.
Got it. Well, first of all, thanks. Didn't expect there'd be a packed house, so great to see everybody. Yeah, so last May, we, we actually announced the separation and spin as an independent company, our, what we call our Critical Mission Solutions business. It's effectively our government services business in the aerospace and defense world. Think technical, scientific services for large government agencies, multiple DoD, as well as the Department of Energy and space agencies, predominantly NASA, as well as foreign space agencies as well. It's about a $4.5 billion-$5 billion business, represents about one-third of the company.
Great company, or great business, but you know, as we were growing in our infrastructure and advanced facilities business, it's pretty clear that from a prioritization and capital allocation perspective, you know, we were starting to see some lack of a better word, conflict in how we were allocating capital, as well as management attention and the type of corporate structure that we needed to have to manage two disparate businesses. So we announced the separation and spin with the intent of being an independent company, and that was in May. What we sort of anticipated, but then really came through over the course of the summer, we ended up getting outside interest.
Outside interest in the form of strategics as well as private equity, and also an offer to potentially merge the business. So we evaluated each of those over the course of the summer, and saw a real, a great opportunity to merge in a tax-free format with Amentum, which was a company that was previously a carve-out of AECOM and then acquired a few entities, growing in the government services space and also transforming its portfolio into the higher end, intelligence and national security elements of government services. And so after evaluation of all of those options, saw it was best for our clients, our employees, and our shareholders to go into a merger arrangement. The negotiation also entailed... I'll talk a little bit about the commercials, and then maybe governance.
Perfect.
It was pretty attractive. Amentum did have, in a private equity kind of format, they're larger than, they're twice the size of our CMS business, had a bit of leverage. This was a great opportunity for them to de-leverage as they continued to transform the portfolio. And from a CMS perspective, the opportunity was a pure play government services, service only. So this is a company that's not gonna have products. And so being technology agnostic in the missions that we serve in that space was a great opportunity, and now to be one of the largest in the government services sector was point number one. So great opportunity for our clients, as well as great opportunity for our employees.
From a shareholder perspective, we negotiated roughly a $1 billion dividend as a result of the RMT, and also an 8%-12% retained stake. I'll come back to that in a second.
Yes.
That would be not our shareholders, but the company, Jacobs, would need to liquidate that retained stake within 12 months for IRS and tax purposes. Over the course of our IRS filings, that has, and there's an 8-K on this, I think, the week before last-
That's right.
We ended up modifying that a bit, Brian.
Yeah. I saw that.
Where, that retained stake is gonna be capped for, for ourselves, for the company at 8%, and then based on the incentives that we have in place, we can go up to 12%. That additional 4%, will go to our shareholders. So at the end, our shareholders will, will have, potentially 55% ownership in the new company. And, and then we'll, we'll have 8, with that having a 12-month timeline on it. The other element of the negotiation was, was the governance. We really wanted to see this as a merger of equals. So, we were able to negotiate a 50/50 board structure, as well as of the, of the three management positions, the Executive Chair, CEO, and COO.
Our current Executive Chair, Steve Demetriou, will be going to the new company as the Executive Chair of the new company. The CEO of Amentum will be the CEO, and then the president of our CMS business, Steve Arnette, will be the COO, responsible for all of the business units, as well as growth and sales, for the new entity. So a real balanced, a real balanced approach to governance.
That's great. Maybe just a quick follow-up: Why was Amentum the ideal partner for you as you, as you sought out and went through the details of this transaction?
Yeah. I think when we evaluated, number one, from a financial standpoint, it clearly represented the best for our shareholders. There were sale options, and we have been public about that, but if you consider the tax implications-
Mm-hmm
Of those sale options, it would not have been most beneficial for our shareholders. And then from our, from a client and from a, an employee perspective, it did represent. I mean, I think there's, there's a lot of views on what Amentum is and what it's not, and we, we, we actually had those views. In fact, Jonathan was the one that did the reverse due diligence. And as, you know, as, as competitors and competitors, you know, you form your own views. We started to do the reverse due diligence and saw, wow, this is a company that's got some great, great growth prospects. I don't know, Jonathan, if you wanna mention?
Yeah, I would add to that. I think it expands the scope of capabilities and the breadth of capabilities, really widening the aperture of what we can bring to the customer. At the same time, it's a business that has very little overlap with CMS and our cyber intelligence business. As we looked at both companies' pipelines of opportunities, tens of billions of dollars of potential contract awards, there was less than 5% overlap in those pipelines. So really, a nice synergistic merger, where a lot of, you know, mergers in that space have gone wrong because of dis synergies and diseconomies of scale. We think that there won't be that sort of day-one dis synergy here.
Great! Let's move on now to Jacobs RemainCo, really, and focus much of the rest on that. Talk about maybe the scope of that business in terms of revenue, what the profit margins look like, but also maybe help investors understand the mix of sales by line of business, geography. Talk about how much of your portfolio is into decarbonization or other environmental elements, and maybe, you know, a government kind of commercial split as you think about what you have left.
Sure. So, Brian, you might have to remind me of all the subcomponents of that question.
Me either.
But, but let me give it a shot. So, so the independent Jacobs now will be roughly about an $11 billion business, but over 50,000 employees around the world, 40 different, 40 different countries, and I'll come back to that in a second. But acutely focused on the largest global disruptors that are happening today. And, and when I talk about that, think predominantly all that is the result of, of climate and climate response, as well as what's happening in the world of, of the supply chain kind of realignment, and more specifically around, life sciences and semiconductor manufacturing.
So the business, just at a high level, is focused in on the infrastructure and markets, think transportation and the multimodal component of that, the advance within infrastructure, the water sector growing at a rate that we haven't seen historically, and then the environmental sector. And so all of that encompasses our infrastructure component of the business. And then advanced facilities, which is, you know, Dr. Jacobs started his career 75 years, sev-- oh, 80 years ago, as a employee of Merck. And so the life sciences and the semiconductor clean manufacturing world, we've been a part of that for decades and been an industry leader there. So businesses that are experiencing some generational growth, what does Jacobs do in those, in that space?
You know, deep, deep engineering, domain knowledge of our client's business and taken that engineering, expertise and really gone up the value chain, with regards to higher-end consultancy, science-based consultancy for our clients. So, that's everything from state and local transportation agencies, national as well as, local water agencies, in the environmental sector at the federal level, as well as environmental's kind of ubiquitous talent that we have that spreads across everything that we do.
And then, in the advanced facilities world, these are private sector clients, specifically in the life sciences world, the Tier One clients, Merck, Lilly, Pfizer, and in the biotech world, Novo Nordisk and, and I guess Lilly also is considered a biotech company now too, in the likes of, of Roche and, Genentech, Roche, Genentech, and, and Amgen. In the semiconductor space, it's all the big, the big logic as well as memory, players, Intel and, and Samsung, TSMC, as well as in the memory space, Micron.
And so as either capacity is needed to be expanded or new therapies are coming to market and need to be at commercial scale, Jacobs will go in those sectors, and do the early conceptual design of the facility and then work that all the way through the commissioning and validation in the life sciences part, or the commissioning and first wafer out, in the semiconductor space. And the split of infrastructure versus advanced facilities is probably 60-40, 60-70% in the infrastructure space and 30-35% in the advanced facility space.
Fantastic. And maybe just a geographic mix-
Yeah
... if you kind of think about it.
That, that's actually an exciting piece. So right now, either, it, the, the U.S./outside the U.S. split by revenue is about 65/35. And that 65 for U.S. is either U.S. clients doing work on U.S. soil or U.S. clients doing work outside the U.S. That's how we kinda track, that revenue, and then 35% outside, the U.S. The bigger, geographies outside the U.S.: UK, Middle East, India, Southeast Asia, and Australia, New Zealand.... Interesting dynamic that, that's forming, and after the separation of our government services business, this will get further accentuated. Of that split, 65, 35, our headcount actually goes the other way.
So about 55% of our people are outside the US, 45% in the US, and now, with really optimizing global talent, we're able to take global talent from wherever it sits and bring teams together to deploy solutions locally. And so every single one of our teams looks like, you know, literally looks like the United Nations, which is great.
That sounds fantastic. You're number one or two in just about every major market you serve, from water to design firms, semis, data center, solar, transportation. You kind of run the gamut there. But I wanna double-click on the mix of business by those vertical markets. I think you have a $2 billion or a little bit bigger water business. When we think of your portfolio across some of these big water, transport, and some of these other markets, how do you kind of segment those?
Yeah. And maybe, maybe I'll go by net revenue.
Perfect
Because in the advanced facilities space, we do have some pass-throughs as well. So about $2 billion of our global business is in water, $3.5-$4 billion in transportation, Jonathan?
$3 billion in transportation.
Yeah, over 3 in transportation. And then our cities and places business-
Yeah
... which is kind of our, institutional facilities, giga cities that are showing up all over.
Yeah.
Kind of think buildings, as well as the support infrastructure around buildings. That's the other $2 billion as well.
Great. It also seems that many of these businesses benefit from regulatory tailwinds, whether IIJA-
I left out the biggest piece. Another $2 billion in advanced facilities. That math doesn't work, right? Yeah.
I was thinking things weren't quite adding up.
Yeah, yeah, yeah.
Um,
Need more coffee.
Let's go back to where I was starting to go with regulatory tailwinds. It seems your business would be prone to benefit from many of those, whether this is IIJA, CHIPS Act, PFAS legislation, and more. Would you maybe frame some of the bigger regulatory tailwinds from one being modest to five being gusty, and explain what timeframes they have, will, or could benefit your portfolio?
Yeah, so maybe I'll go through the three big ones, and then maybe there's a fourth. It's not necessarily a legislative act, but it's probably more of a regulatory shift.
Mm-hmm.
So the three big ones are IIJA, and to a certain extent, IRA. I'm kind of clumping that into the same category.
Sure.
The EU CHIPS Act, and then the US CHIPS Act. So probably the most robust is IIJA. A lot of narrative that you probably heard about IIJA, you know, we would characterize it this way: the profile of the bill and the profile of where the bill is going to be spent is still very much intact. The timing by which either the grant money or the uptick on the formulaic money, that has probably, you know, taken longer than we expected. From a statistical standpoint, it's a five-year bill that was approved in the fall of 2021. You know, where we are today, three years into it, we're about 50-ish% appropriated, 25% spent. So you can kind of see that that's got a tail on it.
And there's a whole slew of reasons, continuing resolutions that happened in 2021- 2022. 2021 then continued resolutions back to a 2021, government year that has CARES Act money and all kinds of other things in it. So fundamentally, it really didn't get started getting out to the states until 2023 and now. And we're seeing those in some of the larger programs, and at the end of the quarter, Brian, you'll see some big announcements that are coming out from us, that we're really excited about. The second around the, I'll stay in the US, US CHIPS Act. Again, a lot of narrative, and keep in mind, some of this was directly funded, other was subsidy-based. So you build the plant, you know, and it's operating, and then you receive the tax subsidies that are affiliated with it.
Companies, whether it be Korean companies or Taiwanese companies, as well as the American companies, started those facilities, and we've been involved with all of them. That's probably 50%, not even 50. It's not—it's... As far as targeted, it's probably 50%. As far as spent, it's not even 1%.
Wow!
You know, it's— there's a lot more to go there. And then, what doesn't get hit the news that much is the EU CHIPS Act, and so facilities around the Germany area, Italy, and a few other areas are also coming about. So those would be the three. The rating on the second one, the CHIPS Act, I'd probably say 2-3-
Okay
only just because of timing. And then on EU, same kind of 3. So 5 IIJA, 3 on the others, we're bullish. The one that is not a legislative act is what's happening right now with regards to the FDA and the EU around regulation on drug approvals, and that has-- we've seen that started to kind of open up a little bit. It started during the pandemic, when we had to get, you know, interim approvals for vaccines, but that's also affecting the industry and in a positive way and accelerating some jobs.
Let's, let's maybe pivot now away from government and, think about PA Consulting. That's one of the only businesses really that's been impacted by the macro over the last couple of years. Can you talk about some of the actions you've taken with that unit, what you're seeing from a demand perspective, and discuss maybe the timeline for that business to reach back to its optimal model?
Sure. So, maybe just for those in the audience that don't know about PA. So PA Consulting is a high-end, science-based consulting organization that takes kind of a different approach to business transformation for their clients, as compared to maybe a McKinsey or a Bain. First, it's science-based. The end markets that PA sits in are the same end markets as Jacobs. So all those end markets that we just talked about, PA is in those markets as well, and they use digital consulting from a science-based standpoint and product innovation to drive transformation for a client. Rather, as compared to maybe a McKinsey or a Bain model, where you come in with a playbook on different elements of the business. They use that as a catalyst going in.
But a billion-dollar business, 20%+ operating profit margins, we're a 65% owner. So just to level set on PA. It is 80% based in the UK and had a growing position in the US as well as Scandinavia. Those are probably the three main geographies, and it has been hit, say, kind of early 2023 by the UK macro that has come about. So kind of flattish on the top line this year, after we made the investment in March of 2021, and in the first two years, it grew 20%+, compounded for the first two years.
It came down to 10% and is now kind of flattish as the UK kind of goes through some, you know, some reinvention of government almost there, and we're coming back. Margins have stayed pretty wide.
Pretty good.
And what's exciting right now with what we're seeing with PA, so we're taking actions. We took actions to continue with utilization. Some investments that we had made with regards to maybe hiring forward on some consultants, we've pulled those back, leaned out the corporate structure a bit. So that utilization is still relatively high, positioned well for growth, the pipeline continues to be strong, and sales performance has been good. So we're monitoring the cost and planning forward. The great news about PA right now is part of the investment model was the collaboration with Jacobs, and being able to go kind of from the beginning of inception of how is deployment of capital gonna transform our client's business, PA would get involved.
And then as that started to actualize in some form of deployment of that capital on a project or an engagement or an initiative, Jacobs would get involved. That collaboration, early days, was tough when PA was red-hot. You're also gonna see some big wins coming out this quarter on that PA collaboration, so we're bullish.
Sounds great. Let's talk about... I want to talk a little bit about margins. It's. You don't have to go too far back to see Jacobs as a kind of mid- to high single-digit kind of margin story. You've transformed the business nicely into low teens, high 12%, call it. You've got plans now for a post-spin to take those margins even higher. Can you talk about how you get the next 300 basis points, some of the low-hanging fruit?
Sure.
Some of the other stuff that you'll shake the tree on.
Yeah. So, Brian, maybe just to calibrate kind of the last eight years, we were probably a 5%-6% EBITDA business in 2015. And with the moves that we made, investment in infrastructure, divestiture of our oil and gas business, got that up to mid-tens, so 10.5, 10.6. Post-spin, we'll move into the as a starting point, 13.8% EBITDA margins, with a roadmap that takes us into, probably not allowed to say the number, but, you know, kind of more Accenture-like or EBITDA margins. Moving forward, we've got a line of sight to that, and really, that comes from the profile of our—50% of our business.
50% of our standalone business is gonna be in higher-end consultancy and 50% in mission-critical engineering work for the clients that I mentioned before. And so there's a mix element. There's also, what we're getting some really nice traction around, is the digital enablement. So we're able to take some, you know, some higher-end software platforms, haven't said the two letters yet, and I'll get to that in a second. Some higher-end software platforms and take things like, you know, what technology can do around mobility analytics, and use of that in transportation networks. You know, and what goes on with water treatment plants and the data that comes off of what's needed to optimize water, as well as digital replication in the tech manufacturing world with regards to how these systems and-
Mm
... and layouts come together and enhance margins.
Okay.
So, you know, when you think about $13.8+, part of that continues to be cost optimization, leaner corporate structure. Then we've got the, you know, what's happening with digital enablement. We also are doing a lot around AI, right now, too. And that's with, you know, AI with our own large language model. Because you think about what we've been doing for 75+ years, you know, we have been in the middle of designing and program managing some of the most complex facilities in the world. So all of that data we have, and it is at the codes and standards of the world. And so, you know, we're creating that model. We're being very careful about how we do that because we don't want...
Help me again, Jonathan, what's it called when the model goes outside the model? Hallucinations.
Hallucinations.
Hallucinations.
Yeah.
We don't want hallucinations and, you know, bridges going, being designed off of, you know, stuff that's not real. So-
That would be bad.
Generative, generative, yeah, generative design is kind of the next phase of where we go with that.
You've been very clear and one of the early adopters using, I think, Palantir's Foundry-
Yep
... in your water business, and you've talked about implementing that further throughout the organization. Is that something you're able to use internally or bring to your other infrastructure markets? How do you think about that?
We have. Yeah, it started with water, and it really started with the operations and maintenance of large-scale water treatment plants. And so we've been able to partnership with Palantir. It's interesting because these algorithms were developed for, you know, just the ubiquitous world of intelligence data gathering, and then indexing and analyzing it at that level. We took those same kind of algorithms and applied them to the water operations and maintenance world, and have been able to reduce chemical usage and energy usage of these water treatment plants and extend the life-
Wow!
Which has been great. We operate 250 plants in the U.S. We've been able to deploy that at, I think we're in the mid-teens right now. So a big upside there. We've been able to take that same type of platform and go into the transportation world.
Right.
So, and we also have a software platform, StreetLight Data-
Yeah.
That in combination with StreetLight Data is doing some wonders. Because think about it, $1.1 trillion being spent in the IIJA. The needs for just the U.S., not the world, is about three times that amount.
Right.
Right? So, you know, the use of technology in order to extend the capital dollar is key. Some of the best jobs we've ever done are jobs that we didn't design because they didn't get designed, right? We figured out other ways of solving for the outcome rather than, you know, having to put in new rail lines and new highways and other things.
Great. Last question from me, before we go through this. Talk about your capital structure of RemainCo and what your capital deployment priorities are as you, presumably, you're gonna continue to shift and transform this business over time.
Yeah. So we already operate with, you know, 100% conversion of our adjusted free cash flow today. It will be. And the adjustments are not great when you consider-
Yeah
The things that we're doing to over 100 moving forward. So our cash flows are really, really strong. So we have a low leverage rate today. The dividend that comes in as a result of the transaction, for tax purposes, needs to go to pay down debt.
Mm-hmm.
So we will be beyond, if that's a technical term, beyond investment grade. And then the actual retained stake and the disposition of the retained stake has to go towards debt, too. So we're gonna be in a position where we will be, you know, in a material way, net cash. And so return to shareholders is our number one priority in the form of buybacks as well as continued increase on our dividend. And without the government services component, the pay ratio on our dividend already goes up.
Mm-hmm.
So it's a really strong story on returning to our shareholders, as well as investment in ourselves. I mean, my comment around the digital enablement that's happening in the business is real, and so we're doing make-buy kind of analysis on these platforms. You know, when do we buy? When do we develop ourselves? The one last thing I would say is that when we think about our equity and share buybacks, we look at the PA equity as ours, too.
Right.
So that's a great opportunity to continue to deploy that towards investment in PA.
Great. Maybe just, last one, no follow-up from me. 30 seconds, maybe explain to investors quickly what's unique and why they should consider Jacobs for an investment, straight from the boss.
Absolutely. You know, I've been in this industry for 30+ years. I have not seen the generational tailwinds in the sectors that we serve the way I've seen them today. And they're not going away. So whether it be 2-degree, you know, climate, climate goal, or everything that's going on with the water infrastructure world, and what the world needs as a result of climate, Jacobs is right in the middle of it. And every time you hear about capacity when it comes to chips or GLP-1 drugs or the next solution to Alzheimer's, you think about Jacobs. We're doing some things internally to clean that up, and it's showing right now, so it's exciting times.
Great. Bob, Jonathan, thank you so much for joining us. Thanks, everybody.
Thank you.