All right, great. Thanks, everyone, for joining. My name's Adam Seiden. I lead the U.S. machinery and construction effort at Barclays, and thanks for being here for the Industrial Select Conference for what is the 42nd year, so for this session, we're pretty excited to have the folks from Jacobs, so Bob Pragada, CEO, then the CFO, as well as Patrick, who leads one of their businesses' efforts and the COO of sorts. For this session, it is a fireside chat. Within that, we will be doing audience response questions where we will ask your participation from the gadgets that you have in front of you. There will be a number of questions that you may have seen in other sessions. That's intentional. They are standardized, but we look forward to your participation in that there.
So with that, what I wanted to do in this session, just because the Jacobs folks had an Investor Day just yesterday, I know there's a lot going on. So maybe if I pass it over to Bob, maybe just a couple of quick words on the Investor Day and take it from there. And thanks for.
Sure. Exciting times. And Adam, thank you. And thank you to Barclays for having us. Yeah, exciting times. So we did our Investor Day presentation yesterday where we released our five-year strategy and put out our financial targets for the next five years. And then can talk a little bit about that. But maybe just a little bit of a little bit of history and kind of context setting for right now. For those of you who don't know much about Jacobs, Jacobs is a long-term engineering company, deep roots in the process industries dating back to the '40s. And over the course of the last 75 years, has really delivered some real value solutions to multiple end markets around the world.
Starting in 2016, we went through a series of real hardcore strategic focus and transformation in the business where we effectively spun off about 80% of our revenues, reinvested in the company over that period of time. And today, as a result of the last spinoff that we made last September of our government services business, which is predominantly in aerospace and defense, are now during that same period of time, from 2016 forward, we doubled our EBITDA and doubled our EBITDA margin as a result. And so today, as we sit here, we are an infrastructure solutions business, big, big focus within the water, transportation, energy, and power world, as well as environmental. And then in the life sciences and advanced manufacturing world, I think pharmaceutical facilities, data centers, and semis as well.
As far as the go forward five-year plan, we've got some aggressive hurdles in front of us. We're seeing kind of generational growth in the end markets that we serve right now, probably led by life sciences and in the water market, and we can go into the detail on the why behind that, but a 6%-8% top line CAGR over this period of time, margin expansion of about 300 basis points to 16%+ EBITDA margins, as well as a free cash flow margin of north of 10%, so really exciting times, Adam, and we're happy to be here.
Excellent. So maybe let's touch a little bit on the margin targets. So you guys gave a walk of 50 basis points of annual margin growth per year. And within that, there were a couple of key buckets. So could you talk through the ones that are not linked to operational leverage, maybe more so around delivery, around mix, or even the commercial models? What are they exactly? How do you execute on those? And how do those factor in over the five-year window here with some? Is it an even cadence throughout or some a bit more front-loaded than others?
Sure. Maybe the way I'll address it is I'll talk about some of the operational efficiencies that we're getting. And then I'll turn it over to Venk to talk about the cost leverage as well as the cadence of the margin expansion. So we run what's in our operating model, which we believe is unique, a global delivery model where we have talent in 40 countries around the world and utilize that talent to deliver solutions locally. We're not a franchise operation and have operations in different countries that are segregated from each other. And what that global delivery model allows us to do is not only provide premier solutions for our clients, but also gives us a nice cost advantage as well and the ability to scale in record time. That global delivery model is probably our biggest driver of margin expansion moving forward. That coupled with capital enablement.
Today, we've been in the business for 75 years. So if you think about the end markets that we're in, the amount of data that we have and so is tremendous. And we're utilizing that data, developing digital proprietary software platforms to gain efficiencies in our own work, but also for our clients' work too. So I'd say those two coupled with more and more consulting and advisory work that we're doing with PA Consulting, a big investment that we have with a strategic consulting business, is really driving margins. And we're talking about the commercial models and the cost leverage.
Yeah, absolutely. So as Bob just alluded to, the fact that we have three separate sizable buckets that allow us to expand our gross margins across global delivery and commercial models and then the mixed piece of it. On the commercial model side, I'd say it's about what we call value-based selling. We provide a lot of value to our clients. And how do we ensure that we also keep some of that value for ourselves? It's also increasing the mix of our fixed-price services. And we can improve the efficiency of how we execute on those projects, allowing us to also expand margins in a meaningful way. And then on the operating leverage piece, we started our journey maybe about a year or so back in terms of improving the operating structure and the model in a meaningful way.
We'll see the full benefits of it in fiscal 2025, but there's still coming three to four years. So when you put all of that in combination, in aggregate, you get about 320 basis points of margin expansion. Then Adam, to your question about the cadence of how that gets rolled out, we ended fiscal 2024 at about 12.8% EBITDA margin. For fiscal 2025, we guided for between 13.8% and 14%. A lot of the annualization benefits happen in fiscal 2025. Thereafter, we see a steady cadence of margin expansion.
Got it. Okay. So maybe that actually touched a little bit on Venk. Where I was going to probably go next is the annual growth that you're pointing to over the five-year plan is a little bit different than the one you're talking about for 2025. Still quite strong growth over that long run on margins, but it is a little bit lower. So maybe just to put an exclamation point on what you just said there as far as why is margin growth supercharged in 2025 versus the next four years after.
Yeah. And I'd say from fiscal 2025 standpoint, it's driven by the fact that we get the full year's benefit of the actions that we took. But we're just kind of scratching the surface from the standpoint of the other three drivers of it in terms of global delivery and commercial models and mix. So that's what plays out over the remaining four-year period. And again, we said we will do 16% plus. So obviously, we think we have some room for continued expansion there.
Plus, just give that long picture.
Adam, it might be helpful for the audience when we say cost optimization, the why behind that. So we were running prior to the spin and subsequent merge of what we call our Critical Mission Solutions business or our government business. We had a corporate structure that had structure and advanced facilities business, which was global in nature and had the ability to do business services, back office services centrally. But we also had a government services business that had to have all of its support functions in the U.S. because of U.S. security and U.S. national needs. Now that that's gone, we took those actions around the corporate group. And so those cost optimization efforts, that's what Venk is talking about, the annualization of those.
No, that's really helpful, and maybe if you think then on the end market side, so a lot of helpful commentary you guys provided yesterday across the different end markets and so forth. So similar question there. When you think about cadence of growth, is some a bit more supercharged today versus as you look out and things like that?
Yeah, I'd say that from an end market standpoint, the growth that we're seeing in life sciences and the water sector, and life sciences predominantly U.S. and Europe, water global, I don't know if supercharged would be the right word, but it's definitely charged, and Patrick kind of talked about it. We don't see those tailwinds easing, so I'd say those are the ones. The others, we laid out the CAGRs for the other end markets, but I'll put it this way. In my career and I think in our career, the outlook in the pipeline growth that we've seen, I haven't seen that before.
It's a high-class problem. So maybe let's pivot to the data center side. So you guys talked a bit about data center, probably a little bit more than we're used to hearing. And I know it is very topical in the broader market. So you talked about doubling the NSR in that business. Can you talk a little bit about and then ultimately, if you could flesh out a little bit of the relationships that Jacobs has in that industry and how you're positioned to win?
Yeah. So maybe I'll start with the second part first. So we've been in the data center world for about 20 plus years and have had a leadership position in what data centers have traditionally been is the complex design around the server room. Because 150, 150 megawatt data center with an IT load of that much cooling requirements weren't massive. Now what we're seeing with AI data centers, that's absolutely leapfrogged over that. It represents about 10% of our life sciences and advanced manufacturing business today. And so what we're seeing, and this is kind of what we're seeing across the board, is this next wave and the data center coming together with the hyperscalers who we've had client relationships with for years, doing a lot of studying on how this is all going to work.
They went ahead and they forward purchased a lot of the electrical equipment, hence the Eaton and the Schneider Electric and the Hitachi are basically booked solid for transformers and switchgear, while they stepped back and have now done some really in-depth studies on what's the most effective way to deliver this with a microgrid, with potentially SMR technology, with conventional needs, but off the grid, and that's the study work we're doing right now is actually what's contributing to the growth.
Got it. Got it. Perfect. And so you were talking about, and then I guess we touched on the relationships there. So maybe if we think about some of the other end markets here on power and water, two very high-growing markets over the five-year plan here. So can you speak specifically to the role that you guys have in power and how Jacobs is positioned to capitalize on that? And particularly within power, maybe thinking, is it more renewable-based? Is it traditional T&D? How should we be thinking about Jacobs' participation?
Sure. And then the same question on water as well.
Yeah, exactly.
Yeah, Patrick, why don't you take these.
Yeah, so our power business is one; it's global in nature. We've actually had a lot of power skills in the business for decades, actually. But actually in the last 18 months, we brought it together as a cohesive outward-facing business unit, and it's been growing at over 20% year on year since we brought that together. In terms of the skills that we have there, primarily focused on transmission and distribution and generation, we see a great opportunity for growth in transmission and distribution in particular, often needing bespoke skills to connect green energy sources to reinforce the grid, to meet the demand, like Bob mentioned, around data centers and things like that. On the generation side, it's the full mix of generation. Slightly different dynamic there because you do have the OEMs playing a key role in terms of providing wind turbines or solar panels, whatever it might be.
And so our role there is more as an advisor, owner's engineer, balance of plant design, things like that. But we see the full energy mix being relevant there. And in particular, with energy policy sort of shifting around the world, with geopolitics at play and other things, the need to deploy all of the full energy mix on the generation side we see as being highly critical.
Excellent. So we talked a little bit about the business dynamic globally. And a lot of what was focused on yesterday was talking about the businesses by end market. So just curious if I could try and peel back the onion a little bit on the regional split here. How varied is the growth dynamic across those businesses by region?
Yeah. I would say that right now we are seeing a definite uptick in North America. Now, that's not to say that we don't see growth in other areas as well. So I'd characterize it beyond a quarter or two as being relatively balanced with a bit of weighting towards North America, with one exception, and that's the Middle East and India. That part of the world right now, India, prior, it was India for the world. Now we're starting to see a bit of a dynamic of India for the world and India for India. And so some of the jobs that we've announced on that front kind of point to that, and then in the Middle East, Patrick, I think we've double-digit growth.
Yeah, it's been very strong growth over the last probably three, four years. In particular, we've seen a lot of investment in the transition of the economy in Saudi Arabia. And so that's been something where, programs, we're seeing major events just being announced in Saudi as well with World Expo coming up in 2030, FIFA World Cup in the middle of the 2030s as well. And so those sorts of things will drive more and more investment off the back of what's already been really significant investment in the last few years.
Got it. So you spoke about the regions when it comes to the broader business. Now, if we could drill down a little bit on PA. And in PA, there was a comment made yesterday about seeing tangible signs of an inflection of growth. So maybe could you extrapolate that on what are those tangible signs? And then ultimately, just given the business mix being a bit more U.K.-centric, how widespread is that across the regional profile?
Sure, so maybe I'll kind of dissect that into what markets are driving that pipeline growth right now, and then what's happening between the U.K. and their other geographies, which is mostly the U.S. and the Nordics, so the end markets that are driving it to predominantly energy and utilities, what we call energy and power, and health and life sciences, ironically enough, and that's really PA's involvement in those sectors starts way early in the asset lifecycle with regards to in energy and utilities, conversion of conventional assets into renewables, working with clients on business transformation as a result of large-scale going on. That's been growing, and in health and life sciences, it really has been redefining and getting deeper into pharmaceutical companies' clinical trials and digitizing that process, especially as more personal care comes about, so those two are what gives us excitement.
The next is what's happening in the U.K. And so after probably two and a half years of some softness in the U.K., predominantly in the public sector, we're starting to see that work come back as well. With government agencies like the Home Office starting to continue on the path of digitizing government agencies, driving efficiencies within government agencies, and that's what PA is involved too. So I'd say that flatness, and all we really needed was flatness in the U.K. in order to drive growth in the business. And just for the audience, we have about an 80-20 split right now, 80% in the U.K., 20% in the U.S. and in the Nordics. The U.S. is actually growing at double-digit rate right now.
So let's talk about the U.S. So not sure if anyone checked their phone. There may be a new tweet or something that we have to talk about here. But in any case, there has been a lot of news, right? So we often get the question, is that causing any disruption? So I'm going to pass that to you. What are the client conversations that you're having today? And are those impacted by some of the on a daily or not hourly basis?
Sure. So there has been a lot of reactions. I'd say broadly, our clients have stayed relatively focused on their efforts and their capital deployment. We have been getting questions and queries on what happens to supply chains. How can you help us debottleneck supply chains if in fact we have this tariff here and that tariff there? Most recently, Patrick was on the phone with our Canadian colleagues maybe at the Toronto Airport and other places about, hey, what happens if the border shuts down, those types of things. But they've been conversations, Adam. We haven't seen real tangible movement of cancellations of projects, pipelines contracting, all the things that you would, if it became law or became real, you'd see. We have not seen that.
The area that we've probably been focusing more on, though, is around some of the interpretations on employee policy and kind of some of the social narrative that's been going on as well. And we got 45. When you do see that tweet or see this, it does cause a reaction. So we're staying very, very close to our people right now. And that culture of inclusion and culture of we are a U.S. company that operates globally, or we're a global company that's headquartered in the U.S. I'm sorry. Global company that operates in the U.S., headquartered in the U.S., is really what we're continuing to stick by.
Got it.
We're not changing our culture because of a legislative act.
Not fair. And maybe just for the broader audience, because I see a lot of times people do these screens where they look at anyone who's U.S. exposed or federally exposed and so forth. And Jacobs, there's been a nice transformation in the business here and where you sit today. So maybe just remind everybody where your federal exposure is today versus the state and local, etc.
Sure. So where we have a federal agency as a counterparty, just want to be clear about that, is about 9.5% of our business. 80% of that is in the DOD infrastructure business. So this is water, buildings, transportation for U.S. military sites in the U.S. and globally. And we're actually seeing a pickup in that business, specifically in areas like IndoPac and others. So that's point one. Point two is that, and I've said this repeatedly, but you're right, that screen is pretty tough, is we don't do USAID work and we're not affiliated with a lot of these agencies that have been in the headline. So it's either guilt by association or I don't know what it is, but we were not.
Got it. Fair enough. Maybe this is a good time to switch over to the response questions here. Bob, you're a vet. You've seen these before.
Oh, yeah.
All right. So to participate in that, there's a gadget on your table there, and we certainly would appreciate your participation. So first question here is, do you currently own the stock? Yes, overweight, market weight, underweight, or no? One year, we're going to have theme music.
I don't. Is it the Jeopardy music?
That's what we need.
All right. Two-thirds say yes, overweight. Next. What is your general bias toward the stock right now? Positive, negative, or neutral? All right. We've got about, again, two-thirds of the room positive. Own the stock and positive. Moving on to the next one. In your opinion, through cycle, EPS growth for Jacobs will be above in line or below peers? Sorry, just when that counter goes up. There you go. Now you can vote. The clock is your clue. All right. It's about two-thirds in line. Next question, please. In your opinion, what should Jacobs do with excess cash, bolt- on M&A, larger M&A, repos, divvies, debt paydown, or internal investment? One second till that clock goes on. Okay. There you go. All right. About 70% repos. Well, Venk, maybe we should stop there before we go to the next two.
So yesterday, you guys talked about where you see your balance sheet, your capital structure, etc. So maybe let's talk about that, repos. How do those fit into the broader Jacobs picture and how should we be thinking of cash proceeds as they're received over time and where they could be deployed?
Yeah. So we're very happy to note that our policy is very consistent with what this audience is suggesting as well. So just for context, we announced a $1.5 billion share repurchase authorization program last quarter, which is, by the way, the largest in the company's history. In terms of just our overall capital allocation, obviously, we want to invest in organic growth. That's a first-order priority. But a close second to it is returning cash to shareholders and dividends. And we stated last afternoon in our investor day free cash flow in the form of buybacks and dividends. We're committing to doing at least as much. And as you've seen in the last quarter, we upped it meaningfully from the prior year. And we expect to be at what we consider to be an aggressive pace of buybacks for the coming quarters.
And I think yesterday on the M&A portion of that question, you gave a bit of a view of some of the key attributes you're looking for of an asset or whatnot. But when you think more about from the business perspective, in the long term, as I think it was characterized, what are some of the areas that scream most attractive in that sense as you if and when you get to that later on in the plan?
Yeah. I'd say, I mean, obviously, from an M&A perspective, the first important thing is the strategic fit. But once we crossed the hurdle, we specified some clear financial criteria in terms of it has to be accretive to growth, accretive to margins, and so forth. But from the standpoint of the end markets, where we see the biggest opportunity is when we talk about our cross-cutting capabilities across multiple sectors. And that's where we think M&A could be an accelerant to our strategy.
Great. Oh, sorry.
Goes back to that nexus. We are, for the first time in a material way, seeing the convergence of our end markets. We want to think vertically. We grew up and we learned vertically. And the world is turning horizontal, where these facilities and these outcomes that we're driving for our clients have capability sets across. So when Venk talks about cross-cutting, that's what we would look at, is how to really catalyze that cross-cutting capability. Energy and power kind of rises to the top on that.
Excellent. That's really helpful. Maybe, Venk, if you like this one, you'll like the next one. So can we throw up the next slide, please? In your opinion, of what multiple of earnings should Jacobs trade?
Less than 10, all the way up to higher than 21 times. And again, these are standardized ranges across the conference, but curious where you think
Jacobs fits. I think it's start the clock. All right. So a bunch of answers towards the higher end of the multiple range. And I did notice there were some slides in your appendix around valuation there. So maybe going to the last question here. So what do you see as the most significant share price headwind facing Jacobs? Core growth, margins, capital deployment, or execution strategy? You can start the clock. All right.
It's core growth, about 80% of the room versus just a tiny bit on execution. And that's interesting, right? Because just yesterday, you came out with quite a bit of core growth, at least of what you see over the next five years here. Maybe just to wrap up here, I guess thinking probably directed to both of you on CFO and CEO. When you think about some of the things that have happened with Jacobs, Bob, as far as where the business came from to where it is today, I mean, what do you think has been one of the single most important learning points that you're taking with you as you manage the business here going forward as a more structured vendor?
And Adam, you've been along the journey with us along the way. If I go back in time, the 2016, 2019, 2022 strategies and where we did really well and where we didn't, it's interesting that core growth was there because in those targets that we placed on each of those strategies, we actually hit the target on our infrastructure business, and we didn't hit the targets on our CMS business, but it diffused the overall growth of the company. So clearly, we feel good about where we are today. But just to maybe answer the question with a question that I got yesterday as well. In this strategy, unlike those three other strategies, we built the model not just from a, okay, the markets are top down, which historically what we've done is the markets are going at X, so therefore we're going to grow at Y.
And it was a top down model. This time, what we did was we looked at our backlog growth, we looked at our historical performance, and we looked at the pipeline from a bottoms up. And then we compared that to a top down. And so those metrics that you see there, they're backed by real financial KPIs that are in the business today. And so I think that's what gives us some real confidence that this is going to keep going.
Excellent. All right. Well, actually, I think that's probably a good spot to leave off right there, and we're out of time. So on behalf of Barclays, Team Jacobs, thanks for being here.
Yep. Thank you.
Thank you. Thanks everyone.