The conference operator welcomed everyone to the Jacobs Fiscal Third Quarter 2023 Earnings Call and Webcast. Jonathan Evans, VP of Corporate Development and Investor Relations, then went on to provide an overview of the agenda for the call. Bob Pragada, CEO, and Kevin Berryman, CFO, will discuss the company's recent activities, financial metrics, balance sheet and cash flow. Claudia will provide an overview of separation-related activities, and Bob will provide details on the updated outlook and closing remarks. Finally, the call will be opened up for questions. A reporting change was also made in the quarter, changing the name of net revenue to adjusted net rent revenue.

Jacobs has made certain adjustments to their pass-through revenues and adjusted net revenue for the fiscal years 2022 and 2023. CEO Robert Pragada then provided an update on the previously announced intent to separate the CMS business and noted there has been positive interest from multiple outside parties. The company is evaluating this interest to maximize shareholder value and a spin-off is expected to be completed in fiscal 2024.

Jacobs is focusing on optimizing and accelerating, with an aim to maximize value for stakeholders. In Q3, they achieved a record quarter with organic growth and improving cash conversion. The People & Places line of business saw an increase of 9% in adjusted net revenue and 13% in operating profit.

Kevin will discuss the significant growth seen in the global business units, with a gross margin backlog growth of 8% year-over-year and an increasing pipeline. CMS had a 7% revenue increase year-over-year and a 12% operating profit increase, with an over 70% win rate. Jacobs is advancing flight software and hardware testing for the Artemis II missions. PA Consulting had increased sales and backlog, with margins stabilizing above 21%, and they are seeing increasing opportunities in energy transition and digital expertise.

PA was hired by a leading cybersecurity client to develop a strategic plan focused on AI and mitigating cyber threats. During the quarter, PA won a contract with the Ohio Department of Transportation to extend their Streetlights Software-as-a-Service offering. Jacobs enterprise is seeing considerable and geographically diverse opportunities in their water business. This includes water reuse, treatment and drinking water. They have also been selected by a large Southern California utility agency to provide program management and strategic funding advisory services. Additionally, they were awarded an extension and expansion of a central interceptor program in New Zealand and a $450 million award from the U.S. for environmental and sustainability projects.

In the third quarter of 2023, gross revenue grew 9% year-over-year and adjusted net revenue grew 7.5%. Gross margin as a percentage of adjusted net revenue was 25%, down slightly from the previous year. Adjusted G&A as a percentage of adjusted net revenue was 14.7%, which was better than the previous year. The company is targeting G&A as a percentage of adjusted net revenue to stay below 16% for the full fiscal year 2023. EPA's Great Lake National Program Office and RegionFind Super Fund provided environmental and technical management services in the Great Lakes area, and the company was awarded the Brent Spence Bridge project between Ohio and Kentucky. They also supported the New Orleans Regional Transit Authority in their successful low and no emissions grant application.

This paragraph discusses the GAAP operating profit for the quarter, which was $270 million and included $52 million of amortization from acquired intangibles, other transaction and separation-related costs and restructuring efforts of $38 million and a $1.4 million noncash charge related to decreasing the company's real estate footprint. Excluding these items, adjusted operating profit was $361 million, up 10% year-over-year. The total discrete items for the year, excluding the new CMS separation efforts, will remain at $100 million, with $45 million of noncash impairment costs. The adjusted operating profit to adjusted net revenue was 10.7%, up 30 basis points year-over-year.

In the third quarter of 2023, GAAP EPS from continuing operations was $1.29 per share, which included a $0.27 impact from amortization charge of acquired intangibles, $0.20 from transaction, restructuring and other related costs, a $0.01 noncash impairment charge related to reducing the real estate footprint, and a $0.05 adjustment to align to the projected annual adjusted tax rate. Excluding these items, adjusted EPS was $1.82, down 2% year-over-year. Adjusted EBITDA was $355 million, down 2% year-over-year, representing 10.5% of adjusted net revenue. Backlog was up 3% year-over-year and the revenue book-to-bill ratio was 1x. People & Places Solutions saw 9% year-over-year growth in adjusted net revenue and 10% growth in constant currency, with strength in the Middle East, Americas, and Asia Pacific.

Q3 operating profit was up 13% and 15% in constant currency, resulting in operating profit as a percentage of adjusted net revenue of 14.4%. The Advanced Facilities unit posted a sixth consecutive quarter of double-digit revenue growth, and the People & Places Americas unit reported 10%-plus growth. The Critical Mission Solutions unit had a 70% win rate and 12% year-over-year increase in backlog. Asia Pacific and the Middle East are a bright spot in the portfolio.

CMS reported increased operating profits and margins, Divergent Solutions reported 3% year-over-year revenue growth with a 9.5% operating profit margin, and PA Consulting reported 3% year-over-year revenue growth with a 21.2% operating profit margin. Corporate costs were consistent with guidance at $62 million.

In Q3, the company posted strong cash flow generation, resulting in a free cash flow of $290 million and net debt of $2.1 billion. The company is committed to maintaining investment-grade credit profile and will opportunistically retire floating rate debt. Additionally, the company will pay a quarterly dividend that increased 13% year-over-year.

Kevin, the outgoing CFO of Jacobs, expressed his gratitude for the Board, leadership team, dedicated employees, and investors for their support and commitment. He then handed the call over to Claudia Jaramillo, the incoming CFO, who has been with Jacobs for just over a year and is looking forward to formally succeeding Kevin. She has been overseeing the rollout of the strategic stand-up management office and has made significant progress in eliminating separation-related stranded costs and identifying value levers that can lead to further productivity gains.

Jacobs has outlined a target operating profit margin of 12% and is looking to further expand margins post separation. The company is committed to delivering superior results for shareholders, employees, and stakeholders, and has set a goal of achieving a range of $1.42 billion to $1.47 billion in adjusted EBITDA and $7.25 to $7.45 in adjusted EPS for FY '23. The company is also appreciative of Kevin's contribution to the success of the company and is looking forward to Claudia's continued accomplishments and contributions.

Robert Pragada discussed the key drivers of margin improvement, which include mix, operational discipline, digital enablement, and global delivery model. He also mentioned that there is interest in CMS from interested parties, but did not provide further details.

Robert Pragada and Andrew Kaplowitz discussed the potential sale of CMS and the growth of People & Places. Pragada mentioned that the interest in the potential sale is strong and they are currently evaluating it, but could not give any more detail. Kaplowitz then asked about the growth of People & Places, and Pragada mentioned that the IIJA component is still in the early innings but is seeing flow through and they have gotten in front of it with grant components and assistance in grant applications. He also mentioned that other legislative acts around the world are stimulating similar funding and legislation.

Robert Pragada and Claudia Jaramillo answered an investor's question about cost opportunities and capital allocation priorities. Pragada stated that there are lots of opportunities for efficiencies and cost optimization with a more streamlined strategy and global delivery platform. Jaramillo noted that their priorities are organic growth and returning excess cash to shareholders, both of which are done on a risk-adjusted basis. Lastly, Revich congratulated Pragada on the stock nearly quadrupling in his nearly nine years.

Robert Pragada answered Jerry Revich's question about the potential for the advanced facilities portion of People & Places to be 30% or more of the portfolio in the next year or two. Pragada expressed confidence in the continued growth of the business due to the re-shoring of technology, the Chips Act, and the positive effect of obesity and heart disease drugs in the pipeline and backlog.

Robert Pragada and Kevin Berryman discussed the potential for Advanced Facility to continue growing at double-digit rates and how the company is well-positioned to end the year well with good execution, growth, and streamlining of operations across all segments and corporate costs.

Robert Pragada states that RemainCo is continuing to grow at current rates, and he is sticking to the 6-9% long-term top line growth rate. Claudia Jaramillo explains that the separation process is complex and involves many functions, including finance, HR, and the delivery model. She also mentions that a global delivery platform is being used to maximize efficiency.

Robert Pragada explains that the water sector has the fastest-growing pipeline of any sector, with 30-40% year-on-year growth. This growth is being driven by infrastructure regulations and the need for water due to drought and climate change. Margins in the sector are currently above the mean, and the sector is expected to continue to be a major part of the company's portfolio.

Kevin Berryman and Robert Pragada discuss the restructuring of PA and the cost savings initiatives that have been implemented. They are confident that the cost savings will have a positive effect on the margins and are sustainable. Steven Fisher then asked about the P&PS profit growth, which had slowed from 21% to 13% year-over-year in Q3. Robert Pragada stated that they expect to be able to sustain double-digit growth from a bottom line perspective.

Robert Pragada explains that they have been very deliberate in their decision-making, focusing on end markets that have strong tailwinds that are less tied to inflation than other consumer-driven areas. They are also confident in their portfolio, regardless of what happens with the economy, and have been proactive in streamlining operations and managing costs.

The company is focusing on cost optimization and cost management and has been for decades. The cash restructuring costs for 2023 are expected to be around $55 million. There is a question of whether the restructuring costs can flow through to the profit line and what the outlook for 2024 could be, with the potential sale of CMS being a big factor.

Claudia Jaramillo and Robert Pragada discussed the cash conversion as a key metric for the company and their commitment to maintaining it. Andrew Wittmann asked about the visibility into Divergent's revenue ramp and whether it could lead to better fixed cost coverage and higher margins. The two responded that they do believe it could lead to these positive results.

Divergent is seeing the most growth in infrastructure, transportation, and water, which is leading to margin expansion and digital enablement. They have seen a lot of stimulus money in the transportation sector so far, but are now starting to see more in clean energy and IRA applications.

Robert Pragada answered a housekeeping-type question about the cost improvements of P&PS, stating that they should be seen in the fiscal 2024 numbers. He further discussed the PA comment being focused on specific markets that have strength and the efforts of the company to reduce costs with a more streamlined strategy.

Kevin thanked everyone for joining the call and welcomed Claudia to the future before concluding the call. The operator then announced that the call was finished and everyone could disconnect.

This summary was generated with AI and may contain some inaccuracies.