The operator introduces the Jacobs Fiscal Fourth Quarter 2023 Earnings Conference Call and explains the format of the call. The Vice President of Corporate Development, Investor Relations, Jonathan Evans, then introduces the CEO, Bob Pragada, and CFO, Claudia Jaramillo, who will discuss the company's recent activities, fourth quarter results, financial metrics, balance sheet, and cash flow. Bob Pragada expresses pride in the team's performance and dedication to delivering outstanding results to clients.

Jacobs is making changes to its business model in order to simplify and optimize its operations. One of these changes is the separation of its Government Services businesses, which will be combined with Amentum through a merger. This will create a new government technology services leader with a combined revenue of $13 billion and $1.1 billion in adjusted EBITDA. Jacobs shareholders will own 51% of the combined company and Jacobs will receive a $1 billion cash dividend. The majority of the Divergent Solutions business, including the Cyber & Intelligence unit, will also be included in the separation.

Jacobs will retain the infrastructure-related software assets of Divergent Solutions due to their strategic fit with the company's other businesses. This combination of two industry leaders will drive innovation and growth, with cost synergies and diverse market exposure. The transaction has been approved by the Jacobs Board and is expected to close in the second half of fiscal year 2024. As part of the strategic separation, Jacobs will also implement a cost optimization plan to target over 300 basis points of margin expansion by fiscal year 2025. After the transaction, Jacobs will be a well-capitalized company focused on critical infrastructure and sustainability with strong growth potential.

Fiscal 2023 was a record-breaking year for Jacobs, with record revenue and free cash flow generation. Q4 also saw record numbers, with strong cash conversion and a 104% underlying free cash flow conversion to adjusted net income. The People & Places line of business experienced accelerating growth, with adjusted net revenue and operating profit up 11% and 12% respectively. The company expects to continue this growth in FY 2024 and highlights the significant achievements of the P&PS business in FY 23.

Jacobs has had success in various sectors, but none in the water sector. They highlight two wins in the digital and data capabilities sector, one for a wastewater treatment plant and another for a water and sewer commission. In the energy transition space, they have been selected as the program manager for a large industrial decarbonization project in Germany. In transportation, they have seen momentum from IIJA related funding and have been selected for a 10-year renovation project for an international airport. Internationally, they have high levels of activity in the Middle East, specifically in providing environmental remediation services for the Saudi Arabia National Center for Environmental Compliance. Overall, they have a strong opportunity set for addressing their clients' climate-related challenges.

CMS had a successful Q4 with 7% higher revenue and 26% increase in operating profit. They were awarded a new contract with EDF Nuclear generation and have a strong growth outlook for the future. PA Consulting also had strong results with 13% revenue growth and 21% operating profit margins. They have a new CEO and are utilizing their partnership with Jacobs to secure new opportunities, such as the Copenhagen Metro framework. Divergent Solutions also had a strong quarter with 3% revenue growth and 58% growth in operating profit. They are a leader in space innovation, introducing Mango Two, a revolutionary radio-frequency signal detection system.

In the fourth quarter, Jacobs' gross revenue and adjusted net revenue grew significantly, with GAAP operating profit of $278 million. This included expenses related to the separation of CMS, which is expected to incur one-time costs of approximately $275 million in fiscal year 2024. Jacobs is well-positioned for growth and excited about the opportunity to simplify its business structure and accelerate growth and margin improvement in the future.

In the fourth quarter, the company incurred unavoidable costs related to the separation and transaction, but they are focused on minimizing one-time adjustments. Adjusted operating margin and EPS were up year-over-year, while adjusted EBITDA and backlog also showed growth. The company's effective tax rate for fiscal year 2023 is 21%. Backlog and gross profit also increased year-over-year. For the full year, gross and net revenue grew, and GAAP operating profit significantly increased due to strong gross profit growth.

In the fourth quarter, GAAP EPS was $5.31 and adjusted EPS was $7.20, with adjusted operating profit increasing by 9%. Both revenue and operating profit increased in all business segments, leading to a 20 basis point expansion in operating profit margins. Adjusted EBITDA was $1.44 billion, representing a 5% increase year-over-year. The company expects modest margin expansion in fiscal 2024 and even greater improvement after separation. The book-to-bill ratio for fiscal year 2023 was 1.1 times. In the People & Places Solutions segment, adjusted net revenue was up 11% in the fourth quarter and 16% for the full year, with strong growth in all business units. Operating profit was up 12% in the fourth quarter and 16% for the full year, with an adjusted operating margin of 15% and 14.6%, respectively.

In the fourth quarter, P&PS Americas saw increased revenue due to legislative drivers and healthy state and local budgets. Asia-Pacific and the Middle East also had strong performance, while Europe showed positive growth. Critical Mission Solutions had a 7% increase in revenue and an 8% increase in backlog, with a strong win rate in core focus areas. Divergent Solutions saw a 3% increase in adjusted net revenue, with a focus on portfolio improvement. PA Consulting had a 13% increase in revenue and a 122 basis point increase in operating profit. Unallocated corporate costs were consistent with guidance.

Jacobs has initiated a comprehensive evaluation of their cost structure in preparation for the CMS separation. They estimate that they are carrying about $40 million in temporary costs during this transition period. Despite this, they are confident that their efforts will contribute to a stronger foundation and continued excellence in serving their clients. In terms of their balance sheet and cash flow, they had a strong quarter with $219 million in operating cash flow and $180 million in free cash flow. They were able to return 50% of their free cash flow to shareholders and ended the quarter with $927 million in cash and $2.9 billion in gross debt, resulting in a net debt of just over $1.9 billion. Their net debt to adjusted EBITDA ratio of 1.4 times remains strong.

The company is committed to maintaining an investment grade credit profile and plans to retire floating rate debt in the future. They also plan to return cash to shareholders and have identified over $90 million in cost savings. They expect to reduce their corporate unallocated costs and streamline their operating model to position themselves for growth and cost efficiency. They believe they can deliver over 300 basis points of adjusted EBITDA margin expansion by fiscal 2025.

The company's long-term goal is to achieve industry-leading margins. In the next few quarters, they will focus on driving efficiencies, positioning the business for growth, and deploying shareholder capital. Despite global uncertainty, the company remains committed to accelerating growth opportunities. In fiscal year 2024, they expect a 9-10% growth in adjusted EBITDA and EPS. There will be temporary elevated costs during the separation process, but the company is confident in their ability to generate value for shareholders in the future.

Jacobs and CMS are confident in their plan for long-term value creation and are excited about the future. During the Q&A portion of the call, Claudia Jaramillo provided more details on the margin expansion targets. The targets include a $50 million reduction in stranded costs after the separation, action already taken on the operating model, and a reduction in unallocated corporate costs from $60 million to $50 million, with some temporary costs to support CMS as it prepares for independence. The majority of these actions will occur in 2025, with some acceleration in 2024 after the separation. These actions will result in a simpler management structure and support, primarily in the areas of IT and support layers.

Bob Pragada, CEO of Jacobs, discusses the company's progress in achieving its 2025 plan for the People & Places segment with analyst Jerry Revich. Pragada explains that the expectations for segment margins have not changed since they were laid out over a year ago. He also provides a breakdown of the 300 basis points increase in margins, with half coming from cost reductions and half from margin expansion and mix. Pragada also mentions that backlog growth is expected to contribute to gross margin growth by 8%.

In response to a question about backlog growth, Bob Pragada of Jacobs Engineering Group discusses the strength of their People & Places business and how revenue growth is tied to the project life cycle. He mentions that as their business shifts towards consultancy, they may see lower revenue but higher margin opportunities in backlog. He also mentions water as an area of opportunity for new project backlog growth and notes a change in the mix of services being provided to clients.

Bob Pragada discusses the company's growth in different sectors, such as water and advanced facilities, with strong activity in the semiconductor and energy transition industries. He also mentions the potential for margin expansion and high cash conversion in the next few years.

The operator introduces Andy Kaplowitz from Citigroup to ask a question about the company's Q4 results. Kaplowitz asks for more information on why the EPS was below expectations and if the $40 million in temporary costs should be added back to the EBITDA. Claudia Jaramillo explains that the tax piece and corporate unallocated costs account for the majority of the gap, and the $40 million should be added back to the EBITDA to get a better understanding of the company's earnings power.

The company is very focused on their clients and ensuring their success. They have included additional value and upside in the transaction to benefit both parties. They are confident in their guidance for growth and their backlog is expected to continue growing at a mid- to high-single-digit rate. The company has a diverse client base, including private sector clients who continue to spend despite potential risks. The company has not seen any negative effects from recent infrastructure developments and their pipeline continues to grow.

In a conference call, Bert Subin from Stifel asks Bob Pragada and Claudia Jaramillo about the organic growth profile for the company in the coming year. Pragada confirms that the previous range for P&PS and PA Consulting remain intact, with a 6%-9% organic CAGR for P&PS and 12%-15% for PA Consulting. He also mentions strong growth in advanced facilities, particularly in the semiconductor and life sciences industries. Subin asks for more details on P&PS, specifically regarding water and international opportunities. Pragada says the numbers are positive and the company is seeing a high level of opportunities, but there is a balance between projects in different stages.

Bob Pragada and Claudia Jaramillo are discussing the potential growth of FX in Europe compared to the expected growth from IIJA in the U.S. Bob believes that while it may not reach the same level, it will still be robust. Claudia mentions that despite macro headwinds, their European business has done well. Bob also notes that the Middle East and APAC regions have remained strong. In terms of margins, Claudia explains that half of the 300 basis point margin bridge is due to mix, while the other half is from cost optimization and streamlining the operating model. Steven Fisher asks if segment-level margins will be better after cost optimization, to which Claudia responds that the half that is mix is related to not having lower margin in CMS and achieving better margins in P&PS, and the other half will come from other initiatives over time.

The speaker explains that the remaining businesses will increase their margins through cost optimization and the addition of digital enablement. This will be achieved through segment level efficiency initiatives and the company's overall operating model. The speaker also mentions that their decisions are guided by maintaining an investment-grade rating and returning cash to shareholders, with the goal of reaching a net cash position by the end of 2024.

Gautam Khanna from TD Cowen asks about the risk profile and project mix in the company's backlog, specifically in terms of margins and commercial models. Bob Pragada explains that the company's focus on scientific and technical offerings and digital enablement allows them to achieve higher margins in both fixed-price and reimbursable scenarios. Gautam also asks about the company's PFAS technology and Bob mentions that it has gained traction in the water center, but not yet as a separate end market.

The company has seen growth in their PFAS consultancy arrangements and larger framework agreements for water clients. They expect this growth to continue as compliance-related items drive the end market sectors. In the medium term, they are looking at opportunities to expand geographically and potentially look at lower margin businesses within P&PS to improve margins beyond just cost optimization. They are also focused on their global delivery platform and digital enablement as key levers for future growth.

The speaker discusses the differentiation between their company and competitors in terms of digital enablement and outcome-based projects, which lead to higher profitability. They also mention that they do not need to expand into new markets, but rather focus on expanding their digital and consultancy-based enablement and access to global talent. When asked about their guidance for the next few years, they mention that the mix of price versus volume will depend on the enablement component and their clients' spending caps in the infrastructure space. They aim to gain higher margins through their digital enablement.

Claudia Jaramillo discusses the company's efforts to drive to the bottom line and create a more simplified and streamlined organization. She also mentions the timing of the $275 million costs associated with the actions, which will be closely linked to the execution of the separation. The first quarter guidance is discussed, with Claudia confirming that the corporate unallocated cost run rate will be about the same. The seasonality of the first quarter is also mentioned, with the previous year's footnote items presenting a tough comparison. The exclusion of costs related to restructuring and separation in the first quarter is questioned.

In paragraph 27, Claudia Jaramillo discusses the seasonality of the business and the impact of the $40 million cost to support the separation of CMS. She clarifies that this cost is linked to the transaction and preparing CMS to operate in a new environment. She also mentions that the $60 million is carried across the company to support CMS and Cyber & Intelligence. The team is excited about the future and looks forward to providing updates on their plan. The call concludes after thanking everyone for joining.

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