The operator, Christa, welcomes everyone to the Jacobs Engineering Second Quarter 2024 Earnings Conference Call and introduces Ayan Banerjee, Senior Vice President, Finance, Treasury, Investor Relations, Corporate Development. Ayan refers to the forward-looking statements, non-GAAP financial measures, and operating metrics on Slide 2 of the presentation and introduces CEO Bob Pragada and Interim CFO Kevin Berryman. Bob provides an overview of recent activities and highlights from the second quarter results, while Kevin discusses financial metrics, the balance sheet, and cash flow. Ayan then turns it over to CEO Bob Pragada, who welcomes Kevin back as interim CFO and highlights his experience and expertise.

The interim CFO played a crucial role in driving growth and overseeing the separation and merger of the company's businesses. The company is actively searching for a permanent CFO and the current CFO will remain in his position until the transition is complete. The company is making progress on their cost optimization plan and their strategic shift towards a higher value and higher margin portfolio. They have received all necessary approvals for the separation and expect to complete the transaction in the second half of the fourth quarter of fiscal year 2024.

The company had a strong second quarter with 5% growth and 3% adjusted net revenue growth. The backlog and gross margin also increased, showing confidence in continued profitable growth. The People & Places Solutions line of business had solid top line growth and record adjusted operating margin and profit. They expect mid to high single-digit organic revenue growth in FY 2024 and have won several major contracts, including a $6 billion project with Amtrak and a long-term relationship with Los Angeles World Airports.

Jacobs has been selected for various water infrastructure projects, including upgrades for wastewater treatment plants in Miami-Dade County and support for major capital works in the U.K. The company has also been chosen to design and operate a seawater desalinization plant in Australia. In the environmental sector, the U.S. EPA and EU have taken steps to regulate PFAS compounds, which is expected to increase demand for Jacobs' services in consulting, engineering, and remediation.

The company has been preparing for the impact of new regulations on PFAS materials for several years and is now discussing options with clients. They are working with companies to remove PFAS from products and supply chains and are well-positioned for growth in this area. In other sectors, the company has seen double-digit growth and strong margins, with positive trends for long-term growth. Their partnership with PA Consulting has also been successful, resulting in significant wins such as the Frederick Douglass Tunnel project and a government agency framework in the U.K. for software upgrades.

Divergent Solutions had a strong second quarter, with a 5% increase in gross revenue and a 3% increase in adjusted net revenue. The company's suite of digital products and platforms are contributing to their success and they are well-positioned for future growth opportunities. Kevin Berryman, the company's CFO, highlighted their commitment to providing high-value solutions and improving margins through operational excellence and execution. The company's GAAP operating profit was $281 million, but included $53 million in amortization from acquired intangibles and $58 million in transaction, restructuring, and other costs related to the separation transaction. The adjusted operating margin was 11.3% and GAAP EPS from continuing operations was $1.29 per share. Excluding the impact of the separation transaction, adjusted EPS was $1.91, a 7% decrease from the previous year.

The company saw a 10% increase in non-GAAP EPS when adjusting for last year's tax benefit, and anticipates maintaining a 22% annual effective tax rate. Q2 adjusted EBITDA was up 10% year-over-year, with backlog increasing by 2%. The revenue book-to-bill ratio was 0.96 times, but would have been 1.06 times if not for a one-time change in government funding strategy. People & Places Solutions saw a 5.6% increase in adjusted net revenue and a record adjusted operating margin of 15.3%. Critical Mission Solutions also saw growth, with revenue up 3.2% and adjusted operating profit up 10.3%.

The company has experienced a decrease in revenue and operating profit in the second quarter due to a recent program loss and changes in funding strategy. However, they remain confident in their long-term resilience and positive momentum in near-term sales. PA Consulting saw a slight decline in revenue but a strong increase in adjusted operating margin. The company is focused on optimizing their operating model and reducing costs.

In the second quarter, the company's free cash flow was negative due to increased working capital, but their reported free cash flow conversion for the first half of the year remains at 100%. The company has also repurchased shares and plans to continue returning capital to shareholders while maintaining a strong balance sheet. They are confident in their ability to reach their previously stated objectives.

Jacobs has narrowed their guidance for fiscal year 2024 adjusted EBITDA and EPS growth. They expect a 9-10% growth year-over-year at the midpoints. This is due to strong demand for their science-based digitally-enabled solutions. They are well-positioned to capitalize on the momentum in the critical infrastructure market and confident in their ability to grow market share. They will now open the call for questions. A question was asked about Jacobs' backlog and they explained that backlog in People & Places is up 2% year-over-year, but did not elaborate further. They also mentioned a change in the space-based ISR impacting Divergent, but did not provide details.

The P&PS backlog is at a record high and is expected to continue growing in the second half of the year due to expected awards. The Divergent segment is also experiencing a backlog reduction due to a change in funding strategy, but it is expected to rebound in the long-term. Overall, the company is confident in their backlog growth and book-to-bill ratio for the rest of the year.

During a recent earnings call, Robert Pragada and Kevin Berryman of People & Places discussed the company's margins and performance. Pragada mentioned that the allocation of corporate costs has not changed and that the mix of higher-margin work in segments like Water and Life Sciences has contributed to growth. Andy Kaplowitz from UBS also asked about any changes in the background that may have led to the guidance change for the second half of the year, to which Berryman responded that the company is being prudent in their guidance and that it still represents a 13% increase in EPS.

The speaker discusses the positive impact of offsetting inventory write-offs on the company's numbers. They also mention the importance of project selectivity and long-term client relationships in their success. The speaker then answers a question about the timing and level of projects in the life science, semi data centers, and facilities industries.

Robert Pragada discusses the impact of current projects and upcoming developments in the life sciences and semiconductor industries on the company's momentum in the second half of the year. He mentions the success of their work with GLP-1 and obesity drugs, as well as the growth in oncology and contract manufacturing. In the semiconductor industry, there is a focus on AI and data centers, with projects in the works for Phase 2 development. Overall, the company is well positioned for continued success in both industries.

Bob and Kevin discuss the positive growth opportunities for their company, particularly in the areas of R&D, manufacturing, test and assembly, and data centers. They mention that the PA backlog was up 8% year-over-year and that the U.K. macro is driving business, with an expected election in the second half of the year. The team has also done a good job of rightsizing the organization to maintain a 20% plus margin in the back half of the year.

The speaker discusses the company's long-term outlook and the upcoming UK election. He also mentions that they have clear visibility on their reported numbers for the third and fourth quarters of the fiscal year, with solid execution in the PA business. The next question is about the margins in the back half of the year, which the speaker attributes to a mix of factors and a record high in people in place. He also mentions that the company is feeling better about their margin profile and expects it to be attractive by the end of the year. The second question is about large awards expected in the back half of the year, which the speaker says are not necessary for meeting their 2024 guidance.

Robert Pragada provides an update on the company's anticipated awards and pipeline, stating that they are optimistic about both. He also discusses the current state of the Saudi market, stating that their pipeline of work is diverse and continues to be robust. He mentions specific projects such as the expansion of the Riyadh airport and water infrastructure. Pragada also addresses the recent scaling back of the NEOM project, stating that their current work on the project has not been affected. The paragraph ends with a request for information on the power and energy market and the U.K. market.

Robert Pragada discusses the impact of the energy transition on Jacobs' power, transmission, and renewables work in Southeast Asia, Australia, New Zealand, Europe, and the US. He notes that Europe's energy transition is driven by geopolitical factors and that the US market has been an enabling one for the company's expertise in renewables, data centers, and the EV ecosystem. Pragada also mentions the recent PFAS legislation and its potential impact on Jacobs' backlog, estimating that the $200 billion in potential work will span over 25 years.

The paragraph discusses the growth of PFAS remediation and consulting within the Department of Defense, as well as the potential for scope growth in existing work. The infrastructure pipeline is evolving, with a focus on the US and opportunities in rail, highways, and transport in Australia and the Middle East. The stability in the UK could also lead to growth in that region, and the company's digital platforms are creating value for clients.

The use of StreetLight Data is revolutionizing the company's offerings to clients and has been successfully implemented in the US, UK, and Middle East with plans for expansion in Australia. However, there have been some program losses that will impact CMS revenue growth in the back half of the year, resulting in a more flattish outlook for Q3 and Q4. The team is working to mitigate these losses and position the business for growth in 2025.

The team has delivered operational efficiencies, resulting in double-digit bottom-line growth and the highest operating margins seen in the business. Corporate unallocated costs are expected to decrease post separation, with a step function change in the first quarter of 25%. The IIJA funding ramp is still expected to occur around 2026 or 2027.

The company's new awards are being catalyzed by IIJA and are expected to continue in the future. They are targeting an absolute number for unallocated expenses and are working to create a stand-alone entity that will accelerate growth. This may impact their ability to further reduce expenses in the short-term.

The speaker expresses pride and satisfaction in the teams working on the separation and standup management office, as well as the rest of the organization that is being pulled away from their day jobs to support the process. They mention their presence in Dubai and their interest in pursuing projects there, particularly in the areas of infrastructure and aviation. The speaker also discusses the potential for growth in the data center market, which could be similar to their success in the semiconductor equipment market.

The minority share of money invested in chip manufacturing and the entire life cycle of chip delivery to the market is driving the growth of the business. The power, cooling, and water needs are becoming more complicated and the company is focused on expanding their value proposition in these areas. The Water and Life Sciences sectors were the biggest drivers of growth in the quarter and are expected to continue growing in the next few quarters, with a doubling in size of the pipeline. These sectors are seeing growth globally, even in areas with geo-economic challenges.

During the earnings call, Josh Sullivan from The Benchmark Company asked about labor availability and wage inflation. Robert Pragada, the speaker, stated that while wage inflation is still present, their ability to provide value-added solutions for clients has helped with retaining talent. He also mentioned their global delivery model and how it has allowed them to have talent in every geography. The short-cycle wins mentioned were in the telecom, weapon sustainment, and aerospace sectors. The call then concluded with closing remarks from Pragada.

The speaker expresses excitement for future updates and meetings with investors and analysts. They thank everyone for participating in the conference call and it is now concluded.

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