Jacobs Solutions Inc (J) — Q4 2023 Earnings Call Transcript

Thank you, good morning. Our earnings announcement was filed this morning and we have posted a slide presentation on our website, which we'll reference during the call. Our 10-K will be filed later today. I would like to refer you to slide two of the presentation material for information about our forward-looking statements and non-GAAP financial measures. Turning to the agenda on slide three. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and CFO, Claudia Jaramillo. Bob will begin by providing an overview of recent activities, then summarizing highlights from our fourth quarter results. Claudia will provide a more in-depth discussion of our financial metrics, as well as a review of our balance sheet and cash flow. Finally, Bob will provide details on our updated outlook along with closing remarks and then we'll open up the call for questions. With that, I'll turn it over to our CEO, Bob Pragada.

Thanks, Jonathan. Good day, everyone. Thank you for joining us to discuss our fourth quarter and fiscal 2023 business performance and 2024 outlook. Our team has shown remarkable strength, adaptability, and dedication in continuing to deliver outstanding results to our clients. I'm proud of our people for continuing to drive our culture of caring to new heights. Over the past couple of quarters, we have shared our intention to simplify our business model, optimize our cost structure, and accelerate profitable growth and margin expansion. Today marks a key turning point as we boldly move forward. I want to provide an update on our previously announced intent to separate the CMS business on slide four before I move on to our fourth quarter results. As we communicated, following a robust evaluation of all opportunities, we are excited to announce the creation of a new leading government services player. Jacobs will be separating our industry-leading Government Services businesses, Critical Mission Solutions, and the Cyber & Intelligence Unit of Divergent Solutions by way of the spin-off to Jacobs' shareholders and then combining those assets with Amentum through a merger which has been structured as a Reverse Morris Trust. This combination is intended to be largely tax-free for Jacobs shareholders. Turning to slide five, the combination creates a combined government technology services leader with approximately $13 billion in revenue and approximately $1.1 billion of combined adjusted EBITDA, including $50 million to $70 million of net synergies expected to be realized by year two. Jacobs shareholders will own 51%, and Jacobs will retain a stake equal to between 7.5% to 12% of the combined company based on the achievement of operating profit targets prior to close. Jacobs will also receive a $1 billion cash dividend, subject to customary adjustments, as well as additional value through the disposition of our retained stake within 12 months of closing. As part of our continued separation efforts, we concluded it was best to include the majority of our Divergent Solutions business including the Cyber & Intelligence unit in the separation perimeter, owing to the strategic synergies, shared costs, and operational overlap with CMS. We will retain the infrastructure-related software assets of Divergent Solutions, given their strong strategic fit with our Critical Infrastructure, Advanced Facilities, and PA Consulting businesses. We believe this combination of two premium industry leaders, who share strong operating platforms, high-performance culture, and breadth of expertise offers shareholders the best opportunity to realize long-term value. The combined business has the ability to drive significant innovation and growth with meaningful cost synergies, added scale, and diverse end-market exposure, and is supported by secular growth trends. After a comprehensive review of all inbound inquiries, we believe the transaction is in the best interest of the company and our stakeholders. The transaction has been unanimously approved by the Jacobs Board, as well as the financial sponsors of Amentum and is not subject to any other shareholder approvals. The transaction is expected to close in the second half of fiscal year 2024, subject to customary closing conditions and regulatory approval. For more details regarding the structure of the deal, I invite you to review the materials we published earlier. Moving to slide six, which shows our multi-year transformation. As part of this strategic separation, which results in a more focused Jacobs, we are concurrently announcing a cost optimization plan to be executed over the next 24 months, during which time we will target over 300 basis points of margin expansion, compared to our as-reported fiscal year 2023 results driving an expected adjusted EBITDA margin of at least 13.8% in fiscal year 2025 for pro-forma Jacobs. Claudia will share more details in her prepared remarks. Post-transaction, Jacobs will be a well-capitalized pure-play critical infrastructure and sustainability leader with a strong balance sheet and significant growth potential. Fiscal 2023 marked record revenue and free cash flow generation for Jacobs, and we look forward to 2024 as we begin to chart our path forward as two leading independent companies. Turning to slide seven and Q4, I'm pleased to report another record quarter as measured by both revenue and operating profit. I would like to once again reiterate that this growth is entirely organic. Strong cash conversion remains a hallmark of our business model and remained robust in Q4 allowing us to drive record fiscal year 2023 free cash flow in order to return capital to shareholders, while investing behind our growth accelerators, Climate Response, Data Solutions, and Consulting & Advisory. We recorded a 104% underlying free cash flow conversion to adjusted net income in FY 2023 on a record year of $837 million in free cash flow generation. We expect to generate greater than 100% underlying free cash flow conversion again in FY 2024, before the impact of restructuring transaction separation costs. Our underlying business and outlook remain healthy, and we continue to be excited about robust growth opportunities in all our end markets. Turning to slide eight, our People & Places line of business delivered accelerating top-line growth with adjusted net revenue up 11% year-over-year and adjusted operating profit up 12% year-over-year. Claudia will provide further details on the significant growth we're experiencing in our global business units. We continue to see widespread positive indicators with gross profit and backlog growth of 8% year-over-year. Once again, our pipeline continues to grow faster than our top-line, which provides visibility and confidence, and our expectations that growth can persist at mid-to-high single digits organically in FY '24. Looking back at FY '23, I want to highlight the significant achievements of our P&PS business with double-digit organic OP growth in every quarter. Water continues to be a pillar of our business; of the top 30 wins in the quarter, none were in the water sector. Of those wins, we wanted to highlight two that showcase our digital and data capabilities. Firstly, at the City of Farmington, New Mexico wastewater and surface water treatment plant, our data-enabled product, AquaDNA, is a key part of the solution to provide resiliency efforts and improve energy efficiency. Secondly, for Boston Water & Sewer Commission, we are leveraging our AI model that analyzes assets that are most likely to fail, helping our clients create data-driven maintenance and replacement plans. In the Energy Transition space, Jacobs has been selected as the Program Manager for thyssenkrupp's $2.5 billion effort to decarbonize its steel mill in Duisburg, Germany, with a new green hydrogen power plant. The site is Europe's largest steel mill, and the effort represents one of the largest industrial decarbonization projects worldwide. It is also a testament to the diversity of our expertise. In Transportation, our largest market, we continue to see broad-based momentum from IIJA-related funding. Overall, IIJA-related pipeline has increased approximately 20% year-over-year. In Q4, we were selected to lead and manage the 10-year renovation of the Seattle-Tacoma International Airport international terminal. Emphasizing upgrades to enhance mobility and energy efficiency to position Seattle as a global tourism and business hub. Internationally, we continue to see high levels of activity in the Middle East. For example, in Climate Response, we are providing program management services to the Saudi Arabia National Center for Environmental Compliance. The work forms part of their ongoing environmental remediation program to repair damage to terrestrial and coastal environments. Our environmental expertise is truly global, and we continue to see a robust opportunity set related to our clients’ climate-related challenges. In CMS, we performed very well in Q4 to cap off a great year. CMS Q4 revenue was 7% higher year-over-year and operating profit increased 26% behind 128 basis points of margin expansion. Its pipeline and growth outlook remain robust with major award prospects in FY 2024 and minimal forecasted recompete pursuits. CMS was awarded a new project management resources framework contract with EDF Nuclear, the licensee of eight nuclear power stations, which account for approximately 16% of the U.K.'s electricity output. PA Consulting continues to post strong results with 13% revenue growth and nearly 21% operating profit margins, despite a very challenging macro environment. While we remain cognizant of the weakness that some consulting peers are seeing, we continue to be pleased with the strong operational performance delivered by the PA team. Utilization has improved, and during Q4 PA announced the appointment of Christian Norris as its new CEO. Christian formerly led PA's Life Sciences unit as a respected leader both internally and externally and has creative ideas to take the Jacobs partnership with PA to new heights. For example, the power of our relationship is driving further opportunities as evidenced in our recent award to the Copenhagen Metro framework. Together with PA, we are bringing our enterprise digital tools, AI solutions, and deep knowledge of the rail sector to support the Copenhagen Metro as it continues to deliver modern, future-ready infrastructure to meet the city's fast-growing population and urban travel demand. Our Divergent Solutions operating unit delivered a strong quarter with 3% adjusted net revenue growth and 58% year-over-year growth in operating profit. In Divergent, we are a leader in space innovation, with the introduction of Mango Two, a revolutionary radio-frequency signal detection system that utilizes cutting-edge AI and machine-learning analytics emphasizing affordability. This is an example of the leading IP portfolio that reinforces independent CMS as a formidable player in this space arena. Turning to slide nine. In summary, we are extremely well-positioned for growth across all sectors we serve, building off our established leadership position and proven track record of operational excellence. We are excited to turn the page on this next chapter in Jacobs' history, where we will be creating two leading independent companies. Looking at Slide 10, independent Jacobs is a leader in the majority of sectors in which we operate and a global leader in the overall industry. With today's announcement, we are enthusiastic about the opportunity to further simplify our business structure, optimize our cost base, and accelerate growth and margin improvement in the quarters and years ahead. Now I'll turn the call over to Claudia to review our financial results in further detail.

Thank you, Bob. Turning to slide 11 for a financial overview of our fourth quarter results. Fourth quarter gross revenue grew 10.5% year-over-year and adjusted net revenue grew 8.9%. GAAP operating profit was $278 million for the quarter and included $52 million of amortization from acquired intangibles, $43 million of other transaction separation-related and restructuring costs, and an $11 million non-cash charge related to decreasing our real estate footprint. The other transaction separation-related and restructuring cost of $43 million are primarily related to advisory and other costs associated with the separation of CMS. As we go forward, our costs will now include expenses to be incurred in connection with the separation. Looking to fiscal year 2024, we expect to incur approximately $275 million in one-time costs related to the separation and associated cost optimization actions. These costs are largely unavoidable in a separation and transaction of this size, but I want to reiterate that post-separation, it will be a key focus of ours to minimize one-time adjustments inclusive of restructuring costs. Our adjusted operating margin was 11%, up 14 basis points year-over-year. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.25 per share and included a $0.27 impact related to the amortization charge of acquired intangibles, $0.23 from transaction, restructuring, and other-related costs, a $0.05 non-cash impairment charge related to reducing our real estate footprint, and a $0.10 adjustment to align to our annual adjusted effective tax rate. I refer you to slide 30 for more details on these adjustments. Excluding these items, fourth-quarter adjusted EPS was $1.90, up 6% year-over-year. Q4 adjusted EBITDA was $384 million and was up 10% year-over-year, representing 11.1% of adjusted net revenue. The company's U.S. GAAP effective tax rate for continuing operations is 21% for fiscal year 2023. Our U.S. GAAP and adjusted effective tax rate for the quarter and year include certain tax charges for deferred tax valuation allowances and audit assessments. In the fourth quarter, this amounts to an EPS impact of $0.06 per share, and as a result, fiscal year 2023 adjusted earnings per share from continuing operations reflects a 21.6% adjusted effective tax rate. Finally, backlog was up 4% year-over-year. The revenue book-to-bill ratio was just over 1 times with our gross profit and backlog increasing 8% year-over-year. Moving to slide 12 for a brief recap of our full-year 2023 performance. Fiscal year gross revenue grew 10% year-over-year and net revenue grew 7%. GAAP operating profit was $1.1 billion, up significantly year-over-year, driven primarily by strong growth in gross profit while holding G&A relatively flat. GAAP EPS was $5.31 and adjusted EPS was $7.20, up 7% and 4% year-over-year, respectively. Adjusted operating profit grew 9%, and was up 11% on a constant-currency basis. Both revenue and adjusted operating profit increased year-over-year in all of our business segments. Operating profit margins expanded 20 basis points to 10.8%, driven by strong underlying performance. Adjusted EBITDA was $1.44 billion, up 5% and up 7% in constant currency. As a percentage of adjusted net revenue, adjusted EBITDA was 10.8%. We expect modest adjusted operating margin expansion in fiscal 2024, driven by a combination of a higher-margin revenue mix and lower corporate G&A. However, we expect an even greater uplift in margins post-separation as we streamline our operating model and cost structure. On a trailing 12-month basis, fiscal year 2023 book-to-bill was approximately 1.1 times. Regarding the performance of our lines of business, let's turn to slide 13 for Q4 performance and 14 for full-year performance. Starting with People & Places Solutions. P&PS continues to see solid momentum, delivering strong revenue and operating profit results. Q4 adjusted net revenue was up 11% year-over-year. Growth was consistently strong across all business units. Europe rebounded positively after being our weakest region year-to-date, and we saw continued strength in the Middle East, Americas, and Asia-Pacific. Backlog was relatively flat sequentially, although gross margin and backlog was up 8% year-over-year as we continue to focus on improving business quality. P&PS Q4 operating profit was up 12%, driven by strong growth, maintaining healthy gross margins and solid G&A management resulting in an adjusted operating margin of 15%, up 16 basis points year-over-year. For the full year, adjusted operating profit was up 16% and adjusted operating margins were 14.6%, up 100 basis points year-over-year. Our P&PS Americas unit, which is our largest by revenue, benefited from legislative drivers and healthy state and local budgets continuing to book client spending. Internationally, Asia-Pacific and the Middle East continued to be bright spots in the portfolio, supported by Giga Cities and strategic water pursuits. Additionally, our European business showed positive sequential growth. Now moving to Critical Mission Solutions. Q4 revenue was up 7% year-over-year and backlog is up 8% year-over-year and the business continues to demonstrate a strong win rate against a very healthy pipeline in all of its core focus areas. CMS operating margins were up 128 basis points year-over-year. For the full year, margins were roughly flat, while operating profit increased 6% year-over-year. Notably, margins continued to rebound throughout the year as forecasted. Moving to Divergent Solutions, adjusted net revenue increased 3% year-over-year in Q4, as we remain focused on portfolio improvement. We expect growth to accelerate from year-end levels as investments mature and lower-margin contracts roll out of backlog. Operating margins for the quarter were 10.1%, a 50 basis point sequential improvement. Turning to PA Consulting, revenue from PA was up 13% year-over-year in Q4 and increased 4% year-over-year in fiscal year 2023. Based on booking trends, we expect revenue growth to show a positive trend in fiscal year 2024 while remaining cautious of the macro risk as the U.K. goes through an election cycle. PA's Q4 operating profit was 20.6%, up 122 basis points year-over-year and up 21% year-over-year. Utilization continues to improve, and we expect operating margins to be over 20% for the medium term. Our adjusted unallocated corporate costs were $60 million in Q4, roughly flat sequentially and consistent with our guidance. In conjunction with the CMS separation, we have initiated a comprehensive evaluation of our cost structure under a more streamlined business model. However, despite initial cost actions taken, we will carry temporary costs associated with supporting the entirety of Jacobs, including the businesses to be separated. We estimate that we are carrying approximately $40 million in temporary cost throughout this transition period. This allows us the opportunity to reinforce our commitment to our clients and enhance business resilience. We are confident that these efforts will contribute to a stronger foundation and continued excellence in serving our clients as two leading independent companies. Turning to slide 15 to discuss our balance sheet and cash flow. We posted a very strong quarter of cash flow generation, which is indicative of the quality of our earnings. Operating cash flow was $219 million and free cash flow was $180 million. As a result, we were able to deliver above our anticipated 100% reported and adjusted cash flow conversion targets for the year with 104% underlying cash conversion. During fiscal year 2023, we returned 50% of our free cash flow to shareholders for a total of $480 million through both share repurchases and dividends. Though we were unable to repurchase shares in the quarter due to the CMS separation, we utilized cash flow to strategically pay down floating rate debt, ensuring a more robust financial position for the future. This disciplined approach aligns with our commitment to long-term financial stability and value creation for our shareholders. We ended the quarter with cash of $927 million and gross debt of $2.9 billion, resulting in just over $1.9 billion of net debt. Our Q4 net debt to 2023 adjusted EBITDA of approximately 1.4 times remains a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment-grade credit profile, both today and as a more focused business, post our announced CMS separation. In August, we completed the offering of $600 million in senior unsecured notes due 2028 with a fixed rate of 6.35%. This allowed us to repay a portion of the amounts outstanding under our revolving credit facility. As of the end of Q4, approximately 35% of our debt is tied to floating rates and our weighted average interest rate was approximately 5%. We intend to opportunistically retire floating rate debt in the coming quarters. For your benefit, in the appendix of the presentation, we have included additional detail on our debt and quarterly interest expense. Given our strong balance sheet and free cash flow, we remain committed to returning cash to shareholders. On November 9, we paid a $0.26 dividend, representing a 13% year-over-year increase. Finally, I wanted to highlight our cost optimization plan shared on slide 16. We recognize that our cost structure is high, and we see opportunities to optimize in the coming quarters and post-CMS separation. We have identified over $90 million in run-rate savings, including lower corporate and allocated costs to the specific measures that we are starting to action. We expect to reduce our corporate unallocated costs from around $60 million per quarter to approximately $50 million per quarter, including full elimination of stranded costs post-separation. We are streamlining our operating model with an eye towards positioning us for growth and cost efficiency, while staying focused on our clients. While we will not yet comment on long-term growth and margin expectations beyond our 2025 strategic plan, we believe we can deliver over 300 basis points of adjusted EBITDA margin expansion from fiscal 2023 as reported margins to fiscal 2025 for standalone Jacobs. This results in an expected adjusted EBITDA margin for standalone Jacobs of at least 13.8% in fiscal year 2025. This is a bold undertaking as it is our longer-term aspiration to deliver best-in-class industry margins. In closing, Bob and I are committed to three things over the next few quarters. First, driving efficiencies in our business and maximizing our profitability as demonstrated by the margin targets. Second, positioning our business with the financial resources needed for multiyear free cash flow growth. Third, strengthening discipline and deploying our shareholder capital. Thank you. And I will turn the call over to Bob.

Thank you, Claudia. Turning to slide 16. As we discussed throughout our remarks, we remain committed to accelerating robust growth opportunities ahead for all businesses. Given today's global macro uncertainty, that strength is more relevant than ever as we plan for the future as two independent companies. It's crucial to emphasize that the underlying fundamentals of our business have never been stronger. Turning to fiscal year ‘24 outlook. We expect adjusted EBITDA of $1.53 billion to $1.6 billion, with an adjusted EPS of $7.70 to $8.20, representing 9% and 10% growth at the midpoint, respectively. This outlook incorporates the full-year contributions of the businesses to be separated. We expect a fiscal year ‘24 effective tax rate of 22%. As Claudia previously mentioned, we will carry temporarily elevated overhead costs needed to support CMS during the separation, including IT and corporate support. This, coupled with historical seasonality, will have an approximately 10% negative effect year-over-year on adjusted EPS in Q1. We believe these costs are necessary to continue to support our clients as we progress through this transition period. This temporary cost is non-recurring and shall not be viewed as a reflection of a stand-alone company's earnings power. We are well positioned to accelerate profitable growth in the years to come as we seek to compound per share value for our shareholders. We continue to be energized and excited about the future for Jacobs and CMS and remain confident in our plan for long-term value creation. Operator, we will now turn the call over for questions.

Yes, hi. Good morning everyone and congratulations on all the strong work here. Can I just ask in terms of the margin expansion targets? Can we just flesh that out a little bit and just talk a little bit more about the timing, how back-end loaded is that '24 versus '25, and if we just unpack the pieces a little bit more in terms of just the buckets of the 300 basis points relative sizes, that would be helpful. Thank you.

Hi, Jerry. I want to discuss the details on this slide. First, there's a component for stranded costs, which will occur after the separation and amounts to roughly $50 million. We have also started addressing the operating model, which will pick up pace after the separation, but we have already made some progress. You can expect to see results from this throughout 2024, increasing after the separation. Additionally, as I mentioned earlier, there's the overhead or unallocated corporate costs typically seen as a separate line item. I noted a reduction from $60 million to $50 million. We will incur some temporary costs to support CMS as we get it ready for the independent or combined company, and this will also ramp up in 2025. In summary, you can expect some movement in '24, with an acceleration following the separation. The focus here involves a lot of IT support, support layers, and a more streamlined management structure.

Yes. What we laid out over a year ago, Jerry, continues. With regards to the P&PS margin expectations in that strategic time period, that hasn't changed.

Hi, good morning, guys. So I just wanted to continue on the margin question. I was hoping you could bridge the 300 basis points, how much comes from CMS? How much comes from, I guess, the decision to include Divergent Solutions in the cost-out? And is there anything else that we should be thinking about when bridging today versus 2025?

So Chad, the 13.8% is the standalone Jacobs, so it excludes CMS and Cyber & Intelligence. And then the nature of those costs is the three buckets that I mentioned before, which are really corporate unallocated going from the $60 million run rate to the $50 million run rate post-separation, and then the operating model, which is $50 million in total run rate and then full elimination of stranded costs up to the separation.

Chad, if you were to take it in two buckets, if you're taking two buckets, half is coming from the operating model of a cost structure that's more in line with the type of business that we will have, and half is coming from margin expansion and margin mix. It's a higher margin, higher growth business. So think about it simplistically that way.

Got you. Okay. That's helpful. And then just a question for you on backlog growth. I appreciate that gross margin in backlog is growing by 8%. But I was hoping maybe you could frame backlog growth, excluding the capacity revenues. Just really trying to understand what were some of the puts versus the takes, strength versus weakness that you're seeing underlying in People & Places? And then maybe you can talk about just the size of the pipeline.

Yes. I don't actually think, Chad, it's a weakness. Actually, I think it's really strong in our P&PS business right now. It's really on project life cycle. We measure that revenue growth based on where we are in the project life cycle, right? And so when we're deep into whether it be advanced facilities jobs or large infrastructure programs, we're going to be burning and booking a lot higher revenue kind of models. But as our business continues to profile more into a consultancy world, we're executing higher value services over the project and program life cycle. So you'll have lower revenue, higher margin opportunities come into backlog, and it just depends on when that program life cycle is. So we've talked about it before, which one is accelerating at a faster rate. I'd kind of tie that to where are we in the cycle of some of the spends.

Got it. Thank you.

Hi, good morning, Claudia.

Good morning.

Good morning, Mike.

Bob, could you provide some insights on the backlog pipeline as you prepare for 2024 in P&PS? You mentioned water in your initial comments. Are there other areas where you see potential for growth in new project backlog? Additionally, you spoke about changes in the types of services you're going to offer to your clients. How soon or how noticeable will these changes be, particularly on the project management consultancy side, as we evaluate the revenue model over the next two to three years?

So two parts. One, Mike, you're asking about kind of what are some of the other end market secular trends that we're seeing? And then the second part of the question is around how do we see kind of revenue models as our consultancy business continues to grow. Is that fair?

Yes, to drive that, the better mix that you're talking about over your…

Sure, sure. The other verticals, I mentioned that of our top 30 wins, nine are in water. If you take water and advanced facilities, half of the top 31 wins were in both of those sectors; six big advanced facilities markets, too. So we continue to see strong activity within the advanced facilities world, probably driven more so now as we bottomed out from an end market standpoint as far as sales goes within the semiconductor industry. Keep in mind our clients continue to spend through there. But now with the GLP-1 drugs going on in life sciences and all the strength that we see with our clients we've had for years, advanced facilities is going to continue to be strong. And then the others, I'd highlight is energy transition. I highlighted a specific job, but the whole grid modernization of everything that we're seeing, and we're kind of in that consultancy component of that, and that's a strong piece, which is a segue to the second part. I would say that that continued profile of our portfolio within now, call it, independent Jacobs, is we're kind of in the early innings of that. And so it's going to be a balance. But I'd say over the course of the next two or three, four years, it's going to drive that margin expansion even beyond what Claudia talked about post '25 with a cash conversion component to that that's very high.

Perfect, I appreciate that. Thank you.

Hey, good morning, everyone, again.

Good morning, Andy.

So just sorting through Q4 results, I know there's a lot of noise because of the announced deal, but EPS and upcoming in below the low end of your previous guidance, could you give us more color into what exactly happened in the quarter that was below your expectations? And you mentioned the $40 million of temporary costs that you're carrying and how that's impacting your results. Should we simply be adding that $40 million back to your $1.53 billion to $1.6 billion EBITDA for '24 to get what guidance would have been if you weren't doing the RMT?

Yes. Andy, let's begin with the main factor contributing to about half of the gap, which is related to taxes. I mentioned several aspects of this in my earlier comments. To quantify, it's a $0.06 impact due to a one-time allowance, which relates to deferred taxes. Next, we have overhead costs that are not allocated, referred to as corporate unallocated expenses, which is another significant factor. Additionally, the share count was affected, and I explained why we were unable to conduct stock repurchases in the fourth quarter due to the transaction. This provides a broad overview of the situation. I also included some remarks on the temporary costs we are incurring as we get the CMS and the Cyber & Intelligence unit ready to function independently. This adds another layer to the overall context.

Claudia, can we say that if you weren't undertaking the RMT, you would add that $40 million to EBITDA? Or is that not a correct way to think about it?

Absolutely. As Bob mentioned at the end, our earnings power should exclude those temporary costs. We are very client-focused. It's our clients' mission, and we want to ensure there is significant value associated with this transaction and the potential benefits we expect to gain from it and the new entity. We aim for both entities to succeed. This is temporary, and we want to ensure we are preparing to have strong leadership and continue to excel.

So Andy just to clarify. The EBITDA guidance that I gave at the end is carrying it in that guidance.

Yes, that's clear. And then, Bob, just P&PS, net revenue up 11% year I think you said you have good confidence in mid- to high single-digit organic revenue growth. Could you elaborate on the confidence do you see P&PS backlog growing at that rate in FY '24? And then how are you thinking about the balance between higher interest rates impacting projects and geopolitical risks with all the fiscal stimulus, that you mentioned and so on.

Yes. I think on the backlog piece of the question, Andy, my answer is yes, I think that mid- to high single-digit growth will continue. Remember, we've got a really nice diversity within P&PS. So if we think about some of the political risk or what's happening with interest rates, which might be affecting some of our private sector clients, there's not a full immunity, but our private sector clients continue to spend just because of whether they be technology-based or global supply chain-based drivers or supply chain drivers that have continued, and that's really been driving the performance. As far as IIJA or a larger infrastructure around energy transition outside the U.S., we have not seen that effect. In fact, our pipeline continues to grow at mid to high-single-digit percentages, and this is on a base that's very high.

Appreciate the color.

Hey, good morning Bob and Claudia. Thank you for the time.

Hey, Bert.

Hi.

Bob maybe just taking that, I think that was more of a backlog question. You said in your prepared remarks the outlook remains very healthy. Can you just walk us through how you're thinking about the organic growth profile for the company in this coming year? Just for Remainco, you think the previous range for FY '24 for P&PS was a 6% to 9% organic CAGR, with PA Consulting at 12% to 15%, do those remain intact? And on the advanced facility side, pretty positive comments there. Do you think that can keep growing double digits?

Yes, in response to the first part of your question, I would agree. The growth in advanced facilities is robust. Many of the larger programs, particularly in the semiconductor and life sciences sectors, are at their highest levels in terms of accounts. This strong level of activity is expected to continue. We are also witnessing the emergence of new therapies, including GLP-1, as well as advancements in oncology and various neuroscience projects. Therefore, the number of opportunities remains high. As these projects progress through their life cycles, we see a balance, with some areas experiencing a decline while others are on the rise, leading to a reset period of about 12 to 18 months. Based on my comments, your projections make sense.

Got it. Okay. And maybe just a level deeper into the P&PS side. You mentioned some positive remarks on water and on international opportunities. Can you just sort of give us the viewpoint on how you're thinking about, I guess, the regional disparity in FY '24? As FX starts to become less of a factor, do you think what you're seeing in Europe and other parts of the world can rival sort of the growth we're expecting from IIJA in the U.S.?

I don't know if it will get to that level, but I think it will be robust. And I think Claudia mentioned, our European business, despite these macro headwinds that it faced has done well. And so I think water, transportation, energy transition that's driving the U.S., probably more pronounced around energy transition in Europe. The Middle East is across all of our sectors; P&PS sectors in the Middle East. And then in Southeast Asia and Australia and New Zealand, those have remained strong. Our business in APAC this year grew at significant double digits. And so a smaller base in the rest of the world. So I'd say all in all, the geographic diversity that we have in our business really, really is strong and helps us.

Thanks, Bob.

Thanks. Good morning. I just wanted to follow up on the mix element of the 300 basis point margin bridge. I think, Bob, when you were talking about the half before that's mix, like how much of that is related to just not having the lower margin in CMS in there versus achieving better margins in P&PS? I guess I'm wondering when all is said and done with your cost optimization, will your segment-level margins be better? Or will that come out of some other initiatives over time?

Yes. So Steven, let me just make sure I understand. So I'll recap what Bob said, and then I'll address the segment margins. So the first one is the going up to 13.8%, roughly half is just the mix. And by mix, I mean, just what remains with us. The other half is the cost optimization, the streamlining of the operating model. And that is really a function of the remaining businesses removing costs and also the addition of our digital enablement and all that. So that and other works, the segments remain with us or the businesses that stay with us are going to increase their individual margins. Does that answer your question?

Yes, it does. So as part of the cost optimization, there are segment-level efficiency initiatives as opposed to just sort of the corporate-level element. Yes, that's helpful.

Both operations that's where it shows overall as a company.

Okay. Great. And just trying to think about your debt position in about 12 months from now. I'm not sure if I missed if you framed this out or not, but $1.9 billion of net debt now, $1 billion of dividend coming back from the separation to pay down debt. Free cash flow looks like it would be about another $1 billion before whatever cash restructuring expenses you're calling out. I don't know how much that is. But are you assuming close to sort of a net cash position exiting 2024?

Yes. Our decisions are based on a few key principles. The primary one is to maintain an investment-grade rating, which is crucial for our strategic flexibility. These decisions are influenced by our discussions with rating agencies, particularly regarding this transaction. Additionally, we are dedicated to returning cash to our shareholders. As we approach this transaction, an important aspect is how we distribute to our shareholders. This focus on shareholder returns this quarter and this year reflects our commitment to making the best risk-adjusted decisions for them. This is a vital component of our strategy.

Thank you very much.

Hey, good morning, guys.

Hey, Gautam. Good morning.

Hi, Gautam.

Could you describe the risk profile of the projects you've been adding to the backlog, especially since the margins appear to be higher? Are they primarily fixed cost contracts? What contributes to the increased profits? Is it mainly the combination of fixed pricing? How would you generally characterize this? Thank you.

Yes, Gautam, that's an excellent question because it relates to our role within the client business. We're engaged at a level of scientific and technical service that is at the forefront of our clients' operations. Whether it's through our dedicated PA Consulting efforts or our science-driven technical services in infrastructure and advanced facilities, we see a more sophisticated commercial model. Additionally, we're focusing on digital enablement, offering outcome-based solutions instead of relying on traditional models that manage margin through fixed costs or reimbursement while depending on productivity gains. We can achieve these margins in both reimbursable and fixed-price service scenarios due to the significant positive impact we're making on our clients' businesses.

Okay. And just one quick follow-up. You guys have talked about your PFAS technology. I was just curious if you've had any commercial traction yet? And if not, when do you anticipate booking some of that PFAS-related work?

Yes, it has. In the PFAS work, we haven't segregated it as an end market. The gains we're seeing in PFAS are within our water center. These wins, along with larger framework agreements we have with water clients at the federal, state, and local levels around the world, are significant. We're also establishing PFAS-related consultancy arrangements. The true impact of PFAS in the industry tends to emerge when superfund applications and containment issues are highlighted publicly. We see growth, but it's more about how that growth impacts our end market sectors. When we reach the 25%, 26%, or 27% range and begin to encounter compliance-related issues that further drive those end market sectors, the growth becomes more substantial.

Thanks, guys.

Great, thanks and good morning. I guess I just want to get a little bit of perspective on maybe just the medium term even if it's directionally. As you look at the 13.8% in fiscal ‘25, and maybe just think about your mix by end market and region. If we just think moving on from that, is there opportunity whether to maybe look within P&PS for maybe lower margin businesses? Or where you expand geographically? I'm just thinking about the levers kind of going forward you see for the P&PS margins beyond just cost optimization to sort of get to that level in a few years?

Okay, you go ahead.

Yes. I would say this is something we are currently doing and consistently engage in. Two significant factors play a role: our global delivery platform, which is very important and one of the best, if not the best, and has been for several years, is the first. The second is digital enablement. You can see that some of the projects we highlighted today clearly differentiate us from our competitors, where digital enablement and the outcome-based service mentioned by Bob drive more profitable projects.

Yes. To add one more point, Sabahat, regarding what we need. We are very confident that our portfolio in the end markets we operate in is strong. Claudia mentioned our two biggest enablers, and I'll add a third, which is our consultancy enablement. We don't feel the need to search for new geographies or acquire new skills in an end market sector. Our focus is on expansion through digital and consultancy-based enablement, along with access to global talent. I strongly believe we excel in how we deliver on that.

Okay. Great. And then as you think about your guidance for kind of next year, the numbers embedded in your three-year plan, you laid out the 6% to 9% for P&PS. And even as you look out sort of maybe another year beyond that, what mix of price versus volume do you anticipate given some of the funding that's in the system right now? And how should we think about that mix over the next couple of years, particularly in the kind of infra space?

Yes. I believe this will be linked to the enablement component. The response may vary for different areas of the infrastructure and advanced facility space, but we are focusing on infrastructure. Our clients have limits on their spending for infrastructure needs. Therefore, we position our offering to gain margin through enabling outcomes-based solutions. There is a pricing aspect, but with higher margins driven by our digital enablement. We expect this to positively impact the bottom line as we implement the strategies Claudia discussed, which aim to create a more simplified and streamlined organization.

Great. Thanks very much.

Oh, great. Thanks for taking my questions here. I guess it would just be kind of helpful to understand the timing on the $275 million of costs associated with all these actions. It sounds like there's going to be some here ahead of the transaction, but some probably translate to after the transaction. Claudia, can you just talk about the timing of those cash items and recognition of those on the income statement?

Andy, this is very closely linked to the execution of the separation. You'll see more costs towards the end due to the elimination of stranded costs and advisers. Throughout this process, you will notice these costs because of the advisory fees I mentioned earlier. This is all aligned with the timeline of the separation.

I would like to understand the 1Q guidance better. It seems you are indicating that the corporate unallocated cost run rate will remain about the same in 1Q. Could you please confirm that? Also, regarding seasonality, is there something unique about this year's 1Q seasonality compared to previous years? Is it mainly due to the tough comparison mentioned in last year's footnotes? Additionally, if there are restructuring and separation-related costs, why aren't those being excluded in the first quarter?

No, I think we discussed the seasonality of the business, so I would agree with that. Regarding the $40 million, it's related to the costs associated with separating CMS. This is primarily connected to the transaction and preparing CMS to function in the new environment. That cost amplifies the impact, but I didn't suggest it would exceed the $60 million, which reflects the additional expenses we incur company-wide to support CMS.

Alright, thank you.

Yes. Thank you, everyone. We're excited about the future, and we look forward to providing more updates as we progress our exciting plan forward. Thank you, everyone.

Thank you.