Jacobs Solutions Inc (J) — Q1 2024 Earnings Call Transcript

Thank you, Audra. 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. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements, non-GAAP financial measures and operating metrics. We have also introduced a new supplement that consolidates certain information, including our non-GAAP financial tables. Additionally, beginning with this quarter, the company will no longer apply an adjustment to adjusted net earnings from continuing operations and adjusted EPS, which previously resulted in the application of the expected annual tax rate to all quarterly periods. Prior comparable periods are also being presented on this basis. Turning to the agenda on Slide 3. 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 and summarizing highlights from our first 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. With that, I'll turn it over to CEO, Bob Pragada.

Thank you, Jonathan. Good day, everyone, and thank you for joining us to discuss our first quarter fiscal year 2024 business performance. We continue to prioritize simplifying our business model, optimizing our cost structure and accelerating profitable growth and margin expansion across our lines of business. Our team continues to demonstrate great resilience and dedication as we delivered better-than-expected underlying results in Q1, while also working to the added task of standing up two independent companies. At the corporate level, we are diligently working to create a leaner operating model that aligns Jacobs' position as a global leader in delivering science-based digitally-enabled solutions to our clients, allowing us to benefit fully from the broad-based strength that we see in global infrastructure and sustainability investments. We are confident that the actions we are taking are providing the foundation for multiyear improvement in profitability and margins, and we look forward to sharing more detail in the quarters to come. Turning to Slide 4. I want to provide a brief update on a few key milestones related to the spin-off and merger of our Critical Mission Solutions in Cyber and Intelligence businesses with momentum. We continue to progress towards closing the transaction in the second half of fiscal year 2024, consistent with our previous expectations. Together with momentum, we are making progress on preparing our Form 10 and private letter ruling request in keeping with the established timeline of the transaction. Additionally, we are progressing antitrust filings and regulatory approvals. Upon the public filing of the Form 10, we aim to offer more comprehensive information and look forward to introducing the combined leadership team to our investors and analysts later this spring. I would also like to briefly touch on the cost optimization plan that we outlined last quarter. Our transformation to a less vulnerable and higher-value, higher-margin portfolio is well underway. We continue to find new ways to streamline our operating model. While it is too early to positively revise our targets, we are increasingly confident in our ability to enhance our long-term profitability. As we progress towards separation and optimizing our corporate cost structure, we now are able to better align costs to the applicable business units. As a result, we have made the decision to shift some corporate unallocated costs into the current P&PS segment, which will allow for greater long-term recovery of our corporate overhead. While this has the effect of temporarily weighing on our segment operating margins, this has no impact on our bottom line today. Rather, this will boost corporate profitability in the long run as we gradually recover costs from public sector clients. This provides upside beyond the initial 13.8% adjusted EBITDA margin target set for stand-alone Jacobs, post-separation that we shared last quarter. This adds to our conviction that our transformation will drive multiyear value creation. Turning to Slide 5. In Q1, I'm pleased to report a strong first quarter revenue driven by 9.5% gross and 7.9% adjusted net revenue growth that is entirely organic. Backlog increased 5% year-over-year, and gross margin in backlog improved 29 basis points year-over-year, boosting confidence that our businesses can continue their profitable growth trends. This quarter's results include a one-time noncash $15 million inventory write-down. Excluding this item, adjusted operating profit would have increased versus the prior year period. We saw a continuation of strong organic growth in P&PS with 8.4% adjusted net revenue growth. We had a Q1 operating cash flow of $418 million, up 38% year-over-year. Strong cash conversion is a hallmark of our asset-light business model and remains robust in Q1 with $401 million in free cash flow, and we expect to generate greater than 100% adjusted free cash flow conversion in fiscal year 2024. The ultimate measure of our ability to create value is long-term growth of free cash flow per share, and that will continue to be our North Star. Turning to Slide 6. Our People & Places line of business generated strong top-line growth with adjusted net revenue up 8.4% year-over-year, marking the fifth consecutive quarter of greater than 6% organic growth. We continue to execute against our strategy of prioritizing profitable growth over absolute growth as demonstrated by gross profit and backlog increasing 7% year-over-year. Our pipeline remains robust, and we continue to expect P&PS organic growth of mid- to high-single digits in FY '24. We anticipate full year P&PS adjusted operating margins to increase year-over-year, inclusive of the previously mentioned increase in allocation of overhead costs. The water market remains a pacesetter within the company. In particular, water scarcity continues to trend across the globe, affecting billions of people. Decades of increasing population growth and agricultural demand have significantly depleted the quantity and quality of water resources. Jacobs is a leader in developing solutions to address water scarcity, including water reuse, groundwater management and desalination. In the Americas, California and Colorado have recently adopted regulations for direct potable reuse. And Arizona is making positive strides towards adopting similar regulations. Notably, the world's largest chipmaker, TSMC, is currently building a new semiconductor facility in Arizona. We've been selected for the first phase of the design and project delivery of the campus' industrial reclaimed water plant. In addition, multiple states in the U.S. are developing regional water supply plants to balance water availability and economic growth. As an example of such work, we were awarded a $191 million project in St. Johns County, Florida for the design and project delivery of a water reclamation facility. This facility will treat 3.25 million gallons of water daily for beneficial reuse with 13 miles of transitioning pipelines to deliver reclaimed water for residential irrigation. In transportation, we have a long-term relationship with Brightline West and have been awarded the design of the 218-mile high-speed rail linking Las Vegas to Southern California. Brightline West, through a partnership with Nevada, successfully secured $3 billion in grants from the Federal Railroad Administration as part of the IIJA funding. In Life Sciences, we're supporting Lilly, with permitting and conceptual design for their injectable manufacturing facility in Alzey, Germany, to support an increased demand for their medicines, including their diabetes and obesity portfolio. We continue to secure additional large engagements in the Middle East. For example, we've been appointed to provide preliminary and detail design and supervision services for utility and road infrastructure, including major road upgrades for Wadi Safar and Diriyah Gate 2 in Saudi Arabia. In CMS, we performed very well in Q1, continuing the profitability trend demonstrated in FY '23. CMS' Q1 revenue was up 5% year-over-year, and operating profit increased 14% behind 63 basis points of margin expansion. Its pipeline and growth outlook remain strong with major award prospects in FY '24 and a light recompete schedule. The CMS team is executing well and has great momentum as they prepare to be an independent company. PA Consulting continues to take share as demonstrated by an 8.5% revenue growth in what continues to be a choppy macro environment, particularly in the U.K. Margins were light due to some softness in December. However, we continue to expect approximately 20% adjusted operating margins for the full year and have confidence in our ability to manage variable costs to achieve that goal. Together with PA, we celebrated new wins with the Office of Gas and Electricity Markets in the U.K. for program management services and regulatory practices that will advance the safe and secure supply of hydrogen. Our Divergent Solutions operating unit delivered a solid quarter with 5% adjusted net revenue growth. Profits were impacted by an approximately $15 million one-time expense in connection with the merger. Underlying performance in the business was strong and excluded this write-down. Adjusted operating margins would have been approximately 700 basis points higher and exceeded our expectations for the quarter. In summary, we remain well-positioned to grow while serving our clients with excellence and delivering science-based digitally-enabled solutions for a more connected and sustainable world. And we continue generating strong free cash flow conversion, which will enable us to return capital to shareholders as we chart our new path forward as two independent companies. Now I'll turn the call over to Claudia to review our financial results in further detail.

Thank you, Bob. We are pleased with our Q1 results, which came in above our expectations. Our results illustrate our ability to deliver on our long-standing financial objectives, while at the same time, generating strong free cash flow and returning a significant portion of our cash to shareholders. So let me begin by summarizing a few of the highlights for the quarter on Slide 7. First quarter gross revenue grew 9.5% year-over-year and adjusted net revenue grew 7%. GAAP operating profit was $204 million for the quarter and included $51 million of amortization for acquired intangibles and $60 million of other transaction, separation-related restructuring, and other costs. This includes $51 million associated with the separation of CMS. Our adjusted operating margin was 9.8%. I will discuss the underlying dynamics during the reported segment review. GAAP EPS from continuing operations was $1.37 per share. It included a $0.27 impact related to the amortization charge of acquired intangibles and $0.37 from transaction, restructuring, and other related costs. Excluding these items, first quarter adjusted EPS was $2.02, up 28% year-over-year. Our adjusted EPS included a $0.49 benefit related to a discrete tax item and a $0.09 headwind related to the noncash inventory write-down. Q1 adjusted EBITDA was $328 million and was down 3.1% year-over-year, representing 10% of our adjusted net working capital. Excluding the inventory write-down, adjusted EBITDA would be roughly flat year-over-year. The effective tax rate of 4.2% benefited from $61.6 million in discrete tax benefits related to the permanent reinvestment of capital gains associated with an overseas subsidiary. This tax benefit was incorporated into our annual guidance, and we continue to forecast a 22% annual effective tax rate through fiscal year 2024. We will no longer be adjusting our non-GAAP EPS to align with our full year effective tax rate expectations. With the entirety of the deferred tax benefit in Q1, we now expect the quarterly effective tax rate to approximate 26% to 27% for each quarter of the remainder of this fiscal year. Finally, backlog was up 5% year-over-year. The revenue book-to-bill ratio was just over 1.12x, with our gross profit in backlog increasing 6.1% year-over-year. Regarding the performance of our segments in the quarter, let's turn to Slide 8. Starting with People & Places Solutions. Q1 adjusted net revenue was up 8.4% year-over-year. Adjusted operating profit was down slightly, resulting in adjusted operating margins of 13.7%. However, excluding the impact of cost allocation changes previously mentioned, adjusted operating profit would have resulted in approximately 7% year-over-year growth. We continue to see solid momentum in both growth and profitability in the business and expect full year P&PS adjusted operating margins to increase year-over-year, inclusive of the previously mentioned increase in allocation of overhead costs. Moving to Critical Mission Solutions. Our Q1 revenue increased 5% year-over-year with backlog up 9%, continuing a consistent trend of high-single-digit growth over multiple quarters. We also continue to find avenues through operational improvement with CMS operating margins rising by 63 basis points year-over-year. Shifting to Divergent Solutions. In Q1, our adjusted net revenue increased by 4.7% year-over-year. Underlying execution was strong. Adjusted operating profit was $8 million, including the $15 million inventory write-down. Excluding the one-off write-down, performance was above expectations. Now let's turn our attention to PA Consulting. Q1 saw an 8.5% year-over-year revenue increase. PA continues to deliver ongoing positive momentum in bookings and pipeline. However, the U.K.'s ongoing election cycle introduces macro risks that we are closely monitoring. We remain confident in our ability to navigate these factors by managing variable costs, and we are targeting approximately 20% adjusted operating margins for the full year. In total, it was a strong quarter for each of our segments from an execution standpoint. Our adjusted unallocated corporate costs were $59 million in Q1. This quarter's cost excluded previously mentioned costs that are now being allocated to the P&PS segment. As we continue to enhance operational efficiencies and optimize our operating model, we expect this line item to trend towards $50 million per quarter or $200 million annually post-debt pressure. Turning to Slide 9 to discuss our balance sheet and cash flow. We posted another quarter of strong cash flow generation, which is indicative of the quality of our earnings and cash conversion. As Bob mentioned, we generated strong quarterly free cash flow of $401 million. As a result, we are well positioned to deliver our anticipated 100% reported and adjusted free cash flow conversion to adjusted net earnings. Regarding capital allocation, we opportunistically repurchased $100 million of shares during the quarter, reflecting our commitment to delivering consistent returns to our shareholders. We still have $775 million remaining under last year's repurchase authorization. And as we have said, we will remain dedicated to returning capital to shareholders in alignment with our overarching goal of compounding free cash flow per share. We remain committed to maintaining an investment-grade credit profile. We ended the quarter with cash of $1.14 billion and gross debt of $2.9 billion. Our Q1 net debt to adjusted EBITDA of approximately 1.2x is a clear indication of the continued strength of our balance sheet. As of the end of Q1, approximately 35% of our debt is tied to floating rate debt, and our weighted average interest rate was approximately 5.1%. Finally, with our strong balance sheet and free cash flow, we remain committed to our quarterly dividend. The Board has authorized an 11.5% increase to $0.29 per quarter, and our quarterly dividend will be paid on March 22. With this, we have increased our dividends each year since 2018, driving a nearly 12% dividend CAGR over that period. Now I will turn it back to Bob.

Thank you, Claudia. Turning to Slide 10. We continue to be energized as interest in our science-based digitally-enabled solutions remains robust as clients engage Jacobs to solve their most complex challenges. Internally, we remain focused on execution and continuing to deliver against our operational and financial objectives. We reiterate our outlook for fiscal 2024 adjusted EBITDA of $1.53 billion to $1.60 billion, with adjusted EPS of $7.70 to $8.20, representing 9% and 10% growth at midpoints, respectively. This guidance incorporates Q1 adjusted EPS of $2.02 and as Claudia shared, a 26% to 27% adjusted effective tax rate each quarter for the remainder of this fiscal year. Though we expect a heavier than normal cost structure until separation, particularly in the current year, we anticipate accelerating EPS growth in the second half of the fiscal year. In closing, we've maintained focus on standing up both independent Jacobs and CMS for success while streamlining and optimizing our operating model and positioning both companies for long-term value creation. Operator, we will now open the call for questions.

Oh, great. For those who may not be familiar, including myself to some extent, regarding the SG&A reallocation into the segment, what you're suggesting is that for these reimbursable public sector customers, if it’s within the segment, you can essentially get reimbursed for those costs. That seems to be the mechanism. I just wanted to clarify that. Claudia, could you share the annual dollar amount related to the reallocation from the SG&A line into the segment?

Yes, Andy, that's a great question and a good lead-in. Your assessment of recoverability is correct. If you consider the pre-planning for the separation and outpost, we had a lot of shared costs before, making it unclear how directly they applied to the segment. Since we started this, we've had a great opportunity to have direct visibility on where these costs are being allocated. We hit that right at the start of the government audit cycle in Q1, and now we have a full year of applying those costs. That's accurate. Regarding the full-year amount, it would be the $17 million we identified this quarter multiplied by four. However, keep in mind that this amount decreases each quarter due to the effect of recoverability. Does that make sense?

Yes, it seems that way. The corporate unallocated amount reported for the quarter is $59 million, and what you're indicating is that unadjusted, that figure would have been $17 million higher. In other words, the $59 million includes the $17 million that was moved.

That's correct.

Can you talk about the underlying costs for the corporate unallocated? Were there any notable costs related to separation or other items in the SG&A line right now? Certainly, there have been these efficiency initiatives that you've discussed, but is there anything else we should be aware of that wasn’t excluded from that corporate unallocated line?

No. No, the $9 million of transition costs took it to $59 million and then the $17 million that we were able to, from a positive standpoint, move into P&PS and get recoverability on it was it. I will say, Andy, we are making progress on kind of our overall cost optimization or reductions that we started at the beginning of the year, to where we'll be right on plan of what we identified last quarter.

Could you elaborate on the PP&S in relation to the current pipeline? You mentioned some margin improvements in the backlog during your prepared remarks. How will this develop as we progress through fiscal year 2024? Are you seeing better share in higher-margin projects, possibly in early consulting advisory compared to design work in these projects? Additionally, which areas do you expect to see stronger revenue and booking growth in the P&PS segment as we advance through '24?

Yes, that's a great question. The short answer is yes, we are beginning to see margin improvements according to our profile and mix. Currently, I would lean more towards the water market regarding this mix. To provide a statistic, our year-on-year growth in water bookings has increased by 30%. Another notable area is what we refer to as cities and places, which encompasses our built environment business, and this has been significantly driven by the Middle East with a year-on-year growth of about 40%. What is encouraging about both of these sectors is that, from a cash and margin perspective, we are achieving company-wide margin targets in the Middle East, which is a positive development. Traditionally, the water sector has been our higher-margin segment, so we are observing two positive trends here.

What can you tell us about bookings and outlook as we progress through 2024? Are those the main focus areas, or are there other sectors to consider, like life sciences, among others?

Yes. Looking ahead, we are beginning to observe some exciting developments in the life sciences sector. It has been highly active for several years, but in the last few quarters, while it hasn't decreased, it also hasn't been growing at the previous pace. Recently, we have engaged in meaningful discussions with long-standing Tier 1 clients, and we anticipate sharing positive news regarding those projects next quarter. I mentioned the Lilly project in Germany, where we are seeing continued strength specifically around GLP-1. Additionally, Novo has announced the acquisition of Catalent, and those facilities will require retrofitting, which aligns with our ongoing collaboration with Novo. This is certainly a positive sign for the life sciences area. In the chip manufacturing sector, as our design efforts continue within the external semiconductor market, we are entering a new growth cycle. We are witnessing an uptick in projects focused on tool OEMs, and much of the R&D work necessary to support these manufacturing operations for higher-powered chips influenced by AI has already led to early bookings. We are seeing conceptual work materializing in this area.

So Bob, just following up on Mike's question. You mentioned water overall, the Middle East driving your overall People & Places business, which is great. But are there any areas that you are worried about on that side? You mentioned the U.K. for PA, but not really for People & Places. And your backlog was up nicely in the quarter. Does it just continue to sequentially rise from here?

Yes, the answer to your question is yes. From a profit and loss margin perspective, we are confident that the year-on-year increase I've mentioned is genuine. Therefore, we anticipate a year-on-year rise in margin. There are certainly areas of focus, particularly the U.K. We have managed to maintain stable performance in the U.K., which is encouraging. However, the national infrastructure and construction report was just released, and the U.K. government has committed to maintaining the same level of spending, £775 billion over the next 10 years, accounting for inflation. This is an area we are closely monitoring to ensure continued growth, but overall, the outlook is positive.

That's helpful. And then maybe just on Divergent Solutions. I know a piece of it is going to go with the RMT, but maybe a little more color on the inventory write-down. Divergent just, as you know, like underlying margin is good, but it's kind of been all over the place a little bit over the last several quarters. So what does Divergent look like as you go forward, let's say, post-RMT for Jacobs?

Yes. So let me just clarify one thing, Andy. The inventory write-down has to do with the Cyber & Intelligence business, and that actually is in the perimeter and will be going. And it's really a part of the separation financials and inventory that we had to disposition. So that's not in the piece that will continue with independent Jacobs. We see more of it, and we're working on this operating model right now. Transportation, water and what we're doing in the built environment around digital enablement, being a strong horizontal cross-cutter through now the entirety of the business. So simplifying our reporting as well as taking all the successes that we had within the transportation and water digitization and digital enablement, and integrating them into now what will be independent Jacobs. And so much more to follow on that.

Bob, you mentioned that you're on track with the cost expectations you identified at the beginning of the year. So does that mean the $40 million of temporary costs and $275 million of restructuring are still the numbers to keep in mind? And if so, how much of that has been incurred to date? Is that the $17 million plus the $9 million? Or should the $40 million be lower now that you're going to be getting reimbursed for some of that?

Yes, thanks for the question, Steve. That's a good clarification. Regarding your first question, the $275 million and $40 million are still very much in play. For the $40 million, the $9 million was incurred in the first quarter, and the remaining amount will be spread over the next three quarters, with a greater portion likely in the first half than the second. Hopefully, that clarifies things. We're still on track with the numbers we highlighted in the previous quarter. The $17 million is not included in that; it's our recoverable costs, which is why we moved them into the segment.

And Steve, I'll add to the $275 million, we're also on track. And for that, it's $51 million that I mentioned in my prepared remarks.

Okay. That's helpful. And then the 14.6% margin for P&PS, is that on the same basis as the 13.7% in Q1? I assume it is. And if so, and then how quickly do we get above that 14.6% to kind of deliver for the full year given the lighter side in Q1?

Yes. Steve, the answer to the first question is yes. And I'd say within the next few quarters.

Okay. So in other words, Q2, we should still be expecting it to be below that? Or...

No, no, no, no. It will sequentially increase over the next few quarters to where Q4 will be above where we were last year.

Okay. I'm just...

For the year. Yes.

For this year?

For this year. This year will be higher than last year, year-on-year total.

Right. This year, you're guiding to 14.6%, right? Do I have that right?

Better than 14.6%. So last year was 14.6%. This year will be better than 14.6% full year.

And if you're 14.7% for the quarter, you got to start being better than 14.6%. So I guess I'm just trying to figure out how quickly we get better than 14.6%. Is that...

It will be a gradual increase.

And we'll see that within our reported financials. That's why I said a few quarters.

This is Adam on for Jerry today. Can you talk a bit more about what led to the decline in the margin for PA Consulting despite higher sequential revenues? Additionally, what factors contribute to the visibility on the margin improvement for the remainder of the year?

Sure. I will address the second part of your question first, Adam. The optimism is driven by the pipeline and the backlog in PA. The team has gained better control over the variable cost structure of the entity. Similar to Jacobs, we operate in a people business that is asset-light and service-oriented. The decline was likely influenced by some client volatility in December, particularly in our U.K. operations concerning government, defense, security, and public sector work. When spending stops suddenly, we can't implement variable cost measures immediately, which contributed to the results we observed in that quarter. However, things have since improved, and we are proactively managing our variable costs as we did in mid last year.

And then on the top line, solid growth this quarter, high-single digits, but the comps get a little harder from here. How are you thinking about the organic growth outlook in the balance of the year amid some of the things going on in the U.K. market?

Yes. I think we're still in that kind of mid-single digits to mid-high singles. For three years, we've been in double-digit growth. And so we're still growing. I think we're probably kind of in that mid-single-digit growth now.

So I wanted to spend a little more time on just like what you're seeing from a booking standpoint in People & Places. So first place is just like on the semiconductor side. So it sounds like there's a number of grants to be announced by the U.S. in March. To what extent do you think that could potentially unlock with more activity from a design standpoint? And then just like what are you seeing from a domestic versus international perspective, just for semi-design?

Yes. Let me address the first question, Chad. Regarding the grants that are being announced, I would echo what I shared with Mike Dudas: these grants are primarily being used for research and development. Larger facilities need to ramp up to full production, and the integrated device manufacturers are considering the semiconductor purchasing cycle and planning their output and the startup of these large plants accordingly. As a result, these grants support the areas where technological advancements are taking place, particularly with tool original equipment manufacturers. This is also influencing our current bookings, driven by those tool OEMs. What's advantageous for Jacobs is that we are involved in the technology of the tools and comprehend the facility requirements. This positions us well and is what's contributing to our semiconductor bookings. At the moment, most of our business is domestic, though we are seeing some activity in Europe related to the EU Chips Act. However, the focus is primarily on the domestic market. We're observing significant growth in foreign direct investment in India, particularly as chip manufacturing may shift from China to India. We’re actively engaged with both large Indian clients and foreign companies entering the Indian market.

Got it. That's super helpful. And then just going back to the cost reallocation from unallocated to People & Places. Just wanted to get a sense for like how long it will take before you actually can hit the P&L. Do you have to go through like a full bid cycle? So in other words, do you have to turn over the backlog before you see those benefits?

No, it's gradual. It's gradual. So those costs start the next quarter, I'd say from a full kind of actualization of those costs that goes in, it's about a 12 to 24-month cycle. But just to reiterate, Chad, we're reiterating our year-on-year margin improvement even with the gradual recoverability of that overhead.

Just a follow-up on the PA conversation earlier. Obviously, we see the bookings number. But I guess, as you're talking to your clients in that space, are you seeing a bit of a pipeline build-up there? That business is obviously a bit more macro impacted than the P&PS business, but just wondering where sort of the conversations are that aren't in the backlog right now for that business line?

Sure. I'd say that, so the two areas within PA that we're getting actual traction is within AI and AI enablement as a driver of business transformation for our clients. And so to kind of toggle here, it's good for PA, it's good for Jacobs, in that the AI enablement is the start of the conversation. I think some clients now this kind of goes to how quickly does that get into an engagement, get into backlog, we realize in P&L. That's kind of where we are right now as far as where we are in the cycle. So AI is a big driver. But the timing and speed of how our clients are embracing it is driving some of the booking cycle. The second from an end-market standpoint is Life Sciences. And so PA has been able to take not just AI, but other knowledge and look at the transformation of the whole clinical study program, especially as that's kind of gotten more patient-centric with different types of therapies for each patient. PA has rightly been right in the middle of all of that. And so that kind of got a tailwind as well. And then the last one that is really kind of starting to develop in our pipeline at PA is around the use of AI in early-stage drug discovery piece, and it's real, real early stage. I mean clearly, the Tier 1s are way out ahead. But PA does it from more of a standpoint of how that's going to transform kind of the Tier 2 and Tier 3 clients. So some good stuff. I'd say the timing right now of how quickly those get embraced while clients are thinking about their own business is causing some of that near-term softness.

Great. On the P&PS side, there has been some discussion about when the larger funding packages will really kick in. Could you provide some insight into your top line guidance for P&PS? What assumptions do you have regarding contributions from the IIJA or the IRA, and how much is coming from base level business? How is the government funding tracking compared to your initial expectations?

Sure. I would say that our guidance has been consistent, and I noted that we are seeing mid- to high-single-digit growth within the 6% to 9% range. For the last five quarters, we've consistently been at the high end of that range. Regarding the IIJA, we are currently halfway through the timeline, and for larger rail and highway projects, we have 25% of funds already spent, with 15% obligated. While it hasn't significantly contributed to growth yet, the encouraging news is that it appears the five-year cycle will likely be extended.

Bob, just to follow up on that point. If we look beyond '24 and maybe into '25 and past that, it sounds like your visibility is generally improving not just in advanced facilities but in large parts of P&PS. As you think about potentially toggling you're above what your medium-term view is for the segment, what would drive that? Is that more a function of winning some specific larger projects? Or is it the flow of funding under some of these programs?

Yes, Bert. And are you saying independent of advanced facilities to the other kind of non-advanced facility sectors or inclusive of?

No. I think inclusive of, I guess, from what you were saying, Bob, in your earlier comments, it sounds like you feel like you're more on that upslope and you're seeing sort of the path of some of that CapEx will be beneficial for you. So including that and thinking about what you just mentioned about IIJA and some of the other programs, it seems like your visibility is quite good. If you were to say, several years from now, look at you and you were growing at 9% or faster than your 6% to 9% growth range. I'm just curious if that's more a function of winning some of those larger projects that are out there? Or is it just the funding needs to flow sort of on time?

I would say it's probably more about winning those projects in the market that I would index towards is water. The pipeline growth in water, and I mentioned it last quarter, actually has continued this quarter. It's not as big as transportation, but if transportation continues at the same kind of clip even with the IIJA comment, but water continues at the rate that it is right now, and we're having this conversation 6 to 8 quarters from now, water and then water and environmental for those two are kind of interdependent on each other. I'd say is the one where we're seeing not only the projects being announced but the funding be applied, and a lot of that is being driven around water scarcity. And look at what's going on in California right now, it's either we got too much and we need to figure out where to put it or we don't have enough and we need to figure out how to find it and treat it. And so I'm oversimplifying, but that's probably what I'd say.

Got it. Okay. That's super helpful. Maybe just a cost side question. If we look at that bridge that you guys put in the deck going from 10.8% to 13.8%, can you just help us think through how much of that is cost-cutting related and how much of that is just improved mix? Sounds like you're pretty bullish on the margin opportunity in P&PS. So is that a function of just you're getting better projects? Or is it more cost-cutting? Or is it sort of 50-50?

I'd say it's balanced. Probably 50-50. There's a 50% mix, but 50% is a leaner organization with now and we've started as of Q1, a level of recoverability and optimization of our cost structure rather than relying on the straight variability of, if you're busy, you spend, and if you're not, you cut, right? We want to get more into a steady state.

Yes. Thank you, everyone, for joining us on the call. A lot of exciting things happening in the business right now, and we look forward to giving you further updates in the quarters to come.