Jacobs Solutions Inc (J) — Q2 2024 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. 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. Turning to the agenda on Slide 3. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and Interim CFO, Kevin Berryman. Bob will begin by providing an overview of recent activities, then summarizing highlights from our second quarter results. Kevin 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, Ayan. Good day everyone and thank you for joining us to discuss our second quarter fiscal year 2024 business performance. I want to welcome Kevin Berryman, previously our President and Chief Financial Officer back, following his appointment as interim CFO. Kevin brings a wealth of experience and expertise to this role, having served as our CFO for over nine years. During his tenure, he played a pivotal role in navigating significant transformations and driving growth across our organization and most recently, has demonstrated exceptional leadership in overseeing the ongoing separation of our Critical Mission Solutions and Cyber Intelligence businesses as well as its planned strategic merger with Amentum. As we move forward, we have initiated to search for a permanent CFO with the assistance of an executive search firm. We are working towards concluding this search expeditiously and are grateful that Kevin has agreed to remain at Jacobs through the close of the separation transaction to provide overlap with our next CFO and ensure a smooth transition. Now, moving to Slide 4. I want to emphasize our solid progress on the cost optimization plan. We continue to prioritize simplifying our business model, optimizing our cost structure, expanding margins, and accelerating profitable growth across our lines of business. Our strategic shift towards a less complex, higher value, and higher margin portfolio remains on track. We are actively identifying opportunities to streamline our operating model and enhance efficiency, while continuing to deliver world-class value-added scientific-based, digitally-enabled solutions to create a more connected and sustainable world. We have made significant progress on our Critical Mission Solutions and Cyber Intelligence separation planning. We're pleased to report that we have now achieved a significant milestone by receiving all approvals and clearances under competition and foreign direct investment laws that are conditioned to the separation transaction. We are steadily advancing our Form 10 filing targeted for early summer. We expect to fulfill the remaining closing conditions and complete the transaction in the second half of the fourth quarter of fiscal year 2024. Turning to Slide 5 and Q2. I'm pleased to report solid second quarter consolidated revenue, driven by 5% growth and 3% adjusted net revenue growth that is entirely organic. Backlog increased 2% year-over-year and gross margin in backlog increased approximately 50 basis points year-over-year, boosting confidence that our business will continue to deliver profitable growth. Turning to Slide 6. People & Places Solutions line of business reported another quarter of solid top line growth as we continue to execute against our strategy of prioritizing profitable growth over absolute growth. As demonstrated by P&PS, record adjusted operating margin of 15.3% and strong adjusted operating profit growth of 15.3% year-on-year. We continue to drive organic revenue growth up 7.5% and adjusted up 5.6% year-over-year. Our pipeline remains robust, and we continue to expect P&PS organic revenue growth of mid to high single-digits in FY 2024. During the quarter, we have delivered several marquee wins across multiple core market sectors. In transportation, we have been selected as Amtrak's delivery partner for the $6 billion Frederick Douglass Tunnel program, America's busiest passenger railroad, one of the largest national transportation and infrastructure investments and the most significant IIJA Award to-date. The team will provide program and construction management services from contract initiation through service commissioning for two high-capacity tunnel tubes for electrified passenger trains, improving rail systems and enhancing accessibility to transform this 10-mile section of the Northeast Corridor. PA Consulting is an integral part of our program management team, demonstrating their emerging presence in transport in the U.S. and the power of our collaborative partnership. In Aviation, we continue our long-term relationship with Los Angeles World Airports to provide program management services at Los Angeles International Airport. Infrastructure improvements at LAX will enhance the city's preparedness for upcoming sporting events, including the Los Angeles 2028 Olympics. Water remains a critical growth catalyst with several strategic wins across our key geographies, further bolstering our position in the sector, as evidenced by our appointment by Miami-Dade County Water and Sewer Department to design upgrades for the county's three wastewater treatment plants, benefiting nearly 2.4 million residents and hundreds of thousands of visitors each year. Jacobs will incorporate Intelligent O&M, a digital one water solution from its suite of digital products to provide our confident decision-making and to achieve greater efficiencies, reducing wastewater treatment costs, and optimizing operational labor. Additionally, we were selected by United Utilities, one of the U.K.'s largest listed water companies to its strategic solutions team supporting program optimization for major capital works through the AMP8 and AMP9 cycles, which cover the period from 2025 to 2035. Furthermore, we were selected by Water Corporation, the largest water utility in Western Australia to design, build, operate, and maintain the Alkimos Seawater Desalination Plant in Perth, Australia. The project, part of an alliance with Water Corporation and ACCIONA is expected to ultimately produce 26 billion gallons of drinking water. In recent weeks, significant regulatory steps have been taken in the environmental sector. The U.S. EPA set maximum contaminant levels for five PFAS compounds. The first major U.S. drinking water legislation in 20 years and classified two PFAS compounds as hazardous under the Superfund program, expanding our potential for environmental management and compliance services. Internationally, the EU has also progressed, banning certain PFAS compounds and moving forward with risk evaluations. These developments are expected to increase demand for our consulting, engineering, and remediation services. We've been working with and advising our clients about how these anticipated regulations will impact them since discussions began some years ago. Now, that the regulations are finalized, we're having robust conversations with our clients about their options to navigate this next chapter. PA Consulting is working with companies that have PFAS materials in their products and advising on how to remove them from their products and supply chains as well as assessing how to create alternative materials. With our expertise, strong market presence, and leading position as demonstrated by our ongoing work with the Department of Defense, U.K. government, and Australian Aviation authorities, Jacobs is ready to lead in this evolving space. In Life Sciences, our overall pipeline continues to grow at double-digit rates year-over-year, driven by long-term relationships. There are significant opportunities in the pipeline and we are well-positioned for continued growth. In CMS, Q2 revenue was up 3% year-over-year and adjusted operating profit increased 10% with approximately 50 basis points of margin expansion. The CMS team is executing well, and we continue to see several positive trends for long-term growth as the team prepares for the merger with Amentum. PA Consulting delivered among an industry-leading adjusted operating margin of 20.5% with solid execution and cost discipline. We continue to expect the remaining quarters in FY 2024 to exceed 20% adjusted operating margin. Our partnership with PA continues to be a differentiator for us with some nice wins in the quarter, including the previously mentioned Frederick Douglass Tunnel and an appointment to the HM Revenue & Customs multibillion-pound framework in the U.K., intended to upgrade software systems across the government agency. Divergent Solutions delivered a solid adjusted operating margin performance at approximately 10% and adjusted operating profit growth, which would have been approximately 13% excluding a large license sale to Palantir in the comparison period. Our suite of digital products and platforms are elevating the value we can provide to our clients globally. In summary, we remain well-positioned to capitalize on the growth opportunities across our core market sectors. Now, I'll turn the call over to Kevin to review our financial results in further detail.

Thank you, Bob. We are pleased with our Q2 results, leading to another strong quarter. We are steadfast in our commitment to providing high-value solutions with improved margins, supported by our continued emphasis on operational excellence and execution. So, let me begin by summarizing a few of the highlights for the quarter on Slide 7. Second quarter gross revenue grew 5% year-over-year and adjusted net revenue grew 3%. GAAP operating profit was $281 million for the quarter and included $53 million of amortization from acquired intangibles and $58 million of transaction, restructuring, and other costs, including $47 million associated with the separation transaction. We still expect our total restructuring cost to be approximately $275 million for the fiscal year, materially driven by the separation transaction. Our adjusted operating margin was 11.3%. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.29 per share and included a $0.28 impact related to the amortization charge of acquired intangibles and $0.34 from transaction, restructuring, and other related costs, all of which were materially driven by the separation transaction. Excluding these items, second quarter adjusted EPS was $1.91, marking a 7% decrease compared to the previous year. When adjusting for last year's second quarter discrete tax benefit of $0.32, our current non-GAAP EPS represents an approximately 10% year-over-year increase. Looking forward, we anticipate maintaining an annual effective tax rate of 22% for the full fiscal year. Q2 adjusted EBITDA was $393 million and was up 10% year-over-year, representing a strong 11.3% adjusted net revenue. Finally, backlog was up 2% year-over-year. The revenue book-to-bill ratio was 0.96 times with our gross profit and backlog increasing 4% year-over-year. Excluding a one-time change in government funding strategy with regard to Space ISR programs, which I'll describe in more detail during my segment comments, our book-to-bill ratio for the quarter would have been approximately 1.06 times, with significant strength in pipeline growth and expected large wins in Q3 and Q4. Regarding the performance of our lines of business in the quarter, let's turn to Slide 8. We are particularly pleased with our performance in People & Places Solutions. Q2 adjusted net revenue was up 5.6% year-over-year. Adjusted operating profit growth was strong at 15.3%. Reflecting our commitment to higher end profitable growth, the segment saw a record adjusted operating margin of 15.3%, up approximately 130 basis points year-over-year. We continue to see solid momentum in both growth and profitability in the business. Our backlog has grown by 2% year-over-year and we've seen a 7% increase in the gross profit in our backlog. This improvement reflects our ongoing efforts to enhance the quality of our bids and project wins as we expect some critical large wins to occur in Q3. Moving to Critical Mission Solutions. Our Q2 revenue increased 3.2% year-over-year with backlog up 3.9%. Our adjusted operating profit was up 10.3% year-over-year, while CMS adjusted operating margin rose by approximately 50 basis points year-over-year as the business continued to find avenues of operational improvements. While a recent program loss will put some short-term pressure on the second half, our recent successes in shorter-cycle awards is expected to help mitigate the impact. Our work remains mission-critical, allowing the business to show long-term resilience against shifts in government funding and program adjustments. Let's now focus on Divergent Solutions. During Q2, we observed an 11% year-over-year decrease in adjusted net revenue and 24% decrease year-over-year in adjusted operating profit. Excluding a one-time Palantir license in the previous period, adjusted operating profit would have been up 13% year-over-year. While backlog was negatively impacted by a change in funding strategy with the DoD on space-based ISR programs, we are encouraged by the positive momentum in near-term sales, which we believe will contribute to our ongoing success. Now, let's turn our attention to PA Consulting. Q2 saw a slight decline of 2% in year-over-year revenue, driven by a continued challenging macro environment in the consulting industry and a solid year-ago comparable. However, cost and execution discipline helped deliver a strong adjusted operating margin of 20.5%, a 270 basis point increase from the previous sequential quarter. As we emphasized during our last earnings call, our industry position is uniquely differentiated and our work is both purposeful and critical. As a result, PA continues to deliver ongoing positive momentum in bookings and pipeline growth. We remain confident in our ability to deliver strong adjusted operating profit margins, targeting above 20% for the second half of the year. Our adjusted unallocated corporate costs were $59 million in Q2. We continue to make progress on simplifying and optimizing our operating model and driving costs down. We expect this line item post separation to trend towards $50 million per quarter or $200 million annually. Turning to Slide 9 to discuss our balance sheet and cash flow. After delivering a strong free cash flow in Q1, our quarterly free cash flow was negative $71 million in Q2 as working capital increased to planned levels from the exceptional performance in Q1. Despite this impact in the second quarter, our reported free cash flow conversion for the first half of the year has remained at approximately 100%. And as a result, we are well-positioned to deliver on our forecast, maintaining 100% reported as well as adjusted free cash flow conversion for the full year. Regarding capital allocation, we opportunistically repurchased $95 million of shares during the quarter, reflecting our commitment to delivering consistent return of capital to our shareholders. We still have $679 million remaining under our current repurchase authorization. And as we have said, we will remain dedicated to returning capital to shareholders while remaining committed to maintaining an investment-grade credit profile. We ended the quarter with cash of $1 billion and gross debt of $3 billion. Our Q2 net debt to adjusted EBITDA of approximately 1.3 times remains a clear indication of the continued strength of our balance sheet. Given the strength of the balance sheet, we feel comfortable with a portion of our debt having become current in Q2. We have ample options: refinancing, using proceeds from our upcoming separation transaction, and/or accessing our revolver. As of the end of Q2, approximately 37% of our debt is tied to floating-rate debt, and our weighted-average interest rate was approximately 5.2%. Finally, given our strong balance sheet and year-to-date free cash flow, we remain committed to our quarterly dividend. The Board has authorized a quarterly dividend of $0.29, an 11.5% year-over-year increase to be paid on June 21st. Bob, back over to you.

Thank you, Kevin. Turning to Slide 10. Due to our continued momentum across our business, we feel confident in our ability to reach our previously stated objectives. As a result, we are narrowing the range for fiscal year 2024 adjusted EBITDA to $1.54 billion to $1.585 billion, and adjusted EPS to $7.80 to $8.10, representing a 9% and 10% growth year-over-year at the midpoints, respectively. This guidance incorporates Q2 adjusted EPS of $1.91 and a 26% to 27% adjusted effective tax rate each quarter for the remainder of the fiscal year. Additionally, this represents a 13% EPS growth in the second half of fiscal year 2024 versus the year-ago period. In closing, we are invigorated as demand for our science-based digitally-enabled solutions remains strong, with clients continuing to select Jacobs to address their most complex challenges. We are exceptionally well-positioned to capitalize on the momentum in the critical infrastructure market and we remain confident in our ability to grow market share and fulfill the needs of our clients across key sectors. Operator, we will now open the call for questions.

Good morning everyone.

Hi, good morning Andy.

Good morning Andy.

Bob or Kevin, can you give us more color into what's going on with Jacobs' backlog and how to think about it going forward? I know that you said backlog in People & Places is up about 2% year-over-year, but can you elaborate a bit more on the larger prospects you're talking about for Q3? Do you see a nice acceleration in backlog growth in the second half in People & Places? And then maybe just a change in the space-based ISR impacting Divergent, that business is going with CMS, the deal or correct, but could you give us some more color on what happened there?

Sure. I'll start with People & Places and then Kevin can provide an overview. In People & Places, we have a record backlog for this segment since its inception nearly five years ago. Regarding growth, it is somewhat linked to the timing of larger programs that influence the backlog. Our book-to-bill ratio remains above 1, and we anticipate a significant increase in the backlog for People & Places in the second half, especially with expected awards, some of which we have already received in the first month of the quarter. Kevin, would you like to discuss the overall picture and Divergent?

Yes. I believe the dynamics related to Divergent are important, and that segment of the business will be part of the separation. There has been a shift in funding strategy, where the technology and related projects we have are still seen as viable and likely the best to use moving forward. However, the Department of Defense is transferring the responsibility for funding to the intelligence community. As a result, while we are experiencing a short-term reduction in our backlog due to this handover, we are already beginning to see those projects getting integrated into the intelligence community. Although this creates a delay in the spending of that project, we expect that over the long term, DVS will see a resurgence in their backlog within the next year or so, and we'll need to ramp up expenditures again. Considering these factors, I think they represent short-term challenges, particularly when including People & Places. Looking at our outlook for the rest of the year, we are optimistic about our backlog growth and book-to-bill performance for the remainder of the year.

Very helpful. And then just People & Places margins, obviously very good performance. I know you've been sort of allocating corporate costs. Maybe how much did you end up allocating to the segment? And can you talk about whether you're actually in a better trajectory than you guided when you talked about it being better than the 14.6 that you did last year in People & Places?

Yes. The allocation has not changed since our discussion last quarter, and we intend to maintain that approach. This quarter, we observed that Water and Life Sciences are two segments that are experiencing double-digit growth rates. From a pipeline perspective, both segments are nearly doubling year-on-year. This influx of higher-margin work is significantly contributing to our growth.

Thanks guys. Kevin, welcome back even though that you really didn't leave. Thanks.

Thanks Andy.

Hi, thanks for taking the question. Calling in for Steve Fisher. First question is, what has changed in the background in the second half that drove your guidance change?

Can you say that again? I'm sorry.

Sorry, didn't follow the question.

Yes, sorry. I guess what's changed in the background that drove your guidance change? Like anything going on in the second half that is maybe different than your prior expectations?

No. Look, I think at the end of the day, we feel as if we're being prudent in our guidance, and it still represents a 13% year-over-year kind of increase in EPS. So, I think at the end, we're sitting here saying, that's a good ending result. We're being prudent in the establishment of that. And of course, it's offsetting some of the things that we know are already in our numbers, the inventory write-offs that we had in the first quarter. So, I think it's quite actually a positive.

Okay, that's helpful. And my second question is about project selectivity. How is that playing out in your business and what kind of projects are you saying no to, and how often are you saying no? thank you.

Yes. We have always prioritized project selectivity, and it has become a key focus as opportunities have grown. In our Transportation business, particularly in Water and Life Sciences, our win rates are among the highest in the market and unmatched in our experience. This success largely results from our long-term client relationships. We are not actively seeking new work since we have established connections with our clients over many decades. With around 3,700 clients globally, our turnover rate over the past 20 years is just 2%. This demonstrates our commitment to maintaining long-term partnerships with our clients.

Good morning Bob and Kevin, and welcome back as well.

Hi Mike.

Thanks Mike.

Bob, you mentioned in your prepared remarks life science and an expanded pipeline. And maybe generally in Life Science, semi data centers, some of the more facilities work, the conversion timing and level relative to those businesses? I certainly haven't a diversity help. So maybe you can share a little bit about how that plays through and maybe through the second half, which might incorporate some of those projects you're talking about and still the momentum from the client work that you're seeing into 2025.

Sure. So maybe I'll start with in sciences and then talk about semi kind of the electronics world right now. I mentioned this before, Mike, within our life sciences world, you've heard a lot about GLP-1 and everything is going around the obesity drug. If you look at the two biggest ones that are in that space, our work that we do for them represents nearly over 50% of the capital that they put in place. So that work continues to be a big driver. But what's also happening is two other dynamics. One is around oncology. There are quite a few advances that are happening around oncology. And so timing on those was maybe a little slower than we wanted over the course of the last few quarters. But going into the second half, those jobs are right in front of us, and we're well positioned for those. The last dynamic around Life Sciences is just sheer capacity. Here, the CEOs of life sciences companies and biotech companies talk about capacity as the biggest choke point. The contract manufacturing world is on the rise as well. So we'll have some good news here in the second half and actually in Q3 around what's going on in that contract manufacturing space. Semiconductor, a lot of stuff in the news right now about the ubiquitous world of chip manufacturing and how AI is driving not just chip manufacturing but also data centers. We're seeing that. The chips money has now been delivered to the market, and some of the largest players have benefited from that. So we're seeing projects that we've already been involved with talk about Phase 2 of those. And so we'll have more to say as those become public in the second half, but it's really the entirety of the ecosystem of the chip manufacturing and semiconductor world. Starting from the R&D facility through manufacturing and now you'll hear a lot more about test and assembly and those test and assembly facilities coming to the US. So, we're excited about what's going on. And then in data centers, the power usage of these are creating opportunities for us with regards to power and cooling, the water requirements on now what could be 1 gigawatt data center. So, really, really positive story there.

Thank you, Bob. And my follow-up is maybe for either one on PA. How do you see the macro in the second half of the year and certainly seems like internal opportunities are helping drive a bit more on the margin? And is there an opportunity to get some more maybe profit growth along with some net revenue growth into 2025 as you're looking at it today?

Yes. Maybe I'll make a couple of comments on the opportunities and on backlog, and then Kevin can talk about the margins. What gets embedded in is the PA backlog was actually up 8% year-over-year. And so we're starting to see that momentum of those opportunities and those collaborative opportunities come through. So that's exciting news there. And a lot around the U.K. macro has been driving the business with at least hopefully some clarity that there'll be an election in the U.K. in the second half of the year, we're already starting to see the pipeline grow in the sales performance in the last month of the quarter kind of drove the business. So, the momentum is there. And then given we're talking about the margin.

Yes, I believe the team has done a commendable job in right-sizing the organization, especially considering the challenges faced in the consulting industry, which is affecting PA to some degree. They are particularly well positioned in the U.K. market, and we are optimistic about their potential to achieve a margin greater than 20% in the latter part of the year. Looking ahead, I expect this will reflect positively in our numbers as well. As we approach the end of the calendar year, we need to be mindful of the upcoming U.K. election and its possible impacts. However, we currently have clear visibility on our Q3 and Q4 numbers regarding the health of the PA business. While we don't anticipate substantial growth, we expect solid execution for the remainder of the fiscal year.

Thank you, gentlemen.

Hi. Good morning. I have a couple of questions. First, regarding people in places, it seems that the margins expected for the second half of the year are lower compared to the second quarter. You mentioned the mix, but with gross margins and backlog on the rise, I'm curious about what might be causing this. Is there a degree of conservatism in your margin guidance? My second question relates to the large awards anticipated in the latter part of the year. I'm assuming these awards are not necessary for meeting your guidance for 2024. I'll start with those. Thank you.

Well, let me start on the first one. Look, I think 15.3% that we saw people in place is a record, is at a high level. And consequently, I don't think we can assume that every quarter is going to be 15.3% just because of the factors associated with cost of mix and what actually hit us during a particular quarter. I will say that as we think about our margin profile, we're feeling better about it today than we felt last quarter. So I can characterize it from that perspective. It doesn't mean we're going to hit 15.3% in Q3 and Q4, but I think we're going to end the year at numbers that are going to be pretty darn attractive.

Regarding the awards, when I mention their inclusion in the guidance, our guidance takes into account the probability weighting for the award. We remain optimistic not only about the expected awards but also about the pipeline, which is looking very strong in PPS.

Yes. Hi. Thanks so much for taking my question. So I just wanted to ask about Saudi Arabia and the Kingdom seems to be scaling back on parts of the NEOM project. So I just wanted to hear what you guys are hearing and what your exposure there might look like?

Certainly. I'll provide an overview of Saudi Arabia and then touch on NEOM specifically. Overall, the work pipeline in Saudi Arabia remains strong and diverse, not concentrated on any single offering. We deliver value-added services throughout the project life cycle. In terms of infrastructure, there are significant opportunities in transportation, including aviation and rail, as well as robust water projects. We've recently announced a major expansion for the new Riyadh airport, which is progressing well, along with the water infrastructure we're implementing. Despite the recent slowdown regarding the 170 kilometers of NEOM, our work continues as planned, particularly for the personal canal we're focusing on, and we remain optimistic about the project's growth.

That's super helpful. And if I can ask, you gave us a rundown of a lot of your key end markets. Maybe just a little bit on the power and energy market and what you may be seeing there here as well as in the U.K. on power, transmission and renewables?

Overall, we are seeing solid performance in Southeast Asia, Australia, New Zealand, and Europe. In Europe, this is clearly influenced by the geopolitical impact on the ongoing energy transition. The interconnectors we are working on in Europe, along with our additional projects, are providing some advantages. In the U.S., we see it not just as an independent market but as an enabler as well. Our expertise in renewables is being applied to areas like data centers and the electric vehicle ecosystem, which has become a significant focus for us. The diversity of our skill sets is highly beneficial to our energy and power group. This division has grown from a smaller base and has doubled in size over the past year.

Hi. Good morning, guys.

Hi, good morning, Chad.

Good morning, Chad.

So, in your prepared remarks, you talked about the PFAS legislation that was just handed down. Just trying to get a sense for how to think about timing for potential awards in your backlog, like what's the design cycle for that? And then can you also talk about how Jacobs is positioned to win there?

Yes. Chad, you may have heard this before. The $200 billion opportunity spans the next 25 years across various end markets. We can trace a direct timeline for this as regulations increasingly become law. The presence of PFAS within the Department of Defense, particularly with the Navy, Air Force, and the Corps of Engineers, is reflected in individual projects generating approximately $75 million to $100 million in annual revenue for us. However, a more significant aspect of PFAS relates to drinking water. The work we do in PFAS remediation and consulting, particularly in water treatment or wastewater reclamation projects, continues to expand. Viewing this as incremental may not provide the full picture, but we see it as a catalyst for growth in our existing projects. These are clients we've had for a long time and they will remain a vital part of our offerings.

That's helpful. And then just over on the infrastructure side, specifically on transportation. Can you talk about like how your pipeline is evolving? How's it changed this quarter versus maybe a year ago? Any color on that would be helpful.

Sure. Pipeline growth is evident, likely more focused on the US due to the IIJA initiatives, which is reflected in some of our awards. The larger rail opportunities we discussed last quarter and this quarter are still ongoing. We're also seeing growth in highway work. In Australia and the Middle East, there's continued expansion in transport. I believe that as stability increases in the U.K., we could see growth there as well. What sets us apart from our competitors and enhances the value we provide to clients is how we leverage our digital platforms. The utilization of StreetLight Data, not only in our own projects but also in how it significantly enhances our offerings to clients, is firmly established in the US. We're beginning to observe similar use cases emerging in the U.K., the Middle East, and soon Australia.

Okay. Thank you.

Good morning. Thank you for taking my question. I wanted to clarify something regarding the guidance. The CMS outlook for the second half of the year had indicated a mid-single-digit constant currency growth rate. It's slightly below in the first half, but there have been mentions of some program losses that might impact the second half. I wanted to ensure we fully understand what that commentary means and what your expectations are for revenue growth in the second half of the year at CMS.

Yes, Justin, we did experience a significant loss that will affect the short term, particularly Q3 and Q4. While we have a number of short-cycle awards that are helping to offset this loss, it is likely that we will remain relatively flat instead of achieving single-digit or mid-single-digit growth. This is the situation for Q3 and Q4. I want to remind you that this business will be transitioned. However, I believe the team is doing a great job preparing for 2024 and positioning itself for incremental growth in 2025.

And maybe just one thing to add. The operational efficiencies that the team has really delivered through that double-digit bottom-line growth for this quarter, and we mentioned it last quarter as well, with operating margins that are now the highest that we've seen in the business is another real highlight for what we're doing within CMS.

And that's a good point, Bob, because we shouldn't be seeing impacts on the margin profile, even though we're discussing this one item. But the team has done a really nice job on the margin front.

Okay. Thank you for clarifying. And I guess my second one is just to ask on the corporate unallocated costs. The trending down to the $50 million, you're not expecting that line item to come down until post-separation though, right? So, this kind of $58 million that you've had the last two quarters, that's kind of the run rate for the balance of the year. And then with the spin, that's when you would expect like the step function change in the first quarter of 25%. Is that still the right way to kind of think about it?

That's correct.

Okay. Great. Thank you very much. Appreciate it.

Thanks, Justin.

Bob, Kevin, good morning. This is Sahej on for Bert.

Hi. Good morning.

Hi.

It seems like a lot of good questions have been asked. So I will ask about IIJA ramp. I think we've heard commentary more broadly from the industry and then even for you guys of an expectation of IIJA funding ramp to around 2026 or 2027. Are you still seeing that trend? Are you seeing that trend faster than expected? Any color there would be helpful.

No, it still appears to be trending that way. The trend regarding new awards and the flow of that funding into 2026 and 2027 looks like it could be extended, but this is not due to any slowdown at the moment; rather, it started later than initially expected. The awards we’ve discussed today, along with what we've communicated for the latter half of the year, are significantly driven by the IIJA.

That's helpful. Thank you. And then maybe a follow-up on the prior question related to unallocated expenses. You've given good visibility into the post spin. I think I look at it as I was quickly doing the math, you're trending at about 2% on a trailing 12-month sales, so maybe on a percentage basis trailing 12-month post spin, where are you looking to get? I think it's been elevated post your PA Consulting acquisition in 2021?

I don't have a specific percentage target. We are focusing on an absolute number, which we've already shared. There are many variables involved, like the costs associated with the new organization and the corporate infrastructure we will transition. We will also receive TSA revenue during the transition period. While there are many factors at play, I believe we can aim for that $50 net number by the end of 2025, but there’s a lot of work involved to achieve this. The effort being put into making this company a stand-alone entity positioned for accelerated growth on the government services side is significant. I want to emphasize this because it affects our short-term ability to reduce some numbers. I am genuinely pleased and proud of our teams, including those focused on the separation and the rest of the organization stepping away from their regular responsibilities to support this effort. We feel optimistic about our progress.

Thank you. And then just last one for me is you mentioned the Riyadh airport. I think I saw some news flow on Dubai potentially expanding their airport. Is that a project that you guys are actively interested in pursuing on our in conversations around? Any color there would be incrementally helpful as a tailwind into the Middle East region more specifically?

Yes and yes. It's our presence in Dubai on multifaceted infrastructure work, water, transportation and within transportation and aviation is reaching. We've been there for a decade, and that will continue to be a primary area of focus for us within the Middle East. And so the answer is yes.

Yes. Hi. Good morning everyone.

Hi, Jerry.

Bob, I'm wondering if you could just talk about the data center opportunity for you folks. What does the scope of CapEx looks like for data centers for you folks compared to semi-cap equipment and your market share when we last spoke, the outlook for data center CapEx was, I don't know, probably 30% lower. So, I'm wondering, as you think about the outlook for advanced facilities could growth actually accelerate if your content on data centers is remotely similar to what it is for the semi-cap equipment? Thanks.

Yes, Jerry, looking at data centers in terms of deployed capital as a percentage of the overall electronics market, it represents a minority share of the billions invested in chip manufacturing and the entire lifecycle of chip delivery. That’s the first point. The growth we are seeing is primarily driven by AI and the increasing demands for data centers, which is fueling our business. We anticipate this growth to continue. From a design perspective, the facility itself isn't the most complex aspect. What's becoming more challenging are the power, cooling, and water requirements, which our teams are focusing on. Major power management companies like Eaton and Schneider have indicated how this demand is impacting their business and the hardware used in data centers. Additionally, the consultancy around power and water usage will play a significant role in expanding our value proposition.

And in terms of within People & Places, really good top line growth and you mentioned there's some bookings coming up. Can you just calibrate us which of your end markets were the biggest drivers of growth in the quarter and based on what's in backlog and bookings, which end markets do you expect to be above segment average growth over the next couple of quarters?

Water and Life Sciences. Those two right now, even as far as rates at a point in time that represents probably over 50% of that P&PS growth. And then when we look at the pipeline moving forward, those are pipelines that are, as I mentioned before, doubling in size, and that's global. So, areas that might have some geo-economic challenges such as the U.K. If you look at the water bookings and the growth in water in those geographies, that's growing. And of course, that's been a driver, both in the U.S. as well as in Australia and the Middle East, too. So Life Sciences Europe and U.S. wire globally.

Hey, good morning.

Hi, good morning, Josh.

Can you just comment maybe on labor availability, inflation retention on a geographic basis? Where is it still hot? Or is it getting a little better?

Yes, it's not finished yet. Regarding wage inflation, while it persists, we are focused on providing value-added solutions for our clients and ensuring we can deliver at competitive price points that encourage capital investment from them. This approach remains unchanged as we continue to innovate. Our global delivery model has significantly benefited us. Our engagements, whether small consultancy projects or larger programs, involve talented individuals from our global platforms. We will keep leveraging this model not just for cost advantages but for talent access, as we have skilled personnel across all the regions where we operate. Therefore, this hasn’t posed a major challenge for us.

Got it. And then just on the short-cycle wins you mentioned in the comments there, where specifically were those? Any structural shift in focus or is that just opportunistic?

No. It's probably been focused around telecom, weapon sustainment, and then some scope growth that we see in our aerospace work as well.

Thank you, everyone, for joining our earnings call. We really look forward to providing further updates and visiting with all of you and investors and analysts in the months to come, and look forward to engaging firsthand. Thank you, everyone.