Jacobs Solutions Inc (J) — Q3 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 will refer 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; Special Adviser to the CEO, Kevin Berryman; as well as our new CFO, Venk Nathamuni. Bob will begin by providing an overview of recent activities and then summarizing highlights from our third quarter results. Kevin will provide a more in-depth discussion of our financial metrics. Venk will then provide a review of our balance sheet and cash flow and provide comments around our guidance and Investor Day. Finally, Bob will provide closing remarks and then we will open up the call for your questions. With that, I will turn it over to CEO, Bob Pragada.

Thank you, Ayan. Good day, everyone, and thank you for joining us to discuss our third quarter fiscal year 2024 business performance. I'm joined today by my Special Adviser, Kevin Berryman, who acted as Interim CFO into June, and will therefore report our financials. I'm delighted to also welcome our new CFO, Venk Nathamuni, on his first earnings call for Jacobs. Venk joined us in June and will provide details on guidance. Venk brings a wealth of knowledge and expertise from his 30-plus year career, and I am excited to work in partnership with him moving forward. Kevin will continue in his role as special adviser to me to drive a successful conclusion to the separation and merger of our Critical Mission Solutions and Cyber & Intelligence businesses with Amentum. I'd like to extend my gratitude to Kevin for our ongoing support. Now moving to Slide 4. We continue to make progress on our strategic shift toward a simpler, higher value, higher margin portfolio and remain confident in driving margin expansion over the coming years. Turning to Slide 5. I am pleased to report significant progress on the previously announced planned spin-off of our Critical Mission Solutions and Cyber & Intelligence businesses. An updated Form-10 was publicly filed yesterday with the U.S. Securities and Exchange Commission. This filing made under Amazon Holdco, Inc. includes important business and financial information about the intended merger with Amentum to create a leading publicly traded global government services provider. Amentum will provide additional details during their Capital Markets Day on Tuesday, August 13, 2024. The transaction is now anticipated to be completed in the second half of September 2024. Turning to Slide 6 and Q3. I will now share our third quarter achievements, highlighted by strong backlog growth, consolidated margin expansion and P&PS record backlog and strong adjusted operating margin. This period saw a continuation of a mix shift to higher-margin science-based consulting and advisory services that offers significantly higher returns, contributing to an overall margin expansion, notably led by P&PS and our partnership with PA Consulting. We are seeing an accelerating demand for critical infrastructure, particularly in water, environmental and advanced facilities end markets, which are poised for substantial growth. Consolidated backlog increased 6% year-over-year, bolstering confidence that our business will accelerate profitable growth as we strategically shift our portfolio to higher value, higher margin solutions. Our consolidated adjusted EBITDA came in at $392 million, an increase of approximately 11% compared to the same period last year and representing an 11.5% adjusted EBITDA margin. From a cash perspective, we started the second half of the year by delivering very strong operating cash flow of $483 million and free cash flow of $445 million. We continue to expect exceeding 100% reported free cash flow conversion in fiscal year 2024, underscoring the power of our business model. Turning to Slide 7. People & Places Solutions line of business reported solid top line growth, along with strong adjusted operating margins of 15.3% and adjusted operating profit growth of 12% year-on-year. We ended Q3 with a strong book-to-bill of 1.53x and record backlog. Adjusted net revenue was up 5% year-over-year. Our pipeline remains robust, and we continue to expect solid P&PS organic revenue growth for Q4 fiscal year 2024. I'm particularly pleased to report that during the quarter, we continued to deliver substantial wins in core sectors such as water, environmental and advanced facilities, a testament to our robust market positioning, deep domain expertise and long-term trusted client relationships. We achieved double-digit growth in our water and environmental markets with two-thirds of our water-related business focused on high-value science-based consulting and advisory services, driven by aging infrastructure and emerging PFAS regulations. Water continues to be a foundational element of our portfolio, exemplified by key wins across various geographies, reinforcing our global leadership in the sector. Europe, particularly the UK, has shown resilience, posting a robust quarter in water-related awards. In Asia, we were appointed by PUB, Singapore's National Water Agency to engineer and program manage the new Kranji Water Reclamation Plant designed to enhance Northern Singapore's water treatment capacity by 120 million imperial gallons per day. Additionally, our partnership with Onondaga County, the Syracuse metropolitan area in Central New York, which began in 2008, continues as they've chosen us to provide program management services for their efforts in controlling increased combined sewer outflow and utilizes our Digital OneWater solutions. This expansion will be critical in remediating aging water infrastructure and supporting industrial growth in the geography. We're excited by the continued momentum in pipeline build in our advanced facilities portfolio, predominantly driven by life sciences, semiconductor manufacturing and AI chip driven data center expansion. Specifically in life sciences, we continue to see robust growth with our pipeline and revenue growing double digits year-over-year. Approximately two-thirds of our life sciences-related business is concentrated in high-value science-based consulting and advisory services. We were selected by FUJIFILM Diosynth Biotechnologies to support the $1.2 billion expansion of their large-scale biologics manufacturing site in Holly Springs, North Carolina, providing engineering, procurement and program management services with the first phase of construction expected to complete in 2025. We continue to see a growing pipeline in transportation and energy and power supported by ongoing government stimulus. As an example, in transportation, we were selected to provide program management services for Broward County Transportation Department's first-ever public transit expansion. This $4.4 billion 30-year initiative will transform the county's transportation infrastructure into a multimodal transit system with a new light rail connecting Fort Lauderdale Hollywood International Airport to Port Everglades. Additionally, the quarter was highlighted by several key wins in the energy and sustainability space as demonstrated by our appointment as program manager for the ARCHES Hydrogen Consortium and master service agreement with Shell Energy in Australia. PA Consulting delivered an industry-leading adjusted operating margin of 21.8% with robust execution and cost discipline. Our partnership with PA continues to be a differentiator in our science-based consulting and advisory services. Together with PA, we were selected in Hertfordshire County, UK to enhance the public highways network in the county with services valued at approximately $22 million annually. This collaboration focuses on sustainability and aims to deliver long-term value over an initial five-year period with potential extensions up to 14 years. In Divergent Solutions, we are encouraged by the ongoing demand for our digitally enabled infrastructure solutions that will remain with independent Jacobs post close. A testament to our capabilities is our recent selection by the City of Omaha to develop a data analytics and AI-enabled support system for its wastewater network, utilizing Jacobs Digital OneWater Solutions. CMS delivered 35 basis points of margin expansion, the highest in 10 quarters and has a strong pipeline. Additionally, we're experiencing encouraging trends that support long-term growth as we approach the merger with Amentum. In summary, we remain confident in our ability to win higher value, higher-margin solutions and deliver superior execution to meet our clients' expectations. 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 Q3 results, leading to another solid quarter. Let me begin by summarizing a few of the highlights for the quarter on Slide 8. Third quarter gross revenue grew 1% year-over-year and adjusted net revenue also grew 1%. GAAP operating profit was $260 million for the quarter and included $53 million of amortization from acquired intangibles and $73 million of transaction, restructuring and other costs including $62 million associated with the separation transaction. We now expect our total restructuring costs to be approximately $300 million for the fiscal year, materially driven by higher separation transaction costs associated with our anticipated close now targeted during the second half of September 2024. Our adjusted operating margin was again a strong 11.3%. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.17 per share and included a $0.31 impact related to the amortization charge of acquired intangibles and $0.49 from transaction, restructuring and other related costs, which again were materially driven by the separation transaction. Excluding these items, third quarter adjusted EPS was $1.96, marking an 11% increase compared to the previous year. Q3 adjusted EBITDA was $392 million and was up 11% year-over-year, representing an 11.5% adjusted EBITDA margin. Finally, consolidated backlog was up 6% year-over-year and the revenue book-to-bill ratio was 1.29x with our gross profit and backlog increasing 5.5% year-over-year. Regarding the performance of our lines of business in the quarter, let's turn to Slide 9. Starting with People & Places Solutions. Q3 adjusted net revenue was up 5% year-over-year with adjusted operating profit up 12%. Our mix shift mentioned earlier, resulted in higher margins on lower revenue growth. Adjusted operating margin of 15.3% was up 95 basis points year-over-year. Our backlog grew by 10% year-over-year, while gross profit in backlog grew 9%. This quarter's critical wins underscore our strength in water, environmental and advanced facilities, reinforcing our leadership position in these key markets. These wins translated into a book-to-bill of 1.53x and a record backlog, as previously mentioned by Bob. Moving to Critical Mission Solutions. Our Q3 revenue decreased 3% year-over-year, while backlog was up 4%. Excluding the announced contract loss mentioned in the prior quarter, our revenue would have been up slightly year-over-year. Our adjusted operating profit was up 1.2% year-over-year, while CMS adjusted operating margin rose by approximately 35 basis points year-over-year to 8.7%, the highest margin in 10 quarters as the business continues to drive operational improvements and margin-enhancing client-facing projects. Shifting to Divergent Solutions. Q3 saw an 11% year-over-year dip in adjusted net revenue and a 40% year-over-year decrease in adjusted operating profit, driven by a one-time year-to-date government rate adjustment and the space-based ISR program delays that were mentioned in the prior quarter. Despite the strategic shift in funding with the DoD, we continue to see positive momentum in our space-based ISR technology adoption leading to pipeline build and expected future backlog growth. Now let's turn our attention to PA Consulting. Q3 saw a modest increase in year-over-year revenue. However, PA delivered a strong adjusted operating margin of 21.8%, reflecting a 60 basis point improvement from the previous year. Our margin results this quarter exceeded our expectations and reinforces our confidence in sustaining a strong margin profile as we continue to expect 20% plus margins in Q4. Backlog increased 4% year-over-year, and we expect improved growth as we enter fiscal year 2025. Our adjusted unallocated corporate costs were $61 million in Q3, and we continue to make progress on simplifying and optimizing our operating model to drive costs down. Finally, I am very excited to welcome Venk to the team. We've been working together closely and have made great progress on ensuring a smooth transition. With that, I'll turn the call over to Venk.

Thank you, Kevin. Let me begin by saying I'm very excited to be part of the Jacobs team and a special thanks to Kevin for his partnership and support. I'll now provide a quick overview of our balance sheet and cash flow metrics, followed by consolidated full year guidance. Turning to Slide 10. We posted a strong quarter of cash flow generation, which is indicative of the quality of our earnings and cash conversion. We generated strong quarterly free cash flow of $445 million. Year-to-date, our free cash flow conversion was well above 100%, leading to a full year expectation of greater than 100%. Regarding capital allocation, we opportunistically repurchased $151 million of shares during the quarter, which was up $55 million compared to Q2, reflecting our commitment to delivering a consistent return of capital to our shareholders. We have $528 million remaining under our current repurchase authorization. As we've stated before, we'll continue to return capital to shareholders while remaining committed to maintaining an investment-grade credit profile. On the balance sheet, we ended the quarter with cash of $1.2 billion and gross debt of $2.9 billion. Our Q3 net debt to adjusted EBITDA of approximately 1.1x remains a clear indication of the continued strength of our balance sheet. Given this strength, we feel comfortable with a portion of our debt remaining current in the fiscal year. We have ample options, refinancing as well as using proceeds from the expected separation transaction for repaying the current amounts. As of the end of Q3, approximately 37% of our debt was tied to floating rates and our weighted average interest rate was approximately 5%. On the dividend front, we remain committed to growing our quarterly dividend. The Board has authorized a quarterly dividend of $0.29, an 11.5% year-over-year increase to be paid in August 2023. Now turning to Slide 11. Given the solid execution thus far, we're narrowing our consolidated adjusted EPS outlook to a range of $7.85 to $8.05, representing 10% growth year-over-year at the midpoint. We expect fiscal 2024 adjusted EBITDA to be near the lower end of the $1.54 billion to $1.585 billion range. This guidance incorporates Q3 adjusted EPS of $1.96 and approximately 27% adjusted effective tax rate for the remainder of this fiscal year. Additionally, this represents 13% EPS growth in the second half of fiscal year 2024 versus the year-ago period. Our expectation is that the ongoing positive momentum in our business will lead to increased revenue growth in fiscal year 2025 compared to our current levels. Once we close the separation transaction, we anticipate an immediate shift in our company's growth profile, positioning us solidly for higher growth and higher margins. As Bob mentioned earlier, the anticipated separation transaction close date is now in the second half of September 2024. As a result, we expect Q3 to be the last quarter in which the results of the separated businesses will be included in our continuing operations. Beginning next quarter, we expect our results for our continuing operations to reflect the new independent Jacobs. Historical results for independent Jacobs will be available following the close of the transaction. Lastly, we're excited to announce that we will be hosting an Investor Day for independent Jacobs on February 18, 2025, in Miami, Florida. We look forward to sharing our long-term strategy as well as our financial target model with the investor community during this event. Additional details will be forthcoming, and we look forward to your participation. And with that, now I'll turn the call back to Bob.

Thank you, Venk. 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, gentlemen, and welcome. Thanks.

Good morning, Mike.

Maybe just first to talk about your improvement in the gross margins in the P&PS backlog that you reported this quarter up 9%. Maybe a characteristic of the mix impact, is there any industries or end markets that have contributed more to that? And I guess as my follow-up, as you're looking towards fiscal 2025 and the pipeline you have and a very strong book-to-bill you had, how confident do you believe that you can show backlog and net revenue organic growth moving ahead into 2025, given where your position is today with your backlog and pipeline?

Sure. Mike, maybe I'll address both. I'd say, yes, the gross profit and backlog is definitely being positively affected by two elements: one, our service mix; and second, the end market sector mix. And so on the service mix, I mentioned a couple of times, we are really seeing a fundamental shift in our profile with regards to higher-end science-based consulting and advisory services. And that's not only showing up in our results from a burn profile but also in the backlog. The profile of the backlog is right now at a point in time, heavily weighted towards water as well as in advanced facilities, predominantly life sciences. And those two have a higher margin profile as well, so both are having a positive effect on that. With regards to FY 2025, we were looking forward to potentially another strong Q4 backlog performance, booking and backlog performance leading to confidence in our revenue growth in FY 2025. So, definitely some nice tailwinds there.

That's great, Bob. Thanks, sir. Thank you.

Hi, good morning everyone.

Hi, good morning, Andy.

Good morning.

So Bob, Venk, or Kevin, can you give us a bit more color into the guidance towards the lower end of your annual EBITDA range you just said? What changed versus last quarter? Obviously, your margin has been very good. So you're seeing delays in backlog burning, which is hurting your revenue. Anything else that you could give us in terms of color?

Yes. Go ahead, Venk.

Yes, Andy, yes, thanks for the question. So I'd say a few moving parts as it relates to the EBITDA performance. So obviously, from the standpoint of EPS, we came in kind of the midpoint of the range as we guided to. Now as far as the EBITDA is concerned, we did allude to the fact that there were a couple of segments that were weaker than we expected. One was obviously the CMS, the Cytec loss that was announced in the prior quarter and then some of the DVS delays that Bob alluded to in his earnings script. But I would say at a higher level, when you look at the difference between the EBITDA performance and the EPS performance, clearly, we had a little bit of a tax benefit that helped us on the EPS front. And then obviously, as you also know, we reported a pretty significant stock buyback so that reduced the share count as well. So I'd say the difference between the EBITDA and EPS is primarily due to those two items. But what I would also point to is that if you look at the P&PS backlog, we feel pretty good about where our profile of that business is heading towards, both from a revenue growth standpoint as well as the margin standpoint.

Very helpful. And then Bob, Venk, or Kevin, you kept the 13.8% plus FY 2025 standalone margin guidance intact for now, but obviously, your People & Places margin has been much higher than expected so far this year. So how do you think about that target at this point? Could there be considerable upside to that target? And then when you think about RemainCo sales, I know you said you expect a pretty good year next year. But any reason why you couldn't expect that sort of 6% to 9% growth for People & Places at least that you've been talking about?

Yes. Regarding our confidence heading into FY 2025, we noted some uncertainties related to the separation, which affected timing. However, our performance has been strong. I would describe the situation as having some favorable factors as we approach FY 2025, and we'll provide further clarity as we transition to the next phase, but overall, our confidence remains high. Andy, could you remind me of the second part of your question?

Because you've got a consulting what have you, but how do you think about sort of the visibility toward the core infrastructure growth in 2025?

Yes, no problem. We have good visibility there. During the quarter, we experienced strong tailwinds in water and advanced facilities, despite some minor pauses in the UK regarding transport due to the election and shifts in the Middle East, particularly in Saudi Arabia. These issues haven’t disappeared. Now that the UK election has concluded and there is more clarity on programs in Saudi Arabia, these factors are contributing positively as we look toward FY 2025.

And Andy, if I could, I would say just in terms of just what we see ahead clearly, from a Q4 booking standpoint, there's still some good confidence about the strength of those bookings. But in terms of specifics, we'll obviously provide you fiscal 2025 guidance in the next earnings call. And then we look forward to providing a much more long-term guidance, both in terms of the revenue growth as well as our profitability profile when we have the Investor Day in February. Thank you for your questions.

Thanks. Good morning. I'm not sure if this one would be something you would save for that Investor Day, but really just trying to think about what's the right framework for profit growth year-over-year in P&PS since Bob, you mentioned that you're going to accelerate the profitable growth. I mean, is the framework here any different than sort of the mid- to upper single-digit revenue growth and then some of this margin mix gets you to low double-digit profit growth? Or is something more like mid-teens possible given that you are accelerating these large awards and some of the mix dynamics?

Yes. I think it's early, Steve. We're going to go through all of that in some detail, but we're really excited about the tailwinds that we see for FY 2025, specifically in all subsectors of the infrastructure market and facilities, but we remain very positive.

Well, Look, Steven, I think it's clear that we're going to have a different reporting structure as Venk highlighted once the transaction closes. So the numbers that you will see in the corporate line will start to change, and we're working through all the recurring segments and all that kind of information for the full year reporting. So you may not see exactly the same number going forward, but you will fundamentally on an apples-to-apples basis, that $60 million, we expect will trend down to $50 million over time. And they embedded into a consolidated result for the company, and so you may not see it broken out separately. But that's going to help drive towards that 13.8% EBITDA margin that was just asked going forward. So we feel good about it. Some of that cost will have to be targeted after separation because we still have two businesses to run or three, I should say, with PA. And so more to come on that, but we feel confident about the necessary cost reductions that allow us to get to the 13.8% EBITDA margin.

Thanks and good morning. You mentioned some developments in the UK. Could you discuss the flow of projects in various markets, particularly in the U.S. and the UK, especially with the numerous elections happening? Are there global factors affecting this? Is it aligning with what you expected at the start of the year? Any insights would be appreciated.

Yes. A couple of comments. Let me start kind of with the U.S. and then work my way around. I'd say in the U.S., the flow of bid activity and pipeline across infrastructure and advanced facility, that hasn't slowed. I'd say the burn rate of some of our U.S. transport work has been a little slower from a burn standpoint, but the level of opportunities have been there. In water, I'd say globally, we have seen some real positive momentum both on bookings as well as burn and that's across all geographies. U.S., Europe to include the UK, Middle East and our Asia Pac and ANZ area. So water has been in that realm as well as advanced facilities really driven by life sciences. So I'd say that just the two areas that we saw as a part of the election in the UK pause was transport. Water kept going in the UK and then the reprioritization in Saudi with regards to some of the event-driven cities oriented work moving more towards the time-based work like the Expo or the airport or infrastructure that's going to be needed with a time element to that in 2026 leading to the Expo and the FIFA World Cup. So these are things that we're continuing to add optimism as we move into Q4 and beyond.

Great. And then if you can maybe just follow up on the commentary around the water, I broadly heard that the demand in that space has been growing. Can you maybe just talk about your win rate in that space, any particular areas within the broader water market where you might have been winning an outsized amount of work? And if I could maybe just talk about the progress you've made with AMP8 in terms of any opportunities there that you might have secured.

Certainly. The aging infrastructure is a significant factor driving our performance. Additionally, combined sewer overflows and the impacts of climate change and natural disasters are also accelerating these trends. In terms of drinking water, we are witnessing an increase in the need to address PFAS regulations, particularly in the U.S., Germany, and other regions. To quantify this, our pipeline in the water sector has nearly doubled compared to this time last year, and we are successfully securing most of the projects we pursue, which underscores our focus on growth.

Oh, great. Thanks for taking my questions. I guess I just wanted to get a little clarification on the gross profit in backlog. I guess your total backlog was up 6% year-over-year and your gross profit in backlog was up 5.5%. So that suggests that the overall backlog has a little bit lower margin in it. I guess we've established that the P&PS segment margin is up. So I was wondering what the offset and what segments they are? And if you could talk about the mix in those and what occurred there so we can understand the complexion there a little bit better. I think that would be helpful.

Andy, I’ll let Kevin explain the details regarding the backlog, and then I will discuss the profile related to the different end markets. We can dive into that profile afterward.

Yes. Look, so what we're seeing is we've been talking about the growth profile in People & Places top line wise and being a little bit more muted because effectively we're seeing more consulting science-based technology, technical and consulting work that's happening. In the backlog and the book-to-bill, very strong book-to-bill is some other types of projects, which include lower margin work, which will, at the same time, create accelerated good top line growth. So it will be a little bit of a reduction in mix relative to the consulting piece versus our current levels. And at the end of the day, it's going to be quite positive because we'll still see, I think, incremental margin over time in People & Places because we've proven our ability to do that. And we're going to see some accelerated growth as well associated with some of these larger, I'm going to call it, projects that involve program management and extended dollars being spent, which will include a little bit greater percentage of pass-through revenue, which has more limited margin than the high-value consulting work that we do.

Yes. And Andy, maybe I'll just extend on that last thought that Kevin had. So then if you break that, you cited the consolidated numbers on the 6% and the 5.5% in gross profit. If you then translate that into P&PS, which relates to the last comment that Kevin made, that looks like more like 10% on the top line and 9% on gross profit. So you can kind of see the dynamic leaning towards P&PS is growing at a much higher rate.

Got it. Okay. Yes, that actually makes sense. So, that's helpful. I wanted to also just get an update, Bob, just on some of the actions you're taking in preparation for the split. I know you're looking at how your organization works and where the real cost centers are and the benefit centers are. Can you talk about any things that you've actioned to date that we should know about in terms of how you've changed your business model in anticipation of that forthcoming split, things that you're able to do now before you're able to actually effectuate that deal?

Yes, certainly. We have carefully examined our company as a whole to identify the corporate needs that are becoming more uniform globally. This includes the transition to global business centers and the efficient streamlining of processes and systematic improvements, which are occurring in real time. From a business perspective, we have begun optimizing many of our shared capabilities, such as program management and digital enablement, along with our leading sales functions that span the entire company. The structure we’re implementing combines geographic client-facing entities with these shared capabilities. It feels like we're in a relay race, already passing the baton and moving forward efficiently.

Hi, good morning.

Hi, Bert. Good morning.

Good morning.

Bob, maybe just to start with you, you had some comments on the advanced facility side. It sounds like life sciences has continued to be really strong, and you mentioned AI data centers, which I feel like is more of like a newer area for you guys in terms of that growing. I didn't hear the semi side. Can you just give some context on sort of what the mix there looks like? I mean, I know Intel reported and said they're taking down their CapEx. So like what the expectation is as we move through into maybe in the 2025 for advanced facilities and how it's performing today?

Sure. Specifically regarding semiconductors, we have been engaged in this for quite some time. We do significant work for Intel, primarily related to their capital expenditure program that they emphasized three or four years ago. We have largely completed our projects associated with that. Thus, the recent news has had minimal impact on us. Our diverse range of services for Intel, including ongoing capital work around tool installations, retrofits, and layout-dependent tasks, will persist. Importantly, our expansion into memory clients and other logic customers in both the U.S. and Europe continues to progress, and we anticipate sharing positive updates next quarter regarding that and our geographic expansion efforts in areas like India. Overall, we remain optimistic about the sector and will keep pushing for growth. In the life sciences sector, things are progressing well. There's a lot of conversation surrounding GLP-1, but we are also seeing significant developments in Alzheimer's and oncology drugs. While the two major players in the GLP-1 area are an important focus for us, we are also excited about the new contracts being awarded in contract manufacturing, as well as the promising pipelines of drugs in oncology and Alzheimer's. This is contributing to our positive outlook.

And Bert, if I could, just having most recently come from the semiconductor sector, we do see this as a secular trend in terms of where the manufacturing footprint is and across different realms of semiconductors and logic and memory, as Bob alluded to, and there's also a geographical shift that's happening. So as we look at our portfolio, we have good confidence that we are pretty well diversified. And then just the scope of the opportunities in front of us are still pretty good. Now obviously, any given quarter, it depends on what happens to the market. But I think if you look at it from a secular standpoint, we feel pretty good about our semiconductor footprint.

That's very helpful. Just a clarification there. Bob, you mentioned that the FUJIFILM construction for phase 1 will start to ramp down in the first half. Is that expected to have any meaningful impact, or is the award sort of backfilling that?

That's on the existing work, Bert. What we announced goes beyond that. So we're already on site doing phase 1. My comment was regarding phase 1, and phase 2 is now just starting.

Okay. So yes, a couple of things. One, when we do the Q4 results, the full year results, I should say, since we're closing in or before the fiscal year ends, effectively, we will report on an independent Jacobs for the Q4 results and the full year results and report it on a historical basis as such as well. And all of the business that's included in the perimeter, which will be merged into the Amentum business, that will be basically assets held for sale. So you won't see that information. We have provided you guidance for the full year similar to how we've established it for the full year. So assuming that it closes at the end of the year, all of those numbers that we just quoted would effectively be met. But you're going to actually see a lower number in the results just because some of it is now going to be because it's being put into equity directly as assets held for sale and you're going to be seeing the independent Jacobs. So a lot of clarity we'll be providing to get you an understanding of what that looks like, Bert, when we do report Q4 results, but a lot of moving pieces, but kind of that's a very general view of how you're going to be seeing our financials reported in Q4.

Yes. Yes. Sorry, Kevin, just to add to what Kevin said, in addition to what you said about our business is, obviously, Amentum is going to have their Capital Markets Day in August 13. So we'll have some more color in terms of their business. And then as it relates to ours, we'll provide guidance for all of fiscal 2025 in our November earnings call and then we'll talk about not only the revenue and growth as well as the margin profile. And then later on during Investor Day, we'll provide much more color about our long-term growth and operating models.

Hi, good morning. I think most of my questions have already been addressed. Bob, considering Jacobs after the Amentum spin, you will have a solid balance sheet, and your cash flow generation has been quite impressive. I'm curious about the growth and margins you are experiencing in PP&S and PA Consulting. I wonder what your interest will be in mergers and acquisitions with Jacobs following the spin-off, given the appealing market dynamics. Additionally, any insights you could share on how we should evaluate the free cash flow conversion of RemainCo would be appreciated, as it might be a more positive story than the market expects. Thank you.

Sure. I'll start with the first part, and then Venk can discuss what the free cash flow conversion will look like moving forward. Initially, we have many options available to us. Our main focus in the quarters following the separation is on execution and performance, specifically driving long-term margin growth. We are pleased with our position in each of our end markets and the geographies we operate in. Therefore, there is no immediate need to pursue mergers and acquisitions to stimulate growth, as we are seeing a strong organic growth trajectory. We are confident in executing our current plan. Beyond that timeframe, we have a solid balance sheet with plenty of options, which is an excellent position to be in. Venk will now provide insights on free cash flow.

Yes. Regarding capital allocation, given the opportunities we see ahead of us, we strongly believe in using our capital for organic growth as our top priority. We have a solid balance sheet that enables us to provide dividends to shareholders while consistently repurchasing our shares. M&A is also an option, but for the next few quarters, our main focus will be on execution. As for free cash flow, we have been generating decent amounts and expect to maintain over 100% free cash flow conversion for the rest of the year. Specifically, in the P&PS business, which is a significant part of independent Jacobs, we anticipate improvements in our free cash flow metrics over time. We are optimistic about our current position and future prospects.

Thank you so much for taking my questions. I guess most of them are answered. So I'm going to limit myself to just one. Are there any discrete deliverables from your side to close the Amentum spin in the second half of September? Or is it just mostly just the paperwork that's taking time? Just wanted to get a sense of that.

All of the required regulatory approvals related to foreign investment and antitrust matters have already been finalized. The only remaining item is the IRS ruling on our private letter ruling, which would confirm our belief that the transaction is tax-free for our shareholders. This is currently what is affecting the timing. We have been having productive discussions with the IRS and anticipate receiving approval hopefully within the next month. This would set us up for a closing in the second half of September. There are other tasks to complete, such as the SEC registration for share distribution, but the key factor we are waiting on is the IRS ruling, and we feel optimistic about it.

Hi, good morning guys.

Good morning, Chad.

Good morning.

So my question has to do with the top line growth rate of the P&PS business. Just trying to understand the trajectory of that as we exit 2024 and then going into 2025. So you're starting kind of like a mid-single-digit rate in 2Q. You've got some pretty solid bookings that you brought in this quarter. And so I guess, like will that be enough for the top line to get back into like that, like 6-9% target range in 2025?

Yes. The bookings and backlog performance have been very strong. In fact, we had to check if the 1.53 was a record on its own. We're confident that we'll enter 2025 with solid growth projections, which we will clearly communicate. Regarding the financials and the lagging indicator, the answer is yes. As for the leading indicator, our pipeline and the markets where the pipeline is expanding the most, particularly in water and advanced facilities, also provide us with great confidence. So, to sum up, the answer is yes.

Yes, hi. Good morning everyone.

Hi, Jerry.

I wanted to ask about the profit growth that you have achieved in People & Places, which has been 8% CAGR over the past five years and 11% CAGR over the last three years. As you consider the organic growth opportunities with a more focused Jacobs, can you elaborate on that? The growth has already been quite impressive in People & Places. It would be helpful if you could share some insights on what you'll discuss at the Analyst Day regarding your expectations for continuing that growth. Additionally, do you believe there is potential to accelerate beyond the strong performance the business has already achieved?

Yes, Jerry, without giving any kind of quantifiable number on where that number is going, I'll say that this our pipeline, where we're positioning the end markets that we sit in today and in the tailwinds with regards to our bookings performance on that gives us a lot of optimism. And so in November and when we report out on the full year for independent Jacobs as well as going into February and along the way in between, we'll put a lot more clarity as well as quantify what that means. But overall, I think hopefully, you're hearing some real optimism in our voices and in our performance on getting to exceeding the performance that we had for the last five years. Yes, I would say there has been an increase in discussions. These are now translating into the programs we either paused or were preparing to launch. I believe this represents the next phase, and over the next 6 to 12 months, we should see progress. Interestingly, the water sector in the UK has not encountered any delays and continues to advance. Regarding PA, it’s important to note that their business is roughly split evenly between the private and public sectors in the UK and globally. In this quarter, PA's private sector grew by 11% year-on-year. The public sector has been somewhat stagnant due to elections, but we anticipate a recovery in that area as well, which boosts our optimism not just for the Jacobs business but for PA as well as we move toward fiscal year 2025.

Thanks Bob, Kevin, and Venk. What is your forecast for infrastructure stimulus in the U.S. associated with the IIJA and the CHIPS Act? And is that contributing to your strong backlog? I know you highlighted recent wins with water and also a large multimodal transportation win. But what is your general expectations over the next few years in terms of the IIJA?

Sure, Louie, thanks for your question. Regarding the IIJA, these are industry figures: 60% appropriated and 30% spent. Work continues to flow, but I believe the hurdle is 2026. I've mentioned before that discussions about a second IIJA may push timelines further beyond 2026. This situation is influencing our backlog performance and conversion rates. Additionally, concerning the CHIPS Act, we've been involved with jobs that received CHIPS Act funding, which were already initiated before receiving the funds. We’re at the forefront of this next wave, and I expect that CHIPS Act funding will persist and provide us with significant support. Thank you, operator. Thank you, everyone, for joining the earnings call. We look forward to providing further updates and visiting with investors and analysts in the months to come. Exciting times ahead and look forward to staying very open and transparent with the market as we move forward. Thank you.