Jacobs Solutions Q1 2023 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
February 6, 2024
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Operator

Good morning, my name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs' Fiscal First Quarter 2024 Earnings Conference Call and Webcast. Today's conference is being recorded. [Operator Instructions]

At this time, I'd like to turn the conference over to Jonathan Evans, VP of Corporate Development and Investor Relations. Please go ahead.

Jonathan Evans
Vice President, Investor Relations & Corporate Development at Jacobs Solutions

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.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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 and allowing us to benefit fully from the broad-based strength that we see in global infrastructure and sustainability investment. We are confident that our actions we are taking are providing the foundation for multi-year 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 and Cyber & Intelligence businesses with momentum. We continue to progress toward the closing of 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 time line 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 likely -- like to briefly touch on the cost optimization plan that we outlined last quarter. Our transformation to a less volatile and higher value, higher margin portfolio is well underway. We continue to find new ways to streamline our operating model and 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 cost from public sector clients, providing upside beyond the initial 13.8% adjusted EBITDA margin target set for standalone Jacobs post-separation that we shared last quarter. This adds to our conviction that our transformation will drive multi-year value creation.

Turning to Slide 4 and 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 non-cash $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 remain 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 in 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 to be a pacesetter within the company. In particular, water scarcity continues to trend across globe, affect millions 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 desalinization. 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 chip maker, 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 -- campus' Industrial Reclaimed Water Plant.

In addition, multiple states in the US are developing regional water supply plans 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 transition 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 Lilith, 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 8.5% revenue growth in what continues to be a choppy macro environment. Particularly in the UK, 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 UK for program management services and regulatory practices that will advance a 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 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 remained 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.

Claudia Jaramillo
Executive Vice President & Chief Financial Officer at Jacobs Solutions

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 acquiring intangibles and $60 million of oil 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'll discuss the underlying dynamics during the reporting segment review.

GAAP EPS from continuing operations was $1.37 per share and 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 non-cash inventory write-down.

Q1 adjusted EBITDA was $328 million and was down 3.1% year-over-year, representing 10% of our adjusted net revenue. Excluding the inventory write-down, adjusted EBITDA would be roughly flat year-over-year. The effective tax rate was 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 in our annual guidance and we continue to forecast the 22% annual effective tax rate in 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 quarterly effective tax rate to approximate 26% to 27% for each quarter of the remainder of the fiscal year. Finally, backlog was up 5% year-over-year. The revenue book-to-bill ratio was just 1.12 times, with our gross profit and backlog increasing 6.1% year-over-year.

Regarding the performance of our [Indecipherable] in the quarter, let's turn to Slide 8. Starting with People and 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 anticipate full-year P&PS adjusted operating margins to increase year-over-year, inclusive of a previously mentioned increase in allocations 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 UK'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 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 aligning with our overarching goal of compounding free cash flow per share. We remain committed to maintaining our 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 1.2 times 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, 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.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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 the 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 first half, 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.

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Operator

Thank you. [Operator Instructions] We'll go first to Andy Wittmann at Baird.

Andy Wittmann
Analyst at Robert W. Baird

Oh, great. Excuse me. Thanks for taking my question. I guess for those who are unfamiliar, including myself to some extent here, on the SG&A reallocation into the segment. I think what you're saying there is if -- in these reimbursable public sector customers that you have, if you can show -- if it's in the segment, you can get paid basically for those costs. I think that's the mechanism. I just wanted to clarify that. And maybe, Claudia, could you talk about what the dollar amount on an annual basis is on the reallocation from the SG&A line into the segment?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah, Andy, it's a great question. It's actually a nice lead-in. So your assessment of that recoverability is, correct. And if you just kind of, just moment -- for a moment, take kind of pre-planning for the separation and outpost. Pre, we had a lot of shared costs. And so the direct applicability to this segment was not as clear. And since we started this, we had a great opportunity to now have direct line of sight to where these are being applied. Hit it right in the beginning of the audit cycle, the government audit cycle in Q1, and now have the full year of applying those costs. So that's correct. Now on the full-year amount, it would be the $17 million that we identified this year. I'm sorry, this quarter multiplied by 4. But remember, over each quarter that goes down because of the recoverability effect. Did that make sense?

Andy Wittmann
Analyst at Robert W. Baird

Yeah, I guess it does. The -- I mean, the -- so I guess, with -- in the corporate unallocated reported at $59 million for the quarter, I guess, what you're saying is unadjusted, that number would have been $17 million higher. In other words, that $59 million benefits from the $17 million that was moved? I see.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

That's correct.

Andy Wittmann
Analyst at Robert W. Baird

So can you just talk about -- underlying that business -- or underlying the underlying costs for the corporate unallocated? Were there any other costs that are notable in terms of separation or other things through the SG&A line right now? Certainly, there's been these efficiency initiatives, Bob, that you've talked a lot about. But is there anything else we should know about that wasn't excluded from that corporate unallocated line?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

No, the $9 million of transition cost 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.

Andy Wittmann
Analyst at Robert W. Baird

Okay, thanks.

Operator

We'll go next to Mike Dudas at Vertical Research Partners.

Mike Dudas
Analyst at Vertical Research Partners

Hi, good morning, Claudia, Jonathan, and Bob.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Hi Mike, good morning.

Mike Dudas
Analyst at Vertical Research Partners

Hey. Bob, maybe you can share a little bit more on P&PS relative to the pipeline as it stands today. You talked a little bit in your prepared remarks about margin improvement and backlog. How does that track as we go through fiscal year 2024? Is the -- are you getting better share on higher-margin projects, maybe early consulting advisory relative to design work in some of these projects? And what areas do you anticipate some of the better revenue and booking growth in the P&PS segment as we move through '24? Thank you.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah. Mike, it's a great question. So the short answer is yes. We are starting to see that margin increase according to the profile and the mix. And I'd probably index more towards the water market right now on the mix. Just to give you a statistic, year-on-year growth in our bookings in water have gone up 30%. The other kind of notable one is what we call cities and places, but it's kind of our built environment business, it's been really driven by the Middle East. That year-on-year has been about 40%. And what's kind of positive about both of those? And I never thought that I'd say this before, but from a cash standpoint and a margin standpoint, we're hitting company-wide type of margin targets in the Middle East, which is a positive. And then the water sector has traditionally been our higher-margin component of our business. So kind of two trends there.

Mike Dudas
Analyst at Vertical Research Partners

Perfect. And what about for bookings and outlook as we move through 2024? Those are the areas you concentrated or other areas, given life science, semi-work, reshoring, et cetera?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah. So moving forward, we're starting to see some pretty exciting developments happening within the life sciences world. That -- as we've talked about it before, it's been red hot for several years. I'd say, the last couple of quarters, we've seen -- it hasn't declined, but it hasn't been accelerating the way it was in the past. Just in the last six weeks, we've had some really deep conversations with these are Tier 1 clients we've had forever, that hopefully, we'll be reporting some really good news next quarter on those jobs. I did mention the Lilly job in Germany. That portfolio, specifically around GLP-1 has continued to be strong. NOVO just announced the acquisition of Catalent. Those Catalent facilities are going to need to be retrofitted and we were already in the middle of NOVO's work. So that's a real positive too.

So I'd look at life sciences getting back. And then the chip manufacturing world has been kind of at the -- as our design work continued from an external semi-market standpoint, we're now on the upswing of a new cycle. And so we're seeing more work around the tool OEM. So a lot of the R&D work in order to support these manufacturing facilities on higher powered chips, really driven by AI has been a nice early booking. So kind of concept work that's happening there.

Mike Dudas
Analyst at Vertical Research Partners

Thank you, Bob.

Operator

We'll move to our next question from Andrew Kaplowitz at Citigroup.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Hey, good morning, everyone.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Hi Andy, how are you?

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

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

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah, I'd say the answer to the last part, Andy, is yes. And from a margin -- from a P&L margin perspective, we feel comfortable that our year-on-year increase that I mentioned in the script is real. And so year-on-year margin increased year-on-year. If there were areas where I'd say, soft might be too strong, but if there were areas that we've got a high level of attention on, it is the UK. We've been able to stay flat in the UK, which is a positive. But we did have the national infrastructure and construction report just published here, I think it was Friday. And the UK government committing to the same level of spend, GBP775 billion over the course of the next 10 years, with some consideration for inflation. So that's an area that we're continuing to put some attention on to make sure that we continue to grow, but overall positive.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

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. Divergence 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?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah. 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 those 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 more -- much more to follow on that.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Appreciate the color.

Operator

Next, we'll move to Steven Fisher at UBS.

Steven Fisher
Analyst at UBS Group

Thanks. Good morning. 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 than you're going to be getting reimbursed for some of that?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah, Steve, thanks for the question. That's a good clarification. So the first part of your question is yes, those $275 million and the $40 million are still very much in play. I'd say on the $40 million, that's not the $9 million was what was incurred in the first quarter. And so the balance would be over the course of the next three quarters, and we're indexing probably more in the first half than the second half. So hopefully, that clarifies that. But yeah, we're still on track within the numbers that we highlighted in the previous quarter. The $17 million is not included in that. The $17 million is costs that are with us. They're recoverable. That's why we moved them into this segment.

Claudia Jaramillo
Executive Vice President & Chief Financial Officer at Jacobs Solutions

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

Steven Fisher
Analyst at UBS Group

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, then how quickly do we get above that 14.6% to kind of deliver it for the full year, given the lighter side in Q1?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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

Steven Fisher
Analyst at UBS Group

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

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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

Steven Fisher
Analyst at UBS Group

Okay. I'm just...

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

For the year. Yeah.

Steven Fisher
Analyst at UBS Group

For this year? Okay.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

For this year.

Steven Fisher
Analyst at UBS Group

Got it.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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

Steven Fisher
Analyst at UBS Group

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

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

So better than 14.6%. So last year was 14.6%.

Steven Fisher
Analyst at UBS Group

Yeah, better than 14%. Right.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

And then this year will be better than 14.6% full year.

Claudia Jaramillo
Executive Vice President & Chief Financial Officer at Jacobs Solutions

Full year.

Steven Fisher
Analyst at UBS Group

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%. If that's what you're...

Claudia Jaramillo
Executive Vice President & Chief Financial Officer at Jacobs Solutions

It'll be a gradual increase, Steven.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah, it'll index over the second half, and we'll see that within our reported financials. That's why that -- Steve, that's why I said a few quarters.

Steven Fisher
Analyst at UBS Group

Okay, got you. Thank you very much.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah.

Operator

We'll take our next question from Jerry Revich at Goldman Sachs.

Adam Hotchkiss
Analyst at The Goldman Sachs Group

Hi, this is Adam on for Jerry today. Thanks so much for taking my question.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Hey, Adam.

Adam Hotchkiss
Analyst at The Goldman Sachs Group

Can you talk about -- hi, how are you? Can you talk about -- more about what drove the 280-plus margin decline in PA Consulting even with revenues higher sequentially? And then what drives visibility on the margin ramp through the balance of the year?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Sure. So I would -- answer to the second part first, Adam. The pipeline, as well as the -- we call it, stock of work in PA, but its backlog, is driving the optimism there. As well as the team really does have better arms around the variable cost structure of the entity. Similar to Jacobs, it's a people business, asset-light and services-oriented. The drop was probably driven a little bit by some volatility with our clients in December. And the discretionary spend of -- and it was kind of more in the UK business and around what was going on within UK government, defense and security, as well as the public sector work. And so that was -- that kind of -- if it stops on a dime, we can't make those variable cost actions. And so we ended up seeing that in the quarter. That has since kind of returned and then we're managing our variable costs ahead of it, similar to what we did in mid-last year.

Adam Hotchkiss
Analyst at The Goldman Sachs Group

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 mid? Some of the things going on in the UK market?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah. I think we're still in that kind of mid-single digits to mid-high singles. [Indecipherable] three years has been double-digit growth. And so we're still growing. I think we're probably kind of in that mid-single-digit growth now.

Adam Hotchkiss
Analyst at The Goldman Sachs Group

Great, thank you.

Operator

And next, we'll move to Chad Dillard at Bernstein. Chad, your line is open. Please go ahead.

Chad Dillard
Analyst at Sanford C. Bernstein

Sorry, I was on mute. Hey, good morning, guys.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Hi, Chad.

Chad Dillard
Analyst at Sanford C. Bernstein

Hey. So I wanted to spend a little more time on just like what you're seeing from a booking standpoint, in People and 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 US in March. To what extent do you think that potentially unlock with more activity from a design standpoint? And then just like what are you seeing from like a domestic versus international perspective, just for semi design?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Yeah. So let me answer the first one, Chad, just writing some note on grants. On the grants that are coming out, I would probably -- similar to what I said to Mike Dudas is that those grants are being utilized predominantly in the R&D side, right? Because these larger facilities need to get to full production and so the larger IDM or the integrated device manufacturers are probably thinking more about the semiconductor buy cycle, right, and timing their output or the start-up of those large plants. So those grants then go to where technology advancements are happening, and that's happening at the tool OEMs. And so actually those -- that's kind of driving our bookings right now as well, those tools of OEMs.

The great thing here about Jacobs is we're inside the technology of the tool and understand the facility requirements for them. So we got a nice position there, and that's what's kind of driving the bookings within the SME piece. Right now, I'd say that predominantly, it's domestic. We are seeing some activity in Europe around the EU Chips Act. But really, the business is probably more indexed towards the domestic piece. I would say that the country that we're really watching and are in the midst and was just there in December is the growth of foreign direct investment in India. And as chip manufacturing potentially pivots from China and India, so into India. And so we're kind of on the front end of that as well, both large-scale Indian clients, as well as foreign companies that are non-Indian clients coming in India.

Chad Dillard
Analyst at Sanford C. Bernstein

Got it. That's super helpful. And then just going back to the cost reallocation from corporate unallocated to People and 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 bid cycle? So in other words, do you have to like fully turn over the backlog before you see those benefits?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

No, it's gradual. It's gradual. So the piece that actually starts the next quarter, I'd say from a full kind of actualization of those costs that goes in, it's about a 12 month 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.

Chad Dillard
Analyst at Sanford C. Bernstein

Got it. Thanks, guys.

Operator

We'll go next to Sabahat Khan at RBC.

Sabahat Khan
Analyst at RBC

Great, thanks and good morning. 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? The 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?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Sure. I'd say that, so the two areas within PA that we're getting one actually is kind of ubiquitous in today's world as low as within the PA world. And then I'll go to an end market sector. Is the use of AI and AI enablement in our clients' business as a driver of business transformation? 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 tail on it 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 really, really 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 this 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.

Sabahat Khan
Analyst at RBC

Great. And then I guess on the P&PS side, there's been some discussion about when some of the larger funding packages really got going. But maybe if you could provide a little bit of color around your top-line guidance for P&PS and what assumption is in there from kind of contribution from the IIJA or the IRA? And kind of -- or how much of it is from kind of just base-level business and how maybe the government funding is tracking relative to initial expectations? Thanks.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

Sure. Yeah, I'd say that, that guidance that we've been pretty true to and I kind of -- I mentioned a statistic there that 6% to 9% or mid to high single-digit growth. And for the last five quarters, we've been right there on the high end of that range is where we're seeing the IIJA component of that is we just saw some statistics that we're from a time line standpoint, halfway through, but on some of the larger rail and highway specifically, we're 25% outlied, 15% obligated and 25% outlaid on the actual money. So it hasn't been a big piece of the growth. But the positive news is that it looks like that five year cycle is definitely going to get extended.

Sabahat Khan
Analyst at RBC

Great. Thanks very much.

Operator

Our next question comes from Bert Subin at Stifel.

Bert Subin
Analyst at Stifel Nicolaus

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?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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

Bert Subin
Analyst at Stifel Nicolaus

No. I think inclusive of, I guess, from what you we're 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 to 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?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

I would say it's probably more of winning those projects in the market that I would index toward is water. The pipeline growth in water, and I mentioned it last quarter, Bert, and it actually has continued this quarter. It's not as big as transportation, but as 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 six to eight 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 got to figure out where to put it or we don't have enough and we got to figure out how to find it and treat it. And so I'm oversimplifying, but that's probably what I'd say.

Bert Subin
Analyst at Stifel Nicolaus

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?

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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 in optimization of our cost structure rather than the straight variability of, if you're busy, you spend and if you're not, you cut, right? We want to get more of in the steady state.

Bert Subin
Analyst at Stifel Nicolaus

Thank you, Bob.

Operator

And there are no further questions at this time. I would like to turn the conference over to Bob Pragada for closing remarks.

Robert V. Pragada
Chief Executive Officer & Director at Jacobs Solutions

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 quarters to come.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Jonathan Evans
    Vice President, Investor Relations & Corporate Development
  • Robert V. Pragada
    Chief Executive Officer & Director
  • Claudia Jaramillo
    Executive Vice President & Chief Financial Officer
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