Jacobs Solutions - Q2 2024
May 7, 2024
Transcript
Operator (participant)
Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Jacobs' Q2 2024 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press Star followed by the number 1 on your telephone keypad. And if you would like to withdraw that question, again, press Star 1. Thank you. I will now turn the conference over to Ian Banerjee, Senior Vice President, Finance, Treasury, Investor Relations, and Corporate Development. Ian, you may begin your conference.
Ayan Banerjee (SVP, Finance, Treasury, Investor Relations and Corporate Development)
Thank you. Good morning. Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we will reference during the call. I would like to refer you to slide two of the presentation material for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Turning to the agenda on slide three. 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 Q2 results. Kevin will provide a more in-depth discussion of our financial metrics, as well as review of our balance sheet and cash flow. With that, I will turn it over to CEO, Bob Pragada.
Bob Pragada (CEO)
Thank you, Ian, and good day, everyone, and thank you for joining us to discuss our Q2 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 9 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 a 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 margin, 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 five in Q2. I am pleased to report solid Q2 consolidated revenue, driven by 5% growth and 3% adjusted net revenue growth that is entirely organic. Backlog increased 2% quarter-over-quarter, and gross margin in backlog increased approximately 50 basis points quarter-over-quarter, boosting confidence that our business will continue to deliver profitable growth. Turning to slide six.
People and Places Solutions line of business reported another quarter of solid top-line growth as we continued 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% quarter-over-quarter. We continue to drive organic revenue growth up 7.5% and adjusted up 5.6% quarter-over-quarter. 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 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 '28 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 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 OneWater solution from its suite of digital products, to provide our competent 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 USEPA set maximum contaminant levels for 5 PFAS compounds, the first major US drinking water legislation in 20 years, and classified 2 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, UK 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 quarter-over-quarter, 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% quarter-over-quarter, 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 and Customs multi-billion GBP 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 turn the call over to Kevin to review our financial results in further detail.
Kevin Berryman (Interim CFO)
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 margin, 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% quarter-over-quarter, 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 costs 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, Q2-adjusted EPS was $1.91, marking a 7% decrease compared to the previous year. When adjusting for last year's Q2 discrete tax benefit of $0.32, our current non-GAAP EPS represents an approximately 10% quarter-over-quarter 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% quarter-over-quarter, representing a strong 11.3% adjusted net revenue.
Finally, backlog was up 2% quarter-over-quarter. The revenue book-to-bill ratio was 0.96 times, with our gross profit and backlog increasing 4% quarter-over-quarter. Excluding a one-time change in government funding strategy with regard to space ISR programs, which I will 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 and People and Places Solutions. Q2 adjusted net revenue was up 5.6% quarter-over-quarter. 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 quarter-over-quarter. We continue to see solid momentum in both growth and profitability in the business. Our backlog has grown by 2% quarter-over-quarter, 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% quarter-over-quarter, with backlog up 3.9%. Our adjusted operating profit was up 10.3% quarter-over-quarter, while CMS adjusted operating margin rose by approximately 50 basis points quarter-over-quarter as the business continued to find avenues of operational improvements.
While a recent program loss will put some short-term pressure on the H2, 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 spending and program adjustments. Let's now focus on Divergent Solutions. During Q2, we observed an 11% quarter-over-quarter decrease in adjusted net revenue and 24% decrease quarter-over-quarter in adjusted operating profit. Excluding a one-time Palantir license in the previous period, adjusted operating profit would have been up 13% quarter-over-quarter. 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 will believe will contribute to our ongoing success. Now, let's turn our attention to PA Consulting.
Q2 saw a slight decline of 2% in quarter-over-quarter 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 H2 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 -$71 million in Q2, as working capital increased to plan levels from the exceptional performance in Q1. Despite this impact in the Q2, our reported free cash flow conversion for the H1 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% quarter-over-quarter, quarter-over-quarter increase, to be paid on June 21st. Bob, back over to you.
Bob Pragada (CEO)
Thank you, Kevin. Turning to slide ten. 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-$1.585 billion, and Adjusted EPS to $7.80-$8.10, representing a 9% and 10% growth quarter-over-quarter at the midpoints, respectively. This guidance incorporates Q2 Adjusted EPS of $1.91 and a 26%-27% Adjusted effective tax rate each quarter for the remainder of the fiscal year. Additionally, this represents a 13% EPS growth in the H2 of fiscal year 2024 versus a 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.
Operator (participant)
Thank you. We will begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw that question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And please limit your questions to one and a single follow-up. Your first question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.
Andy Kaplowitz (Managing Director and Senior Equity Research Analyst)
Good morning, everyone.
Bob Pragada (CEO)
Hi. Good morning, Andy.
Andy Kaplowitz (Managing Director and Senior Equity Research Analyst)
Morning, Andy. Bob or Kevin, can you give us more color into what's going on with J's backlog and, and how to think about it going forward? I, I know that you said backlog in People and Places is up about 2% quarter-over-quarter, 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 H2 in People and Places? And then maybe just the change in the space-based ISR impacting Divergent. I think that business is going with CMS and the DoD, correct? But could you give us more color on what happened there?
Bob Pragada (CEO)
Sure. So maybe I'll start off with P&PS, and then Kevin can talk about kind of the entirety. So in P&PS, Andy, a couple of things. One is timing. Let me first off by saying that as a gross number, the P&PS backlog represents a record backlog for this segment since we formed it nearly five years ago. So kind of point one there. As far as the growth, we kind of got tied a little bit into some timing of some of the larger programs that drive the backlog.
You know, our book-to-bill is still over one, and in the H2, with expected awards, some of which, you know, we've already received in the first month of the quarter, we're gonna see a real acceleration in the backlog in, in P&PS. Kevin, you want to talk about the, the overall as well as, as well as Divergent?
Kevin Berryman (Interim CFO)
Yeah, look, I think the dynamics associated with divergent, and you're right, that part of the business is gonna be part of the separation, so it's in the perimeter of the separation transaction, Andy. And look, there was a change in funding strategy whereby the technology and associated projects that we have are still considered viable and probably the best technologies to be utilizing going forward. But because of deciding how they were gonna be funding it, DoD is handing over that responsibility to the intelligence community. So while long term, we have a reduction. Well, short term, we have a reduction in our backlog because the DoD is handing that over. We're starting to, right now, see immediate build back up in some of those projects being now embedded into the intelligence community.
While it represents a certainly a delay in some of the burn of that project, our expectation is longer term, that DVS will start to see that same backlog come back into their their kind of backlog over the course of the next year plus, and consequently, we'll have to build up the burn once again. And so if you think about those two dynamics, I think those are kind of short-term dynamics when you include the people and places. And when you see the outlook for the rest of the the year, we're feeling pretty good about our backlog growth and book-to-bill over the balance of the year.
Andy Kaplowitz (Managing Director and Senior Equity Research Analyst)
Very helpful. And then just people and places margins, obviously very good performance. I know you've been sort of allocating corporate costs, you know, maybe, you know, how much did you end up allocating to the segment? And, and can you talk about whether you're actually on a better trajectory than you guided, when you talked about it being better than the 14.6% that you did last year in people and places?
Bob Pragada (CEO)
Yeah. So on the first part, that allocation hasn't changed since we talked about it last quarter, so that's remained consistent. And we're not gonna change that philosophy. Really, this quarter, the mix that we saw, specifically around water and life sciences, when you think about it, those are two segments, Andy, that are growing at double-digit rates. And from a pipeline standpoint, I mean, both are clearly the pipelines are doubling on a year-on-year basis. So that mix of higher margin work that's coming in is really driving that growth.
Andy Kaplowitz (Managing Director and Senior Equity Research Analyst)
Thanks, guys. Kevin, welcome back, even though you really didn't leave. Thanks.
Kevin Berryman (Interim CFO)
Thanks, Andy.
Operator (participant)
Your next question comes from the line of Judah Sokel with UBS. Please go ahead.
Judah Sokel (Managing Director and Senior Equity Research Analyst)
Hey, thanks for taking the question. Calling in for Steve Fisher. First question is: What has changed in the background in the H2 that drove your guidance change?
Bob Pragada (CEO)
Can you say that again? I'm sorry.
Kevin Berryman (Interim CFO)
Sorry, I didn't follow the question.
Judah Sokel (Managing Director and Senior Equity Research Analyst)
Yeah, sorry. I guess what's changed in the background that drove your guidance change? Like, anything going on in the H2 that is maybe different than your prior expectations?
Kevin Berryman (Interim CFO)
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% quarter-over-quarter 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-off that we had in the Q1. So I think it's quite actually a positive.
Judah Sokel (Managing Director and Senior Equity Research Analyst)
Okay, that's helpful. 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.
Bob Pragada (CEO)
Yeah, project selectivity is. We, we've always had that, and that has become a kind of a primary focus for us as the opportunities have increased. Talked a little bit about water and life sciences. You know, in our transportation business right now, our win rates have been the highest you could say, and they're highest in the market, and they've been the highest that we've experienced, and a lot of that comes from the subjective evaluation, you know, from what we put our effort and our money behind on trending. The, probably the biggest component of that is around long-term client relationships. We're not out looking for work.
You know, we've been with our clients for decades, and if you think about 3,700 clients around the world, and over the course of the last 20 years, you know, that's a 2% client turnover. And so when we're with a client, we're there for the long term.
Operator (participant)
Your next question comes from the line of Michael Dudas with Vertical Research. Please go ahead.
Michael Dudas (Senior Equity Research Analyst)
Good morning, Bob and Kevin, and welcome back as well.
Bob Pragada (CEO)
Mike.
Kevin Berryman (Interim CFO)
Thanks, Mike.
Michael Dudas (Senior Equity Research Analyst)
Bob, you mentioned in your prepared remarks, life sciences and expanded pipeline, and maybe generally in life sciences, semi, data center, some of the more facilities work. The conversion timing and level relative to those businesses, I certainly having a diversity help, so maybe you can share a little bit about how that plays through and maybe through the H2, 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.
Bob Pragada (CEO)
Sure. So maybe I'll start with life sciences and then talk about semi and kind of the electronics world right now. You know, I mentioned this before, Mike, within our life sciences world, you know, you've heard a lot about GLP-1 and everything that's going around the obesity drug. If you look at the two biggest ones that are in that space. You know, 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.
You know, there are quite a few advances that are happening around oncology, and so timing on those was just maybe a little slower than we wanted over the course of the last few quarters. But going into the H2, 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. You hear these CEOs of life sciences companies and biotech companies talk about capacity as the biggest choke point. You know, the contract manufacturing world is on the rise as well. So we'll have some good news here in the H2, and actually in Q3, around what's going on in that contract manufacturing space.
Semiconductor, you know, 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. You know, the CHIPS Act money has now been delivered to the market, and some of the largest players have benefited from that. So, you know, we're seeing projects that we've already been involved with talk about phase two of those. And so, you know, we'll have more to say as those become public in the H2. But it's really the entirety of the ecosystem of the chip manufacturing and semiconductor world, starting from, you know, the R&D facilities through manufacturing.
And now, you know, you'll hear a lot more about test and assembly, and those test and assembly facilities coming to the U.S. So we're, we're excited about what's going on. And then in data centers, you know, the power usage of these are creating opportunities for us with regards to, to power and cooling. The water requirements on now what could be, you know, 1-gigawatt data center. So really, really positive story there.
Michael Dudas (Senior Equity Research Analyst)
Thank you, Bob. My follow-up is maybe for either one on PA. How do you seeing the macro in the H2 of the year? Certainly seems like internal opportunities are helping drive a bit more on the margin. Is there an opportunity to get some more from maybe profit growth along with some net revenue growth into 2025 as you're looking at it today?
Bob Pragada (CEO)
Yeah, maybe I'll make a couple 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% quarter-over-quarter. 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 you know, a lot around the U.K. macro has been driving the business, you know, with at least hopefully some clarity that there'll be an election in the U.K. in the H2 of the year. We're already starting to see the pipeline grow, and the sales performance in the last month of the quarter kind of drove the business. So the momentum is there, and then Kevin will talk about the margins.
Kevin Berryman (Interim CFO)
Yeah, look, I think the team has done a really good job, Mike, relative to right-sizing the organization, given some of the challenges in the overall consulting industry, which obviously is impacting PA to a certain extent. But they're very well-positioned, especially in the U.K. market. And so, we're feeling good about their ability to be delivering that 20% plus margin in the back half of the year. And so longer term, I think that that translates into numbers, you know, going on from there as well. And look, I think, as we enter the end of the calendar year, we do have the dynamic of the U.K. election, so we're gonna have to watch that carefully to see what impacts there are.
But, what we have right now is pretty clear visibility on our Q3 and Q4 reported numbers in terms of the health of the PA business. Not substantial growth, but certainly, you know, good, solid execution in the balance of the fiscal year for us.
Michael Dudas (Senior Equity Research Analyst)
Thank you, gentlemen.
Operator (participant)
Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.
Jamie Cook (Managing Director and Equity Research Analyst)
Hi, good morning. Couple questions. One on people in places. The, the margins implied in the back half of the year, Kevin, I think are down relative to where we were in the Q2. I know you spoke to mix, but with backlog—with gross margins and backlog being up, I'm just wondering, you know, what's going on there, or is there just some level of conservatism in your, in your margin guidance? And then my second question, just on the large awards that you're expecting, in the back half of the year, I'm assuming that you don't need any of these awards to, y-y-you know, to, to make your guide for, for 2024. So I'll start with those. Thank you.
Kevin Berryman (Interim CFO)
Well, let me start on the first one. Look, I think fifteen point three percent that we saw people in places is a record, is at a high level, and consequently, I don't think we can assume that every quarter is gonna be fifteen point three percent just because of the factors associated with cost of you know mix and what's what actually hits 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. Doesn't mean we're gonna hit fifteen point three percent in Q3 and Q4, but I think we're gonna end the year at numbers that are gonna be pretty darn attractive.
Bob Pragada (CEO)
... And then on the awards, Jamie, you know, those are, when I say, are they part of the guide or not part of the guide? You know, our guide incorporates a probability waiting for the award, but we're feeling optimistic about not just the anticipated awards, but the pipeline. The pipeline is looking extremely robust in P&PS.
Jamie Cook (Managing Director and Equity Research Analyst)
Okay, thank you.
Operator (participant)
Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets. Please go ahead.
Sangita Jain (Managing Director and Equity Research Analyst)
Yes, hi, thanks so much for taking my questions. I just wanted to ask about, you know, Saudi Arabia, and the kingdom seems to be scaling back on parts of the NEOM project. I just wanted to hear what you guys are hearing and what your exposure there might look like.
Bob Pragada (CEO)
Sure. So maybe I'll just talk about, broadly, Saudi, and then specifically on NEOM. Broadly, Saudi, the pipeline of work continues, and it's, for us, it's a diverse pipeline. We don't index towards, a specific type of offering. You know, we've got value-added services that we provide to the, you know, the entire life cycle of, these different programs. And if you look at the pipeline, the infrastructure component of it, the transportation, whether it be in aviation or, in rail, as well as the water, opportunities that we've had, have been, pretty robust. So, you know, we just announced, a major expansion of the Riyadh, the new Riyadh airport that's, that's going on, that's in full force, as well as the water infrastructure that we're putting in place.
Our exposure on NEOM, even with the pullback on NEOM, as far as the 170 kilometers, the work that's going on right now has not abated. And continues to go on schedule for not just the personnel that we're dedicating towards the job, but the growth that we see in the job as well.
Sangita Jain (Managing Director and Equity Research Analyst)
That's, that's super helpful. And if I can ask, you, you gave us a rundown of a lot of your key end markets. Maybe just a little bit on the power and energy markets and what you may be seeing there, here, as well as in the UK, on power transmission and renewables.
Bob Pragada (CEO)
Sure. So, overall, solid. The work that we're seeing, both in Southeast Asia, in Australia, New Zealand, and in Europe, and Europe, clearly driven by the geopolitical kind of impact that it's had on energy transition, that continues. The interconnectors that we are not just in the middle of in Europe, but the additional pursuits that we have in place, kind of put some tailwinds there. I'd say in the US, it's been not just a market on its own, but it's also been an enabling market. Our expertise around renewables and then taking that energy expertise and taking it to areas such as data centers and the EV ecosystem, with regards to transportation, that's probably been a greater level of focus in the US.
So kind of the diversity of our skill sets is really helping that energy and power group that we have. Again, it started off from a smaller base, but it's doubled in size just in a year.
Sangita Jain (Managing Director and Equity Research Analyst)
Great. Thank you so much.
Operator (participant)
Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead.
Chad Dillard (Managing Director and Senior Equity Research Analyst)
Hi, good morning, guys.
Bob Pragada (CEO)
Hi, good morning, Chad.
Kevin Berryman (Interim CFO)
Morning, Chad.
Chad Dillard (Managing Director and Senior Equity Research Analyst)
So, Bob, 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, the design cycle, for that? And then can you also talk about, you know, how Jacobs is, is positioned to win there?
Bob Pragada (CEO)
Yeah. So, and, Chad, you probably heard this before, you know, kind of the $200 billion that spans over the course of the next 25 years, you know, that is across multiple end markets. And so, we can see a direct pipeline to that, over, you know, a long period of time, as regulations continue to become more and more part of the law. The way PFAS, you know, within the DoD agencies, specifically the Navy, and the Air Force, as well as the Corps of Engineers, you know, that's showing up as individual pursuits. And, you know, it's kind of in that $75 million-$100 million of annual revenue for us, as an offering.
What you don't see is probably the bigger piece of PFAS, which is in drinking water. And so the work that the PFAS remediation and PFAS consulting that we do within a water offering or, you know, within a whether it be water treatment or wastewater a reclamation project, that continues to grow. So to look at this as an incremental is gonna be, you know, a little cloudy, but to see it as a catalyst for, you know, scope growth on existing work is kind of how we're looking at it. And these are... Like I said, on the first question, you know, these are clients that we've had for a long time and will continue to be a critical part of our offering.
Chad Dillard (Managing Director and Senior Equity Research Analyst)
That's helpful. And then just over on the infrastructure side, specifically on transportation, can you talk about, like, how your pipeline is evolving? Has it changed, you know, this quarter versus a year ago? Any color on that would be helpful.
Bob Pragada (CEO)
Sure. Pipeline growth is there, probably more indexed towards the U.S., in what's—you know, the IIJA focus that's come through, and you're seeing that in some of our awards. So I'd say the, you know, the larger rail opportunities we talked about it last quarter, we talked about this quarter, those continue. The highways work is continuing to grow. And then, you know, in Australia and in the Middle East as well, you know, we're seeing continued growth in transport. I'd say that the areas that, you know, as there's more stability that comes within the U.K., that we could see the growth coming in would be in the U.K.
And then what's differentiating us amongst our, you know, our, not just our competitive pool, but creating more value for our clients is, how we're enabling that with our digital platforms. So, you know, the use of StreetLight Data, not just in our own work, but how that's kind of, you know, almost revolutionizing our offering to clients, is something that we've got it firmly embedded in the US, but we're now starting to see use cases come about, both in the UK as well as in the Middle East, and soon to come in Australia.
Chad Dillard (Managing Director and Senior Equity Research Analyst)
Great. Thank you.
Operator (participant)
Your next question comes from the line of Justin Hauke with Baird. Please go ahead.
Justin Hauke (Equity Research Analyst)
Yeah, good morning. Thanks for taking my question. I just wanted to clarify one thing on the guidance. The CMS outlook for the back half of the year, I think, you know, previously you guys were talking about kind of a mid-single-digit constant currency growth rate. It's a little bit below in the H1, but I think you were talking about some program losses that are going to pressure the H2. And so I just wanted to make sure that we understood kind of what that commentary meant and what your expectations are for the revenue growth in the back half of the year at CMS.
Kevin Berryman (Interim CFO)
Yeah, Justin, we did have a loss, one that was somewhat sizable, which impacts the, I would say, the short term, and I would call short term Q3, Q4. While we have a lot of short cycle awards that are filling in the gap, fundamentally offsetting and mitigating the impacts of that, it probably puts us in the short run to be more flattish as opposed to seeing the, you know, the growth of single digits, mid-single digits. So I think that's the dynamic, at least in Q3, Q4. I would remind you that this is the business that is gonna be transferred over. But I would tell you, the team is doing an amazing job in filling in and positioning for as exiting 2024, putting itself back in a place to be seeing incremental growth in 2025.
Bob Pragada (CEO)
And maybe just one thing to add, the operational efficiencies that the team has really delivered through, you know, 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.
Kevin Berryman (Interim CFO)
That's a good point, Bob, because, you know, 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.
Justin Hauke (Equity Research Analyst)
Okay. Thank you for clarifying. And I guess my, my second one is just to ask on the, the corporate unallocated costs. The, the trending down to the $50 million, you're not expecting that line item to come down until post-separation, though, right? So this, 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, in the Q1 of 2025. Is that, is that still the right way to kind of think about it?
Kevin Berryman (Interim CFO)
That's correct.
Justin Hauke (Equity Research Analyst)
Okay. Great. Thank you very much. Appreciate it.
Kevin Berryman (Interim CFO)
Thanks, Justin.
Operator (participant)
Your next question comes from the line of Bert Subin with Stifel. Please go ahead.
Sean Eastman (Equity Research Analyst)
Bob, Kevin, good morning. This is Sean Eastman for Bert.
Bob Pragada (CEO)
Hi, good morning.
Kevin Berryman (Interim CFO)
Hi.
Sean Eastman (Equity Research Analyst)
Seems like a lot of the good questions have been asked. I will ask about IJA ramp. I think we've heard commentary more broadly from the industry and then even even through you guys of an expectation of IJA funding ramp to, you know, around 2026 or 2027. Are you still seeing that trend? Are you seeing that trend faster than expected? Any color there would be helpful.
Bob Pragada (CEO)
No, it's kind of still trending to that. You know, the trend on the new awards and how that money flows, 2026, 2027, I think we've mentioned last quarter that, you know, that looks like it could get extended, but that's not because it's slowing down right now, but it's because it started later than what was anticipated. But, these awards that we've not just talked about today, but also what we've, you know, telegraphed for the H2 of the year, those are really being catalyzed by IIJA.
Sean Eastman (Equity Research Analyst)
That's helpful. Thank you. And then, and then maybe a follow-up on the prior question related to unallocated expenses. You know, you've given good visibility into the post-spin. I think I look at it as, I was quickly doing the math, you know, you're, you're trending at about 2% on a trailing twelve-month sales. So maybe on, on a percentage basis, trailing twelve-month post-spin, where are you looking to get? I think it's been elevated post, your PA Consulting acquisition in 2021.
Kevin Berryman (Interim CFO)
Well, but look, I'll have the—we're not targeting a percentage, we're targeting an absolute number, which we've communicated. There's a lot of moving pieces in that, which I just want to highlight. For example, we're conveying cost to the new organization. Part of our corporate infrastructure is gonna be conveyed. There is gonna be TSA revenue that we will receive from the transition period. So there's a lot of moving pieces, but I think it's safe to say that we're gonna be targeting that number to be at that $50 net number at the end of the day, as we go into 2025. Got a lot of work to be able to execute against that.
And look, the amount of effort that's being expended in this company right now relative to ensuring that we're creating a standalone entity that's gonna be able to, you know, day one look to accelerate its level of growth, given its effective focus on the government service side, is not inconsequential. And I just want to reinforce that because it has impacts relative to the short-term ability for us to further reduce numbers. And at the end of the day, I can't tell you how pleased and proud I am actually of the teams. Not only those that are actually dedicated to the separation and stand-up management office, but the rest of the organization, which is getting pulled away from their day jobs to help support the separation. So just feeling really good about it.
Sean Eastman (Equity Research Analyst)
Thank you. And then just last one from me is, you know, 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 or in conversations around? Any, any color there would be just incrementally helpful as a, as a tailwind into the Middle East region, more specifically.
Bob Pragada (CEO)
Yes and yes. It's, you know, our presence in Dubai on multifaceted infrastructure work, water, transportation, and within transportation, aviation, is reaching, you know, we've been there for decades, and that will continue to be a primary area of focus for us within the Middle East. And so, the answer is yes.
Sean Eastman (Equity Research Analyst)
Okay. Thank you so much.
Operator (participant)
Your next question comes from the line of Jerry Revich with Goldman Sachs. Please go ahead.
Jerry Revich (Managing Director and Senior Equity Research Analyst)
Yes. Hi, good morning, everyone.
Bob Pragada (CEO)
Hi, Jerry.
Jerry Revich (Managing Director and Senior Equity Research Analyst)
Bob, Bob, I'm wondering if you could just talk about the data center opportunity for you folks. What is the scope of CapEx looks like for data centers for you folks, compared to semi cap equipment and your market share? You know, 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.
Bob Pragada (CEO)
Yeah, Jerry, if you look at data centers as a percentage of, from a deployed capital perspective, of a percentage of kind of call it the, you know, the electronics universe, it is just... And this is not Jacobs. It's just, it is a minority share of, you know, the billions that get put into chip manufacturing and then the entire life cycle of the chip delivery profile to the market. So that's kind of point one. But the rate of growth, really driven by AI and the needs for these data centers is what's driving our business. So we see that growing. You know, from a pure design perspective, these are not overall, the facility itself is not the real complicated component.
What's becoming more complicated are the power needs and the cooling needs, the water needs. So that's what our teams are really focused in on. You've seen probably some of the bigger power management companies, Eaton and Schneider and others talk about, you know, how it's driving their business. That goes into the hardware that's going into data centers. But the consultancy piece, that power and water usage is gonna be a bigger piece of how we, you know, kind of expand that value proposition there.
Jerry Revich (Managing Director and Senior Equity Research Analyst)
And in terms of within People and Places, you know, 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?
Bob Pragada (CEO)
Water and life sciences. You know, those two right now, even as far as rates at a point in time, Q2, that represents probably over 50% of that P&PS growth. And then when we look at the pipeline moving forward, you know, those are 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, you know, a driver both in the U.S. as well as in Australia and the Middle East too. So, life sciences, Europe and U.S., water globally.
Jerry Revich (Managing Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Your next question comes from the line of Josh Sullivan with The Benchmark Company. Please go ahead.
Josh Sullivan (Managing Director and Senior Equity Research Analyst)
Hey, good morning.
... Hey, Josh, can you just, can you just comment maybe on labor availability, inflation, retention on a geographic basis? You know, where, where is it still hot? Where is it getting a little better?
Bob Pragada (CEO)
Yeah. It's hot all over. And you know, as far as wage inflation, you know, we still—it's there, but our ability to kinda look at value-added solutions for our clients and looking, you know, on how we can continue to deliver at a price point that drives our, the capital deployment from our clients, that has not, that has not really changed, as we continue to innovate in that space. What's really helped us, Josh, has been our global delivery model. You know, if we look at the engagements that we have, whether they be, you know, smaller consultancy engagements or larger programs, you know, these jobs and these engagements with our clients have literally got people from all over our, you know, our global delivery platforms.
And so, you know, and we're gonna continue with that because it's not necessarily the cost arbitrage that might be an outcome, but it's the talent arbitrage, and our talent is literally in every geography that we have today. So, you know, it has not really been a big issue for us.
Josh Sullivan (Managing Director and Senior Equity Research Analyst)
Got it. And just on the short cycle wins you mentioned in the comments there, you know, where specifically were those? Any structural shift in focus, or is that just opportunistic?
Bob Pragada (CEO)
No, it's probably been focused around telecom, weapons sustainment, and then, you know, some scope growth that we see in our aerospace work as well.
Josh Sullivan (Managing Director and Senior Equity Research Analyst)
Got it. Thank you for the time.
Operator (participant)
That concludes our question and answer session, and I will now turn the conference back over to Bob Pragada for closing remarks.
Bob Pragada (CEO)
Thank you, everyone, for joining our earnings call. Really look forward to providing further updates and visiting with all of you, and investors, and analysts in the months to come. Look forward to engaging firsthand. Thank you, everyone.
Operator (participant)
This concludes today's conference call. Thank you for your participation, and you may now disconnect.
