Jacobs Engineering Group Inc

NYSE:J

Earnings Call Analysis

Jacobs Reports Strong Q4 and FY 2023 Results

Jacobs engineered a robust Q4 and FY 2023 with strategic growth maneuvers, including the spin-off of its Critical Mission Solutions (CMS) and Cyber & Intelligence unit to form a new government services entity in partnership with Amentum, expected to close in H2 FY 2024. The new venture is anticipated to generate approximately $13 billion in revenue and $1.1 billion in adjusted EBITDA. Revenue and adjusted net income growth were remarkable, with People & Places Solutions and PA Consulting posting double-digit increases and strong backlog expansions. Operating cash flow reached $219 million with free cash flow at $180 million, achieving a higher than targeted cash conversion rate. Moreover, the company returned $480 million to shareholders through repurchases and dividends. Investors can anticipate mid-to-high single-digit organic growth in FY 2024, while PA Consulting expects to sustain over 20% operating margins for the medium term.

Positioned for Growth Amidst Organizational Change

The company is preparing to embark on a significant transformation, with plans to split into two independent entities. This strategic step capitalizes on the company's history of operational excellence and leadership within their sectors, aiming to enhance growth prospects.

A Strong Finish with Notable Increases in Q4

In the fourth quarter, gross revenue climbed 10.5% year-over-year, and adjusted net revenue grew by 8.9%. While GAAP operating profit was robust at $278 million, it incorporated several non-operational costs such as amortization, transaction, separation-related costs, and charges for real-estate footprint reduction. Excluding these adjustments, the adjusted EPS of $1.90 reflected a solid 6% year-over-year increase. This quarter's adjusted EBITDA also rose by 10%, indicative of the company's strength; a 21.6% adjusted effective tax rate was observed for the fiscal year.

Consistent Full-Year Performance and Positive Outlook

The full-year review highlights a 10% rise in gross revenue and a 7% increase in net revenue, while GAAP operating profit soared, supported by gross profit growth with stable G&A expenses. Year-over-year, GAAP EPS augmented to $5.31, and adjusted EPS to $7.20, marking up by 7% and 4%, respectively. The company forecasts a moderate uptick in adjusted operating margins for the next fiscal year through a strategic mix of high-margin revenue and reduced corporate G&A, signaling progressive financial stability.

Diverse Business Segments Show Robust Growth

All lines of business have reported growth, each with distinct highlights. For instance, the People & Places Solutions segment demonstrated an impressive 11% increase in adjusted net revenue for Q4, with positive growth and healthy margins across all regions. The Critical Mission Solutions and Divergent Solutions also showed promising year-over-year growth in both revenue and margins. PA Consulting, meanwhile, achieved a strong 13% revenue surge in Q4, with expectations of continued growth given a favorable booking trend. While the company anticipates temporary elevated costs during transition periods, their focus on high-quality business and cost efficiency remains unfaltering.

Striking a Balance Between Debt and Shareholder Returns

The company concluded the fourth quarter with admirable cash reserves and a manageable debt level, maintaining a net debt to adjusted EBITDA ratio of approximately 1.4 times. This financial prudence reflects a commitment to sustaining an investment-grade profile and long-term shareholder value creation. Moreover, a recent dividend payout increase and future savings identified in the cost structure plan wedded to strategic growth targets after the CMS separation, augur a stronger fiscal position. They aim for over 300 basis points of adjusted EBITDA margin expansion by fiscal 2025, projecting minimum 13.8% margins for standalone operations.

Fiscal 2024: A Year of Optimism with Prudent Earnings Guidance

The trajectory for fiscal 2024 appears encouraging, with forecasted adjusted EBITDA between $1.53 and $1.6 billion and an adjusted EPS range of $7.70 to $8.20. Despite anticipating temporary costs to support ongoing separation and transition, the company is poised to weather these as one-time impacts and drive forward its profitable growth strategy in subsequent years.

Responding to Inquiries: Diligence on Margin Expansion and Backlog Growth

The management detailed that margin expansion targets will primarily manifest post-CMS separation, with plans in place to tackle stranded costs and refine the operating model. They reaffirmed a commitment to P&PS segment margins as laid out in their strategic plan. Meanwhile, concerns regarding backlog growth were addressed by highlighting an 8% year-over-year increase in gross margin in backlog, and confidence was expressed in maintaining double-digit growth in the advanced facility side, supported by a strong project life cycle and market trends.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Chibrow, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs' Fiscal Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jonathan Evans, Vice President of Corporate Development, Investor Relations. Please go ahead.

[Jonathan Evans, executive]

Thank you. Good morning. Our earnings announcement was filed this morning, and we have posted a slide presentation on our website, which we'll reference during the call. Our 10-K will be filed later today. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements and non-GAAP financial measures.

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 fourth 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. Finally, Bob will provide details on our updated outlook along with closing remarks, and then we'll open up the call for questions.

With that, I'll turn it over to our CEO, Bob Pragada.

[Robert Pragada, executive]

Thanks, Jonathan. Good day, everyone. Thank you for joining us to discuss our fourth quarter and fiscal 2023 business performance and 2024 outlook. Our team has shown remarkable strength, adaptability and dedication and continuing to deliver outstanding results to our clients. I am proud of our people for continuing to drive our culture of caring to new heights.

Over the past couple of quarters, we have shared our intention to simplify our business model, optimize our cost structure and accelerate profitable growth and margin expansion. Today marks a key turning point as we boldly move forward. I want to provide an update on our previously announced intent to separate the CMS business on Slide 4, before I move on to our fourth quarter results.

As we communicated, following a robust evaluation of all opportunities, we are excited to announce the creation of a new leading government services player. Jacobs will be separating our industry-leading government services businesses, Critical Mission Solutions and the Cyber & Intelligence unit of Divergent Solutions by the way of a spinoff to Jacobs' shareholders and then combining those assets with Amentum through a merger, which has been structured as a Reverse Morris Trust. This combination is intended to be largely tax-free for Jacobs' shareholders.

Turning to Slide 5. The combination creates a combined government technology services leader with an approximately $13 billion in revenue and approximately $1.1 billion of combined adjusted EBITDA, including $50 million to $70 million of net synergies expected to be realized by year 2.

Jacobs shareholders will own 51%, and Jacobs will retain a stake equal to between 7.5% to 12% of the combined company based on achievement of operating profit targets prior to close. Jacobs will also receive a $1 billion cash dividend, subject to customary adjustments as well as an additional value through the disposition of our retained stake within 12 months of closing.

As part of our continued separation efforts, we concluded it was best to include the majority of our Divergent Solutions business, including the Cyber & Intelligence unit in the separation perimeter, owing to the strategic synergies, shared costs and operational overlap with CMS.

We will retain the infrastructure-related software assets of Divergent Solutions, given their strong strategic fit with our critical infrastructure, advanced facility and PA Consulting businesses. We believe this combination of 2 premium industry leaders who share strong operating platforms, high-performance culture and a breadth of expertise offer shareholders the best opportunity to realize long-term value. The combined business has the ability to drive significant innovation and growth with meaningful cost synergies, added scale and diverse end market exposure and is supported by secular growth trends.

After a comprehensive review of all inbound inquiries, we believe the transaction is in the best interest of the company and our stakeholders. The transaction has been unanimously approved by the Jacobs Board as well as the financial sponsors of Amentum, and is not subject to any other shareholder approvals. The transaction is expected to close in the second half of fiscal year 2024 subject to customary closing conditions and regulatory approvals. For more details regarding the structure of the deal, I invite you to review the materials we published earlier.

Moving to Slide 6, which shows our multiyear transformational. As part of this strategic separation which results in a more focused Jacobs, we are concurrently announcing a cost optimization plan to be executed over the next 24 months. During which time, we will target over 300 basis points of margin expansion as compared to our as-reported fiscal year 2023 results, driving an expected adjusted EBITDA margin of at least 13.8% in fiscal year 2025 for pro forma Jacobs. Claudia will share more details in her prepared remarks.

Post transaction, Jacobs will be a well-capitalized pure play critical infrastructure and sustainability leader with a strong balance sheet and significant growth potential. Fiscal 2023 marked records for revenue and free cash flow generation for Jacobs, and we look forward to 2024 as we begin to chart our path forward as 2 leading independent companies.

Turning to Slide 7 and Q4. I'm pleased to report another record quarter as measured by both revenue and operating profit. I would like to once again reiterate that this growth is entirely organic. Strong cash conversion remains a hallmark of our business model and remained robust in Q4, allowing us to drive record fiscal year 2023 free cash flow in order to return capital to shareholders while investing behind our growth accelerators, climate response, data solutions and consulting and advisory.

We recorded 104% underlying free cash flow conversion to adjusted net income in FY 2023 on a record year of $837 million in free cash flow generation. We expect to generate greater than 100% underlying free cash flow conversion again in FY 2024 before the impact of restructuring, transaction and separation costs. Our underlying business and outlook remains very healthy, and we continue to be excited about robust growth opportunities in all our end markets.

Turning to Slide 8. Our People & Places line of business delivered accelerating top line growth with adjusted net revenue up 11% year-over-year and adjusted operating profit up 12% year-over-year. Claudia will provide further details on the significant growth we are experiencing in our global business units.

We continue to see widespread positive indicators with a gross profit and backlog growth of 8% year-over-year. Once again, our pipeline continues to grow faster than our top line, which provides visibility and confidence in our expectations that growth can persist at mid- to high single digits organically in FY '24.

Looking back at FY '23, I want to highlight the significant achievements of our P&PS business with double-digit organic OP growth in every quarter. Water continues to be a pillar of our business. Of the top 30 wins in the quarter, 9 were in the water sector. Of those wins, we wanted to highlight 2 that showcase our digital and data capabilities. Firstly, at the city of Farmington, New Mexico wastewater and surface water treatment plant, our data-enabled product, AquaDNA, is a key part of the solution to provide resiliency efforts and improve energy efficiency.

Secondly, for Boston Water and Sewer Commission, we are leveraging our AI model that analyzes the assets that are most likely to fail, helping our clients create data-driven maintenance and replacement plans. In the energy transition space, Jacobs has been selected as the program manager for the Thyssenkrupp $2.85 billion effort to decarbonize its steel mill in Duisburg, Germany with a new green hydrogen power plant. The site is Europe's largest steel mill and the effort represents one of the largest industrial decarbonization projects worldwide. It is also a testament to the diversity of our expertise.

In transportation, our largest market, we continue to see broad-based momentum from IIJA related funding. Overall, IIJA-related pipeline has increased approximately 20% year-over-year. In Q4, we were selected lead and manage the 10-year renovation of the Seattle-Tacoma International Airport International terminal, emphasizing upgrades to enhanced mobility and energy efficiency to position Seattle as a global tourism and business hub.

Internationally, we continue to see high levels of activity in the Middle East. For example, in climate response, we are providing program management services to the Saudi Arabia National Center for Environmental Compliance. The work forms part of their ongoing environmental remediation program to repair damage to terrestrial and coastal environment. Our environmental expertise is truly global, and we continue to see a robust opportunity set related to our clients' climate-related challenges.

In CMS, we performed very well in Q4 to cap off a great year. CMS Q4 revenue was 7% higher year-over-year, and operating profit increased 26% behind 128 bps of margin expansion. This pipeline and growth outlook remained robust with major award prospects in FY 2024 and minimal forecasted recompete pursuits. CMS was awarded a new project management resources framework contract with EDF Nuclear Generation licensee of 8 nuclear power stations, which account for approximately 16% of the U.K.'s electricity output.

PA Consulting continues to post strong results with 13% revenue growth and nearly 21% operating profit margins despite a very challenging macro environment. While we remain cognizant of the weakness that some consulting peers are seeing, we continue to be pleased with strong operational performance delivered by the PA team. Utilization has improved and during Q4, PA announced the appointment of Christian Norris as its new CEO. Christian formally led PA's Life Sciences unit as a respected leader both internally and externally and has creative ideas to take the Jacobs partnership with PA to new heights.

For example, the power of our relationship is driving further opportunities as evidenced in our recent award to the Copenhagen Metro framework. Together with PA, we are bringing our enterprise digital tools, AI solutions and deep knowledge of the rail sector to support the Copenhagen Metro as it continues to deliver modern future-ready infrastructure to meet the city's fast-growing population and urban travel demand.

Our Divergent Solutions operating unit delivered a strong quarter with 3% adjusted net revenue growth and 58% year-over-year growth in operating profit. In Divergent, we are a leader in space innovation with the introduction of Mango Two, a revolutionary radio frequency signal detection system that utilizes cutting-edge AI and machine learning analytics, emphasizing affordability. An example of the leading IP portfolio that reinforces independent CMS as a formidable player in the space arena.

Turning to Slide 9. In summary, we are extremely well positioned for growth across all the sectors we serve, building off our established leadership position and proven track record of operational excellence. We are excited to turn the page on this next chapter in Jacobs' history where we will be creating 2 leading independent companies.

Looking to Slide 10. Independent Jacobs is a leader in the majority of sectors in which we operate and a global leader in the overall industry. With today's announcement, we are enthusiastic about the opportunity to further simplify our business structure, optimize our cost base, and accelerate growth and margin improvement in the quarters and years ahead.

Now I'll turn the call over to Claudia to review our financial results in further detail.

[Claudia Jaramillo, executive]

Thank you, Bob. Turning to Slide 11 for a financial overview of our fourth quarter results. Fourth quarter gross revenue grew 10.5% year-over-year and adjusted net revenue grew 8.9%. GAAP operating profit was $278 million for the quarter and included $52 million of amortization from acquired intangibles, $47 million of other transaction separation-related restructuring costs and $11 million noncash charge related to decrease in our real estate footprint.

The other transaction separation-related and restructuring costs of $43 million are primarily related to advisory and other costs associated with the separation of CMS. As we go forward, our costs will now include expenses to be incurred in connection with the separation.

Looking to fiscal year 2024, we expect to incur approximately $275 million in onetime costs related to the separation and associated cost optimization actions. These costs are largely unavoidable in a separation and transactions of this size, but I want to reiterate that post-separation, it will be a key focus of ours to minimize onetime adjustments inclusive of restructuring costs.

Our adjusted operating margin was 11%, up 14 basis points year-over-year. I'll discuss the underlying dynamics during the reporting segment review. GAAP EPS from continuing operations was $1.25 per share and included a $0.27 impact related to the amortization charge of acquired intangibles, $0.23 from transaction, restructuring and other related costs; a $0.05 noncash impairment charge related to reducing our real estate footprint and a $0.10 adjustment to align to our annual adjusted effective tax rate.

I refer you to Slide 30 for more details on these adjustments.

Excluding these items, fourth quarter adjusted EPS was $1.90, up 6% year-over-year. Q4 adjusted EBITDA was $384 million and was up 10% year-over-year, representing 11.1% of adjusted net revenue. The company's U.S. GAAP effective tax rate for continuing operations is 21% for the fiscal year 2023.

Our U.S. GAAP and adjusted effective tax rate for the quarter and year include certain tax charges for deferred tax valuation allowances and audit assessment. In the fourth quarter, these amounted to an EPS impact of $0.06 per share. And as a result, fiscal year 2023 adjusted earnings per share from continuing operations reflects a 21.6% adjusted effective tax rate.

Finally, backlog was up 4% year-over-year. The revenue book-to-bill ratio was just over 1x with our gross profit and backlog increasing 8% year-over-year.

Moving to Slide 12 for a brief recap of our full year 2023 performance. Fiscal year gross revenue grew 10% year-over-year, and net revenue grew 7%. GAAP operating profit was $1.1 billion, up significantly year-over-year, driven primarily by strong growth in gross profit, while holding G&A relatively flat.

GAAP EPS was $5.31, and adjusted EPS was $7.20, up 7% and 4% year-over-year, respectively. Adjusted operating profit grew 9% and was up 11% on a constant currency basis. Both revenue and adjusted operating profit increased year-over-year in all of our business segments. Operating profit margins expanded 20 basis points to 10.8%, driven by strong underlying performance. Adjusted EBITDA was $1.44 billion, up 5% and up 7% in constant currency. As a percentage of adjusted net revenue, adjusted EBITDA was 10.8%.

We expect modest adjusted operating margin expansion in fiscal 2024, driven by a combination of a higher margin revenue mix and lower corporate G&A. However, we expect an even greater uplift in margins post-separation as we streamline our operating model and cost structure. On a trailing 12-month basis, fiscal year 2023 book-to-bill was approximately 1.1x.

Regarding the performance of our lines of business, let's turn to Slide 13 for Q4 performance and 14 for full year performance. Starting with People & Places Solutions. P&PS continues to see solid momentum delivering strong revenue and operating profit results. Q4 adjusted net revenue was up 11% year-over-year. Growth was consistently strong across all business units.

Europe rebounded positively after being our weakest region year-to-date, and we saw continued strength in the Middle East, Americas and Asia Pacific. Backlog was relatively flat sequentially, although gross margin in backlog was up 8% year-over-year as we continue to focus on improving business quality.

P&PS Q4 operating profit was up 12%, driven by strong growth, maintaining healthy gross margins and solid G&A management resulted in an adjusted operating margin of 15%, up 16 basis points year-over-year. For the full year, adjusted operating profit was up 16% and adjusted operating margins were 14.6%, up 100 basis points year-over-year.

Our P&PS Americas unit, which is our largest by revenue, benefited from legislative drivers and a healthy state and local budgets continuing to propel client spending. Internationally, Asia Pacific and the Middle East continue to be bright spots in the portfolio supported by Giga Cities and strategic water pursuits. Additionally, our European business showed a positive sequential growth.

Now moving to Critical Mission Solutions. Q4 revenue was up 7% year-over-year, and backlog is up 8% year-over-year, and the business continues to demonstrate a strong win rate against a very healthy pipeline in all of its core focus areas.

CMS operating margins were up 128 basis points year-over-year. For the full year, margins were roughly flat, while operating profit increased 6% year-over-year. Notably, margins continued to rebound throughout the year as forecasted.

Moving to Divergent Solutions. Adjusted net revenue increased 3% year-over-year in Q4 as we remain focused on portfolio improvement. We expect growth to accelerate from year-end levels as investments mature and lower-margin contracts roll out of backlog. Operating margins for the quarter was up 10.1% -- was 10.1%, a 50 basis point sequential improvement.

Turning to PA Consulting. Revenue from PA was up 13% year-over-year in Q4 and increased 4% year-over-year in fiscal year 2023. Based on booking trends, we expect revenue growth to show a positive trend in fiscal year 2024 while remaining cautious of the macro risk as the U.K. goes through an election cycle.

PA's Q4 operating profit was 20.6%, up 122 basis points year-over-year and up 21% year-over-year. Utilization continues to improve, and we expect operating margins to be over 20% for the medium term. Our adjusted unallocated corporate costs were $60 million in Q4, roughly flat sequentially and consistent with our guidance. In conjunction with the CMS separation, we have initiated a comprehensive evaluation of our cost structure under a more streamlined business model.

However, despite initial cost actions taken, we will carry temporary costs associated with supporting the entirety of Jacobs, including the businesses to be separated. We estimate that we are carrying approximately $40 million in temporary cost throughout this transition period. This allows us the opportunity to reinforce our commitment to our clients and enhanced business resilience. We are confident that these efforts will contribute to a stronger foundation and continued excellence in serving our clients as 2 leading independent companies.

Turning to Slide 15 to discuss our balance sheet and cash flow. We posted a very strong quarter of cash flow generation, which is indicative of the quality of our earnings. Operating cash flow was $219 million and free cash flow was $180 million. As a result, we were able to deliver above our anticipated 100% reported and adjusted cash flow conversion targets for the year with 104% underlying cash conversion.

During fiscal year 2023, we returned 50% of our free cash flow to shareholders for a total of $480 million through both share repurchases and dividends. Though we were unable to repurchase shares in the quarter due to the CMS separation, we utilize cash flow to strategically pay down floating rate debt, ensuring a more robust financial position for the future.

This disciplined approach aligns with our commitment to long-term financial stability and value creation for our shareholders. We ended the quarter with cash of $927 million and gross debt of $2.9 billion, resulting in just over $1.9 billion of net debt.

Our Q4 net debt to 2023 adjusted EBITDA of approximately 1.4x remains a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment grade credit profile, both today and as a more focused business, post our announced CMS separation.

In August, we completed the offering of $600 million in senior unsecured notes due 2028 with a fixed rate of 6.35%. This allowed us to repay a portion of the amounts outstanding under our revolving credit facility. As of the end of Q4, approximately 35% of our debt is tied to floating rates and our weighted average interest rate was approximately 5%.

We intend to opportunistically retire floating rate debt in the coming quarters. For your benefit, in the appendix of the presentation, we have included additional detail on our debt and quarterly interest expense.

Given our strong balance sheet and free cash flow, we remain committed to returning cash to shareholders. On November 9, we paid a $0.26 dividend, representing a 13% year-over-year increase.

Finally, I wanted to highlight our cost optimization plan shared on Slide 16. We recognize that our cost structure is high. And we see opportunities to optimize in the coming quarters and post CMS separation. We have identified over $90 million in run rate savings, including lower corporate and allocated costs to the specific measures that we are starting to action.

We expect to reduce our corporate unallocated costs from around $60 million per quarter to approximately $50 million per quarter including full elimination of stranded costs post separation. We are streamlining our operating model with an eye towards positioning us for growth and cost efficiency while staying focused on our clients.

While we will not yet comment on long-term growth and margin expectations beyond our 2025 strategic plan, we believe we can deliver over 300 basis points of adjusted EBITDA margin expansion from fiscal 2023 as reported margins to fiscal 2025 for standalone Jacobs. This results in an expected adjusted EBITDA margins for stand-alone Jacobs of at least 13.8% in fiscal year 2025. This is a bold undertaken as it is our longer-term aspiration to deliver best-in-class industry margins.

In closing, Bob and I are committed to 3 things over the next few quarters. First, driving efficiencies in our business and maximizing our profitability as demonstrated by the margin targets. Second, position in our business with the financial resources needed for multiyear free cash flow growth. Third, strengthening discipline and deploying our shareholder capital. Thank you. And I will turn the call over to Bob.

[Robert Pragada, executive]

Thank you, Claudia. Turning to Slide 16. As we discussed throughout our remarks, we remain committed to accelerating robust growth opportunities ahead for all businesses. Given today's global macro uncertainty, that strength is more relevant than ever as we plan for the future as 2 independent companies. It's crucial to emphasize that the underlying fundamentals of our business have never been stronger.

Turning to fiscal year '24 outlook. We expect adjusted EBITDA of $1.53 billion to $1.6 billion with an adjusted EPS of $7.70 to $8.20, representing a 9% and 10% growth at the midpoint, respectively. This outlook incorporates the full year contributions of the businesses to be separate. We expect a fiscal year '24 effective tax rate of 22%.

As Claudia previously mentioned, we will carry temporarily elevated overhead costs needed to support CMS during the separation, including IT and corporate support. This, coupled with historical seasonality, will have an approximately 10% negative effect year-over-year on adjusted EPS in Q1. We believe these costs are necessary to continue to support our clients as we progress through this transition period. This temporary cost is nonrecurring and shall not be viewed as a reflection of a stand-alone company earnings power.

We are well positioned to accelerate profitable growth in the years to come as we seek to compound per share value for our shareholders. We continue to be energized and excited about the future for Jacobs and CMS, and remain confident in our plan for long-term value creation. Operator, we will now turn the call over for questions.

[Operator]

[Operator Instructions]

Your first question comes from the line of Jerry Revich of Goldman Sachs.

[Jerry Revich, analyst]

Congratulations on all the strong work here. Can I just ask in terms of the margin expansion targets. Can we just flesh that out a little bit and just talk a little bit more about the timing, how back-end loaded is that '24 versus '25, and if we just unpack the pieces a little bit more in terms of just the buckets of the 300 basis points relative sizes, that would be helpful.

[Claudia Jaramillo, executive]

Jerry, so I would like to -- you have some of the details on this slide. And so let me just go over the details of this slide. So you have first a component of the stranded cost. So that one will happen after the separation. So that's roughly $50 million that you see there. So then you have one that we started to taking action, which is really the operating model, and that will obviously accelerate after the separation, but we've already taken action on that.

So you'll see some of that over time in '24 and accelerated after the separation. And then as I mentioned in my prepared remarks, you have the overhead or the unallocated corporate that we normally see -- you normally see it as a separate line. And I talked about the $60 million down to $50 million.

We will carry some temporary costs to support CMS as we prepare it for the independent company or the combined company. And that one as well, you'll accelerate in 2025. So in summary, you'll see a little bit in '24 accelerating after the separation. If I want to give you the nature of what is that, is really the -- a lot of the support is IT, the support layers and just in general, a simpler management structure and support.

[Jerry Revich, analyst]

Okay, super. And then the core underlying People & Places cadence that's better than that. Can you just expand on how that looks versus what you folks laid out to us in the 2025 plan? How -- what's progressing faster or slower than expectations relative to the segment margin ramp that you laid out just over a year ago?

[Robert Pragada, executive]

Yes. What we laid out over a year ago, Jerry, continues. With regards to the P&PS margin expectations in that strategic time period, that hasn't changed.

[Operator]

Your next question comes from the line of Chad Dillard with Bernstein.

[Charles Albert Dillard, analyst]

So I just wanted to continue on the margin question. I was hoping you could bridge the 300 basis points, how much comes from CMS? How much comes from, I guess, the decision to include Divergent Solutions the cost out? And is there anything else that we should be thinking about when bridging today versus 2025?

[Claudia Jaramillo, executive]

So Chad, the 13.8% is the stand-alone Jacobs, so it excludes CMS and Cyber & Intelligence. And then the nature of those costs is the 3 buckets that I mentioned before, which are really corporate unlocated going from the $60 million run rate to $50 million run rate post separation, and then the operating model, which is $50 million in total run rate and then full elimination of stranded costs up to the separation.

[Robert Pragada, executive]

Chad, if you were to take it in 2 buckets, Chad, if you're taking in 2 buckets, half is coming from the operating model of a cost structure that's more in line with the type of business that we will have and half is coming from margin expansion and margin mix. It's a higher margin, higher growth business. So think about it simplistically that way.

[Charles Albert Dillard, analyst]

Got you. Okay. That's helpful. And then just a question for you on backlog growth. I appreciate that gross margin in backlog is growing by 8%. But I was hoping maybe you could frame backlog growth, excluding the capacity revenues. Just really trying to understand what were some of the puts versus the takes, strength versus weakness that you're seeing underlying in People & Places? And then maybe you can talk about just the size of the pipeline.

[Robert Pragada, executive]

Yes. I don't actually think, Chad, it's a weakness. Actually, I think it's really strong in our P&PS business right now. It's really on project life cycle. We measure that revenue growth based on where we are in the project life cycle, right? And so when we're deep into whether it be advanced facilities jobs or large infrastructure programs, we're going to be burning and booking -- booking and burning a lot higher revenue kind of models.

But as our business continues to profile more into a consultancy world, we're executing higher value services over the project and program life cycle. So you'll have lower revenue, higher margin opportunities come into backlog, and it just depends on when that program life cycle is. So we've talked about it before, which one is accelerating at a faster rate. I'd kind of tie that to where are we in the cycle of some of the spends.

[Operator]

Your next question comes from the line of Michael Dudas with Vertical Research.

[Michael Dudas, analyst]

Bob, maybe you could share maybe a touch of the pipeline of backlog. As you're entering 2024 in P&PS, you touched on water in your prepared remarks. What are some of the other areas that you see some interesting opportunities for new project backlog growth? And how much of -- you mentioned about the change in mix of the type of service that you're going to be providing to your client base. How quickly or how noticeable will that be maybe on the project management consultancy side as we run through the revenue model over the next maybe 2 to 3 years?

[Robert Pragada, executive]

So two parts. One, Mike, you're asking about kind of what are some of the other end market secular trends that we're seeing? And then the second part of the question is around how do we see kind of revenue models as our consultancy business continues to grow -- consultancy type business. Is that fair?

[Michael Dudas, analyst]

Yes, to drive that, the better mix that you're talking about over your...

[Robert Pragada, executive]

Sure, sure. The other verticals, I mentioned of our top 30 wins, 9 are in water. If you take water and advanced facilities, it's -- half of the top 30 ones were in both of those sectors, 6 big advanced facilities markets, too. So we continue to see strong activity within the advanced facilities world, probably driven more so now as we bottomed out from an end market standpoint as far as sales goes within the semiconductor industry. Keep in mind, our clients continue to spend through there.

But now with the GLP-1 drugs going on in life sciences and all the strength that we see with our clients we've had for years, advanced facilities is going to continue to be strong. And then the others, I'd highlight is energy transition. I highlighted a specific job, but the whole grid modernization of everything that we're seeing, and we're kind of in that consultancy component of that, and that's a strong piece, which is a segue to the second part.

I would say that, that continued profile of our portfolio within now, call it, independent Jacobs, is we're kind of in the early innings of that. And so it's going to be a balance. But I'd say over the course of the next 2 or 3, 4 years, it's going to drive that margin expansion even beyond what Claudia talked about post '25 with a cash conversion component to that that's very high.

[Operator]

Your next question comes from the line of Andy Kaplowitz with Citigroup.

[Andrew Kaplowitz, analyst]

So just sorting through Q4 results, I know there's a lot of noise because of the announced deal, but EPS and upcoming in below the low end of your previous guidance range, could you give us more color into what exactly happened in the quarter that was below your expectations? And you mentioned the $40 million of temporary costs that you're carrying and how that's impacting your results. Should we simply be adding that $40 million back to your $1.53 billion to $1.6 billion EBITDA for '24 to get what guidance would have been if you weren't doing the RMT?

[Claudia Jaramillo, executive]

Yes. So Andy, so let's start with the first one, which is the big one and explains roughly half of the gap is the tax piece. And I had -- I included some of them in my remarks. So if I take, it's $0.06, so it's more the -- when you have a one-off allowance, and this is something that happens with your deferred tax. And -- so then the next one is going to be basically overhead costs or unallocated is one, we call it corporate unallocated. That's the other big piece. And then the share count, and I mentioned why we could do stock repurchases in the fourth quarter given -- based on the transaction. So that's at a high level what that means. Then I added some of the commentary that is on the temporary cost that we're carrying as we prepare CMS and the Cyber & Intelligence unit to operate independently. So that's the other piece of the puzzle, if you want.

[Andrew Kaplowitz, analyst]

Claudia, is it right to say that you could -- again, if you weren't doing the RMT, you would add that $40 million debt to EBITDA? Or is that not right to think like that?

[Claudia Jaramillo, executive]

Absolutely. And that's what Bob mentioned that towards the end, that's really our earnings power should exclude that -- those temporary costs. We're very client-centric. It's our clients' mission, and we want to make sure we have quite a bit of value tied to this transaction and the upside that we included in this additional value that we're going to get in the transaction and the new entity. We want the 2 entities to be very successful. It's temporary. And is to make sure we're preparing to have a very -- the leader that we want and that we continue to be.

[Robert Pragada, executive]

Just to clarify. So the EBITDA guidance that I gave at the end we're carrying it in that guidance.

[Andrew Kaplowitz, analyst]

Yes, that's clear. And then, Bob, just P&PS, net revenue up 11% year-over-year in Q4. I think you said you have good confidence in mid- to high single-digit organic revenue growth. Could you elaborate on the confidence, do you see P&PS backlog growing at that rate in FY '24? And then how are you thinking about sort of the balance between higher interest rates impacting projects and or geopolitical risks with all the fiscal stimulus, IIJA that you mentioned and so on.

[Robert Pragada, executive]

Yes. I think on the backlog piece of the question, Andy, my answer is yes, I think that mid- to high single-digit growth will continue. Remember, we've got a really nice diversity within P&PS. So if we think about some of the political risk or what's happening with interest rates, which might be affecting some of our private sector clients, there's not a full immunity, but our private sector clients continue to spend just because of the -- whether they be technology-based or global supply chain based, when I say technology-based science-based drivers or supply chain drivers that has continued, and that's really been driving the performance.

As far as IIJA or a larger infrastructure around energy transition outside the U.S., we have not seen that effect. In fact, our pipeline continues to grow at mid- to high single-digit percentages, and this is on a base that's very high.

[Operator]

Your next question comes from the line of Bert Subin with Stifel.

[Bert Subin, analyst]

Bob, maybe just taking that, I think that was more of a backlog question. You said in your prepared remarks, the outlook remains very healthy. Can you just walk us through how you're thinking about the organic growth profile for the company in this coming year? Just for Remainco, you think the previous range for FY '24 for P&PS was a 6% to 9% organic CAGR, with PA Consulting at 12% to 15%, do those remain intact? And on the advanced facility side, pretty positive comments there. Do you think that can keep growing double digits?

[Robert Pragada, executive]

Yes. So the first part of the question, Bert, my answer is yes. I think on advanced facilities, I would say the underlying growth is strong. A lot of these larger programs, whether they be in the semiconductor space or in the life sciences space, are -- there are several, in fact, from an account standpoint, it's probably the highest that it's been. It continues to stay at a very high level. We're seeing now kind of the next wave of -- I mentioned GLP-1, but also other novel therapies run, oncology and some of the neuroscience projects that we're seeing. So the numbers will stay -- as far as numbers of opportunities will stay high.

Where they are in the project life cycle will kind of balance -- imagine there's 2 curves. One is kind of coming down as far as the way that we saw. The others coming up, which kind of leads to a 12 to 13 -- I'm sorry, 12- to 18-month kind of reset there. Gather everything that I just said, your numbers work.

[Bert Subin, analyst]

Got it. Okay. And maybe just a level deeper into the P&PS side. You mentioned some positive remarks on water and on international opportunities. Can you just sort of give us the viewpoint on how you're thinking about, I guess, the regional disparity in FY '24? As Fx starts to become less of a factor, do you think what you're seeing in Europe and other parts of the world can rival sort of the growth we're expecting from IIJA in the U.S.?

[Robert Pragada, executive]

I don't know if it will get to that level, Bert. I think it will be robust. And I think Claudia mentioned it, our European business, despite these macro headwinds that it faced has done well. And so I think water transportation, energy transition that's driving the U.S., probably more pronounced around energy transition in Europe. Middle East is across all of our sectors -- P&PS sectors in the Middle East. And then in Southeast Asia and Australia and New Zealand, those have remained strong. Our business in APAC this year grew at significant double digits. And so a smaller base in the rest of the world. So I'd say all in all, the geographic diversity that we have in our business really, really is strong and helps us.

[Operator]

Your next question comes from the line of Steven Fisher with UBS.

[Steven Fisher, analyst]

I just wanted to follow up on the mix element of the 300 basis point margin bridge. I think, Bob, when you were talking about the half before that's mix, like how much of that is related to just not having the lower margin in CMS in there versus achieving better margins in P&PS? I guess I'm wondering when all is said and done with your cost optimization, will your segment-level margins be better? Or will that come out of some other initiatives over time?

[Claudia Jaramillo, executive]

Yes. So Steven, let me just make sure I understand. So I'll recap what Bob said, and then I'll address the segment margins. So the first one is the going up to 13.8%, roughly half is just the mix. And by mix, I mean, just what remains with us. The other half is the cost optimization, the streamlining of the operating model. And that is really a function of the remaining businesses removing costs and also the addition of our digital enablement and all that. So that in other words is the segment remain with us or the businesses that stay with us are going to increase their individual margins. Does that answer your question?

[Steven Fisher, analyst]

Yes, it does. So as part of the cost optimization, there is segment level efficiency initiatives as opposed to just sort of the corporate level element. Yes, that's helpful.

[Claudia Jaramillo, executive]

Post separation that's what the operating model, that's where it shows, overall as a company. Yes.

[Steven Fisher, analyst]

Okay. Great. And just trying to think about your debt position in about 12 months from now. I'm not sure if I missed if you framed this out or not, but $1.9 billion of net debt now, $1 billion of dividend coming back from the separation to pay down debt. Free cash flow looks like it would be about another $1 billion before whatever cash restructuring expenses you're calling out. I don't know how much that is. But are you assuming close to sort of a net cash position exiting 2024?

[Claudia Jaramillo, executive]

Yes. So all our decisions are guided by a few principles. The first one is maintaining an investment-grade rating. Very important for us to maintain the strategic flexibility that we want. So those decisions are guided by our conversations with the rating agencies, especially with this transaction. And the other one is our commitment to return cash to our shareholders.

So as we go to the transaction, I think one of the elements is also the element of distribution to our shareholders, and that's one of the reasons I highlighted so much we returned this quarter -- this year, and that is an important guiding principle for us is on a risk-adjusted basis to make the best decisions for our shareholders. And so I think that's an important element in the equation.

[Operator]

Your next question comes from the line of Gautam Khanna with TD Cowen.

[Gautam Khanna, analyst]

I was wondering if you could characterize the risk profile of some of the projects you've been booking in the backlog given the margins seem to be higher. Are these mostly fixed price jobs, what allows the profits to be higher? Just the mix of fixed price? Is there any more -- just how would you characterize those?

[Robert Pragada, executive]

Yes. No, Gautam, it's a great question because it's where we're playing within the client business. I mean we're talking about a level of scientific and technical offering that is at the highest part of the business of our clients' business. And so whether it be in our pure-play PA Consulting work or in our science-based technical offering in the infrastructure and advanced facility space, that garners a higher level commercial model, Part 1.

Part 2 is around the digital enablement, right? We're actually offering outcome-based solutions rather than the historical, I'm going to get margin from a commercial model that's either fixed or reimbursable and trade on a productivity gain. We're able to get those types of margins with -- we'll get them in a reimbursable scenario or we'll get them in a fixed-price services scenario just because of the level of impact that we're having in our clients' business.

[Gautam Khanna, analyst]

Okay. And just one quick follow-up. You guys have talked about your PFAS technology. I was just curious if it had any commercial traction yet? And if not, when do you anticipate booking some of that PFAS-related work?

[Robert Pragada, executive]

Yes, it has. It has in the PFAS work, to segregate it out as an end market, we haven't. Where we're seeing the PFAS gain is in our water center. These wins that I'm referencing as well as some of the larger framework agreements that we have for water clients, whether they be federal, state or local around the world, that comes into play. We're actually making PFAS type of consultancy arrangements around that, too.

The real PFAS for PFAS sake across the industry comes when you get type of super fund type of application in these containments being highlighted on public dockets. So we're -- we see growth, but I would look at that growth probably from a perspective of how it affects our end market sectors. And then when you get kind of in the 25%, 26%, 27% range and you start to get some compliance related items that are even further driving those end market sectors it gets bigger.

[Operator]

Your next question comes from the line of Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

I guess I just want to get a little bit of perspective on maybe just the medium term even if it's directionally. As you look at the 13.8% in fiscal '25, and maybe just think about your mix by end market and region. If we just think moving on from that, is there opportunity whether to maybe look within P&PS for maybe lower margin businesses? Or where you expand geographically? I'm just thinking about the levers kind of going forward you see for the P&PS margins beyond just cost optimization to sort of get to that level in a few years?

[Robert Pragada, executive]

You go ahead.

[Claudia Jaramillo, executive]

Yes. So I'd say this is something that we do -- we're doing currently, and we do all the time. So I would say 2 big levers are the -- our global delivery platform is one, very important, and we have one of the best platforms, if not the best, and it's been for several years. That's the first one. The other one is the digital enablement. And you see at some of the projects that we highlighted today are you see a clear differentiation that we have compared to our competitors, where we -- the digital enablement and the outcome based that Bob mentioned before, drives those more profitable projects.

[Robert Pragada, executive]

Yes. And just to add one more thing, Sabahat, on the kind of the -- what we don't need. We don't -- we feel really strongly that our portfolio in the end markets that we're in is strong. Claudia talked about our 2 biggest enablers. I'll add a third, which is our consultancy enablement as well.

But it's not like we need to go search for new geographies or buy skill sets in an end market sector. It's really the expansion through the digital and consultancy-based enablement, coupled with access to global talent, which -- I'll be in high agreements that we're one of the best in how we deliver on that.

[Sabahat Khan, analyst]

Okay. Great. And then as you think about your guidance for kind of next year, kind of the numbers embedded in your 3-year plan, you laid out the 6% to 9% for P&PS. And even as you look out sort of maybe another year beyond that, what mix of price versus volume do you anticipate given some of the funding that's in the system right now? And how should we think about that mix over the next couple of years, particularly in the kind of infra space?

[Robert Pragada, executive]

Yes. I think that that's going to be tied to this enablement component. It's not -- this is honed in because it's kind of a different -- probably a different answer for different components of that infrastructure in advanced facility space, but let's just hone in on infrastructure. Our clients are capped with how much they can spend for the infrastructure needs. So what we do is we come in with an offering where we're gaining margin with the enablement of outcomes-based solutions. So there's a price component that -- but with a higher margin is what we're driving with our digital enablement. So we see that driving to the bottom line as we do all the things that Claudia talked about is creating a more simplified and streamlined organization.

[Operator]

Your final question comes from the line of Andy Wittmann with Baird.

[Andrew J. Wittmann, analyst]

I guess it would just be kind of helpful to understand the timing on the $275 million of costs associated with all these actions. It sounds like there's going to be some here ahead of the transaction, but some probably translate to after the transaction. Claudia, can you just talk about the timing of those cash items and recognition of those on the income statement?

[Claudia Jaramillo, executive]

So Andy, this is very closely linked to the execution of the separation. So there will be more towards the end, you will have more because of elimination of -- we talked about the stranded costs and the advisers and all that, but very much throughout if you're going to see it because of the advisory fees and all that I mentioned before. So that's just aligned with the time line of the separation.

[Andrew J. Wittmann, analyst]

Okay. And then I guess -- I don't want to do next. I guess on the 1Q guide, I guess I just want to get a little bit more comfortable with that. I don't think you're saying that the corporate unallocated cost run rate is going to be higher in 1Q. It sounds like you're saying it's going to be about the same. I just wanted to confirm that. Then when you talk about the seasonality, I guess, there's always seasonality in 1Q. What's different about this year's seasonality? Is it just the fact that the items that were called out in last year's footnote that present a tough comp that weren't excluded? And I guess maybe related to that, if there are costs that are related to restructuring and separation, why aren't those being excluded in the first quarter?

[Claudia Jaramillo, executive]

No, I think we talked about -- well, there is a seasonality of the business. So yes, I'd say yes to that one. And then the ones that I mentioned of the $40 million, just at a high level, the cost that we're carrying to support the separation of CMS. So it's really linked to the transaction or the preparing CMS to operate in the new environment. So those, I would say -- that one amplifies the impact. But I didn't say it would be higher on the $60 million is more what we carry in extra throughout or across the company to support CMS -- CMS and Cyber & Intelligence.

[Operator]

At this time, there are no more questions. And now I would like to turn the call back over to the team.

[Robert Pragada, executive]

Yes. Thank you, everyone. We're excited about the future, and we look forward to providing more updates as we progress our exciting plan forward. Thank you, everyone.

[Claudia Jaramillo, executive]

Thank you.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.