J - NYSE

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Jacobs Solutions Fiscal First Quarter 2023 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Jonathan Doros, Investor Relations, you may begin.

Thank you. Good morning to all. Our earnings announcement and 10-Q were filed this morning, and we have posted a copy of the slide presentation on our Web site, which we will reference during the call. I'd like to refer you to Slide 2 of this presentation materials for information about our forward-looking statements and non- GAAP financial measures. Turning to the agenda. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and Chief Financial Officer, Kevin Berryman. We are also joined today by our incoming CFO, Claudia Jaramillo. Bob will begin by summarizing highlights from our first quarter results, discuss our commitment to sustainability and then provide an update on our strategy. Kevin 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 your questions. In the appendix of the presentation, we provide additional ESG related information, including examples of our leading ESG solutions. With that, I'll now pass it on to Bob Borgata, CEO.

Thank you, John. Good day, everyone. Thank you for joining us today to discuss our first quarter fiscal year 2023 business performance. Starting on Slide 4. I'd like to welcome to the call, Claudia Jaramillo, who is currently our Executive Vice President, Strategy and Corporate Development. We recently announced her transition to CFO later this year. I'm excited to now lead Jacobs as CEO. Over the last several years, we have repositioned the company through a purposeful strategy of transforming our portfolio and capture higher value opportunities in our core and adjacent sectors. At this juncture in our strategy, strong execution and focus is pivotal to our success. There are three key priorities, first, we will maintain our inclusive and inspirational culture that fosters the creativity needed to live by our mission, challenges today reinventing tomorrow. Second, we will focus on driving a higher structural growth rate across our core sectors by executing against the three needle moving growth accelerators of climate response, data solutions and consulting and advisory across the entire organization and sectors we serve. While we are in a leading position to capitalize on the mega trends and structural tailwinds, our relentless focus on long term client relationships is driving sustained growth. Third, we will deliver long term returns for our shareholders by driving further operational discipline across the business to accelerate cash flow generation with disciplined capital allocation. From a financial standpoint, our underlying business remains strong. Our People & Places Solutions line of business delivered strong performance with net revenue up 8% year-over-year, 13% in constant currency, operating profit up 20% year-over-year, 28% in constant currency, and we continue to gain market share in both the global critical infrastructure and advanced facility sectors. In CMS, we continue to deliver a strong base of recurring revenue with a growing new business pipeline. We anticipate strong tailwinds and backlog growth with CMS moving forward. PA Consulting experienced lower than expected utilization, but we continue to experience double digit top line and backlog growth. We are seeing strong demand with robust opportunities in PA sales pipeline. The number of recent wins underscores our strategy and demonstrates our move of the value chain with our clients to higher margin consulting and advisory services. Across the company, we see exciting opportunities ahead of us, specifically in the areas of climate response and especially in energy transition. Our ability to deliver data enabled solutions is enhancing our clients’ resilience and sustainability. The establishment of Divergent Solutions enables Jacobs to scale and deploy our domain centric data platforms across multiple sectors and geographies, further enabling us to deliver solutions to typically complex challenges. I will talk to these key themes further in the presentation. Turning to Slide 5. We remain steadfastly committed to our cultural transformation to create an inspirational journey for all. In 2015, we started our culture journey with the empowerment and accountability, incorporating inclusion, innovation and inspiration into the very fabric of the company. I believe our emphasis on inclusion and diversity has been a critically important contributor to our success and provides a key differentiator in attracting and retaining the world's best talent as well as driving innovation for our clients. A key benefit of being a company with a broad range of capabilities is our ability to provide multiple career and development opportunities, what we refer to as agile careers. When we learn and grow together, we activate empowerment and accountability, inclusion and diversity and innovation. We lead, embrace and anticipate change. To further demonstrate our commitment to inclusion and diversity, we have included a KPI in the refinancing of our credit facilities linked to female leadership representation. Kevin will discuss further details in his remarks. Turning to Slide 6. Our commitment to sustainability is core to our strategy and our significant performance is being recognized by many of the top ESG accredited institutions. Over the past five years, we have advanced to an industry leading status. This culminated in our inclusion into 2022 Dow Jones Sustainability World Index, ranking Jacobs among the world's leading companies with outstanding sustainability performance. While the scores themselves are impressive, what's even more significant is the public recognition of Jacobs' positive impact on our clients, communities and the world. As we turn to Slide 7, we will focus on our 4 key growth sectors of critical infrastructure, energy and environment, advanced facilities and national security. These growth sectors are are driven by the following catalysts: federal government stimulus from the Infrastructure Investment Jobs Act, the Inflation Reduction Act and the CHIPS Act, supply chain and technology investments in advanced facilities and the emergence of increased global threats. Let's examine the legislative drivers first and our positioning in the market. I am proud that Jacobs has helped our clients secure over $1 billion in IIJA competitive grants since its patent, and the bill is only in its early stages. We supported our clients in securing over $350 million in IIJA competitive grant funding just last quarter, the largest quarter since the passing of the act. This includes the largest grant awarded nationwide for subway station accessibility in New York City, a major port infrastructure development grant to a long term client in Alaska, the first phase award of one of the largest water treatment plants in the US and the design of a sustainable battery recycling facility. With another four years of locked in and robust funding the US infrastructure climate is strong. The coming months will also bring the first dollars of two other areas of focus for Jacobs. The inflation Reduction Act with $369 billion to fund the Green Economy transition and the CHIPS Act for semiconductor investment, all in core Jacob sectors. Before the end of the calendar year, we fully expect to have all three bills firing at full strength and funding critical projects sponsored by local governments, the federal government and the semiconductor industry. This overlap of spending will continue for four or five consecutive fiscal quarters and drive growth across the infrastructure and energy markets. In advanced facilities, we continue to see sustained capital investment in the semiconductor manufacturing space, biotechnology capacity expansions and the electric vehicle ecosystem, all being driven by reshaping of global supply chains, technology advancements and decarbonization efforts. Turning to Slide 8. As evidenced by double digit pipeline growth in each of these sectors, our industry position continues to grow, and we see this being a long term secular trend. In addition to previously discussed infrastructure wins, we have been awarded major programs in the semiconductor space to include greenfield expansions in the US and Europe for a global chip manufacturer. In the biotechnology sector, we have won multiple expansions in the US, Europe and Asia, and we continue to see global growth in electric vehicle ecosystem driven by a favorable regulatory environment with project wins for battery and vehicle manufacturing and charging infrastructure in the US and Europe. Within National Security, we are seeing increased defense spending in the US, UK and Australia due to continued global threat. As highlighted as a future prospect last quarter, in the US, we were successful in winning a critical Cyber Intelligence Award for $469 million, five year contract for a classified defense customer to provide secure data and network solutions globally. In the UK, PA is leading the consortium that has been selected by the MoD to deliver Crenic, a future force protection electronic countermeasures program. It will provide the next generation of innovative solutions to counter the threat posed by radio controlled and provides explosive devices, otherwise known as IEDs. And in Australia, we are supporting the acquisition and sustainment of military platforms for the Australian Defense Department, which has engaged Jacobs with increasing volumes of work. Now I'll turn the call over to Kevin to review our financial results in further detail.

Thank you, Bob. Let's turn to Slide 9 for a financial overview of our first quarter results. First quarter gross revenue grew 12% year-over-year and net revenue grew 8%. Net revenue grew 12% year-over-year on a constant currency basis, an acceleration from our fiscal year 2022 constant currency growth of 8%. Adjusted gross margin in the quarter as a percentage of net revenue was 26%, sequentially in line with the fourth quarter, but as expected, was down approximately 130 basis points year-over-year, primarily driven by: one, the remaining year-over-year impact of the Idaho remediation contract; and two, lower utilization and NPA consulting. I will provide additional comments regarding our segments later in my remarks. Both People & Places Solutions and Divergent Solutions gross margins were flat year-over-year. We expect total gross margins to remain plus or minus 26% of net revenue for the remainder of the fiscal year and trending higher as we exit the year from a higher margin mix of revenue and new higher margin opportunities from our growth accelerators. Adjusted G&A as a percentage of net revenue was 15.5%, slightly higher than Q4 but down 130 basis points year-over-year. During the quarter, we benefited from lower employee benefit costs, which were mostly offset by miscellaneous other cost. During the remainder of the fiscal year, we plan to make additional investments in employee welfare programs such as higher 401(k) match and improved medical benefits as part of our continued investment in improving our culture and employee engagement. These costs are factored into our full year outlook. As a result, we are still targeting G&A as a percentage of net revenue to stay below 16% for the full fiscal year 2023. GAAP operating profit was $238 million for the quarter and included $50 million of amortization from acquired intangibles, a $28 million noncash charge related to decreasing our real estate footprint aligned to our future of work strategy and finally, other acquisition deal related costs and restructuring efforts of $17 million. Actual restructuring costs were less than half of these costs and supported the creation of our new Divergent Solutions reporting segment. The remaining costs are largely related to PA noncash contingent equity based agreements associated with our PA transaction structure. Adjusted operating profit was $332 million, up 8% year-over-year. On a constant currency basis, adjusted operating profit was up 15% year-over-year. We remain committed to reducing our restructuring related costs. Consistent with our previous comments, we expect $15 million of restructuring charges for the full year fiscal year 2023. We also expect another $30 million in noncash real estate impairment charges over the course of Q2 and Q3 as we further execute our future work strategy. Finally, we expect approximately $20 million of transaction related expenses from deal related integration and other costs, most of which is performance based incentives that were factored into our total purchase price consideration for these acquisitions. It also includes the noncash contingent based equity associated with our PA transaction structure. Our adjusted operating profit to net revenue was 10.6%, flat year-over-year. I'll discuss the underlying dynamics during the review by reporting segment. GAAP EPS from continuing operations was $1.07 per share and included a $0.26 impact related to the amortization charge of acquired intangibles a $0.16 noncash impairment charge related to reducing our real estate footprint, a $0.09 adjustment to align to our projected annual tax rate and a $0.09 from transaction, restructuring and other related costs. Excluding these items, first quarter adjusted EPS was $1.67, up 7% year-over-year. Q1 adjusted EBITDA was $339 million and was up 9% year-over-year, representing 10.8% of net revenue. Finally, backlog was up 1% year- over-year and 2% on a constant currency basis. The revenue book-to-bill ratio was 1.1 times with our gross margin in backlog as a percentage of net revenue up over 100 basis points year-over-year. Our book-to-bill ratios continue to be impacted by the burn of the approaching NASA -- Kennedy NASA rebid as the project's backlog continues to fall until which time the rebid is awarded. Regarding our LOB performance, let's turn to Slide 10 for Q1. Before delving into the details by segment, I would like to make some overall comments regarding the strength and diversity of Jacobs portfolio. As you all know, all aspects of our portfolio are aligned with long term secular growth trends. Our results in the quarter exhibit the strength of this diversity and its ability to deliver strong consistent operating profit growth. In this quarter, our People & Places Solutions business led the way. So let's start with them. Overall, People & Places delivered strong revenue and operating profit results driven by an alignment to the secular growth trends that Bob discussed earlier. Q1 net revenue was up 8% year-over-year and up 13% in constant currency. All business units contributed solid and often very strong constant currency growth. Backlog grew 2% year-over-year and gross margin and backlog was up double digits in constant currency with a book-to-bill greater than 1. Total People & Places Solutions Q1 gross margins were flat year-over-year, with Q1 operating profit up 20% and 28% in constant currency. Operating profit as a percentage of net revenue was 14.5%, up over 140 basis points year-over-year, driven by revenue growth and a disciplined management of overhead costs. We continue to expect year-over-year improvement in People & Places operating profit and margin, resulting in strong double digit growth in full year operating profit. Our Advanced Facilities unit which benefits from investments in the life sciences, semiconductor and electric vehicle supply chains posted the strongest double digit revenue and operating profit growth. We continue to monitor the macro demand trends across sectors that impact our advanced manufacturing clients, and we continue to see robust demand from our life sciences clients, which comprise two thirds of our People & Places business. Our backlog and sales pipeline remains robust across a diverse set of customers. And as a result, we continue to expect our advanced facilities growth rate to remain strong during fiscal year 2023 despite the very solid and strong 2022 year-over-year comparisons. Our Americas unit had an outstanding quarter with over 20% year-over-year operating profit growth, driven by infrastructure related monetization wins beginning to convert to revenue. The backlog and sales pipeline provides us confidence as we are seeing many large programs mature for a late 2023 or early 2024 award, which should continue to support longer term momentum. Our international business, Q1 revenue and operating profit were up single digits year-over-year on a reported basis but grew double digits in constant currency. Our international business will continue to be materially impacted by FX during Q2 and with FX neutralizing over the second half of our fiscal year, assuming no large variation from existing current foreign exchange rates. Moving to Critical Mission Solutions. CMS benefits from highly recurring multiyear contracts that require limited overhead support. The business is aligned to national security, space exploration and energy transition priorities mainly in the US, Europe and Australia as well as infrastructure monetization solutions such as US 5G telecom investments. Q1 revenue was up 10% year-over-year and up 13% in constant currency, driven by the Idaho nuclear remediation project contract that ramped up in Q2 of last year. For the remainder of fiscal year 2023, we expect revenue growth in the mid single digits for the CMS business as we now compare to quarters that include the Idaho project. CMS book to bill was just over 1 times and continues to be impacted by the approaching NASA Kennedy rebid, which we expect to be awarded soon. Gross profit margins were down year-over-year due to the revenue mix impact from the lower margin remediation project and the year ago closeout benefits associated with our strong performance on several enterprise contracts. CMS operating profit was $82 million, down 10% year-over-year and down 6% on a constant currency basis. Operating profit margin was in line with expectations and was down 170 basis points year-over-year to 7.6%, but up 60 basis points sequentially from the Q4 figure. We expect operating margins to improve in the second half of fiscal 2023 with the ability to expand margins as we can convert higher margin opportunities in our sales pipeline. Moving to Divergent Solutions. Gross revenue was up 11% year-over-year. And when excluding the impact from pass-throughs, net revenue increased 7% year-over-year. We expect net revenue growth to accelerate materially in the second half of our fiscal year as we start to see growth from our investments in sales, data solutions and technology offerings. Gross margins in Divergent are in line with our consolidated gross margin, which we believe provides us the ability to significantly expand DVS operating margins as we gain additional scale from our heightened growth investments. Operating profit margins were 6%, driven by early stage investments and well below our future run rate projections for this business as we begin to embed integrated [data] enabled offerings in our core markets. We expect Divergent to finish fiscal 2023 with margins approaching double digits. Turning to PA Consulting. The translation impact from a stronger US dollar from the year ago period continued to impact reported revenue and operating profit growth. Revenue from PA was down 3% year-over-year in US dollars but up over 11% in British pounds. PA had a solid book-to-bill of over 1 times. We expect revenue growth in British pounds to remain near or above 10% during fiscal year 2023. Turning to profitability. During fiscal year 2022, PA aggressively hired ahead of an increasing demand from strong secular growth opportunities across energy transition, sustainable consumer goods and strategic and digital transformation opportunities. While the sales pipeline remains robust and backlog continues to grow, the delayed conversion of these opportunities into burn continues to impact utilization. As a result, Q1 operating profit margins were 18%. While actions have been taken to significantly improve utilization, we expect margins to improve incrementally approaching 20% as we exit the fiscal year. Our nonallocated corporate costs were $40 million, down year-over-year as we made a strategic decision to move to a more flexible paid time off program in the US and invest further enhanced employee welfare plans, including improved medical, 401(k) match benefits and parental leave offerings. We believe this strategic decision is key to further strengthening our culture and attracting and retaining world class talent. While Q1 was lower than our previous quarter run rate guidance, we do expect that our corporate costs for the year will increase to our previous estimate of $190 million to $210 million. And we are monitoring our medical and other fringe costs closely which can vary depending upon our revenue and delivery mix as well as seasonality of medical claims. Turning to Slide 11 to discuss our cash flow and balance sheet. We posted another strong quarter of cash flow generation, which is indicative of the quality of our earnings power and cash conversion capabilities. Free cash flow was $270 million and included an outflow of $60 million for payment of the CARES Act deferral benefit of payroll taxes and $6 million related to transaction costs and other items. Excluding the unusual payment associated with the CARES Act, our underlying free cash flow for the quarter was a very strong $330 million. In the second quarter, we expect free cash flow to approximate the year ago figure driven by the very strong Q1 performance. For the full year, we continue to anticipate 100% adjusted free cash flow conversion to adjusted net earnings. Regarding the deployment of our free cash flow, we repurchased approximately $140 million of share during the quarter. As we previously have discussed -- as we previously announced, the Board of Directors has also approved a new three year $1 billion share repurchase authorization. We will remain agile and opportunistic in repurchasing shares if we see price dislocation in our relative valuation. We ended the quarter with cash of $1.2 billion and a gross debt of $3.5 billion, resulting in $2.3 billion of net debt. Our Q1 net debt to 2023 expected adjusted EBITDA of approximately 1.5 times is a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment grade credit profile. And given our commitment to inclusion and diversity, all of Jacobs bank debt now has a sustainability linked KPR target of achieving a 40% female representation in our management team as defined as our Vice President and above population. As of the end of Q1, approximately 60% of our debt is tied to floating rate debt, which includes our $500 million notional interest rate lock of 2.7%. As of the first quarter, our weighted average interest cost was 4.6%. For your benefit, in the appendix of the presentation, we have included additional detail related to our debt maturities, interest rate derivatives and quarterly interest expense. Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was increased 13% year-over-year and which will be paid on March 24th. Now I'll turn the call back over to Bob.

Thank you, Kevin. Turning to Slide 12. Our portfolio is positioned to benefit from multiple secular growth trends across our core sectors with the opportunity to structurally increase our long term earnings power by executing against our growth accelerators of climate response, data solutions and consulting and advisory. We reiterate our outlook for fiscal 2023 adjusted EBITDA of $1.4 billion to $1.48 billion and adjusted EPS to $7.20 to $7.50, which incorporates recent FX rates. In closing, I would like to reiterate my priorities as CEO to maintain an inspirational and inclusive culture that will capitalize on our growth accelerators and drive long term returns for our shareholders. Before we open up the call for questions, I'd like to take a moment to express my sincere condolences on behalf of Jacobs to all those affected by the terrible earthquakes that occurred in Turkey and Syria earlier this week. Our employees have yet again demonstrated a culture of caring and practice by raising their hands to seek ways to support those most impacted by this tragedy. I'm proud to lead a company that rises to the calling in such challenging circumstances. Operator, we will now open the call for questions.

[Operator Instructions] Our first question is from Jerry Revich with Goldman Sachs.

This is Adam Bubes on for Jerry Revich today. Now that your leverage ratio has declined. Can you provide an update on the M&A pipeline, and if you'd care to comment on opportunity set by line of business?

Go ahead, Kevin.

So look, I think the M&A pipeline, we have a list of opportunities at every single point in time. There are things that are of interest. But ultimately, I would suggest to you that we really have nothing to comment on other than we do believe there's some things that are aligned with our strategy. And remember, how we think about our deployment of capital against M&A is to be aligned with our accelerators. So it's climate response, that's data consulting, data solutions and data -- consulting and advisory. So those are the areas we're continuing to focus on. And certainly, given the strong cash flow that we continue to generate, we'll have degrees of freedom to deploy that capital as appropriate when we see value added opportunities.

The next question is from Andy Wittmann with Baird.

Kevin, I guess I just wanted to dig in a little bit to some of the comments you made about I guess, some of the adjustments here. So you previously said $15 million of restructuring. You reiterated that again, obviously noting some real estate impairments that are noncash. But I guess here you took an exclusion on Focus 2023 expenses. I guess I wasn't expecting that. Could you talk about what that was in the quarter, what you're hoping to achieve with that? And maybe what the expectation or the budget is for the year, if there are going to be any further Focus 2023 expenses?

The focus 2023 to the extent that there is any indications that are really related to the real estate impairment. It's part of our overall Focus 2023 initiative. So it's not over and above the kind of real estate impairments that I highlighted.

Might have been viewed as future of work…

Yes.

The next question is from Michael Dudas with Vertical Research.

Bob, you talked about your drivers, the key drivers in the end markets and how they will be impacted. How comfortable do you feel as you're taking over here how you're positioned from a resource basis to drive that growth, what areas there’d be more tension paid upon? And of the several different end markets that you see, you did touch on some of them in your prepared remarks. But what ones could we expect to see some more better growth, better opportunities for Jacobs not only just to increase the book your bookings, but also drive the higher margin mix that you're anticipating?

From a resources standpoint, Michael, I'd say that we're feeling comfortable. And really, it goes back to what we've talked about previously. Our use of global talent has really balanced our ability to deliver on our clients’ expectations. So it's not where the capital is being deployed. It doesn't necessarily map to where we source talent and deliver the solutions that were expected and can deliver. So we're really positive about the resources front. As far as of the areas that we're looking at, I'd say that specifically in infrastructure and even more specifically in energy transition is providing some real overextended growth opportunities. And that was very evident this quarter in our growth in pipeline, I talked about double digit composite for the entirety of our insectors, the highest was energy transition. And we've got a great base, great talent, great solutions and with work that we've already been doing in the renewable space for quite a while, it's serving us well.

The next question is from Andy Kaplowitz with Citigroup.

Bob, you mentioned four years of locked in funding for IIJ and that you expected funding from IIJ, IRA and the CHIPS Act to be a strong run rate by the end of the calendar year. Maybe you can give us a little more color regarding what that could mean for PPS NSR. You're already growing NSR at 8%. So does it mean you could trend higher than that, and is there any risk that DC related budget noise can impact the infrastructure ramp up?

So let me answer the last part first. I think that the infrastructure ramp up is pretty locked in with regards to IIJ. And then the effects that the IRA and the CHIPS Act will be supplemental to that. My comment about the end of the year is that those three will be in real time. So we're feeling comfortable about that four year time line. I think what's also important to understand is that when we -- the difference between the appropriation, the deployment of the funds and capital and then the duration of the projects, programs and engagements, that has a tail on it that's six to seven years. And so you see -- Kevin talked about the backlog growth in revenue being kind of in that mid single digits, but the gross margin being in double digits on a constant currency basis, that's really a function of where we are in the phasing of that work. So comfortable on that front. As far as could that mean incremental growth to what we've already projected in our out year plan, we're feeling strongly that it could really be a big part of the company. So we're optimistic.

Your next question is from Jamie Cook with Credit Suisse.

This is [indiscernible] on for Jamie. So on CMS, I was wondering if you continue to expect low to mid 8% margins for the year? And is there any opportunity to look at divesting underperforming or noncore businesses in CMS and focus more on higher margin businesses, in particular, now with Claudia on board.

So look, I think we are a proactive team that always evaluates what we believe is the right portfolio for our company, both now and into the future. We've proven that by the divestiture that we executed against in 2019 with the sale of our Energy, Chemicals and Resources business, which one could argue was actually the legacy of the company. So we are always proactive in that consideration. So I'll leave it there. And so we can't really comment on anything other than, look, we always consider the opportunities. As it relates to CMS, we do believe that they are going to be able to get up into the 8% margins over the course of the year. So we see improving, they're at a point in time where some of the wins that they've had, which are a little bit higher margin are yet to kind of get into the burn. And we would expect that, that will be happening over the course of the balance of the year.

If I could add just one item to what Kevin said. When we talk about energy transition, please keep in mind that, that includes components of CMS that’s around our our nuclear new build and the AMR SMR technologies that we have, and we're seeing some real opportunities and growth in Europe that will be contributing to the margin profile that Kevin mentioned.

And just to clarify as well, when we talk about the future, I think we're approaching 8% for the year, which means because we started at the level we are, we're going to have to be having in subsequent quarters margins that are going to be above 8%.

The next question is from Michael Feniger with Bank of America.

On the potential DC lockdown or just headlines around a prolonged continuing resolution. Just Maybe, Kevin, you kind of walk through on -- I know we talked on IIJ, but even on the CMS side, anything that we should be aware of that could lead to orders being pushed out, rebid being pushed out? Are you hearing any of that based on some of the headlines we're seeing down in DC?

Go ahead, and then I'll back you up.

Look, I think the bottom line is we have an Omnibus in place for 2023. So what we're really fundamentally talking about is a continuing resolution for 2024. Look, it remains to be seen how that plays out. Clearly, there's some differences of opinion in the house right now relative to where we may end up. I would say the good news is relative to this, if there is good news, is that we're kind of based off a strong Omnibus program in 2023, it could impact new items getting funded, but we're based on a 23% kind of level, which is pretty straightforward. As it relates to the disruption relative to the debt and whatnot, we think our view is they’ll come to some rational conclusion on that, but we'll see how that plays out.

And right now, the programs, Michael, that we're looking at are not totally insulated, but we've got a strong view on those programs being funded here in the near term -- awarded.

The next question is from Robert Connors with Stifel.

Well, first off, Bob, if I remember correctly, I'm wishing your birds a good luck next weekend. And I guess for my question, you guys have a lot of tailwinds going into the back half, strong outlook on various end markets. Just sort of wondering what your thinking was with around sort of maintaining the guidance, especially with currency sort of being a tailwind here.

Well, there's a couple of things that we have to recognize certainly exchange rates are a positive, but also we have incremental interest costs that are largely offsetting that. So there's gives and takes here. I think given the dynamic of how we're playing out in DC, I think we're being prudent relative to our guidance that we've provided. And look, there's gives and takes here. FX isn't the only one. I would say, certainly, interest is some headwinds that we're facing and then the business is kind of net off. And I think at the end of the day, we're I think, positioned for good results for the full year fiscal 2023.

And then, Robert, maybe I'll make a couple of comments on the markets. The reason why we highlighted those four sectors that we did is the tailwinds that we are seeing and it's materializing in the double digit pipeline growth, the backlog growth that we're seeing and our bookings performance, all leading indicators to strengthen those markets. The burn of those bookings is something we continue to monitor very closely. But the stage that we're coming in on those programs are creating a higher level of utilization, specifically in the US for the Jacobs business.

The next question is from Louie DiPalma with William Blair.

Congrats to everyone on your promotions and new positions. As it relates to the exceptional strength for advanced facilities for this current fiscal 2023 on top of 2022, Kevin, I think you mentioned how this is [called on]. And I was wondering, should investors expect a consistent long term upward trajectory for advanced facilities with all of the stimulus funding from the CHIPS Act, or will it be lumpy in certain years as funding maybe inconsistent?

Louie, I think if you go back over a decade ago, that lumpiness was -- in the time between cycles, whether it be semi or in life sciences was a lot longer. We're seeing those cycles contract look at the current semi cycle as well. And so we think that, that long term growth aspect versus what we used to see a decade ago, we've demonstrated that the diversity of our portfolio has been able to really sustain that. You mentioned '22, it was also '21 as well. So we're feeling really positive there. The other item I would highlight is that it's the reason what's driving these growth catalysts, the reason why we highlighted the supply chain disruption as well as technology advancements is that in the past, the lumpiness was driven by demand. And so capacity was almost exclusively tied to demand and then you could just map it via economic cycles. Today, that has completely changed and the drivers are more driven around technology advancements, reshaping of supply chains from the east to the west as well as innovations that are happening in, whether it be chip design or novel therapy. So the drivers also give us that level of confidence too.

The next question is from Gautam Khanna with Cowen.

I was wondering if you could talk a little bit about recompetes, besides the Kennedy contract over the next 18, 24 months, do you have any big ones coming up? And then just related to the continuing resolution risk around the budget next year, are there any programs that kind of new programs that -- in your prior guidance, you were counting on growing, but that might not be able to grow in such an environment? Anything that we should be thinking about as a potential headwinds in '24?

Maybe I'll talk first on the recompetes. Outside of Kennedy, for the next 12 to 18 months, I think that was the time line that you put it at nothing of that size. We have smaller recompetes that are probably a little less under the radar -- a little bit more under the radar. But those are well within the normal cycle of our business. On the CR with new programs, Gautam, that's one where we continue to be very sensitive to that. From a recompete standpoint, those could end up being upside for us, because we're on programs that are continuing to be determined. But I think the diversity of our portfolio has lessened the impact of what we saw historically with CRs. And so I think that's where -- I think it would not be wise of us to predict the effect of CRs. But I think the diversity is where we see the hedge and we feel confident about our business.

The next question is from Josh Sullivan with The Benchmark Company.

Just to follow up on that a little bit. As far as the NASA Kennedy rebid itself, given so many changes in the space industry and emergence of a lot of commercial space interest, where is your confidence in retaining the work?

Our confidence is solid. As whether it be NASA or other clients you could even outside the aerospace world, we've grown with our clients. So the intimacy that we have with the science of our clients’ business has allowed us to be their long term advocate and long term partner. So wherever the space industry goes, a movement to commercial, which we're involved with or in other areas of exploration, we've been a part of that journey and a valued partner. So we're feeling confident.

The next question is from Chad Dillard with AB Bernstein.

This is Brandon on for Chad. Follow-up on CMS margins. You said that ending the year above 8% to give the full year to 8%. But given the high margin projects you all have been talking about, is it safe to assume that we can expect that exit rate to be the prevailing rate going forward and could the margins potentially approach People & Places levels given all these projects?

That would certainly be consistent with our strategy. I would say the margin burn that I was referring to is second half oriented primarily. So as we look to beyond 2023, certainly consistent with our strategy, we are always looking for an incremental profit improvement in terms of margin. So yes, that would be consistent with our execution strategy.

The next question is from Alex Dwyer with KeyBanc Capital Markets.

This is Alex on for Sean this morning. So my question, the backlog was very strong this quarter and it looks like all segments grew sequentially from 4Q. You guys had highlighted this gross margin in the backlog was up 100 basis points. Can you guys talk a little bit about what's driving this 100 basis point increase in margin? Is it one or two segments or is it more broad based in all the segments?

I'd say it's broad based. This is -- again, when we keep reiterating, moving up the value chain with our clients, these are higher higher level technically complex as well as digitally enabled offerings that we have now in the marketplace, which is driving that higher margin in our backlog. And so it's not acutely focused in a specific one area, it's across the board.

We have no further questions at this time. I'll turn it over to the presenters for any closing remarks.

All right. Thank you, operator. And thank you, everyone, for joining our earnings call. Looking forward to future calls and providing further updates on upcoming events and on our further calls. So thank you very much, and have a great week.