Jacobs Engineering Group Stock

and welcome to the Jacobs Fiscal Third Quarter 2026 Earnings Conference Call and Webcast.

[Operator Instructions]

I will now hand the conference over to Bert Subin, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and welcome, everyone. Following market close, we issued our earnings announcement, filed our Form 10-Q and posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to Slide 2 of the presentation for information about our forward-looking statements, non-GAAP financial measures and operating metrics.

Now let's turn to the agenda on Slide 3. Speaking on today's call will be Jacobs' Chair and CEO, Bob Pragada; and CFO, Venk Nathamuni. Bob will begin by providing comments on the business as well as highlights of our third quarter results, and a recap of notable awards. Venk will then provide a detailed review of our financial performance, including commentary on end market trends, cash flow and balance sheet data as well as our updated outlook. Finally, Bob will provide closing remarks. Then we'll open up the call for questions. With that, I'll turn it over to our Chair and CEO, Bob Pragada.

Good afternoon, everyone, and thank you for joining us to discuss our third quarter 2026 business performance. We delivered strong results in Q3. I'll quickly highlight a few key takeaways. First, adjusted EPS grew approximately 14% to $1.84, supported by more than 8% adjusted net revenue growth, all organic, and more than 100 basis points of year-on-year margin expansion. Second, INAF posted nearly $2.1 billion in net revenue, a 10% increase year-over-year and a quarterly record for the segment. And third, our backlog grew 27% to $29 billion, setting another new record with a trailing 12-month book-to-bill of 1.4x on gross revenue and 1.2x on net revenue. As we look ahead, we see continued strong underlying business momentum as reflected by our third consecutive guidance raise for FY '26, which Venk will walk through in more detail shortly.

Turning to Slide 4. We provide a detailed overview of the quarter. We are very pleased with our Q3 results as strong operating performance paired with our lower share count drove the sixth straight quarter of double-digit growth in adjusted EPS. Our margin profile continues to trend higher with our business achieving an adjusted EBITDA margin above 15% in Q3, up over 100 basis points year-over-year and up almost 200 basis points when compared to the same period in 2024.

The combination of strong annual margin expansion, high single-digit organic growth and continued share repurchases enabled by strong free cash flow generation has created a powerful earnings growth algorithm. Further, we are seeing convergence of backlog growth and overall revenue growth, and we are positioned to deliver another strong bookings performance in Q4.

Turning to Slide 5. I'd like to highlight a few notable project awards from the third quarter. In Water & Environmental, Jacobs is selected to provide program management and technical environmental services to the U.S. Navy's environmental restoration program, primarily across the Mid-Atlantic and Puerto Rico. The work involves restoring contaminated sites, including PFAS ammunitions related projects with the goal of reducing health and environmental risks and returning these sites to beneficial use. It extends our 40-year partnership with the Navy and underscores our leadership in delivering complex high-impact environmental solutions. This key win as well as new awards with private sector clients, gives us increased confidence we will see a return to growth in the environmental sector in coming quarters.

Also in Water & Environmental, we were selected to deliver central Utah Water District's Strawberry High Line improvement project, which will modernize roughly 40 miles of aging canal infrastructure through new pipelines, a pump station, a regulating reservoir and related facilities. By converting a historic open canal into a modern pressurized system, the project will improve long-term water reliability for agricultural and municipal users while supporting regional growth and enhanced recreation along the corridor. It's part of the district's broader Nivo regional water project, an approximately $1.5 billion program designed to sustain a doubling of the area's population in the coming decades. This also includes the South Utah Valley regional water treatment plant, where Jacobs is already under contract to lead design and engineering during construction.

Shifting to life sciences and advanced manufacturing. Jacobs was awarded a sole-source EPCM contract by Hut 8 to deliver Beacon Point, the company's second AI data center campus in the U.S. located in Texas, the multiphase campus is designed to support 1 gigawatt of total capacity. This award is a follow-on to Hut 8's Riverband campus in Louisiana, where Jacobs is also leading program delivery. We'll apply proven design elements from that project and deploy our data center digital twin to simulate critical assets, helping to derisk commissioning and reduce time to first revenue by accelerating the deployment of AI workloads.

Initial energization is targeted for 2027. Winning a repeat sole-source contract at this scale reflects the confidence clients place in Jacobs to deliver complex AI infrastructure with speed, safety and certainty. It also builds on our standing as engineering news records #1 data center firm, a sector where we see substantial runway as AI investments increase. And finally, PA is supporting the U.K. Royal Air Force's Optimise initiatives, enabling RAF leaders to use data-driven insights to further strengthen operational readiness and decision-making in an increasingly complex environment. The work turns data into confident, evidence led decisions that support the RAF's readiness, and it reinforces our standing as a trusted delivery partner in the defense sector, delivering high tempo programs that have real operational impact.

Now please turn to Slide 6. Given the growth tailwind we are seeing from AI investments, I wanted to take a moment to quickly highlight our position in the AI infrastructure build-out. We've been serving data center clients since the 1990s and have long-standing relationships with semiconductor manufacturers that span over 50 years. Significant capital is being deployed to build AI data centers, and we have been able to grow our addressable market by expanding our scope of services, which now range from [indiscernible] advisory and design to digital twins and full program delivery.

Further, the AI data center build-out is increasing capacity requirements in the semiconductor industry where we are a leading facility designer, and we are leveraging our capabilities across water, environmental, power and digital to further expand our market share with both private sector clients and utilities. For context, as of Q3, the direct AI build-out represented 11% of our adjusted net revenue up approximately 100 basis points from last quarter, and our pipeline of future opportunities continues to grow meaningfully.

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

Thank you, Bob, and good afternoon, everyone. Please turn to Slide #7, where I'll walk through our results for Q3. Gross revenue increased more than 34% year-over-year, and adjusted net revenue, which excludes pass-through revenue grew by over 8%. Q3 adjusted EBITDA was $367 million, up 17%, with our margin at 15.2% or 109 basis points higher year-over-year. This resulted in adjusted EPS increasing 14% year-over-year. Consolidated backlog was up more than 27% year-over-year to a record $29 billion with our trailing 12-month book-to-bill at 1.4x. Book-to-bill was strong again in Q3, driven by good awards activity across our end markets with standout performance in the advanced manufacturing, environmental and transportation sectors.

Additionally, on a year-over-year basis, net revenue and gross profit in backlog increased 11% and 14%, respectively, during Q3. We are demonstrating faster organic growth in the business today and strong recent awards activity positions us well as we look ahead to fiscal year '27. Regarding our performance by end market in infrastructure and advanced facilities, let's turn to Slide #8. At a high level, we continue to see strong growth rates in life sciences and advanced manufacturing as well as in critical infrastructure during Q3. Focusing on life sciences and advanced manufacturing, net revenue grew 24% in Q3, our highest growth rate since we began reporting end markets in late 2024. Strong performance in the data center and semiconductor sectors contributed to substantial year-on-year growth, and we anticipate that this trend will continue in Q4. We're seeing high demand for new projects across life sciences and advanced manufacturing, setting us up well for the new fiscal year.

Shifting to clinical infrastructure, net revenue increased 9% year-over-year. Critical infrastructure trends remained similar to Q2 with transportation and energy and power activity leading to strong growth versus last year. We continue to expect critical infrastructure to grow in the mid- to high single-digit range over the medium term. Net revenue growth in our water and environmental end market was a little more than 1%. Net revenue growth for water remains strong. And as we indicated last quarter, we did continue to face year-over-year headwinds in the environmental sector.

On a positive note, we're forecasting growth for the water and environmental end market to sequentially improve in Q4 based on [indiscernible] awards activity in the quarter. In summary, strong life sciences and advanced manufacturing performance during Q3 was complemented by good demand across the majority of our sectors.

Moving now to Slide #9, I'll provide a brief overview of our segment financials. In Q3, I&AF operating profit increased 14% year-over-year on 10% net revenue growth. PA Consulting operating profit increased 2% on flattish revenue and operating margin, again came in strong at above 22%. Both segments saw only a minor operating profit growth impact from foreign exchange during the quarter. Focusing on PA, the segment experienced some temporary disruption from the recent change in governmental leadership in the U.K., which delayed project start dates. Importantly, we are already seeing a return to normal, and our forecast indicates solid quarter-on-quarter revenue growth in Q4, supported by recent awards activity, new project commencements as well as performance quarter-to-date.

Now moving on to Slide 10. We provide an overview of cash generation and our balance sheet. For Q3, we generated $541 million in adjusted free cash flow which removes the impact of $110 million in payments related to proceeds for the PA transaction as we had indicated last quarter. This brings year-to-date adjusted free cash flow to $633 million. Please note, we will not make adjustments to free cash flow in Q4 and will return to providing guidance for reported free cash flow margin in fiscal year '27. Focusing on capital returns, we remain aggressive buyers of our shares during Q3 to take advantage of the dislocation in our share price. As a result, our total repurchases through Q3 rose to $614 million, which combined with dividends paid, puts us on track to return more than 100% of free cash flow to our shareholders for the second consecutive year.

This brings total share repurchases since the beginning of fiscal year '25 to $1.4 billion, and we see continued runway moving forward, given our strong outlook for free cash flow.

Shifting now to the balance sheet. At the end of Q3, our net leverage ratio declined to 1.8x, achieving our target for net leverage to be below 2.0x, a quarter early, and we still plan to delever to approximately 1.5x by the end of fiscal year '27.

Please turn to Slide 11 for our updated fiscal year '26 outlook. We're increasing our fiscal year '26 adjusted net revenue growth range to 9.5% to 10% year-over-year, narrowing our adjusted EBITDA margin range to 14.7% to 14.8%, raising our adjusted EPS range to $7.20 to $7.30 and raising our adjusted free cash flow margin forecast to 8%. Notably, our outlook for fiscal year '26 now implies nearly 19% year-on-year growth in adjusted EPS at the midpoint. As it pertains to Q4, we expect our adjusted EBITDA margin to be approximately 16%, with year-over-year net revenue growth of approximately 14%. Furthermore, we expect our tax rate to be roughly 27.5% and a quarterly free cash flow to be approximately $150 million. Overall, we're very pleased with our year-to-date performance and our Q4 outlook highlights that we expect a strong finish to fiscal year '26. With that, I'll turn the call back over to Bob.

Thank you, Venk. In closing, I'd like to express my gratitude for the trust our clients continue to place in Jacobs and to our more than 47,000 talented employees for their continued commitment to delivering excellence. We're tracking very well heading into the final quarter of the fiscal year with strong Q3 performance, enabling us to increase the midpoint of our full year adjusted EPS outlook for the third consecutive time. Our backlog is at a record level, and our pipeline continues to expand, positioning us for profitable growth in FY '27 and beyond. Operator, we'll now open the call for questions.

[Operator Instructions]

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

Bob or Venk, so backlog growth has obviously been accelerating over the last several quarters. I think you mentioned 1.2x book-to-bill on net revenue, as you said. So I know it's early to talk about FY '27, but your exit rate in Q4 will be in the double digit at 14%. So does that mean it's possible to grow FY '27 net revenue as faster, faster than FY '26 or at least at this point you have much higher visibility than usual towards that normal algorithm of mid- to high single-digit growth that you have?

Yes, Andy, I'll take the question. Yes. So obviously, as you pointed out, good solid growth in Q4 that we're projecting and good growth for the full year. certainly, our backlog is in a really good position. I think we will defer specifics on the growth algorithm for fiscal '27 on the next call. But suffice it to say that looking at our current backlog position, we feel pretty good about growth at least in line with the long-term average that we put on that.

Okay. That's helpful. And then you had comments about sort of the data center business in life sciences and advanced manufacturing in general. I mean it does keep increasing as a percentage of NSR. So maybe how are we thinking about that sector now versus your Investor Day 1.5 years ago, whatever it was, can you grow that business sort of double digits for the foreseeable future based on sort of what you see in maybe the share gains that you've had.

Yes, Andy, we absolutely can. It's a growth engine right now, but is deep and broad for us with the entirety to that ecosystem. And if we look all the way from kind of what we're doing in the high-bandwidth memory chips, the water and power requirements that are feeding the data center and then the complexity that's going into the data center, our share is increasing, and the clients that we're working for have got long pipelines ahead. So the answer is an absolute yes.

Your next question comes from the line of Sangita Jain with KeyBanc.

One, I want to ask on water and environment, like it seems like last quarter, you had a lot of good wins, a couple of them, Bob, you highlighted in your prepared remarks. How should we think about the scope of some of those bookings and the period over which they're going to burn? I'm trying to figure out how we should think about what an environmental growth going forward.

Yes. So Sangita, the wins that we had in the quarter will start to burn in Q4. So kind of that inflection point that we've always been telegraphing that would come at the end of the year, it's right in front of us. You'll see sequential growth in the quarter. And then going into FY '27, we're positioned extremely well to be on those growth rates that we highlighted during the Investor Day of that mid- to high single-digit growth for water and environmental and the water sector continues to be high single-digit growth for us and the pipeline as well as the forward outlook is very bright. So we're excited about the sector.

Got it. And then maybe one for Venk. Your SG&A as a percent of sales in 3Q was lower than it has been in a very long time. And I'm wondering if there was anything one time or if it's just a function of what you've been saying that you're going to grow your OpEx at a slower pace than your revenue, and that's starting to show maybe.

Yes, that's exactly right. As our revenues continued to accelerate over the last several quarters and based on the guidance we provided, we made a commitment to spend less than the revenue growth rate, and that's exactly what you see in terms of operating leverage. And you'll see more of that coming through in Q4 as well.

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

A nice uptick there in the book-to-bill in the quarter. So as you guys look at your pipeline, how should we think about that book-to-bill from here? It seems like the growth is poised to accelerate. So with that faster burn, how sustainable do you think, say, 1.5x or better is as you accelerate? And how lumpy do you think it's going to be from here?

Yes, Steve, I think if you look at the gross revenue book-to-bill versus the net revenue book-to-bill, let me kind of segregate those, the lumpiness in the gross revenue book-to-bill, where we would have a 1.5 or 1.6, you probably remember last year, we had a 1.7 for a quarter. That's going to come up and down as some of these larger full program delivery jobs are booked. But the 1.1 to 1.3-ish net revenue growth, pretty consistent.

Okay. Sounds good. And then wondering if, Bob, you can give us an update on 2 things: one, Middle East activity in general, how you're managing that over there? And just international overall. Is the pace of that business picking up? Clearly, you've had some good wins. Just kind of curious on how those 2 things are developing.

Yes. So Steve, maybe I'll take the second part first and then hone in on the Middle East. Internationally, we've done well. We're kind of in that 9% growth rate internationally. And that is probably more skewed a little bit to Australia and New Zealand and Asia. The Middle East is stable, and we've continued to do well there. But I'd say the European areas again, stable mid-single digits. So overall, internationally, we see some continued pipeline growth as well as stability as we look forward to the Q4 as well as into -- going into next year.

Your next question comes from the line of Jamie Cook with Truist.

Congrats on a nice quarter. I guess just 2 questions. One, Venk, there's still -- we're one quarter left, there still implies a significant ramp Q3 to Q4, which makes sense, like given the top line growth of 14% you're talking about. But I guess why so much variability to $0.10 around the fourth quarter, what would be the drivers behind the low end versus the high end of the guide. And then my second question, I guess, sort of what struck me about the quarter was the margin uplift then, I guess the implied 15% and then implied margins going to 16% in the fourth quarter. As I think about the trajectory for 2027 and we're thinking about a world where organic growth is accelerating and margins can expand, is it fair to say more of the margin uplift would come from I&F versus PA Consulting or any comments you want to make around that?

Yes. First of all, thank you for your comments, Jamie. Obviously, a really good quarter. So I'll split the response into 2 halves, right? One is just focused on the net revenue growth as well as the margin expansion. So on the net revenue growth, we guided to about 14% for the quarter. As you know, we have an extra week in the Q4. So that in and of itself accounts for about, call it, 6% to 7%. So when you normalize it, we are growing at 8% for the quarter. So given the fact that we grew [ 7.8% ] or 8.3% in Q3, we see good line of sight to be able to grow the 14% for Q4. That's number one.

It's driven by the fact that the program ramps that we talked about in Q3 and in Q2, they are now coming into full fruition in Q4, which drives up utilization, and we have good visibility into that. So that's from a revenue perspective. When you look at it from a margin perspective, we've done a pretty good job of increasing our margins sequentially over the last 3 quarters as well as year-on-year. As you recall, I think we started the year at 13.4%. We went to 14.1%. And in this quarter, we had 15.2%. So 110 basis points of sequential growth as well as good year-on-year growth and what we're guiding for in Q4 is 16%. So really good line of sight to be able to achieve that with the increased utilization that we talked about as well as increased use of global delivery. So a really good visibility into achieving those targets for both revenue as well as EBITDA margin.

And Jamie, I think on the question that you had with regards to '27 and where we could see that continued margin expansion, I'd say it's pretty balanced that we would continue to get it from both I&F as well as PA Consulting because we're right in the middle of the cost synergies that we're working on with consulting. Just as a reminder, PA Consulting does have the highest margins in that space. So we're continuing to grow on a base that's really high.

Your next question comes from the line of Andrew Wittmann with Baird.

Yes. Great. So I just -- I think I heard a comment that you said in the fourth quarter, you're going to report free cash flow without any adjustments, and that's great. Is there a similar comment that you can make like that related to your income statement? I know that, obviously, over a year ago, you announced some actions for the IAF segment. But now, Bob, you just mentioned that you're kind of integrating PA. So what should the investment community expect in terms of income statement adjustments between GAAP and non-GAAP, and not just maybe for 4Q, but how long are you going to continue to recognize something there? And when can those 2 converge.

Yes, Andy, I'll take that question. I would say, obviously, you've seen with this Q3 print, the gap between GAAP and non-GAAP EPS was primarily driven by just a tax item. But overall, you've seen a pretty significant convergence between our non-GAAP numbers, except for the PA acquisition. So from that standpoint, we feel pretty good about the quality of the earnings, and we will continue to make additional progress in Q4 and beyond. You'll see it from both the P&L side as well as on the free cash flow side. And we've already taken M&A off the table. So you don't have to expect a lot of these variances between GAAP and non-GAAP going forward. So our view is that with Q4, as we stated on the Q3 call, the fact that there was a tax delta because of how the PA compensation expenses was treated. So that will have an impact on Q4 because it's for the full fiscal year. But going forward, that gap will reduce substantially and will be more in line with our non-GAAP and GAAP tax rates.

Got it. I guess just on my follow-up then, I wanted to dig in on the environmental side. Obviously, it sounds like you had some wins here in 3Q that are going to help that growth rate improve in 4Q. Just was hoping you'd be a little bit more specific. Are these -- what -- is there a general context to something? Is it state and local? Is this federal money flowing better? Is this -- I mean, there's lots of different things that you do in this and just thought that since this is an area that seems to be undergoing a little bit better momentum, maybe you'd want to elaborate on that a little bit more.

Yes, Andy, I'd be happy to. So we had 2 sizable wins in the private sector. And unfortunately, I can't name the 2 clients, but they are in the industrial space. So private sector industrial space long-term contracts that we won, and we were successful in the book-to-bill, ironically are -- as a result in the quarter was over 1.3 just for the environmental business. So that balance between private and public, we're holding true to it because in the public sector, those things that you just mentioned with regards to PFAS and the DoD continuing to go back to some of those regulatory items that got paused in 2025. We're capitalizing on that work, too. So going into FY '27, we're feeling confident that our environmental business will return back to the levels that we previously had.

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

So question for you guys on the Infrastructure and Advanced Facilities business. It looks like on a constant currency basis, margins were up about 50 basis points. Can you talk about some of the moving parts there? How much is mix? How much is pricing? How much was leverage from technology? And then as we're thinking through our 2027 bridge, how do you think about the opportunity going forward?

Yes. So Chad, thanks for the question. So I'd say, as you pointed out, good expansion in margins both sequentially as well as on a year-over-year basis. As you may recall, when we announced our margin trajectory at the February 2025 Investor Day, we laid out specific things in terms of the drivers of the margin. I'd say we've shown, as Sangita pointed out earlier, good operating leverage that continues to be a part of the core principle to drive continued margin expansion. So that will be a main stay going forward. But in addition to that, with the other 3 buckets you might recall, we talked about mix. We talked about the commercial models and then also use of global delivery really good progress in global delivery, especially with our life sciences and advanced manufacturing businesses use a lot of global delivery implementation. So that's driving a lot of the margin expansion. I'd say on the mix side, you'll see more of an impact coming in FY '27 and beyond, but operating leverage and global delivery are the bigger drivers in the first, call it, 4 to 5 quarters since we announced the targets. So well on track in terms of margin expansion. And just for everybody's benefit, you'll recall that in fiscal year '25, we increased our margins by 110 basis points. And in fiscal year '26, at the midpoint of the guidance that we provided, that will represent another 90 basis points of margin expansion. So 200 basis points of margin expansion, which we think is industry leading, and we have lots more margin expansion ahead of us as well.

Great. That's helpful. And then second question is on data centers. So with the shift from 34-volt to 800-volt architecture, are you starting to see those sorts of data centers coming through your design pipeline, how does the design intensity change when you're making that shift? Any color you think about that?

Yes. There's complexities that are going on, Chad, that I'd say is increasing our scope. So that 800-volt DC solid-state transformer is a big deal has been well publicized. But I'd say -- I wouldn't point to that as the single source of that inflection point. the complexity in all of the utility requirements to feed the next generation of chips is increasing the complexity as well as the scale. And so that's where kind of it's in the sweet spot of Jacobs. And so if we look at the clients that we're working for, not just the hyperscalers, but also the neo clouds, we're on that journey with them. And hence, you can see the results in our performance.

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

Bob, just maybe you could share some further thoughts on critical infrastructure and the tone of the types of business and what the areas, say highway, maybe any brief comments on what may happen out of maybe next IIJA bill. And on PA, with the change in government should be helpful, but anything with the integration over the past several months and how that could drive some more growth in some maybe the business with your current customers in the U.S. or other parts of the world to help drive helpful on the margin and also the growth for PA itself.

Sounds great. So a lot there, Mike. Let me kind of take one at a time with regards to critical infrastructure, again, really solid growth. Just as a kind of a recap, that vertical contains our transportation business, Energy & Power and cities and places. Our Transportation business continues to be a real growth vector for us in all geographies and growing at a high single-digit rate. I'd say the subsectors that are channeling that growth are around aviation, the rail business globally as well as in the ports and maritime world. Highways and bridges was a nice element in Q3. But those 3, we've got a market-leading position there, and we're seeing a lot of activity there. E&P has been really, really strong, double-digit growth predominantly in the U.S. around our T&D efforts, and I'd say outside the U.S., more on the generation side. And so if you think Sudlink or Marinus Link, the renewables effort that's going on outside the [indiscernible] has really been a nice growth trajectory for us.

And then in cities and places, nice growth in the U.S. That cities and places team has some really, really strong building design capabilities, which we're able to not only applied to venues, but also has been with the resource needs that we have in data centers. The team has really been facilitating that growth that we're seeing in the data center business. I'd say probably the one area that we continue to monitor is a bit of, I'd say, a temporary pause in the Middle East. So grew in the Middle East overall because of our utility work. But that would be the only area where I'd say a little bit of a pause, but definitely some pipeline work that would show upside next year.

On IIJA, we actually feel -- we've been saying this for a while. With a possible extension going into December, we feel like the funding flows coming from IIJA will continue. We've always said that there was always a 2- to 3-year lag from the expiry date just as monies are obligated and then spent, we're still kind of at that 50% level spend. And so going into the midterms and coming out of the midterms and everything that's being set up for [ Build America 250 ] hopefully next year, the funding levels have been pretty solid as a result of those stimulus bills, and we'll continue on, feeding all those things that I aforementioned around transportation.

PA, I'd say the areas where we're starting to see some real growth, again, notwithstanding my comment in Q3 on the kind of the temporary disruption that we're already seeing to see come back in July. Defense and security in Europe as the U.K. MOD has taken a leadership position on what an independent Europe defense posture looks like, PA is right in the middle of that. And the synergies with the U.S. with Jacobs, in the I&AF business on setting up that defense infrastructure, whether it be ports and maritime or manufacturing facilities for the defense primes, is something that we've already started to see some nice progress there. And the transportation in the U.S., PA has got a strong presence in the U.K., and that's serving as a nice synergistic value as we look at the U.S. and the revenue synergies coming out of of the PA relationship. So hopefully, that gives you kind of a broader overview.

[Operator Instructions]

Your next question comes from the line of Jerry Revich with Wells Fargo.

This is Andrew Rosen for Jerry Revich. I just wanted to ask, last quarter, you saw a significant expansion in the AI specific data center infrastructure pipeline. I was curious if we can get an update on how that's progressing this quarter. That pipeline is awarded or in backlog? And what's kind of the conversion rate that you're embedding into your guidance and maybe even into next year?

Yes. Maybe I'll take the front part of that and then, Venk, you can take in how much of that is in backlog. So Andrew, our backlog growth just in the data center space is -- has been significant. And I'd say kind of in the order of doubling over the period of time, the pipeline has gone up 3x. And so the visibility that we see before it was probably 6 to 9 months, we're getting visibility into the pipeline that extends out 2 to 3 years. And so this is something that we see. And again, we're being selective because there is also a lot of speculative work that's out there. So the work that we are pursuing, [indiscernible] back up, winning, executing and continue to pursue are those where they're established customers of ours that we've had for a while, the neo Cloud providers are coming in are normally backed by folks that we've known for a long time within the hyperscale world. So overall, really strong trajectory in the data center space.

Yes. And if I extended beyond data centers into just the overall AI ecosystem, you recall last quarter, we said it was roughly 10% of our business. Now it's at 11% and the growth is actually accelerating. So we are doing a good job of converting that backlog into real revenue and that's driving not only growth for us in Q4, but we expect significant growth in fiscal '27, which we'll quantify. I also want to add to this, the previous question about revenue synergies. Obviously, AI is a big part of what PA does as well in terms of implementing agentic AI for not only their clients, but it's an opportunity for us to also use it internally, both within the PA ecosystem as well as the Jacobs ecosystem. So AI is really a big driver of our growth for us, and you've seen that being demonstrated in terms of our revenue growth, but also over time with margin expansion.

I appreciate that. I guess, secondly, are customers kind of still indicating that the U.S. semiconductor construction activity is accelerating and maybe what are your -- some of your early thoughts for FY '27 on that front?

Short answer, Andrew, is absolutely yes. Our customers are pushing us to accelerate those designs. And we're working for the largest high-bandwidth memory chip manufacturer in the U.S. today. So that pipeline continues to grow. And now with some of the announcements that you've heard from Intel moving forward, as we have publicly stated, we've been the engineered record for Intel for a couple of decades. And that relationship, we stayed with them during this kind of slower time. And we're starting to see that pipeline grow going into '27.

There are no further questions at this time. I will now turn the call back to Bob Pragada for closing remarks.

Well, thank you, everyone, for joining us for our earnings call. We look forward to engaging with many of you over the coming weeks and have a great evening.

This concludes today's call. Thank you for attending. You may now disconnect.

Greetings, and welcome to Jacobs Fiscal Second Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Bert Subin Senior Vice President, Investor Relations. Thank you. You may begin.

[Technical Difficulty]

Solid year-on-year margin expansion and continued robust sales activity. I'll quickly highlight a few key takeaways. First, adjusted EPS grew 22% to $1.75, supported by 9% organic net revenue growth, outpacing the 8% growth rate in Q1 and 70 basis points of year-on-year margin expansion. Second, our backlog grew 22% to $27 billion, setting another new record with a trailing 12-month book-to-bill of 1.4x on gross revenue and 1.2x on net revenue.

And third, we completed the acquisition of PA Consulting, which we celebrated together by ringing the closing bell at the New York Stock Exchange in March. In summary, we are exiting Q2 with significant momentum and the strong first half of the year gives us confidence to increase our FY '26 outlook for the second time in 2 quarters, which Venk will walk through shortly.

Turning to Slide 4. We provide a detailed overview of the quarter. We are very pleased with Q2 results as strong operating performance, paired with our lower share count drove the fifth straight quarter of double-digit growth in adjusted EPS. During Q2, we also delivered another quarterly book-to-bill above 1.0x with both gross and net coming in at 1.2x. The addition of the net revenue book-to-bill metric will provide a useful context for our investors and analysts and reinforces the strength in our bookings over the last 12 months.

Turning to Slide 5. I'd like to highlight a few notable project awards from the second quarter. But before I do that, I want to recognize a major achievement. Jacobs ranked the #1 design firm by engineering news record in their newly released 2026 and Top 500 report, marking the seventh time in the last 8 years, we've held this ranking. Our strong organic growth profile helped us earn this honor. And I want to thank our 47,000 colleagues for delivering leading solutions to our clients every single day.

Now moving on to Q2 awards. In Water & Environmental, Jacobs was selected by the San Francisco Public Utilities Commission to deliver the Southeast wastewater treatment plan, a landmark investment in environmental protection for the San Francisco Bay. The project will upgrade San Francisco's largest wastewater facility, positioning a plant as the first major discharger to proactively meet new nitrogen limits for the bed. This win highlights another significant award in one of our fastest-growing sectors and positions Jacobs for similar regulatory-driven investments emerging across Northern California, the Pacific Northwest and the Great lakes.

Also within Water & Environmental, Jacobs and PA have secured a 2-year economics and policy consultancy contract with Ofwat, the U.K. water regulators. The engagement brings together industry-leading expertise across water regulation as well as financial, technical and strategic consulting. Our solution will be delivered to support pricing, performance oversight and policy development tied to substantial investment across the AMP cycle and beyond. In life sciences and advanced manufacturing, we had motor wins with hyperscalers and other data center customers spanning the full project life cycle from advisory, design, program management and digital solutions to full EPC. This includes our recently released data center digital twin developed using the NVIDIA Omnibirsh-DSX blueprint.

Our strategic partnership with NVIDIA continues to gain momentum as we work to expedite the delivery of AI factories with compute load requirements rising substantially. Last year at our Investor Day, we laid out a road map for how we believe our data center business would evolve and the combination of our deep domain expertise, our full asset life cycle model and the expansion of AI investment has accelerated that journey. We grew our data center business by more than 100% year-on-year in Q2, and we see very strong runway to build on that success in the second half of the year and it's more than the data center sector.

We are seeing rising demand in semiconductors, water and energy and power as the technology and infrastructure go hand in hand. This is bolstering total revenue growth with our backlog and pipeline indicating the investment cycle is still in the early stages. Moving on to critical infrastructure. Jacobs has selected a lead design at Dallas [indiscernible] International Airport as part of the terminal extension. The project involves existing bridge operations essential to allow for up to 16 additional gates and for the airport's growing demand.

Combining bridge design expertise with the unique challenge of maintaining operability of the SkyLink people mover during all phases of construction, we are modernizing infrastructure while keeping passengers moving. Jacobs is ranked as engineering news record #1 firm in Aviation, a sector where we continue to see significant growth in demand for terminal upgrades and noodles.

In summary, we continue to build on our industry leadership in sectors like wastewater, aviation and data centers, securing key awards that position us for growth in the second half of the year and into FY '27. Now I'll turn the call over to Venk to review our financials in further detail.

Thank you, Bob, and good afternoon, everyone. Please turn to Slide 6, where I'll walk through our results for Q2. Gross revenue increased 27% year-over-year, and adjusted net revenue, which excludes pass-through revenue, grew by 9%. These both represent the highest consolidated growth rate for the company since the separation of our government services business in 2024. Q2 adjusted EBITDA was $327 million, growing more than 14%, but our margin come in at 14.1% and are up 70 basis points year-over-year, driven by good operating discipline.

This resulted in adjusted EPS rising 22% year-over-year. Consolidated backlog was also up 22% year-over-year to a record $27 billion with a trailing 12-month book-to-bill at 1.4x. Book-to-bill was strong again in Q2, driven by good awards activity across our end markets. Additionally, on a year-over-year basis, net revenue and gross profit in backlog increased 12% and 15%, respectively, during Q2. We are demonstrating faster organic growth in the business today and our strong bookings position us well as we look out to fiscal year '27'.

As you see is the separation of our government services business in fiscal year '24, our earnings quality has been improving. However, as a result of the PA transaction, which we have previously communicated, there was a wider than normal spread between GAAP and adjusted EPS in Q2. We expect this to be mostly a Q2 phenomenon and we anticipate more normal differentials between GAAP and adjusted EPS in Q3 and beyond. Regarding our performance by end market and infrastructure and advance cities, let's turn to Slide 7.

At a high level, we continue to see strong growth rates in life sciences and advanced manufacturing as well as in critical infrastructure during Q2. Focusing on life sciences and advanced manufacturing, netted grew 12% in Q2 and our highest growth rate since we began reporting end markets in late 2024. Combining acceleration in advanced manufacturing with continued solid performance in the Life Sciences sector, has resulted in a double-digit top line increase for the end market, and we expect any growth will likely exceed Q2's level in the second half of the year.

Shifting to critical infrastructure, net revenue increased 9% over Q2 2025. Critical infrastructure continues to be led by strong growth in the transportation sector, where our rail, aviation and ports businesses grew double digits as well as in the energy and power sector on the use of high demand for transmission and distribution services. Net revenue growth in our water and environmental end market came in at 2% as strength in water which has continued to grow in line with our target, was offset by softness in the environmental sector. Performance for our Environmental business is on track to show meaningful year-over-year improvement as we reach Q4.

In summary, we saw a diversified extent across our end markets during Q2. Moving now to Slide 8, I'll provide a brief overview of our segment financials. In Q2, IAF operating profit increased 11% year-over-year or just over 8% on a constant currency basis. PA Consulting operating profit increased 19% as revenue grew 17% and operating margin came in strong at 22%. On a constant currency basis, operating profit grew 12%. PA has seen demand tailwinds from national security and public investments in the U.K. and the business is centrally positioned to help advise on European different strategy as well as implement digital solutions across the entire region.

Combined with Jacobs' proven history of delivering complex manufacturing and national security infrastructure, we see a compelling opportunity to augment growth in the sector. Focusing on the second half of the year, we believe PA will continue to grow revenue high single digits on a constant currency basis. Now moving on to Slide 9, we provide an overview of cash generation and our balance sheet. For Q2, we had an adjusted free cash outflow of $272 million, partly as a function of a favorable Q1 cash timing item that reversed in Q2. This makes our first half adjusted free cash flow to $93 million, a solid increase over fiscal year '25.

I just want to note, we're highlighting an adjusted free cash flow figure as we have to account for the portion of the PA transaction proceeds in operating cash under U.S. GAAP reporting guidelines. These entries impacted Q2 reported free cash flow by approximately $233 million and will impact Q3 reported free cash flow by just over $100 million. But it's important to keep in mind these amounts were already included as part of the upfront consideration paid in connection with the transaction. Focusing on capital returns, we remain aggressive repurchases of our shares during Q2 to take advantage of the value of our stock.

Consequently, our total repurchases in the first half of the year were $472 million, which puts us ahead of our annual target of returning at least 60% of free cash flow back to our shareholders. Our balance sheet is in good shape following the acquisition of PA Consulting with a net leverage at 2.1x ending the quarter, and we plan to return to below 2x by year-end. Additionally, our weighted average interest rate has declined to around 5% and following the successful refinancing of our debt stack and issuance of new bonds to fund the acquisition.

Net leverage is roughly 0.5 turn above our target range, but the increase in EBITDA from the [indiscernible] of PA as well as our strong outlook for cash generation positions us to lower our net leverage ratio back towards 1.5x during fiscal year '27. Please turn to Slide 10 for our updated fiscal 2016 outlook inclusive of our acquisition of PA Consulting. We're increasing our forecast for adjusted net revenue growth, adjusted EBITDA margin and adjusted EPS relative to our guidance from last quarter.

We're increasing our FY '26 organic net revenue growth range, 8% to 10.5% year-over-year, adjusted EBITDA margin rate to 14.6% to [ 14.9% ] and an adjusted EPS range to $7.10 to $7.35. We continue to anticipate adjusted free cash flow margin will range from 7% to 8.5%. Notably, our outlook for FY '26 now implies 18% year-on-year growth in adjusted EPS at the midpoint. As it pertains to Q3, we expect our adjusted EBITDA margin to be approximately 15%, with year-over-year net revenue growth of approximately 7.5%.

This implies a margin above 16% in Q4 on double-digit top line growth, inclusive of the extra week we will have this year during that quarter. Additionally, we expect our adjusted effective tax rate will be in the 27% to 28% range in Q3 and in Q4. We have good line of sight to achieving our updated CD206 targets, and we're pleased to be trending well ahead of our initial outlook for the year.

Now turn to Slide #11 for a few updates to our fiscal year '29 targets. We are reaffirming our range of 6% to 8% organic growth on a 5-year compound annual growth rate basis for net revenue. Combining our fiscal year '25 results and the midpoint of our fiscal year '26 guidance, we would be ahead of the midpoint for the first 2 years. Adding this to our central positioning in the build-out of AI infrastructure and the potential for growing revenue synergies with PA led to believe we will meet or exceed a 7% compounded annual growth rate.

As it pertains to adjusted EBITDA margin, we are increasing our target by 100 basis points to 17% plus for fiscal year '29. This is due to the implementation of gross margin and G&A initiatives that are well underway as well as the acquisition of the remaining stake in PA Consulting, where we currently see opportunity for at least $20 million in annual cost synergies. This implies at least 75 basis points of identified annual margin improvement from fiscal year '27 through fiscal year '29, in addition to the 200 basis points we're expected to deliver over the course of fiscal year '25 and fiscal year '26.

And lastly, our high margin expectation and working capital management give us confidence we can now reach or exceed an 11% free cash flow margin, also up 100 basis points from our prior target. At our forecasted growth rate that implies $1.2 billion to $1.3 billion for annual free cash generation by fiscal year '29. We're off to a great start just about 1/3 of the way through our strategy cycle.

With that, I'll turn the call back over to Bob.

Thanks, Venk. In closing, we're tracking very well heading into the second half of the fiscal year with strong Q2 performance enabled us to increase our full year outlook for the second consecutive quarter. We are seeing momentum in our growth rate, margin and bookings trajectory, all of which give us confidence in our outlook. Operator, open the call for questions.

[Operator Instructions]. Your first question comes from the line of Steven Fisher with UBS.

Congrats on the quarter. I just want to ask you a high level, how much of the raise is driven operationally by a better-than-expected demand or operational performance versus bringing the rest of PA Consulting in. We had sort of done some calculations that maybe it would be about $0.10 to $0.20 increase from PA Consulting, maybe our math was off. But just curious kind of how much was operational? And if so, where within the segment, did you see that upside?

Yes. So Steve, maybe I'll start it off and then I'll hand it over to Venk. Just at a high level, it is purely based on our operational performance the drive we're seeing in our bookings, how that's translating into our run rate, that drove the top line. And I'll let Venk talk a little bit about how that flowed down all the way to the bottom line where there in the consolidation, there might have been just a tad.

Yes. Thanks, Steve, for the comment. I would say, yes, as Bob mentioned, pretty solid performance on the I&A side of the business. We've got a little bit of a tailwind from an FX perspective, but the bulk of our operational performance is driven by the INF section. In addition to it, from a margin perspective, and I alluded to this in my prepared remarks, a lot of operating discipline in terms of just keeping tight controls and that in conjunction with some of the margin improvement that you saw, that's what drove the true outperformance.

Okay. That's very helpful. And then just talk about AI and digital enablement. Just curious if you can give us an update on kind of what the customer receptivity has been in the past few months to our digital tools and anything AI-enabled? And to what extent are you seeing sort of incrementally more margin opportunities coming from that? And when might we see some of that coming through more materially?

Yes, Steve, thanks for asking the question. AI is absolutely driving our business in what's going on with regard to the AI infrastructure build out. We're seriously at an inflection point and it's accelerating our entire business. I'll kind of I'll kind of quantify what that means within the data center space, which right now represents between 3% to 4% of our overall business, that's growing at 100% year-on-year.

Now the AI ecosystem, which would include all the way from the beginning to the chips through the power and energy requirements and then how that's feeding the data center world. That represents in its entirety with our diversified offering between 10% to 11% of our overall business, and that's growing in excess of 40%. And so you're talking about a significant part of our business that's growing at a very fast rate, all centered around the AI infrastructure build.

And then it's having an indirect effect on AI and drug discovery and what's happening with kind of other sectors that wouldn't traditionally be affiliated with AI. So we are well positioned in the kind of the AI CapEx, AI infrastructure world and our enablement internally is helping us become more efficient and deliver to that demand.

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

Great. Maybe just extending the line of questioning that Steve just started on. One of the themes that we're discussing a lot is just the visibility to these types of projects for sort of suppliers and vendors like yourself. Can you maybe just talk about the demand? It sounds like it's growing at a very high clip. But maybe what is the line of sight to sort of projects? Is it 6 months, 12 months? Is it multiple years? Maybe just talk to us about the near to medium-term visibility in that end market specifically.

Yes. Sabahat, just a clarification, specifically around kind of the AI infrastructure build? Or are you talking broadly across all of our end markets?

More specifically, yes, just on the data center and the 100% clip that you talked about, the growth or just in that end market.

Yes, absolutely. Let me kind of quantify it first, a our AI infrastructure pipeline, the data center component of that, the pipeline has gone up 400% year-on-year. We have visibility well through going to '28, and our client relationships, kind of our long-term relationship-based client model is kind of gaining share of that client spend. And these are the top hyperscalers as well as now the NEO cloud providers that are being supported. And then what's backing that visibility is really our relationship with NVIDIA.

Our work on the digital in the work that we're doing around the plan of record. And then as that's evolving with the next-generation chip, and now we're talking about [ virarubin ] now, and we're in the middle of developing that plan of record is tying us back into the AI players, and so the visibility is strong.

Great. And then maybe just a question for Ben. I guess on the balance sheet side, somewhere between PA and the repurchase there this quarter leverages at about 2.1 just above your sort of targeted year-end range. Can you just help us through the likelihood of buybacks? Is it going to be more opportunistic and just sort of broader capital allocation given the free cash flow and the leverage for the rest of the year.

Yes, Sabahat. Clearly, as we highlighted during the press announcement, we did take on some debt to fund acquisition, we're about 2.1 but we have a clear plan to delever pretty quickly. And we said we would be below 2x by the end of fiscal year '26, which is just 1.5 quarters away. We've also been very aggressive in terms of our share repurchases.

We are big believers in the value for stock, and we'll continue to maintain the share repurchase activity. We'll obviously modulate the quantum based on market conditions. But our purpose in terms of the goals is to continue to reduce our leverage. As I said, we can get to about 1.5x in fiscal '27 as well as the purchases of our stock. And then one thing to note is that our second half tends to be very seasonally strong from a free cash flow perspective. We're expecting more $600 million to $700 million of free cash flow in 2H, so that helps us delever fairly quickly. So we have a lot of optionality, a lot of ability to do both the buybacks as well as delever without straining the balance sheet.

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

Good afternoon, gentlemen. Bob, you've had, what, 5 years or 2 months of insight into PA. Maybe you could share a little bit about what the combination now that's on board with 100% Jacobs has in store? What areas that we can look for over the next 6 to 12 months that might show up in help on not only the better on the bookings or more life cycle driven or maybe even better on the margin front as you execute through the plan of the combined company?

Yes, Mike, I'd probably segregate it into two parts. One is a capability set that we've been working on over the course of that runway of 5 years together and the relationship that we've had. And then the second applied that to the adjacencies that we've already got a track record on by end market perspective. So one on the capabilities. So what we've done over the last 5 years is really built out our digital capability set. And this spans everything from software developers all the way through to these digital platforms and digital products that are helping enable innovation within our clients' business as well as our own, but our client business.

And now together, we have nearly 2,000 kind of digital experts. That we're looking at how to further integrate as one company that platform. The end market that, that applies to kind of separate between what we're seeing in Europe with regards to national security, global security in the public sector. And then in the U.S., energy and utilities and transport. What we're seeing in Europe with a defense independent Europe, is that PA is deep entrenchment, not just with the U.K. MOD, but also now with sovereign nations in Europe building up their own [ defense boxer ] is turning into defense infrastructure.

So that asset life cycle is something that we're primed as a combined entity to deliver as well as what we're seeing in the public sector on the increased digitization and enablement through government deficiencies that PA is in the middle of [indiscernible]. In the U.S., it really is around energy and utilities and transport. That end-to-end cycle of transport advisory all the way through to delivering complex programs and projects is something that we're really excited about. And now with the combined digital capability and driving that in the energy and utility space, driven again by the AI infrastructure, which you just talked about, we're excited about the future with

Excellent. My follow-up, Bob, is the critical infrastructure showing very strong growth this quarter. It's been certainly chugging on quite well. It probably gets lost in the headlines a little bit given all the data center and advanced the facilities work. Do you continue to see very solid opportunities, certainly second half of the year into 2027. And any additional thoughts on IIJA 2.0. And you think it'll be issues? Are your clients are concerned about any of the issues that might arise if there's a delay or with the Congress and the changes?

Yes. Yes. Mike, maybe I'll separate that into two as well. Yes, we're proud about the critical infrastructure piece that's really being driven by two primary areas. One is global transportation we're seeing strong in high single digits in certain geographies, kind of double-digit growth within transportation. And that's really around continued build-out of the aviation sector as well as ports and maritime, which is a really strong subsector for us. And so that's been really got.

And these have long tail type of mattress procurement processes, which we kind of felt in the last 3 or 4 years, but now the design and the build cycle is something where we're really starting to see the fruits of that. The second part, as far as in the U.S., IIJA, what happens with the election this year, we're kind of -- we've modeled every scenario, as you can imagine. And in each scenario, we do see, at a minimum, a continuing resolution, which actually would be good for us. And then what happens on the extension of IGA. Is there a new bill looks promising, but probably too early to speculate right now.

But even on a continued resolution, these are long-tail type of programs. And we're only 50% outlaid on the current IG. So things continue to look solid.

Your next question comes from the line of Adam Bubes with Goldman Sachs.

Just wondering if you could help us parse out the new Versal guidance. Is there a way to frame what incremental EBITDA and the new guide is coming from the acquired stake in PA Consulting and how much of the incremental EBITDA uplift is underlying?

Yes, I'll take that, Adam. So I'll separate it into fiscal year '26 guidance and then the -- obviously, we provided guidance for fiscal year '29 as well. So in fiscal year '26, we've increased our range from 14.7% to now a new range of 14.6% to 49%. So that is primarily driven by the full consolidation of but there are additional measures and initiatives that we are putting in place that will drive towards the margin expansion.

And then on fiscal year '29, it's not just the consolidation, but also the fact that we talked about multiple identified initiatives in terms of gross margin drivers in terms of how we engage with the commercial model and the increased use of AI and so forth. So I'd say the vast majority of that comes from the operational improvements across both the commercial model and global business and global delivery model is also a fundamental part of how we drive margin expansion. And so that's progressing really well, and we expect that to continue to accelerate.

And then last but not least, we are making a commitment to continue to drive operating leverage such that we will grow the OpEx at a substantially lower rate than the revenue run rate. So it's like one thing. It's a multitude of tools that we have to drive continued margin expansion.

Great. And then can you just update us on how you expect your AI integrated offerings to evolve over the next 12 to 16 months. Any incremental investments or opportunities on that side?

Well, Adam, I'd say that as far as any incremental investments, we don't see it. We've been investing in digital enablement for the better part of this year. That keeps -- it's now growing. It's now 7 years. that we've been doing this. So I don't see us having to make some huge investment in order to continue on the trajectory that we're on. The way it's evolving is in -- it is definitely being -- it's being pulled from the market with the acceleration that we're seeing in our end markets.

And it's really both what we're doing for our clients business as well as what we're doing for ourselves is really going into full gear. It has been in bulk gear it's accelerating. Again, AI infrastructure, which is kind of the virtuous cycle, is driving that, and we're centrally positioned for that entire buildout.

Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets.

Great. Bob, can you give us an update on the Middle East and what you're seeing there in terms of activity levels and just kind of how your folks are handling the situation.

Yes, Gita. First and foremost, we have been acutely focused on our -- the safety of our people. From the beginning to now to every single day, we've had crisis management teams stood up and are doing not just daily, hourly check-ins on our people, and they continue to be extremely resilient. The second I would say is that we have been very deliberate and vocal about focusing in on time-based mission-critical programs and projects in the Middle East and for us, that's predominantly in Saudi and in the Emirates.

Those have continued, and they've been centered around transportation as well as water and time-based venues, and those have not stopped. So I'd kind of characterize it right now as -- we've seen minimal disruption and the team has been extremely resilient in delivering those from the confines of their own home. And just recently today, we went back into a work-from-home scenario. And so that -- those are kind of the highlights. What's really been the backbone of this and it goes to something that Venk has talked about several times before, is our global delivery model.

We're delivering services for our clients, not only with folks that we have in country, in region, in Kingdom, but also from around the world. And that has really been highlighted and it served as a strength.

Great. That's super helpful. And then I know we've talked about data centers on this call, but can you tell us what you're seeing in Life Sciences in Advanced Pharmaceuticals, and if there is any appetite to reshore even further back to the U.S?

Absolutely, Sangita. The Life Sciences business is in real-time pipeline up 81%. And year-on-year. A lot of in-flight pursuits that we've been in the early stages are soon to be going into the field. And so that business -- and into the field in the U.S. But we are now starting to see a bit of build going on in Europe as well. But that has been -- continues to be a really strong business for us. And it's it kind of goes through the different phases.

So some of that reshoring activity that started a year, 2 years ago, you'll start to see those now mature in the field over the course of the next few quarters.

Your next question comes from the line of Jamie Cook with Truist Securities.

Congrats on a nice quarter. I guess just question for Venk. Maybe this is more for you versus Bob, but I'm just looking at the EBITDA margin trajectory implied in the back half of the guidance. I think you said third quarter fourth quarter, 16-ish. Understanding it's PA Consulting and maybe an extra couple of working days, but still structurally, there still seems to be some margin improvements. And I'm just wondering given where the margins are implied in the back half of the year, what the setup is for fiscal year 2027 because it doesn't seem like The Street is factoring in margins that are implied in the back half, and I don't want to make too much of it, but I'm just wondering if we're missing the margin opportunity potential.

Jamie, thanks for the question. So as you pointed out, we've guided for 15% in Q3, which would represent about a 90 is point sequential improvement, which is pretty good. And then as you pointed out, that would imply a 16% plus margin in Q4. As I've talked about in the last quarter, we're investing in some programs that are identified and they're ramping those investments for delivery. That gives us good visibility to 16% plus in Q4. And the fact that we have executed on that plan last year as well, we feel pretty good about the margin trajectory.

And then looking beyond in Q4, obviously, there's still substantial margin improvement ahead of us. Just to put things in context, the last couple of years, fiscal '25 and '26 would have delivered about 200 basis points of margin expansion and then we're guiding for another 75 basis points per year. Keep in mind also that some of the other margin drivers for us, apart from the gross margin things that I talked about earlier is global delivery and then the mix, right?

As we combine PA Consulting and Jacobs, the opportunity to deliver on the entirety of the asset life cycle and the fact that the PA margins are substantially higher than Jacobs, that gives us the opportunity to go back and upsell some of those margins as well. So lots of room for us to continue to execute on margins, and we feel pretty good about our guidance.

Your next question comes from the line of Jerry Revich with Wells Fargo.

Nice to see the really strong bookings performance. Can you just talk about comfortably what level of organic growth do you think you could ramp the business up to without having a significant resource constraints. Is it possible if the bookings trajectory continues to get to double-digit organic growth the extra week notwithstanding in the fourth quarter? And what are the implications for margins beyond what you folks just laid out if you do ramp up to that level of capacity utilization implied by getting to double-digit growth?

Jerry, we missed the first part of your question.

The first part was a little garbled, Jerry, do you mind mentioning the first part again?

Yes. I apologize for the poor connection. I was asking really strong bookings performance. And I'm wondering -- do you have the resources on hand from essentially a capacity standpoint to ramp up to get to potentially double-digit organic growth. And if you do get to that level of growth what are the implications for potential additional margin upside beyond what you folks laid out?

Yes, absolutely. So the short answer, Jerry, is, yes, we do have the capacity. And this goes to exactly what we've been talking about for quite some time as well as highlighted in our strategy. That global delivery model if you think about it, just year-on-year, the growth in what we call global delivery is well into the double digits and our ability to access talented labor that's delivering at a very high level has been very, very strong. So short answer is yes.

And so our resourcing to meet like is in our backlog, coupled with the progress that's being made on those programs, projects, engagements, we feel strongly about, and it is driving the margins. And so it's yes on the margin front as well.

Super. And then separately, on the reshoring side, one area where we're seeing significant progress is in semis and their -- the industry group is talking about return to 24 levels of highs of CapEx for semis into next year. Can you talk about what you're seeing? Is that consistent with the opportunity set that you folks see? Is there a potential for additional projects to move forward beyond what the group is looking for in '27?

Again, Jerry, yes and yes. So we are seeing it. And that's why, if I go back -- so yes, we are seeing that investment in the semi sector. And yes, we do see that cycle transcending well into '27. I think what's important is what's driving it, and it goes back to the earlier comments around the AI infrastructure. And so where we're positioned right now on high-bandwidth memory manufacturing facilities, is putting us on the front end of what we're seeing then translate into the utility sector and then eventually into the racks, so into the compute load in the data centers.

And to see it across that ecosystem is what, quite frankly, is driving our business right now. So those relationships that we've had with high-bandwidth memory manufacturers as well as ASICs and other logic providers is coming true.

Your next question comes from the line of Andrew Wittmann with Baird.

Well, great. I wanted to ask about the longer-term margin outlook that you guys talked about, the 75 basis points a year. So you guys have talked to [indiscernible] about the various areas of commercial models. I think you've been through 1 million tons. I was just wondering if those out-year drivers are any different from the ones that you've been realizing here over these last two very strong years. And also if the benefits that you expect in those out years, are going to come just from like basic blocking and tackling? Or do you have to launch some new initiatives to achieve those things, in other words, is that going to cost you cash to make -- implement some changes to achieve that?

Yes, Andy, thanks for the question. So I'd say our margin trajectory, as we highlighted before, a couple hundred basis points in the first couple of years. And then as you pointed out 100 basis points per year going forward. This is a combination of several things that are well underway. Clearly, you saw -- in the first year, I would have characterized mostly driven by operating line benefits driven by the separation with the CMS and C&I business and rightsizing our business.

But everything that after has been driven by specific initiatives that have been identified with gross margin. The global delivery model that we talked about is actually increasing in pace and in scope and in scale. And so it's a combination of those things. And additionally, as you look at the operating leverage, it's not just what we do from the standpoint of the business side of things, but also on the enterprise side, how we go about running enterprise functions in finance and legal and so forth, deploying AI.

And so from -- and so that's what's driving those margin expansion opportunities for us. And then to answer the previous question about what does it mean for the CapEx. So our investments, we have maintained about 1% of our revenues and what's happening is we are reallocating the capital, traditionally you would have invested in SaaS software and so forth and things that are now moving more to an AI basis. and that's what's giving us the ability to continue to make those productivity improvements without having to raise our CapEx numbers.

Got it. Just for my follow-up question, you guys alluded in your prepared remarks to the unusually high level of transaction costs. And I'm guessing because some of the consideration that you paid PA 4 was operating or had was required to be recognized as operating expense rather than capital expense that's probably most of it for the quarter bank. So I just wondered if you kind of just drill on that -- was there anything else in there?

And because you mentioned that there was going to be a fiscal third quarter cash outflow in addition to the substantial cash outflow that was recognized this quarter. Does that mean that exclusion next quarter might be relatively high as well? I know you had a comment that it was mostly contained in the second quarter. But I'm just trying to get a sense of what the balance of the year looks like. And then that Nirvana state, hopefully, in 4Q were these kinds of exclusions won't be as apparent.

Andy, you're exactly right. So the accounting treatment is what necessitated to be part of cash flow from ops as opposed to cash flow from investing or finance. And that's why you saw that exclusion -- roughly $235 million of it was what we call compensation expense acceleration for the vesting of the shares. And then in Q3, we called out about $105 million of what's called employee benefit trust payment. And then we're done. But even with the Q3, that's already included in the P&L. So it's only a sits only a cash flow item in Q3. So you exactly -- and then just one other point to note is that if you look at our last couple of years, we've been steadily decreasing our restructuring costs, and we are on track to be substantially lower in fiscal '26 compared to fiscal '25.

Your next question comes from the line of Natalia Back with Citi.

congrats on a nice quarter. So now that PA is 100% under [indiscernible]. Can you frame for us any potential for sales synergies accelerating?

Very high. Very high. We had certain elements of -- is mostly U.K. regulations around conflict of interest and whatnot as far as visibility into each other's sales pipeline. So the way we expanded the way I've always described in the past with regards to joint opportunities and increasing the shaded area, the then diagram going to market. That's now gone. And so the pipeline has really increased on that front with regards to going now market either tPA or as Jacobs, but then the joint opportunities are increasing.

I would also say that -- and it was an earlier question that was asked the innovation and delivery across the entirety of the asset life cycle, we did that as a collaborative form when we had the majority investment made a lot of progress. Now that is also going to accelerate was going to increase that operating payment where I would say the main areas where that would be applied would be in the defense infrastructure and national security in Europe. As well as in the U.S. transportation and energy and utility space, again, feeding the AI infrastructure.

Got it. Much appreciate it. And then maybe just on the cost synergy side, any lending through across opportunities in the near term?

Yes. So I'll take that, Natalia. So in terms of the cost synergies that we highlighted on the prepared remarks. So one is we said when we close the transaction a few weeks back, we had announced roughly GBP 1 million to GBP 5 million of synergies. We have now identified specific things in terms of opportunities from a cost perspective. These are specifically real estate, a good opportunity for us to combine the footprint there. Vendor rationalization in terms of how we go about procurement with the combined companies.

And then on the IT side, a lot of opportunities for us to do system optimization as well. So specific targets that we've identified, which give us good visibility to getting to $20 million plus of synergies in fiscal '27. Thank you.

There are no further questions at this time. I will now turn the call back to Bert.

Yes. Thank you, Cara. I know we got cut off in the beginning. We lost about a minute of time for some audio challenges. So I just wanted to make the mention that I refer you to Slide 2 of the presentation for information about our forward-looking statements non-GAAP financial measures and operating metrics, I apologize for the technical difficulties. I'll now pass it over to Bob for some closing remarks.

Thanks, Bert, and thank you, everyone, for joining our earnings call. We really look forward to engaging with many of you over the coming days and weeks -- and thank you, and have a good evening. Good day and good morning, depending on where you're coming from. Thanks, everyone.

This concludes today's call. Thank you for attending. You may now disconnect.

I'm Brian Gesuale, covering analyst of Jacobs Solutions. Really delighted to have the company here to present their story. If it's not obvious, we're going to do a fireside chat appearance. If there are some questions from the audience, please raise your hand, and we'll try to get to those as we go through. But I have Bob Pragada, Chief Executive Officer, here joining me; and Venk Nathamuni, Chief Financial Officer here, joining me as well to take us through the story. Welcome, guys.

Thank you, that's fine.

Bob, maybe we level set here, take a few minutes to set the audience and give investors a perspective on your core services that you provide, the markets you serve, the geographic footprint that you have and really Jacobs right to win.

Sounds good. So just as an overview, we are in the technical advisory, engineering and program delivery market around 3 main verticals. Those 3 verticals are the life sciences and advanced manufacturing world. I'll come back to that in a second. Second is around water and environmental. And our third is what we call critical infrastructure. Critical infrastructure embodies transportation, energy and power and our cities and places business as well.

And that really came from deep core roots in the engineering space dating all the way back to the 1940s. I think where we play the strongest is some of the biggest technology innovation as well as some of the biggest issues that are facing the planet today. We're right in the middle of providing solutions for our clients on how to deal with those in the form of delivering capital programs, capital projects to solve.

And in today's world of very fast-growing innovation, that's really driving our business as well. The one other thing I would say on that is that you think about a classic engineer, and I'm sure we're going to get to it today, Brian. And you notice I didn't use the word consulting because consulting apparently has now turned into a 4-letter word. But we have, for generations, started with the technology of what the facility or what the structure is designed to do or what the outcome is based on. And then knowing that worked outward, whether it be a molecule or a chip or a structure and done that really well over the test of time.

Sounds great. Let's dig into some of these themes that you're really at the heart of. Maybe let's start with the advanced facilities. Just about every investor that I talked to is really curious about your data center positioning and how AI is transforming that market. When you talk about what Jacobs' role is in this market, how the buying patterns have changed over time? And maybe talk about some of the key metrics and the long-term opportunity that you see for the company.

Right. So probably to level set on it first is kind of what we used to do and now what we're doing. What we did before kind of in the generation of the 25-megawatt -- sorry, 50-megawatt data center started off with specific needs of data need, data storage needs for a client, then moved to cloud. Now it's going to AI. In that first 2, we were the engineer of the white space in that area. So cooling, rack design as well as how that interface with what would be on-site power and water needs in the gray space. That has since -- and so kind of think a $2 million to $5 million type of engagement for a $100 million plant or $150 million plant.

That has since really, really transformed into now the gray space and the white space, emerging power and cooling requirements needed for advanced node chips in the GPU world have gone through the roof. And so our knowledge of not only what's going on at the chip level, but interface with the electrical OEMs, the power needs as well as now the cooling needs has expanded our scope in a material way. We're working with every single one of the hyperscalers as well as now the Neocloud providers as well. And that business is growing.

In fact, it's doubling pretty much every year for us. The other is what I call kind of the AI ecosystem. We've been in the design of chip manufacturing facilities for 50-plus years. Our power and water capabilities are as a vertical, very, very strong. So as -- and right now, we're the primary engineer for the high-bandwidth memory chip manufacturing plants that are occurring in the U.S. today. Same thing with power and water, and now it's culminating in a data center. So what we can offer to our client across that entire ecosystem has been pretty powerful.

It's still a relatively small business today, but it's growing rapidly. How do you see that opportunity?

Right now, it's 3% of our business. 3%, 4% of our business.

So 3% of our business that's growing at 100% over the last couple of years. And then just to put some context around the dollar value of our engagement there, as Bob mentioned, this typical simple data center would have been, call it, single-digit millions of dollars. Now we're talking about orders of magnitude, actually 2 orders of magnitude higher in some of these cases.

And over the course of the last 3 or 4 quarters, we have announced some really big transactions there with some public companies like Hut 8, but also a lot of the private companies and the Neoclouds that are now investing pretty heavily in this space.

Definitely exciting times there, and we're looking forward to hearing more updates on that business as we go forward. Let's maybe run that question back in a different market, talk about pharma and life sciences -- size that market for the audience, talk about the themes driving growth. Where you're ideally positioned and why you win?

Sure. I'd say from a service revenue standpoint, it's about $1 billion business for us today. We have been in that space. Actually, Dr. Jacobs was a Merck employee when he started the company back in 1947. So we have been on this journey as small molecule manufacturing turned into biologics and large molecule manufacturing.

And we've been right along that innovation journey with our clients. And now with the use of -- here it comes again, the use of AI and drug discovery, new molecules are coming to market at a very rapid pace with capacity needs that have now doubled and tripled over time. That, coupled with these facilities now probably more than industrial manufacturing being onshore here in the U.S. And our focus on, we call it the Tier 1 players, the Lillys, the Merck, the Pfizers, the AstraZeneca and like. That business is growing at a nice high single, low double-digit rate.

And we see the protective moat around that because we're in the molecule and understand what's happening and what the utility needs and what the structural needs are going to be working very closely with those clients.

And life sciences and advanced manufacturing together constituted about 25% of our revenue and growing at high single-digit growth rate.

Yes, absolutely. Really exciting areas that we're really monitoring closely. Let's look at one in the water space.

Maybe just one more on Brian, on life sciences, a lot of people think, okay, it's around this -- exclusively around this GLP-1 tsunami that's happening. There is a big component that is around GLP-1s. Now GLP-1 is going from an injectable to tableting form. That is a piece of that growth. The other piece is early-stage innovations that are happening in Alzheimer's, what's going on with antibody drug conjugates and the ability to treat different forms of cancers. All of that is driving this growth. So I just want to add that.

Yes. I appreciate the color there. Let's move on to water. This is another area where you're having amazing success. Take us through the growth drivers again, how your bid pipeline and backlog look and talk about your views on water. And maybe if there's any regional color you can sprinkle in, that would be appreciated.

Good news is that the growth that we're seeing, and it's kind of high single-digit top line growth, that's global. And it's pretty uniform, maybe a little less in the U.S., but pretty uniform across our major geographies, which are North America, Europe, Middle East, Asia and Australia and New Zealand. So that's been a positive. Similar to life sciences, it's a business that we've been in for several decades. And what's unique is, again, concentrating on the science, we work with our clients across the entirety of the life cycle.

So everything from inception of I have an issue, I need to figure out a way to solve it to designing it, program managing it, and then we operate and maintain those plants as well. Years of underinvestment that's been in that sector, unfortunately, mostly in the U.S., but then the effects of climate. And so we're seeing the effects of climate hit issues of water scarcity, it's like the extremes, either water scarcity or coastal sea rise and too much flooding issues that we're having. So we're working with states and municipalities as well as national governments outside the U.S. to solve for these issues, and it's driving growth in our business.

Okay. These were some of the handpick themes that I wanted to talk about -- maybe tick through the list because you're top 1, 2 or 3 in every market you serve. Maybe hit some of those and remind people where you're strong at. And then I'd like you to pick out 2 areas that you think you're particularly excited about that we didn't discuss in those first couple of themes.

Okay. Well, we're kind of moving past advanced manufacturing -- I'm sorry, life sciences, advanced manufacturing and water and environmental. We're seeing nice growth in the critical infrastructure business, specifically in transportation. For us, in transportation, the denominator, the available market is pretty huge. But areas that we're -- and over the course of the last few quarters, we've seen that business grow at a high single-digit rate and really driven around growth that we've been participating in around sustainable and decarbonized transportation, rail, transit and then in aviation, kind of sustainable airports as well.

And that's been a global phenomenon. So that strong business for us. Cities and places in the early part of '25, late '24 was a business that -- when I say cities and places, what this is not just building design, but large venues. So if you think about the World Expo or the World Cup or the Olympics or these types of large venues, we'll do program management and design of these facilities that a lot of cases have a time requirement to them.

And now we're seeing that business grow in the Middle East. And so that has been something that's been a nice tailwind. And then Energy and Power, not only as a vertical for clear reasons, grid modernization and energy transition, but now as a horizontal. Every single one of our verticals has got some element of energy and power requirement that's driving that facility. So we're excited about kind of the entirety of the portfolio. I would not be fully transparent if I didn't mention there is one area, it's our environmental business in the U.S. that over the course of the last year has been a bit soft as deregulation and not even deregulation, but lack of clarity on regulation has put a bit of a pause with some of our private sector clients around environmental planning and environmental remediation. We're starting to see the pipeline come back as a lot of clients, interesting enough, a lot of data center clients are saying, look, the regulations are the regulations. Let's go ahead and commit to those because that's for the long term. So we're starting to see that turn a bit but that has been a bit soft this year.

Makes a lot of sense. Make it easy for us in the audience to think about the relative strength of the regional markets you're serving. Give us a 1 to 10 or top to bottom of where you're seeing the most regional strength and maybe where the opportunities are most muted in the near term.

I'd say regional strength, the #1 regional strength in both from a critical infrastructure as well as the kind of the tech manufacturing world is the U.S. The U.S. has been on a 1 to 10, I'd call it, I don't know, [ bank ] at 10, yes, close to 10%. Europe, interestingly enough for us, has been good, really driven on the backs of -- talked about transportation and water, even as manufacturing in Europe has tech manufacturing, life sciences and manufacturing has come down a bit. We've seen the water and the transportation business grow.

So probably a 5% or 6% right now. Middle East, another 10. I'm going to have too many 10 on that. I got to do my math here. And really, the Middle East really driven around not just the big cities and places or the big venues, but also the infrastructure to support them. So that's been a net positive. Asia has held its own, probably at 5 or 6 as well.

And for us, India is our biggest country in Asia. And what we're seeing in India is for a long time, we had our India platform for the rest of the world. And now we're starting to see, especially in semiconductor, a pivot from Taiwan into other areas. So we're seeing that business starting to grow. And Australia and New Zealand has really hung in there for us, really driven on the backs of water and a bit of transportation, too.

It's amazing all these themes are interconnected and you seem to have a piece of the value chain in each spot. Let's maybe talk about the structure of the business. PA Consulting, it's a business we really like. You've had an ownership in that business for a long time, but you're going to own the entirety of it here shortly. Maybe remind people of the transaction details, summarize some of the things that you think that brings strategically to both revenue and cost synergies and what some of your objectives as you bring that business into your fold and under the tent full time is?

Yes. Maybe I'll start off with the origins to level set and then Venk can talk a little bit about now where we go from here. The origins were in -- so what is PA Consulting? PA Consulting is a technical advisory firm that deals with the science as well as the use of clients' capital in order to drive business transformation.

But unlike a more of a playbook or textbook kind of approach and a McKinsey or a BCG or others, they go at it from what is this product innovation? How can you deploy capital in order to get higher growth in those components of your business that are going to result in that type of growth expectations at the very front end before the decision has even been made. That's kind of what their bread and butter has been.

They do compete against those other firms in the U.K., 80% of the business is the U.K. But where the difference is that they also are the exclusive technical adviser for the Ministry of Defense in the U.K. as well.

Carlyle owned 65% of the business and went to market in 2021 with wanting to liquidate their position. And we saw it the congruency to our business from a full asset life cycle standpoint and made that 65% ownership, 35% stayed with the employees and then figured with separate governance and run independently, Venk and I sat on the Board of PA, we started to merge at the top end pursuits as well as opportunistically going to market together and ran it that way, knowing that at time certain that we would make a decision whether to roll that over or to acquire the balance of the equity. So maybe kind of moving forward, what it means.

Yes. So we announced on January 4 that we are buying the remaining 35% that we didn't already own, and we expect that transaction to close probably in the next 3 to 4 weeks. So our plan is to provide an update in terms of both the revenue guidance as well as margin expansion opportunity at our next earnings call. But suffice it to say that as many of you in the room know, the PA Consulting business is best-in-class in terms of margins. So it will be very accretive to our overall corporate average, and we'll quantify that exact accretion in the coming weeks.

But equally importantly, it's the fact that the growth has really turned around quite nicely over the last several quarters now, and we feel quite comfortable about high single-digit growth rate for the PA business in its current form, but also the opportunity for us to exercise a lot more of the revenue synergies that Bob alluded to, not only in terms of what we do here in the U.S., but also in Europe and especially taking into account the opportunity that we have in Continental Europe, where today, there's a much bigger opportunity for us to expand both the top line as well as the bottom line.

So overall, it's a great strategic fit. We talked about the concept of running the entirety of the asset life cycle all the way from consulting to design to implementation and so forth. So this really fits very well with that overall strategy, and we're already seeing some tremendous traction across the globe. So I will quantify the numbers, but suffice it to say that it's a really good combination for us.

We're excited to hear about the margins going forward and see we really structured that business to really have some nice utilization and growth coming out of really profitable growth. One of the questions I get a lot, and I think you've done a lot of work on this, is the retention of some of those people. So maybe just give us a little bit of view on your retention strategies there.

Well, maybe one clarifying point. So yes, it is a big topic, a big point of awareness. Of the proceeds, a little under 50% of those proceeds will be going to nonemployees. So a lot of the employees during the Carlyle to Jacobs inflection point or liquidity event rolled over their proceeds into the next round. So that's kind of point one, which is great.

Second point I would say is that we do have retention programs in place as a part of the consideration for now what we know to be the real kind of core of PA. Great thing in this transaction is that we've had a 5-year head start. So we know the business really, really well, where normally if you're making an acquisition, you're then post acquisition, learning about where is the real talent within the company.

We know all the talent. And so we've been able to be very, very targeted there. And then the third part I'd say is that now unlike in the first 5 years, there was a PA equity component -- and PA drove the Jacobs performance and equity but weren't incented by it. Today, those will now be aligned.

And so what -- the kind of the partner motivator of being tied to the performance of a company. It was PA, now it's going to be the entirety of the enterprise.

Yes. Sounds exciting. Maybe, Bob, so much transformation since you took over as CEO from the spin of CMS to consolidating PA here shortly. You gave a 3-year outlook. Can you maybe update us on how you think about the update is the wrong word. Give us the confidence in that 3-year outlook. What's maybe ahead of schedule, behind schedule? How some of these transformative things kind of give you confidence in what your outlook has been?

Yes. I think that outlook came in February of '25, so exactly a year ago. Good news is that on the top line, on the margin expectations and where we see our business going, we're ahead of plan as well as even on the free cash flow margin as well. And so the confidence that we're -- that continues to build as we look forward is our backlog growth.

And last quarter, we posted some numbers that. Yes, -- we were a little nervous even saying those numbers because we were afraid that the 2.0 book-to-bill would be something that turned into an expectation, but we did have -- we had a really nice quarter. But on a trailing 12-month basis, that $1.4 billion gives us confidence that we're going to continue to meet and hopefully exceed the next 3 or 4 years.

And Brian, if I can just add to that. So we laid out a plan for the next 5 years a year ago, and we talked about 6% to 8% revenue growth. So over the last 3, 4 quarters, we've grown at 6%, 7% and then most recent quarter, 8.2%. We raised the guidance for the full year to 6.5% to 10% growth rate and then also expanded our margin target. So if anything, we feel really good about the top line growth acceleration as well as the margin expansion story.

I want to talk a little bit, maybe hit on that margin and free cash flow. That's been a really big source of strength, and we think the outlook is really positive there. We think you're fairly early innings still on that. Can you maybe just talk about the key levers for both of those going forward? And how far you think you are in that expansionary process?

Yes. So I think -- so just for context, in fiscal '25, we did about 110 basis points of margin expansion, and we've guided for another 50 to 80 basis points of margin expansion every year. That does not even include the PA consulting contribution, which we'll quantify in the coming weeks.

But at a high level, multiple drivers of that margin expansion for us. So number one being operating leverage. So we made a commitment that as we grow the top line at, call it, 8% to 8.5%, that we'll grow the OpEx at a substantially lower pace. So we'll continue to exercise that discipline. And then there are multiple aspects of our gross margin expansion story. So for those who are not familiar with Jacobs, we have a very robust global delivery model where we can implement these really highly complex functions, engineering functions in places like Poland and India and Philippines regardless of where those projects originate.

So that gives us tremendous margin arbitrage and ability to expand margins and also more importantly, from a customer standpoint, being able to provide 24/7 customer service. So we're still in the early innings of that journey, and we're seeing some good traction in terms of global delivery acceptance, and that's driving margin expansion in fiscal '26 and beyond. The other thing is we talk about our commercial models, how we go to market in terms of how we serve our clients. So today, the vast majority of our contracts are what we call cost reimbursable models, but we're also increasing the mix of what we call fixed price models as well.

So the advantage of the fixed price model is that once you understand the scope and the risk associated with the project, you can implement a lot of efficiencies that you'll pass on to the client, but also keep some of that efficiencies for ourselves. So that's another big driver. And then the last but not least is what we call mix. So as we look at the entirety of the asset life cycle, going all the way from consulting to design to implementation and operations and maintenance, as that mix moves more towards the high end of the service type, if you will, that also is added to the overall margin. So multiple levers of margin expansion, and that's on the gross margin and EBITDA margin side.

And then ultimately, the test of true efficiency is free cash flow and free cash flow margin. And on that front, we made some really good progress already, both in terms of working capital performance, but also in terms of how we're generating these free cash flow revenue -- free cash flow numbers and translating that into free cash flow margin. So we're well on our path to get to the 10% plus. And this quarter, we announced an update to the guidance I said we're going to get to 7% to 8.5% this year.

Yes, I've been really impressed with the trajectory of that margin and profit expansion and cash flow. Let's maybe move into kind of net leverage. I feel like this business generates a lot of free cash. You're maybe a little bit underlevered at the moment. You've been returning a lot of capital to shareholders. So I want you to go into all of those elements. But also, as I think about PA and being able to put bolt-ons around that, are there properties that would make sense to combine with that, that would be complementary? Or should we still stick to kind of most of it going back to shareholders?

Yes, Brian, really good point. So just for context, in the quarter that we reported, our balance sheet, obviously, in really fantastic condition. We said 0.8x is a leverage ratio as of last quarter. We did publicly announce that we're going to take on some debt to finance the PA transaction. As a matter of fact, last week, we raised about $1.3 billion in debt, really well received by the market at interest rates that are substantially lower than what we're paying before.

So it should lower our interest expense in a meaningful way. And again, we'll quantify that in the next earnings call. But our goal and our stated ambition is to stay within the 1 to 1.5x leverage ratio such that we maintain our investment-grade rating. So as we raise this particular tranche of debt, we will be slightly above that range, but generating a lot of free cash flow such that over the next 3 or 4 quarters, we'll be able to come back within that range. So a solid commitment to maintaining our investment-grade rating.

On the buyback front and the dividend front, so a huge believer in continuing to raise our dividend. So over the last 5 years, we have doubled our dividends. And in the most recent quarter, we announced a 12.5% increase in the dividend. In addition to that, we made a commitment last year at our Investor Day to return at least 65% of our free cash flow in the form of dividends and buybacks. Last year, we did well in excess of -- well in excess of 100% free cash flow return. And over the last 5 quarters, we've returned more than $1 billion of cash in the form of buybacks and dividends. And this first quarter, we did about $250 million of buybacks. We're already on track to exceed our 65% free cash flow return. So very strong commitment to continuing to return cash to shareholders in the form of both buybacks and dividends.

Great. Last one, as we're closing up on time here. Bob, no follow-up for me, drop the mic moment, talk to the audience about why they should consider Jacobs in their portfolio.

Exciting business. We're in end markets like we were talking about before we started, Brian, in each of our end markets, the level of innovation that is driving our clients' business is exciting. And what's even more exciting is we're in the middle of that science and that innovation. Unlike maybe what would be thought of as a classic engineer, we don't work from a client's requirements and then work from the outward in to where it's proprietary to the client. We're actually with our client at the molecular level, at the chip level, at the molecule level and working outward.

And so I think that whether it be NVIDIA or it be Lilly or it be Micron or it be any one of the public sector clients that we have, that's something that gets really, really exciting about the future.

Great. Mic drop. We're out. Thanks so much, Bob, Ven. I appreciate you and the audience. Thanks for joining us.

Thank you.

All right. Hate to interrupt the smooth jazz, but we'll get going here. So my name is Adam Seiden. I lead the U.S. machinery and construction effort here at Barclays. Thanks for joining us again for the Industrials Conference. So for this session here, we have the folks from Jacobs.

So we have both Bob and Venk, CEO and CFO. So really excited for these guys to be joining us. From the -- for the format of this session, like a lot of the others here at the conference, we'll be doing a fireside chat. We do invite your participation, though, through the gadgets that are on your tables there, where we'll be taking some questions for the audience. So certainly, welcome your participation. So with that, team Jacobs, welcome back to Miami.

Thanks, Adam. Thanks for having us.

Well, you got it. Always good to have you guys here. So last year in Miami, actually, you guys were here for this conference. We were also here for some other things as well, including your Investor Day. So back at the Investor Day, one of the takeaways you're talking about like redefining the asset cycle -- asset life cycle, sorry, and moving towards higher-value services. So I guess here we are one year later, what progress have you made in that transition? And what tangible changes could we expect over the next couple of years here?

Yes. So Adam, I'd say we've made tremendous progress along that effort. The good news is that we said redefining the asset life cycle, we've always been in the business of driving client outcomes, but in certain cases and in other cases, we haven't necessarily had the ability to influence in an earlier stage of a client's capital decision-making process in order to deliver that outcome, right? So that was kind of the origins, but it wasn't coming from scratch. We had a bit of a runway beforehand.

Since the Investor Day, we've made great progress, I think, by -- demonstrated by our financial results over the course of the last 4 quarters and culminating last quarter and probably one of the best quarters that we've had in recent history, going back with the company for 20 years, and I think that's probably one of the best quarters we've ever had. But it wasn't by chance, and it wasn't a one-off. It really was a buildup of this, what's happening in our end markets, specifically in places like life sciences and advanced manufacturing, in the water sector as well as our international business, it's kind of been a nice nugget in front of us.

And then really delivering to long-term client relationships and getting involved very, very early in the decision-making phase. So it's gone well.

Great. So talking a little bit about the portfolio and really the backlog here. The backlog is at very nice record levels there. How would you characterize the duration of the margin profile and really the risk that you guys are taking within those contracts in the backlog today versus where you'd want it to be?

Yes. Maybe I'll have Venk talk a little bit about kind of the profile of the backlog, but maybe I'll address the risk comment. Just to be clear is we are not taking on added risk as a result of getting kind of the full program delivery for these jobs. We have a long history in full program delivery in life sciences and in the water sector. Now with the speed that's required around very complex AI data centers. That level of delivery certainty at scale is what our data center clients are asking us for, but the posture is the same.

Yes. And then just on the backlog, I would say, obviously, last quarter was a tremendous quarter in terms of our book-to-bill being 2.0, but when you look at it from a trailing 12-month perspective, it's been rising pretty steadily from 1.2 a few quarters back, now to 1.4. So we feel really good about the growing book of business, and it's very representative of our overall end market exposure. As you know, 50% critical infrastructure, about 25% in life sciences and advanced manufacturing, and then the other 25% in water and environmental. So it's a fairly good representation of our end market exposure, and that's what we see. If anything, we're seeing higher growth in our life sciences and advanced manufacturing driven by not only some of the work that we're doing for the GLP manufacturers, but also what we're seeing in the data center side. So overall, we feel pretty good about the backlog, and continuing to grow it for -- and in terms of the pipeline, visibility is pretty strong.

If I could just put a fine point on the backlog, and you talked a little bit about the 2.0 and so far to Q1. So as we think about through the year, a book-to-bill of 1 or above, is that a reasonable expectation for this year?

Yes. I think obviously, we're not going to print 2.0 every quarter, but suffice it to say that the trend has been up and to the right, and we have good visibility in terms of the pipeline looking ahead as well.

All right. So there's the backlog kind of like sets the table for what's to come. Obviously, there's the burn of the backlog, and you guys are talking a bit about your revenue guidance. You did raise that a little bit. So I guess the simple question first is just essentially what determines if we land on the more mid-single-digit side versus kind of that -- the higher end of the revenue guidance?

Yes, I'd say the pace of play on some of our more tech manufacturing-centric jobs. We didn't want to overcommit on what that velocity was going to be on those jobs as well as there's a bit of a ramping that we need to do in Q2. So the second half kind of looks better, but that was -- it was the first quarter. We knew that we were going to raise guidance after the first quarter, but we were just taking a pragmatic view in case when things go either way.

Got it. And in Q4, there's an extra week as well that helps.

Yes.

Okay. So if we think about like the mix within the backlog, there has been, within several large awards they've carried a higher pass-through so forth in revenue. How -- could you just talk through a little bit of that dynamic and what that means for Jacobs' book of business and how that will impact -- how that flows through to the P&L?

Sure, sure. So I talked earlier about kind of the speed required around certain of our life sciences and now data center clients as well as in semi. But in semi, we were really an engineering and design consultant in that space do a lot of it, but that's kind of where we've stuck to our knitting there.

On the data center component, some customers, like the hyperscalers have sophisticated capital projects teams. Interesting enough, most of them come from our end of the sector anyway, so our end of the food chain or supply chain. So -- but some of our data center clients, like Neocloud providers, know a lot about data centers and the technology and what's going on within the racks, but might not have project delivery expertise as well. That's the case with the large award that we announced with Hut 8. They're a Neocloud provider. Clients are going to be anthropic. Fluid stack is going to be the operator. Google is the investor. JPMorgan and Goldman Sachs are both the investor -- the creditors came to us with the full program delivery partnership where we would procure on their behalf, equipment, subcontractors and the like, and then have back-to-back terms with them and pass through that revenue.

Great. And you just brought up data centers and I'm sure we'll talk about it a bit throughout the conversation and advanced facilities work. So maybe just the level of growth that we've seen in advanced facilities, whether that's life sciences semi, et cetera, how sustainable is the -- are those growth levels? And then maybe if you could just talk to us as far as how big of an impact is data centers on the business today?

Yes. Well, short answer on sustainability of that -- of those end markets. We believe that they are sustainable. If I go back 10 years, 20 years, there was a very cyclical market, where you'd have a novel therapy or a molecule, it'd get to market, and then there was a lot of consolidation happening in the biotech world.

Today, with AI and drug discovery, these molecules are coming to market faster than before. And if you hear any of the CEOs of the large biotechs, count how many times they talk about capacity being the limiting factor with regards to manufacturing. And so I'd say that sustainability we see before we would have 6 to 9 to 12 months of visibility, we now have 24 months of pipeline visibility by line item. So I'd say it's strong there.

The second around data centers, and it's an interesting dynamic. We talk about data centers as the ultimate facility. But if you look at where Jacobs plays, we're playing across the AI infrastructure. So high bandwidth memory on the chips. We design those facilities. The utility requirements that are going to be needed for the data center, driven by what's going on with the chip, we're in the middle of that with power and water. And then the actual data center itself is innovating in real time.

What gives us confidence that there's sustainability there? We have an exclusive partnership with NVIDIA, where we're doing digital twinning and simulation models on next-generation chips in the virtual world, and seeing what kind of requirements are there and how fast these things are getting to market, which kind of gives a runway on that side as well.

And then, Adam, to your question about the size of the data center business, we've called it out to be about roughly 3%, 3.5% of our revenues, but it's growing at a very, very fast clip, almost doubled in the last couple of years, and we see that pipeline continue to grow. And then to Bob's earlier point, the level of engagement that we have in the data center, the scope of engagement has gone up quite dramatically. So to the extent that a few years ago, what would have been our work in the design of the ins of the data center, now has become a much more comprehensive soup-to-nut solution all the way from site selection to the power needs, the water needs and ultimately, implementing the data center in its entirety. So the scope is increased by almost an order of magnitude for us.

Yes. And I just want to clarify, 3% is that last phase of the AI infrastructure chain is the boundary limits of the data center. If you were to add on the utilities and add on what we're doing in the chip manufacturing space, that number probably goes to 10%-ish. So it's growing fast.

Got it. So maybe thinking through from the Analyst Day a little bit from last year, you were targeting global delivery and cross collaboration increasing from, call it, around 40% to over 50% closer to the end of the decade. So what progress did you guys make on that in FY '25? And then what are the drivers from here?

Yes, I'd say FY '25 and the first quarter of '26, we've made great progress. I think, yes, we've made great progress in that. I don't want to jinx this just yet, but those targets that we put out might have already been surpassed.

Okay. That would be pretty quick. All right. So we're talking a little bit about AI and so forth.

I didn't actually notice.

Are you getting any questions? So first, let's talk about some of the tools and solutions for yourself. So you've got your own sets of tools, and you're using like Acuity, Engage AI and using that to delivery. How do you monetize those capabilities? Is it through margin expansion, win rates, larger projects? Just curious like how does that flow through for Jacobs?

Yes, all of the above. All of the above. Really how many bps of margin expansion using AI is delivering is tough to measure because it's become such an integral part of how we deliver engagements, programs, projects. We've been on this journey for nearly 7 years. And it started with digital enablement. We did a lot of design automation as well as take the data analysis phase of what we do, and really programmed in a lot of efficiencies there. Now we're moving into AI in a material way, not only for ourselves, like those items, you said as well as our sales process, a lot of the corporate functions groups, but more so for our clients' business, right?

If you look at the 32, 33 AI-enabled platforms that we deliver for our clients, they're driving efficiencies for our clients, predominantly in the water sector, in the life sciences sector, and now we're deploying it on delivery of data centers as well. But we wouldn't be able to do those jobs had we not had those digital tools, right? So said another way, AI and the digital enablement in a resource-constraint, I mean, we're significantly resource-constraint is driving growth, headcount, billable hours and revenue.

And Adam, another important part of all our software and digital capabilities is the fact that it allows us to get a lot more stickiness with our customers. So we have multiyear contracts, and obviously, from a margin perspective, even though it doesn't show up in the top line, it does have substantially accretive margins relative to our overall business. So over time, it has a very, very positive impact on both margins and stickiness, and ultimately, drives additional revenue growth over time.

Just because I know it's probably front of mind of a lot of people in the room right now. Yes, exactly is so why? Why not the Silicon Valley firm that can gather as much data as we have over the course of the last 40 years, come up with their own LLM and basically eradicate an entire sector, right? A couple of things. One, access to that data is not as simple as possible. These are unstructured data that has been developed over hundreds of thousands of projects over 40 years, measured in -- I'm not so tech savvy, in terabytes or zettabytes or whatever it's a lot of data, we've been working to take that unstructured data into structured form, create our own LLM called Jacobs AI, put cyber protections around it, following all of the standards, codes and regulations from around the world, right?

And so that is -- that's something that doesn't happen overnight, one. Two is knowing that AI is deterministic looking backwards or what's been done, no -- nothing that we're designing today looks the way it did before, and we're solving for future opportunities and future challenges, right? So it's a very, very dynamic world.

Now if a firm was in the commercial real estate building business and it was a static structure that continues to be the same as it's been for 50 years, could there be, in companies like Bentley and Autodesk and others, who are suppliers to us, are already innovating there. So I think that's where we -- the client dialogue we're having right now is not around less billable hours or why do I need Adam, Bob and Venk when I can just do it with Venk. We're not having these concessions. Our clients are asking us, "Hey, bring everything that you've got, because we need this outcome as fast as we possibly can."

Got it. And based on what you're saying, you're not worried that the client conversation transitions into that over time.

No. In fact, a lot of those 32 platforms that we're talking about, we co-created with our clients. Things like Aqua DNA that we've talked about in the past, intelligent O&M, flood modeler, all of these tools, we've co-created with our clients, right?

Yes. So thinking of the portfolio a little bit in AI. So now you guys took a full ownership stake in PA. So -- and with AI reshaping a little bit of what's going on in the consulting world. So how does the PA plus Jacobs platform stack up competitively in that environment?

I think really strong. The you're right. Consulting has now turned into a 4-letter word. But really, if you look at the technical advisory component of PA's ability to take clients on that digital journey from a science-based perspective. Remember, one of the big drivers around making the 65% investment in '21 when Carlyle went to market with that 65% was their digital capabilities, coupled with the fact that these weren't folks coming from the financial world or the IT sector, they were science-based scientists and engineers and business-focused people that were taking digital enablement to transform businesses, understanding the science of the business, right, which was a nice fit for Jacobs as we could get deeper into the boardroom when decisions were being made.

We learned a lot over the last 5 years. We -- just for everyone's education is that we made the investment, the company, 35% was owned by the employees, the partners and then they had separate governance and was run independently and so imagine the Venn diagram, we went to market opportunistically when our skill sets matched, and we can drive a greater client outcome. And then we operate independently.

So now making this 35% investment, taking the learnings, 5-year head start, we know where the talent is, combining our back offices, combining our pipelines, still having the PA brand. And now that digital capability has grown with Jacobs and PA to now 2,000 people that are holistically centered in on digital, along with all of the other items of PA that PA brings. So we're really excited. You saw some nice growth numbers coming out of PA as well, definitely.

And a financial model that's accretive to the Jacobs core business. So -- and obviously, margins that are industry leading at 22% and top line growth of high single digits that we feel pretty good about as well.

Great. Thank you, Venk. Maybe we'll shift to the audience response questions here. So just as a reminder for the audience, when the questions come up once the clock starts to go, that's your queue. So the first one is, do you currently own the stock? Yes, overweight, market weight, underweight or no. All right. 80% of the room says no.

Next question. What is your general bias towards the stock right now, positive, negative or neutral? All right. About a little over half of the room is neutral.

Next question. In your opinion, through cycle, EPS growth for Jacobs will be above peers, in line with peers and below peers. Happy we have Jacobs Solutions, not engineering, I think of that before. All right. About 50% in line, 40% above.

Next question. In your opinion, what should Jacobs do with excess cash, bolt-on M&A, larger M&A, repos, do the debt pay down or internal investment? Right after the PA conversation. All right. About 45% of the room says share repos.

And I think our last one here is valuation. So in your optimism on, what multiple of '26 earnings should -- optimism, yes, in your opinion, on what multiple of earnings. Yes, there you go. Should Jacobs trade ranges from less than 10x to higher than 21x. All right. So it's about 1/3 of the room each in the 16 to 18 and 19 to 21. So it gives you that.

So maybe thinking through a little bit of the base business, right? Everything that you do very well on the transportation side and the water side, et cetera, I guess, I do have to ask the obligatory question just about what your view will be on reauthorization and really just more so than thinking about the policy view. It's more how does Jacobs as a business operate in a scenario where like today, which we have the current program and how does that influence at all your guys' ability to win work if we're in an extension scenario?

Yes. I think the extension scenario, probably the impact would be neutral for us. We've gone through this before. Even the original IIJA was delayed by nearly 2 years. So we're starting to see that continued trend. I think the number is 35%, 40% obligated and spent, but the tail on that -- on those dollars continue on. So it's neutral.

Great. In the quarter, I thought there was a little bit more talk around international and some of the tick-up that you've seen there. So -- maybe could you touch on that, expand on that? What types of projects are you seeing? How broad based across the regions and so?

Yes. Actually, if you look at our results for Q1, we said that international grew faster than the domestic business, and that's driven by pretty broad performance across Australia and New Zealand. We've done really well in the Middle East, especially with some of the marquee projects that are being under development now, and we have a pretty strong position there, and we see some good pipeline there as well. And then the U.K. has been very strong.

So obviously, after a few years of political uncertainty, we've had some stability in the last, call it, 1 year, 1.5 years, and we're seeing that show up in our business strength both in terms of what we do at Jacobs, but also the PA business has been pretty strong as well for us. So international is very strong, and we continue to see that pipeline grow quite nicely.

The add I would put on that is you hear a lot about Australia. And we've actually seen the opposite. There were not a lot of huge -- or say huge, larger transportation jobs going on in the country. We were fortunate to win the largest, which is called Torrens to Darlington. It's a job outside of Adelaide. And so that's really driven the business. But what was consistent and the continuation of what Venk is saying is that our water business was solid across the world and drove the Australia growth as well.

Got it. Maybe just to think through on one of the questions there, we had like uses of cash, right? And I had a broader question just around the industry and consolidation and so forth. So the sector is very fragmented. We talked a little bit about the current -- cross currents of the industry right now. I mean, how do you expect the industry to evolve? Do you see more combinations and so forth in the future just given the environment or not?

Yes. Maybe I'll talk about the industry and then Venk, you can talk a little bit about kind of how we view on Jacobs. On the industry, do I see sector-based consolidation happening when I say sector by end market? Likely, right? There are a lot of opportunities there. As far as large-scale consolidation, I wouldn't speculate that, that would be something that's a certainty because we've got a lot of -- I mean, you talk about our organic opportunities.

Yes. And as it relates to Jacobs for us, we're very confident in terms of the organic growth story. We've seen the guidance raised in fiscal '26. And obviously, pipeline is pretty strong and our book-to-bill is pretty strong. So our -- in terms of capital allocation, our first priority is continue to invest in the organic growth. And then as was indicated in the polling, we've been very, very aggressive buyers of our stock. We think it's a tremendous value. And we've been returning well over 100% of our free cash flow last year, and committed to returning at least 65% this year. We're already on track to exceed that.

And then ultimately, we will look at M&A, but it's probably not something in the short to medium term. PA is the near-term focus, but we feel really good about our long-term organic growth, and that's going to be the primary use of cash in addition to the share repurchases. And also on the dividend front, we've grown our dividend by 10% plus over the last 5 years. And we just raised our dividend recently to a 12.5% year-on-year increase. So very, very committed to capital returns as well.

Adam, I think a good example, there's a lot happening in the energy and power space right now and some very -- some deals that have some very high multiples that are related with them. Just kind of how we've been growing organically in that same space, in the energy and power space is that the U.S. business right now is probably -- is growing at clear double digits in Energy and Power organically, and we have been scaling with pretty significant levels of hiring that's going on in the Philippines and in India, right?

So this isn't outsourced engineering or some -- you take your job to a certain point, and you put production engineering in a different location. This is scaling on an organic basis where the talent is and combining them with global talent in front of the client, and creating a business. That business 3 years ago in the U.S., barely a business, right? So those are things that we've got great opportunities organically.

I appreciate you adding that color there. So maybe to button this all up, we start with the long-term line with the long term a little bit. When you think about getting to that 16% plus adjusted EBITDA margins by the end of the decade, I mean, what are the 2 or 3 most important structural drivers that you think will get there?

Yes. So several things. So we said we'll get to 16% plus by fiscal '29. We're well on our way to get there. I mean, obviously, this last year, we did a 110 basis point increase in EBITDA margin, which is probably one of the highest in the industry, if not the highest. This year and in subsequent years, we've talked about 50 to 80 basis points. So the primary drivers of that would be: Number one, operating leverage. We're making a commitment to grow the OpEx at a substantially slower pace than the revenue growth. So that's going to continue to drive margin expansion. And then we've called out in specific drivers in terms of gross margin expansion in terms of how we do more global delivery, especially as it relates to some of these life sciences and advanced manufacturing and water-related projects. That will be a good boost to our margins.

And then in addition to that, the commercial mix of our business is also growing. So multiple aspects to our margin expansion story, and we feel really good about reaching those targets by fiscal '29, if not sooner.

Great. Thank you, Venk, and thank you, Bob. We'll get them all a round of applause and thanks so much for being here.

Yes. Thank you.

All right. Thank you.

I'm very excited to have Jacobs with us today. We have Bob Pragada, who is the Chief Executive Officer. We've got Venk Nathamuni, who is our -- who is the CFO of Jacobs. So I'm going to come over to you guys, and maybe Bob or Venk if you have a couple of prepared remarks, and then we'll get ready to Q&A.

Sure. Well, first, Andy, thanks for having us. Just a couple of comments. One, coming off of a great quarter. Q1 was probably in recent years, in fact, we had to go back several years, really solid top line growth of 8.2% organically, good margin expansion trend continuing. We really are out in front as it pertains to the AI narrative and AI is actually enabling and augmenting our work. And so all of that kind of drove a raise in our guidance for the balance of the year.

One other note, we hit an all-time high on our book-to-bill of 2.0, not to be the new norm, but really solid pipeline growth as well as continued bookings growth. So really excited.

We'll count on a book-to-bill of 2 going forward, that's right. Just kidding for anybody who's doing this.

Okay. So Bob, you've been the CEO now for several years. And I think Jacobs has gone through a pretty significant transformation to that time. You did an RMT, portfolio is more focused. You now just bought or announced PA Consulting that you're going to buy the rest of it. So where do you think the company is in a journey to be sort of a more simplified focused platform? And importantly, what do you see as any sort of piece of work ahead to sort of realize the vision of where you want Jacobs to be?

Yes. I think on the last part, Andy, the vision is clear for us is that with a simplified focused business in end markets that we have, not just a leadership position, but very, very tied to the technology advancements that are happening in those end markets whether it be critical infrastructure, life sciences and advanced manufacturing or in the water and environmental sector.

That starting from what's happening at the molecule, what's happening in the chip, what's happening with the science of our clients business and working outward has been the vision, and now that vision is now becoming reality moving forward. So we're really excited about where this go moving forward was in each of those end markets, technology is advancing at the fastest pace that it ever has and probably the slowest pace that it ever will.

So Bob, like I think you mentioned the book-to-bill, your backlog for lack of a better word, was sort of creeping higher then all of a sudden it just kind of exploded higher last quarter. So maybe talk about sort of what happened there. Obviously, I cover all the big multi-industry companies, data center bookings kind of exploded higher really over the last 2 quarters, particularly this quarter. So was that the biggest reason? But I think you've talked about other markets semiconductors or life sciences that help lead the charge. So maybe do you see more potential quarters like this? And could you give us a bit more postmortem on where the backlog came from?

Yes. Well, maybe just to level set, I think the other trailing 12-month booking trend of kind of creeping from 1.2 to 1.3 to 1.4 is probably the better trend that we're trying to see. With regards to Q1, it was pretty broad-based, yes. We did have and we announced it a sizable booking in the data center sector. But it really was probably 20% of the overall number. The balance was pretty equally spread between water, semi and transportation.

Got it. And maybe just -- so if I think about that data center or just to double-click on it for a second, like you've had several data center orders and like why is this one so much bigger, like in terms of capabilities, all that kind of stuff?

This one really, really -- we capitalize on the entirety of the life cycle -- the asset life cycle and our ability to go from early end advisory work on everything from site selection to the technology that was going to be deployed all the way down to the server racks and then beyond with regards to the cooling requirements, working with the supply chain ecosystem and then move that into what we're moving its active tents into different phases. Client had a tremendous amount of trust in us. It's a NeoCloud client, and we were able to book the entirety of the facility.

Got it. So we'll get to some of your other end markets later but I want to ask you about -- and you kind of alluded to it just now about the company's competitive moat, right? You're going to get that question, and you're getting that question a lot in the last couple of weeks. Can you talk about whether you bought fair amount of software over like the last 15 years or something like Jacobs bought StreetLight Data, I remember. Could you talk about whether and how these technologies are differentiating Jacobs and lead to incremental business? And then how do they create a moat versus AI ultimately?

Yes. Well, they're getting us deeper into the data analytics component. So if you look at what's going on in the industry over the last 40 years, design automation, digital replication, design or digital clean technology, that's been something that we have been deploying over the course of the last 40 years. So that has continued on now with AI enablement too. That's not only making us more efficient internally, allowing for us in a resource-constrained environment to do more.

That's why we've always said this is driving top line -- top line growth and bottom line margin expansion. So we're -- while that's been going on, things like which have been in the headline news recently, billable hours, headcount, pipeline and bookings growth are all coming as a result. And so those software platforms, yes, we bought them at a point in time but the development that's happened since that as the markets have changed, I think, is the real power of those platforms.

Just one follow-up with that, Bob. Like, so how do you think about sort of the billable hours environment? Are you going to be more efficient with these engineers? What's going to happen, do you think, if I look out over the next 3 to 5 years?

I think that we're going to be able to increase our SAM, right? We're now doing things similar to the data center comment that you made that we're able to expand our SAM. The other is that the -- we're not working on one end of the spectrum. I'll use AI infrastructure the example.

If you look at the continuum of AI infrastructure, starting with chips, then determining what the utility requirements are going to be required and then kind of the battery limits of the data center, we're working across that entire spectrum. We designed the chip manufacturing facilities. We're in the middle of the power and water infrastructure assessment and then that's the value that we're delivering for our clients. In that, the reason why I use that as the example, billable hours is actually going up because of that increase in service in the SAM.

Yes. No, that's helpful. And maybe to that point, Bob, like, so what are you hearing on the ground, right? Like there's the Wall Street and then there's what's actually on sort of Main Street, if you may, and what you're hearing on the ground with customers, what are they saying to you about AI? And if you think about, as you said, harvesting project efficiency, like how far along are you on that in terms of valuing or harvesting AI to create value?

Yes. So the last part of your question, Andy, I'd say we're in the early innings for baseball fans that are out there. We're in the early innings of that and we see a nice runway ahead of us. On the front part of your question with regards to what's actually happening on the ground, what's the dialogue with the client right now.

The client is asking for more and the speed by which we have to go to, and we traditionally pivot to our private sector business or the tech sector on the need for speed. That's happening in the public sector as well because if you look at the effects of climate, specifically accentuated in water, but then driven in power and the energy transition as well. Speed is absolutely essential.

So the clients are asking us, hey, bring all the tools that you have that you can go as fast as best one. If this was a static environment, I think then the -- what the kind of the capital markets dialogue right now of one gets replaced for the other in a static environment. This is very, very dynamic.

Yes. And like just to not belabor the point, but I should ask because like what can Jacobs do that some small AI startup can't theoretically?

The decades-long ownership of unstructured data around the facilities that we designed that we're turning into structured data and able to apply that in a very efficient way. That data has come from decades long of experience, one. Second, every single end market we're in is a regulated market that is regulated by ...

And that's an important point, by the way.

These are ingestible drugs. This is clean water that are going humans or transit systems that are being traveled by human. So adherence to those standards and codes with decades long of experience in data is something that is tough to do with an AI model in a garage.

Yes. And Andy, I'd just add to that. If you look at any given year, we have between 25,000 to 30,000 projects. So the level of insights we're able to glean from the data and then obviously over multiple decades, that gives us premeds insight into solving these complex problems that an AI algorithm can figure on its own, right? So it's something that really has expanded and accelerated our ability to solve these complex problems and expand the serviceable available market in a meaningful way for us.

Got it. And then probably this next question is for you. I think you have a relatively back-end loaded margin guide for '26, but that does seem to coincide with a solid uptick in revenue in the second half of '26. So is the margin improvement in the second half really as simple as improved operating leverage and/or some of your larger recently won projects beginning to ramp up? And if you deliver this ramp up in margin, what does that mean towards the year progress of FY '29, 16% margins?

Yes. Thanks. So just for context, in fiscal '25, we increased our EBITDA margin by 110 basis points, which is one of the largest annual increases in our sector. And for this year, we've guided for margins to increase by another 150 to 80 basis points. So as it relates to what happens to fiscal year '26 in the first quarter, we came in at 13.4%. We've guided for margins to expand by 50 basis points quarter-over-quarter.

And then Andy, to your point, we have announced a lot of big projects, especially in the life sciences and advanced manufacturing. So clearly, those things are -- those projects are going to be executed over the course of the next 3 or 4 quarters. Those projects also have the ability for us to use a lot more of the global delivery model, which obviously is very conducive to margin expansion. And then last but not least, as we go through the remainder of the year, we have stated publicly in the past that our Q4 has an extra week as well. So that also helps with expansion.

But overall, we feel really good about our margin expansion opportunity. It's not just the operating leverage piece, which you alluded to. So what we've guided to for The Street is as we grow our revenue by, call it, 6.5% to 10% was the guidance range, we are making a commitment to growing our OpEx at a substantially slower pace. So that drives the operating leverage of the business. And then we've guided to specific areas within gross margin expansion, global delivery that I alluded to, where we're able to implement these projects in the lower-cost geographies regardless of where those projects originate, that drives significant margin expansion for us. And then just the overall mix of the business. So multiple levers for us to drive margin expansion, and we feel pretty good about our target.

To your last point about fiscal '29. So we had guided The Street at our Investor Day last year that will get to a 10% plus free cash flow margin 16%-plus EBITDA margin. We're well along our way to get there. If anything, we'll see some significant progress there in fiscal '26. And that doesn't even include our contribution from PA that's on the comp.

That's helpful, Venk. And this might be a follow-up for either you or Bob, like just on pricing. You've been doing this for a long time. Has pricing changed at all because it does seem like there's a lot of demand these larger projects to kind of hook Jacobs in for, I don't know, multiyears or something like that? Can you get a little more pricing, so maybe mix can be a little better?

On a sector-by-sector basis. But I'd say, yes, in our public sector business, some of those pricing hurdles are within procurement law. What digital enablement has allowed us to do, though, is to keep a relatively stable price point and increase margins with efficiencies. And so that's been a big play for us.

Yes. No, that's interesting, Bob. And then maybe to that point, if you had to rank the most durable margin drivers over the next several years, I mean, you talked about operating leverage. You talked about global delivery, you've got commercial models, mix, all these things. Which of the drivers probably has the most impact, whether it's this year by '29 to get that 16% target?

Yes, I'd say we had provided some ranges for each of these at our Investor Day. But I would say the bulk of what we did in fiscal '25 was driven by operating leverage, primarily driven by the fact that we had separation of our CMS business from the core Jacobs. We will continue to drive operating leverage over the coming quarters and years. But a bigger opportunity for us this year is in gross margin expansion. Global delivery is going to be a big part of it, especially given some of these life sciences and advanced manufacturing projects, which will be implemented in those global delivery centers.

That's probably one of the biggest drivers in fiscal '26 and beyond. But I would say equally importantly, as we look at our commercial models in terms of how we engage with our clients. So on the private side, today, call it, roughly 70% of our business is private and 30% is government and even with the government business, a lot of it is states and municipalities. So we do have opportunities for us to change the commercial model mix as we go forward.

And then last but not least, on the mix portion of it. As we complete the acquisition of PA Consulting, we have the opportunity to get engaged with our clients earlier in the asset life cycle. And as you all know, consulting and the ability to get involved at the scope definition process gives us a lot more margin uplift. So it will be all those levers. But in fiscal '26, I would say, global delivery is the biggest chunk of it, combined with operating leverage, but we have multiple levers for fiscal '27 and beyond.

Venk, you laid this all out very clearly as you said. Has one been better or more favorable than you expected, where they've all kind of about what you've expected?

I'd say operating leverage has come -- has continued to play through as we expected. On the global delivery side, especially this year, we're seeing some really, really fantastic growth rates there, just given the nature of our projects that we've signed up. And so you would see that coming through very strongly in fiscal '26.

I would say on the mix portion, just given the fact that it's a smaller portion of our revenue, the impact of mix will be more elongated over multiple year period. But global delivery should have a very strong impact in fiscal '26, continued alongside with the operating leverage piece.

Got it.

Andy, one clarification because we saw this in one of the breakout sessions is that there could be, especially in today's kind of volatile narrative. Equating global delivery to, oh, that could be an AI scare because instead of going to another location, you just have a bot or an agent do it. Interestingly enough, for us, the highest concentration of our AI use cases actually happened in our global delivery centers because we've got the best opportunity to now disparate standards, codes, regulatory levels around the world. Our centers in Poland and India and the Philippines know the global standards. And so they're able to implement design automation and an AI enablement faster than anywhere else in the world.

Right. That's key. Okay. So I want to open up to audience in a second, but maybe I'll ask you a couple of more questions. And so like I want to focus on your subsegments a little bit. So start with infrastructure and advanced facilities. Maybe in water and environmental in particular, it seems like environmental might have stabilized over the last couple of quarters. It seems like it's growing more slower than water. So maybe you can talk about both. And then do you think water continues to be one of your higher growth markets over the next few years?

Yes. So maybe Venk can take the water. I'll address kind of the area, probably the one area that we've had a little bit of softness dating back probably 4 quarters in the current U.S. administration. The volatility in the environmental regulations in the U.S. did put a pause on some of the private sector. When we say environmental, it's actually kind of a T-Shape. We have a vertical that's environmental where we have an environmental offering to the client. And we count that from our taxonomy as our environmental work. We also have 10,000 environmental practitioners that work across other sectors.

So the growth that we're seeing in the other sectors is actually driven by environmental work. We just -- we don't see it that way. In the direct environmental work, we did see a pause with some of our larger, mostly in the hydrocarbon space environmental work and the -- even in the public U.S. public sector, mostly federal, some pauses with regards to that environmental work. In Q3, Q4, we started to see the pipeline reverse. This quarter, pipeline is now growing. So that will start to make its way through the bookings and then the backlog and then the P&L. Venk, do you want to talk about water?

Yes. On the water side, we're feeling really good about high single-digit growth rate, especially for those of you who are following us on a regular basis, you'll see that over the last 4 to 5 quarters, we've announced some really large water projects. They've done the entire gamut from design to implementation and project management and so forth.

And one of the advantages of these larger scope and larger scale projects is that it gives us multiyear time visibility, right? So we're able to take on these projects which will get executed over the course of the next 3 to 4 years. So it gives us some solid visibility. And just the level of engagement that we have across the globe has been really something we're very excited about, and we see that continued high single-digit for some time to come.

And the evolution of the U.K. water program, how has that gone for you guys?

Yes. It's been solid. Yes, the next SAM program is already -- we're starting to see it in our results right now. Europe, both water and transportation had really solid growth. Our international growth right now actually, absent -- if we were to take life sciences and advanced manufacturing outpace the U.S. and some of that was driven by what's happening in the U.K.

Any questions from the audience? Anybody want to ask a question? Anyone? They're counting on me to have many more questions which I do.

So let me get to critical infrastructure. Seems to be delivering organic growth relatively in line with your company growth algorithm mid- to high single digits. But we know you have good exposure energy and power. I mean you mentioned traditional transportation. So especially in power, could we see that business pick up a little further? How do we think about sort of that growth rate in critical infrastructure moving forward?

We could. And driven by the U.S. So what we're seeing in the U.S. go across the entire electrical life cycle from generation through transmission and distribution. We are growing at a healthy double-digit rate we're ramping that skill set in the Philippines, in India as well because this is taking a lot of horsepower in order to drive it.

What's driving it? We're on the other side of the meter of because we can see it on what's happening within the AI infrastructure world. And when I say AI infrastructure, I'm not only talking about data centers, but also what's going on with regards to chips in certain locations, so that would be the catalyst, Andy, is that continuing on, and we're putting a lot of effort there.

So I mean it seems like it then has overlap right with advanced manufacturing is kind of what you're saying because this -- I was talking about critical infrastructure, but if we think about Energy and Power, I'm just curious about your point around building out the Philippines and so on. So like you just have a lot more capacity now and that's going to help out with growth?

The capacity is going to help the digital enablement is helping. The actual connectivity of the life cycle? Where is the power going? How do we work now with PA? How do we work with the regulatory agencies, the state and local governments, the public utilities. That's what PA does. So going to Jacobs that can not just facilitate the demand would then be a partner to the client as they're going from delivering the required power on a continuous and uninterrupted basis for the need.

Interesting. Okay. So let me ask you about life sciences and advanced manufacturing then. Last couple of quarters, it's been accelerating 10% adjusted net sales growth in Q1. We already talked about data centers that's leading growth, but you mentioned chips, let's include life sciences. So if I think about the strong backlog that booked, can you -- can that adjusted net revenue tick up into the double digits? And I think you have a 7% to 9% longer-term guide. Should I start getting excited that maybe it could be a little bit better in that?

Yes. Maybe I'll talk about what are the drivers of why we're seeing that growth at data centers as well and then Venk can talk a little bit about what the expectation could end up being.

Two main areas. Again, we talked a lot about AI infrastructure and specifically data centers. On chips, what we're seeing is this -- the advances that are happening right now with high bandwidth memory are happening at a pace that we've never seen. Just as an example, in the classic DRAM memory base, it took nearly 20 years of innovation in order to get memory chips to where they were. And so the capital infrastructure requirement kind of followed suit in the memory world. The logic road was going up and down according to cycles.

That and high-bandwidth memory now has happened in 4 years and continue to innovate at a very fast clip, which is driving the capacity requirements at a faster rate. So -- and we're very close partners with the largest high bandwidth memory player in America which I can't say the name, but you probably figured it out.

No, I know what the name is. But is there anyone else who can do what you do for that particular company?

At the speed and the scale, we would say no. And that's why we stuck to our knitting around technical advisory and engineering not gotten too far out into other components of the project delivery. So that's on that piece. Life Sciences, by the way, that was also on the chip development aspect. This is where AI again, is helping. That's accelerating the advancements that need to happen on the chip.

Same thing is going on in life sciences. The time for a molecule from identification that this molecule will cure this ailment to now getting it through all the clinical trials and out to market in the kind of the iterative process that, that takes with AI and drug discovery is happening at a very fast rate. I think you saw that Lilly announced even a partnership with NVIDIA, all around this. We're in the middle of that because what then becomes the constraint capacity needs. So huge headline numbers that are being thrown out. I'd say a few of them are now turning into a few of those clients are going forward at a very fast pace that's driving our business.

And just to add to what Bob said in terms of the Life Sciences and the brands Manufacturing segment. Just for context, it's about 25% of our revenue and growing at high single digits. On the semiconductor side, in particular, it's not just what's happening in the U.S. and HPM. It's actually becoming geographically diverse for us as well. We've talked about some projects outside the U.S. Those are progressing quite nicely for us and expanding our footprint there.

And then on the life sciences side, clearly, it is one of the earlier examples of how AI is taking a big share of the implementation of projects. So several cases where the customer would implement the first phase of a particular project using more of a cost reimbursable model, but then quickly going to Phase II and Phase III with a digital twin or a digital replication model that allows us to, number one, add a lot of value to our clients, but also keep some of the value for ourselves with the productivity boost. And then ultimately, it's all about expanding the serviceable available market because these opportunities will allow for a lot more drugs to be in the pipeline compared to what was traditionally the case 2 or 3 years back.

And Venk, just to push you a little bit, like I know is a long time away. But if DRAM is continuing to get better and life sciences continue to get better and you're already growing close to 10%, why couldn't you grow double digits over few years without setting new guidance here today, like what would stop you from continuing to decelerate from where you are? And maybe it's a good question to ask you about life cycle of these things, right? You see an announcement from your larger customer, like how long is the tail for you guys in terms of growth?

I think it's a fair question. All I can say is without providing an updated guidance is that we feel really excited about the growth prospects, especially in these markets like life sciences and advanced manufacturing, water, where there are no major public competitors. So we feel really good about our current position, but also the pipeline at a pretty rapid clip. We will update guidance when it's appropriate, but suffice it to say that there are a lot of tailwinds for us in that business and the visibility is also increasing in a nice way.

Do you want to add anything?

No, it sounds good.

And then again, just one more on sort of the competitive moat. Like is there anything that you're doing to -- because obviously, technology is increasing or proliferating quickly now to stay ahead with these large customers?

Staying close to the science and forming partnerships where we're in the middle of the development that the client is doing. I think a classic example of that is the partnership that we have with NVIDIA right? What's going on with NVIDIA chips and the effects that those chips have on cooling requirements, on power requirements, what's going on at the rack level and how does that then influence the entirety of the facility with partners, with the ecosystem, with the Vertivs and the Eatons and everybody else.

I think that is a classic example of working through that in a digital twin scenario and then that now becoming a part of NVIDIA's offering, whether it be hyperscalers. I know one probably is getting more advanced on another route or with NeoCloud providers or have you, our name is getting affiliated as an exclusive partner along the way. Very close to doing that with the chip manufacturing client that you mentioned. And we've been doing that with the likes of GLP-1 manufacturers and others for a long time.

That kind of puts us into protective moat, but one that we're not taking loosely. We're -- and this is where you think about -- this is where we get really, really excited. The next generation of talent that's coming out of universities today really is exciting because they're coming out with the standard, we still hire chemical engineers and mechanical engineers, electrical engineers, but the level of data center science that the young graduates are coming out with are now giving us the ability to really expand that moat.

Interesting. So let's talk about PA Consulting, delivered strong margins, good revenue quarter. But can you talk about whether Jacobs owning all of PA now could lead to an inflection in growth moving forward. As you're able to further engage with clients on the front-end projects and potentially accelerate the build-out in the U.S.

Yes. Yes, I'll start, and then I'll let Venk continue on. Maybe just to answer the why. Why was the us acquiring the balance of the 35% important? And it was really -- it was a unique opportunity but a real benefit for us in that just for everyone to calibrate, we took on a 65% ownership in PA Consulting 5 years ago, Carlyle previously owned that percentage and then went to market.

What was very attractive to PA for us is they had science-based technical advisory skill sets that had a strong digital consultancy component to it, and most importantly, in the same end markets that we're in. And so the ability to go really, really deeper into the clients business was real benefit. 35% was still owned by the employees. And so we ran the business with separate governance, Venk and I sat on the Board and then we went to market on an opportunistic basis.

We're bringing the 2 platforms together, create more value for the client. We learned a lot over the last 5 years. Now we feel like, look, with all those learnings, this isn't like going into an acquisition brand new. We know each other. We know exactly where the talent is. We can now get some better cost leverage with a combined corporate functions group, combine now some of our capability sets, specifically in the digital world, and combine our pipeline in order to increase the revenue opportunities and rightfully said, the U.S. is probably the best example of where that can be.

The other part was, while the kind of the geopolitical narrative was going on, PA for those who might not know, the origins of PA back after World War II is that they were the exclusive consultant to the Ministry of Defense in the U.K. and have had a defense and security advisory skill set for 70-plus years. As a result of kind of a military independent or defense independent Europe, that business is now growing at a very, very strong clip. Most of that advisory is on defense posture, which then results in defense infrastructure, which is kind of in the sweet zone of Jacobs. So you kind of put both of those together, and we said, look, this is a great opportunity to continue to go to change.

Interesting.

And as it relates to the kind of the business model for PA and we've provided guidance for high single-digit growth rate and 22% margins. By the way, 22% is industry-leading margins. And so we want to have that good balance between continuing to drive good profitability but also high single-digit growth rate. And obviously, when we complete the transaction in the next couple of months, we would provide an updated impact on the guidance in terms of margin expansion and so forth.

But we're really excited about the combination in addition to the defense and security portion of the business that Bob alluded to, they're really well positioned energy and utilities and health sciences and a lot of areas where there's a lot of commonality between what we do and the ability to complement what we do is really -- is what gets us really excited about the combination.

Bob, you at least partially answered my geography question already, but maybe you could tell us direction of growth in the Middle East seems like it probably should be pretty good, but you tell me --

Yes.

And Asia, Australia. We already talked about the U.K. a bit.

Yes. Maybe I'll just go -- we'll go eastward from Middle East, eastward. Right now in the Middle East, we're still experiencing strong double-digit growth. There's a lot of headline news around the growth that is in Saudi around the 2030 vision. We were very selective, as you remember, in fact, I think we were sitting right here, and only took on those projects and programs that had some time line requirement, whether it be the World Expo, World Cup, things that we knew that they were a definitive end to, those have continued to expand.

We also concentrated on the infrastructure, the water and transportation infrastructure that would be required around that. So that continues to grow. While over the course of the last probably 2 to 3 quarters, we're seeing a rebound in the pipeline in the Emirates, which we have -- that's kind of our sweet spot in the Middle East is out of Dubai and Abu Dhabi. And so that's been really transportation and water driven. So we see a nice tail in the Middle East.

India continues to grow for us, kind of going eastward. India continues to grow. Interesting dynamic and Venk actually hit on it. For a long time, India was a growth platform for us for the rest of the world. Today, now we're seeing with large clients in semi and life sciences India for India. And so those types of projects, high-end chip manufacturing, biologics facilities, our population -- our Jacobs employees in India have been designing these for a long time for the rest of the world. And now they're going on India with multinationals as well as some large Indian conglomerates working there. So that's been a really nice positive for us.

Singapore is on a steady rebound really driven around water for us. And then Australia, it's really been about share gain. We have seen continued growth in Australia, predominantly water, but our transportation business in Australia continues to be -- there has been a lot of programs. We've been forcing up to win those programs that have come out.

Interesting. Venk, just free cash flow margin. I think you have 7%, 8.5% this year, still well off your 10% margin that's expected by '29. So maybe just more color on how you get there, just out of curiosity.

Yes. So first of all, fiscal '26 1st quarter, we actually raised the guidance. We came in at about $36 million in free cash flow, substantially better than we expected. A lot of that was driven by the fact that the team did a fantastic job in terms of cash collection and just working capital management. But also, we had one of the larger data center customers. There was a -- there's a cash element to it as well, which helped.

But suffice it to say that we feel really good with the start -- with a strong start to the year that we are raising our full year guidance from 7% to 8% to now 7% to 8.5%. And that's certainly ahead of our plan in terms of getting to the 10% plus. So it's a combination of deploying a lot of these capabilities. We talked about AI from the standpoint of what we do for customers, but also what we do internally in terms of improving the cash collection function and so forth, that's obviously a part of it, better working capital management. And then ultimately, as we drive these margin enhancements those should flow through to the bottom line and ultimately to cash flow. So we feel really good about our free cash flow margin and growth in free cash flow per share.

Got it. And then your balance sheet leverage is right now mostly your long-term target, but it seems like you're pretty happy with leaning into share repurchases being extra prudent call it, on M&A. Is that kind of a strategy for the foreseeable future?

Yes, absolutely. I think phenomenal balance sheet and 0.8x leverage in the most recent quarter. We did say that as we acquired the rest of the PA stake that we don't already own, we will probably grow slightly above the 1 to 1.5x range. We want to stay investment grade rating and tremendous free cash flow generation that I just talked about. So it gives us the optionality not only to continue to invest in the top line growth, but we've been really good about returning a lot of our cash to shareholders in form of buybacks and dividends.

Our dividends have grown at double-digit growth rate for the last 5 years. Buybacks, last year, we did -- this year, we've already down about $250 million in buybacks just in the first quarter. And we're committed to continuing to be regular buyers of our stock. So it's a very balanced approach in terms of continuing to invest in organic growth, continuing to be good stewards of capital and returning cash in the form of buybacks and dividends. And then M&A is something that we'll consider in the medium to long term, but we think we have solid top line growth prospects for some time to come, and that will be the focus.

Last question, 30 seconds. I've asked you every year, what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? Are there any emerging industry trends that are perhaps being overlooked in the current discourse? Have to answer in a minute like ...

Look, I think the world -- and I'm not going to say the 2 letters, but the --

Everyone else does.

The world of digital enablement is having a profound in a positive way effect on our business, allowing us to grow. And the second would be, there might be some geopolitical undercurrent of populism that's going on. We're actually going the opposite way. We're driving the globality of our business because we've got a great company with global talent that's able to deliver to our clients' expectations every day and beyond as that technology continues to develop within our clients business.

Got it. Well, Bob, Venk, thank you very much.

Thank you.

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome you to the Jacobs Solutions Fiscal First Quarter 2026 Earnings Conference Call and webcast. [Operator Instructions]

I would now like to turn the call over to Bert Subin, Vice President, Investor Relations. Bert, you may begin.

Thank you, Christa, and welcome, everyone. Following market close, we issued our earnings announcement, filed our Form 10-Q, and we have posted a slide presentation on our website, which we'll reference during the call.

I would like to refer you to Slide 2 of the presentation for information about our forward-looking statements, non-GAAP financial measures and operating metrics.

Now let's turn to the agenda on Slide 3. Speaking on today's call will be Jacobs' Chair and CEO, Bob Pragada; and CFO, Venk Nathamuni. Bob will begin by providing comments on the business as well as highlights from our first quarter results and a recap of notable awards. Venk will then provide a detailed review of our financial performance, including commentary on end market trends, cash flow and balance sheet data. Finally, Bob will provide closing remarks, and then we'll open up the call for questions.

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

Good afternoon, everyone, and thank you for joining us to discuss our first quarter 2026 business performance. We delivered very strong results for Q1, exceeding our expectations across all key metrics and made incremental progress toward achieving our FY '29 targets.

I'll quickly highlight a few key takeaways. First, adjusted EPS grew 15% to $1.53, supported by robust 8% net revenue growth and solid underlying margin performance. Second, our backlog grew 21% to over $26 billion, setting a new record with our trailing 12-month book-to-bill rising to 1.4x. And third, we announced an agreement with the shareholders of PA Consulting to acquire the remaining stake in the company. We see PA's core competencies in digital consulting, innovation and AI advisory as a force multiplier for Jacobs and a key accelerant in our strategy to redefine the asset life cycle.

In summary, we are exiting Q1 with momentum and the strong start to the year gives us confidence to increase our FY '26 outlook for net revenue, adjusted EPS and free cash flow margin, which Venk will go through in detail shortly.

Turning to Slide 4. We provide a detailed overview of our quarterly results. We are very pleased with Q1 results as a strong operating performance paired with our lower share count drove the fourth straight quarter of double-digit growth in adjusted EPS. During Q1, we also reported a substantial increase in our quarterly book-to-bill to 2.0x, positioning us well for the rest of FY '26 and beyond.

Turning to Slide 5. I'd like to highlight a few notable I&AF project awards for the first quarter. Q1 included several marquee wins that reflect the breadth of our capabilities and the strength of our -- of demand across our end markets. Starting with water and environmental, we were selected to lead the engineering design for the Bolivar Roads Gate System along the Texas Gulf Coast, spanning the narrow strait connecting the Gulf to Galveston Bay, this project is expected to be among the largest storm surge barriers in the world. Once completed, it will help protect more than 6 million people, while safeguarding businesses and maintaining operations along the Houston Ship Channel, a critical energy corridor. This major program underscores our leadership in delivering complex and high-impact water infrastructure focused on long-term resilience.

In life sciences and advanced manufacturing, we were selected to provide engineering, procurement and program management services for Hut 8's River Bend data center in Louisiana, a flagship, AI and high-performance computing project. The facility is poised to be one of the largest of its kind in North America. The region's power dense utility infrastructure enables the speed, reliability and flexibility required for next-generation AI workloads. This project demonstrates how we're leveraging our deep domain expertise in data centers, power, water and digital clean technology to deliver increasingly complex facilities.

In critical infrastructure, we continue to secure high-value mission-critical programs that underscore the strength of our combined Jacobs and PA Consulting capabilities. Notably, in the U.K., the Health Security Agency selected PA supported by Jacobs to act as a delivery partner in its Trust Programme, an initiative focused on strengthening resilience and safeguarding critical health data and infrastructure. Through advisory, technical and delivery support, we'll help the agency meet data security and cyber requirements, ensuring the systems that underpin public health and emergency response remain resilient and secure. This award reflects the growing demand for our integrated consulting and delivery approach and reinforces our role in supporting some of the U.K. government's most critical priorities.

Also within critical infrastructure, we were selected to lead program and construction management services for the $1.6 billion modernization of Cleveland Hopkins International Airport. The program will modernize aging infrastructure and improve accessibility and passenger flow at Ohio's busiest airport. Jacobs has ranked as Engineering News-Record's #1 firm in aviation, a sector where we continue to see significant growth in demand for terminal upgrades, master planning for new builds, digital implementation and AI advisory.

In summary, we are deepening our relationship with key clients, which is driving multifaceted, multiyear program wins as demonstrated by our significant backlog growth in the quarter.

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

Thank you, Bob, and good afternoon, everyone. I'd like to echo Bob's earlier comments on our announcement to acquire the remaining stake in PA Consulting. Our partnership over the last 5 years has truly differentiated our approach to our clients' business, and we look forward to accelerating the integration of our combined offering.

A year ago, at our Investor Day, we talked about the power of focus and increasing our ownership in PA Consulting to 100% will support our goal to simplify our structure, execute on our strategy and produce predictable high-quality earnings over the long term.

Now please turn to Slide #6, where I'll walk through our results for Q1. In the first quarter, gross revenue increased 12% year-over-year and adjusted net revenue, which excludes pass-through revenue, grew by more than 8%. Q1 adjusted EBITDA was $303 million, growing more than 7%, with our margin coming in about 13.4%. Recall that last year during Q1, we absorbed less PTO than anticipated, resulting in a margin tailwind that did not recur this year. Overall, adjusted EPS rose 15% year-over-year, a great start to fiscal year '26.

Consolidated backlog was up 21% year-over-year to a record $26.3 billion with our trailing 12-month book-to-bill rising to 1.4x. Book-to-bill was particularly strong in Q1, driven in part by several large awards in the life sciences and advanced manufacturing end markets. We expect these awards to contribute positively to net revenue growth through fiscal year '26 and beyond, but do note that they carry higher-than-normal pass-through revenue.

Importantly, gross profit in backlog, which would not be impacted by this pass-through dynamic, increased 15% year-over-year during Q1, highlighting the underlying strength of our sales performance.

Regarding our performance by end market and infrastructure and advanced facilities, let's now turn to Slide #7. At a high level, all of our end markets performed well during the quarter with strong revenue growth in life sciences and advanced manufacturing and critical infrastructure within I&AF as well as PA Consulting. As a result, we finished above the high end of our Q1 forecast for enterprise net revenue growth.

Focusing in on life sciences and advanced manufacturing, net revenue grew 10% in Q1 a nice improvement from Q4 as programs in our advanced manufacturing vertical ramp up. As we have noted in past quarters, strong award activity in both the data center and semiconductor sectors is now helping drive higher growth.

Additionally, we continue to see favorable trends in life sciences, and this combination positions us well for the remainder of the year. Our current expectation is that growth in this end market will lead I&AF in fiscal year '26 as programs ramp up during the second half of the year.

Shifting now to critical infrastructure. Net revenue increased 8% over Q1 2025. Critical infrastructure is performing well across the board with robust growth in transportation, particularly in rail and aviation, driving strong overall growth for the end market. Net revenue growth in our water and environmental end market increased sequentially to 4%, driven by high single-digit growth in water and a modest easing of headwinds in environmental. We forecast year-on-year performance for environmental will improve as we move into the second half of the fiscal year.

In summary, we performed well across our end markets during Q1, and we believe we are positioned nicely for the remainder of fiscal year '26 and beyond.

Now moving on to Slide #8, I'll provide a brief overview of our segment financials. In Q1, I&AF operating profit increased modestly year-on-year with similar constant currency performance. PA Consulting operating profit increased 27% on 16% revenue growth and a strong operating margin of 24%. On a constant currency basis, operating profit grew 22%. PA continues to benefit from rising demand for digital consulting and advisory services in the public, national security and energy sectors. As we look ahead, we expect PA's revenue growth to remain solid with fiscal year '26 tracking in the high single-digit range year-on-year.

Moving on to Slide 9, we provide an overview of cash generation and our balance sheet. For Q1, free cash flow came in at $365 million, supported by solid working capital performance as well as a favorable cash timing item at the end of the quarter that will reverse in Q2. Excluding this timing item, underlying free cash flow performance was still very strong and gives us confidence to raise our full year free cash flow outlook, which I'll discuss shortly.

Focusing in on capital returns, we increased our share repurchase quantum during Q1 to take advantage of the dislocation in our shares in the second half of the quarter. As a result, we're starting the year well on our way to returning at least 60% of our free cash flow to shareholders.

Additionally, we announced last week that we will be raising our quarterly dividend from $0.32 to $0.36 a share, a 12.5% increase. We have now more than doubled our quarterly dividend per share since 2019. Additionally, our net leverage ratio currently stands just below 0.8x on LTM adjusted EBITDA, which is well below our 1.0x to 1.5x target range.

Our balance sheet strength has enabled us to increase share repurchases, raise our quarterly dividend and entered into an agreement to purchase the remaining stake in PA Consulting. The acquisition of the remaining stake in PA will raise our net leverage to slightly above the high end of our 1.0x to 1.5x target range upon closing but we expect to return to the target range within a year.

Finally, please turn to Slide #10 for our updated fiscal year '26 outlook. We are increasing our forecast for adjusted net revenue growth, adjusted EPS growth and free cash flow margin relative to our guidance from last quarter. We're increasing our fiscal year '26 net revenue range to 6.5% to 10% year-over-year, adjusted EPS range to $6.95 to $7.30 and free cash flow margin range to 7% to 8.5%. Our expectation remains unchanged for an adjusted EBITDA margin range of 14.4% to 14.7%.

Notably, our outlook for fiscal year '26 implies over 16% year-on-year growth in adjusted EPS at the midpoint. We provide relevant assumptions on the right side of the page to help with your modeling. Please note that our guidance does not reflect the announced acquisition of the remaining stake in PA Consulting, and we plan to update our outlook once the deal closes, likely with our Q2 results in May.

Based on current assumptions, we expect the acquisition to be accretive to adjusted EPS in the first 12 months following closing. We anticipate the $16 million to $20 million in projected cost synergies will begin to phase in during fiscal year '26 with revenue synergies providing incremental upside. As it pertains to Q2, we expect our adjusted EBITDA margin to be in the range of 13.8% to 14% with year-over-year net revenue growth of approximately 6.5%.

In summary, we're off to a great start in fiscal year '26 and remain focused on strong execution, profitable growth and continued capital returns.

With that, I'll turn the call back over to Bob.

Thank you, Venk. In closing, we're tracking very well to the start of the new fiscal year. We performed ahead of our expectations in Q1, enabling us to increase our full year outlook across 3 key metrics after just 1 quarter. Our strong execution, secular growth tailwinds and the announced acquisition of the remaining stake in PA Consulting position us extremely well to deliver on our FY '29 target.

Operator, we will now open the call for questions.

[Operator Instructions] And your first question comes from the line of Sabahat Khan with RBC Capital Markets.

Great. Maybe just a higher-level question on sort of the outlook here. And obviously, this last calendar quarter to end the year had some concerns about a government shutdown. It doesn't seem to have flown into your numbers. Similarly, obviously, some puts and takes on the macro. If you can just walk us through kind of what's reflected in your guidance? What it would take to get to sort of closer to that higher end of the top line guide versus the lower end? And how you've sort of baked in some of the potential green shoots and potential sort of government-related considerations into this updated guidance, just to start off?

Yes. Sure. Sabahat, just on your first one with regards to kind of how we position ourselves within that revenue range that we talked about. I'd say it would be the burn profile of the backlog. We had some really nice wins within our life sciences and advanced manufacturing group, driven by data centers and chip manufacturing. Those tend to have pretty high velocity to them. And so if those continue to go at the pace that they are, that would be a driver.

And we're also seeing a nice tick up across the international business. We had an international business that grew over 9% this year, and that's -- that was pretty broad-based in Europe, Middle East as well as in APAC. And so I think that balance of our business and not feeling the effects of the government shutdown has given us confidence in the range that we put out there. But again, it would be the velocity of that private sector work that would get us to the higher range.

Great. And then just for my follow-up, I think it was Venk's comment around the environmental services side of the business doing better in H2. That was a business that investors had some questions about last year just given some of the evolutions and sort of the backdrop. Nice to hear that's trending in the right direction. Can you maybe just talk about, is it a specific end market that's driving that? Is it just maybe some catch-up in that work? Just kind of the bigger picture demand drivers of the environmental services business because it's been a bit of a focus for investors.

Yes.,, Sabahat, I would segregate it into 3 buckets of how it affected us over the course of calendar '25. And now we're starting to see a bit of an inflection point in our pipeline. That's why we're pointed to the second half as a recovery. The government component of that for us is very centric towards the U.S. Department of Defense. And now we're starting to see some larger programs, specifically for the Navy and the Army Corps of Engineers come through with some optimism on where we're positioned long-time clients of ours. And so that's kind of one piece.

The second piece, and that was -- had some of the indirect effects of DOGE if you think back to '25, so now we're seeing that flow through. The second is around this transfer around the disaster relief work from the federal government to state and local, that has taken a longer time to settle down. And so as that continues to play out, we're starting to see some early indications of that in our pipeline.

And then the third is in this -- we have seen a pickup in this component is the private sector and this is kind of the diversity of how we apply our environmental practitioners across our private sector in whether it be industrial or in life sciences and advanced manufacturing. Those jobs have started to pick up. Now they're smaller in scale. So they're not having an effect right now. But as that continues to grow, and we're seeing it again in our pipeline, and that pipeline is up double digits. So that's where we're kind of pointing to the second half.

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

Bob, very impressive, certainly, book-to-bill. Sure. It seems like the project...

Pardon the interruption, Michael, we are having a hard time hearing you.

Can you hear me now?

Yes. Got you now, Mike.

Okay. So Bob, on -- you're looking very impressive on the book-to-bill backlog growth in Q1. Maybe you could share on the -- it looks like the projects are getting larger, a little longer for gestation, but much more complex and how that plays towards what your current pipeline looks, maybe that 2-year pipeline outlook and the ability to gain more, I guess, life cycle revenues or business out of the bidding that you're working on with the negotiation with these larger projects with the clients that are certainly we've been reading about in the press that seem to be accelerating their cap spend in your -- especially in your important private sector markets.

Yes. Thanks, Mike. I'd say maybe one comment on the overall portfolio, and then I'll talk specifically about what we're seeing in the private sector accelerate at a faster pace. Overall, this is always in our strategy. We talked about it at Investor Day with regards to redefining the asset life cycle and continuing to work across that. That is happening on a broad base. I'd say that gestation period of the work, probably it's going faster within water, a little longer in transportation and energy and power, but we're moving at pace.

Private sector is happening in real time, and a lot of it is for just the demand cycle that's happening in those end markets, whether it be data centers chip manufacturing in life sciences. So for us, that business is in growth mode. We are seeing the pipeline grow at some significant rates. I'd say that 2-year pipeline that you're referencing, 1 year, it's greater than 50% if I were to have a composite rate. And as you get past that period, private sector, we don't really get past 18 months with any kind of high level of surety in pipeline, but that 12 to 18 months, definitely greater than 50% on a composite rate.

I appreciate that. Excellent, Bob. And my follow-up for Venk. With the very strong Q1 start on cash flow and the dynamics throughout the year. So given the financing that you're participating on PA and such, the 60% free cash of the company is still targeted towards, again, the share repurchase on a more ratable basis, you feel still comfortable to delever and add opportunistically when the market requires on your capital allocation in this year?

Yes, Mike, thanks for the question. And as you pointed out, a pretty strong start to the year in terms of free cash flow generation, and we feel pretty good about where we end the year, which is why we raised the guidance. So as it relates to our current position in terms of repurchases, obviously, we increased our repurchases in Q1 to take advantage of the market dislocation, as I mentioned in the script, but we also increased our dividend. So we feel very good about our commitment to returning 60% plus of free cash flow to shareholders. At the same time, with the solid balance sheet and the good cash flow that we're generating, we also want to quickly delever from the 1x to 1.5x range. When we do the PA financing, we have good line of sight to be able to get to that range within the first 4 quarters. So a solid cash position to start with, really good cash flow, and we have enough firepower to allocate our capital between repurchases as well as debt paydown.

Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets.

If I can follow up on the cash flow question. Venk, you said cash flow in the quarter was quite high, but some of it may reverse in the second quarter. Could you elaborate on what that reversal relates to? And also, I was under the impression there was going to be some cash tax payments that you would have to take care of in the first half. Has the timing of that change?

Yes, Sangita, thanks for the question. So as you pointed out, really good cash flow in the first fiscal quarter. I would say the vast majority of that strong cash flow was driven by really fantastic working capital performance across the entirety of our customer base. So that was number one. We also had a onetime impact from a customer in the data center space, where we collect the revenue and the cash during a particular quarter, and then we paid the subcontract in subsequent quarters. So that's what's going to drive the free cash flow performance in Q2, but we have very good visibility that in the first half, we will still be free cash flow positive. And the tax payment, as we mentioned, is going to be a Q2 phenomenon. So that will impact Q2. But when you look at first half -- first couple of quarters in aggregate, we feel pretty good about our free cash flow being positive for the first 6 months of the year and obviously, continued strength in Q3 and Q4, such that we're able to get to the 7% to 8.5% range.

Got it. I appreciate that. And then as a follow-up, can I ask about the Sizewell C contract that you press released a while back in the U.K. and if you can elaborate on the size of that and if there is further scope -- if there's a chance that the scope on that may increase over time?

It could. We're doing -- just to clarify on that, Sangita. We're performing the enabling works and the program management around the enabling works. And so that has continued through -- actually, it started even before '25, '24, '25 and will continue into '26. There is opportunity for continued scope growth on that and our relationship there with Sizewell C is strong. So we would anticipate so.

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

Just in light of the backlog growth, obviously, we know from some of the press releases, descriptions of what your scope is on some of these projects. But just curious what some of the pass-through things are that are going through there. And then maybe if you can give us maybe a sense of maybe looking at the profit increase in backlog might be more representative. I know you said 15% year-over-year. Curious if you can give us some measure of that sequentially.

Yes. Let me go -- I'll go back to the sequential gross profit in backlog. But I'd say that the majority of the pass-through is related to, as you know, in a data center, a tremendous amount of electrical equipment and equipment purchase that will be -- and it was announced on who's going to be providing that equipment in modular form. So the interconnects and how that equipment is arriving to site in modular form would all be around the envelope of a pass-through. We would do the design and not just that, but also the balance of plant to house as well as the interconnections of all the utilities. The trade contractors also end up making that pass-through too. And traditionally, we put a fee on both of those.

On the gross profit sequentially growth, say it's high single digits sequentially quarter-to-quarter, year-on-year, that 15% number is a strong number.

Okay. Very helpful, Bob. And then just obviously, last quarter, in the last few months, there's been lots of discussions and follow-ups about AI, and I'm just curious if there's been any change to either what you've observed in your own business? Anything that has developed or your own thinking or message that you'd like to give on sort of the AI outlook and impact for the industry and the company?

Yes, absolutely, Steve. Nothing has changed. We felt strongly about AI before the November event that happened, and we feel equally and more strong about AI moving forward. Kind of the main things we've been talking about, not just in Q1 -- I'm sorry, for the Q4 call in Q1 and that we've been talking about since 2019. We are getting great data advantage in what we do. Our data sets and our information are -- continue to be strong, strong platforms for us to use as for insights as well as build the models that we're building for the clients. It is helping when I say it, digital enablement and AI with the scarcity of resources that we are continuing to face. We are growing head count while we're using digital enablement to continue to grow at the same time as that scarcity.

And I'd say the biggest piece has really been around what's happening in the AI ecosystem from chip manufacturing to power and water requirements, all the way to the data center, we're playing across that continuum and seeing that -- we're seeing it in the numbers, right? So kind of the ultimate test of the power of AI is coming through in our bottom line results.

Your next question comes from the line of Adam Bubes with Goldman Sachs.

Maybe just one follow-up on the AI point. So you've been talking about AI/machine learning for a couple of years now. And so just wondering if you could expand on to what extent AI/machine learning is impacting projects and productivity today? And just how those conversations with clients have gone in terms of your ability to capture value from either improved productivity or high-grading your offerings?

Yes. So a couple of things. One, as far as how we're talking to our clients about it and how we are driving it is a value differentiator for our clients. If you think about the speed right now that we are going at, especially not just in the private sector, but also in the water market as well and transportation, the schedules and the delivery model for these can't be done without the use of the AI platforms. And when I say AI/machine learning, the automation of tasks that we put into play. So it is driving backlog growth through differentiation in our award rates and the bookings.

The other is that in the field, we're using some strong predictive analytics, it's a platform called Acuity, in order to really get out in front of field level issues that are coming up in real time. And that's been a real game changer for us. We've got Acuity deployed across all of our end markets. in the field program management work that we do.

And then the last thing, and we've talked about this several times, but we're seeing more -- we use Replica as our digital twinning. But now digital twinning, not just in the water sector, but now in the manufacturing sector and the data center sector is allowing for us to get to the data insights in the simulation technologies -- with the simulation technologies in a much faster rate in order to solve for some really, really complex issues that we're solving for our clients.

So overall, it's coming through. We've got a whole slew and suite of platforms that we're using.

And then really strong PA Consulting margin performance. I think, 24% this quarter. Any outsized benefit to call out there? Or what's the right way to think about sustainability of those margins in the balance of the year?

Yes, Adam, great question. So I would say, yes, as you point out, really strong performance. Most of it is driven by the fact that there's a solid top line beat and we had some operating leverage there as well. What we have stated all along is that we want to balance really high single-digits growth for PA with margins that are, as you know, already industry best. So a 22% margin is kind of the way we think about as a long-term model there, and we want to make sure that we have a good balance between high revenue growth and high industry-leading margins. So the way to model PA margins going forward is about 22%. But clearly, we had a really strong performance there in the just concluded quarter.

Your next question comes from the line of Jamie Cook with Truist Securities.

Congratulations on a nice quarter. I guess, sorry, Bob, another question on AI. Just as you sit here today and think about AI and the opportunity for Jacobs, both on the revenue, on the margin side, how do you balance the two? Do you know what I mean? I mean over time, if you had to pick one versus the other, do you think there's an opportunity to grow the top line at a quicker rate and perhaps operating profit more so versus the margin? Just sort of how you're thinking about that balance as AI impacts your business model? I guess it's my first question, and then I'll ask another one after that.

Okay. Great. Jamie, if the world was plentiful with qualified resources for all the work that's out there, from filling the denominator of the TAMs that we play in, I think that we would probably be making choices between top line and bottom line. We're not. We are in a resource-constraint market that AI is enabling us to grow the top line while we're operating with -- in a resource-constrained environment and driving efficiencies and type of solutions that we're delivering to our clients. So not a choice as well as not a pivot. We feel like we're well positioned to do both.

Okay. And then I guess, Venk, just on the margin performance in I&AF in the back half of the year. Obviously, we're expecting some margin improvement to achieve besides PA Consulting strong margins to help get to your full year adjusted EBITDA margin forecast. Just what's driving that? Is it more mix? Is it self-help? Just trying to understand what's driving the margin improvement in I&AF in the back half of the year.

Yes. Jamie, thanks for your question, and thanks for your comments as well about the quarter. I'd say lots of really positive trends for us from a margin perspective. Obviously, Q1, we came in at 13.4%. And Q2, we're guiding for a 50 basis point sequential improvement. And then we see a linear progression in Q3 and Q4.

So a few things that drive that margin expansion for us. Number one, continued operating leverage. So we're going to maintain the discipline in terms of ensuring that our OpEx grows at a slower pace than revenue growth. And then clearly, from the standpoint of some of the gross margin drivers that we talked about at Investor Day, with the way we expect our global delivery to step up, which is already happening, and we see more of that coming in Q2, Q3 and Q4. And then also on the commercial model side, right? So with the extent -- to the extent that we are engaging more with some of the life sciences and advanced manufacturing clients, that also helps from the standpoint of driving those commercial models.

So I would say it's not one thing. It's a combination of several things that we talked about at Investor Day, more of that coming to fruition in Q2, Q3 and Q4. And we feel really good about our margin performance for the full year. Obviously, just for context, in fiscal '25, we grew our margins by 110 basis points, and we're guiding for a range of 50 to 80 basis points increase in fiscal '26.

Maybe one add to that is that in the second half is really where we're starting to see the advanced facilities or some of these bookings that we have from a mix perspective have contribution to that linear progression in our margins and confidence.

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

I wanted to ask about this very good backlog, very exciting. Obviously, some of these really marquee projects. Bob, I thought maybe given that there's a little bit more mix here to some of this EPCM scope, I want to ask about how you're managing the risk criteria here. Are these contracts -- are you basically able to offload any risk to these, to the subcontractors that you are managing on this? Or do you bear any? I'm just wondering because, obviously, some of these projects are pretty significant and percent changes on large numbers could actually kind of matter in the future. So -- but maybe I'll let you address that, please?

Yes, absolutely. So our risk profile, Andy, has not changed. And so the same EPCM delivery model that we've been very focused on for the balance of 20 years in life sciences. We do a lot in the water sector as well. Those are the same risk profiles we're taking now. And as you know, we've been pretty consistent on how we flow those to our supply chain. So the awards that we're getting right now, we have not inflected to a different risk profile. We're utilizing the same risk profile we have for the balance of the 20 years in those sectors.

Okay. Great. And then I just wanted to get a clarification on PA and the capital deployment that went along with that as well. It's obviously a large capital deployment. So when I was looking at the press release, the EBITDA increase that you're getting from PA is because PA is already consolidated, the EBITDA that you're picking up is really only the reduction of the noncontrolling interest. Obviously, noncontrolling interest is after tax. You'd have to gross that $52.3 million up to a larger number. But even when you do that, against the $1.6 billion capital outlay, the math that I get here for the multiple is substantially larger than the 13x.

And so I know there's some kind of different accounting -- GAAP accounting that's maybe around this. And I just thought for the benefit of everybody, you could address how that works and why it works out that way, please?

Yes. Andy, thanks for the question. And I know that we -- obviously, you mentioned that in your report as well. So at a high level, as you rightly pointed out, there's a slight difference between the accounting and economic ownership. So just for everybody's benefit here, the economic ownership was 65% and the accounting ownership was 70%. But there's obviously some dilution from what we call C shares, which are basically shares that the employees own.

So to make a long story short, that's the delta. But in terms of the absolute valuation, as we mentioned in the press release, it's a 13.0x multiple on EBITDA. And then if you take into account the synergies at the 12.3x multiple. So we feel really good about the valuation for this and the value creation. But happy to take additional questions. And maybe, Bert, you can add to it as well.

Yes, sure. Andy, what is -- essentially what's happening here is when you take the accounting ownership, which was 70% and you reduce it by the employee benefit for us, we get down to a 60% ownership. And so we acquired 40% of the stake, which we highlighted. On the NCI, what we did is we reduced EBITDA by an after-tax number. And so it reduced EBITDA by a smaller amount. So essentially, we'll be adding back that NCI component to our EBITDA going forward.

I think the important takeaway that we -- Venk highlighted in his prepared remarks is we expect this to be accretive to earnings, and we see a lot of opportunity from both the revenue and cost synergy with the combination of PA and Jacobs. So we can take some of the more specifics offline when we talk later on.

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

So I wanted to spend some time on the project pipeline. I think you talked about it being up double digits. Could you break that down by the core end markets? And then if you can comment about fixed versus reimbursable? And then finally, just on the global delivery model, how much of that is deployed using that method versus what's in your revenue today?

Yes. Maybe I'll simplify it, Chad. If you look at our 3 main verticals, water and environmental, up. The pipeline is up. And when I say double digits, very much double digits that are 25% and above. In life sciences and advanced manufacturing, double-digit pipeline growth, those are 50% and up. And in our critical infrastructure, we're talking kind of high single digits and low double digits pipeline growth. That's not acutely focused on the U.S. That's a global number. And so the pipeline is strong, and that's a 12- to 18-month pipeline that we look at that -- then there's win rates and everything else. But the markets that we're serving are in a really strong state right now.

Got you. That's helpful. And then just maybe circling back on the AI topic. So how are you communicating to your customers, the value creation from deploying AI like in a particular project? Are you having explicit conversations about sharing that? Maybe just like talk about if you can even give me a particular example, that would be very helpful.

Yes. Well, in order to do that, I think you got to go back and our clients' issues right now, we're not solving for issues that were around or even contemplated 5 years ago, 10 years ago, 20 years ago. And so how we're articulating this to our clients is not in the form of bots or agents or people being replaced with AI figures. How we're discussing it is the use of data to give greater data insights to solve for complex issues and deliver outcomes at a faster and more predictable rate. That's how we're describing it to our clients. And our clients are co-creating with us in the platforms that we develop, kind of part one.

The second, where we go to market is around AI advisory. But we have -- whether it be in the aviation space or it be in the transportation space, we've got a lot of our clients that want to understand how AI can enable their business even more. And so now with PA, we've now doubled the size of our AI, not just on the development side, but also AI consultancy component as well. And this isn't AI consultancy just driving business transformation. This is AI consultancy on how they can effectively serve their client base even greater. So we've -- the investment thesis around increasing our investment in PA, coupled with how PA is growing in that space across all the end markets and then us going to market together is really creating an exciting story going forward.

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

Bob, I just want to dig in on a couple of areas. I think historically, you guys have been very strong in semicon, particularly on the memory side. So what are you seeing in terms of investment there? Could we actually be in acceleration mode again? Like it seems like we are, but maybe any more detail there would be helpful.

Absolutely. Short answer is yes. Yes, Andy, we are in acceleration mode. There are 3 main players around the world. One is American. And the advances in high-bandwidth memory that the American provider is going to market with at record pace. It took 20 years during the traditional DRAM cycle to advanced nodes. That 20 years is now being shortened into 2 to 3. And so to get the plant ready and delivering on those chips is a big deal. So they've made some announcements in Idaho and New York, and we're squarely in the middle of those.

And then, Bob, just following up on the water vertical. I mean, I think you answered a question earlier about environmental. Water has been strong for you guys for a while. I get some questions occasionally about municipal spending, what eventually happens as IIJA starts to run down. So maybe you can talk about -- I think you've had good bookings here recently in water, but maybe you can talk about the longevity of the water infrastructure cycle as you see it?

Yes. It's high single digits for us right now and how it's flowing through, Andy. And so maybe I'd kind of divide it between U.S. and international. Maybe start with the real positive. The result of the AMP8 cycle in the U.K. is driving kind of double-digit growth for us in the water market there in Europe, but we're also seeing strong tailwinds in the Middle East and in Australia. Australia has been a real highlight for us, both in water and in transportation.

The municipal spending and the tie to IIJA never really was a strong one. IIJA really was focused heavily on transportation. And so that has continued. And again, the whole water scarcity, aged assets and just the sheer effects of climate, these aren't -- I'm not saying they're completely delinked from funding opportunities that states and locals have, but definitely have risen up on the priority list just because of the severity. So we see kind of a long-term tail on that.

And Andy, if I could add to just what Bob said, there's been tremendous strength in bookings in water over the last several quarters, and we've highlighted some marquee wins that typically take multiple years to play out. So we see that pipeline continue to grow and the visibility for a multiyear period. So we feel really good about our water market overall.

Your next question comes from the line of Jerry Revich with Wells Fargo.

Can I ask on critical infrastructure, really impressive performance relative to the end markets that you folks are clearly gaining share. Could you just double-click for us in terms of the drivers of the share gains? Is it just part of the market where you folks have higher concentration? Have you bid on the right projects moving forward? Can you just expand on the drivers of what looks to be about 5, 6 points of end market outgrowth that you're delivering?

Yes. Well, maybe I'd most succinctly talk about it in 2 main areas, Jerry. One is that our international business in transportation has been strong, very strong. And that's been highlighted by really key wins that we've had in Europe, in the Middle East and in Australia. Australia, it's been really nice growth there as well. Aviation and rail has really been the strong drivers there. We still do a lot of work on the highways work, but those 2 have been really strong drivers. And then the U.S., with continued growth in the aviation sector there, coupled with now some high-speed opportunities as well as faster rail in locations, we've been capturing share gain in that area as well.

So strong internationally, driven by aviation and rail and highways; strong in the U.S., driven by Aviation and rail.

And if we could just pull on that market share threat into the AI theme, you folks on the semi plant side with the use of digital twins have been able to allow your customers to deliver projects really quickly. Just it sounds like based on your comments earlier on the call, Bob, you see yourselves as gaining share in that type of environment. What's the outlook for the broader industry structure as you see it 5 years down the line, 10 years down the line? Do companies that look like Jacobs gain share? Do companies like Jacobs do more EPCM type work for an integrated solution like you're doing here on the data center example that you gave us? Can you just talk about how you see this all playing out for the industry as a whole because you folks have been ahead of the puck in terms of your digital twin investments, et cetera?

Yes. So maybe -- and just to clarify, Jerry, you were talking specifically about semi? Or were you talking kind of broader base across kind of the tech landscape?

Bob, I was just talking across the broader tech landscape, right? So in other words, you folks have clearly used digital tools and let the market gain share. And I just want your perspective on where you see the industry headed in 5 years now that the tools are getting better and better.

Got it. Got it. So I kind of talk about it from our participation across the ecosystem of, call it, the electron landscape. So everything from the chip at the semi side through power and water, whether it be at the grid level or what eventually goes into the data center, our participation across that ecosystem, I think, has been a big differentiator. And so when I look out 5 years from now, the partnership that we have with NVIDIA and the kind of the tech relationship down to the chip design and how that affects utilities for these plants, whether it be with any of the high-bandwidth memory players or other traditional logic players, that's what's driving that out-year growth. Because as these plants -- no plant is the same. As these plants are continuing to become more and more complicated, we're out in front of those.

Now you back all that up with design automation, AI tools in order to get greater data insights, and we're continuing to really -- and digital twins, like you said -- I'm sorry, Jerry, then that protective -- I don't know if I'm allowed to call it a moat, but I will, that moat starts to develop and we go from there. So we're excited about where we're positioned. This is something we've been in for the better part of 40 years and we see that going forward for another 40.

And that concludes our question-and-answer session. I will now turn the conference back over to Bob Pragada for closing comments.

Thank you, Christa. Thank you, everyone, for joining the earnings call. Some great questions. Really excited about the performance last quarter and our performance for the balance of the year, and we look forward to engaging with many of you over the coming days and weeks. Thanks, everyone.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Okay. Good afternoon, everyone. Thanks for joining. I'm Steve Fisher, UBS Machinery, Engineering Construction and QS Building Materials analyst. Really thrilled to have the management of Jacobs here with us today. We have Bob Pragada, CEO; and Venk Nathamuni, CFO; and Bert Subin as well.

Just one disclosure before we get started as a research analyst, I am required to provide certain disclosures relating to the nature of my own relationship and that of any company express a view on this call today. The disclosures are available at ubs.com/disclosures, or you can reach out to me after this session, I can get them to you.

All right. Bob, Venk, thank you so much for being here. Maybe just to start off, you just wrapped up your fiscal 2025, your first year post the Amentum spin. Bob, maybe you can talk about kind of what went right, what were the most notable accomplishments that you want people to be aware of?

Yes. Thanks, Steve, and thanks again for having us here at the conference. It's been great. We just finished the first year post spin. Really, really excited about our operational and financial performance. We came out with not only our guidance for the year, but also at Investor Day in February, we put out the KPIs, not just for the balance of the year, but for the next 4 years. And we either met or exceeded every one of those KPIs that we put forward on all fronts, top line, bottom line, EPS as well as continued backlog growth. So I'd say that's one.

Second, with regards to the transition, and you know, Steve, we've done a couple of these in the past. The actual separation of the business, merging it with Amentum and that going public within 12 months of a TSA with shared services. I think this is the first time ever that, that actually was done 12 months later. So that clean break and removal of the -- I'm sorry, disposition of the retained stake, all happened right when we had scheduled for it to happen. So I think that was another real benefit. And then the third is kind of where we sit in the marketplace. We're coming off of record backlog at the end of Q4, our Q4. We've got some nice tailwinds in our end markets. We'll be announcing some really nice wins here in Q1 relatively shortly. And we're feeling excited about the coming year as well as the momentum that we're building into the future.

Fantastic. Maybe just a bigger picture question. In terms of -- as we think about the broader engineering, construction, consulting sector, there's been, I think, various business models that have been evolving and maybe some blurring the lines between project delivery, engineering, consulting, contracting. How do you think about the evolution of Jacobs' business model and where it makes sense for you guys to go over the next few years?

Yes. Over that evolving, Steve, of these different components of what we can do for our clients, we've really locked in on what's going on with our clients' business. What are some of the challenges our clients are having? How is their science evolving? If you look at our business and especially in life sciences and advanced manufacturing and in the water sector, just the developments that have happened over the course of the last 10 years, actually the last couple of years, have really driven the level of complexity in the facility to go up. And now with AI and drug discovery, AI and chip development, AI and driving our clients' business, it's allowed for us to continue on the technology journey with our clients. So long way of answering, I see our skill sets being a really nice match for participating across our -- the entire life cycle of our clients' assets or the capital deployment of our clients. And so we're now participating with them in the early phases of business advisory and then working through what would have been the traditional project phases and even staying with the asset during operations and maintenance. And we're doing that with AI enablement, and it's really serving as a growth driver for our business.

Well, that's a great transition because I want to talk more about AI. I'm sure you're surprised about that.

But very surprised. I haven't heard -- I haven't gotten that question once in the last 2 weeks.

So obviously, it was a couple weeks ago, was pretty eventful for the sector in terms of AI discussions and stock reactions. Any comments you want to just sort of make about your views on AI and then the market reactions to the quarter and your outlook?

Yes. Maybe I'll let Venk talk about the quarter and the outlook. We're really -- actually really proud of the quarter and the outlook, but I'll let Venk talk about that. Look, let me segregate it into 3 main points. And I think it's probably well known what was said by one of our competitors. Here's how we view it. And this is something we feel very strongly about it. If you go back into our 2019, 2022, 2025 investor decks in all 3 of those investor decks, you will see us talk about even early days of AI and machine learning all the way through to how it is serving as an accelerant and a catalyst to our business because, quite frankly, we live in markets that are all resource constrained right now. And AI and the software enablement that we have seen is allowing us to do more, not less, with more people as well with the use of AI. So this concept that it's going to cannibalize billable hours or cannibalize headcount, we've actually seen the exact opposite in our 6-year journey, and we've been investing in this over the course of the last 6 years as well. So that's kind of point one.

Second is, if you look at this industry, and I'm going to kind of just segregate the industry into the engineering field. Over the course of the last at least 35 years that I've been doing it for 40 years as well is we've gone from rulers and drafting tables to 3D modeling to BIM modeling to each time there's a technology node. And all along the way, it's allowed us to do our work more efficiently and getting to solutions faster. And we see this as yet another node, a pretty big one, but another node to driving that continued growth. And that kind of leads to the last point, which is I know we all -- especially the top 5 of us all are considered engineers and operate in end markets. But if you look at our portfolio and then you segregate that into -- there's 50% of our portfolio, our end market portfolio that our peer competitors, our public peer competitors don't participate in at the extent and level that we do. And that is mostly in the private sector, life sciences, advanced manufacturing as well as in the entirety of the life cycle of water. That has been where our clients have really had the absorption level of AI. And it's something that we're co-creating with our clients. We're thinking about it from our clients' business inward and then what we can do to make ourselves more efficient, and it's really been a net benefit for us. So -- and on the quarter?

Yes. So thanks, Bob. I'd say on the quarter, we finished the quarter and the fiscal year pretty strong. As Bob mentioned at the outset, we came in at or better than all the expectations in terms of all the key metrics. Revenue, we had a solid growth year. We had obviously tremendous margin expansion. So we had guided for fiscal '25 to grow 110 basis points in EBITDA margin, which we delivered, which is one of the largest increases in any given year for the industry. And then obviously, in terms of capital deployment, we returned over 150% of our free cash flow in fiscal '25. So we feel pretty good about implementing the first year of our strategy to everything that we committed to.

And then looking ahead to Bob's earlier point about AI, we actually see AI as an accelerant, both on the revenue line as well as on the margin expansion side. And as a matter of fact, we have provided guidance for fiscal year '26 to grow at 6% to 10%, so at midpoint of 8%, substantially faster than our growth rate for fiscal '25. And a lot of that is enabled by the fact that we are seeing increased adoption of AI across a multitude of our end markets is actually helping us drive both the top line growth as well as margin expansion.

That's really helpful. Maybe I could just push on -- I think it was your second point here, Bob, about that there's always been an evolution of technology and you're getting to different nodes. And you said this one is a bigger node. Is it possible that this one is sort of a turning point and an inflection point such that it really does disrupt? Can it be that big a node?

I would answer it this way. If the -- if what we were applying our intellectual horsepower towards was static, it might be. So if there is a, for example, a 3-story residential building that really hasn't changed that much and the interior finishes might be the only difference from how that structure would have looked and you can use the kit of parts to move utility systems and whatnot and have it at a click of a button, pretty static environment could be some cannibalization. We're not in that space. We're in a space where no 2 water treatment plants look alike. What's happening within the environment is affecting the facilities that we're designing. So everything that we're doing is starting from the science and working out on what does the asset need to function in order to drive that. So while there's that dynamic nature of what we do, it's actually assisting. It's helping us.

I take chip design right now. In fact, NVIDIA just announced another big acquisition of Synopsys, that chip design in getting to GPUs that are now extracting more heat and needing in the future even greater, both liquid and air cooling potentially. We're working with NVIDIA as well to look at, okay, if these things happen in a digital twin, here's what we could do in order to support that utility load as well as this is what you need to be doing behind the meter and your water requirements as well. And so it's helping us get the solution. NVIDIA came to us as a partner for that type of work. So it's helping us as science is evolving at a very, very rapid pace.

Interesting. So maybe to build on that a little bit to go back to your point, number one, about the accelerant. And just thinking about 2026 and how you see AI accelerating your business, you just gave one example. Are there other examples or how broadly do you think AI can be an accelerant in 2026?

Yes. Maybe I'll start with the life sciences example. This is something that we publicly disclosed. We have a major engagement with one of the largest contract manufacturers in life sciences in North Carolina. That's a classic example of where in Phase 1 of that project, we did it on a cost reimbursable basis, understanding the scope and the scheduled risk and so forth and implemented it successfully. But in the Phase 2, we were able to use the learnings from Phase 1 and deployed with a digital twin and digital replication. So a lot of AI-driven learning that we got out of Phase 1, which we're able to deploy in Phase 2. As a result, we were able to lower the cost of implementation of Phase 2 compared to Phase 1. They were identical buildings, if you will, but passed on some of the cost savings to our clients, but also kept some of the cost savings for ourselves. So from a margin expansion standpoint. So it was both a revenue growth contributor as well as a margin expander because of the fact that it totally expanded the SAM or the serviceable available market, because of the returns requirement for the client, right? The client needed to make sure that the second phase was remunerative for their business purposes. And so it's a classic example of how AI in this case has been an accelerant both to the top line as well as margins. And I can give you a multitude of other examples that's happening in the AI data center space. It's happening in semiconductors with some of the largest semiconductor players that we are supporting. And we truly believe that this is still in the early stages of a mass adoption across multiple end markets.

Steve, one other thing I keep talking about resource constraint, resource constraint, but we also live in a world of capital constraint as well. And so even though it's a lot of capital, it's still not enough to what infrastructure and manufacturing needs that the world has. So it allows for that capital dollar to go further and create more opportunities for companies.

So that's a good point, which perhaps goes to my next question, which is really about different types of customers, different types of contract structures. And I'm just wondering as it relates to sort of the billable hours type model where you are creating efficiencies with all these technology tools that you've been developing over the years. How do we understand the impact of AI in this next node of efficiency and accelerant on those billable hours? It seems like the billable hours should be coming down. So is the theory that because you're freeing up more capital, there'll be more projects to do with those excess available billable hours and capacity. How is that part not disrupted, I guess, is the question?

Maybe to -- maybe just a slight way of different thinking around it. So we don't see billable hours as the input. We see billable hours as a lagging indicator as a metric of how much work we performed. If you look at contracting platforms at a high level, there's a reimbursable mode. There's a fixed-price mode and then there's an outcome or incentive mode too. When we go into reimbursable contracting, normally, it's because there's no scope, right? So in order to go in and on a reimbursable high rates, go in and figure out what is the scope that -- because the client comes to us and has an issue. I have an issue, I need to solve it. Please bring in your specialist to help me solve it. We're using AI in the solving -- in a reimbursable mode in order to come to a solution which then turns into a scope, then we put some fixed price parameters around that scope. And AI and other software enablement helps gain productivity in the fixed-price mode, accretes to us. And we're also using that outcomes incentive base in order to generate margin expansion as well as top line growth. So it's allowing for clients to now do more and we've got a differentiated position, too. So we haven't -- again, over the last 6 years, our billable hours have gone up. In fact, even in the last year, they've gone up in a material way. But again, we track that -- we track billable hours even on fixed price work, right? So we use that as a lagging indicator.

And if I could just add to that, we're operating in resource-constrained markets, right? So at any given point, we still have several thousands of job openings. And what AI is helping us to do is to improve the efficiency of these implementations such that we can take on more work. And life sciences, advanced manufacturing, water, transportation, all of these are very resource-constrained markets. So AI is actually an accelerant because we're able to take on more.

So should investors not be concerned that -- but the whole concept of billable hours is basically the conclusion that we should be taking away from this?

I would hope so. I'd also hope that investors would get excited, right? Excited about just how much opportunity this unleashes for this -- I'll stop being selfish here for this sector, right? Because we see it as a real accelerant and something that we're getting excited. And again, it's -- and let me go back to being selfish again. In the science-based world that we live in, this is something where it's really, really helping us. We have -- Venk just talked about the opening 7,000 openings that we have in the U.S. That number goes up by another several thousand when you go outside the U.S. So it's something that's driving growth for us because there's also a misnomer that's out there is that we've talked a lot about global delivery and how we're utilizing talent from all different countries of the world in order to deliver solutions locally. There's a thought process also that's out there that maybe someone has said that well, wait a second, can't you just now do it in the West because that's where AI is and then now global delivery because the thought is that those are the menial tasks. It's actually reversed. A lot of the AI implementation that we're utilizing is actually happening in the East, right? And so this kind of -- the world is flat, and we're learning together is happening.

Interesting. Maybe from an investment perspective, obviously, it's a very rapidly evolving opportunity set. How should we think about the investments that you are making this year, next year, over the next couple of years in this area?

Yes. So Steve, obviously, when we gave guidance for fiscal '26, we also -- in addition to the top line growth and margin guidance, we also provided guidance on CapEx. So our CapEx guidance, which is roughly 1% of revenue is contemplating all our investments in AI. To Bob's earlier point, we have been investing in AI for the better part of 6 years now. And what we have done internally is to shift the investment focus from traditional software to more of the AI tools. We have a lot of Agentic AI tools that are already in play. We announced some partnerships with Palantir a few years back. And we're continuing to make those investments, both for -- from the standpoint of what we deliver to our clients, but also internally in terms of improving our efficiencies. I'll give you a couple of examples in the enterprise functions, even take finance and legal and so forth in finance, how do you automate a lot of the cash collection function, right? What do you do with invoicing and such so that for the vast majority of those invoices that are automatically generated, and we learn from customer behavior and client behavior. Same thing on the legal side. As we look at the 29,000-plus contracts that we typically sign any given year, how do we ensure that we are not leaving any pricing on the table and ensuring that we're executing the contracts to its fullest degree. So a multitude of examples both on the external side in terms of what we deliver to our clients, but also internally, how do we improve efficiencies such that we can redeploy those dollars for client-based functions.

That's great. And maybe that's a good segue into as we think about another angle on this is sort of how this affects your margins. And there's obviously been discussion about incremental margins and how this helps capture more of it. Maybe just to start off with perhaps your 2026 margin guidance. I think you're going EBITDA from 13.9% to 14.5%, 14.6%, something like that. Can you talk about sort of the bridge within that? And then maybe bigger picture, how you see AI is not only revenue accelerant to business opportunities, but on the margin side, how you might quantify any impact there?

Yes, sure. Again, as I said before, fiscal year '25, the 110 basis point margin expansion was driven primarily from kind of the operating expense side of things. In fiscal '26, we're getting a lot of specific actions that relates to gross margin expansion. So we identified 3 buckets, as we discussed on the Investor Day call in February. One is what we call global delivery, which we just discussed. There, it's not just about doing back-office work, but a lot of the advanced engineering functions are being implemented in places like Poland and India and Philippines. And these are domain experts in all of these areas. So to the extent that regardless of where the project originates, we can implement it to those functions in those areas that actually helps us with margin expansion in a meaningful way. And we're still early in that journey.

The second big portion of it is what we call commercial models, where we take on, for example, the Phase 1 implementation in a cost reimbursable mode. And then Phase 2, we'll do a fixed price model where we deploy AI and other functions, that will drive kind of the margin expansion there. And the third piece is what we talked about again at the Investor Day in terms of the asset life cycle, the earlier you start engaging with the client on the consulting side of things as opposed to the design and so forth, that allows for margin expansion as well. So a multitude of ways where we can continue to drive the margin expansion story. And as many of you will know, we have guided for fiscal year '29 to be 16% plus margin. We're already more than 1/3 of the way there. And based on the guidance that we provided for fiscal '26 of 50 to 80 basis points margin expansion, we think there's still a lot of headroom for us.

Terrific. Lots and lots of topics to talk about. But maybe before we move on, I'll ask anyone from the room if there's any questions on the on the AI topic or anything else before we move on. Anyone would like to ask a question? And if not, we will come back to that in a minute or 2. But maybe if we talk about some of the revenue opportunities in 2026, maybe just talk about sort of where you see things going the fastest, where you think things might be lagging a little bit, how you break that down?

Yes. So just going by the 3 main verticals that we referred to the business in, life sciences and advanced manufacturing. Life sciences continues to be a real growth driver for us. Everything that we're now seeing in continued growth with other entrants into the GLP-1 space, the antibody drug conjugates and how the advances that are happening with regards to new cancer therapies there and as well as in other oncology products that are coming out, really deep pipeline, good growth that we expect there. Chip manufacturing is returning, which is good. A lot of that being driven back to AI again. A lot of that being driven by the NVIDIA chip and what's happening with high bandwidth memory. So good growth there. And then data centers as I said on the call, 5x growth in the pipeline just in the last 2 quarters has been a real driver for the data center work. So it's -- and the data center growth is now showing up in the top line year-on-year growth number. I think last quarter, it contributed 50 to 60 bps of growth and that's on a business that's about a $200 million business of our overall P&L. So all of that in that vertical is driving nice growth.

Water environmental did say, I'll just kind of go one step back. Environmental was a bit flattish. We saw in the U.S., 85% of our business is in the U.S. as a vertical. We've got 10,000 environmental practitioners that are part of multidisciplined across the entire company. But as a vertical, some changes in the U.S. regulatory kind of profile in the environmental world as well as some shift of disaster relief funding from the federal government to the state put some pressure on that part of water environmental. It's about 30% of that vertical. We see that kind of flattening out as states are organizing on how they're going to deal with now having to deal with some of the -- we do a lot of the environmental compliance post disaster recovery of those items. Water continues to be a great source. I mean just everything from water scarcity to conveyance and then treatment needs is really driving that business too. So good growth there and then critical infrastructure.

Second half of the year, transportation really bounced back for us. And so seeing some really nice growth in the transportation world as well as cities and places which for us is really driven by Middle East, maybe I'll just end on that. The Middle East is still in double-digit growth mode for us. We announced a couple of big wins recently and now with Mukaab, the Expo, potentially soon the World Cup and then growth back -- growth in the Emirates is driving nice growth there. So overall, our markets are in really decent shape.

That's great. Maybe just to follow up on the life sciences area, and we've done some more detailed work on this back a handful of months ago. And as we talk to investors about this, one of the most consistent questions we get is, yes, there's been a lot of announcements that we've seen about things, but how much of that is really going to end up materializing. So I'm curious as you guys are really involved in that market, do you have any perspectives on that? And as certainly a good amount of those projects do move forward, what's your role in these once we move sort of beyond the initial planning phase, if anything?

Yes. So we'll do -- so the short answer on the first part, Steve, is that a lot of those headline numbers that came out, a lot of those jobs had already started, right? So there was a headline number. And then -- because we were looking at those numbers, like, where did that number come from? But a lot of those jobs had already started, some in the U.S., some in Europe. Some of those ones in Europe got pulled back into the U.S. So those have started. Those are now moving into the field. Our role is once the conceptual work is done, we'll do the design and then will program manage the delivery of that facility. Again, this is where AI is helping us because we're using tools in order to get more efficient there. Of those drivers of what's driving life sciences right now, I'd say the one that we're getting pretty excited about is the tableting form of GLP-1 therapies. And if that goes forward, that could be a real nice catalyst of continued growth.

Great. So maybe as we zoom out on -- well, maybe before I do that, it's just thinking about overall international work versus North America. Any particular sort of differentiation you would say between them?

Yes. I'd say, unlike what we've heard from our peers, our International business is continuing to be very strong. I'd say Middle East, in particular that Bob just talked about, we're seeing double-digit growth there and our pipeline looks pretty solid. By the way, we're very selective in terms of what we engage with in the Middle East. And those projects, some of them are time-based. So there's a real impetus to get those things done in a certain time frame, and we are participating in those. I'd say Australia and New Zealand, probably in fiscal '24, had a bit of softness, but we've seen that come back pretty nicely. Some big projects that we announced in those regions the last 2 or 3 quarters in our earnings calls. And then Europe, as you know, especially in the U.K., where they went through 3 different changes of government. Now there's a semblance of stability there, and we're seeing that reflected not only in our growth rates, but also in PA Consulting's growth rate. So I'd say international is looking pretty good for us. And then U.S. is coming back strong. Bob talked about the strength in transportation. A lot of that was driven by the U.S. as well. So pretty all-around growth across all the regions.

So when we think about your organic growth in 2026 versus 2025, it seems like a continuation of steady growth. Just trying to think about how the buildup might be different in '26 versus '25. It sounds like perhaps chip manufacturing might be something that's different. Transportation, you talked about a little bit different. Any other areas that you kind of see different even if the revenue growth numbers are not all that different?

Data center is becoming a more material part of our overall portfolio.

That was the last one.

Okay.

Terrific. Maybe we should move on to PA Consulting. And I'm curious what your priorities are in terms of driving the growth there? Is it more in the international side? Is it more -- I know you've talked about kind of more integration in North America. What are the priorities on growth in PA Consulting?

Yes. So right now, what's driving the business in PA is the defense and security, more so defense independence in Europe is driving PA in a material way. So just as -- just to calibrate here, PA historically was the -- actually, the term PA or the acronym PA came from -- after World War II, they were the personal assistant of the U.K. Ministry of Defense. So they've been a consulting partner to the Ministry of Defense for the better part of 75 years. Now that, that business is -- that's what's driving the entire business is defense and security for MOD. And then as MOD has taken on more of a leadership position in Continental Europe, as company -- or countries are now spending 3%, 4%, 5% of GDP on defense posture, PA has been right in the middle of that on business advisory and how to create that defense posture. That's translating into synergy opportunities because a lot of it is the defense primes with a lot of the manufacturing base in Germany and the U.K. are not set up for defense manufacturing. And so that's where Jacobs is coming to play, too. So that's been going well.

The public sector business in PA, which is mostly for their equivalent of their state apartment is starting to -- they're digitizing the entirety of the home office. And that's been a really nice growth driver. And then energy independence in Europe, where PA has been involved with the large utility agencies on energy independence for Europe. This has started post Ukraine invasion, but it's continuing on. So all of that's been really solid, and we saw it in '25. '26, that continues as well as continued growth in the U.S. with us. So that was kind of early stages, that's continuing on as well. So that initial plan of getting that client exposure, specifically in transportation and in energy and utilities in the U.S. is continuing.

Great. Obviously, you have a potential transaction around PA Consulting. Any other comments you want to make or message you want to give to investors about how that might be playing out and developing?

Yes. So just for context, we have to make a decision combined before March of 2026. And what we publicly stated on these calls and earnings calls over the last several quarters is that we are contemplating an increase of our stake. Today, we own 65% of PA. We're contemplating the increase of the stake anywhere up to 100%, and it is a negotiation and things are progressing. So when we have an update, we'll provide that update to the investor community.

Okay. So maybe, Venk, a couple more for you. You have this target of 10% margin on free cash flow. I think this year, 7% to 8% is the target. Can you just talk about what it will take to go from 7% to 8% up to 10%?

Yes, absolutely. So 7% to 8% is something that we feel really good about. We think of free cash flow margin as the ultimate determinant of operating efficiency of a company and a clean metric to compare not only companies in the same sector but across industries as well. What's driving a lot of that margin expansion, obviously, continued robust top line growth and gross margin expansion that flows through EBITDA. Lots of things that we're doing in terms of cash collection, the DSO, I talked about using Agentic AI for a lot of those functions and then the continued discipline on CapEx. So combination of those things drive good visibility. We feel pretty good about 7% to 8%. And then several things in the pipeline for us to get to the 10% plus in fiscal '29.

Okay. And I think at some points in fiscal '25, you were talking more about -- I think the word might have been aggressively buying back stock. How should we think about your approach to buybacks?

Yes, Steve. Yes, thanks for bringing it up. I would say, obviously, as we saw in fiscal '25, we made a strong commitment to buying back our shares. We returned more than 150% of our free cash flow. Our dividends have been growing at a double-digit growth rate for the last 5 years. We -- obviously, it's a board decision, but we intend to continue to grow the dividends at 10% plus. And then on the buyback front, we've been pretty aggressive buyers of our own stock because we got tremendous value there. And we'll continue to be buyers of our stock. We want to be disciplined about being in the market every quarter. We want to be opportunistic as well. In terms of market dislocations, we will be more aggressive. But we have a strong commitment to returning at least 60% of our free cash flow to shareholders in the form of buybacks and dividends. And we've stated this on the call, given the dislocation that's happening now, we'll be more aggressive than we have been.

Great. I'm going to turn it back to see if anyone has any questions in just a minute, but maybe just to round out the discussion, just in terms of business optimization and margin opportunities. And you've talked a little bit about various things during our discussions here today, but maybe to bring it all together, if you think about what were some of the things that you can do to optimize the business and margins in 2026 relative to what you accomplished in '25?

Yes. So 2025 was primarily driven by consolidating our enterprise functions and the overall business structure as it related to the separation of the CMS and C&I business. So I think that was more optimization across the entirety of the company, driven by kind of the structural things, if you will. What we have said going forward is the -- a lot of the margin expansion is going to come through gross margin expansion, the 3 buckets that I identified earlier in terms of global delivery, the commercial models and the mix, but also continued discipline in terms of operating leverage such that if we plan to grow our top line by mid- to high single digits, we are making a commitment to growing the OpEx at a slower pace. And this goes back to AI, where as a result of AI, we don't need to grow the headcount at the same pace as the revenue growth as in past years. So I think that will drive some meaningful growth both on the top line as well as margins.

Terrific. Okay. One last check to the group. Anyone have any questions like to ask? If not, then Bob, I'll give you the last word here. Anything else you want to just make sure we take away from today for the messaging, anything you really want to kind of hammer home?

Yes. Steve, first of all, again, thank you for having both Venk and I here. We're excited. We came off of a really solid year. If you think about last year with some U.S. administration changes in the first half of the year, that growth was not quite where we wanted to. We recovered in the second half of the year and made the year. So we're coming off of a really solid year with some really nice tailwinds going into next year. We're excited about our end markets. If you look at the scale and depth and breadth of what's happening in our end markets right now, we're ideally positioned to really be a great partner to our clients as they're dealing with some of the greatest opportunities as well as some of the greatest challenges that the world has ever seen, and we're right in the middle of all of that. And what's been an accelerant and is really going to propel us is our great human capital, coupled with strong AI enablement. And so, it's going to be a great time.

Fantastic. Well, we look forward to following the next year.

All right.

Thanks so much for being here. Really appreciate it.

Yes. Thank you.

Thank you.

Good morning, and welcome, everyone, to Jacobs Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. Today's conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Bert Subin, Senior Vice President, Investor Relations. Please go ahead.

Thank you, [ Audra ], and good morning, everyone. Our earnings announcement and 10-K were filed this morning, and we have posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to Slide 2 of the presentation for information about our forward-looking statements non-GAAP financial measures and operating metrics.

Now let's turn to the agenda on Slide 3. Speaking on today's call will be Jacobs' Chair and CEO, Bob Pragada; and CFO, Venk Nathamuni. Bob will begin by providing comments on the business as well as highlights from our fourth quarter and fiscal year results and a recap of notable awards. Venk will then provide a detailed review of our financial performance, including commentary on end market trends cash flow, balance sheet data and our FY '26 outlook. Finally, Bob will provide closing remarks, and then we'll open up the call for questions.

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

Good day, everyone, and thank you for joining us to discuss our fourth quarter and fiscal year 2025 business performance. We delivered strong results for Q4 and are pleased to end FY '25, the first year of our 5-year strategy on a positive note. For both the quarter and the fiscal year, we drove strong double-digit growth in adjusted EPS and supported by solid revenue growth and robust margin expansion. Our consolidated backlog grew 6% to $23.1 billion, setting a new record to close out the year, and PA consulting capitalized on strong demand delivering double-digit revenue and operating profit growth in the second half of FY '25.

Overall, we are very pleased with our results, and we see great runway as we enter FY '26. Turning to Slide 4. We provide a detailed overview of our quarterly and full fiscal year results. We grew Q4 adjusted EPS by 28% year-over-year, and this was primarily driven by 6% net revenue growth, a record quarterly adjusted EBITDA margin of just over 14.4% and better below-the-line performance. For the full year, we grew adjusted EPS 16%, largely as a result of mid-single-digit net revenue growth and strong margin expansion. We've also seen a solid EPS tailwind from share repurchases which we increased significantly during FY '25. Reflecting on our expectations, last quarter, we guided to an adjusted EPS range of $6 to $6.10 for FY '25 and we were able to finish the year above the high end of that range at $6.12.

Turning to Slide 5. I'd like to highlight a few notable infrastructure and advanced facility project awards from Q4. These wins highlight the power of our strategy to redefine the asset life cycle as we prioritize expanding our addressable market with core clients. We continue to see a positive outlook in water and environmental, particularly in the water sector, which remains one of our most resilient and high-growth areas of our portfolio. Our full life cycle delivery model, enabled by deep domain expertise and leading digital capabilities helps our clients address aging infrastructure, scarcity issues and regulatory changes around the world. Demonstrating the trust our clients place in Jacobs to deliver long-term outcomes, we extended our operational intelligence agreement with United Utilities, the largest listed water company in the U.K. through 2030.

Using our AI-powered Aqua DNA platform, we're helping modernize utility operations and deliver measurable, sustainable benefits for millions of people. In the Life Sciences and Advanced Manufacturing end market, data centers and life sciences continue to be 2 of the fastest-growing sectors in our portfolio. Additionally, our revenue growth in these sectors is now being complemented by new semiconductor investments. As an example, we were awarded the design for a commercial scale semiconductor fabrication facility by a confidential customer. Our scope encompasses the design and engineering of a greenfield semiconductor manufacturing plant along with its related infrastructure and manufacturing support facilities. We are also seeing strong demand across the critical infrastructure end market, with all verticals performing well during Q4.

In the U.K., together with PA Consulting, we were named to the Crown Commercial Services Management Console framework. This appointment expands our role advising public sector clients on delivering cleaner, smarter infrastructure and maximizing value from public investment across transportation, sees, defense and clean energy. In the U.S., we continue to build on strong momentum in the transportation sector. In New York, we were selected by the MTA, North America's largest transportation network to deliver the Interborough Express Light Rail project, a transformative new 14-mile transit line connecting Brooklyn and Queen. The project will enhance mobility, reduce travel times and promote sustainable transit-oriented growth for New York City communities.

In summary, these awards reflect our continued momentum and highlight the broad secular tailwinds driving growth across our business. As I reflect on FY '25, we met or exceeded all of our annual targets continue to drive robust bookings, stayed true to our disciplined capital return policy and now enter year 2 of our strategy cycle on track to achieve our long-term outlook.

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

Thank you, Bob, and good day, everyone. During fiscal year '25, we delivered our commitment to drive profitable growth which consisted of double-digit growth in both EBITDA and adjusted EPS as well as a 7% free cash flow margin. We're demonstrating our differentiated business model to strong margin expansion, and we see continued opportunity to increase our margin profile moving forward.

Now please turn to Slide #6, where I will walk through our results for Q4. We finished fiscal year 2025 on a strong note. In the fourth quarter, gross revenue increased 7% year-over-year, and adjusted net revenue, which excludes pass-through revenue, grew by 6%. Q4 adjusted EBITDA was $324 million, growing 12% year-over-year. Our adjusted EBITDA margin during Q4 came in strong at 14.4%, which is an increase of 79 basis points versus the same quarter last year. As a result, adjusted EPS rose to $1.75, a 28% increase year-over-year. Our disciplined cost management contributed to a new record adjusted EBITDA margin, both during the quarter and for the full fiscal year, and we're well positioned to build on this momentum in fiscal year '26. Consolidated backlog was up 6% year-over-year to a record $23.1 billion, including our trading 12-month book-to-bill at 1.1x. Notably, gross profit in backlog increased over 13% year-over-year during Q4, highlighting our strong sales performance.

Moving on to Slide 7. I'll recap fiscal year '25 results. Fiscal year '25 total gross revenue increased about 5% year-over-year with adjusted net revenue rising more than 5%. Revenue growth and higher margins resulted in adjusted EBITDA and adjusted EPS increasing by 14% and 16%, respectively. We are pleased to end fiscal year '25 in a strong position with mid-single-digit organic revenue growth mid-teens adjusted EPS growth and a backlog that sets us up well for the future. Regarding our performance by end markets and infrastructure and advanced facilities.

Let's now turn to Slide #8. At a high level, net revenue growth across our 3 end markets was slightly consistent in fiscal year '25. With Water & Environmental and Life Sciences and Advanced Manufacturing growing just over 4% and critical infrastructure at about 6%. Focusing on Q4, net revenue increased more than 9% year-on-year in critical infrastructure. Our strong growth was a function of several key programs ramping up in the transportation sector and continued momentum in Energy & Power with favorable trends in both the U.S. and internationally. As we look ahead, we believe continued tailwinds in the transportation and energy and power sectors will be underpinned by improvement in CDs and places. In our Life Sciences and advanced manufacturing end market, net revenue grew a little more than 5% in Q4, a modest improvement from Q3.

During the quarter, we saw strong net revenue growth in the life sciences and data center sectors, but a tougher comps in the industrial portion of the portfolio. Positively, we are on track to fully lap these tougher comps and are seeing semiconductor programs ramp up. which we believe will benefit our setup in fiscal year '26. Net revenue for our water and environmental end market was roughly flat year-on-year in Q4. Our demand across these 10 markets was mixed with continued strength in the water sector, offset by softer revenue performance in environmental, particularly in the U.S., where both public and private clients moderated spending more than anticipated. Looking ahead to fiscal year '26, we expect water to remain a key growth driver. And on the environmental side, opportunities are reemerging as we position for a return to growth. In summary, we're seeing favorable trends in each of our end markets and believe we are entering the new fiscal year with solid momentum.

Moving on to Slide 9. I will provide a brief overview of our segment financials. In Q4, Infrastructure and Advanced Facilities operating profit increased 16% year-on-year with a modest tailwind from FX. In fiscal year '25, operating profit increased 13% year-over-year, and on a constant currency basis. Infrastructure and Advanced Facilities results were aided by both revenue growth and margin expansion. Now moving to PA Consulting's performance. Revenue increased 10% year-on-year in Q4. This contributed to a 17% increase in operating profit or 13% in constant currency on a strong operating margin of 23%. The PA continued to benefit from rising demand for services in the public and national security sectors, driving double-digit growth in their backlog. For fiscal year '25, operating growth for PA was in line with Q4 performance. As we look ahead to fiscal year '26, we anticipate PA's revenue growth will be similar to our consolidated growth rate.

Turning now to Slide 10. We provide an overview of cash generation and our balance sheet. For fiscal year '25, free cash flow generation came in at $607 million. As a reminder, this does not add back the impact of restructuring or other charges. Good free cash flow generation and our high-quality balance sheet enabled us to repurchase $754 million of our shares and pay out $153 million in cash dividends. As a result, we returned approximately 150% of our free cash flow during the fiscal year. Adding in our dividend of momentum shares distributed in May, we returned $1.1 billion to shareholders in fiscal year '25, a company's record.

We also paid down debt, ending the year with $1 billion in net debt yielding a net leverage ratio of 0.8x on LTM adjusted EBITDA, which is below our 1.0 to 1.5x target range. Our balance sheet strength supports continued investment in the business, along with continued returns to shareholders via share repurchases as well as long-term dividend growth. Our commitment to return capital to shareholders is evidenced by our recently approved $0.32 per share dividend, representing 10% year-over-year growth and our material increase in share repurchase activity this year.

Finally, please turn to Slide #11 for our fiscal year '26 outlook. We expect adjusted net revenue to increase 6% to 10% year-over-year adjusted EBITDA margin to range from 14.4% to 14.7%, adjusted EPS to range from $6.90 to $7.30 and free cash flow margin, which is free cash flow divided by adjusted net revenue to be in the range of 7% to 8%. Notably, our outlook for fiscal year '26 implies 16% year-on-year growth in adjusted EPS at the midpoint. We provide relevant assumptions on the right side of the page to help with your modeling. One item to be mindful of is the fact that fiscal year '26 will include an extra week during Q4, adding just over 0.5 to our net revenue growth rate. Additionally, as it pertains to Q1 we're forecasting 5.5% to 7.5% net revenue growth and a low to mid-15% margin. Note that Q1 is typically our seasonally slowest quarter due to holiday timing.

In summary, fiscal year '25 was a great first year in our strategy cycle. We executed to our 13.9% EBITDA margin target, which puts us well on our way to reaching 16% by fiscal year '29. We grew the top line mid-single digits, demonstrating resilience in a dynamic macro environment. In addition, we returned record amounts of capital back to our shareholders. As we enter fiscal year '26, we believe we are very well positioned to build on our fiscal year '25 performance.

With that, I'll turn the call back over to Bob.

Thank you, Venk. In closing, we're proud of our continued strong execution in FY '25. With the record backlog, expanding margins and healthy demand across the sectors we serve, we are entering FY '26 with significant momentum. Operator, we will now open the call for questions.

[Operator Instructions] We'll take our first question from Sangita Jain at KeyBanc.

Can I start with the federal government shutdown and if you think that had any impact on your fiscal '26 bookings to date?

Fiscal '26 or '25?

Well, the fiscal '25 ended and the shutdown started. So I'm trying to see if you had any impact in the early part of this year from the shutdown.

No, we did not. The bookings trend was -- those awards in the federal government happened before the shutdown. So the short answer is no, Sangita. .

All right. Great. And then can you give us an update on PA and how that process is unfolding?

Sure. Sure. So our negotiations continue, and I would say they're progressing. We said from the beginning that we would be making a decision on that on or before March of '26, and we're on track to do so.

We'll move next to Andy Wittmann at Baird.

I guess my first question is just on the water and environment portion of your business? Obviously, we saw some deceleration here, Bob, you mentioned the environmental business has been a little weaker. I was hoping maybe you could just drill into that. It seems like the water side is strong, but what was it about the environmental side that caused a little bit of softness? Would you tie that to anything? Maybe the administration change or something else? And what are the indications that you have today? You made some comments that you see that improving going forward. And I just wondering kind of what that's based on. So I thought you could drill in a little bit more there.

Yes, absolutely, Andy. Maybe just -- I'll start with the positive. So the water sector continues to be strong. The pipeline is up double digits as well as our booking trends. So we still see high single-digit growth in the water sector moving forward into FY '26 and beyond. And that's global. All major geographies are participating in that. In the environmental sector, kind of 2 dynamics that played out during the year or actually during Q4 -- accentuated in Q4. One was we did have a onetime event, a positive on last year's comp.

So that was one. But from kind of the core of the business, the regulatory volatility right now within the environmental world has put a bit of a pause for our private sector clients. And so until those kind of settled down, our private sector clients are tending to pull back a bit of the spend that we saw traditionally and these are some of the larger industrials as well as chemical folks. On the public sector, it really was about disaster relief. The traditional -- the kind of switch of FEMA funding and application down to the state level. there was a bit of a pause on how the states were going to, especially after the BBBA was passed, how states were going to reorganize their budgets. And so we saw some delays in awards as well as a pullback in FEMA.

Got it. Was the theme of the onetime item for the prior year? Or you're saying that's that affected this quarter?

No. The prior year -- the Q4 of FY '24 onetime was a federal agency outside of the U.S. that we had a onetime event.

Got it. Okay. And then just for my follow-up, maybe for Venk. We saw the guidance here on free cash flow. Just the bridge you're now doing it as a percentage of revenue, but if you convert it back to the old way of doing it, it's under 100% targets. And I was wondering what the items in the '26 outlook are that bridge you because, obviously, the business fundamentally is equipped to deliver at 100% or greater. And so that means something is kind of unusual or included in this number that we should all about. And I thought maybe you could expand on that a little bit more. .

Yes. Thanks, Andy, for the question. I'd say, first of all, I'd point out that as we stated at Investor Day, free cash flow margin of 10% target, we're well on track for that. We delivered 7% this year, and we're guiding to between 7% and 8%. What we have imputed in that guidance is that there is a kind of a onetime tax event unrelated to our continuing operations that we're expecting some time in fiscal '26. So we just want to give transparency to that. And then on top of it, as Bob alluded to in response to Sangita's question, we are expecting a resolution on our combination with and we're just assuming some cash expenses associated with that. So those are the things that we want to factor in. We feel really good about our free cash flow margin expansion, and we think that will be a true indicator of the efficiency of the business. And you're absolutely right, our efficiency has been improving, and we see continued growth in that in fiscal '26 and beyond.

We'll move next to Jamie Cook at Truist.

Congrats on a nice quarter. I guess my first question, with regards to the margin performance in Infrastructure and Advanced Facilities, we saw a nice improvement there. Anything unusual in margins and how to think about the cadence of margins in that segment as in 2026? And then my second question, Bob, to you sort of more strategically, your peer -- one of your public peers came out this week talking about their competitive advantage on AI and what that means for margins for them over the longer term. you have similar business models. Just wondering how you're merging AI? And is there a margin opportunity outside what you've already announced given your peers came out with much more bullish margin targets longer term?

Great. Thanks, Jamie. On the first part with regards to margins in I&F, I'll let take that, and then I'll address the AI question following. So Venk?

Great. Jamie, thanks for the comments. I'd say in terms of our margin performance continues to up into the right, really solid performance across the entirety of our business, also a good job of improving our cash collections and so forth. I'd say as we guided to in the prepared remarks, when it comes to Q1, there will be a sequential slowdown and a seasonal slowdown driven by a couple of factors. One is fringe as it relates to things like medical insurance costs and health benefits that typically have an impact in Q1, but you get the recovery in subsequent quarters.

So we'll see a linear progression in margins throughout the rest of fiscal year '26, but we wanted to make sure that we were transparent in terms of how to model it for fiscal Q1. So that's number one. And as it relates to the overall free cash flow margin target of 7% to 8% imputed in that, as I mentioned earlier, is the fact that we're continuing to see operational improvements in the margin performance, combined with some of the onetime items that we expect to happen in fiscal '26. And all of that is imputed in our margin guidance.

And then on the AI question, Jamie, we've been very vocal about this since dating all the way back to 2021. In fact, if you remember in our '19 and '22 strategy, we -- and it was the origins of the partnership with PA Consulting as well. So this is a journey we've been on for over 5 years. How it's transpired. We see it as an accelerant and differentiator, a space that we continue to use to primarily provide greater solutions externally for our clients. And that has realized itself, and these are things that we've highlighted in the past. All the way back to 2021 being able to deliver a transformational effort for Intel as they were expanding their business model into a foundry model back in '21 that was done through machine learning and digital replication.

That then led to our partnership with [indiscernible] and all of the water platforms that we have developed since in reference on in Aqua DNA as well as intelligent O&M that's really creating a differentiated position to gain efficiencies for our clients. Most recently, we announced a partnership with NVIDIA where we're utilizing AI enablement platforms as well as digital cleaning technology to simulate gigawatt plus type data centers and creating a reference design for NVIDIA clients and even going all the way up to today where street light data is providing unbelievable transportation analytics for major metropolitan areas around the country. In fact, over 26 state DOTs are utilizing the Streetlight platform. And so kind of you look at that portfolio and it's creating a differentiated position for growth in the market. And it is contributing to our margin expansion as we continue to go up the value chain.

Congrats on the nice quarter.

We'll move next to Andrew Kaplowitz with Citi.

This is Natalia on behalf of Andy Kaplowitz from Citi. Congrats on the quarter. Maybe first question I'll start off with. You cited that transportation was a contributor to growth. But I'm just curious how the funding visibility under IIJ is progressing? Are you seeing any delays or accelerations as new money flows through the states?

We're not. We're not. That continues to be a catalyst. But I would say that transportation number, we're seeing globally. It's not just in the U.S., but nice growth that we experienced in Europe, Middle East as well as in Australia and New Zealand. So it's something where -- and again, it kind of goes to the previous question too, differentiated position, utilizing strong transportation analytics and driving mobility concerns. So it's -- I'd say IA is a component budget clarity in the U.K. is another component. Growth in the Middle East as well as Australia continues to be a really strong market for us in the transportation space.

Got it. That's super helpful. And maybe just continuing on the strength that you see [indiscernible] transportation, maybe more so just curious about the regional performance across your end markets, which regions outperformed expectations? And which ones are you expecting maybe to be a little softer in 2026?

Yes. We're seeing growth across the board, Andre. It's -- our business domestically in the U.S. has got some strong tailwinds behind it. But we're not seeing -- let me say it in the positive. Our business outside the U.S. and internationally is in growth mode. We've got double-digit growth going on in the Middle East. Europe is going through a nice recovery. And Southeast Asia and Australia and New Zealand are really being buoyed by strong transportation and water growth. So it's pretty uniform for us across the globe. .

And if I could add to just what Bob said, I mean that's true of the PA business as well. We're seeing some good solid momentum in the PA business, especially in the U.K. and Continental Europe.

We'll go next to Steven Fisher of UBS.

I wonder if I could just follow up on Jamie's question on the margin in terms of bridging the expansion in margins between fiscal '25 and fiscal '26, if you can kind of be a little more specific on some of the major puts and takes, be it cost savings, operating leverage, any specific investments that you're making to support AI and digital? Anything that you can help us sort of bridge what's in that.

Yes. Thank you, Steve. So as we mentioned in the prepared remarks, fiscal '25, solid performance in terms of 110 basis point margin expansion. And we're guiding for between 50 and 80 basis points for fiscal '26. A lot of what happened in fiscal '25 was driven by some of the operating leverage and cost actions as well as some early improvements in margin as it relates to gross margins. we see a much bigger contribution, especially on the gross margin line going forward, driven by 3 things that we outlined at Investor Day, global delivery being a big component of it. As we look at the mix of business across the globe, we see that there's tremendous adoption of global delivery across our various end markets.

So that should be a meaningful driver of margin expansion for us this year. And then we talk about commercial models and how with the adoption of AI that's increasing across the multi-let of end markets that Bob talked about, that also makes a meaningful contribution to margin expansion. So I would say multiple levers on the gross margin front. And then we are committing to maintaining our operating leverage, meaning we want to grow our OpEx at a slower pace than our revenue growth, and that's driven by both efficiencies as well as what we do internally as well as externally for our clients. So a multitude of factors, we feel really good about our margin expansion story, and we're guiding for basis points at the midpoint after a 110 basis point expansion in fiscal '25.

Very helpful. And then, Bob, maybe on the data center side, since I think you guys have a pretty interesting perspective and role in the industry. being on the front end of things. I'm curious if you could talk about the changes in the assignments that you're getting this year versus a year ago. what are your customers asking you that's different this year? What are the -- how are the projects different? Is there anything more international or more domestic. Any changes there? Just curious your perspective on how things are different entering '26 versus '25?

Sure. Well, let me start with the geography and then go to how our scope is expanding in that area. We're seeing interest now in data center starts in the Middle East and in Europe in addition to the U.S. The U.S. continues to be the strongest of the 3. So -- but it is expanding into Europe and to the Middle East as well. from a scope standpoint, our scope has traditionally been within the white space. the white and the gray space are now emerging. And so especially the work that we're doing now for NVIDIA is translating into a more innovation happening within the server rack in that white space area. And then broadly, solutions around the power requirements behind the meter as well as reclaimed water that we're expanding our scope on that front, too. So all of that put together has really been a net benefit.

Just another data point, Steve. In the last quarter, our pipeline in the data center space has gone up 5x. And so we're actually being selective on how we deploy that talent and growing that talent not just in the U.S. but in the Philippines and in India as well.

We'll go next to Michael Dudas at Vertical Research.

Bob, maybe tailing off your last comment on pipeline, which is for maybe you could share you've put out, I guess, in your investor day, 2-year pipeline outlook and you of the segments. Maybe you can refresh on that, how that looks today versus a year ago? And what areas should we be looking at as we monitor on bookings and progress as the year goes through, there are a certain couple of areas. I mean you just touched on some of them, but [indiscernible] the pipeline and whether the conversions are going to happen sooner rather than later that might drive the -- to 10% range of '26 numbers.

Sure. Maybe Mike, I'll kind of segregate it into 2 categories, 1 by sector and then second, by geography. By sector, I'd say the fastest-growing pipelines, and I can quote some numbers here in the data center world just mentioned, pipeline is up 5x. In the semiconductor world, we're seeing more growth there after some flatness over the course of the last year, and it's really centered around high bandwidth memory for the American client in the U.S. semiconductor pipeline is up 20%. And Life Sciences continues to be strong. And in all those areas that we mentioned before, that's really been driven in the U.S. That pipeline is up 50%. And and the water sector. The water sector continues to be a strong sector for us globally, and that's up 50%.

So overall, the pipeline is looking really, really strong as we go into FY '26. The reason why I mentioned those 4 sectors is because that's where we see the fastest conversion of that pipeline in '26 and in early '27. From a geography standpoint, it's the Middle East. We just announced the award for Neumuraba, specifically the [indiscernible] component of that. That's a huge -- a really good job for us. We're now on the expo and we've got a few opportunities at Abu Dhabi and [indiscernible] that could convert here shortly. So across the Middle East region, we're seeing good growth leading up to not just the Expo, but also the World Cup coming up to.

Give me the visit in Washington this week from the Saudi certainly can add to that visibility, I would assume. The second question, I think, just as we think about cadence through 2026 on free cash and share repurchase, just 2025 had a lot of artistic onetime issues. But how do we think about as you allocate that cash relative to share repurchase and whatever, maybe target on that relief or what have you as we look through '26?

Yes, Mike, thanks for the question. So I'll answer the margin question first, which is as we guided to expecting linear progression in margins, Q1 being probably the slowest in terms of margins and then a steady increase right through the rest of the year, such that we feel good about the 50 to 80 basis points for the full year. As it relates to our use of cash, as we pointed out, our net leverage ratio is right now at 0.8x. We do want to maintain the optionality for additional deployment of cash for a potential increase in our stake in PA as we've been stating all along. But outside of that, we want to be regular buyers of our stock. We truly believe in the value of being predictable in terms of buying back shares, and we'll do it at a regular quantum. And it won't be at the same level as opposed last year but we made the commitment at Investor Day to return at least 60% of our free cash flow in the form of share repurchases and dividends, and we're committed to that.

And we'll take our final question from Jerry Revich at Wells Fargo.

Given the top line outlook you have for the year and ink, which you shared for the first quarter, you could be exiting if you at the high end of the range with, call it, 13% top line growth in the fourth quarter. Can you just talk about if you do hit the high end of the range? Given the color you provided earlier, Bob, which end markets do we need to see that pipeline turn into bookings if we're talking about the high end of the outlook being feasible and exit to get that teens growth rate in the fourth quarter, if that plays out? .

Yes, Jerry, I'll take the first part of the question, and then Bob can add a lot more color. I would say in terms of the sequential nature of the growth profile as well as the margin profile, you expect -- we expect to see continued momentum right through the year. And as we stated, Q4 is the one which will have the extra week, so that will have an extra room for fuel in terms of both revenue contribution as well as margin contribution. But in terms of the end markets, it's pretty broad-based, and maybe Bob can add more color on how we expect that to play out.

Yes. The ones that would drive the high end of the range, Jerry, would be life sciences and data centers, clearly, and really that's a matter of those sectors moving at pace. That wouldn't have to be accelerated. Just need to move at pace, and that will be a big contributor. We're seeing semiconductor fabrication facilities start to move. And so if that were to accelerate, that would definitely be a tailwind. Momentum, I think on Citi's question with regards to transportation, that international transportation market would provide some momentum as well. And then major prospects. We're seeing major prospects in cities and places in the Middle East, but also we're now starting at the L.A. Olympics as well FAA and a few other kind of larger initiatives that would drive the higher end.

And then, Bob, on data center, specifically, you mentioned a fivefold increase in that pipeline for you. Obviously, that market is very hot, but I don't think it's up 5x. Are you folks expanding the scope of what you're doing within data centers? Or is it people are looking further out to lock in services? Can you just expand on that fivefold comment? And if you're willing to share off of what base from a Jacobs' standpoint, that would be helpful.

Yes. Just to put in perspective, it's about a $200 million business for us today. And over time, I won't be specific on time, but that business could be as big as our Life Sciences business today in a few years. So that's kind of where it's headed. I'd say it's across the board. It's hyperscalers. It's what we call kind of the neo cloud providers as well as multi-tenant players as well. And it's in just sheer numbers of people that are coming into the market. our scope has expanded from a content standpoint, going within the battery limits of the data center into the water requirements as well as power needs and that's a nice kind of adjacency with our Energy and Power group.

And then alternative delivery. So similar to what we do in the life sciences sector, where we -- as well as in the water sector, where we do not just design but program management for the delivery of the facility, we're now in that mode in the -- I'm sorry, in the data center space as well.

And anything you could do to improve traffic in the New York area. A lot of us on the call would be grateful.

We're working on it, Jerry.

And that concludes our Q&A session. I will now turn the conference back over to Bob Pragada for closing remarks.

Well, thank you. Thank you, everyone, for joining our earnings call. We look forward to engaging with many of you over the coming days and weeks as we go on the road and hope all that are celebrating the U.S. Thanksgiving have a happy holiday.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Thanks for joining us today. I'm Adam Bubes, I'm an engineering and construction analyst here at Goldman Sachs. And I'm delighted to host today's panel on water and land efficiency. Rising temperatures, growing and aging global populations and a heightened focus on overall resource security have all intensified to focus on water and land efficiency. We're increasingly seeing headlines in the press about problems related to too much or too little water and ensuring security of supply for key resources while minimizing environmental impacts. This panel is going to explore both leading corporates and investors that are addressing these challenges of meeting reliability needs while maximizing efficiency.

We have with us today a range of experts: Susan Moisio, Global Water Market Director at Jacobs Solutions. Jacobs is a global leader in water infrastructure. We have Matt Diserio, Co-Founder and President of Water Asset Management, an investment firm focused on water. And Ara Erickson, VP of Corporate Sustainability at Weyerhaeuser, a major land and timber manager.

So let's start with you Susan. Jacobs Solutions is at the forefront of designing and implementing water infrastructure. Can you just outline where Jacobs plays in the water space? What's your core approach to helping customers? And what do you see as the biggest demand drivers for this portion of your offering across each of the water verticals?

Thank you. Pleasure to be here. So as Jacobs, we look at water from a 1 water endpoint. And what we mean by that is that we -- all water has value. The solutions that we've got to come back with, have got to look at this complex and interconnected way that water is not only procured, but how the water cycle is in real life, if you will.

So from that standpoint, we also manage this from the complete asset life cycle from planning to design to construction and operations and then back to asset management.

So looking at it from that standpoint, allows us to dive into providing complete solutions for our clients from also a digital standpoint. And I think the importance of our digital offering is that because we are in the operations business for water and wastewater, we're actually able to show that the digital offerings that we are developing, that we're using them and they are working for our clients and for us.

And then the final thing I would say is that what is driving water in our -- for us is it's either too much water, such as we're hearing you can't actually see anything outside the windows because of that. There's too much we either have too much water from a climate change standpoint or too little water from also a climate change standpoint, such as water scarcity in the western part of the United States or we have a water quality issue.

So I'm going to stop there and let's move on.

Terrific. Well, let's move from the waters to the timbers. So Weyerhaeuser manages vast timberlands or help us understand how do you integrate sustainable forestry practices and land stewardship into your business strategy to ensure water quality and also forest health and then what are some of the KPIs you're using to measure this progress? What lessons have you learned from managing such extensive natural assets?

Yes, great question. Good morning, everybody. I think this is my third year being here, and you guys always do job giving us many questions at one time. So I'm going to touch on just a couple of aspects of this as one of the world's largest force land owners and also manufacturers of wood products. Forest and water have a like inherent connection. So our trees cannot grow without water. And we -- so we cannot physically grow our assets or then sell our logs or create our wood products that go into important things like homes and buildings around the world without water.

Now I like to joke, some people ask us, do you water your trees, how much water does it take to water your trees and I like to picture all of these little elves out watering every tree. But in reality, we rely on rainwater. And so rainwater falls on our forests and then our forests absorb that, uptake that water and create these beautiful things that we then love and also can use as valuable assets in the world.

So water and forests are important. Mostly in forest, that's about water quality. And that's about how do we make certain that the water that is being filtered and used on our forestlands, falls on our forestlands, returns to the water cycle. And as Susan mentioned, it's all connected. And that, that water is then clean for downstream uses, like cities and New York City, for example, not our forest, but New York City has a protected watershed upstream that provides filtered delicious water. I hope you're all drinking it from the tap. I'm not right now.

So we think about water quality, and I'll get into later about how we sort of manage for that water quality in our forests. Some of those KPIs are things like, so how big are our riparian buffer so that we can protect water quality in our forests. And then we have an assurance program around our forest management and the fiber we procure from others, other landowners around things following best management practices around riparian areas. That's what we look to.

Can we meet those expectations? And then can we pass on that assurance to our customers and can our investors understand that we are protecting water quality, protecting riparian habitats and ensuring that the water that we are so fortunate hopefully falls at the right amount at the right time, and we'll get into this a little bit later, so that we can continue to manage that asset far into the future.

Terrific. Matt, let's bring you in from the investment perspective. Water Asset Management is obviously focused on water, but can you talk about the scope of your investable universe across the supply chain? And how has that focus shifted over the past few years in terms of where across water value chain or life cycle you're focusing your attention and with water stocks among the most overweight in sustainability funds today, where do you see the most underappreciated investment opportunities?

Our areas of focus are in global listed water-related equities and water resources in the Western United States. So those are the 2 areas of focus. We have 2 separate teams. One is a global listed equity team and the other is our private equity team. On the listed equity side, despite your comment, we're actually seeing more value in listed -- in certain sectors, a listed global water-related equities today.

For example, in the U.S., water utility infrastructure is trading at multiples that are where they were like 15 years ago, they basically had almost doubled during the 0 bound rate period, and then they -- many of them have corrected significantly. So there's a lot of value in water utility infrastructure. And when you combine that with the fact that privatization of water utility infrastructure has been a long-term theme since we started focusing on water investing, it's coming to -- it's getting realized today at a rate that we've never seen before.

So for example, there's about a half a dozen water utility infrastructure systems around the world that have historically been owned by governments that -- where those governments recognize their inability to fund the substantial capital investments required and they recognized the need for more efficient private industry-type operational expertise.

And what are they doing? They're listing those companies. So there's the opportunity set, the universe is growing. And in that particular sector, it's actually cheaper to express infrastructure through listed equities with daily liquidity than in private equity. And as we all know, literally trillions of dollars have been drawn into locked up private equity infrastructure funds. And a lot of those folks don't have -- they don't -- their mandate doesn't include listed equity. So it's a very underdeveloped and under kind of explored universe.

On the -- just quickly on the land and water side, the private equity stuff that we do is focused on -- we own about 70,000 acres currently of farmland only in the Southwest, very specific and selectively acquired farmland with senior water rights that has historically been used to flood irrigate low-value annual crops, primarily alfalfa, which has historically mostly been exported. And what we do is we buy that land and we crop switch from very thirsty alfalfa to a desert crop, it's drip irrigated, and then able on farm to save about 80% of the water and then we can sell or lease that water to the federal government who is looking for augmented supplies, cities, real estate developers, industry, energy generators, et cetera, et cetera. So when we're talking about land and water efficiency, I mean, that strategy, which we can talk about more is really directly focused on that optimization.

Super interesting. So let's shift gears here and talk about the actual economics of sustainable water and land management. Let's start with you Ara. Let's discuss the economics of sustainable forestry. What are some of the strategy Weyerhaeuser deploys to manage its forest across regions.

But can you highlight some of the practices put in place that are not required by federal or state regulations, but have a direct benefit on the portfolio and value chain. Are there any specific examples of in-the-money solutions, which provide tangible benefits, whether it's reduced operational risk, improve biodiversity, enhanced market value for sustainably sourced wood products.

Great. Well, I'll start with maybe -- again, I always kind of go back to the basics. So the basic thing that we can do to sort of enhance efficiency and manage is increased productivity in our forest lands. So since the -- since the 1930s, Weyerhaeuser has been replanting for us, by the way companies and agencies and organizations did not do that early before 1930s or the early 1930s.

Since the 1960s, we've been investing in what we call high-yield forestry. And what we're looking at is how can we actually grow a larger tree quicker on our landscape. And sometimes, we can only make a tree grow so fast. So we -- it's not like we can make a tree grow out of nothing. But so with that high-yield forestry, we've been able to increase the amount of literal wood that we can put on a tree in a shorter amount of time in a smaller acreage.

And I kind of go back to some of the times where we've stopped harvesting as much from National Forest or Public Forest in the United States. But the private sector has really been able to continue or maintain the amount of fiber available into the market by increasing our productivity. And Weyerhaeuser has been at the forefront of that.

So I actually think that is the first thing that we do is forest land owners have high productivity land. So we focus our portfolio in those lands that can grow the trees the best. We adapt to what's happening in the climate or related to, will there still be water falling on those trees? What's the growing season? And then what can we do for very targeted application of things like fertilizer to allow for those trees to grow faster? What kind of thinning operations can we do?

So that's a really basic thing that is not required regulatorily or compliance, but it's actually what improves our asset. We have many more examples of things that we are doing, where we measure for and enhance biodiversity and I am going to go back to that certification program again, because it is our assurance that we are improving and enhancing biodiversity, protecting water quality, working with communities, adapting to climate change. All of that is wrapped into both our forest management and then some of that is wrapped into our wood fiber procurement.

And that's what I would look to as sort of the evidence of where we are doing those things because it's impossible to sort of quantify at anything that's really digestible at the scale we operate. We have 10 million acres in the United States of highly productive forest land, and we manage 14 million acres in Canada. So it is huge. And what I look to is like where do we then prove that we are doing all these things that we were being asked to do to maximize efficiency, whether it's from water to the soil microbes. And that's going to show up in our certification and in our wood procurement programs.

Great. Susan, from a project perspective, what are the switching and investment cost for a customer to transition from traditional water infrastructure to more resilient and efficient engineered solutions? What are the premiums for innovative digital water technologies or integrated urban water planning and what are the long-term benefits? And then which type of customers and geographies are you seeing a more willingness to invest to mitigate physical risk?

So starting from the standpoint of -- that was a long question, my friend. I'm just going to protest that right now. Long question. So I have to get rest and think of the beginning of which you ask me. But kind of setting the stage for what we've got. When we're looking at our clients who are looking to be more sustainable, and I'm going to use an example one here in New York, Onondaga County. And Onondaga County has concerns and has consent decrees about their combined sewer overflows. So there's too much water and the water quality is poor. So that -- those are the issues that they are managing right now.

So they can go 1 of 2 directions. They can build big gray infrastructures, tunnels, storage tanks or they can look at this as a system. And that ties back into what Ara is doing is this is -- water is a system. It is -- if we manage it as a watershed, if we understand it as watershed, if we understand that it is not merely the municipal, but it is also the natural and it also is the people side of things, then we can manage this from a way that is sustainable.

So I got to your first question, okay? So now what are the switching costs? And so you want to be more sustainable and you want to invest in this, what does that take? Well, first of all, you have to understand what you have and what the opportunities are to make that happen. And in Onondaga County, that meant looking at and being willing to invest in green infrastructure, which makes it -- it's a longer-term proposition.

I just got back 2 weeks ago from London, where we just are commissioning the Thames Tideway Tunnel. It's a big CSO tunnel. I'm on what's called the design suitability oversight group for them, making sure that when we're -- we commission it, that it works in the way it was intended. So that's a decision. A decision was made. It is a good decision. It's a water quality-based decision. When you're wanting to be more sustainable, you have to think longer term in bigger area, a bigger and broader look at this. So was that your second one?

Last one is just which customers are you seeing are trying to focus on sustainability, which geographies, are there any shifts?

All of my customers care about sustainability and some of them can embrace it more fully than others. I'm going to use Singapore PUB as an example of one that has embraced it for many, many years and had developed a very 1 water approach of how they don't have enough water. And so not having enough water, they had to look at this from a water security standpoint. So that's an example of a government. But we're also looking and as we -- as AI data centers become more common, there's a big water play there. And so that's not our typical customer. That's a more industrial customer. So all of our customers.

Matt, from an investment perspective, how do you quantify the financial returns and risk associated with investing in water efficiency and reliability projects. And what metrics are you using to assess long-term value creation from these investments? When you think about factors like regulatory certainty, technological innovation, public perception, how do those factors play a role in your valuation and investment process.

Yes. On our private equity water resource development strategy, the -- we basically underwrite to kind of basically 3 or 4x MOIC unlevered. And the -- what's very appealing about the strategy is that the return profile is extremely asymmetrical, meaning that the risk of capital loss is minimal. And the reason for that is because we buy these assets at their agricultural value. And there's a substantial arbitrage between a molecule that is regulated or allowed to only be used for agricultural consumption. And then having that regulatory rules also allow for municipal and industrial consumption of that molecule.

Achieving that arbitrage is not easy. It takes a lot of work and it takes time, and you have to have the right asset when you select it when you buy. But if, in fact, we don't meet our underwriting objective, well, then we own a great farm pretty much usually unlevered and the underlying appreciation of agriculture in the U.S. has been roughly 4%, 5%, 6% per year on a rolling 5-year average for 50 years. So we've been doing this for 15 years. We've done it like 63x or something and knock on wood, we've never -- we don't have any assets that are worth less than what we bought. And we closed recently on a sale of water just in July where we met our established underwriting targets.

And one of the things that's super interesting is that these programs that we've -- these on-farm water conservation programs that we've initiated, I mean we're currently saving around 34 billion gallons of water a year, which is a massive amount of water. And the outline that we've got for the next few years is to double that again. The crop switch that we're engaged with also has an additional benefit in that the -- our partner for every acre they plant with us, they don't cut down 20 acres of forest. It's a replacement crop.

So if you think about 50,000 acres, that's 1 million acres of forest that don't get cut. That has a carbon sequestration component, biodiversity and a whole bunch of other virtuously cyclical things. So the strategy generates great returns. It does it in a very low-risk fashion, and it does it with a lot of impact.

Great. So let's switch gears here. Now that we've better grasp on that economic perspective, let's explore some of the technologies that are being used to deliver the solutions. Ara, let's start with you. How is Weyerhaeuser leveraging technology to monitor precipitation and cultivate seedlings that can withstand the changing temperature and climates. And then are there direct impacts to the harvest cycle and how quickly can you grow your resources to provide financial returns?

Yes. Great question, much shorter. Thank you. So I think we -- many of us are here this week for New York Climate Week, and one of the real impacts that we are seeing is in some places, there's a lot of water falling in much heavier amounts. And in some places we're seeing, places where we aren't getting water falling when we're expecting it.

So as a -- we have the benefit of having land all across the United States and managing land in Canada -- and 125 years of analytics and information. Obviously, the analytics looked a little different 125 years ago, but analytics and information about our growing conditions of our forest.

And that means in some areas, we have longer growing cycles like in the Southeast, it's raining a little bit more, and it's very warm temperatures. And so forests actually are responding pretty positively to that. We have areas that are quite wet sometimes for harvesting, and so we may need to adapt when we are harvesting in order to make certain we can maximize getting those trees out and then replanted in the right time frame.

In the West Coast, where it's a little bit warmer and a little bit drier in some places and potentially a shorter growing season because summer is extended in some places, we are looking at how and deploying when we plant our seedlings potentially at different times of the year. We may be planted in the spring and we may need to look a little earlier. Those are all things that we have the ability to adapt to. We grow our own seedlings. And we also collect our own seeds then, and we can then be looking at and doing what we call tree improvement, not genetic modification, but traditional breeding to be pulling seeds potentially from maybe lower latitude areas, planting them in higher latitude areas so that they can be growing in these drier conditions.

As a large company, we have the ability to do that. We also then produce seedlings for others to purchase so that those can be adapted in certain places. And I think that's the base technology. It's like how do we understand where growing conditions are best suited for the types of seedlings we are growing. That is our biggest technology that we have right now.

We're also -- I'll just touch on like 2 other examples of where we're doing applied research with universities. The forest sector has a long history of working in co-ops and with universities to help support how we manage our forests, both public and private across the United States. And we've deployed -- we're working with the university to deploy acoustic monitoring for things like pests, so you can actually hear them.

If those are issues on our lands or other lands, those are things that are happening in a changing climate. But forests have also like they've been adapting for millennia. They will continue to adapt. It's really our job as a steward of those forests and of the asset right now to best adapt to what's happening right in front of us and project out in the future. So I'll just end on, we plant a tree today, it takes us many decades before we can reap the return on that. So we have to do everything possible to make certain we are reducing the cost and then the survivability of that tree, of that seedling.

So we get capital, we deploy that capital, and it is in our interest and everyone who invests in us' interest in order to make certain that survives. And so we have a full -- we have -- it's very tied to our financial performance as a company. And it's -- but it's also tied to the stewardship of the resource that we have. So there's -- that's just one example, sort of very small scale, but all the way up to the top line of our company.

And Susan, what technology levers such as specific engineering technologies, digital water solutions, did Jacobs deploy and where you're seeing the most outsized impact on water efficiency and resilience. And then last question. What key challenges and opportunities do you see in reducing land and energy footprint of water treatment facilities?

Okay. Next time you invite me, I'm going to have Nora sit out there with the question. So they pop up, so I can remember them. Okay. So from a technical standpoint and technical, meaning whether it's a digital technology or a process technology. So we invest and develop both of those. And so I'm going to give you examples from a watershed standpoint that goes in then to how do we manage and operate a treatment plant more efficiently?

So we've developed a software called Replica many, many years ago. And Replica is about looking at that complete watershed approach of where all of the water -- it's a water balance piece of that. So you look at it and say, where does Ara need the water, where does New York City need the water? How are we managing this water balance. We move with that digital product into how do we do planning, how do we then operate the system more thoughtfully.

So we've developed what we call intelligent O&M. And by the way, as a company, when we name things, everybody gets together and names. So some of our names are not very cool and some of them are Dragonfly, okay? So we go over the whole balance of that.

So being able to test how you're going to manage a treatment plant or a water plant so that you can reduce the chemical and the power cost, that's what we've been focusing on. So we've been able to test that in the places where we're operating these plants. And then the tough thing about this is that truth in lending, if you will, I'm a civil engineer. Civil engineers were actually kind of easy for us to embrace tech. We live and die by. Operators of treatment plants, not so. They are a little skeptical because they're on the line from a requirement standpoint. They have to do this well.

So being able to show that we can make this work and that our operators will embrace it gives us then a case study that we can take and we can use that in other places where we're not operating it. So that's where we've seen the greatest benefit. We've seen the greatest -- being able to adopt it and show where we could take this elsewhere and do this around the entire world. Last piece of an example is, in Denmark, VCS is a long-term client of ours. Great sustainability client. I love the way that they think. We have worked with them to have an energy positive wastewater treatment plant, which means that not only are we more efficient in how we're managing that plant with them, but they're giving back to the community. And so being able to develop that with them, test it, pilot it and then take it somewhere else, that's where we see this going.

And Matt, what are some of the most exciting technologies today that you're seeing? What do you think has the greatest potential for driving water savings and resiliency at either municipal, corporate or household level?

Well, I'll answer that question like in 2 pieces. One is that the water industry, as Susan referenced, has been adopting and implementing technology to create efficiency pretty aggressively from the last, I'd say, 10 years, give or take. And so it's stuff like miniaturization of water quality sensors which enable 24/7 telemetry so that you can monitor water quality not just when you dip a little bottle in a water system to measure and then take it to a lab, but it's nonstop water quality analysis.

The whole Internet of Things, i.e., linking equipment together so that you can monitor it real time. And then obviously, there's all predictive analytics around both leak detection and pump efficiency, for example. So companies now can predict before a pump is going to fail. So they can anticipate that and not have a systems outage.

So there's lots and lots of technology that is being implemented to create efficiency and transparency. There's -- we get the question all the time, like is there a silver bullet technology that's going to solve water. The answer to that, in our opinion, is No. The silver bullet for solving water quality and water supply reliability is actually regulatory.

It's having the right regulatory framework within a service territory that requires ultimately full cost pricing, which enables the economic flywheel, which is the foundation of this industry to generate ultimately the cash to support capital investment, capital investment maintenance, operational management. And then as importantly, debt -- servicing debt and generating a return on equity.

And where you see regulatory frameworks like that, and I don't care whether it's in California or Manila. That's where you get very reliable 24/7 water because it's attracting all the capital that's needed, and that's where technology gets implemented.

The second part of my answer is that solar, renewables, in particular, solar and all of the data center and sanity going on right now needs land and we're experiencing a very kind of value-added opportunity on the land that we own and underwritten, which was not really part of the original underwriting. I mean we -- when we sell water, we often -- and we have leased significant amounts of our land to solar developers. And so we're getting an incremental value from multi-decade long leases from solar developers some of the land we own. And again, we knew we had access to some of this infrastructure, but it wasn't the reason we bought the land.

We'll have natural gas pipelines, for example, on the land. It will have close proximity to large fiber trunks -- and right now, everybody is looking for multi-gigawatt scale data center development and the grid is we're going to hear more and today it is going to be very hard for the established grid to provide that. So we're going to see, I believe, we believe an explosion of behind-the-meter power development. And in order for that to happen, you need land, you need water and you need access to either solar and/or natural gas.

And the number of pipelines that have that kind of multi-gigawatt gas deliverability, available capacity with a good gas source at the end, there just aren't that many of those. So if you've got one, it's a very value that combination of assets where there's also a solar coefficient that can become a very valuable asset. So 2 answers to that with regards to technology.

So we've covered a lot. Let's wrap up here by focusing on what's next for this theme. Matt, let's stick with you. What do you think is a water land management technology or topic today that's underappreciated? And what do you anticipate changing stakeholder opinions to catalyze greater attention and action for it?

So we started 20 years ago on the core belief that water is and will become and it is now really the defining resource of this century. And I think the thing -- most people don't -- one, don't realize that water is an investable asset class. And then number two, most people -- and I say most people, most like sophisticated allocators still don't understand that water has been an outstanding place to invest. I mean water -- water investing has outperformed most widely -- many widely held asset classes for the last 20 years. And most people don't know that, whether it's the S&P or the MSCI, all world, credit, renewables, emerging markets, commodities.

And I mean, if you ask most people in this room, they probably would not have said that, that was the case. So I think it's important for people to understand that water is investable. It's a great -- the returns outperform many asset classes. And the reason that's important is because -- and some of us mentioned in an earlier panel, climate change is bad because of the intensification of drought and flood. The whole community has been focused exclusively on mitigation and mitigation strategies for the last 10 or 15 years. We need balance with adaptation, not only in mind share, but within capital allocation. And adaptation is water. That is, it's water-related companies and water-related assets and water-related solutions to address the intensification of drought and flood.

And Susan, given the growing global focus on water footprint of agriculture, how is Jacobs extending its expertise in water resource management to improve efficiency on agricultural land. And are you exploring new digital solutions to address this?

We are. So we've had a focus as we've gone through our recent strategy refresh on water, energy and food nexus. And how do we look at this not only from inside the fence from a plant standpoint, but how do we look at this for the entire watershed. So that brings in your ag piece of this. So from that standpoint, I think we've always done that, but we've done it in a way that was more siloed. And so as we go forward, we're going to put more focus on not only what are we doing from what we call pure-play water, but how are we impacting across all of our end markets. And how are we playing not -- I'm really excited, I'll be on this panel and hearing what you guys have going on because that -- I see that's the play to be in. It's not only, are we the best at designing and implementing treatment works, but are we understanding how we could play in an ag space, how can we play in AI data center space and how can we look across water.

Great. And then Ara, as the largest private timberlands owner, how is Weyerhaeuser benefiting should the value of carbon increase over time? And looking forward, how do you see Weyerhaeuser playing a role in climate solutions at scale? How is that tie into land efficiency?

Great. Well, I hope you hear some themes, and I'm going to build on both what Susan and Matthew said kind of as a wrap-up here. So obviously, forests are an incredible sink of carbon, and that's one of the really important -- I'm going to call it mitigation measures is that we need to maintain those carbon sinks, first and foremost. And to maintain those carbon sinks, especially in forests like ours, it means we need to have demand for what we do. We need to have investment for what we do as a forestry company that we can create and sell wood products. And I think, Susan, if we could build those data centers out of wood and manage the water there, we get a double whammy because that provides revenue back to companies like ours to maintain this forest.

Before we think about anything else in the climate change right now, it's about maintaining those carbon sinks today. So that's really important. So then we layer on additional revenue opportunities onto those forest lands because that's what we -- it's our responsibility as a company to do that. And we believe that the voluntary carbon market, at least in the United States, without a compliance market, the voluntary carbon market is the most readily available. It's not a silver bullet, but most readily available technology today to invest in natural climate solutions for climate mitigation.

That is by far the quickest and least expensive thing we can do. We are layering on those forest carbon projects onto our already existing working forest. We're balancing that, still producing wood products. That allows us to keep our forest. It allows us to increase the carbon stocks on our forest. We have to prove additionality in that. So we aren't just getting paid for a credit for something we're already doing. We're physically changing practices on those lands.

That allows us to add value by bringing in carbon credits, maintain our forest as forest, which, again, underlying the importance of those forest carbon sinks today and tying it to water, the water that falls on those forests is filtered, captured and filtered, and I'm a forestry student. I'm just going to end with this really simple analogy that I learned about water.

If you picture the trees with all these little tiny tea-cups, on them. When water falls, those tea-cups actually hold on to the water and then they go into the tree eventually and they filter down. And if there are no tea-cups out there, then all that water is going to quickly, very quickly end up into us needing to manage them at the end source through massive investments, which I'm really glad to know there are companies doing that. We rely on some of those in our wood products manufacturing sites, and we rely on them as people who live in urban areas in order to clean that water.

But if we go back to just letting those tea-cups be there, those forests can actually hold on to and retain so much water. So I think it's all kind of -- it's all cyclical. The water cycle is cyclical. The carbon cycle is cyclical. And it's really up to us to be putting our resources to those places where we know it can be both maintaining -- mitigating climate change and maintaining our water systems.

Terrific. So we're going to end with 1 last question for each of you, the same question. And we're just looking for 1 or 2-word answer here. So in a year, do you believe proactive investment towards water and land efficiency solutions will be modestly higher, meaningfully higher, flat, modestly lower or meaningfully lower than today?

We can start with you, Susan and just go down the line.

Meaningfully higher.

I agree, meaningfully higher.

I'm going to say, absolutely, and I sure hope so.

Terrific. Well, Susan, Matt, Ara. Thank you so much for joining us today.