雅各布工程 (J) 2016 Q2 法說會逐字稿

Good morning and welcome to the Jacobs Engineering second-quarter 2016 earnings conference call.

All participants will be in listen-only mode.

( Operator Instructions )

Please note this event is being recorded.

I would now like to turn the conference over to Kevin Berryman, CFO.

Please go ahead.

Thank you, Austin, and good morning and afternoon to all.

We welcome everyone to Jacobs 2016 second-quarter earnings call.

I will be joined on the call today by Steve Demetriou, our President and CEO.

I must say, I love that hold music that was there, as we enter into our call we'll be a little bit more upbeat, perhaps, than the music that you are hearing.

As you know, turning to slide 2, our earnings announcement and form 10-Q were released this morning, and we will be posting a copy of the slide presentation to our website, which we will reference in our prepared remarks.

Before starting, I would like to refer you to our forward-looking statement.

Any statements that we make today that are not based on historical fact are forward-looking statements.

Although such statements are based on our current estimates and expectations and currently available competitive, financial and economic data, forward-looking statements are inherently uncertain, and you should not place undue reliance on such statements, as actual results may differ materially.

There are a variety of risks, uncertainties and other factors that cause Jacobs actual results to differ materially than from what may be contained, projected or implied by our forward-looking statements.

For a description of some of the risks, uncertainties, and other factors that may occur that could cause actual results to differ from our forward-looking statements, see our most recent earnings release and quarterly report on Form 10-Q, as well as our annual report on Form 10-K for the period ended October 2, 2015, including item 1, Business, item 1A, Risk Factors, item 3, Legal Proceedings, and item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other filings with the Securities and Exchange Commission.

We undertake no obligations to update any forward-looking statements.

Please now turn to slide 3 for a quick review of the agenda for today's call.

Steve will begin with some comments on our BeyondZero safety culture here at Jacobs, followed by a summary of our second-quarter financial results.

It will include summary comments on the portfolio of our four lines of business, or LOBs, and also provide some commentary on end-market conditions for each.

I will then provide a more in-depth discussion on our financial metrics backlog and financials for our new lines of business, segment reporting.

I will continue with some comments on our current restructuring efforts and capital allocation.

Steve will then discuss some next steps with the Company, focusing on project delivery initiatives, strategic review, and some closing comments.

We will then open it up for some questions.

With that, I'll pass it now over to Steve Demetriou, our President and CEO.

Thank you, Kevin, and welcome to our FY16 earnings call.

I'm on slide 4, and before we dive into the results, I'd like to discuss our industry-leading BeyondZero safety culture.

At all Jacobs offices and customer job sites, there is an unquestionable commitment to a safety-first behavior, and our culture of caring is not just what we do, but it's who we are.

Through our relentless drive to improve safety performance, we have seen a number of incidents trend down over the last several years.

In the first six months of this fiscal year, our overall injury rate, as measured by industry standard TRIR, total recordable incident rate, was at 0.24, considered top quartile performance and highly valued by our customers.

This week, Jacobs is involved in the industrywide global safety week, during which our employees are engaged with customers in local communities on improving safety awareness, focusing on five topics: safe driving, energy risks, positive mental health, travel security, and safety innovation.

We recently appointed Catriona Schmolke, a Jacobs veteran of 28 years, as our new head of global safety, and I have no doubt she will continue to strengthen Jacobs' position as an industry safety leader.

And importantly for shareholders, we recognize that companies that have sustainable best-in-class safety performance typically achieve superior operating and financial results.

So, at Jacobs, we believe safety is also a leading indicator and a key management metric which supports business performance and accountability.

Moving to slide 5, I'll summarize our second-quarter business performance.

We continue to experience very challenging global economic conditions, particularly in petroleum and mining sectors.

However, demonstrating the strength of our diverse portfolio, a more positive market, such as aerospace and technology, pharma-bio, and buildings and infrastructure helped us mitigate these more challenged sectors.

Our revenue for the quarter was $2.8 billion, and our backlog ended at $18.2 billion, holding stable versus the previous quarter.

The relentless focus on rightsizing our cost structure and driving efficiencies continued to benefit Jacobs.

Through the first six months of this fiscal year, we have delivered $70 million of adjusted G&A costs savings to the bottom line, a 10% cost reduction versus last year.

Our strong focus on upgrading and standardized project delivery tools, processes and capabilities, is showing early signs of success.

In the second quarter, improved project performance was a key contributor to a sequential increase in our total professional services gross margin.

Our bottom-line results were solid with adjusted earnings for the second quarter at $0.75 per share.

And I'm also pleased with the cash flow performance, which helped us end the quarter with a strengthened balance sheet, and we look forward to further improvements as our heightened focus on working capital takes hold in the second half.

I'm now on slide 6. And as we announced at the beginning of last quarter, we are now managing the company by four global lines of business.

These are petroleum and chemicals, which is comprised of upstream refining and petrochemicals; buildings and infrastructure, aerospace and technology, which covers our national public government business, primarily supporting US and UK government agencies in the areas of defense-based nuclear technology; and industrial, which is comprised of mining and minerals, food, beverage and consumer goods, specialty chemicals, life sciences and field services.

The charts on the slide show the breakouts of revenues in adjusted segment operating profit by each line of business, excluding non-allocated corporate expenses.

Kevin will color more financial details on the LOB, shortly, but here we provide insight into the differing economics of each business, which provides a greater sense of profitability versus the top line.

We believe the new financial disclosure will provide valuable insight on the diversity of our portfolio.

For example, it's important to note that over 70% of our LOB profits year to date were driven by businesses that are not directly impacted by the hard-hit oil and mining industries.

The stability of our aerospace and technology, buildings and infrastructure, and certain industrial businesses, form a strong foundation to drive profitable growth.

And even within the petroleum and chemicals line of business, end-market diversity has helped Jacobs remain resilient in a challenging macroeconomic and provides long-term opportunities to achieve profitable growth when oil and gas market dynamics improve.

I'll cover our petroleum chemicals group on slide 7. Crude oil prices fell below $30 per barrel earlier in the quarter, and have rebounded to over $40 most recently.

However, much of this increase does not appear to be based on supply-demand dynamics.

Price volatility is expected to continue, and there is significant uncertainty in which direction all prices will move.

The most pressured segment is clearly the upstream side of our business, where it is all about cash preservation.

For many of our upstream clients, it's a wait-and-see spending strategy, and any capital being spent is primarily going to projects that drive cost out, ensure regulatory compliance, and outsourcing plant maintenance programs, all areas of strength for Jacobs.

Although our global petroleum and chemicals backlog is down from last year, mainly due to the heavily-hit upstream sector, especially in the Canadian oil sands, this line of business started to stabilize over the last several months.

We are pleased that the second quarter held flat versus first quarter, demonstrating the success our team has had in focusing on markets where capital is being spent.

This includes the midstream side of the industry, where we are winning business and pipelines, terminals and storage, as our clients drive for more distribution flexibility and access to cheaper [fuel supply].

The refining sector remains profitable, although margins have narrowed in recent months.

We're seeing continued opportunities in global refining, with a focus on maintenance, turnaround activity and sustaining capital products, as well as compliance-mandated initiatives.

One example of a recent success, is a confidential client win for a significant five-year sustaining services contract.

We are also involved in the early stages of a few large-scale refinery expansions and grassroot-capacity projects across the globe, and we're seeing increased opportunities in process safety, an area where we can offer clients industry-leading capability.

Recent momentum in the petrochemical sector is also helping us to mitigate headwinds.

Our strategy to geographically expand in chemicals is paying dividends, as we are winning new framework agreements with several of the key global players.

Many of our clients are adapting their facilities to capitalize on lower-cost cash feed stocks, creating several opportunities for us to win plant revamp projects.

Through recent examples of strategic plant wins include a major engineering and procurement contract to support Monsanto's planned expansion in Louisiana, and also a cracker revamp project in Europe.

We have also won a significant number of front-end engineering design projects in the first six months of this fiscal year, up versus 2015, providing Jacobs a great opportunity to convert these to larger-scope projects in the near future.

So, across our global footprint, our petrochemical project pipeline is getting stronger.

Moving to slide 8, as announced in February, Bob Pragada rejoined Jacobs as President of Global Industrial.

Consistent with his new responsibilities, we have added the field services business unit to the industrial line of business, which is reflected in the backlog reporting showing here for all periods.

Our mining clients are facing one of the most challenging commodity recessions of our generation, and similar to the oil and gas situation, it is all about preserving capital, reducing spending, and defering projects for as long as possible.

We believe we've hit the bottom in mining and it's stabilized business, especially in Asia and the Americas with a successful focus on sustaining capital programs.

We are also well-positioned for a few larger capital projects that may get sanctioned in the mining industry, and hope to announce a significant strategic win in the near term.

Although our global mining backlog plummeted from 2015, our total industrial backlog is up approximately $1 billion from last year due to our strong growth in life sciences, and held flat through the first six months of the current fiscal year.

Our life sciences segment continues to benefit from a strong wave of new product approvals.

For example, the number of new molecular entities that were approved last year were the most since 1996, and we see this trend continuing.

As a result, the biopharmaceutical majors are heavily investing in new capacity.

We had success winning many of the first wave of next-generation projects, including the large cap programs for Biogen, BMS, and Novo Nordisk.

The second wave is now in its initial stage, with planned investments by many of the leading global biopharmaceutical players, and we expect to continue to win a larger share of these opportunities due to our industry-leading technical expertise and strong project delivery track record.

In our specialty chemicals and manufacturing sector, we are experiencing modest growth in the phosphate fertilizer market, which is driven by continued population increases and agricultural demand.

Our team is doing an excellent job in following customers to emerging markets, such as Brazil, Russia and Indonesia, and expanding from our traditional technology licensing model, the full design/supply contract.

In our field services business unit, we've had a number of growth opportunities in construction and maintenance, as our clients continue to focus on near-term capital project optimization and longer-term sustaining CapEx gain.

Our diversity and services uniquely positioned us to be a critical partner to drive best-in-class results for our clients.

Moving to slide 9, our buildings and infrastructure group saw a slight uptick in backlog to just over $4.8 billion.

This global line of business covers a number of sectors.

Beginning with buildings, we continue to maintain our strong global brand, particularly in the federal space.

We were recently awarded major contracts with a Naval Facilities Engineering Command, US Army Corps of Engineers, General Service Administration, and the National Guard.

The healthcare industry continues to grow, due to an aging population and new medical technologies, and we are well-positioned as evidenced by recent hospital project wins in San Francisco, Sydney and Sydney -- Cincinnati and Sydney.

The corporate commercial building market is expanding for us.

We recently won a major EPCM contract for two manufacturing centers in the defense industry.

We've also been awarded several national building contracts, including Vanguard, Sonafi, Amgen and SAP.

Very exciting, it is also an opportunity to provide planning design and program management for a major education city and Australia.

This represents a wave of future connected, resilient, sustainable, smart cities of the future.

In mission-critical, cloud computing, the internet of things, can they switch to software and apps is driving an expansion of data centers globally.

We were impacted in the last few quarters by a temporary spending decline by our largest client due to a strategic schedule change.

However, we expect to resume growth there, soon.

Infrastructure markets are also growing steadily.

In the highway sector, our largest infrastructure market globally, we see continued opportunity to grow.

The passage of the US highways bill is providing increased spending confidence, and represents growth in high-mobility areas, such as the West Coast, Texas, Southeast, and Virginia Mid-Atlantic.

We are working on the largest integrated transport and revitalization project in Australia, and we were recently awarded a highway upgrade project in Adelaide.

In the UK, where we are a top provider of planning and design, we were recently awarded three significant contracts for Highways England.

The global rail market is also steadily growing, as exemplified by the Los Angeles metropolitan area positioning for a new $130-billion transportation revenue package.

Recent major awards include a Metrorail project in the Middle East, construction management for a large metro rail project in Seattle, and a multiyear CM contract for BART in San Francisco.

Finally, we see increased investment in global aviation, where we're a leading planning asset management company and a top design firm.

We recently were awarded an airport design in New York, and were selected to assist the American US Airways rebranding through 80 airports across the US.

Our aerospace and technology line of business is summarized on slide 10.

We are pleased with the underlying backlog trends in this business.

Although year-over-year backlog declined, lower margin revenue burn has been replaced by new higher-value strategic sales, which is reflected in the strong second-quarter operating profit performance.

Also, as we previously reported, the backlog excludes approximately $250 million of recently awarded, but protested contracts, which, by the way, is three times the protest level of last year.

We are confident, however, that most of this delayed backlog will be confirmed in the near future.

Another positive trend is that Jacobs has won all our major contract rebids through the first half of this fiscal year, which contrasts with a 2015 industry benchmark of only a 25% incumbent win rate.

Our recently-announced US Army Aberdeen Test Center and NASA Ames Research Aerospace Testing and Facilities contracts are significant examples of this rebid success.

Our US government work, particularly with Homeland Security and intelligence-related markets, remains strong.

Significant commercial investment in mission-critical and advanced investment design facilities continues in our pipeline of opportunities in this area's increasing.

As announced last month, we acquired the Van Dyke Technology Group, a 180-person firm, which enhances our capabilities in the fast-growing cyber security- and intelligence-related market.

We expect to significantly leverage the acquired capabilities globally across Jacobs public and private sector clients.

The US environmental market sector represents excellent growth potential for Jacobs.

Most notably, we recently finalized a framework agreement with BP, a core client of Jacobs, for environmental remediation.

In addition, we'd leveraged our strong experience to win a significant construction service contract with the Tennessee Valley Authority.

In the UK, the Nuclear Decommissioning Authority funding is projected to be around $20 billion over the next 5 years.

A large portion of this spend will be at Sellafield, and prioritized around high-hazard risk mitigation, where we are positioned well as an incumbent.

The final sanctioning of the Hinkley Point C Nuclear New Build project, which represents a long-term upside for Jacobs has been delayed, but is expected in the relatively near future.

In defense, we reached an agreement with the UK Ministry of Defense to extend the financially significant maintenance and operations contract for the Atomic Weapons Establishment, known as AWE, with a contract term through 2025.

Also promising for us is the UK's decision to invest in naval shipyards, the F-35 fighter jet and other platforms, providing an improved opportunity pipeline for Jacobs.

I will now pass it to Kevin to present more details on our financial results.

Thanks, Steve.

Now turning to slide 12, as we previously communicated in our last earnings call, we were expecting some continued short-term challenges on revenue, and as expected, revenue for the quarter was $2.8 billion, which is down just over 4% from a year ago.

Backlog stands at $18.2 billion, as Steve already highlighted, flat versus Q1, in a relatively challenging environment.

We actually feel good about that stability.

In addition, our book-to-bill on the Trailing Twelve basis was 0.94, slightly up from the last quarter.

Gross margin dollars for the quarter were $444 million, resulting in an improved gross margin profile versus Q1, up 50 basis points to 16%.

Comparatively, this improvement was driven by our professional services gross margins, which was at the highest level since 2014, an indication of our improving execution.

This has allowed the Company to more than offset some of the pricing pressure that exists in certain of our more challenged end markets.

Benefits associated with our restructuring continue to gain momentum, resulting in our adjusted G&A being down $22 million, versus the year-ago quarter.

As Steve talked to, on a year-to-date basis, our adjusted G&A costs have now fallen over 10% versus the year-ago period, a clear indication of solid execution against our restructuring program.

As a result, adjusted operating profit was $122 million, down modestly from our Q1 level.

Adjusted EPS was $0.75 for the quarter.

This includes a net positive impact of $0.03 from several items, including the successful resolution of an international tax litigation, a one-time benefit to noncontrolling interest related to certain work performed with one of our partially-owned subsidiaries, the costs associated with the litigation settlement, and the negative impact of a customer bankruptcy.

Finally, operating working capital improved during the quarter, resulting in our net debt position at Q1 to $181 million, turning into, actually, a positive net cash position of $27 million in Q2, the first, net cash positive position that Jacobs has seen since the first quarter of 2013.

This was driven by an improved free cash flow of over $200 million during the quarter, and importantly, the improvement in our net cash position is after having spent an additional $30 million in share repurchases during the second quarter.

Moving on to slide 13, I would like to provide some brief commentary on our total backlog.

Our backlog currently stands at the combined $18.2 billion recently noted, which is flat from the Q1 figures.

We are pleased with this performance, as our stability in backlog versus the last quarter was seen across the portfolio, including the petroleum and chemicals business.

With regard to our professional and field services backlog mix for the quarter, professional services now stands at $11.4 billion, and field service at $6.9 billion, those stable figures versus our Q1 figures.

Our backlog at the end of the quarter, again, exemplifies the benefits of our diversity.

We're certain of our lines of businesses that target customers in stronger end markets has helped steady and helped mitigate some of the pressures from reduced CapEx spending by oil and gas and mining customers.

Turning to slide 14, I'd like to spend a bit of time discussing our new segment reporting.

Per SEC guidelines, we have aligned our segment reporting with how we now manage the business.

To simplify our discussion, and since this is our first time reporting our segment information, I've noted here on the slide our six months results.

I believe these six-month results are indicative of the overall trends in our Business, but I will provide some additional color on quarterly numbers, as appropriate, in my following comments.

You will note that three of the four LOBs have actually shown relatively stable adjusted operating profit performance over the first half of 2016, resulting in an improved margin profile in the first six months, versus the year-ago period for our LOB segments.

Our petroleum and chemicals operating profit margin, up 60 basis points to 3.5%, has shown resiliency in their year-to-date performance and actually held operating profit levels relatively flat in a tough environment.

In fact, petroleum and chemicals adjusted profit levels increased in Q2 2016 versus the year-ago period, as our aggressive restructuring efforts resulted in cost reductions, which allowed for us to offset the drop in revenues year over year.

Industrial profit is down versus the year-ago period, driven by the challenged mining and minerals end market, and the margin benefits last year that were associated with large mining project closeout benefits.

The business was also impacted negatively during Q2 this year by a litigation settlement and a customer bankruptcy.

Going forward, the elimination of these items and the growing momentum in our life sciences unit bodes well for improving profitability in the second half of 2016.

Regarding aerospace and technology, revenue declines in lower-margin business has impacted the top line versus the six-month year-to-date figures of 2015.

However, this business still delivered flat adjusted operating profit for the fiscal year first half, improving operating margins, actually, to 7.7%, up 50 basis points, versus the year-ago period.

The LOB also realized operating profit growth during the second quarter versus the year-ago period.

Lastly, D&I revenue, while decreasing over the six months, we are optimistic about its ability to grow and deliver profitable growth going forward.

Substantial benefits associated with our restructuring effort drove the LOB's improvement in adjusted operating profit over the first half of the year.

This resulted in operating margins rising to 7.3% or 70 basis points up, versus the year-ago period.

As we look ahead, we like the makeup of the LOB diversity, as long-term market dynamics in our buildings and infrastructure, aerospace and technology, and industrial, specifically life sciences businesses, position the company well for growth.

And with petroleum and chemicals, we believe this line of business provides long-term opportunities to possibly grow when oil and gas market dynamics ultimately improve.

Finally, a few comments about our corporate-related costs.

These non-allocated corporate costs consist of cost elements that some are inherently predictable, such as routine G&A expenses related to the corporation as a whole, acquisition-related expenses, primarily amortization of intangible assets, and other routine costs and expenses, but also includes other items that are inherently less predictable, including adjustments to employee fringe benefit programs, around medical pensions and other employee benefits; certain litigation costs, including defense and settlement expenditures; and margin adjustments on projects not related to LOB performance.

These non-allocated corporate costs rose by approximately $19 million over the first half of 2016, versus the year-ago period.

Increased legal defense costs, fringe rate true-ups, and expenses related to our strategy work represent the majority and the bulk of the increase in costs.

We believe that especially as it relates to the more predictable elements of this line item that we now present in our segment reporting, we will be able to reduce these non-allocated corporate costs, longer-term.

So, before turning to make some additional comments on our restructuring, a few words about our segment reporting efforts, I really would like to call out the extraordinary efforts of the finance and accounting team here at Jacobs.

I am thrilled that they were more than up to the formidable challenge to meet the aggressive timetable we set once we put in place the decision to transition to an LOB management structure.

I know that the Board, and certainly myself, would like to personally thank them.

So, I'd like to turn now to turn to slide13, where I would like to provide an update on the restructuring effort that was announced in July of last year.

As we have discussed in past quarters, the primary focus of our restructuring efforts has been to simplify Jacobs globally, and to ensure we have a lean cost-effective structure.

We have been very successful with our restructuring efforts, and these are already benefiting our financials, as evidenced by the significant reduction in G&A over the last 12 months.

These actions support the Company's ability to deliver satisfactory profit levels regardless of the economic environment in which we are operating, and we look forward to continued benefits in the second half of this fiscal year and the full-year impact in next FY17.

Our restructuring efforts are now nearing completion.

Our primary focus continues to be on reducing our fixed cost infrastructure, primarily on labor and real estate.

Given the incremental opportunities identified as part of the reorganization that we announced late last year, calendar year, we are now forecasting the total one-time costs of our restructuring effort to be $330 million to $350 million through the end of Q3, approximately, with final expected growth savings of $240 million to $270 million.

Importantly, the cash portion of both our costs and savings result in a cash payback of less than one year, relative to this effort.

Steve will discuss further in his closing comments coming up, that our cost-reduction efforts to become more cost effective are not over as we close the books on this specific restructuring effort.

Our initiatives to date have targeted reducing costs to match the realities of current market conditions, while in the next phase, we will seek further cost synergies that are aligned with our strategic agenda and our ability to support a strategic growth agenda that is profitable.

Finally, turning to slide 16, a few comments on our share-buyback status.

We continue to execute per our previous guidance, resulting in $30 million of repurchases in Q2, and increasing our year to date figure for the first six months of 2016 to $72 million, representing approximately 1.8 million shares being repurchased.

The previous guidance remains in place at this point in time that we will spend in a relatively consistent manner over the three-year term of the program.

We continue to work through our strategic review and our plan is to provide an update in our use of cash and capital structure in our Investor Day later this year.

With that, let me hand it back over to Steve.

Turning to slide 18, and as we discussed during the last several earnings calls, strengthening our project delivery performance is a top Jacobs priority.

Our specific goals, including providing clients increased value with industry-best quality and execution, all our shareholders benefit from increased Jacobs' project profitability.

To achieve this, we are driving several initiatives, including upgrading project tools, streamlining our procedures, and strengthening our global strategic sourcing.

We are also defining top-quartile benchmarks, driving innovation, and engaging all leaders to achieve best practices.

We are beginning to see measurable improvement.

Our project write-downs have been reduced by 21% versus last year, and our low-cost high-value India execution center work has increased significantly.

We are also receiving positive feedback from our customers.

Our client-approved value-plus project savings currently stand at $4.7 billion through the first six months, and client satisfaction is running at greater than 92%.

This is a long-term transformation, and much of the improvement is ahead.

Many initiatives are underway, and we expect full rollout in FY17.

I'm excited for our employees when it comes to project delivery excellence, we are committing resources and investment that will unleash our people to excel at a high level that they desire to be proud about the work we deliver for our clients.

Moving to slide 19, as previously discussed, we believe that developing and executing a profitable global strategy is necessary for Jacobs to deliver mid- and long-term industry-leading shareholder value.

Demonstrating our commitment to this, Alan Dick, who has led large global functions of businesses, utilizing strategic planning to achieve success, has joined Jacobs to lead our global strategy efforts.

Late last year, we commenced our strategic review.

The first phase of this involved a deep dive on where we make money: by office, by customer, by our different project delivery models, and many other analytical slices.

Our business leaders are now combining this data with a strategic lens to further optimize our global office footprint, with a goal of better serving our clients and extracting further cost synergies.

When we roll out our strategy later this year, we will provide an update on the new and additional 2017 cost savings.

To be clear, as we now approach the successful completion of the restructuring initiative, which was tied to right-sizing Jacobs to the challenged market conditions, the next phase of strategic cost optimization will be more aligned with our strategic growth agenda.

We are now moving into assessing current end markets and geographies, along with potential new growth opportunities.

Additionally, we will evaluate those industries and businesses that do not earn an adequate return and make decisions on how to manage these to create shareholder value.

Our goal is to have an overarching Jacobs strategy that provides a blueprint focused on profitable growth and additional cost-efficiency opportunities, which leads to an improved return profile for the Jacobs portfolio, longer-term.

Our strategy blueprint will also provide clarity on other key elements, such as capital deployment and risk profile.

We're targeting to review this with our Board in July, and soon after we'll provide a strategic review to the investment community.

To the last slide, while our second quarter and first half generally met our expectations, we continue to be pressured by a challenging global environment.

The economic dynamics of commodity prices, such as oil and mining will continue to impact our Business, although our portfolio diversity remains a strength.

Our cost-savings initiatives should benefit the Company as they continue to ramp up and our market strategies play out in certain businesses.

We expect both of these initiatives will yield additional improvements as we move through the second half of FY16.

Our first-half performance gave us increased confidence that we will meet our objectives for the year.

Consequently, we're narrowing our FY16 EPS guidance to $2.90 to $3.20.

With that, I'd like to thank you for listening, and we'll now open it up for questions.

Austin.

(Operator Instructions)

Jamie Cook, with Credit Suisse.

Hi, good morning.

I guess a couple questions sort of one strategic and relates to the guidance, too.

It's been a recurring theme, we increased our costs again, associated with the restructuring.

Kevin, is there any way that you can help me understand the savings that is implied for the full-year guidance now, and in the back half of the year, versus your expectations before?

Because you keep increasing your costs, and you say that the restructuring and, I guess, sounds like there is more to go after that.

I'm trying to understand for 2016, how much of your earnings are being helped by the savings, and how much in terms of a deterioration of your organic business, how much is that when I think about your 2016 guidance, if that makes any sense.

And my other question is sort of more strategically, Steve, it was helpful to provide the margins by line of business.

The profitability associated with some of your business is very interesting, and based on some of the hires that you have also just announced, is it fair to say when you actually provide your color on your long-term strategy that there could be something more transformational here with Jacobs?

Is there a bigger opportunity for divestitures of some of your businesses, or do you feel like a lot can be accomplished through internal self-help?

I know there was a lot there.

I will start first and then Kevin will take your initial part of your question, but it is too early to comment on the strategy.

We are looking at everything.

As I mentioned, we are not moving into the phase of really understanding with the help of some outside experts where each of our markets are projected to go, and also look at things that were not potentially strong or involved in the market could be exciting moving forward, so there's a lot going on.

There's a lot going on.

We will look first and foremost of how we organically go after that, and inorganic could also emanate, could also play into that.

And I did comment we are going to look at underperforming markets and sectors equally as strong, and that could lead to some decisions, potential divestitures as well, but it's premature to talk about what that will look like -- is there going to be several different small- to mid-sized initiatives that add up to something big, or is it going to involve some transformational steps?

I would say everything is on the table, and we will have more to talk about later this year.

I want to make sure you understood my question, because I knew it was longwinded, so.

I think I'm good, let me take a stab and we can go forward and see if there is any additional clarity you'd like.

The dynamic of the restructuring certainly there was phase 1 that we did before we initiated our realignment into the LOB structure, And as the LOB structure came into play, and as you recall, this was announced in our first quarter, I believe in, officially and formally, in the first quarter of this year, and the teams have been forming and ultimately coming up with an idea of what the new structure looks like to help support their growth agendas.

So that has been a big driver to incremental benefits associated with the restructuring as you now see it.

Specifically as it relates to what's in the forecast for 2016, the reality is if you look at where we are right now in terms of our total cost to date, I think we're somewhere in the neighborhood of in the middle of 250-figure numbers, roughly, and so, given that we still got close to $100 million to go, that means that as we are executing now, the benefits of that really won't happen in a material way, on a full annualized basis until we enter into FY17.

So certainly, some of it is occurring this year, it certainly is helping as it relates to our ability to perform against our original expectations, and I would say that our guidance that Steve has provided is prudent as it relates to the current economic uncertainties that we are facing.

But I guess the question I'm trying to ask is, is there a deterioration in sort of the core business based on where you thought we were last quarter and the beginning of the year?

Let's take your savings aside, is there a change or do you feel like for the most part the businesses that were showing declines are bad, but they have at least stabilized?

Is there a change in your core business assumptions?

Our overall theme today is stabilization.

Whereas a lot of things were declining throughout 2015, and even in the early part of our fiscal year, the last several months, I think we have seen pretty strong evidence that we are hovering around the bottom in some of these more hard-hit markets, and we're not predicting when that is going to turn up, but I feel like we've hit a stabilization point.

I will let someone get in queue.

Thank you.

Steven Fisher, with UBS.

Please go ahead.

It looks like you upgraded your chemicals characterization from steady to strong.

Wondering if you can talk about what is the biggest reason for that.

It sounded like the feed activity now has picked up a little bit, but where would you say the pipeline is strengthening by type of chemical project?

And if you could give some color on a regional basis, is it still your best opportunities in North America or is it more balanced now?

So, there are several different things that we can comment on that.

North America, specifically, it's clearly sort of our best-performing pipeline, if you will.

And globally, when we comment about those feeds, numerous feed wins, first of all, they are up significantly from last year, the number of wins on the feed side, which are really the smaller portion of potential larger opportunities, because where we've seen in the past is once we get into the feed win, there is a higher probability that we're going to be able to convert that to more work, whether it is a full EPC or EPCM opportunity, it provides a significant pipeline to grow with those existing clients, so we are optimistic about that.

We have also shifted very specifically beyond focusing on a set of core clients to spreading our wings and going after more of the pie and more of the market, and that is going very well, and we've announced some recent large framework agreements with some multinational customer that historically we haven't been as strong in, and so I would say we are extending our reach.

And then also, there is several factors around the cracker world, as far as our participation in some of the peripheral work around some of these large projects, but also more importantly, derivatives.

There's a lot of derivative opportunities that people are going now that a lot of this front-end capacity is put into the market, and that's an area where we're extremely strong.

Those are examples of different opportunities that are making us more bullish about chemicals versus some of the other petroleum and oil and gas markets.

Okay, so, part market and part-your own strategy, it sounds like.

In terms of directionally, how are you thinking about backlog for the remainder of the year?

Do you think there are still opportunities to get growth out of this after being pretty flat from here based on what you are pursuing?

I know you mentioned a strategic win in mining, and some delayed aerospace and technology bookings, where do you think backlog can go from here over the next few quarters?

We're not going to give any specific guidance to backlog, but as I mentioned before, when we look at petroleum and chemicals as a whole and the mining where we have been hardest hit, the theme is stable.

Where are more optimistic in some of the building and infrastructure sectors, and aerospace and technology.

Where all that mix ends up, we will see, but I think right now we are pleased that in the declining backlog areas, like the mining and upstream side of oil and gas, we feel like we have reached the point where that has stabilized, and so we're just doing our best now to go after wins across the different sectors.

One of the focal points for Jacobs, as we continue to look at how to strategically adjust to address the market opportunities is we are looking more today than maybe we have in the past around selective larger projects, where we are capable of strong project delivery capability, and hopefully at some point in the future, that will contribute to backlog growth.

Thanks a lot.

Andrew Kaplowitz with Citigroup, please go ahead.

So, gross margin continues to improve sequentially at 16% from 15.5% last quarter.

Gross margin is still a little lower than last year's level, so can you talk about your progress improving?

You've had some [last-minute projects], if you go to late last year in your portfolio, and the balance of execution versus a difficult pricing environment, is your backlog gross margin higher than your revenue gross margins so we can expect gross margin to continue to rise?

I would say that there is definitely a lot of discussion here at Jacobs around the whole price volume relationship, or margin volume relationship, where in this environment we are more focused on strengthening the mix of our backlog going forward, rather than chasing low-value business that is just going to not really play out successfully for Jacobs, and we are making good progress on that.

And so, generally, I would say starting with aerospace and technology, there has been an excellent shift to burning off lower-value business and replacing it with higher-value margin business, and that's underway.

And I think, as we go through the other sectors, there are similar success stories around that, and I feel like right now that is our focus, and I like the mix of business as we're moving forward.

And that'll start to really pay dividends as some of these commodity cycles turn more positive to position us for profitable growth.

Is it fair to say there will be backlog growth at least equal to or higher than what you are reporting now?

You didn't come through clearly, can you repeat that question?

Is it fair to say that your backlog gross margin is better than your revenue gross margin at this point?

Generally, I would say the answer is yes.

Kevin, could I ask you about cash?

2Q I've never thought of as a seasonally very strong quarter for cash, and it seems like you have very strong results.

You talked about working capital improvements this year, so maybe you can talk about your outlook for cash, moving forward.

Was there anything one time in the quarter in cash, lower tax payments, something like that, that allowed for such a good cash result.

We don't really have a lot of significant cash items in the quarter, per se.

We did mention some things that occurred relative to some of the discrete or one-time items that we called out, but those weren't drivers of big differences in cash.

I think ultimately there is a couple of things I should call out.

One, probably our Q1 cash flow was a little bit less than what we would have expected, so Q2 is helping put us back on track and then some, so that is one comment I would make.

But the other comment is we are focusing the organization on trying to improve a return profile, especially as it relates to our accounts receivable within the construct of the LOBs, and we are attempting to drive efficiencies into our total working capital at the corporate level, as well.

You've heard me say that I think we have opportunities to improve, I believe that that can continue to play out over the next years.

It's pick-and-shovel work, you've also heard me say that, and I think ultimately this is the first time we've really actually started to see some improvement, as it relates to the efforts that have been in place for the last six, nine months.

So we're happy to see that, and we are going to continue to try and drive incremental improvements going forward.

Jerry Revich with Goldman Sachs, please go ahead.

Kevin, can you talk about the industrial segment margins in the quarter?

What was the impact of one-off items, excluding the industrial business, margins expanded across the board for you folks.

So I'm wondering if you could also touch on when do the comps get easier for the industrial business, is it any easier in the back half of the year compared to what we've seen in the comps in the first half?

I think that there's two things going on in the numbers associated with the industrial business.

There are some unique benefits that were realized in the first half of 2015, and there are some unique negatives that we saw in the first half of 2016, so your comparability figures are a little more challenged in the first half of 2015 to 2016 than they would normally be.

So, as I think about how the comparability will look going forward, very much, much more favorable, and as I outlined in the call, in terms of our prepared remarks, we do expect, especially since we will eliminate some of the one-time items that we saw in the industrial business in Q2 of 2016, by default we expect the momentum in our life science business to start to pick up going forward in that particular business.

So, I do think we're going to be seeing a much more favorable picture going forward.

And Kevin, just order of magnitude, the extraordinary or one-off items this past quarter, are we talking $1 million or $2 million, or is it more significant than that, can you just frame it for us?

And then just to confirm, I understood your point, so the comps are easier in the back half of 2016 than they were in the first half because you don't have the positives that you alluded to?

Yes.

To be clear, it is not $1 million or $2 million, it's more substance of that in Q2 in terms of the takeaways relative to those issues.

In the 10-Q for the aerospace and technology business, you spoke about some customers' preference for awarding contracts toward smaller businesses, can you say more about that?

Is that a small subset of the customer base?

Can you just expand on that point, please?

It's really related to the federal government and a lot of their work, they're looking to do set-asides for small businesses, minority businesses, and so the contracts that are being led by the federal government oftentimes have pieces of the business that we would've normally had access to are being set aside for these other smaller organizations.

We've partnered with those organizations oftentimes, but it just means the percentage of the profit [pull] available to Jacobs is a little bit less.

Our next question comes from Tahira Afzal with KeyBanc.

Hi, team, congratulations on a good quarter.

Thank you.

First question is, when I look through some of the contracts you have announced and press released, Steve and Kevin, there seem to be some pretty interesting areas where we maybe haven't seen you guys being active.

So, can you talk about, as you look at your sale initiatives, where we've seen some market share gains and traction in particular you're excited about?

There's a lot to talk about, but I think you've definitely hit on a strategic shift for us that, as I mentioned earlier, we're still very much focused on our core clients, but we are also equally focused on addressing sort of adjacent opportunities in those markets with more and more clients that we have not served in the past.

It is definitely starting to play out and we are gaining some interesting wins.

There is some examples of some bright spots across our Business, where we're seeing good momentum on that activity.

I will just look at the building and infrastructure and aviation, where, for example, in the UK, our aviation business has doubled versus 2015, and a lot of that is because of successes we have had with some of our core aviation clients.

We're now globally extending that region and winning aviation projects in Asia-Pacific and some other regions where we haven't been present.

But, Tahira, I would just say overall, it's a big part of our changing strategy, and I think there's going to be more to come as we play out more wins in the future.

Got it, Steve.

And is there a common thread in these, where you have gained market traction that you've been able to identify and you can maybe replicate in other areas?

I think sort of a core change in the way were going after is the new line of businesses.

Now that we have global petroleum and chemicals organized under one leader, the meetings that I have been involved in, periodically, there's a lot of excitement and learning coming out by putting all of our petroleum and chemicals regional leadership together and building off each other's regional success.

And so, we are globalizing previous regional successes at a much faster pace because of the new line of business organization.

That is helpful.

And I guess the second question, Steve and Kevin, we have seen technology companies strangely become more visible recently, largely on the facilities, the transportation and the building side, both with Google with Sidewalk, and as you know, Oracle just bought a technology-oriented infrastructure company.

Can you talk a bit about what you are seeing in regards to smart city implementation and maybe 3-D buildings?

We are seeing a lot of that coming up in the Middle East.

Is this an opportunity for you guys, is it more a long-term sort of opportunity or is it something that could happen very fast?

The answer is definitely something that we are in the mix on.

I commented on the Australia education city, like when we look across the globe, our building and infrastructure team are on the front end on several of these smart city type initiatives, where we are seeing some preliminary opportunities, feasibility studies, some of the upfront planning, and what we would expect is that as we get through those, and these initiatives get funded, we will play a much bigger part.

I think the question is always going to come down to funding.

I'd say generally on the global infrastructure business that is the big question mark.

There's clearly a pent-up demand for infrastructure growth across the globe, and what we're seeing right now just sort of hold that back, sort of generally across the globe is funding.

And we are starting to see great new creative funding mechanisms to start to move these necessary infrastructure projects forward.

The question of, really, is just at what pace that is.

I can't comment on how quickly we will see it, but the whole sustainable smart city opportunity is clearly an area of opportunity for Jacobs in the future.

Chad Dillard with Deutsche Bank.

Please go ahead.

I just want to go back to your comments about project renewals and the aerospace and technology.

Have you seen any change in pricing and in terms of the contracts that you renewed?

As far as these rebids, I would say the margins have stayed solid.

There has been nothing material that we can comment on with regard to what we are winning.

I'd say the mix is better, is really what my comment earlier was.

Is as we are winning those rebids, if you will, and gaining some new additional business in different areas like mission-critical, et cetera, overall, that mix is up versus, historically and specifically last year, but as far as rebid contracts, I'd say they have been very stable in the margin rebid.

Now that you've given the new segments, I was wondering if you could perhaps talk about maybe some longer-term margin targets by segment, just in terms of how to think about that.

I'm sorry, some longer-term what?

Margin targets for your new segments, just how to think about that.

I think more to come on what we are going to be working through on the strategy over the next two to three months.

You heard Steve talk to the fact that we've done a deep dive on the economics of the portfolio and we're marrying that up with a strategic lens on competitive advantage positioning across the globe, risk profiles to determine where we're going to be driving our profitable growth agenda.

I think it will certainly entail at least some pieces of the strategy that will be about ensuring that we have good solid gross margin, which leads to our ability to have profitable growth.

So we are not in a position at this particular to provide any perspective or specificity around that.

Andrew Wittmann with Robert W. Baird.

Andy asked earlier if backlog margin or job level margins are higher than what is currently being realized in the P&L today.

When you marry that with the incremental cost savings that you announced today, to feel like the operating margin in total next year, it feels like to this point that the margin and the actions have been more margin preservative than incremental.

But I'm wondering if you're getting to the point where we can talk about these being additive to the profitability of the Company.

One of the key messages we shared today is that our cost optimization, cost reduction, is not over, even though we talk about completing our previous restructuring.

And so, we continue to see opportunity at Jacobs to drive improvement, efficiency across the Company in a meaningful way in many different areas of our spend.

The restructuring was clearly heavily focused on adjusting our headcount to the marketplace with some of office initiatives.

As we are now moving into the more strategic phase of our cost optimization, we are broadening that to all of our spend across Jacobs and our initial assessment in the strategy work shows some significant opportunity over the next several years.

The reason why we're talking about that and doing that is we are not satisfied with the margins in this business, and we believe that there should be margin growth in all terms.

So I would just say that our strategy expectation is for margin improvement over the next several years, and that is what we are going to go after with both the efficiency and mix of business that we're going after.

And I'll just end that by saying what you should expect that is when some of the commodity businesses cycle back up, with all this work we're doing on cost improvement, we should see eventually stronger margins in those businesses as well.

I would add a comment on, specifically -- and it is important to note the line of business margin profile that has been presented today for the first time, actually.

And it is worth noting that in a challenging environment, where actually many of the businesses have had the reduction in revenues, their operating profit margins were up, year over year.

And I think that's indicative of what Steve was saying, is that, one, we're taking cost out of the system, and if you look at the core level of our segments, in our operating profit by the lines of business, even within the construct of having some challenges on the top line, margins are going up year over year, and so I think that is consistent with the message that Steve is delivering.

You talked about some of those non-allocated corporate costs burning off over time.

But are you able to give us some context about what that level could be?

$19 million for the year over year on the first half, but from here isn't that like a $40-million run rate for the year that next year could be $30 million or $20 million?

Is that right order of magnitude to be thinking about?

I would say that ultimately I hope that we don't have the elevated level of legal costs forever, let's put it that way.

Could I ask one followup on refining?

A year ago refiners are making a lot of money, crack spreads were wide, they have narrowed here more recently, and I was wondering if that is having an impact on their desire to spend.

Your commentary has been fairly stable for a while, but I would imagine maybe their economics are changing might affect you, are you seeing any of that today?

We clearly are in our customer discussions understanding that some of the more positive margin trends have now turned the other way.

But where we participate we are still seeing some good steady opportunities and the whole maintenance turnaround; a lot of regulatory opportunities.

One significant opportunity in refining, which is a real strong point for us is alkylation.

With the change in regulations on C4s, there is a lot of work to build alkylation units to convert those C4s to high-octane blending opportunities for gasoline, and we fit right into that mix, and believe that there's a pretty interesting pipeline of opportunities.

So, when you put all those type of things together, we continue to view this as a good steady opportunity for us.

Anna Kaminskaya with Bank of America Merrill Lynch.

Can you hear me okay?

I just wanted to go back to your comments about scrubbing some of the underperforming projects or regions, particularly in the petroleum and chemicals business.

Do you find it is more of contract pricing or project structure, or is it more of a cost and efficiency?

And if it's more of a contract structure, how do you address the issue in the current environment, particularly with pricing pressure, more competition?

I will start with that.

I think generally you hit them all.

The answer is yes, yes, yes.

And that is what is exciting us about now getting this information and deciding what to do with it.

There are things that are in our control, like optimizing our office footprint and including also looking at where potentially we are not making money or just extremely low-value business, trying to decide how to shift our focus in those resources to high-value opportunities that are clearly out there.

But also this is giving our organization much more capability to sit down with clients and have more discussion around win-win.

In many cases that was not happening, in many cases the awareness of the margin problem on our side was not as evident to our own people, and I think part of our next phase is going to move into really addressing even some of the pricing equation when it comes to opportunities out there.

A high-level answer that all of those are showing issue, which should lead to opportunity.

If you go to the client and ask for a price increase and you do not get it, is that part of your potential exit strategy, or how would you address that?

That needs to be considered.

If we are not getting a minimal return in an opportunity out there, I think we need to question whether that is the right use of our resources versus redeploying our people to higher-value opportunities.

The one thing that I've learned at Jacobs through my early days here is that our people generally have capability to work across different markets, opportunities, businesses, and I think this is something that strategically we're pretty excited about, optimizing the whole business model going forward.

To follow up on cash redeployment, I think you mentioned that acquisitions are potentially part of the mix.

How quickly can you build up the pipeline of acquisitions with targets, given that you've effectively been so much internally focused over the past two years?

And I think you didn't bring up potential consideration of dividends, is that on the table for the August meeting, the Board meeting?

If you could address those three issues.

Addressing the dividend one, Kevin mentioned about capital deployment strategy being part of our review, and so, we will have more to talk about, all elements of our capital deployment at that strategic review.

As far as M&A, I'm really excited about the line of business structure, and that is another clear opportunity and momentum that's building in the Company around all aspects of running a global business, which include more focus on reviewing a strategic M&A opportunity.

I think that Van Dyke was just a perfect example of an outstanding bolt-on acquisition that was initiated and led by our aerospace and technology team, and we are starting to have more discussion internally across all four lines of business on strategically profitable, attractive high-value M&A opportunities.

They are starting to come into the discussion.

So, if you do decide that M&A is part of the strategy, you could potentially do something bolt-on, more relatively sizable in the next 12 months.

How should I think about the timing of returning to the M&A market?

I would just leave it with where it's starting to -- the discussion is increasing, but as far as the pace, I would just wait until we come out with our strategy to talk about where organic versus inorganic fits in.

Thank you.

Perhaps we can take two more questions.

Jeff Volshteyn with J.P. Morgan, please go ahead.

A couple of quick ones, when you look at the cost reductions, can you break them up for us, where they are coming from, by business line or by geography?

It is pretty broad-based across the world, actually.

I do believe that we have in the Q, I don't have it in front of me, we do have some information in the Q as it relates to our current spending on restructuring by the lines of business, so I will refer you to the Q.

As a followup, when you look at the early takeaways from your strategic review as you have it today, is it fair to say that whatever you have already identified has been reflected in these cost reductions, or there's still opportunities before we get to the final stages of the review?

The specific message is that what Kevin has talked about in cost reduction and restructuring, I think you've just got to look at that as the previous initiative, and we've bucketed it all under that frame of numbers that Kevin shared.

When we talk about how further strategic cost initiatives, we are targeting and expecting additional savings.

So more to come on getting some guidance on what that looks like as we complete the strategy work.

Michael Dudas with Sterne, Agee.

For Steve, when you look at the four lines of businesses that you have created in the past 9 to 12 months, are there any that are positioned currently to take more aggressive projects, maybe trying to grab more margin, or maybe take a little bit more risk, or [fixed price on] some opportunities from some of the others, or is that something that is going to be [brought] as strategic review and you set up these businesses more on their own footing?

I'll take the latter, great question.

The one thing I want to always repeat on these calls is, we are going to challenge ourselves to look at how to take more intelligent risks, but I definitely don't want to leave our investor community thinking that this is going to be a radical shift in strategy.

I like what has happened over at Jacobs over the last many decades, and I think it has built up a great company.

I think we all believe there's things we can do more of that would be a kind of bolt-on adjustment to some of the risk profile that we've taken in the past, and I think the strategy work will help us articulate that.

So I think the latter part of your question/answer was the right way to look at it.

Just back to your question on the restructuring, I took a quick glance, and the restructuring, as you would imagine, is mostly petroleum and chemicals-related, more than 50%.

Thanks, Kevin.

I appreciate all the questions and the time today.

I want to leave the call that we are excited about what we're talking about as it relates to the future.

Jacobs is a strong company, long history of delivering for our customers and our shareholders.

Hopefully you get a sense that we are implementing change to complement and support our existing strengths, and the things that we're talking about are capitalizing on our diversity, really continuing to leverage off of our client relationship focus, and deploy capital and cash in a smart way.

We're focused on winning more business.

I believe there is good momentum in a tough market.

I hope you get a sense we're driving stronger, deeper accountability, and we are also trying to achieve world-class standards in our most important product, which is our project delivery.

Our value proposition has always been a key differentiator at Jacobs.

The global team is really driving forward to get Jacobs back on track to grow profitability, and we look forward to continuing to talk about this over the next several quarters.

So thanks for your time, and have a great rest of the day.

Thank you.

The conference is now concluded.

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