雅各布工程 (J) 2016 Q4 法說會逐字稿

Good day, and welcome to the Jacobs Engineering Group Inc fourth-quarter and FY16 results conference call and webcast.

(Operator Instructions)

Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Kevin Berryman, Chief Financial Officer and Executive Vice President.

Please go ahead, sir.

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

We welcome everyone to our 2016 fourth-quarter earnings call.

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

Turning to slide 2, as you know, our earnings announcement and Form 10-K were released this morning and we have posted 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 disclaimer.

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 could cause Jacobs' actual results to differ materially 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 our annual report on Form 10-Q for the period ended September 30, 2016.

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 obligation to update any forward-looking statements.

During today's discussions we will make a number of references to non-GAAP financial measures.

You'll find additional disclosures regarding these non-GAAP measures, including reconciliation of these measures with comparable GAAP measures, in the presentation that accompanies our prepared remarks, which can be found on our investor relations website located at www.Jacobs.com.

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

Steve will begin our fourth-quarter earnings presentation with some comments on the business and our results over the quarter and fiscal year, followed by a summary of market conditions for each of our four lines of business and backlog.

I will then provide some more in-depth discussion on our financial metrics and results for each LOB.

I will continue with comments on our restructuring and our share buyback program, before Steve finishes with some closing comments.

After, we will open it up for some questions.

With that, I would now like to pass it over to our Chairman and CEO, Steven Demetriou.

Thank you, Kevin.

Welcome to our FY16 fourth-quarter earnings call.

Before we move into the financials, I'd like to spend a few minutes discussing the recently completed FY16.

Over the past year, while facing challenging conditions in several of our key end-markets, we took the opportunity to implement a set of key improvement initiatives that significantly strengthened our foundation and positions us for success moving forward.

The most important steps taken involve reorganizing the four global lines of business, implementing a major restructuring to right-size the Company and become more cost efficient, and developing our corporate strategy aimed at profitably growing Jacobs.

While undertaking these initiatives, we also implemented a number of changes designed to increase accountability and transparency to drive greater financial discipline, in turn, significantly optimizing cost and working capital.

Allowing us to reinvest in Jacobs to upgrade our tools and processes to further strengthen the business and delivery of projects for our clients.

Our efforts to transform the core is driving a renewed sense of urgency and energy across our Company to deliver business improvements across the globe.

While much has and continues to be done to positively change Jacobs, we're also cognizant of our very successful past.

Since 1947 when Joe Jacobs founded our great Company, Jacobs was headquartered in Pasadena, California, and enjoyed decades of impressive growth.

In recent years, as we faced challenges to sustain growth, we recognized the need to transform our business and structure.

One of the many steps identified was a new headquarters location.

As such, last month we announced our relocation to Dallas, Texas, which fits with our plans to drive efficiency, attract top talent and achieve a more convenient access to best-serve our clients.

Moving to slide 5 and a summary of our business performance, Kevin will cover more details regarding our solid fourth quarter in a minute.

But on this slide, I'd like to summarize our 2016 total year performance.

For the year, revenue was right at $11 billion, and on adjusted basis, earnings per share was $3.08, which is above the midpoint of our initial FY16 guidance range.

As such, we're pleased we were able to consistently deliver for each quarter and for the full year against our internal expectations.

During FY16, we continued to see adverse market conditions across multiple lines of business, particularly in our petroleum and chemicals and mining markets.

And these were major contributors to the year-over-year revenue decline in both the fourth quarter and total fiscal year.

We also faced competitive pricing pressures and cyclical economic patterns in certain key markets, which negatively impacted our revenue mix.

However, as the year progressed, we started to build momentum, due in part to our more focused global line of business structure, and began to win more business, as evidenced by the $438 million increase in our backlog at the end of our fourth quarter and the improved year-over-year margins generated in the second half of the year.

I'm very pleased with how the entire Jacobs team has been relentless on improving various financial metrics, as we saw considerable improvement across multiple KPIs during the year.

Specifically, the restructuring initiative drove down our global-adjusted SG&A costs by more than 9%, reducing costs by $127 million.

And our efforts to improve our working capital position resulted in a significant increase in operating cash flows.

In fact, resulting in the largest-ever annual free cash flow in the history of Jacobs.

Just as positively, we also achieved our first year-end net positive cash position since FY13.

Much of this was achieved through acute focus on our accounts receivables and improving our DSO, which decreased seven days versus prior year.

Our focus on greater project delivery excellence also assisted in the improved margins we saw in the second half.

Given our positive cash flow performance, we continued our efforts to return capital to our shareholders in the form of $153 million in purchases from our share buyback program.

Moving to slide 6, I'm extremely pleased with where our total backlog stands at the end of the fourth quarter, $18.8 billion, a significant sequential increase of nearly $440 million versus the prior quarter.

Our backlog is now less than 2% off of our previous record of $19.1 billion.

Also noteworthy is that our current backlog includes $182 million in negative foreign exchange movements when compared to the year-ago figure.

So when adjusting for this, our backlog would in fact be up $137 million versus last year.

Also positively, the professional services component of our backlog stood at $12 billion at fiscal year-end, the highest since June of 2015, and a positive sign to support higher margins going forward.

Overall, we're pleased with our sales performance under the tough macro conditions faced by several of our lines of business.

And the improvement in backlog across the portfolio is representative of our more disciplined approach and focus on leveraging synergies across the Company to drive growth.

Over the next four slides, I'll provide more specifics of each of our lines of business.

But the key messages around our sales efforts going forward are as follows.

Number one, we believe we're poised for further backlog growth as we move through 2017.

Secondly, we're focused on adding higher-value sales to backlog, to drive long-term margin improvement.

And we're holding ourselves accountable for this.

We've added an annual management incentive measurement that will monitor our progress against profitably growing our backlog.

Turning to slide 7, the summary of our Aerospace & Technology line of business, where backlog remains steady at $5.1 billion versus last quarter, but higher by $230 million year over year.

Program funding with our various customers remains generally stable and represents a large and diverse market, providing significant opportunity for market share growth.

Defense spending, and particular in the US, UK, and Australia, is expected to remain large and stable in the face of dynamic political circumstances, including the US presidential election and the recent Brexit vote in the UK.

As previously reported, we continue to have a number of awarded contracts with significant value not yet backlogged due to competitor protests.

In this line of business, for the last 12 to 18 months, we've been primarily focused on core client program re-bids, and have, for the most part, been very successful based on a strong track record of performance and our lean cost structure.

I'm particularly pleased with the mix of business our Aerospace & Technology team has achieved both in terms of our successful re-bids, as well as recent high-value new business wins.

This is reflected in our operating margins, as this business improved to 7.7% of revenue in FY16 versus 7% in the prior year.

We're now shifting focus to a strong new business pipeline of opportunities valued at over $20 billion, the largest we've ever experienced for this market.

While protractive procurement timelines exacerbated by persistent protests are expected to continue, we believe significant organic growth potential exists in Aerospace & Technology.

With regard to specific market sectors, homeland security, cyber and intelligence-related industries remain strong areas of national priority spend.

We continue to build momentum in bringing our services in these markets to other lines of business at Jacobs, and have positive success engaging several commercial clients.

In US environmental services, our re-bid win of the 10-year, $350-million remedial action contract for New Bedford Harbor with the US Army Corps of Engineers further solidifies our base in this market.

This, coupled with a dominant position in places like Alaska, where significant federal spend for environmental services provided foundation to expand into other government customer bases and geographies.

At the same time, we continue to expand our business base with Jacobs' traditional commercial sector customers, who have significant environmental-related spend.

In the UK, the Nuclear Decommissioning Authority funding is projected to be steady, around $20 billion over the next five years, and much of this funding will go to the Sellafield facility.

Our nuclear clean-up group continues to support efforts here, and with our strong delivery performance, we're well-positioned for much of the continuing work.

Also in the UK, the final sanctioning of the Hinkley Point C nuclear new-build project has been completed.

The recent approval is obviously an important and positive milestone for the program, and is expected to have positive ramifications on the prospects of sanctioning approvals for the Horizon and new-gen nuclear new-build programs as well.

As previously reported, we've already been awarded a major framework for the Hinkley C program, and we're supporting its development.

All three nuclear-built programs in the UK have expressed their intent to continue forward in light of the Brexit vote, and these provide good opportunities for Jacobs.

Moving to slide 8, during the fourth quarter, we experienced positive momentum across the globe in Buildings & Infrastructure.

For the first time in several quarters, our backlog increased by $190 million to $5.1 billion versus the third quarter, and is also up $310 million versus this time last fiscal year.

The general buildings market remains steady, and we have successfully been growing our position as we continue to target bright spots in selective markets.

We are seeing increased opportunities in the healthcare market, specifically in the US and New Zealand, which we'll be announcing shortly.

Our market leadership position in the government building sector continues to grow, with strategic wins at both the federal level with the US Navy, and state level with customers such as the State of California and the City of Los Angeles.

We continue to make great progress on this area, and look forward to continuing this aspect of our business.

The education sector represents one of our highest potential sub-sectors for growth, with emerging opportunities in Asia Pacific, specifically in Australia and New Zealand, and continued growth in the US, with several recent bond measures receiving approval in the Midwest and West Coast.

We're also utilizing our knowledge base in the sector to enhance our value proposition for large-scale smart cities emerging near Melbourne with the Australian Education City, and also in Birmingham, England.

Finally, we're happy to announce our selection as a platform partner for the Rockefeller Foundation-sponsored 100 Resilient Cities program.

The program is looking to drive remediation actions to member cities around the world faced with physical, social, and economic challenges.

On the infrastructure side, the global transportation market remains steady, and we're using our strong position to capitalize on a number of opportunities.

In aviation specifically, we're leveraging our well-established capabilities to target investments locally and abroad.

Positively, we had recent wins at Denver International Airport for a critical design-build project, at Washington Dulles Airport for Phase 2 rail expansion, and at LAX for terminal development work.

We're also progressing several other international opportunities that we expect to announce soon.

Within the US highway sector, federal spending remains flat, and most developments are being driven by regional design packages.

Texas, Florida and California transport departments dominate the local spend, and we're well-positioned, since these states are strong Jacobs markets.

The Australian and UK markets continue to be buoyant, and we're forecasting increased government and local authority investment.

Some notable recent highway wins across the globe include the Darlington Upgrade Project in Australia, a professional services contract for transport for Greater Manchester, and a construction inspection services contract for the New Jersey Department of Transportation.

The UK rail market also continues to see significant investment, and we're providing PM/CM services on a large metro project in the Middle East.

In the US, we see opportunities across California, Seattle and the Northeast corridor.

Australia is also a growth region, as well as Asia.

We had a number of exciting wins in the fourth quarter, including the UK Network Rail, the Level Crossing Removal Authority program in Melbourne, and the LA County Purple Line Extension.

In the water market, we have a moderate position, and are leveraging our expertise in the UK and Australia to grow our position globally.

We've just completed two major projects in Australia, and won several other projects, including the United Utilities AMP6 Asset Management program in the UK, and the St.

Louis Sewer District watershed management and design project in the US.

I'm now on slide 9 and the summary of our Industrial line of business.

In the fourth quarter, we saw positive wins in several markets that offset much of the strong life science backlog burn.

As a result, quarter-end backlog remained near steady at $3.1 billion.

While the mining and minerals sector remains weak, we are seeing some indications that eventual recovery may begin.

In South America specifically, investments totally $49 billion are projected in Chile over the next 10 years.

And in Argentina, there's approximately $5 billion of projects expected to be announced by the end of 2018.

Despite strong competition and sustaining capital work, we're also seeing more proposal activities for studies and evaluations, although this is in part driven by some of our competitors exiting the market.

Positively in the fourth quarter, we secured an engineering services contract for a treatment plant in South America.

We won an underground study in Chile, and were awarded a position on a global engineering panel in Australasia, which puts us in a strong position to capture additional opportunities.

The life science sector remains robust.

Expansion continues in biologics, and secondary manufacturing opportunities are also increasing.

We are currently capitalizing on the second wave of biotech plant design efforts, and expect a third wave from other major companies to meet pipeline products currently in Phase 2 clinical trials.

Our global manufacturing facility expertise in emerging areas such as cell and gene therapy is also being sought after as clients shift their focus to small-scale manufacturing approaches using disposable technology.

Geographically, major CapEx spend continues in Ireland, where we're growing market share through concerted efforts to expand our life sciences presence in Germany and Switzerland, along with the West Coast of the US.

The India market remains flat, although we expect activity to increase next year as new incumbents plan investments in biosimilars.

Opportunities in our consumer product and manufacturing clients also increased during the fourth quarter, and we're seeing growth opportunities as we establish new alliances in the consumer goods market.

Most exciting was the contract award to provide design service for Vastly's $2 billion tissue and fertilizer investment in Virginia, the single largest Chinese greenfield economic development project in the US.

This award is indicative of the upward investment trend of pulp and paper, particularly as established European and Chinese companies expand in the US -- and is welcome news for us, as we have a strong history and reputation supporting the sector's largest producers.

Our field services business is seeing an increase in project activity, particularly in the US Gulf Coast.

In addition to several petrochemical wins, we secured a four-year framework agreement with a new client in the private-sector water market, which will have a positive effect for adjacency work in our Buildings & Infrastructure line of business.

Sales activity is also increasing in standalone construction capabilities, and we're seeing an uptick in opportunities with clients in the US and Canada for sustaining capital services.

With expansion of Morocco's transport energy and residential commercial sectors, we are leveraging our relationship with our joint venture partner OCP to include mid-cap EPC and maintenance opportunities.

We anticipate this could be an area of growth for our field services sector in FY17.

Turning to slide 10, our Petroleum & Chemicals line of business saw a significant backlog increase of $361 million over the quarter, and is now at $5.5 billion near the year-ago backlog level.

Upstream oil and gas markets remain weak, although we're seeing signs of stabilization, with oil prices hovering in the $45 to $50 range over the past six months.

Inventory builds appear to be flattening, and OPEC is again talking production caps, although high inventories and a quick return of production from proven oil reserves will likely moderate crude prices.

Established producers continue to make necessary investments to maintain production, but budgets will only begin to increase as balance sheets stabilize and producers gain confidence that prices can be sustained above $50 a barrel.

With the increased production of shale oil, condensates, and natural gas liquids in the US, we're more focused on pursuing opportunities in the midstream arena.

Process and pipeline infrastructure needs to be put into place to move these barrels to market.

Additionally, propane, butane, and naphtha over-supply in the US Gulf Coast is forecast to continue, which will require additional export infrastructure or conversion capacity to alleviate.

The global excess of LNG will also renew efforts to develop alternative markets.

Central-South America, Asia, and Africa are likely targets for gas-to-power and small gas distribution projects and additional LNG penetration is likely into the transportation fuel markets, sparking new projects.

The refining market is comparatively steady, although profitability is at lower levels than 18 months ago, and consequently, this will impact capital spend over the near term.

Despite this, we're seeing continuing opportunities in maintenance turn-around efficiency improvement and regulatory projects, particularly as we expand our [J-Pro] initiative, our new safety, reliability and process optimization service offering.

In the US, there continues to be increased focus on process safety and octane improvement projects, while the US refining margins also continue to be supported by product exports to Latin America.

As previously reported, we continue to see feasibility study requests in developing countries across Asia and Africa.

And the recent decision by the International Maritime Organization's Marine Environmental Protection Committee confirmed reinforcement of regulations to reduce the global sulfur cap on bunker fuel from 2020.

Grassroots refining opportunities are also developing in India and South Asia, driven by growth for clean transportation fuels.

The downstream petrochemicals market remains strong, and we continue to expect multiple investments in the US Gulf Coast and Middle East.

We're seeing interest from Saudi Arabia and elsewhere regarding development of crude oil-to-chemicals projects, and there's increased focus on diversification, moving away from first-line commodity chemicals.

Ethane, LPG and [math] to feedstocks are also plentiful and relatively cheap, and will provide economic incentives for project developments.

This is a global trend which is driven by the excess of pet-chem feedstocks being exported from the US.

We had several exciting wins in the quarter, including a confidential grassroots chemical facility in the US Gulf Coast, an engineering services contract for TransCanada, and an EPC contract with INEOS for a linear alpha olefin unit in Texas.

And a refinery upgrade fee project for the Singapore Refining Company.

With that, I'll now pass it to Kevin to discuss the financials in more detail.

Thanks, Steve.

I'm turning now to slide 11.

You will see a more detailed summary of our financial performance over the quarter and FY16.

As we have communicated throughout the current fiscal year, adverse market conditions in certain end-markets continued to negatively impact certain of our businesses.

As a result of these ongoing pressures, particularly in oil and gas, our revenue for the quarter was $2.6 billion, down approximately 15% versus our fourth quarter last year.

For the year, revenue was $11 billion, down 10% versus last year.

EPS on an adjusted basis was $0.77, which excludes $0.53 per share in after-tax restructuring and other charges.

Which are comprised of after-tax charges of $0.30 per share in connection with our restructuring activities that began in FY15, a $0.14 per share loss on the sale of our French subsidiary as a result of our strategic decision to exit our French operations, and a $0.09 per share non-cash write-off on an equity investment.

While the adjusted EPS of $0.77 for the fiscal quarter-four was lower than $0.80 reported in the comparable quarter last year, note that FY15 included a 53rd week in our Q4 results in 2015, which added approximately a $0.03 per share benefit to the year-ago quarter.

Book-to-bill on a trailing 12-month basis continued to improve over the course of FY16, and ended at a high for the year at 1.0 times.

Q4 gross margin percentage was up 120 basis points versus the year-ago quarter, indicative of our improving execution and focus on cost discipline.

Importantly, our gross margin percentage for our professional services business continued the positive trend that we've seen earlier this year.

Specifically, this helped increase our consolidated gross margin percentage in the second half of 2016 by 70 basis points versus the same period of 2015.

For the full year, adjusted G&A was reduced by $127 million versus the last fiscal year, or an improvement of 9.3% -- again, a positive indication of our success in right-sizing the Company and driving cost efficiencies.

Our adjusted operating profit for the quarter was $134 million, an improvement of 25 basis points on an operating profit margin basis versus the fourth-quarter of 2015.

Specifically, in the second half of 2016, our improving traction and financial discipline resulted in our operating profit margin improving versus the second half of 2015 by 30 basis points, to 5.2%.

Finally, our efforts to improve our accounts receivable efficiency saw our DSO improving to 70 days at year-end versus 77 last year, as noted earlier by Steve.

As a result, free cash flow also continued to improve, totaling $213 million for the quarter, an improvement of $134 million versus the fourth quarter of 2015.

For the year, free cash flow reached $612 million, up $216 million versus a year ago, and the highest in the history of the Company.

At fiscal year-end, the Company's net cash position now stands at $268 million, an improvement of $140 million from the last quarter sequentially, and a more significant $405 million turnaround from last fiscal year-end.

So turning to slide 12, you will see the Q4 and FY16 adjusted segment financials for our four lines of businesses.

As you can see, two of our four business lines increased their segment operating profit versus the year-ago quarter.

Importantly, three of our LOBs improved their adjusted operating profit margins both for the quarter and for the full year versus the year-ago periods.

Regarding Aerospace & Technology, while we did see a decline in adjusted operating profit versus the fourth-quarter of FY15, the adjusted operating profit for the entire fiscal year held near flat, despite a decrease in revenues, on account of a 70-basis point improvement in margins for the year.

The improvement in the margin profile over the year was driven by strong performance fees, particularly in Q3, and by an overall improvement in the margin mix of this line of business.

The Buildings & Infrastructure business also saw revenue decline in Q4 versus the year-ago period, but adjusted segment operating profit actually increased by a significant 79% and finished up 20% for the whole of FY16.

This was driven by significant improvements in project execution, which allowed higher project margins versus a more challenged Q4 and full year in 2015.

As a result, the operating profit margin for this business was up 380 basis points in Q4 and 190 basis points for the full year versus the year-ago periods.

The Industrial line of business saw an increase in revenues for the quarter of 12% versus the year-ago quarter, supporting a near-11% increase for the fiscal year, driven by strong performance in our Life Science business.

Despite this, adjusted segment operating profit was down 54% versus last year's Q4 when compared to the year-ago period, and down 36% for the fiscal year.

2016 challenges were related to several project disputes and client settlements in Q2 and Q4 of 2016, primarily in our Mining business.

In addition, last year had a significant benefit in Q2 associated with successful close-outs associated with several large projects.

Lastly, our Petroleum & Chemicals line of business saw a 33% decline in revenue for Q4 versus the year-ago period, but a far more positive 6% increase in adjusted operating profit over the same period.

The fall in revenue was also apparent for the full year, given the challenging end-market dynamics.

Despite these challenges, segment operating profit margins actually increased by 180 basis points for the quarter, and by 60 basis points for the full year, versus the year-ago like periods, a clear indication of the strong focus on cost efficiencies and restructuring in this line of business.

So moving to slide 13, you will see the split of revenues and segment operating profit by each LOB.

As discussed over the last several quarters, the strength in some of our lines of businesses, such as Buildings & Infrastructure and Aerospace & Technology, demonstrate the benefits of our diverse portfolio in maintaining relative stability in times when economic challenges exist in certain of our end-markets.

What is clear is that the shape of our portfolio is changing.

Specifically, those LOBs that are most impacted by global commodity price changes are representing a lower percentage of the profits of the Company, while other businesses are expanding.

Consequently, the position of our portfolio offers us two advantages at this point in time.

First, we continue to be well-positioned to further leverage off of our strong position in those businesses that are not impacted by commodities.

And two, we are at a point where further fall-off in our commodity-oriented businesses is obviously less likely.

As a result, there is real upside for these businesses when commodity prices do ultimately improve.

This argues for relative stability in the short run, with upside in the long run.

Moving to slide 14, we continue to be successful with our restructuring and efforts to improve financial discipline and performance.

The restructuring that began in July of 2015 was aimed at simplifying the business and enhancing our cost-effectiveness.

Our LOB re-alignment and continued drive to identify cost savings allowed us to find additional cost savings opportunities over the course of a year.

And as a result, our final savings are expected to be in the range of $260 million to $270 million, with total costs approximating $390 million to $400 million.

Relative to our cash cost and savings, our payback is slightly less than one year.

I'm pleased to report that we're on track to obtain the full run rate of these savings in FY17.

And the reduction in adjusted G&A of $127 million we achieved in FY16 is evidence of this, especially when adding to the savings already realized in 2015.

Further savings that we'll realize in 2017 are important, as it will allow us to reinvest back into the business certain strategic investments into the Company, and to enhance our position to drive profitable growth in the long term.

Finally, before turning it back over to Steve, slide 16 provides a short update on our share buyback program activities for FY16.

During the quarter, we continued to execute share buybacks in a balanced and steady manner, bringing the total repurchases for the fiscal year to 3.4 million shares, for a total of $153 million.

This represents a 3.7% reduction in shares outstanding for FY15.

As you are aware, we have previously indicated that we expect to continue to spend the remainder of the $500 million share buyback in a relatively consistent manner over the remaining term of the three-year program.

We plan to provide an update on our use of cash and capital structure strategy at our 2016 Investor Day next week on Thursday, December 1. With that, let me hand it back over to Steve for closing comments.

Thanks, Kevin.

Moving to the last slide, we're pleased with our fourth-quarter and FY16 results.

We expect challenging market conditions to continue into FY17.

Weak growth in developed markets, geopolitical issues, and uncertain commodity prices will continue to impact some of our end-markets.

Much like the beginning of last year, our oil and gas, mining, and certain industrial clients are continuing to avoid large capital expenditures to conserve cash.

We do believe most of the declines in these end-markets are now behind us, but it remains to be see when industry growth will return in these sectors.

More positively, we saw select growth opportunities in our Buildings & Infrastructure, Aerospace & Technology and Life Sciences markets in FY16, and we expect further growth in these end-markets in 2017.

As we progressed through our FY16, we saw our backlog stabilize and then increase by the fourth quarter, and we expect further increases to our backlog as we progress through FY17.

We also remain heavily focused on improving margins.

The restructuring we have undertaken over the past several quarters continues to provide momentum, and supports our ability to invest back in our profitable growth agenda.

We're seeing improvements in our project delivery efforts, and write-offs continue to be reduced across the board.

Finally, our efforts to improve our financial performance in 2016, and particularly our operating profits, gives us confidence in a more stable outlook for FY17.

Consequently, we're providing initial guidance between $3 and $3.30 for adjusted EPS, which provides for operating profit growth in a continuing challenged market environment, and includes a set of largely one-time investments of $0.15 per share to support our growth strategy.

As Kevin mentioned, our strategic review is complete, and we look forward to our discussions next week at our Investor Day on December 1, where we'll outline our strategy for long-term sustainable shareholder value.

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

(Operator Instructions)

Our first question comes from Jerry Revich of Goldman Sachs.

Mr. Revich, is your line on mute?

Hello, Jerry?

Are you there?

Dan, why don't we move on to the next question.

Our next question comes from Andrew Kaplowitz of Citi.

Good morning, guys.

Good morning, Andrew.

Kevin, if we can start with cash flow, can you talk about the improvements in working capital that you continue to record?

If my math is right, free cash flow conversion on adjusted net income looks like it was over 150% in FY16.

When you look at FY17, can you still achieve free cash conversion north of 100%?

And how much more runway do you have toward working capital improvements?

Can you get DSOs sustainably under 70 days?

Because that's already a pretty good target.

Thanks for the question, Andrew.

Look, we're very pleased with the amount of progress -- a lot of hard work within the lines of businesses to really gain some momentum in the back half of the year, specifically on improving our DSO.

That doesn't just automatically happen.

I do think that our year-end position is really quite good.

And the way we think about driving long-term working capital benefits, and specifically accounts receivable, isn't about a point in time.

It's about an average level, so that we ultimately are able to have a sustainable level of working capital.

So having said all of that, I would not perceive us being able to necessarily have the kind of free cash flow that we saw in 2016, per se.

But we are planning on continuing to drive DSO improvements in 2017, and will be part of our financial metrics.

We'll talk a little bit more about this in our Investor Day next week.

But we still think there's opportunities to improve, and longer term, be a more efficient capital investment behind our business, which ultimately will increase our return on invested capital.

Okay, thanks for that, Kevin.

And Steve, I kind of have to ask you a topical question, which I'm sure you're expecting.

It does involve US transportation.

You mentioned, it's sort of a steady business right now, but you also talked about strength in, or positioning that you have, in California, Texas, Florida.

Can you talk about the confidence that you have in these markets maybe beginning to pick up after we did get some positive referendum spending?

And then maybe talk about Jacobs' overall positioning if Trump does get through a bigger spend on infrastructure?

How do we think about that -- early sort of thoughts?

Yes, well, as I mentioned, we feel very well-positioned with where our major capabilities are in the US -- Texas, Florida, California -- where we do see pretty robust certain spending, more certainty around spending in those areas.

And those are three states where we believe we provide leadership and strong capabilities.

We were bullish on our capabilities to grow in transportation, irregardless of the election outcome.

So we're pleased to see a lot of the positive hype around what's going on with the Trump expectation, but we're positive about moving forward in transportation.

And when we talk about transportation, by the way, we think of not only highways, but we think of rail, where we've got a very strong position.

And then the broader aviation sector, where we're seeing the big benefits of how we've integrated Buildings & Infrastructure.

Because as you know, we get into aviation projects, it's a combination of infrastructure, but as well as building facilities.

And our new line of business structure has given us the capability to leverage off of certain strengths regionally, and take those strengths globally.

And I think you're going to see us win projects around the world over the next several quarters that are going to be very exciting.

Okay.

And then Kevin, maybe if I could just ask you about the mining disputes in the quarter, you mentioned second quarter, and now in fourth quarter.

Is there any concern that we should have that these things continue or maybe get bigger?

Or is it basically sort of the tail-end of the mining side going, 2017 should be a cleaner year for that?

Look, I'll answer the question in a couple ways.

The first one is, as we've been improving our project execution, we're seeing a holistic reduction in terms of some of the potential exposures relative to us losing some [hassled] margin because of certain project disputes with our clients.

So in general, we're seeing a reduction in 2016, and also into 2017.

So we holistically are seeing a reduction.

As it relates to the specific question on mining, you know that, that business is really quite challenged right now.

We're not doing much work, and a lot of the work we are doing is sustaining cap-related activities.

Plus, obviously we have the new project we announced in Mongolia -- I think that was last quarter or quarter before.

So I think we're well-positioned as it relates to our ability to deliver against our hassled margin in that particular business going forward.

Thanks, guys.

Our next question comes from Steven Fisher of UBS.

Thanks, good morning.

Good morning.

A quick clarification first.

What's the tax rate that you guys have assumed for FY17?

Look, we've effectively always -- we're in the neighborhood of low-30%s, basically.

And we would expect it that we'll be able to continue to drive towards those kind of numbers.

Okay, that's helpful.

And then in 2016, three out of your four segments had declining revenues, but you're talking now about a pivot to growth.

Can you talk about what that means exactly?

How many segments do you expect to grow versus decline in 2017, and are you expecting overall revenue growth?

Yes, I think the revenue is a tough metric for our Company.

Because, as you know, we have certain businesses we win with pass-through revenue, and we typically like to focus in on the professional services side, where we get good margin.

And we've shifted our strategy as we go forward, that we're going to be much more conscious of the total margin.

And therefore, whether it's professional services or the field services side, we're expecting to drive margin improvement.

And as a result, you're seeing the effect, to some extent, of a strategy mix, of really focusing on margin as we also drive down cost, and all the things that we've talked about for FY16.

But as we move into 2017, we are talking about the whole shift and pivoting to growth, and we feel like it's pretty broad-based.

As you saw, we got backlog growth in our Petroleum & Chemicals business, which I think is an extremely successful achievement, in light of the tough conditions.

And that's because of a successful strategy shift to really focus on petrochemicals.

A lion's share of our wins are coming in petrochemicals.

We continue to see a very robust pipeline of activity in petrochemicals.

And again, our new line of business structure has given us the opportunity to really globalize and expand beyond our previous core client focus, to a much larger set of customers.

So we see that in petroleum and chemicals.

I think we gave you a sense that Building & Infrastructure, we're pretty bullish globally, and we're actually leading the way in growth in Australia.

Our Australia team on the backs of what came out of the political situation last year, has really driven spending increase across that country, and we're now seeing momentum in the US and the UK as well.

So very positive on building an infrastructure.

Aerospace & Technology, one thing in that business that we all need to remind ourselves about is that, from 2010 to 2015, there was a 25% decline in federal defense spending in the US.

And in spite of that, we held our backlog up.

And now as we've progressed our strategy and we've seen stabilization of that spending, and we're gaining market share in what's a very large spend in government services -- in the US especially -- we believe as we get through 2017, we're going to actually see backlog growth and revenue growth.

I think the area that right now is, I'd say, more stable, is the overall Industrial segment.

Because that is made up of a lot of different businesses, and there's a bit of a timing going on, on when we win the next wave of farmer projects as we burn off backlog in that business.

So that's kind of the overall story of sales growth.

Steven, this is Kevin.

Maybe augmenting Steve's commentary, specifically started as discussion relative to that focus on margin.

And that we're looking really to focus on driving a profitable growth agenda, as opposed to just a growth agenda.

So that's an important point that he made.

The other note that is important to understand is, as we look at this focus of pivoting to our profitable growth agenda, I would say in those businesses, specifically Petroleum & Chemicals we're still comparing to some pretty good year-ago numbers.

And the stabilization of that business is happening as we speak.

So as we progress over the course of 2017, we would expect that, that pivot to growth will actually play out, hopefully in the Petroleum & Chemicals business.

But at least in the near term, there will be some pressure points in the first quarters of the year.

Okay.

And just quickly, the $0.15 of strategic investments, can you just say what that is, and have those been made already?

Is that just technology, or is it more M&A-related?

What is that?

Yes, next week in Investor Day, we're going to lay out our growth strategy and talk a little bit more about that.

But it's really near-term investments, very heavily weighted toward the first quarter and a large portion of it in the first quarter of our current quarter fiscal year involves a set of actions to ignite our strategy and position us to achieve our three-year goals that we're putting into our strategy.

And it involves some external consultants that we're bring in as part of our strategy execution.

It involves a major new tool set in project controls, and a few other areas of delivering projects.

And also some systems enhancements that we're implementing as we speak.

So again, very front-end loaded to the fiscal year, and we believe are going to be critical and measurable as far as how we achieve our three-year growth strategy.

Thanks, guys.

Appreciate it.

Our next question comes from Jamie Cook of Credit Suisse.

Hi.

Good morning.

I guess a couple questions.

First, Steve, just with regards to the restructuring actions, we've been through, I guess, several increases in terms of the restructuring actions that you've taken.

Do you feel like we're finally at the point where this is sort of the last round of costs, that we're through enough that we shouldn't see more cost increases going throughout 2017?

I'm just trying to figure out where we are in terms of the innings of the ball game there.

And then I guess my two other quick questions.

While it's still very early, Steve, I think people are trying to figure out, post the election, has the tone from customers changed at all, do you feel like, post-election?

And then my last question -- any update that you can provide on the Motiva arbitration?

Thanks.

Yes, so with regard to restructuring, we're in the very late stages of completing a very successful restructuring.

And as we move into 2017, I really want to emphasize, what we're talking about now is the pivot to growth.

But we're not going to take our eye off the cost ball.

We still believe that we have several productivity efficiency steps that we can implement on an ongoing basis, like all great companies do.

But it's really to move away from a mindset of restructuring, to productivity, and with a large effort around now taking that leaner cost structure and winning more business because of the competitiveness that, that brought us.

As far as the post-election situation, again, I feel like I've commented on that, Jamie, that with everything we were doing to position ourselves for growth, we attribute the momentum to that activity, and less around the early stages of post-election.

Are we optimistic?

Yes.

Do we hope all the stuff we read about happens?

Of course.

We've seen what the Australian elections have done, and we hope that same thing happens in US.

And in fact, Theresa May's administration in the UK is reaffirming several of the important nuclear and other projects in that region that are important to us.

And so we feel good about what's going on globally around the political side of positioning our business.

With regard to Motiva, the arbitration process continues.

We continue to feel very confident around that whole activity.

And we hope in the near term, we'll be able to put that behind us and move forward.

Okay, thanks.

I'll get back in queue.

Our next question comes from Tahira Afzal of KeyBanc Capital Markets.

Hi, folks.

Congratulations on a good year.

Thank you, Tahira.

Steve, if you look out three years from now, there are so many new developments that have happened on a macro level.

Are you more excited about the opportunities on the aerospace and defense side, or are you more excited about infrastructure?

And this is on a global basis.

Right.

So I don't want to steal the thunder for next week, and I know we're going to see you there.

And so we look forward to talking about this at length with the line of business leaders, with Kevin and me going through this.

But I think what you're going to see -- Jacobs shifting, and that shift is already underway.

Is that we really have moved from a Company that had 250 offices that everyone around the world at Jacobs was sort of locally focused on, how to win business at offices.

To a much more targeted strategic growth strategy that's going to be fact-based around where we believe the markets are growing fastest, where we're the natural owner of that market, if you will, and where we're strong.

And therefore, still maintaining a very strong diversity of end-market participation, but, I think, a much more focused strategic area.

And we're going to highlight what those markets are next week.

They clearly involve building in infrastructure markets.

But even within that big B&I sector, there's going to be priority targets.

Aerospace & Technology, of course, is going to lead the way.

And you're going to hear about the focus there and how we're going to extend into some new areas outside of our current situation.

And even in Petroleum & Chemicals, I think I've already talked about the focus on downstream and petrochemicals.

And Gary Mandel will talk about that next week and discuss how we're going to focus there and a few other important sub-verticals across Jacobs.

So we're looking forward to laying that out next week.

Okay.

And Steve, I know you sort of emphasized the one-time nature of the investment you're making next year, the $0.15.

For some of our companies in the past, they end up being more recurring.

What gives you confidence that, that is going to be more of a one-time element?

The first thing that gives us confidence is our culture -- the transparency, the rigor, everything is traced now as far as making sure when we talk about restructuring costs that we're going to get the savings, and we cement those savings in and they're not offset somewhere else.

And so the same question you have is the same sort of -- I mean, I'll just say it -- the paranoia that we have that we have to track the spending, track the savings and demonstrate that they've given us profitable growth.

And I think that's the best way to answer it, is that, that's just our culture moving forward.

Thanks a lot.

Our next question comes from Anna Kaminskaya of Bank of America Merrill Lynch.

Good morning, guys.

My first question is just around the cadence of quarterly PS next year.

I think you mentioned in 1Q, we'll have the $0.15 of growth investment.

So should we be thinking that 1Q PS will be somewhat below what the street is modeling, and your outlook is more second-half weighted?

Good morning, Anna.

This is Kevin.

Yes, Q1 is going to be the quarter where we will face some comparable issues versus year-ago.

Remember, last year, we had a discreet tax item benefit of, I think it was $0.09, a year ago.

So that's not necessarily going to be repeated.

And then of course, we have the investments that Steve related to.

But the other dynamic is also that, as we stabilized, what we believe that we're beginning to stabilize our revenues, the first quarter of this year compared to last year, there still was a larger revenue stream that we were realizing in the first quarter.

So there is specifically some challenges in Q1.

And as relates to your specific comment about the balance of the year, that's where we see the pivot that Steve is alluding to, where we'll start to be able to see improved EPS growth in the back part of the year.

But certainly Q1 will have some comparability challenges versus year-ago.

Okay.

And then on the backlog, I think you mentioned that you expect growth in 2017.

Are there any particular large projects that are driving it, or are you just seeing better opportunities across the board?

And I think you also mentioned that you're changing your incentive structure.

Not sure if you can touch on it today or we have to wait until next week -- how do you balance backlog growth against profitable backlog growth?

And you mentioned that the environment remains competitive.

We've seen it across different companies.

How do you ensure -- how do you get visibility into profitable backlog growth?

Right.

So a lot in that question, but great questions.

The backlog momentum is really across the board, rather than any single projects.

I think that's been traditionally Jacobs' strength, is that we're not over-reliant on large projects, that it really is built off of our strong end-market diversity.

And I think I covered that earlier, that we actually see it in most of our line of businesses, and feel throughout the year that, that's going to happen.

Last year we recognized the need to really drive cash and put DSO and working capital in our management incentive compensation targets.

And we're going to maintain that going in to 2017, because we believe there is, as Kevin said, there is more work in capital efficiency out there.

But as we pivot to growth, we now want to do the same thing with backlog growth specifically.

And I think you hit the nail on the head, that it's profitable growth.

So as we look at backlog growth, without getting into the specifics, what our Board is going to hold us accountable for is actually the gross margin in that backlog growth.

So it is going to be aimed at profitable backlog growth.

And we've put new systems and tools in place to be able to measure that growth, which kind of goes to the last question, is, as we talk about margin focus and it's still in a very tough environment, I think the major difference moving forward is, we now have the ability to measure profitability by client, by office, and many other ways, in a much better way than we had a few years ago.

So as everyone goes after upgrading the mix, they actually have the tools and capability to track that.

Okay, super-helpful.

And then maybe last question, more of a modeling for Kevin.

Just looking at corporate expense, you've been running $20 million, and this quarter it's only $2 million.

Is it just allocation of corporate expense to the segments?

And how should we model it going forward?

I think modeling the total-year figures is probably not an inaccurate way to think about 2017, consistent with 2016.

There can be some variability in those numbers just because of how the true-ups occur over the course of the year.

But generally speaking, modeling consistent with 2016 is not a bad idea.

Great.

Thank you very much.

(Operator Instructions)

Our next question comes from Chad Dillard of Deutsche Bank.

Hi, good morning.

What percentage of your year-end backlog will be recognized as revenue for 2017?

Just trying to get a sense for how much of your 2017 earnings is already booked, versus what you need to win for 2017?

Hi, Chad.

We typically have about 60% to 65%, which, we're in that range as it relates to the percentage of our backlog that we would expect to burn in 2017.

Thanks.

And then on the Petroleum & Chemicals margins, we saw a nice step up in this fourth quarter to about 5%.

Were there any one-time items or nonrecurring items to contemplate?

And then, is this the run rate that we should be contemplating going forward?

If you can just touch on how to think about margins for the rest of the [second spur] for 2017, that would be helpful.

We did have some specific items that helped support the margins in 2016 fourth quarter.

However, I will really suggest that the biggest driver to the overall performance in Petroleum & Chemicals over the course of the year was the very, very strict adherence to the restructuring, and delivering cost savings as it relates to that.

So as we think about 2017 going forward, the fundamental profitability of that business has been reoriented.

To ensure that the savings profile that was developed over the course of 2015 and 2016, with an aggressive restructuring effort, carries forward and allows us to continue to have an improved dynamic longer term in the Petroleum & Chemicals business.

Great, that's helpful.

Thank you.

Our next question comes from Justin Hauke of Robert W. Baird.

Good morning.

Thank you for taking my question.

I just wanted to focus a little bit more on the moving pieces on the margins for next year.

Just given that the tax rate that you gave and the pivot towards growth, it would imply that the margins are up, I don't know, 20, 30 basis points at midpoint of guidance.

I'm just trying to understand, some of that is going to be just the benefit alone from the mix shift of your business lines, but you also have the unrealized savings from the restructuring.

So maybe an update on what the net savings are thus far, and how much more still to go in 2017?

Look, thanks for the question.

We're going to be talking a little bit about this at our Investor Day, so sorry to punt a little bit, but we will talk about it.

Look, I think the comment I would make is, first, there is a focus on attempting to drive incremental margins for the business in general.

So you made the comment that there's an implication of margin.

That certainly would be our intent, that we try and drive improvements in margins longer term.

So that's certainly consistent with our intent.

But we'll provide a little bit more detail in terms of the restructuring, the investments we're making, all of those types of things, which we started to talk about over the course of this call, and we'll talk in more detail next week.

But clearly the intent of our business, and certainly the profitable growth pivot that Steve has alluded to, is very much about trying to ensure that, as we build from our now more profitable foundation, that we're adding profitable growth to it.

Okay, that's fair.

We will look forward to next week.

And I guess maybe the other question, and maybe this is going to be addressed next week as well.

But since you did mention in the prepared remarks that you are in a net cash position, the buyback is still steady at the $500 million, three-year pace that you talked about.

Is there any comments that you want to offer at this point about where you see your balance sheet trending to, what you see as an optimal capital structure, and how you might deploy that?

More to come next week.

All right, thank you very much.

I appreciate it.

We will look forward to it.

Very good.

Our next question comes from Michael Dudas of Vertical Research.

Hi, good morning, gentlemen.

Hello, Michael.

How are you doing?

Wonderful, thank you.

Just quickly -- and I know we'll be in details next week.

Steve, as you look at the restructuring and how you position your lines of businesses, is Jacobs positioned, or each line of business positioned, to take on more risks or try to grab more margin on a project relative to a lump sum services or fixed price work?

I guess it's edged up a little bit in the last 12 to 18 months.

And relative to your total back, I'm sure everything is scrubbed and quite profitable, but is Jacobs willing to move down that curve as you come out for your search for growth -- or pivot for growth, rather?

Again, just so we don't keep saying this, but next week we're going to have a better opportunity to lay that whole picture out for you and others.

But just to kind of give you a bit of a headline to what you'll hear next week, is that, I don't think you'll see a radical shift in our risk profile.

I think there will be some modest improvements.

And I think it should be viewed as improvement that where we're capable of taking more intelligent risk, we will.

And we've proven it over the last couple of years in certain areas where we've been successful.

Most of the write-offs that you hear about at Jacobs actually involve the more reimbursable side of our business.

And where we have decided to take on some sort of fixed price risk in the past, it's actually been very successful.

And so you'll see more targeted strategic moves to extend that where it makes sense, but very selective, very carefully.

And I think the guys will outline that next week.

Fair enough, Steve.

Have a great Thanksgiving, guys.

You too.

Our next question comes from Jerry Revich of Goldman Sachs.

Hi, good morning.

Hello, Jerry.

I'm wondering if you can talk about -- within Buildings & Infrastructure, you've had excellent bookings all year.

Can you just talk about, based on the project timing, when do you expect the revenue burn to accelerate and deliver year-over-year revenue growth?

How do you see that over the next couple of quarters?

We're probably most positive on what Kevin talked about, is the shift to not only see backlog, but see it in the top-line revenue in our P&L in this business -- Buildings & Infrastructure.

So based on the size of the projects we do here and some of the other factors, we should see that earlier in the 2017 year than maybe some of the other LOBs.

Okay.

And within Aerospace & Technology in the quarter, your revenue decline on a year-over-year basis was more than it's been in the trailing couple of quarters.

Can you just add some context to how much of that is project timing versus the extra week that you mentioned?

Can you give us any more color on what were the big drivers and how we should be thinking about the revenue burn cadence for that product line on the same basis that you just provided for Buildings & Infrastructure in 2017?

Look, I think, Jerry, on Aerospace & Technology, there's a shift in our mix that's going on within that business right now, and that will ultimately result in there being some pressure points on our revenue in 2017.

Having said all of that, very excited about the underlying shift to good opportunities and growth opportunities longer term.

And at the end of the day, the margin profile and the operating profit will play out in a way that will be evident as we go through into the longer term.

So some pressure, I would say, on 2017, purposeful and unexpected as it relates to that business.

But we think it's re-orienting the mix to something that will be more attractive longer term.

Okay.

And should we -- your comments on top line are very clear, Kevin.

What about for margins?

What are the mix shift implications?

Could operating profits be more resilient than revenue for that line of business in 2017?

I think ultimately, yes, but I'll let you figure that out as you model through.

All right, thank you.

All right.

Okay.

Well, thank you for calling in, and we want to thank the investment community for listening to the quarterly call today.

We believe the actions we've undertaken continue to increase shareholder value.

We're going to drive long-term sustainability of a stronger and healthier Jacobs.

Look forward to seeing many of you next week.

And for those of you in the US, wish you a very happy Thanksgiving.

Thank you.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.