雅各布工程 (J) 2003 Q1 法說會逐字稿

Good day everyone and welcome to the Jacobs Engineering Q1 earnings conference call.

This call is being recorded.

Today's presentation will be available for replay at 2:00pm eastern time through January 30 at midnight.

You may access the replay by dialing 719 457 0820 and entering the pass code 110716.

Again, 719 457 0820 and pass code 110716.

There will also be a webcast of this teleconference which can be accessed by logging on to www.jacobs.com and at this time, to read the forward-looking statement I would like to turn the call over to Miss Patty Brewer.

Please go ahead ma'am.

Good morning.

The company requests that we point out that any statements that the company makes today that are not based on historical fact are forward-looking statements.

Actual results may differ materially.

Information concerning factors that could cause such differences is set forth in Jacobs' form 10-K for the period ending September 30th 2002 under the heading "Forward-looking statements".

The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Now, John Prosser, Chief Financial Officer of Jacobs, will discuss the quarter's results.

Thank you Patty.

Welcome to our first quarter conference call.

I will be going through the financial highlights and then I'll turn it over to Noel Watson, CEO, to go through the business overview and outlook for this quarter forward.

As we put out in the press release, we had a very good quarter.

Earnings, the EPS, were 54 cents, which is up 15% from a year ago, slightly above the consensus for our quarter.

Also the record net earnings were $30.1m which was up 17%.

Backlog did remain strong at $6.7b and the debt was reduced by about $18.1m to just over $73m.

Just as important was the fact that our cash increased a little bit and if you look at our net debt, the debt net of cash was about $16.3m.

So we continued to improve our balance sheet, resulting in a debt to total capitalization ratio of 9% which is the lowest its been since 1999.

Even with this good strong quarter.

We still are comfortable with the range out there, the street estimates which is from 227-230.

We believe that this just confirms the outlook for the year and doesn't necessarily have any impact, or to change that range.

Going to the next slide, which is slide 5, this is the graph we show each quarter that we are very proud of and I don't really have a lot of comments on it but it does show the strong consistent growth we've had over the last fifteen years.

Moving on to backlog, which is slide 6, the professional services backlogs increased by about $0.5b dollars over a year ago.

It was up slightly from the prior quarter.

The overall backlog was up about $300m from a year ago, and it was also actually flat at the last quarter.

That's reflecting a $140m removal of some construction revenues from one project that-- you know we changed the structure into a corporate entity so therefore we will be recognizing on just on a net results basis equity method.

So while revenues, or the backlog, has been reduced by that amount, the operating results going forward for that project will be virtually the same, we just won't have the revenue and costs pass-through reflected in the statements going forward.

With that I will now turn it over to Noel Watson to discuss the business overview.

Thanks John.

I am on slide 7 now and strategies to maintain the 15% growth.

We'll go through each one of these bullets as we discuss the business as it is and the look ahead.

Many of you have seen these before and I hope I don't bore you to death but I think it's worth repeating because a lot has not changed.

We do have a fairly consistent strategy, starting with our relationship based business model depicted on slide 8.

We do the bulk of our business through preferred relationships and when we're talking about preferred relationships we're talking about where we have long term alliance contracts; we have local partnership arrangements.

It's for clients that we work for day in and day out.

Our repeat business number stays in the mid 90s so we're not working for a lot of new clients anywhere.

We do take on discreet projects.

As you can see, maybe about 10%-12% of the pie on the left-hand side.

Discreet projects are for clients that we have not worked for on any kind of long-term basis.

These are projects that we take either to make money or try to be the beginning of a long-term relationship with the client.

Occasionally we take on a transactional project.

We define transactional as the lump-sum competitive bid of the constructional element of the project.

We do very, very, little of this but we do this on just a very rare basis.

It's almost always a unique set of circumstances and in an area where we probably have done this before.

We are not into big risk taking and that's the reason that transaction sliver is so very, very small.

On the right-hand side of this chart on page 8 we do have what we consider to be the standard industry model.

This is our perception of the standard industry model, which says that many, many of our competitors have a majority of their work into transactional projects.

We are not saying our model is better or worse, we're saying our model on the relationship base is what we are at Jacob.

We believe it drives a high percentage of repeat business - as I said in the middle 90s.

It does help drive consistent earning growth.

We are not into big events, we are into creating a very stable earnings stream and we do believe it helps us manage the risk a lot better.

Let's move on to slide 9 and talk about our market diversity.

We have two pies here, one 1992, one the last 12 months.

You can see from this slide back in 1992 60% of our business was in what we would call heavy process, which would be chemicals and refining and petroleum.

Today that number is down under 40%.

That doesn't mean we've moved out of these businesses because the next slide will show that both of those businesses continue to grow.

What it does mean, is that as we have expanded we have diversified dramatically and I think one of the key diversification facts here is in the federal programs which has gone from 10% of a $1b revenue to 22% of a $4.5b revenue.

Even more than that would be Pharmabio which was 3% of a $1b revenue which is $30m to 20% now of a $4.5b stream.

So we have diversified the company dramatically over the past decade.

We believe this diversification reduces cyclicity and it will stabilize the individual operations.

Slide 10 kind of shows the balanced growth that we have.

All of these markets, as you can see, are better today than they were a decade ago.

Some of them, like Pharmabio, had gone from almost zero to being dramatically increased and one of our very largest markets.

We have broken down the federal government revenues on slide 11, of which I'm talking $1bn in the past 12 months and as you can see, the Department of Defense comprising the majority of those revenues.

Moving on to slide 12, our [broadened] life cycle services.

Every time we sell a contract to a client we sell it in one of these four areas.

It can be in the engineering, which is under project services; it can be consulting; it be construction; it be O&M.

Then the exercise is to broaden our service base to that client.

So if we start with operations and maintenance we then want to sell the engineering, construction and consulting.

If we start with consulting we want to sell all of the downstream activities.

So one of our goals is when we start with a client, and it will normally be in just one of these pie segments, it is then to sell all of those services to that client.

This tends to balance both the long-term and the short-term need and, by the way, when we get into operations and maintenance and construction, it does reduce our dependency on the capital cycle, which as you know in all of the industry, tends to swing fairly dramatically.

If we move on to slide 13, we are talking about leveraging our multi-domestic network.

We don't consider ourselves either a global contractor or an international contractor.

We consider ourselves multi domestic.

The definition of that is in the bullets here on the slide.

The first charge our people have is to make money in the local market place.

The second charge we have is to anticipate the future needs of our core clients so we can position ourselves in local market places to serve those clients.

An example of this is in our French operations, which are sizeable, we basically do work in France.

The Frenchmen do not go to North Africa, the Frenchmen do not go to Asia.

They work in France.

The same is true of the English and the Irish and the Americans.

We work in our country.

If we're going to work in a faraway place we tend to try to set up an operation in a faraway place, let's pick Singapore.

As you know, we have had about a billion dollars of pharmaceutical work in play down in Singapore over the last three or four years.

We now have set up a permanent operation in Singapore to serve the Singapore market - both the pharmaceutical market and the heavy process market, which is both big oil and chemical.

In fact Singapore is the third largest collection of heavy process clients in the world after the Gulf Coast, United States and then the Amsterdam/Rotterdam/Antwerp area.

So that would be a typical multi domestic strategy.

Now, Singapore is unique in that we set this office up and did not make an acquisition.

Typically we would make an acquisition to move into a new geography, much as we've done throughout Europe.

We also at this point in time are setting up an operation in Puerto Rico.

Big pharmaceutical is moving to Puerto Rico in droves.

And so in anticipation of that we have sent a team of people to Puerto Rico to open up an office and start servicing those clients, doing work both in the US for those clients, on the mainland if you will, and then down in Puerto Rico.

But that's what our multi domestic network is.

We're basically doing work in the local country, for local clients, working with our global core clients when they show up.

If you move to slide 14, I know the people in the company get tired of hearing me talk about costs but it's a little bit like religion, we have to do it every Sunday morning.

With you folks we do it every quarter just for drill.

Our clients are under tremendous cost pressures and therefore the service providers, like Jacobs, have got to be looking for ways to drive the costs of doing business down.

So we believe cost discipline within our company is a competitive advantage.

We do that first of all by keeping our costs within Jacobs very competitive so we can provide very competitive services to our clients.

Secondly, we set up low-cost engineering centers, primarily in India, to be able to participate in major projects, both in the US and Europe, where the hourly rate for our people is a fraction of what it is in the States.

By doing this our clients get projects that cost less, Jacobs maintains the same or more margin so it's a win/win situation for everybody.

So we are currently using these low-cost engineering centers on almost every major heavy process project coming off the Gulf Coast of the United States and we also have several projects in Europe that are taking work to India.

We do this electronically.

We're doing it on 24-hour design basis around the clock.

Work sharing like this not only benefits our clients and lowers their costs in engineering projects, but it also allows us to move work from places that have too much to places that don't have enough.

So it does help us stabilize the workforce and provide a better employment pattern for our people.

If we want to move to slide 15, we've got the same five strong markets on here that we've had now for a couple of years and I always start by talking about the markets that are not so strong and those would be chemicals, pulp and paper and semiconductors.

We still have a lot of chemicals business but it is at the bottom of cycle.

It does appear that there is some activity in some of the specialty chemical markets and we are winning some work but I would not tell you that it has moved significantly off the bottom.

Although we are hopeful that by the end of this year it will be moving.

The pulp and paper business remains fairly depressed.

High level executives and some of our very large clients are talking about increasing capital spending next year.

I was meeting with the CEO of one of our major clients less than a month ago, talking to him about this very thing, and he still has a wait-and-see attitude, although we do believe that by the end of the year we may see some uplift.

Paper consumption continues to grow modestly.

Most of the work we're doing is rebuilding paper machines to develop improved products.

In semiconductor markets, the third one, and you guys know where that is - it's not doing very well.

We have some major work but it is very limited.

Go to the hot markets for a minute.

Defense as you know is hot.

There is a lot of money being spent on business here - it's growing fairly dramatically.

The threat of a war in Iraq certainly can't hurt that business.

The infrastructure business continues to be strong for Jacobs, both in the US and Europe.

I hear a lot of conversations about the market being soft.

We have looked at what we're doing.

We continue to sell more work than we're working off.

We believe that market is going to grow on a 2%-3% range this coming year.

So it's down from kind of a double digit growth we saw a few years ago, but it does continue to grow and our business here remains fairly robust.

[Pharmabile] remains our hottest private sector market.

The capital spending in this market continues to move up every year almost at double digit rates.

It is driven by a couple of different things.

We've got a lot of new drugs showing up from the recombinant DNA research that started back in the early 80s.

So there's a lot of new drugs coming to market.

We have some capacity shortages in some areas that facilities are being built to replace.

One of the things I haven't talked about before, but if you think about it is a very pertinent factor in the Pharmabio market, and that is the regulatory drive out of the USFDA.

The FDA is giving our clients fits and is a fairly significant amount of money being spent to satisfy new FDA requirements.

There's been no new laws, it's just how they're being enforced.

So you can go look at the consent decrees and the kinds of things that have happened to big pharma over the past year, and see that that would drive spending to make sure that their plants are passing all the FDA inspections.

I would say the pressure in this area is up dramatically over the last 3-4 years.

The buildings business, which for us is primarily a governmental business, remains very strong.

We have a lot of activity in schools.

If you go back and look at the last election school bonds passed all over the place.

We still continue to do a lot of research hospitals.

Through the federal government we're involved with the FAA and the INS and the IRS and the Justice Department where we continue to build both jailhouses and courthouses.

So the buildings business remains quite strong.

And then I go down to petroleum and here we still are talking about the downstream petroleum business, which is refining.

We have seen a lot of work in the last couple of years being generated by taking the sulfur out of gasoline and that's going on both in the US and in Western Europe.

That work continues but we are probably at the peak in that work and now we're starting to take the work on that removes the sulfur out of the diesel fuel.

After we have done with diesel we're going to have aviation, we're going to have off-road and so this whole regulatory drive on the refining business in the western world will continue, we believe, until near the end of the decade.

So all those five markets remain in pretty good shape.

If I move to the last slide, which I think is slide 16, in which we talk about investor appeal.

We believe our business model gives us advantages.

Everybody can be a relationship-based company.

Most people don't try to be.

We believe that it is our future and with it we're going to get our stable earnings stream and our relationships with our clients at our 95% plus repeat business.

We have diversified the company dramatically both from a market point of view, from a geographic point of view and from a services point of view.

So if you look at the company today versus 10 years ago, or 5 years ago, or frankly even 2 years ago, we do continue this diversification strategy both through brute force growth like we do in Singapore, or acquisitions like we've done throughout Europe and Canada in the last few years.

As John said, the balance sheet is strong.

We put kind of a moratorium on acquisitions about a year ago as we needed to integrate [Stork] and [Gibb] and the [McDermot] acquisition in Canada.

We consider those acquisition integrations complete.

We declare victory.

We have paid now most of the debt and so we are on the hunt for acquisitions as we talk but we are always on the hunt for good acquisitions.

We'll just have to see which comes to play.

We do continue to commit that we will grow the business at the bottom line 15% a year.

That is our commitment to you and that's an average number but we do continue to make all our plans around that and try to structure our business to make that happen.

I believe, with that, I am done with the formal part of the presentation.

What I would suggest is we open for questions and answers, okay?

I am turning it back to Tamika.

Hello.

Thank you sir.

The question and answer section will be conducted electronically.

If you would like to ask a question please do so by pressing the star key followed by the digit '1' on your touchtone telephone.

If you are using a speakerphone please make sure that your mute function is turned off to allow your signals to reach our equipment.

We will proceed in the order that you signal us and we will take as many questions as time permits.

One again, that is dial '1' to ask a question.

And we will take our first question from Raymond Chang with Lehman Brothers.

Good morning folks - a question concerning cost control.

SGNA came down quarter over quarter and I just want to get a sense from management's perspective-- are trying to contain the G&A number at the level of about $104m per quarter?

Or are you trying to align G&A increase at the lower rate than the sales growth?

First of all we're always trying to get the G&A growing slower than the sales growth OK?

That's kind of a right of passage in this company.

Secondly, the last quarter of the fiscal year, for whatever reason, always has a little lower GNA--.

First quarter.

Well the last quarter of the calendar year, first quarter of the fiscal year, always has a little lower GNA, but I think it'll probably grow a little bit in Q2, Q3 and Q4 but not a lot.

That certainly is our plan right now is we look at the business, but the Christmas quarter is always just a little bit lower than the rest of them.

So what we do for the rest of the year is battle the increase, but it's not going to be a lot.

Gross margin declined quite a bit.

Was it to do with a higher percentage of field work?

Do you see a spike in the pass-through costs this quarter?

Or is to do with more competitive conditions in the industry?

If you look at last quarter it was only down about 10 basis points, but it really is a mix issue.

If we break down the revenues between the technical services, professional services and field services-- in that a year ago that was about a 50:50 breakdown.

This quarter it's been trending, as some construction has happened on some of the pharmaceutical and some of the refining jobs and others-- that mix is valid.

Those are like 43:57 - it's primarily a mix issue.

It's about the same as it was last quarter so that's why the margins haven't changed much from last quarter but from a year ago there has been a shift to a little bit more construction.

It's not a competition issue though.

No.

Do you have the pass-through costs for the quarter?

No.

We'll have those in the 10-Q.

Great.

Do you have the operating cash flow number for the quarter?

No.

Again, those will be all disclosed in the 10Q.

You can see from the fact we've paid down the debt, we had a positive cash flow.

We tend to use our cash flow for the reduction of debt at this point so they're probably pretty close to each other.

OK.

Are you maintaining the CAPEX-- use it for the upcoming year at about $40m?

Yeah the first quarter was below that run rate but we're certainly going to be trying to push that into the $35m-- closer to $35m than $40m, but it'll be in that range.

Now to the unfunded pension fund situation, do you foresee after the annual review that you're going to have to increase your pension contributions?

That review is already done.

That's why-- we do it for June 30 for our year end.

Pension is not a significant factor in our overall fringe rates.

We have a couple of pension plans here in the US, one of which is frozen and one of which is funded by the government.

If the impact on that is to increase a little bit, it really passes through on our project costs and government.

We have a couple of pension plans overseas.

The charge we took to retained earnings at year-end really related to the market changes.

Hopefully the market, over time, will pick back up and we'll wipe that out.

Even if it didn't come back significantly the amount of charge would not be material, would not have changed the annual impact.

These things are looked at over long periods of time and we have to make adjustments through the-- in accordance with FASB-87-- itwon't have a significant impact on our costs going forward.

I think the thing to be sure you understand is for most of our US employees there is no pension, no defined-benefit pension fund.

OK.

Thanks very much.

Our next question comes from Michael Dudas of Bear Stearns.

Good morning everybody.

John, in new orders for the quarter-- any significant orders, say greater than $100m?

I believe there is one for $200m.

Was it released by the client?

Could you say which client?

I don't think it's been released yet.

No it hasn't been released yet.

They haven't released it yet.

Secondly, Noel you kind of alluded to it in your prepared remarks-- overall hesitancy amongst the people you talked to relative to their spending plans and expectations going forward.

You know, just from personal-- do you think we need to get through the geo-political issues before people feel better?

Or is it strictly just the coming out of the bubble or uncertainty coming in the economy?

Could you share your thoughts on that?

My thoughts are I think the Europeans are-- seem to be-- I spent last week in Europe so I'm sensitive.

In fact both Craig and I did.

The Europeans seem a little more concerned about the geo-political considerations than the Americans.

Whether that's showing itself in the capital spending, I doubt it.

We don't know, do we Craig, that any projects are being held up over geo-political considerations.

None.

None.

So I don't think it's the geo-political considerations right now.

I think it's just, you know, everybody's coming out of what's been a very slow period and trying to figure out what to do with the money.

And then of course, we've got some of the problems at the federal government level and the state government level.

The federal government still doesn't have a budget and we're operating under continuing resolutions.

And some of the state governments are struggling a little bit, but I don't-- I think those are the issues.

I don't think the geo-political considerations are significant in our business at all.

So you think maybe it would be a comparison towards the 1992-1993 period where we were coming off the recession, coming pretty slowly out?

Is that a fair comment?

That's what we think.

OK.

Thank you guys.

Our next question will come from Steven Metcalf of CSFB.

Good morning guys.

A question on the $140m removed from backlog.

Can we trace that back to a specific quarter when that entered, just so we can clean up on our historical numbers?

We don't have clue.

Actually it was about over a year ago and it came in at a higher rate.

The project had been going on for about a year.

OK, OK.

There's that in the last couple or three quarters it went in.

It went in longer ago than that.

And you mentioned that the only difference is how it's going to be accounted for so it's-- you didn't give away any of your work on the projects?

No. profitability-- the profitability will be exactly the same.

Great.

Secondly, as far as the strong orders in the field services segment-- did that come in any specific in-market?

I mean did you start with more construction work, let's say the petroleum side, or-- can you give some color on that?

They were pretty mixed.

We won some big government contracts, right? [Indecipherable] work.

We got some big private sector contracts, one of the bigger numbers was in the petroleum business.

I think the wins in the pharmaceutical business last quarter were fairly modest.

The prospect list is pretty bullish right now but the wins last quarter were actually fairly modest.

It was all over the place.

I think all the markets had wins and they were evenly spread throughout the system, and we see that - they all come in cycles in these different markets.

I mean, 40% will come from one market in one quarter, then it'll be 40% from another market in the next.

It was spread out.

Alright.

And lastly as a far as the petroleum side-- possibility of kind of gaining more of the upstream work.

Is that something you'll look to do through acquisition or try and do it through brute force with what you have on hand right now?

Well right now we're trying to use brute force with what we have on hand but if we found a decent acquisition we'd do it.

Alright.

Thank you very much.

That's all I have.

And once again if you would like to ask a question today, please press "*1".

And we will take our next question from Chris Hudsey of Goldman Sachs.

Good morning, gentlemen.

I just want to ask you a question on use of cash.

You've gotten your balance sheet now into pretty nice order.

That's certainly not a distraction.

You guys do generate a pretty nice free cash flow going forward.

The change in the US dividend policy having an impact on what you guys might be considering on that area?

And maybe a little bit more detail on the follow up on [M&A] activities.

Can I go out on a limb and ask if ABB's problems are going to create an opportunity for you?

Okay, well on the dividend issue, it's been our position as a company as long as there was this double taxation thing, we weren't going to do a dividend.

If the law changes we will probably re-look at it.

I don't find the mood at the board level to pay a dividend but to be frank with you, we haven't had a detailed conversation.

So we will, like all companies not paying a dividend, take a look at and try to decide where we're going to use that cash.

The second issue on the cash and the acquisitions, we continue to focus on-- we have a lot of interest in the possibility of an upstream acquisition if it would make sense.

We are looking at some governmental acquisitions if they would make sense.

But we don't have anything in our sights right now.

As far as the ABB deal goes, we understand that the unit is on the market but we are not a participant.

Alright, thanks very much guys.

Thanks Chris.

And our next question comes from John Rogers of D.A.

Davidson & Co.

Good morning.

I'm curious a little bit, Noel or John, in terms of your backlog and the pace of work that you're taking in.

You know, it's run at a lower growth rate than revenue over the last couple of quarters.

You had another great quarter in terms of sales growth up about 18% and yet backlog growth is not at that level.

At some point don't those numbers have to match out?

And how much of a concern is that or is it just a timing issue?

First of all, you know, the sales rate has exceeded the work out rate I think in each of the, you know-- certainly for the last four or five quarters.

Right.

So while you've seen very little big activity in projects over that same period, so that's something that, you know-- it isn't a serious concern over the short term and yes, if it started doing that forever then it would certainly be an impairment to future growth.

But right now with the outlook we have and the way we've been booking work I think things are looking just fine.

We continue to book margin well in excess of what we're working on and that--.

We don't measure the revenue as much as we look at the gross margin and the gross margin numbers were strong this quarter on the sales side and they're certainly well ahead of what we booked and we worked off.

And Noel, is that a reflection of the shift more towards professional services as a portion of your backlog?

Well, we have a fair amount - and then of course this last quarter particularly - we had a fair amount of professional service margin come in.

The big contract with the air force was a lot of professional services.

The diesel work coming in is all front-end work taking the sulfur out of diesel so we have been booking a fair amount of front-end work but sooner or later that transfers into construction revenue.

The air force contract won't, that will probably be a lot more pro service than field service work before it's all done.

Okay.

So it's fair to say then that if we were to look at it-- If you were to share with us just what the estimated gross margins within your backlog, that's growing along with the business?

Yes, it's fine.

Okay, and in terms of the activity that you see out there in terms of bidding activity - doesn't give you any pause?

Well we think the prospect activity, Craig and I were discussing this last evening, we think probably it all bottomed some time late last summer.

Okay.

And of course, we believe that, it bottomed last summer.

Okay, great, thank you.

And once again if you would like to ask a question today, please press "*1".

And we do have a question from Mike Coyle of Jacobs.

I don't think so.

I'd be surprised if that were true.

And if you would like to ask a question please press "*1".

And there appear to be no further questions at this time.

Again I would like to remind everyone that you may listen to a re-broadcast of this conference at 2:00pm eastern time today through January 30th at midnight by dialing 719 457 0820 and enter confirmation code 110716 on your telephone.

That concludes this question and answer session today.

At this time, Mr. Watson, I would like to turn the conference back over to you for any additional or closing remarks.

I just want to say thanks to all of you for listening.

We do appreciate your time.

If you have got any further questions you can always call.

Thanks very much.

That's it.

And that does conclude today's conference.

Thank you for your participation.