雅各布工程 (J) 2012 Q2 法說會逐字稿

Good morning, and welcome to the Jacobs' second quarter fiscal 2012 results conference call.

All participants will be in a listen-only mode.

(Operator Instructions).

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions).

Please also note, that today's event is being recorded.

Now I would now like to turn the conference call over to Ms. Patty Bruner.

Ms. Bruner, please go ahead.

Thank you.

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.

Although such statements are based on management's current estimates and expectations and currently available competitive, financial and economic data, forward-looking statements are inherently uncertain, and involve risks and uncertainties that could cause actual results of the Company to differ materially from what may be inferred from the forward-looking statements.

For a description of some of the factors which may occur that could cause or contribute to such differences, the Company requests that you read its most recent earnings release, and its annual report on Form 10-K for the period ended September 30, 2011, including Item 1A, Risk Factors, Item 3, Legal Proceeding, and Item 7, Management's Discussion and analysis of financial condition and results of operations contained therein.

And the most recent Form 10-Q for the period ended December 30, 2011, for a description of our business, legal proceedings, and other information that describes the factors that could cause actual results to differ from such forward-looking statements.

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

And now, I will turn the call over to John Prosser, CFO of Jacobs.

Thank you, Patty, and good morning, everyone.

I will just go briefly through the financial highlights, and cover a couple of points that were in the press release.

And then I will turn it over to Craig Martin, our CEO, to go through our growth strategies and business overview and outlook for the quarter.

If you go to slide 4, these are the information -- most of this was contained in the press release.

As reported, we did have EPS for the quarter of $0.65, on net earnings of $83.9 million.

These earnings were lower than expected, and it's a little disappointing to us.

And the lower results were driven by really three items, two affecting margins, one on the G&A.

We had a lower field service activity for the quarter as continues to wind down.

But it was also exacerbated by the fact that we also had a number of deferrals of some turnaround activity that had been expected in the second quarter.

But now have been postponed out, and probably won't be initiated until fiscal 2013.

Also, we found that because of the continued competitive markets that the work flowing in this quarter had a slightly lower overall multiplier rate and margin rate.

And so, our operating margin was down from prior quarter, both on the professional services side and on the field services side, and with the mix, it was also down.

So those two things contributed to a lower than expected margin and also G&As were higher.

While we -- usually we will have a slightly higher G&A in the second quarter, just because of the first quarter tends to have a lot of holidays and such.

We found that in the second quarter, it was driven also by just a lot of activity in hiring, and delays in getting those people that we hired actually on to projects and billables.

So most of the overrun in the G&As that we experienced were related to that -- to labor, and utilization, getting them utilized, which we think is a temporary activity.

And as those people get on to jobs and such, we should be able to get our G&As more in line with expectations over the balance of the year.

Backlog was a very -- good reported increase.

Year-over-year, we are up almost 8% and quarter-over-quarter in total, we are up a little over 4%.

Book-to-bill continues strong, 1.1 for the trailing 12.

As you will see when we file our Q, probably later today or tomorrow, we will -- we still have a strong balance sheet.

Net cash position is still strong at $380 million.

And we did revise our guidance and lowered the top end of the range.

So our guidance mow is $2.80 to $3.00.

We had previously had guidance out there of $2.80 to $3.20.

So with the lower results for this quarter, we did adjust the top end of the range.

Moving on to slide 5, the earnings history -- just point out, that while we talk about long-term 15% average annual growth rate, we still are delivering that as we've gone through the recession and the downturn.

And we still believe that that's a good goal and something that we expect to be able to meet going forward.

On slide 6, just talk about backlog a little bit more.

The professional services backlog had very good growth.

And as we have said in the past, that is really the leading indicator for our business.

If you look at that year-over-year, it is almost a 14% growth in professional services.

While the overall balance (technical difficulty).

So I'm going to start on slide 7, with the growth strategy.

These are the same five points that we make every quarter because this is fundamentally our approach to the business.

Nothing about it changes significantly from quarter to quarter.

The first four bullets; our business model, our market diversity, our geographic diversity and our approach to acquisitions.

I am going to talk about more in depth, as we go through the rest of the presentation.

But I wanted to take just a minute to talk about the last bullet, driving down costs.

As you know, Jacobs has always taken the position that aggressive cost control is a good strategy for supporting growth and profitability.

And we believe that continues to be the case.

So we are very focused on cost control, as we go forward.

We have been pretty aggressive about recruitment, and bringing in teams for work that we see out in front of us.

That has impacted our costs a little bit this quarter, as John mentioned.

But overall, we see our cost posture as good.

And the good news is we see margins as starting to improve a little bit from a standpoint of new sales.

So we think the opportunity to raise prices, particularly in the private sector is out there, as we speak.

Public sector is going to remain a little more competitive, but that actually plays to our strengths.

So we think the markets, from a cost perspective, will be a little bit better for us going forward.

Moving on now to slide 8, this is our -- a little different version of the slide.

Some of you may have seen this before, about our relationship-based business model.

As you recall, our business model is based on long-term relationships with our customers and a high level of repurchase loyalty.

We do well in that regard.

Our repeat business last quarter was over 91%.

We got almost 80% of our business from preferred relationships, and our core clients dominate those preferred relationships.

But you can see here how the model works.

We build relationships with these customers, they trust us, we improve our business, and provide them superior value.

That's what gets us that repurchase loyalty and reinforces those long-term relationships.

From that loyalty, we get growth that the clients fuel.

We get a lower cost of doing business and more manageable risk.

All of that helps us grow earnings.

We reinvest that in our business to improve our delivery to our customers.

And we end up with what is a pretty virtuous cycle, as we see it.

This is a very different model than our competition, who tends to focus on big events, on lump sum turnkey, on the global competitive slate.

And you rarely hear us talk about those kinds of outcomes.

Moving on now to slide 9. Here is our market diversity.

You can get a sense of how the business is distributed at the moment.

I'm going to take each one of the major areas, and talk about it in a little more detail.

Let me start first, with the public and institutional markets.

And so, we will turn to slide 10.

As you recall, that is made up of three groups; national governments, infrastructure, and buildings.

Let me talk about each one of those in order.

The national governments business, believe it or not, is actually improving from our perspective.

What is happening in terms of the technical complexity of projects and this trend toward multi-award task order contract, the so-called MATOC, actually puts us in a position to expand our share of the market.

We're also very well-positioned in the well-funded segments.

Cyber security and IT, environmental management are all areas where we expect strong funding relative to the overall government markets going forward.

And then the old budget issue is also driving opportunities and outsourcing -- and GOCOs government-operated -- or government-owned contractor-operated projects, something we're very good at.

So we see a lot of potential there.

The environmental management business, I mentioned that already, but it continues to be strong.

UK, NDA,spending something on the order of $140 billion over the next few years, and DOE spending continuing to increase in that area.

So the national governments market is actually a positive for us in the overall public and institutional business that we are encouraged about the way we can take position.

And it's, in this case, it is all about taking market share.

The Infrastructure business is also improving, not rapidly, but it is getting better.

The strengths tend to be in water, rail, transit, aviation.

The kinds of businesses that have user fees to support the investment.

There are also lots of opportunities in the Middle East, India, Australia, plus opportunities to work on our mining and minerals, and oil and gas projects.

And I will talk about that more, again in a minute.

We also see a lot of opportunity in the US, in the pipeline infrastructure, design and upgrades.

We think we're well-positioned to take advantage of that.

So we see that as another growth opportunity for our infrastructure business going forward.

Turning to the third part of that area of our business; the public and institutional area, buildings.

It is kind of a mixed bag right now.

The non-federal spending is improving, the federal spending is weak.

Where we see the investment in federal is largely in things like data centers, other mission-critical applications, energy programs, that sort of thing.

And we certainly are the world's leader in the data center, mission-critical facility type.

If you look at the backlog chart on the right-hand side of the chart, you can see that we have maintained a good steady backlog quarter over quarter.

I think we will be able to continue to make our position a solid one in the public and institutional area as we go forward.

Moving on now to slide 11.

This is the process area of our business.

That is chemicals; oil and gas, upstream and downstream.

Let me start with the downstream side of the business; the refining business.

Crack spreads today are actually quite good, particularly on the US Gulf Coast and the West Coast.

They are probably as strong as we have seen them in a long time.

The refiners tend to spend cash flow, so that is a positive for refinery investment.

Singapore is profitable for the first time in some time on their crack spread basis.

And only northwest -- northern Europe is really weak, comparatively speaking.

We are seeing lots of activity around better efficiency, flexibility in terms of heavy sour crudes, and of course, the environmentally-driven projects.

There is a lot of clean fuel activity for export, particularly Middle East, India.

And then, we're seeing a fair amount of possibilities in South America, although we will have to see how the Argentine thing sorts itself out.

Moving on to oil and gas.

That market is very strong, just a tremendous amount of opportunity in the shale oil -- shale gas world.

Oil sands, particularly SAGD, are very active.

We see an $18 billion to $20 billion capital expenditure in 2012 and we see every reason to think that is going to continue to increase over the next few years.

There's a lot of prospects coming across in pretty much all phases.

And the interesting thing is the heavy sour, light sweet spread is about $15 a barrel, which also makes the Canadian crudes attractive.

There's -- construction capability is starting to become an issue, and I am going to talk a little bit more about construction later in the conversation.

But the oil and gas business is very strong for Jacobs right now, and we see every reason to think it is going to continue to be so.

On the chemical side, again, a really strong business right now, as strong as we've seen it in 15 years probably.

Certainly, low gas prices are driving investments in North America.

Growth in the so-called BRIC countries; China, India, Brazil, are also causing people to consider expansion investments.

We see lots going on in North America, the Middle East, India, Asia.

We're well-positioned to take advantage of those things.

And in particular, Jacobs' strength is in the secondary and tertiary chemicals.

So these 8 crackers that have been announced in the US, which if they all got built would be something like $32 billion worth of investment -- I don't think they all will get built -- will drive a lot of chemical projects for Jacobs as well.

And you can see, we have got nice backlog growth, quarter-over-quarter and year-over-year in the process business.

So that's a positive for us.

Moving on to slide 12, this is what we call industrial.

I will start with the pharma bio business.

We see a lot of continuing investments in emerging markets.

This is one of those areas where Jacobs has a unique position, long client relationships, global reach, and sort of a last-man-standing position.

Most of the major competitors have left the pharma business, pretty much leaving us as the industry leader.

And we are doing some pretty impressive work as a result.

We have won an E&R best award for our work for Merck recently.

And it is a good example of the kind of work we're doing for our pharma clients around the world.

Mining and minerals continues to be very strong.

You will see that word adjacency opportunities again here.

Not only is the mining minerals business about ore processing and all of the related activities, it is also a big buildings and infrastructure business.

That's what we mean by adjacency.

And we see significant growth opportunities for all of our businesses, in supporting the mining and minerals industry.

We've got solid momentum there.

We're starting to get some pretty significant wins.

And we're seeing a continuing investment, particularly in things like copper and gold, where our customers are just forging ahead very strongly, in spite of the slight reduction in copper prices.

This is also a business where our relationship-based business model resonates very strongly with the customer.

And we see that as a real positive.

And then finally, sort of our other category, that is power, pulp and paper, high-tech, food and consumer products, kind of a mixed market.

Pulp and paper in the US is, is again, probably as good as it has been in a very long time.

Our high-tech spending, mostly that's semiconductor, is up with selected clients, and there are some very large prospects in the offing.

Consumer products tends to be a little softer right now, but we are seeing a lot of emerging markets opportunity, and we continue to do well in alliances.

And our kind of role, as the supporting cast in the power business, doing the work, other than what is the power island itself, continues to be a positive for us.

This is an area again, if you look at the backlog chart on the right, we have had very strong backlog growth quarter-over-quarter, and year-over-year.

That then moves us to our geographic markets.

Let me just kind of work through those, one at a time.

I have talked a lot about the North American market already, strong oil sands, good position for us on the government side, rail and transit improving.

But I think again, a big part of the story is gas and chemicals.

The natural gas CapEx is estimated to be something on the order of $200 billion in the next 20 years.

And the chemical market is surging strongly.

We think that we will see $25 billion to $35 billion of real projects get done.

South America, we're a major player in the mining and minerals market.

We're aggressively exploring opportunities in Brazil.

We have other customers who make investments there.

There is also a big refining opportunity coming in South America, though I don't know what impact this situation in Argentina will have on all of that.

But it does look like a good strong market for us.

Moving over to Europe, infrastructure and buildings remain under pressure.

But the other aspects of our business over there are pretty good.

Environmental and nuclear business is strong.

We're seeing a lot of opportunity on the defense business in the UK.

And interestingly enough, there seems to be a lot of medium and small projects in the oil and gas industry, refining, chemicals and the like.

I spent a couple of weeks in Europe and the Middle East, right before this call, talked with a number of customers.

I was actually quite pleasantly surprised at the number of investments that are planned, and in particular for northern Europe in the chemicals and refining arena.

That was a real positive for us.

And then, of course, Africa, not a big market for us, but we do see some emerging opportunities in the mining and minerals business.

Moving over to the Middle East, just a huge market for us.

I mentioned I spent the other half of my trip in the Middle East.

The prospects there are just enormous.

They are just tremendous activity.

We are very well-positioned.

We're continuing to be the industry leader in things like GES Plus, and our investment there in the Middle East is a strength for us.

You can just see the investments that people are planning.

And it is not just a process business anymore, there is strong activity in both buildings and infrastructure, and we're positioned to take advantage of it.

Moving on to India, great business for us.

We're in both sides of the business there; buildings and infrastructure, and the process business.

India has planned a $1 trillion dollar investment over the next five years in India.

They never spend everything they plan to, but they might spend half that, and that will be a huge market opportunity for us.

We continue to see big expansions from our customers in refining and chemicals.

Indian oil has a big expansion program.

Reliance continues to spend aggressively to grow their business.

So we think India is going to be very important to us in our growth, both in India, and in supporting our growth in other areas.

China and Southeast Asia, for us, this is really China and Singapore, good businesses right now, a lot of activity.

Their refining business is finally profitable again.

But our big opportunities, I think, are supporting our pharma bio clients, particularly pharma bio clients investing in China.

We're positioned to both serve those clients, from a global perspective, as well as actually execute the local delivery to support those customers.

And then finally, Australia, another growth opportunity for us, very significant mining and minerals business, very significant oil and gas.

It just plays right to Jacobs' strength.

And we expect to be seeing significant growth out of the Australian operations.

I promised that I would take a minute to talk about construction.

We took a hard look at construction to help answer some of the questions about, where is the construction business going?

And when should we start to see the construction side of the business pick up?

On the maintenance side, I think the significant ramp is out in the first quarter of 2013.

On the construction side, it looks like the significant ramp is starting at the end of this year.

And both of those then, continue for about as far out as we can reasonably predict.

It's pretty aggressive growth.

So we think the construction business is still maybe a quarter or two out, but we do expect pretty substantial growth in both the maintenance and construction side, the field services business, I guess, as we look ahead into the fourth quarter and beyond.

Finally, turning to slide 14, this is the acquisition slide.

We continue to have the focus that we've described in the past, China, Australia, Brazil, oil and gas, mining, IT, niche additions to our business.

Power, as well, if we could find the right deal.

And, of course, we're always interested in adding customers, who can put us close to core client kinds of clients.

So moving now to '15.

I think we've got a good story, in spite of the weakness of this quarter's performance.

We have a solid business model.

We're -- we've got good market and geographic diversity.

Our balance sheet is strong, and will certainly support expansion and strategic acquisitions.

And we continue to have a good solid cost position.

And I think that will allow us to continue to achieve that 15% compound growth goal that we all talk about.

So with that, I will turn this back over to you all for Q&A.

And I apologize about this -- the break earlier in our technology.

(Operator Instructions) Our first question comes from Jamie Cook from Credit Suisse.

Please go ahead with your question.

Good morning.

I guess, two questions.

Just, I'm trying to understand, when we think about the miss in the second quarter, what is specific to the second quarter, versus what impacts sort your future outlook?

So one, John, when you think about -- how large was the SG&A impact related to increased hiring, et cetera?

How do we think about SG&A going forward?

Then my second question is, on the margins in Field Services and technical professional services, what markets were the margins lower specifically?

Then, it is confusing, because at the same time, Craig, you made a comment during your remarks that you see -- it sounded like you thought margins would be getting better.

So, I'm just trying to dove-tail, just trying to understand the two, if that makes any sense.

Let me address the last part of your question first.

I -- what we see, as we look out is that margins in the as-sold category are starting to firm up.

Now, that takes a while to work its way through backlog.

So the weakness that we saw in the second quarter isn't inconsistent with what I think we're seeing going forward.

But it takes a little time for those margins as we sell them, to work their way into backlog, and the weaker margins from sales in earlier periods to work their way out.

So that is really why, I'm expressing a little optimism looking forward.

And you're not yet seeing it in the numbers.

But which markets specifically are as-sold margins getting better?

Is it just -- I'm assuming it is the private segment.

But any color there?

I guess I'm just surprised, that the margin surprised you, in the second quarter on the down side.

I mean, what were you forecasting relative to what came in?

Well, okay, let -- first off, in terms of markets, it is largely the private sector markets that are in fact getting better.

To talk more specifically, certainly, mining and minerals is improving.

The upstream oil and gas business is improving.

Chemicals is improving.

Refining is not quite so much.

Short of that, all the other categories not so much.

Pharma bio, pretty much constant, not much change there but that's one place where margins never really went away.

So it is that side of the equation.

It's a little -- in the markets that I described us as very strong in my earlier remarks, are probably where the margins are moving -- are more likely to move up sooner and are doing so, compared to the ones that I didn't describe as strongly.

Does that make sense?

Yes.

Then with regards to the second quarter, which -- where were the deferrals, and how big were those deferrals?

Then the last question, I guess, I'm still surprised the margins surprised you in the quarter.

Let's take the as-sold margins out of this.

I guess I'm surprised, it surprised you, because Jacobs doesn't get surprised.

(Laughter).

I'm trying to figure out what you were assuming relative to what actually came in.

And then I'm sorry, the last question on the SG&A, if you could just quantify, and when those people are expected to be allocated to other projects?

Okay.

Well, in terms of the factors that drove the quarter negatively, they are all about equal contributors give or take.

Okay.

The -- and looking forward, the weakness in margins, that was specific to the month of March.

Yes.

I don't expect most of that to recur.

So those were one-time events that --

But I guess, why --?

-- we didn't anticipate.

I mean, why would a margin issue just be specific to March?

Was there something specific to Jacobs, I guess, margins came in lower because of something Jacobs specific or was it market related?

No, it was Jacobs specific.

Okay.

So it sounds more like an execution issue somewhat?

Well --

So -- I mean, I don't want to make a big deal out of this.

But it does seem -- (multiple speakers).

Yes, I don't want to make a big deal out of it either.

There were certainly a couple of execution issues in there.

There were also some issues with federal rates, and making adjustments to those rates.

I mean, there is a whole bunch of little things added up to the miss in March.

But to be clear, it sounds more Jacobs specific versus market related, which --

It absolutely --

Which makes sense -- (multiple speakers).

Yes --

Relative to the guide in the back half.

That's perfect.

Yes.

Thank you.

It was very much Jacobs specific.

Okay, that's perfect.

Thank you.

I will get back in queue.

Okay.

Thank you, Jamie.

Our next question comes from Scott Levine from JPMorgan.

Please go ahead with your question.

Hi, it is actually Rodney Clayton here for Scott.

How are you, gentlemen?

Hi, Rodney, how are you doing?

I'm pretty good.

So first, can you talk a little bit about the labor and regulatory backdrop within your mining business?

I guess, anecdotally hearing some comments that things may be tightening a little bit in that market?

Has there been any discussions about any delays or scope reductions that you've heard about there?

Not at this point in time there has not been any of that.

I have to tell you, my conversations with our mining and minerals customers are very much them taking a long view.

Some of these projects and programs take ten years to fully develop.

They're just -- they're not swinging their decisions around short-term kind of issues.

We have at least one major mining project that won't -- it will take ten years to produce its first piece of ore.

So when you have those kinds of investment horizons, the kinds of things that we're hearing about from the regulatory environment or otherwise are issues.

I don't want to say they're not, but they are not -- they are certainly not negatively impacting investment decisions that we're seeing.

Okay.

That's helpful.

Secondly, if we look at your government business there.

I mean, you mentioned a couple of things I thought were interesting.

One being, that you are well-positioned in some of the better funded areas.

Should we expect a meaningful -- I would say, mix shift, in your mix of, maybe agencies or types of projects within your government business?

And then secondly, on the GOCO opportunities, are there any particular areas where you are seeing maybe the possibility for outsourcing whether it be disposal facilities on the radioactive side or anything of that nature?

Any color you can give us there would be helpful.

Sure.

Well, let me talk first about GOCOs.

We're seeing a number of interesting GOCO opportunities in the UK.

And these are fairly significant projects.

In some ways, they are a little bit of -- the big event kinds of projects that I talk about us not focusing on, but they're nice when they come along.

We've got -- and we see several of those in the UK.

We see a couple of those in the US.

We find that we're uniquely well-positioned because of some of the work we're doing with the government today in terms of GOCO-type operations in the test and evaluation world and in the nuclear materials world, in terms of the weapons complex in the UK.

I think those things are helping us position, for some major GOCOs that we might not have otherwise looked at.

So that is a chunk of what is driving that whole area.

But I think the -- as you know, we're much more focused on getting market share day by day.

I think the more interesting part of this whole business of breaking up what had historically been big single award contracts into multiple award task-order contracts.

That is letting us penetrate a lot more locations.

We are finding ourselves able to take share almost everywhere we -- we're successful in getting in.

So the net effect of that, I think will be continuing growth in our national governments business for sure.

Probably not double-digit kind of growth, but certainly growth.

All right.

And then, one more, if I may.

You touched a couple of times, loosely on Argentina.

Can you just talk a little bit about maybe preliminarily, what your customers -- or how their approach to that market is changing in light of the nationalization project there or initiative there?

I would, but I don't yet know what their thinking is going to be.

That is why I phrased it as a question.

It is an area that we are going to have to explore.

I will be talking to some of those customers over the next couple of weeks.

At this point in time, I don't know what -- to what extent it is just an Argentina specific issue in the minds of our customers, and therefore frankly, not a big deal.

Or whether it's going to have broader implications for our customers, as they think about investments, joint ventures, and that sort of thing.

It is just too early to tell in that regard.

Certainly, we had a prospect there that we're probably not going to see come to fruition, and that was a disappointment for us as a Company.

But I don't think -- it certainly doesn't swing the needle for us as a business.

Okay.

Yes, that is what I really wanted to know.

I guess, it sounds like it will not be a major issue for you on your -- maybe on what you project in 2012 backlog.

No, it will have no impact on our 2012.

It just has an impact on our outlook for the South American market in the refining and chemicals world.

Okay, that sounds good.

Thanks a lot.

Appreciate it.

Our next question comes from Andrew Kaplowitz from Barclays.

Please go ahead with your question.

Good morning.

Good morning.

Maybe I can follow up on Jamie's question in a different way.

The salary multiplier is very important to you, or various salary multipliers.

And John mentioned them being a little bit softer.

But I heard from you guys that salary multipliers have generally been improving for Jacobs.

So I guess, which is it?

I mean, it sounds like from your comments, Craig, that generally they're getting better.

But maybe a little bit more clarity would help?

Well, I think you've got a look forward, versus a specific conversation.

When we talk about margins in March being below expectations, those are unit margins.

Certainly, that gets right to John's comment about multipliers.

When we talk about looking forward, in terms of what the market is doing, we're seeing opportunities that push the multiplier up, little by little.

We're not talking about major improvements.

We're talking to our sales team about getting an extra dollar an hour.

Got you.

Okay, Craig, that's helpful.

This -- and so, when you look at the whole SG&A issue that you had in the quarter.

I mean, one thing that you notice, when you look at the Jacobs earnings progression over the last few quarters is, sales generally have stayed stuck around that $2.7 billion run rate, while bookings have increased pretty significantly over time, and so has backlog.

So, I mean, is it the case, where you're just seeing projects taking longer to develop here?

You book them, and then the customer sits on them for a while?

So then you go hire people.

Maybe you hire them too quickly, versus in the past when customers would go very quickly?

Is that kind of what is happening?

It is a mixed bag.

Some of what you said is accurate.

What we are seeing is, customers are being more disciplined about their processes.

So for the most part, not everywhere, but for the most part, we're going through a very disciplined front end.

We're developing detailed design pretty thoroughly and completely, before the release of construction.

And that is part of why, although construction and maintenance volumes are expected to improve bit by bit, that is why I have -- I see that fourth quarter of '2012, first quarter of 2013 as being the a inflection point in terms of what is going on.

So if you look now, backward, you pointed out that the revenues have been flat.

What has been happening by and large, is that the mix of TPS and Field Services has been moving toward TPS, Technical Professional Services.

Yes.

And, that is what has kept the revenue line flat, as you look back.

I don't expect that to change significantly for a couple more quarters.

Then I think you'll start to see -- what you'll see first is the Field Service backlog move up.

Then, you'll start to see the revenue line move up.

Right.

Because Craig, you talked about a couple of big oil sand jobs sort of moving forward.

And maybe last quarter, you said, in the next two to three quarters.

Has that stayed on target or have they kind of -- they still continue to be two to three quarters out?

No, it stayed on target.

I think we're in that -- well, since I talked about it a quarter ago, I think we're in the one or two quarters kind of time frame now for some of these big jobs to start rolling in.

So there is no reason to think that backlog can't continue to increase here on a sequential basis when it comes down to it?

I certainly expect it to.

You know backlog is lumpy.

Of course.

We can have a quarter, where a big project doesn't come in, and misses the quarter by a week or two or a month.

So, the backlog doesn't look great for that quarter.

But our -- as we look out, in terms of our prospects for backlog growth, we see steady, again, setting aside the lumpiness, steady growth in backlog out quite a ways.

Thank you.

Our next question comes from Joe Ritchie from Goldman Sachs.

Please go ahead with your question.

Good morning, everyone.

How are you doing?

Doing well.

So just wanted to follow up on the margin questions.

Specifically, you mentioned the deferrals on the turnaround activity.

How should we be thinking about that activity coming back, I guess in the early part of next year?

What impact that could that have, on both margins and EPS to next year?

Well, it -- the impact of those turnarounds is pretty significant.

They tend to be very concentrated, short-term efforts, a month, six weeks of very high volumes of craft employees.

So they have a significant impact on the quarter in which they occur.

Part of why, that we had the problems we did this quarter, when they didn't happen.

I think, we will have -- we will see a similar impact the other way, when they do happen.

But I do think they are an FY 2013 opportunity at this point.

There will be some minor turnarounds between now and then, but the big ones are put off for basically a year.

Can you tell us why that happened exactly?

What was behind the decision making?

(Multiple Speakers).

Customers are making so much money running these facilities that they can't afford to shut them -- they don't want to spend the money to shut them down, or lose the money by shutting them down.

Remember, this will take a refinery or an oil sands project down for six to eight weeks.

And if you're producing 100,000 barrels a day, let's say, of crude, at pick a number $80.00?

Yes.

Right?

You're talking about a very, very significant cost.

So they're trying to -- they basically have tried to push these turnarounds out absolutely as far as they can go, and still have a safe operable facility.

The good news about the turnaround business is, sooner or later, they absolutely have to do the turnaround.

They can't push it, year on year, on year on year.

Well, that's -- and that was my follow-up question is, based on what you've seen in terms of your installed base and the amount of maintenance you've done over the last couple of years.

What is your sense that if we get into the first quarter of next year, that they don't just push it out and defer it another year?

I think it is really unlikely they can do that.

Okay.

I guess, and on the margin side, based on the factors that you have discussed for this quarter, how quickly do you think we get back to where margins were?

We were just at -- almost in the mid 5s, did sub 5 this quarter, and how quickly do we get back to -- back to the mid 5s?

As I've -- and this was a little bit of an aberration as Craig alluded to.

I think we will -- with what we're seeing in the sales prospects, certainly what we're bringing into backlog in the process side of the business is at or above the level we've been working off.

So I would expect that -- well, it is not going to be any big dramatic shift, that we will see margins, percentages moving up through the end of the year, and into 2013.

But as the -- again, as the Field Services start picking up then that is going to have a dampening effect on the overall margins but it will be -- probably show a little faster growth on the revenue side.

So over, all dollar margins will continue to grow.

Okay.

All right.

Well, thanks for answering my questions.

I will get back in queue.

Our next question comes from Steven Fisher from UBS.

Please go ahead with your question.

Good morning.

Good morning.

Just a question on the minority interest.

The pick up in that line item this quarter, was that due to growth in the Middle East activity?

It is heavily weighted to that, because as you may recall, when we had did the acquisition of ZATE, a few years ago, it was -- we didn't buy 100%, I believe we bought 70%.

So, the increase in the minority interest points to the fact that our Middle Eastern business, and that's not the only item that is in the minority interest but it is a big part of it, is growing.

So, the part that goes to the minority interest grows.

Yes.

So I guess, having that grow is an indicator that that part of our business is growing.

So I guess it is good news.

Yes, it is.

Right.

So, would you expect that line item to continue to grow further as your Middle East business there grows over the next couple of years?

Yes.

Okay.

When I think about the different pieces in getting to your EPS growth targets; core growth, acquisitions, SG&A leverage, pricing and mix -- I'm not sure if I missed any, but are you thinking that they should all be positive contributors over the next few years, including pricing?

Well, I certainly think pricing is going to be that.

I didn't write down your list.

So run me by -- run me your list again, would you?

Core growth, acquisitions, SG&A leverage, pricing, and mix.

Yes, let's -- let me just work through this.

I think, core growth, the organic growth, will continue to be a contributor to profit growth at the bottom line.

We certainly see acquisition activity as very good.

There are a lot of really nice potential acquisitions out there that would be very complementary, very additive to Jacobs.

So I believe that will be an ongoing contributor.

The SG&A leverage, I believe -- I really believe that the problems we had in the second quarter, are just that, second quarter problems.

That we will be able to put those behind us, and continue to do a really good job of leveraging our growth, in terms of economies of scale.

Pricing, I think I've said, that I think pricing is going to improve going forward.

Mix, if you talk about it in terms of absolute dollars, I think the mix is a big positive for us.

I think if you are looking at percentage profitability, particularly the construction and maintenance growth that we're seeing, will probably take those percentages down.

Okay.

Yes, that's helpful.

Thank you.

Our next question comes from Michael Dudas from Stern Agee.

Please go ahead with your question.

Good morning, everyone.

Good morning, Mike.

How are you doing, Mike?

Wonderful, thank you.

Craig, you can talk about maybe how the US economy given your discussion with clients -- and some of the numbers out of the construction market has been mixed lately.

Do you get a sense that things are stabilizing or getting a little weaker?

And on that front, are customers uncertain about regulatory issues, and maybe about November, that could be holding back some of the investment and the work you are having?

I don't see a big economic or political impact on the private sector investments of our customers.

Again, our customers are largely big global companies whose spend is focused on a global marketplace and whose commitments to capacity expansion, and CapEx in general, are largely driven by their overall view of the market, not a US-centric view.

So in businesses like chemicals, for example, chemical manufacturing in the US is competitive on a world scale basis and globally competitive, when feedstock prices are anywhere near where they are today.

As a result, we're going to see significant investment, because frankly, it is cheaper -- and cheaper is probably not quite the right word -- but it is a very productive place to invest, if you have low cost feedstocks for global supply.

So that part of the economy, I think, is going to be good.

I think it is going to continue to be good.

I think the CapEx for things like gas and chemicals, are going to be real positives for the economy.

I'm much more negative about the consumer side.

I don't think we're going to see a consumer-driven recovery.

I think, therefore, we are going to have some challenges with that segment of the economy.

So if I think about commercial -- these aren't necessarily areas where we work -- but commercial buildings, retail, not so good, and probably not going to get good.

I think in -- if your primary customer base is the US market, you are probably going to be a little bit careful about your investments.

If your customer base is more global, I think what happens in the US is less of an issue.

Does that answer your question?

It does.

Certainly, on the public sector side, it probably -- it is pretty self evident, correct?

Yes, I think the public sector is going to be a very difficult market.

I think there are going to be significant winners and losers because I think it's going to be a share game.

Really good companies with really good cost postures will gain share, and there'll be some big losers on the other side.

Frankly, probably, small business is going to get hurt the worse when you talk about the public sector side of the business.

Now, there may be some political moves to try to fix that, but it is a very difficult problem to fix.

Mike, you have to remember that in our traditional public sector markets, we have grown outside the US.

So we're not as US-centric, as we were maybe five years ago, as we've moved into more activity in the UK, and now in India.

Even in the Middle East, things like buildings and infrastructure opportunities are there.

As Craig mentioned, on the adjacencies, particularly in the some of the upstream activities and particularly in the mining and minerals activities, those projects involve a lot of infrastructure kinds of activities that we can bring from our traditional public sector infrastructure business into the roads and rail, and other kinds of activities that go around the major mining project or major upstream piping development.

Duly noted, John.

Mike, just one quick follow-up on -- given where your balance sheet and your cash position is today, I know these are difficult to time, can you maybe thought about potential acquisition over the next six months in your fiscal year 2012?

Can we expect something and maybe just a little sense of, given that there is some weakness in the public sector, is that an area that you may be want to be able to beef up on?

Thank you.

Let me respond to that.

We are constantly looking with potential acquisitions.

At any given moment in time, there are always two or three or four that we're pretty excited about.

But as you -- I think we've said many times on this call, these deals are pretty opportunistic.

There are deals out there, I would like to think would close in the next six months.

But there is a long way between here and there, and lots that could happen in the meantime.

So it is dangerous to predict that they will or they won't.

But it is a good robust market.

It is robust in both growing market areas, where people are trying to capitalize on the strength of the market, and in places where the performance is weakening and people are starting to maybe panic a little bit, and are anxious to sell.

We're certainly going to be in a position to take advantage of either one of those.

From a balance sheet standpoint and resource standpoint, we do have confidence that we have the resources needed.

We just announced that we did close a new credit line facility just before the end of the quarter, which gives us ample resources committed to do the kinds of acquisitions that we certainly are focused on.

Thanks, gentlemen.

Our next question comes from Andrew Obin from Bank of America, Merrill Lynch.

Please go ahead with your question.

Yes, good morning.

Good morning, Andrew.

How are you doing?

How are you?

Our strategists inside Merrill have been talking about the fiscal cliff event of the year.

Given your exposure would love to hear your thoughts on the subject and also what contingency measures, if any, you are taking?

Well, I guess this is -- now practicing forecasting in an area where we don't have any qualifications to forecast, so it is just opinion.

My opinion is that our government will kick that whole issue down the road, and won't come to grips with the deficit or the spending reductions.

And that we won't see what the dreary outlook that is out there that -- based on what is supposed to happen, let me put it that way.

On the contingency side, the US business is one that is pretty easy for us to manage in that regard.

If the work goes away, so do the people.

I mean, that is an ugly thing to say, but that is really the consequence of what happens.

We are aggressively, as I think I pointed out earlier, recruiting in places like Asia, Australia, India, Middle East, South America.

Our -- I think our growth opportunities there are enormous.

So I believe that we will be able to offset any further reduction in our business, as a result of whatever the government decides to do at the end of the fiscal year.

But like you say, I think the most likely case is that they'll just pump the whole problem down the road.

All of the good questions have been asked.

So I will be -- like asking negative questions today.

(Laughter)

So recently, BHP and Rio, I think, literally within the past couple of days have indicated that they are going to slow down their CapEx, quite meaningfully over the next couple of years.

I know that you guys are positive on the near-term for mining.

But have you had any conversations with your clients about longer-term prospects for the mining industry, and the rate of growth for CapEx, over the next two, three years?

We have had a few conversations, but none of them are real recent, Andrew.

When we talk at the project level., at the project level the guys see that the CapEx reductions are going to impact project selection a little bit.

They are going to be a little more focused.

But most of our customers are saying they continue to have the expectation that significant investment will occur.

Part of the problem that the industry faces is that the high quality ores, this mining -- I will go specifically to copper here for a minute, the high quality ores that have historically been produced are going away.

You are finding yourself increasingly with poorer quality ores that require more processing and shortfalls, therefore, in terms of commodities.

You may have seen recently that the Chilean Copper Company had to go out, and buy copper on the spot market to fulfill its obligations to its customers.

I think that is very indicative of some of the resource demographics of that industry right now.

So while I think there may be, and like I say, I will get around and talk to those customers again over the next quarter.

While I think there may be some impacts of CapEx, there is also a level of CapEx that is not only likely, but is basically required to continue to produce copper at the levels to match demand.

I think that bodes well for that business.

So I'm maybe not yet -- maybe I should be, but I'm not scared yet.

Does that make sense?

Yes.

Thank you very much.

Our next question comes from John Rogers from D.A. Davidson & Company.

Please go ahead with your question.

Good morning.

Hello, John.

Craig, just a little bit of follow-up.

Relative to the -- what you called the surge or the pickup in bookings that you see for the construction segment coming later this year and into 2013.

I mean -- as you look at this cycle hopefully developing, is it large projects?

Is it a lot of small work?

I mean, because we always worry about deferrals, and just timing of some of this.

It is both, quite honestly.

When you look at -- and like I say, I had the guys do a special analysis, just so we could have a conversation about this on this call.

Yes.

When you look at the prospects, they range from everything from $50 million upgrades of a facility and, of course, our ongoing expectations in maintenance and small cap to major projects in SAGD in the Middle East.

A way to look at this is that as I talk about those peaks, the maintenance part of the peak that I described is going to contribute as much to our Field Services activity as the construction part of it will, at least in FY 2013.

Does that help?

Yes, that does.

So, but relative to the last cycle -- and look, they are all different and the drivers are different -- but I mean you had some very large projects that came in later in the cycle and then ran off.

As you look at the business, and how you're positioning yourself for it, and it's chemicals and gas-driven and upstream work.

What do you think about in terms of what you're telling your guys that you want to be involved with?

Well, we continue to treat the -- what I will characterize as small and medium sized projects as our top priority.

Okay.

What constitutes small and medium size is probably bigger, than what it was ten years ago.

It is bigger than what it was ten years ago.

Okay.

But we are also so well-positioned, that we are going to see the big work come in -- when I talk about big work, I'm talking about north of a $1 billion dollars -- the big work come in as well.

We really don't expect, and none of the discussion we've had today, is based on Motiva scale projects for Jacobs.

Okay.

So I'm not considering the $5 billion this or the $10 billion that, as a part of my forecast going forward.

So it is biased still toward smaller, but the topside of smaller is pretty big.

Okay.

Great.

I appreciate the color.

That helps.

You might also remember, in a couple of the markets we're in -- take the oil sands for instance, many of these are done as programs that are multi-phase.

So you'll hear the market talking about $2 billion this or $5 billion that.

But really, what that is, is a number of phases over a particular -- say in the oil sands, over a particular deposit that is going to be exploited over a series of activities in the SAGD.

Same kind of thing with some of the mining and minerals.

There are some very large programs, but they're multi-phased.

Just as Craig mentioned, there's -- some of them may take four or five years or longer just to get to the ore because of what you have to do with the infrastructure to get there, and then taking the overburden, and all of the other things that go along with it.

So and each of those are done in different phases, and different kinds of activities.

So while it might be a $7 billion or $8 billion program, the pieces are let out in more manageable increments that fit more likely into our size range.

Okay.

But the strategy is still to be involved in its program level rather than trying to go after these as discrete large projects.

Absolutely.

Nothing has changed about our strategy in that regard at all.

Okay.

Even as you've expanded into a broader number of markets, I mean the mining and some of the other areas.

Based on the experience of Motiva, and maybe it was -- you realized that you could make a ton of money just going after large projects.

I just --

Well, we can have a long talk about whether you make a ton of money on large projects or not.

But I -- in fact, just to go specific to the mining and minerals business, one of the great opportunities that we see is in the small cap side; the sustaining capital side of the mining and minerals business which is not well served today.

So, we get excited about big event mines, just like everybody does I suppose, and particularly because they are very long duration assignments because for us they tend to be that program that John was talking about.

There is also a huge amount of opportunity in sustaining capital that is not being done well today.

Okay., okay.

And I'm sorry just to follow up on my sort of first thing.

Is relative to the timing of this work -- I mean, Craig, you've talked about being out and visiting a lot of clients -- I mean this work that you're seeing coming.

I mean, this is work that is in budgets, looks like it's going forward.

It's not -- I'm just trying to separate it from what your experience with the turnarounds this quarter.

I would characterize the work that these customers are talking about largely not speculative.

It's got ROIs or ROEs that are well above the customer thresholds, and these projects are highly likely to go.

And that's true, frankly, of a lot of the work that is in backlog as well.

We're not -- one of the things we track pretty carefully is cancellations and deferrals.

We're not seeing a lot of that activity.

Okay.

Good.

Thank you.

Our next question comes from Avi Fisher from BMO Capital Markets.

Please go ahead with your question.

First of all, quickly on the -- thanks for taking my question, and good morning.

Good morning.

On working capital ratios, they seem to have elevated a little bit back towards, where they were during the economic crisis.

Is this a timing issue?

Or has there been a change in the way some of your core clients pay or your new clients -- when I look at working capital relative to revenue or backlog.

It is a number of factors, but part of it is the mix shift, because traditionally on professional services, we go back to the monthly billing, 30 day terms.

So, by the time you collect the money, you get -- you're in 60 to 70 days.

The -- when you are having a heavier activity on the field side, those tend to pay much quicker.

You do more -- either zero funding or advanced funding or more favorable payment terms.

So as we've seen in the mix shift, we've seen a little bit of a shift in the receivable make-up and such like that.

Nothing that has any problems with it.

It is just kind of a mix shift that goes along with some of the other stuff.

I think, as we get back into a more normal Field Services cycle and a more likely mix -- as those maybe move back more to the 50/50 or even more.

You will see the receivables coming down, and because it will get more favorable funding terms and more paid, when paid, because we will have the pass-through costs and things like that.

So I think it is just the shift that has taken place, with the market shifts in our revenues.

I'm not really concerned about it.

Okay.

I mean some of your --

Although I believe we should be able to collect our receivables faster.

That's something we always will be focusing on, but it is -- part of this shift, has just been the business shift.

Some of your competitors largely -- are moving into larger international marks, specifically Middle East, or South America, occasionally have issues on their DSOs.

Are you seeing anything there?

The Middle East tends to be a longer collection cycle than in other geographies, yes.

But is that a factor as well?

And that is part of it.

It is still a small part of our business, but that is probably added -- a little bit, just because they tend to take a little longer.

Particularly, when you're ramping up, because there is a lot of process that you have to put in place on projects.

For example, GES Plus, while we have talked a lot, and there are a lot of good things there.

There is a lot of -- because it is a new program it, there is a lot of new requirements, that even the client wasn't really sure about how the invoicing and billing should take place.

It just takes a little while to get that system working.

Once you get it working, then it becomes more steady state.

Okay.

How far along are you on that?

We're improving daily.

Okay.

I guess, I'm probably -- towards the end of the queue here, but I'm still a little bit confused about this SG&A issue.

I mean, I don't know if you're going to tell us what it was.

But when you look at SG&A as a percent of revenues, it normally trends in line with TPS mix.

So it seems to be doing what it should be doing, with TPS revenue mix expanding.

Yet, your margins, excluding pass-through costs have been flat to down.

So, I mean, have we hit the bottom on pricing?

It's just -- trends just seem negative.

That's what is surprising to me.

I think that -- we've been saying that we've been at the bottom for a while.

I think it is just -- we're still rocking along in there.

We -- so it doesn't take much to change the needle a little bit.

As Craig said in March, we just -- the mix got us, and a few other things that came in, impacted the margins negatively.

But I think the -- with the pricing we see coming in, and all of the longer-term prospects, certainly show that it is going to be improving.

What is your availability to move engineering to lower cost locations?

Well, it remains very high.

We have the largest engineering operation in India today, and we back office a substantial amount of work there.

There is really not any significant limit on our ability to do that, other than customer preferences, which is usually the biggest challenge.

So, and we are developing other potential locations for back office engineering as well, but it looks like the Indian operation has got years worth of legs left.

And has that been ramping?

The Indian operations?

Very significantly.

Is the margin on that lower, since it is all cost reimbursable?

Lower level, lower cost?

We actually don't approach the back office work that way.

The back office work is structured to maintain aggregate margins that are equal to the margins we get in the local geographies.

All right.

Thank you for taking my questions.

Sure, thank you.

Our next question comes from Tahira Afzal from KeyBanc.

Please go ahead with your question.

Good morning, gentlemen.

I have a bit of a [queue for decab], but I will give it a shot anyhow.

First question is utilization.

Could you talk a bit about [percentage] in terms of utilization, to the extent you can, in the fiscal second quarter?

Really, if you look at the midpoint of the guidance, where you see that?

Well, our utilization continues to be strong.

We did have the issue, as I said, that we had a build up of people, so it has a little impact.

But the numbers are such, that it didn't really -- when you look at the overall utilization, it didn't move the needle, but it did have an impact on our G&As.

So I think that we will continue to see good utilization.

As we get those people, and many of those we've already got utilized and all, I think that utilization will be strong.

What was the second half of your question?

I'm sorry.

Well, I guess, as you look at the second half, what the implied guidance -- what the implied utilization might be?

But I guess, you're not giving it in qualitative terms, so let me put it another way.

If you're looking at 2008, where we saw fairly noticeable, we saw margin expansion versus what we saw in the fiscal second quarter.

Could you talk about, as you look at the last week, where your utilization is going to be, versus that, for the second half of this fiscal year?

Well, the utilization rates -- back in '07 and '08, we were still working an awful lot of overtime.

We're starting to work some overtime now, but still not at the rates, universally as we were back then.

Some locations like up in Canada and places, where we're extremely busy, the rates are a little bit higher.

But there is still markets today, that are softer than they were back in '08.

We're still at the beginning of the recovery, in even in some of our process markets, like in the refining and such, it is improving.

But it is nowhere near the rates, that they were back in '08.

Certainly, the mark-ups and the multipliers are not anywhere near where they were back then either.

So I think that we will -- I guess, what we're looking at in the second half, is continued improvement in utilization, and continued growth in hours, because we will continue to hire.

That will feed the -- if you are talking about the midpoint, that's what it is going to take to feed the midpoint of the range.

Got it.

Okay.

That's helpful.

My second and last question I guess, is as you look at all of the hiring you've done in the second quarter, which is typically I guess, a very, very good sign for how you see fundamentals playing out.

Can you talk about how much revenue, accrued over the next, let's say, rolling four quarters, you can accommodate with that hiring?

So can you accommodate, let's say, revenue accrued a year out from now which is up in the mid teens, closer to your 15% range, with that hiring?

Or do you feel at that point, you might need to ratchet up your hiring even more?

We are in a continuing hiring process, and we expect to continue to hire as we go forward.

It is not a case, that we have gotten so far ahead, or anything that we are going to stop.

The outlook for growth, the outlook in a number of the markets, is that we will continue the need to hire to feed that growth.

Got it.

So should we assume that G&A could tick up more sequentially, as we go forward, let's say, two or three quarters out from now?

Well, I think G&A will tick up sequentially in absolute dollars, forever more.

The challenge is to manage the G&A growth, relative to the gross margin growth, in a way that gives us that the bottom line growth that we've committed to.

I certainly, believe we will be able to do that.

As you look forward, we really aren't trying to achieve 15% compound revenue growth.

We believe that, on something quite a bit less than 15% compound revenue growth, we can produce that 15% compound bottom line growth, through that leverage of economies of scale and efficiency in our G&A.

So, yes, we expect that, that G&A will grow in absolute dollars as we go forward.

Yes, we expect revenue to grow as we go forward, but certainly not at a 15% clip.

We think if we manage both well, we will see that bottom line growth that we've committed to.

Does that make sense?

Yes, no, Craig, that is actually very helpful.

I guess what I was trying to get at, is exactly that.

When do we see that operating leverage kick, given that in fiscal year second quarter, as a percentage of sales your G&A was very high, and have you seen the peak of that, based on what you're seeing as of right now?

I think the answer to that would probably be, yes.

I would have to probably, look at the -- question the way you look at the numbers.

But I believe that, we're going to be able to grow the business relative to growing the G&A, in a positive direction.

Great.

That's very helpful.

Thank you ever so much.

Our next question comes from Andrew Wittman from Robert W. Baird.

Please go ahead with your question.

I just want to dig in a little bit, and try to understand the underlying earnings power from the second quarter.

Just given, that there was some stuff that, sounds like it was one-time.

Can you quantify the dollar amounts and stuff that you saw as one-timish, so we can gauge where are you on a run rate basis, to your updated guidance?

We're not going to break it down this much [with it] because there are a whole factor of things.

I think Craig has said earlier, that it was about equally split between the G&As, and the Field Services, and the margins.

But I think that -- just looking at our guidance, and just taking the midpoint.

We feel comfortable that the second half is going to improve from this.

And this is -- the impact is pretty much the under run we saw this quarter, plus a little bit.

Okay.

John, you mentioned in your comments, that you saw some -- maybe some [margin growth] on the Field Service activity.

Was that basically fixed cost leverage on equipment that you had from, like big projects like Motiva finalizing, wrapping up here, is that one of the things you are referring to there?

No, it just -- it was two things.

It was the deferral of these big turnarounds, or turnaround activity.

The fact that the Field Services activity is just coming down.

Yes, okay.

There's been some talk from the GES Plus goings on, that it might expand beyond Aramco.

I guess, Craig, just some thoughts on that.

Is -- are you being approached for -- working with other state-run companies to potentially do GES Plus type work?

How do you feel that you're positioned for being qualified for that as well as competitively, if you feel like that is something you will be able to participate in?

The GES Plus model, and specifically what Jacobs did, with Jacobs 8, is a pretty positive topic in the leadership in the kingdom.

Whether, they simply expand the scope of GES to other parts of the investment community, the Kingdom's investments.

Or whether they issue new GES Plus type solicitations, and award separate GES contracts, isn't real clear.

It could go either way, based on what we see right now.

We're certainly lobbying to expand GES Plus, rather than go through another solicitation.

But either way, the model is one that has found a lot of favor in the Kingdom.

We expect that we will be able to leverage that into additional relationships, either through the expansion of GES Plus, or through GES Plus type contracts with other customers.

Okay.

We will leave it there.

Thank you.

Our next question comes from Robert Connors from Stifel Nicolaus & Company.

Please go ahead with your question.

I just want to expand on Avi's question earlier, is that going back 20 years, if you look at your domestic pre-tax margins, on average it is about 100 basis points higher, with much less volatility than the foreign earnings.

Do you find that when it comes to North America domestic work, you're able to apply JEC's lower cost outsourcing model more liberally, than you would on say, some of your international end markets?

Well, if I understand the question which is, are we able to use the leverage of low-cost engineering centers like India, across all of our end markets, and all of our geographies.

The answer is there really isn't any difference in our ability to do that, from geography to geography.

The only difference is the amount of leverage that is available.

I say, that with one exception.

There is really no opportunity to leverage India and China.

But with that exception, we pretty much are able to leverage those low-cost models, and the work share approach that we've been developing for almost 20 years now, pretty much, anywhere our customers have projects.

How is that --

Did that answer your question?

Yes.

I guess, if you were to rank it, where you can leverage it more versus less, and with China being obviously being the least, how would you rank them roughly?

I would say that, the two probably strongest places for that leverage right now are Canada and the Middle East.

Because it is driven, not only by the cost leverage, but also by the availability of resources.

Yes.

The US would probably be next on that list.

Okay.

So those would be my top three.

You would say those probably pretty much line up, with what you're seeing, as far as strength of end markets, too?

Well, there is certainly -- it is much easier to leverage India, in resource-constrained markets than markets that are not.

Yes.

So to the extent there are lots of resources in the local community, the customers are more reluctant to take advantage of the leverage, that something like India provides.

Okay.

Then, every time TPS shrinks as a percent of a mix, obviously the gross profit margin naturally compresses, but it happens to be at a higher level than the last trough.

So should we continue to see this going forward, where the gross profit margin will trough, especially as it looks like we're starting to move into Field Services, but at a possibly higher level than the previous one, as Field Services ticks up?

Yes, I think that is probably right.

I think that the TPS business today -- we used to say the net margins from the two were equal, TPS versus Field Services.

Today, I think that TPS margins are slightly higher, at the net margin level.

So, I think as you -- as the mix changes, because we have a stronger TPS blend, and because margins are slightly higher on a blended basis in TPS today than they were 10 years ago, I think you will see the trough be slightly higher.

Okay.

Thanks a lot.

Okay.

Our next question comes from Stewart Scharf from S&P Capital.

Please go ahead with your question.

Good morning.

Good morning, Stewart.

Regarding the billable hours in backlog, I'm sorry if you have discussed this already.

I was on another call.

But what are the trends?

Are they trending as you would expect?

Or are you a little behind, regarding billable hours backlog?

Well, billable hours, we don't put a lot of energy into measuring billable hours in backlog.

So backlog is trending nicely for us, and in line with our expectations.

That probably means that billable hours in backlog, are also trending along with our expectations.

In terms of actual billable hour, and what we forecast, this is a little bit independent of backlog, the trends in billable hours remain positive.

We're -- basically, we're continuing to hire every week.

Okay.

Then also, regarding some of the consolidation in the industry, [Sunoco], most recently, Energy Transfer Partners, some other pipeline and refinery types of acquisitions and some private equity.

Do you see that having any impact on your business in that area?

Well, it is always very specific to who does the acquiring, and who gets acquired.

But our history is, that after a period of rationalization, those acquisitions are generally good for us, because of our position in the industry.

That's proven to be true, whether it is in the refining business, or the pharmaceutical business.

But there is some pain associated with that period, where rationalization goes on.

Okay.

Thanks a lot.

Ladies and gentlemen, at this time that concludes today's question and answer session.

I would now like to turn the conference over to Mr. Craig Martin for any closing remarks.

Well, I want to thank you all for your participation in the call.

We, clearly, were disappointed and embarrassed by the second quarter results.

But I think our outlook remains quite positive.

We see the businesses improving, and we think it will continue to do so, this year and beyond.

So, we really look forward to proving that to you.

Thank you all.

Ladies and gentlemen, that concludes today's conference call.

We do thank you for attending.

You may now disconnect your telephone lines.