雅各布工程 (J) 2012 Q4 法說會逐字稿

Good morning and welcome to the Jacobs Engineering fourth quarter fiscal 2012 results conference call.

All participants will be in listen-only mode.

(Operator Instructions)

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

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Patty Bruner, to read the forward-looking statements.

Ms. Bruner, you may begin.

Thank you, Denise.

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 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 annual report on Form 10-K for the period ended September 30, 2011, including item 1A, risk factors, item 3, legal proceedings, 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 June 29, 2012, 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.

Now I'd like to turn the call over to John Prosser, CFO of Jacobs, to discuss the financial results.

Thank you, Patty and welcome, everyone.

I'll quickly go through the financial highlights for the quarter and the year and then I'll turn it over to Craig Martin, our CEO, to give a more in-depth business overview.

If you turn to slide 4, in the package, these are also the information that was reported last night in our earnings release.

We did have a very good quarter and year with diluted EPS of $0.83 for the quarter and for the year, came in at $2.95 -- $2.94.

In both of these numbers, included is a $0.03, one-time gain that arose from the sale of our iron ore pelletizing technology, this also -- just to clarify that, we do still continue to have active projects in utilizing that technology but the part that we owned of it we sold to the equipment manufacturer that could help to take a better utilization of the technology itself.

So it's a one-time gain but it's also a continuing part of our business.

Our backlog for the year ended up at $15.9 billion, that's up both in the quarter and from last year, strongly.

We had a very good book-to-bill for the year of 1.15, so we continue to have a strong balance sheet.

Our total cash position was just over $1 billion at the end of the year.

Net cash was over $500 million.

And we are initiating guidance for fiscal year '13 in a range of $3 to $3.50 per share.

You see on the slide that it says fiscal year '12, but that is for '13.

Moving to the next slide, this just shows our track of our growth over the last 6 years, and underneath the earnings and earnings per share graph show our 10-year compounded annual growth rate.

So while we dipped under our long-term rate of 15%, we still are tracking very close to that and believe that, that still is our long-term goal of being able to perform at that 15% annual compounded growth rate.

Turning to slide 6, history of our backlog shows nice growth again over last year, both in the field services and the underlying technical professional services.

As we've been talking about, if you look over the last few years, our technical professional services have been leading our growth and now we're starting to see that the transition to where that work is moving more into the field and so over the next -- certainly over the next 12 to 18 months we would expect to see the field services component of our backlog and of our operating revenues to start increasing going forward.

With that I will turn it over to Craig Martin, to go into more depth on the quarter.

Thank you, John and good morning, everyone.

I'm on slide 7 now titled growth strategy.

We continue to be focused on five main elements to grow the business.

Our relationship-based business model, our focus on the diversity in our markets, geographic presence that's multi-domestic in nature, and a cash position that's let's us make acquisitions and accelerate our growth.

I'll talk about all four of those more in a moment, but the last element is the continue to drive down costs aspect of our strategy.

And I'll comment about that here.

We had a really good quarter from a G&A control point of view.

Was pleased with our performance and it put us in a great spot in terms of the earnings for the quarter.

Next year on the G&A side will continue to be a challenge.

It's a tough market out there.

We've got to keep our G&As down.

First quarter may be particularly tough in that regard.

But I think overall our cost position remains excellent and that's in the face of slightly improving margins.

And I do mean slightly.

They're improving but it's very slowly.

The private sector margins are improving.

They're better but it's not any kind of a run-up.

We're not looking at any kind of a bubble that would drive margins up significantly.

And the public sector is frankly as competitive as I think it's ever been.

That's good for us because of our cost posture and that business still is higher unit margins than the private sector, but it is a tougher market from a cost perspective than it has been in the past.

Moving on now to slide number 8, this is about our relationship model.

We talk about this all the time, both internally and externally.

It's a very important part of who we are and how we approach the business.

And it's all about building these long-term relationships.

When we do that, we get the clients to trust us and to share their plans with us.

And we get a knowledge of where they're going.

That allows us to drive continuous improvement and high-value.

Obviously when we do that we get repurchase loyalty, which continues to strengthen our long-term relationships.

The benefits to that are for us, our growth, lower cost of doing business, and manageable risk.

All that should drive a steady earnings growth and I believe that for the most part we have shown that it does.

So it's a good model.

It is not a big events model.

One of the things I think is a positive for it is it doesn't depend on a large number of large project out there in the world in faraway places for us to be able to get our growth.

Slide 9 shows the market diversity, and I'm going to talk about each one of the groups of markets individually.

So I won't spend much time on this slide, but it does give you a perspective of how our business is divided.

Moving on now to slide 10, let's talk about the public and institutional aspects of our business.

That's really made up of three major parts.

National governments, infrastructure and buildings.

Let me start with the national government business.

We have a very strong reputation in that business.

The aerospace and defense aspects of national government in particular.

A lot of the work that is being released these days is being released as multiple award task order contracts, what we call MATOCs.

That turns out to be a benefit to us in that we are now penetrating more sites and developing more capability on a more diverse basis than we have in the days of single award contracts.

There's still a few good single award contracts out there.

But there's a lot of this MATOC business, and in the aggregate we are growing in that aspect of the business relative to what you might otherwise expect.

There's lots of nuclear operations and maintenance work out there as well as good opportunities in the nuclear weapons complex both in the US and in the UK.

A lot of that's being driven by this government-owned contractor operated model.

This is what we do for example at AWE and at the Arnold Engineering and Development Center.

Those things are becoming increasingly fashionable as ways to deliver these huge programs and it's a strength of Jacobs that we think will be a real positive for us.

There's also lights of activity in the intelligence world and in cyber security and we're increasingly well-positioned for that.

So while the market is not growing and we don't expect that it will grow, we are strengthening our market share faster than it's growing and so we expect that, that business will be okay for our standpoint as we go into '13.

The infrastructure market, we've described here as good.

I think it is actually a little better than that this point.

Lots of activity in the rail markets globally.

Lots of activity in user-free fee driven programs.

Water and wastewater, utilities, and telecommunications are all very active areas.

And we actually had quite a good election period both from the infrastructure and the buildings business in that over $30 billion worth of bond issues passed to support either infrastructure or buildings related work.

So that's a big positive for us.

And we have the ability to deal with both the building aspects and the infrastructure aspects with our business and I think that adjacency is going to give us a competitive advantage.

We've described the buildings market as mixed.

Certainly there are parts of it that we're not very active in, retail, commercial buildings, very poor.

The parts that we're in are better than that.

We're a global leader in mission-critical facilities.

That market is estimated to be about $50 billion.

It's going to stay that way for the next few years and then escalate to something more like $80 billion by the end of the decade.

Those higher Ed and K-12 type bond issues that passed, just the ones that we were tracking closely because we think we have a very strong position, amount to more than $6 billion of potential work.

And then healthcare continues to be a great strength for us.

When you look at it overall the Affordable Care Act or Obamacare is going to have probably a positive effect on our business both from hospitals and pharma point of view because there are 30 million new users as a result of that legislation.

When you look at the backlog, it's flat quarter over quarter.

Moving up year-over-year, we're in a particular interesting situation with respect to national governments backlog in that we have a couple of our very large single award contracts that are up for re-compete.

So the backlog is curtailed until we win those re-completes.

We're pretty good at doing that so we feel pretty good about where this business is going and where it's going to be as we move forward.

Moving now to slide 11, this is our process businesses, chemicals, upstream oil and gas, and refining.

Let's start with refining.

Right now our refining customers are getting good margins.

And for the most part in the refining business these days, cash flow drives investment.

So good margins means good cash flow.

Good cash flow means spend money to get more good margins.

There is some additional uptick in capital spending on environmental and regulatory projects.

And again, we have the crude slate moving around and changing the configuration of refineries and we expect to see a fair amount of work resulting from that configuration set of changes.

Things like ANS crude going away, Bakken and the Eagle Ford crudes coming in are going to impact a number of refiners.

And that's just one example.

We've got a great set of client relationships here with the major refiners and we have developing relationships with some of the companies who are in the refining business only.

In addition, the refining business is very strong for us in the Middle East and in India, so those are two bright spots.

Oil and gas also very strong.

We continue to be the premier player in the SAGD aspects of the oil and gas business.

We also continue to be a growing Company in dealing with tailings disposal, those kind of issues with respect to the mining side of the business.

So that's good.

And then we have what's happening in unconventional gas.

It's going to be a huge global market, tremendous opportunity not only for the process related aspects of that, but for the surrounding infrastructure, and frankly it ideally suits us as a Company, both the project sizes and wide geographic distribution fit our business model quite well.

We think we'll see a fair amount of conversion for field related activities as we move into the second half of FY '13.

Chemicals also very strong driven by low-cost feed stocks for the most part.

This is again a very strong aspect of Jacobs' business.

And one where we're seeing tremendous growth.

Just the US engineering requirements, this is for all of those of us in the business, is forecasted to go from about 4,800 engineering people today in the chemicals and unconventional gas business, 4,800 engineers, to 12,000 by the end of FY '13.

So that's tremendous growth in both the oil and gas and chemicals business, that combined aspect of what's going on.

And then we're seeing a lot of good activity in terms of winning projects outside the US, Middle East, China, Singapore, India, all good.

The backlog story here is good.

Up nicely quarter-over-quarter and year-over-year.

And I think we'll continue to see good growth in backlog in that business area.

And now finally turning to industrial, slide 12, pharma bio, mining and minerals, and sort of a whole bunch of other stuff, power, pulp and paper, high-tech, food and consumer products.

The Pharma bio business is pretty stable.

It's not a big growth market but it's not a bad market either.

We have the position of being the last man standing in the sense that some of our competitors quit the market two years ago.

Their businesses are weaker in other aspects so we're seeing some attempt to get back in but they're not being very successful.

There's a lot of money being spent in secondary manufacturing, things like presence in China is significant there, Singapore, India, South America, we've won projects, a number of projects, over $100 million.

We wish our customers would let us announce them.

And we think the growth prospects in North America and Europe are not terrible.

Interestingly a couple of days ago we won the International Society of Pharmaceutical Engineering's Facility of the Year for the fourth time.

We've one that Facility of the Year award two of the last three years, so we're proud of the work we are doing for these customers.

Moving to mining and minerals we've downgraded this market to strong from very strong and I think that reflects what we're seeing particularly in Australia in terms of what's going on, but I think it puts us in a great position to expand our market share.

The small cap work will go on and our ability to penetrate that work should be a positive for us as we move forward.

Projects in the Americas, both North and South America remained steady.

The conversions to EPC or EPCM are active and we think we're going to benefit from some of that.

And the market continues to be one that's very conducive to our relationship-based business model.

So we think that's a plus, particularly because we can offer full-service to these mining companies and some of our competitors cannot.

Another aspect of our position is our cost model is really quite positive for us in terms of taking market share in this slightly softer market.

Still a lot of work out there, but a lot of focus on cost effectiveness and price and we're in a good position to leverage that.

Moving to the collection of markets at the bottom of the slide, kind of a mixed bag.

Pulp and paper is good for us.

Again we're kind of the last man standing in the US.

And we're picking up some projects around the world.

We're seeing some activity in the food and consumer products, particularly in emerging markets, again something where our multi-domestic market helps us.

And our share in the power market, although still quite small, continues to grow and we do see about a $4 billion market that we think we could address from where we are.

You can see backlog is up 14% year-over-year, although it's flat quarter-over-quarter.

We think it's going to continue to be a business that we can grow out into '13 and beyond.

Moving on now to our geographic diversity, just quickly talk about each of our major geographies.

In North America the story is oil and gas and chemicals for the most part.

Robust activity in Canada, robust activity in unconventional gas and oil.

A lot of chemical activity including some very significant projects.

And then the infrastructure business has come back a little b it.

We're seeing some strength there in rail, transit, talked about schools and healthcare.

Aerospace and defense, I talked about earlier.

And then the mining and minerals business seems to be relatively steady in the Western US as compared to say somewhere like Australia.

Moving to South America we're still actively recruiting because we're very busy in South America.

We're increasing our stature as a major player in the mining and minerals market.

We're seeing opportunities for emerging oil and gas, pharma bio, and food and consumer product activities, and as I'll mention a little bit more in my discussion about acquisitions, Brazil is increasingly attractive as an opportunity for growth.

Moving to Europe and North Africa, lots of spending by the MOD and all that looks very interesting to us.

We have a very strong relationship with OCP in Morocco and we believe we're going to be able to leverage that for some significant growth and then there's a fair amount of activity, this is probably where our power business is the best, and where we're doing extremely well with water utilities and rail from a growth standpoint.

Moving now to the Middle East, the process businesses, all of them refining, chemicals upstream oil and gas, midstream, all very active for us.

Still a huge amount of potential spend there, or planned spend.

And we think that will be a good, solid market and a real growth opportunity for us for a long time to come.

We're also seeing opportunities to diversify pretty aggressively in buildings and infrastructure, picked up some major rail programs, some major building programs that we think will be the foundation for nice growth there as well.

In India our historic businesses continue to expand.

We continue to see additional work from our customers like Indian Oil and Reliance.

We're seeing some additional work in fertilizers and some of the chemicals that have been a long-term strength of Jacobs.

The infrastructure business is picking up as well.

The Indian government plans to spend $1 trillion in the next five years on infrastructure.

We all know there's no way they'll get all that money spent, but we think they will spend a substantial amount of it and we think we're well positioned to take advantage of that.

China and Southeast Asia, we are in a great position there.

Our operations in Shanghai, Hong Kong and Singapore pretty well bracket the business.

And we have a lot of opportunities for growth in that part of the business as we go forward.

And Australia, I think it's a matter of taking share at this point in time.

It's not a strong market for mining and minerals.

It remains a fairly strong market for oil and gas.

And I think we'll be able to take advantage of that, particularly with our relationship model and our focus on the small cap and sustaining cap kind of work.

So that's our geographic diversity discussion.

Moving onto slide 14, we're going to continue to make acquisitions.

We're not going to force them, but we think there's good opportunities out there.

Geography wise, that's Australia, Brazil, China.

Markets wise that's oil and gas and mining and leveraging niche markets where it makes sense for us.

And always we look to add core clients to our business when we do that.

An example of what we're doing is our recent acquisition of the PMCM business of lease in Australia.

They're an infrastructure PMCM company.

It's not a very big acquisition but the infrastructure business in Australia is projected to grow at about a 6% compound rate for the next three or four years, '13 through '16.

I think we'll be positioned well to take advantage of that with our global skills and now our capability in country.

So that's the sort of acquisition I would characterize on the niche side that's going to help us grow.

So with that I'll turn to slide 15.

Slide 15 is sort of our commercial for Jacobs.

We've got a great business model particularly for this time in the world.

We are geographically diverse and able to be local to our clients, which I think is going to be increasingly important, particularly in things like unconventional gas.

We've got a great balance sheet and good cash position.

I think that both funds organic expansion, but also lets us make really strategic acquisitions.

I think the next year or two are going to be some great opportunities to do that, and I've talked a lot about our cost position.

I think that's critically important as we go forward, and I think we're quite well-positioned to take advantage of a low cost structure.

So with that in mind I'll turn it back to Denise and we'll take some questions.

Thank you, sir.

(Operator Instructions)

Jamie Cook, Credit Suisse.

Hi guys, this is actually Linda Yon, in for Jamie Cook.

Good morning.

Could you guys talk a little bit more about guidance, specifically the drivers to achieve the low end versus the high end?

And then what you would need to see to get to the high end?

Well, as you all know, we don't typically give guidance within guidance.

The range is what it is, but obviously there's a lot of activities out there in the world that are very mixed here, as Craig went through the markets there are some markets that are very strong.

Look like they're getting stronger.

And certainly if we're successful in doing what we think we can, those will help drive performance over towards the higher end.

On the other hand when you look at the economies, particularly even just here in the US with some of the issues that are being addressed between now and the first of the year, that need to be addressed by Congress and such, there's a number of potentials that could be -- have some negative impacts on activities.

And with economies in other parts of the world that are questionable.

I just look at China, which any given day you read articles about China and you have such a wide range of expectations from very low growth to things are really much better than everybody anticipates, so there's just an awful lot of mixed signals.

So, I think that's driven us as we look at it to have a little bit wider guidance than what we have in the past.

And that just because there is a lot of opportunities for both pluses and minuses, throughout our operations and around the globe.

Just to amplify, I've seen six forecasts for China growth next year, ranging from what people are calling a doomsday scenario of 4% or 5% all the way up to 9% or 10%.

It's pretty hard to sit here today and predict what those various growth rates might mean.

The same's true with something like sequestration.

We could get the full bill as its outlined today.

We could get some form of sequestration light.

Or we could get none at all.

And it's pretty hard to tell what those things mean.

So it does drive a pretty wide range, and as you can imagine, big growth in China and no sequestration would be more positive for Jacobs than the opposite.

Okay.

Great.

Thanks for the color.

And then I know you guys mentioned that first quarter the G&A could be particularly tough.

How should we think about the cadence of EPS through the year?

Is first quarter going to be an effect from that or?

If you look out through the year, the first quarter because of the holidays and such, always is a little tougher quarter on the margins, particularly as we've last few years had a greater part of our business coming from the technical professional services that are more impacted by holidays and such than field services just because of fee flow and things like that.

Added to that, with the change in administration, even though the elections came out pretty much status quo, there will be changes in cabinet posts and some of the appointed folks just because of the natural turnover, even when you have the same parties in power and same people in power.

So you'll get a little bit of -- work could get a little bit of slowdown in some of the activities and such through the quarter.

Even an event like Sandy on the East Coast, we have a number of people up and down the East Coast, so offices were closed for a few days and so you have an impact on margins in the short-term that probably will have some impact on the first quarter, but actually, with some of the other work that's being picked up from that because of our relationships with a number of the agencies in the cities and states that were affected, as well as the Federal Government, we'll probably see a little pickup in overall business and evaluations, and just restoration, and work, and such like that.

So, over the year it might be a positive, but in the short run in the first quarter it could be a little bit of a negative, so when you put all those things together, we'll probably see a pattern where the first quarter is a little softer than trends.

And like last couple years might be a little down from the fourth quarter to where we'll see a pickup through the year with the end of the year being strong.

So, I wouldn't be surprised by a pattern that has been similar to the last couple of years other than this last year we did have a significant down in the second quarter.

I wouldn't expect to see that in any given quarter.

Okay.

Great.

Thanks, guys.

Tahira Afzal, KeyBanc.

Thank you.

Good quarter, guys.

Thank you, Tahira.

The first question is really in regards to your book-to-bill.

For several quarters now, you've done a great job.

In fact, for at least the last seven quarters you've seen book-to-bill from about one times and over the last four quarters a very tight range of 1.1 to 1.2.

As we look into 2013 and in general, even with the uncertainties, it seems that you're fairly optimistic on Jacobs' market positioning.

Do you expect book-to-bill to stay within that range or is there some possibility of that also being exceeded?

I think in general, Tahira, the book-to-bill will stay in that range.

I think, again, because of the change in the administration, this current quarter may be a little weaker from a book-to-bill standpoint.

The government slows down its release of contracts as it goes through all these transitions.

But overall, if you think about the trailing 12 through the year I think for the most part it's going to be in that range.

Is that fair, John?

I think one impact as we look forward and if we are successful in conversions and such and we see the pickup in construction and construction management activity, that might push it a little bit higher, but that would be the major -- the only change that I would see that would be something that would push it above that 1.1, 1.2 range.

Got it.

Okay.

And several of your peers have given like yourselves, very bullish commentary on the petrochemical opportunities shaping up in North America.

You've had a very strong positioning there in the 1990s and even onward.

How do you see your market positioning going into this potential cycle versus the last cycle?

Are some of your peers now bigger and better placed, and do -- or do you feel that you essentially do have pretty decent market positioning for the cycle?

I think in terms of the petrochemical cycle that we think is coming up as a result of these low gas prices, we are extremely well-positioned.

Probably as well-positioned as we've ever been.

We have strong relationships with the major spenders.

We have geographic positioning that's better than most of our competition.

And so, I think, if anything, our opportunity to take additional share of whatever the pie turns out to be is pretty good.

We also have scale that we certainly didn't have in the 90s, and I think that will be an advantage to us as well.

We have the largest high-value engineering center, I believe, of any of our competitors in India.

So, the cost effectiveness of our offering is probably as good or better than you can expect to see from anyone else.

I think it all adds up to a real positive and that's why I'm particularly bullish about what the petrochemical cycle could mean to us.

That being said, there are parts of that business that we will not be active in.

For example, we don't have ethylene technology and we won't be the primary engineer or contractor for the inside battery limits kinds of work where those kinds of technologies or similar technologies are involved.

On the derivatives side, and the sort of OSBL outside battery limits, that means utilities and off sites, that business is again ideally suited to Jacobs.

We are working already at many of the sites where these big investments are going to go.

We know those sites well.

I think that again will help us take a disproportionate share of the business, but as you know it's a fiercely competitive market and there are lots of us in it.

So, all that has to be tempered a bit with lots of competition.

Got it.

Thank you very much.

Andy Kaplowitz, Barclays.

Good morning guys, nice quarter.

Good morning, Andy, thanks.

Craig, you guys are the last to report in EMC, and it's been a pretty weird quarter honestly, very mixed across the space.

A couple guys looked very good.

A lot of guys talked about a little bit of a slowdown in some of the large projects.

I know you guys are pretty diverse, mostly focused on small to mid-sized stuff.

How would you characterize the quarter in terms of did you see a slowdown in any of your businesses, or is it because you guys are a little more North America than some of the other guys, and Middle East, you guys have remained strong?

And those are probably the two strongest areas of the Business.

We saw some real negatives in Australia.

I think I mentioned that that we thought we would see that last quarter and we did.

So there, particularly in the mining and minerals business, it was a painful experience for us.

But we are not yet a giant player in Australia.

We're not a WorleyParsons or one of those companies in the Australian marketplace.

So, the overall impact on our numbers was -- wasn't as significant.

Around the rest of the world, the markets remained pretty strong.

And in proportion to my comments about them earlier today.

So, the markets that we said were strong, or very strong, remained strong or very strong.

The markets that we said were improving or mixed pretty much stayed there, as well.

The good news is we didn't have any markets really going south on us, like other than the geography of Australia.

And I think that was a positive for us during the quarter.

We also had a quarter that was not dependent at all on big events.

And that's been true for some time now and I think that's a positive as well in terms of where we're positioned.

It's not to say there aren't some big events out there, but it's not where we're focused and I think that's -- our business model is doing a good job of helping us continue to grow in a market where maybe if we were a big event company we'd be having a different conversation on this call.

Craig, is it fair to say that you're focus on SAGD and oil sands is what protects you from slightly lower oil prices in some of the commentary that we've heard out there about some projects moving to the right?

I certainly think that the SAGD side of it is the less sensitive from an oil price point of view, although that's not to say it isn't sensitive, because it is.

I think there are also some sensitivities to SAGD by terms of what's happening on the unconventional oil and gas side, and whether some of those reserves will be cheaper to get.

But overall I think SAGD business is going to continue to be good for us and like you say, we are getting into the back end of some of the mining and minerals style projects, the mined sands.

But I do think the mining related projects probably have the most chance of moving to the right.

And that's really not where we spend our time and energy.

That's fair.

John, you guys like to downplay I think the margin improvement a bit.

Let's call a spade a spade.

You did pretty good margins in the quarter.

6%, I don't know if I ever remember Jacobs doing those margins.

Some of that probably is maybe the Aker mix is helping a little bit but I know that's a small portion of the business.

So, my question is, is this a little better than just a tiny bit of margin improvement, Craig or John?

It seems pretty good to me in the quarter.

There's a whole mix of things that improve our margins.

One was, we did have a very good operating quarter and as we've talked before, there's always things going up and down in any given quarter and this was a quarter that was very clean from any surprises or unusual costs or things like that.

But also with our hours, billable hours moving up and activity moving up, we're seeing an increase in our activity that we're moving to our value engineering centers like India.

And that actually has a beneficial impact on our margins, because we are able to maintain close to the dollar level of margins on those hours, but obviously the cost base is much lower.

And as we share hours between two or three different offices, so that does have a positive impact in the overall mix.

Craig mentioned we do have different margin profiles between, even within the professional services and technical services, between different markets, just because of the way pricing has developed and such like that.

So, I think there's a lot of factors that move it from quarter to quarter, but underlying it is the fact that we are seeing pickups in pricing and the positive mix that we're getting from the Middle East, from this work share, is also going together.

In the quarter we had a good level of activity in turnaround and field, which actually the turnaround tends to not have as much of the pastoral costs in it, that pure construction would have or total construction, so it tends to have a little bit of a market margin impact, positive margin impact as opposed to the larger construction projects.

Thanks, John, that's helpful.

Take care, guys.

Scott Levine, JPMorgan.

This is actually Ankit Varmani in for Scott.

Hi guys.

Just as we are getting near to this Fiscal Cliff, wanted to ask like what's your sensitivity to the various outcomes, which parts of the Business are more exposed than others, if you can just elaborate on that, that would be great.

The part of our Business that's most exposed to the Fiscal Cliff is the Federal Government business.

So that piece that we call national governments.

And certainly if in fact the sequestration happens, it will have an impact.

We expect that impact in terms of available market to be more of a '14 than a '13 kind of issue.

So, we don't think it will have very much impact at all on this year.

With respect to the impact we think it will have as you look out into late '13 and '14, we think we can continue to grow share and maintain our overall position even in the reduced market.

And so, we think we're in a pretty good position to continue to grow.

The rest of our Business is not likely to be affected except to the extent that sequestration causes some sort of overall recession or economic problems in the US that are significant and it puts us back in another deep recession.

That could impact our other customers' spending and could have some impact on us, as well.

But for the most part, we think we can bulldog our way through the effects of sequestration and continue to keep the Company on a growth path.

Okay.

That's helpful.

And if you can comment on the nuclear decommissioning opportunities in the UK?

I think the project -- the Magnox contract is out for bid, and what's your take on that?

I have Tom Hammond here with us who has responsibility for that part of our UK business and I'll ask Tom to comment.

It's unlikely we're going to participate in the Magnox rebid, but the opportunities, and we've been very successful at winning multiple contracts, at Sellafield and the projects there ongoing, we are part of several teams and several projects and this includes decommissioning and clean up.

It also includes new projects to deliver the Sellafield mission going forward.

On the particular Magnox sites we're very active as a second-tier contractor.

And I think that we're somewhat immune from the rebid because those second-tier contracts will continue to be -- regardless of what the results of the prime contract bid would be.

Okay.

Great.

And just a quick one -- go ahead.

No, unless you have further questions --

Just a quick one on the balance sheet, the cash balance above $1 billion.

Any changes to your thought process on deployment of cash?

No.

I think we're still looking at the fact that we believe there's a lot of opportunities for acquisitions and growth in that respect.

The cash balance and our credit facilities give us the strength to be able to pursue those actively and become an attractive buyer to folks that are looking to sell, so I think that our current outlook is still that the primary purpose of that cash is for acquisitions and growth.

We always review periodically other aspects, and certainly, if we ever got to the point where we thought the cash was greater than what we could deploy back into the business we'd have to consider other things such as buybacks or whatever, but certainly for the current timeframe, our outlook hasn't changed.

And we think the market is still very opportune for acquisitions.

Perfect.

f Thank you, guys.

Michael Dudas, Sterne Agee.

Good morning gentlemen, Patty.

Craig, as we look out to 2013, should we concentrate more on general economic activity in North America, Europe, Asia, or more on some of the discrete decisions that your major customers are going to make on FID's and certain feed work, say, in the North American shale or oil and gas or Middle East?

Because of your comments about China and the US, I didn't know how leveraged Jacobs would be towards growth in China.

I wanted to get a sense, is it overall economics that's going to drive revenues or is it more decisions by your customers on putting out the bids and you guys winning?

One way of describing it, Mike, would be to say it's both.

Okay.

Let me try to separate it for you.

As a Company, our belief and our focus is entirely on specific customers and their spending plans.

So, when we talk about global economic issues, it's about the extent to which what's happening in those economies will affect our customers' commitment decisions, and therefore their capital expenditures.

It's not about those economic situations having direct impact.

So take China, China is a very small part of our Business.

We're they're doing work for our customers who are making foreign direct investments in China, but it's not at that stage where it would move the needle and probably it will never be so big that it will move the needle in a major way.

On the other hand, China's appetite for commodities and natural resources being what it is, that affects the BHP Billitons and the chemical companies and the pharmaceutical companies, as well.

And it's the extent that that economic situation drives their expectations for capital and new capacity that actually impacts our Business directly.

It is not what China does so much as how it affects BHP Billiton, or Rio Tinto, or Shell, or BP, or Unilever, or KC, or Lily.

And to the extent that they are affected, that affects their capital plans and that's what affects ours.

So, the discussion of the macroeconomic thing, it impacts us but it's very indirect.

And we can easily find ourselves in situations where our customers' spending is countercyclical.

We have a couple of big oil and gas customers who always spend in the down cycle.

And so, it's not as easy as if China does well, we do well, or if the US economy is strong, we are strong.

I think it's more of a question of what our customers do.

The other observation I always want to make here is that we have about 0.2% market share.

My big worry is getting from 0.2% to 0.3%.

And in the scheme of the global economies, that's how the economies do, is probably not that big factor.

Does that answer your question?

That's helpful.

To follow-up on that, given your views on where margins are in public sector and private sector, and what seems to be some pretty interesting growth that you point towards internationally, two final questions.

One, your mix of 60-40 public-private, are you happy with that, or is that going to change more to a 50-50 mix as acquisition opportunities allow you to expand internationally and possibly into private markets where potentially margin can accelerate a lot quicker in the up cycle that we're all anticipating in the next three to five years?

I don't really expect the public-private balance to shift very much.

I think it's likely to stay somewhere in the same range, plus or minus a few percentage points.

And the reason for that is that there are parts of the public market that remain basically lump sum competitively bid delivery models.

And we're just not going to be in that business.

So, there's a part of the public market that's one we can't really -- we would choose not to capitalize on.

And that probably means there will be -- it won't be 50-50.

Because our private sector customers are very much willing to contract for construction on the kind of basis where we're comfortable with the risk.

Thank you, Craig.

Appreciate it.

Steven Fisher, UBS.

Good morning.

Just at the midpoint on the guidance side, it suggests about 12% earnings growth and just wondering from a revenue perspective, should we assume that the revenue growth would be less than 12%, and then you add on some margin improvement on that?

Are you still expecting more of the mix to drive margins lower, thereby making your 12% all revenue driven?

If things do move toward construction like we expect them to be, we will see the mix changing.

And that's because of the big construction, bigger construction projects tend to have a little lower overall margins, but bigger revenues, you'll see revenues that are -- will be growing maybe a little bit more than what they have the last couple of years.

Margins having a little bit of pressure on them.

But underlying that I think that the individual pieces will show steady to improving margins because for the most part a lot of public -- the private sector markets are improving.

And with that we tend to see a little bit better pricing and all.

So I think that that's kind of a roundabout answer.

But I would expect over -- maybe not just over '13, but over the next two or three years to see that shift taking place as we move back more toward 50-50 on the revenue side, there'll be some pressure on the margins and -- so the revenue will grow a little faster in order to get the bottom line growth.

Okay.

That's helpful.

Another way to look at it maybe is if the mix didn't change, we would not need 12% revenue growth to get 12% bottom line growth.

But as the mix changes, that sort of upsets the equation.

Right.

Okay.

Just curious what you assume for refinery turnaround activity in 2013 compared to 2012.

Sounds like you may have already started to see some of that activity pick up in your fourth quarter.

More broadly, what do you think is going to be the better year for US refining for you?

Would it be 2013 or 2014 because I know you mentioned some of these crude slate opportunities that could maybe be longer dated?

I think 2013 will be better than '12, but I actually for think '14 will be better than '13 in the Refining business.

Okay.

Can you talk about -- are you expecting a big year still for turnaround activity in '13, the things that have been pushed out from '12, are they now going to happen in 2013?

It looks like they will.

So, a number of the big turnarounds that didn't happen in '12, we are at least having a lot of discussion about in '13 doing turnaround planning for those turnarounds, I think the turnaround season in '13 will be stronger than it was in '12.

And I don't have a forecast for turnarounds specifically when you get out past '13.

The turnaround activity is broader than just the refining.

It's also in the upstream particularly in the SAGD and such like that.

So it's not just focused on refining.

It's a little bit broader than that.

Okay.

That's helpful.

Thank you.

Brian Konigsberg, Vertical Research.

Hi, good morning.

Thanks for taking my question.

Just actually, John, following up on Steve's question just about margins, maybe you can just clarify this.

Before, when you had talked about the difference between field services and technical services, you would say that, I believe, the gross margin profile, there is a differential between the two but when you get to the operating margin line they actually are fairly similar.

So, if you do have a fairly nice growth rate in the topline in 2013, wouldn't it suggest based on the margin comments you were suggesting the upside or the top end of your guidance is more reasonable?

First part of your comment, at the gross margin level, there is a significant difference between professional services and field services.

At the operating margin line, while they are much closer, generally speaking there is still a differential with the technical services being a little higher than the field services.

I hate to get too tech -- or too many layers down, but even within the field services you get different margin profiles.

Long-term maintenance tends to be a lower margin than turnarounds.

The turnarounds tends to be a little bit better than full construction activities.

So, there's a mix within there that even short-term any quarter can have an impact on it, as well.

But overall, when you look at field services activity and it's been relatively flat for the last couple of years, the margins, even the operating margins, there is a little differential and technical services margins tend to be a little bit higher than the field services.

Okay.

I got you.

And maybe moving on to the Middle East and some of the downstream refining opportunities, so the GES plus contracting seems to be getting close to set.

I don't think they have all their participants yet, but I think the slate is almost there.

Maybe you could talk about what you expect to surface in 2013 as that starts to really move the needle.

Noel Watson is here with us and Noel is looking over the Middle East in pretty close detail for us.

I will ask Noel to comment.

Activity in the Middle East, the GES plus contract slate, you're right, is getting settled.

We have a lot of GES plus activity going on.

And so the contract at least in the early days is living up to the promise.

But what we see in the Middle East is still -- how do I say it, a barrage of activity in terms of the spending, whether it's in the chemical that we see going on, the Refining business.

We've got a lube oil refinery we are working on.

There's just a wide mix of work going on, and the pressure to improve and let's say, for instance in Saudi Arabia, Saudiize the revenue stream to give the value added to the downstream products is very strong right now and we don't see any let up in that at all.

I think there's a lot of work there.

There's going to continue to be a lot of work.

We have positioned ourselves very well.

And so, we're very optimistic about what the future holds over there.

And we are being very successful.

And winning work on almost a constant basis.

If that answers the question.

It does.

Thank you very much.

Will Gabrielski, Lazard.

Thank you very much, good morning.

I was just wondering if you could talk about how you had nice growth in the process backlog again, and in your press release, some work with Kelco in the quarter?

And you've talked about that being a driver going forward, but what type of risk do you see in your backlog right now, if any, given what's going on?

And the uncertainty around mining, or do you feel pretty good about the execution schedule you're looking at?

We still feel pretty good about it.

The projects that we have in study phase or detail design appear to us to be projects that are going to go forward with customers who have real business needs to do those projects.

So, I would say in the aggregate we're pretty positive about our position with our existing portfolio.

We're also pretty positive about our ability to penetrate that small-cap and sustaining capital business as these bigger projects work their way through the system.

Okay.

And then, I was wondering if you can give a little more color on the oil sands, just A, from a Jacobs-specific standpoint, how you feel you are faring right now competitively up there, both on the capital side as well as on the maintenance side?

And then from an end market perspective, just what your general sense would be around maybe some big awards potentially coming your way or to the industry?

Or have we've seen the peak in project announcements for the recover in oil sands?

I'll comment quickly and then I'll pass it over to Tom Hammond.

Sure.

We don't think we've seen the end of the growth opportunities.

We continue to be the topline player in the industry up there.

Both in the engineering side and on the construction and maintenance side.

And I think we have every reason to think that will continue.

Tom?

Let me address the Maintenance business first.

First of all, that business doesn't -- the mix of customers does not change dramatically year-to-year.

That's a long-term business, and typically while owners may recompete periodically, it's typically on three, five, seven-year kinds of cycles.

So what drives that business from our standpoint on a more day-to-day basis is a particular owner where we're on the site going to do a major turnaround that year or not.

That's a far bigger driver than we have a site or lose a site on a year-to-year basis.

In terms of the engineering activities, we have a good mix of projects in both early phase, study phase, feed phase as well as detailed design and ready to move into the construction phases.

I think in -- we'll see a lot of activity in the spring of this year.

We've got a couple of programs that have life to them where projects are working their way through.

And they're very large.

And that's very positive.

I think the biggest variable up in Canada right now from a business standpoint is the projects are reaching the point where they're going to go into construction, and for Jacobs that means an opportunity to do the construction, but also leverage our modular shops in Edmonton and in Charleston and in Pickering to support the construction activities.

Craig said it, '13 is going to be far stronger than '12.

We think '14 will be better than '13.

Okay.

But in terms of competition, --

The competition is fierce, but that's true just about everywhere in the world all the time.

We have a very strong presence in Calgary.

It's a good market and obviously that entices others to try and dip their toe into that market and see what they can do, but our competitors remain the same.

Our real competitors remain the same cast of characters they always have been.

Okay.

That's very helpful.

Thank you.

Robert Connors, Stifel Nicholas.

You guys talked about US downstream engineering capacity needing to increase by about 250%.

I didn't really hear you mention that you ware looking at any sort of M&A targets within the downstream arena with a North America presence.

Just wondering if that has any interest to you guys?

And then also if you're starting to see a pickup in some of the multiples on the M&A space with a company that has that profile?

We don't see any advantage to acquisitions in terms of US process engineering capacity.

It's really just a matter of attracting the people to do the work.

We have the infrastructure and the geography to meet that requirement.

So, I don't think that's a big consideration.

As we look at M&A multiples, we have not yet seen a lot of movement, but the fact that we're not looking for acquisitions along the Gulf Coast in particular may mean that there's movement there and we're just not aware of it.

In the overall global market, multiples, if anything, have softened just a little bit.

With respect to the margin impact of all this work, we think there will be some positives out of the margin impact, but we think it's probably late '13 before it really starts to move the needle.

Okay.

And then if I could ask the margin question a different way, with the mix shifting to more field services, do you think that you'll see the same margin pressure on the scope margins excluding pass-throughs as we'll see on the reported GAAP margins?

We don't report -- we don't really monitor quote, unquote scope margins.

So, I really can't comment on them.

Okay.

Thanks a lot.

(Operator Instructions)

Stuart Sharp, S&P Capital IQ.

Good morning, thank you.

Could you add a little color to what you mentioned about unit margins on the Federal side and just talk a little about your feel for the government and going forward in projects in that area, and how if the unit margins remain strong, and you mentioned the overall margins will be weaker, and how you look to offset that and maintain stronger margins?

Well, to make it clear, historically, the public sector margins have been based on a multiplier approach where your multiplier includes whatever your cost structure happens to be.

And the procurement process under what's called the Brooks Bill or similar sorts of policies or legislation required that selection be made without regard to the cost structure of the selected company.

What that has produced from an historical point of view is relatively higher gross margins in that sector of the business than in any other sector.

Because it has been a relatively genteel business in which to bid.

As we have seen the impacts of funding shortfalls across the public sector, we've seen an increasing focus where they can do so on considering price as part of the selection process, what's called a best value selection.

And that is driving down margins in the public sector to some extent.

But even with that best value look, unit margins remain higher in the public sector than they are, gross margins we're talking about here, than they are in the private sector.

And I expect the trend for unit margins in the public sector to continue to be pressured, but I don't think they'll get to private sector levels.

Now, if you have a low cost structure like we do and we run our business from a cost point of view the same whether it's public sector or private sector, all this gives us an advantage in terms of capturing share.

So, on any given best value procurement, we're comfortable we can deliver a competitive price, perhaps the lowest price, and then if the offering is otherwise top-quality we think we can win more best value procurements.

So, that's really what's going on from the margin side in the public sector.

Did that answer your question?

Yes.

And also regarding the budgets for oil projects and the oil sands and the major oil companies in the past, they've basically I believe been in the range of $65 to $70 a barrel.

Is that still pretty much the range?

I frankly have heard all kinds of numbers recently from different sources.

The low side of what I've heard is in fact $65.

I think that's probably lower than the truth.

The high side is in the high $70s right at $80.

To my way of thinking that's probably closer, but maybe a little on the high side.

But that's the range that we're hearing.

And different customers seem to be looking at it differently.

Okay.

And when you mentioned that the engineers growing to 12,000, did you say that's by July '13?

Yes.

Okay.

Thank you.

Ladies and gentlemen, that will conclude our question and answer session.

I would like to turn the conference back over to Jacobs Engineering's Chief Executive Officer, Mr. Craig Martin, for his closing remarks.

Thank you, Denise.

We had what I think of is a really good quarter.

I'm proud of the performance of our team.

It brought us in from a pretty good year, not quite up to our 15% growth objective, but still in a year where we made very few acquisitions, we did quite well.

As we look to '13 I think the outlook is the same.

I expect us to do well.

Even in spite of the uncertainties, I think there are various ways under various scenarios that we can continue to grow the Company nicely.

And so, we have a pretty good outlook and we're pretty upbeat about what FY '13 and beyond looks like for Jacobs.

And with that, thank you all for listening.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.