雅各布工程 (J) 2013 Q1 法說會逐字稿

Good morning and welcome to the Jacobs Engineering first-quarter fiscal year 2013 earnings conference call and webcast.

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, who will read the forward statement.

Please go ahead, ma'am.

Thank you.

The Company requests that we point out that any statements that the Company makes today that are not based on historical facts 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 annual report on Form 10-K for the period ended September 28, 2012, 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, 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'll turn the call over to John Prosser, CFO of Jacobs, who will discuss financial results.

Thank you, Patty.

Welcome, everyone.

I'll briefly go through our financial highlights for the quarter and then I'll turn it over to Craig Martin, our CEO, to review the operations and outlook for the business.

If you will go to slide 4 of the presentation, you'll see as it was reported in our earnings release that we ended up the quarter with diluted EPS of $0.76, which is a little bit better than the Street consensus.

Net earnings were $99 million.

Backlog continues to grow nicely; it grew to $16.2 billion at the end of the quarter.

We have seen that our trailing 12-month book-to-bill continues to grow and is just slightly over 1.15 as of the end of the quarter.

We continue to have a strong balance sheet; good working capital growth and cash grew nicely during the quarter, went up to $1.2 billion in cash.

Net cash is over $700 million and this is up $200 million from the prior quarter.

We have continued our guidance at the $3 to $3.50 range for fiscal year '13.

Moving on to slide 5, this is just a tracking of our history with the last [stock] being the trailing 12.

It continues to show growth.

While we're not back up to our historical or target of the 15% annual average growth, we are hovering just slightly below that.

We think in the years to come that will certainly be a goal that we will continue to track.

Moving on to slide 6, the backlog, a little closer look at this.

It was a very good quarter.

Not only did total backlog grow almost 12% year-over-year but both field services and professional services continue to grow nicely with field services up about 16% and professional services up about 9.5 %.

With that, I will now turn it over to Craig to talk about the -- our growth strategies.

Thank you, John.

Good morning, everyone.

I'm going to go through our strategies for growth the way in which we're going to keep that 15% compound growth going.

You can see here on slide 7 there are five bullets.

I'm going to cover the first four; our business model, our market diversity, our geographic presence and our acquisitions appetite on individual slides later on, but I wanted to take a minute here to talk about our driving down costs.

We had a terrific quarter from a cost perspective.

SG&A is down almost 2% year-over-year, and that cost advantage continues to be a strength for Jacobs.

Our customers are increasingly seeing their markets as competitive.

They're seeing a provider like Jacobs who can provide very cost-effective services and still make a decent profit as a very attractive alternative to some of the higher-priced companies out there.

So we think we have a good strategy to continue to grow at that 15% compound rate.

Turning now to slide number 8. This is our relationship-based business model.

If you think about it in the way we've diagrammed it here, it's what we think of as a virtuous circle.

You can start at any point in the circle and see why it is self-reinforcing.

So if you start with our long-term relationships, our ability to build trust and client knowledge, it lets us continuously improve our services.

And therefore, provide superior value, that gives our customers a repurchase loyalty focus, that fuels our growth, lowers our cost of doing business and results in manageable risk.

All that provides for steady earnings growth which we can then reinvest to develop those client relationships and continue to improve our performance.

So it's a very positive circle of performance for us.

We think it actually has become a bit of a differentiator in the marketplace with our customers.

Even our customers are beginning to tell us that they perceive the differences.

Turning now to slide 9, this is how the market diversity shapes up.

Won't spend a lot of time on this slide but I just want to give you the sense of how these markets compare overall.

Let's move on now to slide 10.

This is the Public & Institutional market.

This has been a better than, perhaps, even we expected market as we've gone through the year so far.

Let me start with National Governments.

We've characterized that as improving.

In particular, our position on things like MATOCs, Multiple Award Task Order Contracts, have proven to be an advantage.

We've been saying for sometime now that our ability to win MATOCs and take market share in what were a single award contracts in the past is a strength.

I think we're demonstrating that steadily.

We had four pretty significant awards in the National Government space in the quarter, totaling something north of $1.4 billion, although not all of that goes into backlog.

We continue to have a really good reputation as a contractor in the National Government space, both as a GOCO-type contractor, Government-Owned-Contractor-Operated, and as a large contract enterprise-wide contract position.

We think that's going to continue to result in significant opportunities for us as a Company, both as a GOCO and consulting with customers in the defense arena on how to do GOCOs right.

We also see the nuclear cleanup business is continuing to be quite strong.

The funding in the UK, for example, is up to $4 billion.

We're seeing some major opportunities being released, some of which we've already won, some we expect to win in the next couple quarters.

Moving now to Infrastructure, that business remains actually quite strong globally.

It's a good business for us.

We are able to leverage our capability in the US and India into markets in the Middle East and Australia.

We've seen a lots of investment by the local community in infrastructure.

Almost every bond issue in the US, over 90% of the bond issues in the US passed in the recent election.

That's $30 billion, plus or minus, worth of work.

We're also seeing a lot of opportunity for projects that are funded by user fees.

Rail and water, there's some highway but it's largely a Rail and Water Waste business.

And then the pipeline in natural gas industry, which is partly an oil and gas play and partly an infrastructure play, is quite a strong market.

We -- you may note from our announcement about Sempra, we were one of the early leaders now in the whole pipeline safety industry, which we think is going to be something like a $6 billion market.

Finally, moving onto Buildings; it's still a mixed market.

The good news for us is that the part of it we're not in, retail, commercial, office, multi-family housing, not our business, and not strong.

But the parts we are in, healthcare, hospitals, technically complex buildings is quite strong.

Our position for -- as a market leader in mission-critical facilities, that's things like data centers and operations centers remains very strong.

We think that's going to be an $80 billion a year market here by the end of the decade.

It's probably closer to $50 billion today so we think that market's going to be very strong.

We have a terrific position in that market and we're very much an industry leader.

The Healthcare business, obviously, there are many things about the Affordable Care Act that are going to cost companies money, us too, but the fact is it's adding 30 million users to the system and that means a lot of hospital construction, a lot of maintenance and growth opportunities for us.

We are well-positioned to take advantage of it as a leading manager of builder of hospitals.

And then finally, the K-12 and Higher Ed business remains strong, another strength of ours.

We're already managing eight major programs and we have nine programs like that in the study phase.

We expect those to convert to full project management, construction management opportunities.

Turning on to slide 11 now, this is the process part of our business.

Again, three sectors to it -- Refining, Oil & Gas and Chemicals.

Let me start with Refining.

That business continues to be better for us.

We're seeing solid margins on our client side and that's driving investments.

There's been an uptick in capital spending on environmental and regulatory projects.

There's a lot of traditional small- and mid-cap work just to keep these big refineries running.

There's some minor capacity additions and then, of course, there's crude slight changes that are also driving additional projects, both in terms of the heavy sour crude side of it.

But now we also have a light sweet crude aspect that changes the configuration again.

So we think there's going to be a lot of activity, particularly in the northern refineries with advantaged crudes like the Bakken and the Marcellus -- not so much the Marcellus but like the Bakken that will drive business for Jacobs as we go forward.

So I think refining is improving and will increase its position in terms of Jacobs as we go forward.

Oil & Gas market remains very strong.

It's one of our hottest markets.

Our clients are making lots of money and they're spending lots of money.

We're seeing global E&P investment at north of $600 billion, probably $160 billion -- $150 billion, $160 billion of that is accessible to Jacobs.

We think that's going to be a tremendous growth market for us as we go forward.

The opportunities for us will largely be in the heavy oils like we do in Canada with the oil sands as well as the unconventional gas and onshore gas globally.

We have a very strong position in North America already.

We think we're going to be able to leverage that into a stronger position in North America and expand that globally.

We are seeing similar opportunities in places like the Middle East and I'll talk about that a little more when we get to the geographic discussion.

In the Chemicals market, it's as good as it's ever been in my memory.

It's a very strong market for us right now.

It's obviously a business where there's a key driver as this cheap gas.

What that means in terms of chemical feedstocks, we're seeing lots of investment across a number of our clients.

Our chemical companies, the ones we've worked for traditionally for years, our core clients have enormous investment programs planned.

We're expecting something more than $30 billion in CapEx in North America alone.

So it's just a record market and there's huge opportunity.

Moving on now to slide 12, this is the sector we call Industrial.

Three parts to it as well -- or actually many parts to it, I shouldn't say three.

First, PharmaBio, that business continues to improve.

We're seeing a lot of opportunities to support our clients in the third world, so that's places like India and China where we're well positioned.

We are also seeing activity in Brazil.

We'll talk about that again in a minute but there's a real focus on bringing pharmaceuticals to the third world.

In India alone, you can see from the note here, we are expecting the investment to go from something like $16 billion to $50 billion over the next eight, nine years.

Mining & Minerals market also a strong market for us.

I don't think Mining & Minerals is strong globally but we happen to be well-positioned in some key markets with key customers and those customers seem to be going forward with their projects.

So we're seeing good activity in the Americas.

I think for us and for most everyone else, the market's fairly weak in Australia.

But I think the Americas will continue to provide a good growth opportunity for us and so we still characterize that market as strong.

Moving down to a mix of everything else that we do -- Power, Pulp & Paper, High-Tech, Food & Consumer products, it is a mix of stuff and it's a mixed market.

We're certainly seeing a lot of investment by our customers in growth, particularly again in the third world.

We're there to help them expand their capability and deliver their products.

We also think there's going to be a lot of facility upgrades.

You can see here the EPS -- EPA estimates about $5.4 billion of facility upgrades for these kinds of customers in the US alone.

We think that this market will continue to be one where alliances are a real positive for Jacobs.

So we're fairly excited about its ability to continue to grow.

But I think it terms of its contribution to the Company overall, it's not going to move the needle as much as some of the other markets that we've talked about.

Moving onto slide 13, this is the geographic distribution of our operations.

This hasn't changed much but I would like to talk a little bit about the individual geographies and what seems to be going on.

So let me start with North America.

Obviously, very busy in oil sands.

This huge chemicals market investment is going to drive a bunch of business along with the conventional and unconventional onshore gas business.

So all of the heavy process businesses that Jacobs plays in, in North America are quite strong.

We are seeing a lot of activity in Rail, Transit, Schools, Healthcare, the Highways business is still a little weak but it's improving.

Mining & Minerals for us in places like Nevada and Arizona continue to be pretty good and some of our major customers are announcing ongoing expansions, such as Freeport-McMoRan's announcement with their recent earnings.

Moving to South America, we're busy.

We expect to continue to be busy.

The businesses that we are working with, the customers that we have projects for today are continuing to invest and expand those projects.

So we're pretty active in recruiting across the world trying to find Spanish-speaking engineers and contracting people.

It's a big market for us from a Mining & Minerals point of view but we think it has the potential as well to grow in Oil & Gas and PharmaBio and Food & Consumer products because those things are also being driven by these expansions I talked about earlier.

We're particularly interested in finding a way to do business in Brazil and do it effectively.

I think that's an important opportunity because a lot of our customers are talking about investment in Brazil.

Moving over now to Europe, we're seeing some activity in the onshore process industries, some Oil & Gas business in the UK and northern Europe.

We've been seeing a fair amount of work -- we had Q1 awards that went nearly $1 billion in the oil & Gas space.

Plus, we've got, of course, our traditional small-cap work for our refining customers and chemical customers all along the Rhine Valley.

UK Defense budget is fueling a bunch of new opportunities.

This is where a lot of that GOCO work will come and our opportunities to both consult and act as GOCOs.

The Power and Environment market is strong in the UK.

Power for Jacobs, probably the one place where we have real strength is in Europe, both in Continental Europe and in the UK.

We're expecting that will drive some business as well.

So overall, Europe is not as weak, perhaps for us, as it might be as -- from a growth point of view globally.

We're feeling like we'll be able to do okay in Europe and perhaps even increase our market share a bit.

Middle East and Africa, start with Northern Africa, great relationship with OCP.

Our joint venture there is continuing to grow, and finding expanding opportunities globally.

We're doing very well in growing our position in the Middle East.

Once again, the Jacobs' approach of being local and executing projects locally has quite a bit of favor with our customers in the Middle East and that continues to be a draw for us and an opportunity to expand our business.

The level of investment there, over and above what I would characterize as sustaining capital, which is obviously a very attractive aspect to the Middle East for Jacobs, there's just planned investment in the $100's billion.

I think just between Saudi Arabia and the Emirates, there's something like $200 billion of investment plans over the next five years.

Moving now to India, the five-year plan for infrastructure in India is $1 trillion.

They won't spend all of that, but we are very well-positioned to participate in the Infrastructure market in India.

We've had a couple of nice awards already that I think are going to continue to provide opportunities for growth.

We're seeing a lot of activity in things like fertilizer and a fair amount of activity in the refining and chemicals industry as well.

So we think those -- the Indian market will be a good market for us as a domestic market.

Of course, we continue to have a very successful high-value engineering center in India, several of them actually, that provide leverage and scale for our growth globally.

Moving on now to China and Southeast Asia, we really do now have a position of strength in China and Southeast Asia.

We're able to support our customers who are making investments in that part of the world much more effectively than we were a few years ago.

So we think for Jacobs, in particular, China and Southeast Asia will be sources of significant growth as we go from a very small player to a significant one.

Then finally talking a bit about Australia, I mentioned already the Mining & Minerals business is under pressure.

However, there's lots of heavy process work out there.

We think that's going to be an opportunity for Jacobs to continue to grow.

We've had a couple of announcements of Australia Oil & Gas projects already in the quarter.

We see a lot of opportunity for that to continue.

Of course, we have a good national government [strike] defense business there and that continues to remain strong.

When you look across the India, China, Australia market, it's broadly expected to be a real strength for us as we go forward, particularly India and Australia, I think they are going to be big positives for us that I haven't mentioned maybe as much as China.

Now moving onto slide 14, this is the acquisition slide.

We've been very successful with acquisitions.

We continue to have lots of irons in the fire as there were plenty of opportunities for acquisition.

Our focus areas are what you might expect, China, Australia and Brazil from a geography point of view.

Oil & Gas, Mining and some niche markets additions from a market's point of view and of course, things that will let us add core clients are always of interest to us.

So I think there's a lot of opportunity out there.

The pricing is attractive on acquisitions.

I think this will be a part of our growth as we go forward, even though there's probably nothing right in the immediate term.

So that brings us to the commercial at the end here, why Jacobs?

We've got a history of solid growth.

We have a unique relationship-based business model.

We're fully diverse and able to demonstrate that we can grow in diverse markets even when the markets themselves aren't growing.

We've got a strong balance sheet and a great cash position to fuel our acquisition appetite and of course, we've got a really solid cost position as a Company.

So overall, I think there's a lot of reasons to think that Jacobs will do well going forward and that's certainly our outlook as we sit here today.

With that, Denise, I'll turn it over for questions.

Thank you, sir.

(Operator Instructions)

Andy Kaplowitz, Barclays.

Nice quarter.

Craig, so if you look at the backlog in process, sequentially it's flattened here.

It's up nicely year-over-year.

I know you're going to tell me it's lumpy.

But to try and characterize that particular part of the business better, how you -- how did the leading indicators in that business look?

Things like billable hours, overtime, utilization, salary multiplier, if you put all these things together, are they still fresh and green for you?

How did they do throughout the quarter given some of the uncertainty on the political front?

Yes, it's lumpy.

So that first part of your question was -- the answer is yes.

But the second part of your question, the answer is yes also.

Billable hours are growing nicely.

We're seeing high utilization, we're starting to work a lot of overtime.

So everything about the business, salary pressures are starting back in.

There's starting to be some opportunity to move up margins.

So everything -- all the indicators in the process industry are where they were a quarter ago or two quarters ago.

We have every confidence that we're going to continue to see good, solid growth out of that.

I think the flat backlog quarter-over-quarter is a timing issue more than anything else.

Okay.

That's what I thought you'd say.

If I -- I remember I think it was at your Investor Day, you talked about maybe having cost structure would be higher in the first quarter and it really wasn't.

You talked about maybe some interruption in that public business from the election.

Obviously, it doesn't look like we saw anything, so maybe if you could comment on that.

I know that I don't want to steal Jamie's thunder about guidance but all I would ask there is, it seems like this quarter may have been marginally better than you thought, yet you [keep] guidance.

Well, a couple things.

In terms of the quarter, we worked really hard this quarter to keep the G&As down partly because we knew we had these headwinds and partly because this quarter we always had the headwind of reduced billable hours because of the holidays.

I think the team did a terrific job of managing costs to offset those things.

So yes, we did have a quarter that was a little better than our expectations.

Now, why does that not fold into guidance?

It's just too soon.

We don't have quite the level of visibility that we need to have to think about raising or lowering or whatever guidance.

So we've kept the guidance where it is because we think that's the prudent place to be at this point in time.

Jamie Cook, Credit Suisse.

Nice quarter.

Just two questions, partly building on what Andy just asked.

The first question back to you, it sounds like you're more constructive on the leading indicators.

One of your peers, a couple weeks ago, came out and said that labor constraints were looking like it was becoming a slight bit of an issue in the Gulf Coast area on the petrochem side.

So I was just wondering if you can -- it's the first time I've heard that in awhile.

I'm just wondering if you can expand or if you're seeing anything like that down there.

Are you seeing labor rates increase or capacity tightening specifically within North American hydrocarbon?

Then my next question, just to build on the guidance question, we're still at a point where the backlog is growing quicker than the topline is.

At what point, John, do we expect to see that inflection point where we start to get some double-digit topline growth?

I know last quarter you said, even if your margins can outpace your revenue growth but I'm just wondering when we see that burn rate kick in?

I'll get back in queue.

Well, let me take the first part of your question, Jamie.

We are certainly seeing pressure, both more so on engineering labor at this stage than craft labor but we are seeing pressure in both on the Gulf Coast.

I think I said last quarter when we had our call that we were forecasting a dramatic increase in requirements for engineering capability as a result of the impacts of both the unconventional gas and the chemicals expansions on the Gulf Coast and in North America.

Nothing about that's changed.

We are seeing some pressure on rates.

We're seeing pressure on turnover.

Maybe just if I can get Greg Landry, who runs our [Southern] operations, as one of his responsibilities, to comment just a little further.

Greg, you will have to speak up because you are a ways from the mic.

Just a snapshot there, we're actually in -- at historical levels from the staff on engineering side as we talk here today.

If you look into the next two, three years, on a monthly basis, there's new chemical opportunities that's being publicly announced between [Mobile], Alabama and Corpus Christi, Texas.

So we will continue to see pressure on escalation in rates.

But it's all good news.

The craft side of the business is probably another eight months to a year away before we start seeing pressure there but on the engineering side we are in the throes of it right now.

Okay.

And to be (multiple speakers) -- sorry.

Just one more question to build on that.

So it sounds like you're seeing to be clear, sounds like you're seeing similar things, which it means the market's tightening and you feel a little better.

My second question, while I know you are a cost-plus contractor, are you seeing more -- a bigger appetite from some customers that potentially would have want -- wouldn't have talked to you or would have wanted to go fixed-price moving more towards a cost-plus model?

Do you see customers' willingness to do cost-plus growing relative to where we've been?

That's generally our experience.

As markets get tight, the work tends to move to cost reimbursable because there's no appetite, even among the traditionally lump sum contracting community.

The appetite for doing lump sum goes away because the risks become just enormous by comparison.

So [the market] does shift towards our model and that does represent, I think, a particular opportunity for us in these upcycles that we can benefit from as we go forward.

So I see that as also as a positive for Jacobs relative to our competition and a positive for the industry in terms of surprises.

Okay.

Sorry, just a last question on the guide.

I will get back in queue.

In terms of backlog versus revenue growth, the revenue growth continues to lag backlog when we expect that inflection point?

Okay.

As we say, you know we don't give specific guidance on revenues, but if you look at the first quarter compared to last year's first quarter, there has been about a 5% growth in revenues.

It's down a little bit from the prior quarter but that has to do with the holidays and just the general curve.

We still believe that going forward that mid-year this year to, into '14 should be the time when we start seeing the revenue pick up as the field services start picking up.

We still see a lot of activity moving to the field, both on the maintenance and sustaining capital side but also on some of the larger programs, such as up in Canada and such that are moving toward the field.

So it looks like, and I would say that either late '13, mid to late '13 and into '14, you should start seeing better revenue comparisons.

Not to split hairs when you're saying mid-year, are you talking your fiscal or calendar?

Our fiscal.

Steven Fisher, UBS.

Just to follow-up on that last question.

So it doesn't really sound like your timing expectations for the ramp-up in field services has changed much at all.

So I'm curious, from your perspective, what still has to happen for these things, these decisions to be made and for these projects going to ramp-up to come to fruition?

That's a tough question because I don't think there's a single answer.

I think as you look across the spectrum of projects, the answers vary by the customer and by the end user market.

But I think for the most part, what we're seeing happen is pretty much on the schedule we've been outlining now for several quarters.

We are not seeing much drift one way or the other.

My concern about the fiscal cliff discussion for awhile was that it might push all these projects significantly out, and it doesn't seem to have done that.

So our customers seem to be planning their investments, particularly the ones in the natural gas or in the chemicals side, based on their ability to look at a global market for their products or increased local market for their products, depending on which product we're talking about.

I think we're going to continue to see them move into construction phases pretty much as we've described.

I expect the [feed] cycle won't peak until maybe our third fiscal quarter.

So that still suggests an awful lot of that work is out even beyond the third fiscal quarter from a construction point of view, but we're starting to see a lot of jobs going into detailed design and into construction.

So I think to John's point, we'll start to see the uptick in the third fiscal quarter or close to it.

That's helpful.

If maybe you pick one specifically in terms of the oil sands, I'm wondering if you could talk about how the activity in that market changed with the oil price differential dynamics over the last few months?

Then specifically or additionally, how the turnaround opportunities there are developing?

Well, two different questions but let me try to answer each one.

With respect to the project volumes, new announcements, planned investment, we're not seeing any fall-off in the work.

We're also not seeing any particular increase.

I think what we're looking at is oil prices, they were, what, $85 the last time we had this call and they're $96 today, at least the NYMEX numbers are.

I don't think there's a lot of difference in those two numbers from an investment perspective in the oil sands.

So I -- the level of investment will be fairly steady, as long as oil prices remain in a north of $70, minus $100 range.

I have Tom Hammond here, who the oil sands team reports to Tom.

Maybe Tom could comment.

We haven't seen any change directionally in the level of investments, the projects that are being identified.

I do think the difference in this investment cycle and the last investment cycle in Canada is that the owners are a little more, I would say -- I don't want to say cautious in terms of investing but a little bit more deliberate in terms of their project execution.

They're not in a race to get to the field.

They're taking their time, doing what we'd call the design basis part of the projects and the feed part of the projects.

So it's still probably a year off before the large ramp-up in the field activities in Canada.

We would expect the turnaround cycle this year to be a normal turnaround cycle.

That's all the indications we have.

Of course, that could change, but we're coming, actually coming out of the slow season up there.

They break for the holidays in December and January.

The heart of the winter months are actually the slowest month in terms of maintenance turnarounds and the like.

We had a good bit of business in the fall.

We'll expect, say, about mid-February to start ramping up for the spring turnarounds, all of which seem to be on plan right now.

Okay.

So you haven't seen any further push-outs because of the suppressed level of WCS relative to WTI?

It doesn't like it.

No.

And the investments up their are very large and they take a long time to reach production.

So I don't think that the industry up there is working on that basis.

I think the positive things, as I understand it, the governor of North Dakota approved the Keystone Pipeline and the Senate approved it.

Also the Canadians are talking about moving forward with the pipeline to the East.

The big one they need is a pipeline to the West and that's going to take awhile, but those conversations all seem to be moving at a reasonable speed.

Scott Levine, JPMorgan.

So it sounds like some of your labor costs are starting to move up and the market starting to tighten.

I was hoping you might be able to elaborate on pricing trends.

It seems the last few quarters that in the private sector markets, it's been improving and in the public sector, maybe it's going the other way.

Overall, if you could comment regarding pricing trends, whether you are able to recover these costs and maybe whether we should expect gross margins -- I know mix is a factor.

Should we expect gross margins to hold steady, maybe move up, a little bit more color there?

Sure.

Pricing trends in the process industry and the -- our industrial area both are trending positive, in a sense that I mean costs are going up but customers are allowing us to expand multipliers.

So we're getting actually a double benefit.

Remember that we're -- almost all our work is cost reimbursable so as labor costs grow, our multiplier approach to pricing results in additional recovery of gross margin.

If we are able to control our G&A, we get a double benefit of that in terms of improving the bottom line significantly.

So from Jacobs, at least, upward pressure on labor rates is a positive for the income statement.

In the public sector, I would say that the overall trends in pricing are negative, that it's getting tougher and cost is becoming an increasing factor in those businesses.

But it's still, for the most part, a cost-plus marketplace.

So we actually have an advantage in terms of growing share.

I was real proud of our team on the public sector side in terms of their ability to grow their backlog, both quarter-over-quarter and year-over-year, in what's a very tough market.

They did that entirely by taking share.

I think our cost advantages, vis-a-vis our competition, in that sector were a real plus for us.

So I think the impact there is mildly negative on margins generally but probably not negative on Jacobs.

The impact in the process and industrial is positive, or for the industry and Jacobs, unless you're in the lump sum business.

I think a lump sum business could be pretty ugly for the next three or four quarters or more.

Does that answer your question?

It does.

Maybe as a follow-on, given the expectation that field activities ramp and generally the margins are lower in that beginning in the middle of the fiscal year, should we think about -- how should the mix impact gross margins at the corporate level maybe second half of '13 into '14?

Can we expect improvement or does mix maybe limit any improvement at the corporate level?

Given the pricing trends that we're seeing and that's across our business, I think if you would -- if everything would stay equal, we'd see an improving trend.

That will be dampened a little bit because of mix as we get more into the field services and that starts growing, but overall, the -- it shouldn't dampen it to the point of being negative but it should be maybe flat to up a little bit.

But the individual elements will be up more than the total.

Got it.

One quick follow-up as well.

The noncontrolling interest ticked up a little bit here sequentially.

Hoping you can give us a sense maybe a little bit -- from a modeling perspective, should we expect that to flatten out or is it still going up or maybe additional color there?

Well, let me make the initial comment and then I will ask John to elaborate if he wants.

Our joint ventures and our -- not joint ventures but our joint companies, our companies where we have a majority but not controlling interests are performing quite well.

As a result, I think we're going to see, for example, our work in Saudi Arabia would be one to point to.

I think as result, we're likely to see an increase in noncontrolling interests as those businesses are successful.

So I think that, that's -- in real truth, that's a positive for us in terms of how well some of these things are working, and how effective we're being able to be in building on the back of these relationships where we've acquired less than 100% control.

John, do you want to add anything?

I think that's a good summation.

Some of these are overseas.

There's one that's still here in the US but it does show that we are -- these acquisitions are growing and continue to contribute positively.

So the growth of that line means that the -- our share is growing as well.

So that is a good news on part of the element.

Tahira Afzal, KeyBanc.

Congratulations on a good quarter.

First question is in regards to competitive dynamics in North America.

Clearly, there's a lot of excitement of all the work that is upcoming and related to the shale gas development and really a lot of the chemical and derivative plays there.

Are you seeing any of your international competitors really looking at North America as a consequence a little closer?

Could you talk a little bit about barriers of entry for international contractors to really take a bigger share?

Sure.

We are seeing some activity from international competitors.

Certainly companies, like WorleyParsons, are very focused on trying to grow their US Gulf Coast position.

We're seeing some activity by the Koreans and the Chinese.

But again, mostly on major Greenfield kinds of opportunities and generally in the after-feed mode, a lot like what we see in the Middle East but I think that it will be a very, very difficult market to penetrate.

For the most part, the engineering capability of the Gulf Coast is dominated by the US players.

We've seen cycles where competitors like the Chinese or the Koreans try to come into North America being -- they've been very unsuccessful.

So I think that the barriers to entry are fairly significant for those competitors.

I think unless you've had a traditional historic position like WorleyParsons has through the Parsons acquisition, it would be very, very difficult to establish a strong foothold in the Gulf Coast.

Greg, would you care to comment?

No.

We're actually seeing some of the owners testing it, but they have not been successful at this point in time.

Basically it's due because of what Craig is talking about is establishing a foothold but from a resource basis; they have to bring people in which is extremely difficult.

Then you go on to the construction side.

They're pulling from the same resource space as the US firms so the advantage they have as they would in the Middle East, I'm using that as an example, of bringing in our foreign workers is not as advantageous here in the US.

So that presents a major challenge for them to bring -- where they're bringing other parts of the world.

Got it.

That is very helpful.

So the second question is in regards to one of the end markets you talked about, Craig, and that's the pipeline market.

You talked a bit about the safety and flash integrity market in a sense.

Could you talk a little more about the opportunity set and whether it's really automatic rate approvals that are helping some of the regulatory changes that are really helping this market going forward?

Thanks.

Sure.

A lot of this pipeline safety business is being driven by the San Bruno explosion, and all the property damage and loss of life that went with that.

So virtually all of the pipeline owners and users starting first, of course, with the regional gas supply players to homes and industry are being required to go through a Pipeline Safety Enhancement Program, PSEP.

These programs range in cost for these utilities from $1.5 billion to $5 billion depending on the scale of the utility involved.

We've been successful in winning a couple of the very early program management and design opportunities in those businesses which puts us in a leadership position across the industry.

We think that market is going to be $6 billion or $7 billion a year for the next decade or so, so it's $70 billion-plus market.

With our wins with People's Gas in Chicago and Sempra here in Southern California, we're very well-positioned to take advantage of that.

The money will go through the rate base.

It's, at least so far, it appears as long as you structure the program right, get it presented appropriately to the regulators, the cost of making these improvements -- and there's a lot of improvements to be made -- will go into the rate base so the money will be there.

So like I said, we're pretty optimistic about what this industry and this area could represent for Jacobs going forward.

That's separate from anything like Keystone or any of the other pipeline work that's more in the -- out in the countryside.

Got it again.

Last question is on the domestic power market.

I know it's a smaller market for you folks, but I just want to get any commentary you have on any changes in outlook.

We've been hearing a bit about energy efficiency really taking a bit of an impact on demand projections from a 5- to 10-year point of view.

So I would love to get your viewpoint on generation needs in the near to medium term.

Thanks.

Well, we don't have much of a viewpoint because it isn't a market where we're really strong and particularly in North America.

What we read and are being told is that natural gas will be replacing coal at an increasing rate and that a big source of consumption for this natural gas supply coming out of the unconventional gas and so on will be, in fact, for power generation.

So that argues, in my mind, for significant investment in gas-fired combustion turbine and heat recovery kinds of investments.

In fact, I think I read somewhere as a result of the move from natural gas to coal, the US is one of the best countries in the world, maybe the number one country in the world in terms of reducing greenhouse gas emissions, which is, I think, something I didn't know at least.

I think that's period 2006 to '11, something like that.

So I think if you are in the combustion turbine heat recovery combined cycle power business, there's going to be a lot of work out there.

I think if you're trying to make money off the coal cycle, you're going to be in a tough market.

We're not really in either one.

Michael Dudas, Sterne Agee.

Quickly here, Craig, when you look at new business opportunities through fiscal year 2013, do you anticipate more new business coming from North America or the rest of the world?

That's an interesting question.

More

(multiple speakers) The question as such.

Well, of course, right?

It's a little bit depends on how you define more, right?

We have a very large presence in North America.

It's a big, big part of our business.

It's going to grow nicely.

So in absolute terms, more will come from North America than rest of the world.

In terms of relative growth, though, I think rest of the world will have greater relative growth than the US will.

So I guess there's two different ways of looking at that answer -- that question.

Does that help?

Yes, it does.

My second one is which grows better, private sector or public sector businesses?

I think, without a doubt, the private sector businesses, the process and industrial parts of it, the work in buildings that we do to support our private sector customers, will be higher growth than the public and institutional businesses will.

Public and institutional is largely going to be a matter of taking market share.

That's always harder than growing in a growing market.

There's still market share to be taken in both, but certainly the growth in the process and industrial side will be higher than the public and institutional side.

With the buildings and infrastructure growth opportunities in Middle East (technical difficulty) be greater than what you're seeing in the US?

I think [those] for us, they're going to be very significant because we are starting from almost none.

In terms of what they mean to the businesses, I don't think they, in and of themselves, offset what we're seeing in weakness in the buildings and infrastructure market domestically.

But those things coupled with our ability to expand our share, and we're doing really well at doing that as we speak, means that those businesses will continue to grow.

My final question on this theme is, when you look at what your order of revenue and potential earnings contributions for this year and next, is it going to be more than historically weighted towards the organic side or will the recent acquisitions that you've assimilated over the past couple of years add more to the growth?

We don't really think of it that way.

Once we buy them, they're organic.

In fact, we generally redistribute what we buy into our regional models, so we get that customer-facing side, so I'd have to do research to even come close to answering that question.

We're expecting our growth in '13 to be largely organic.

John Rogers, D.A. Davidson.

Craig, as this cycle develops over the next couple of years, I'm just wondering are there opportunities near term for major single projects, a la Motiva, for Jacobs?

Absolutely there are.

Whether they will be at a Motiva scale or not, I wouldn't say, but certainly a multibillion-dollar opportunities are going to be out there as these programs develop.

We will certainly be a participant in some of those.

Strategically, your model has always been some of the smaller capital projects add-on with occasionally large projects coming through.

I'm just wondering, strategically, do you have to think about positioning yourself any differently to go after those large multibillion-dollar projects?

No.

We don't.

Or can you do it (technical difficulty) markets?

What we're -- well, with one exception which I'll come to in a minute.

But for the most part, our small and medium cap model is the one that we continue to follow.

It works extremely well for us.

It positions us to do major projects for those customers because most major projects these days are not Greenfield standalone, out in the middle of nowhere.

Most of them are Brownfield, or near Brownfield.

So our physical presence, our local knowledge, our understanding of the operation of the facility from our -- being their small-cap contractor or their maintenance contractor, puts us in a favored position when major investments come along, to get either all or a significant part of that.

Jacobs, today, I think most of our customers perceive us as being easily a source for a $1 billion minus projects and in some industries, it may be bigger than that.

So when the $5 billion job comes along, we may need to partner with somebody and probably would just to spread the capacity issues around.

But I think our position is really good and it doesn't really require that we do anything differently than to -- than we have in the past, except perhaps focus on hiring more of the kinds of people who run these multibillion-dollar kinds of programs onto our team and we're doing quite a good job of that, actually.

The singular exception to that is probably in Mining & Minerals business, where we have historically been doing big jobs and our opportunity there is to take our small-cap and medium-cap model and drive it into the Mining & Minerals industry.

A part of why I am so positive about the industry, unlike, I think, a lot of our competitor, is I think there's a huge opportunity to do that.

For the most part, that work's not being done today by the kinds of competitors that are good at it.

So I think there's a huge leverage in that industry to go convert it to our model, I would say, without sacrificing to really use these giant projects.

Okay.

And then secondly, you mentioned that most of your growth this year, you're expecting your -- for guiding or planning for it to be organic.

Are there more or less acquisition opportunities out there today?

Has that changed at all with the market recovering or is it creating more acquisition opportunities?

I would say that there are more acquisition opportunities on our table today than there have been at other times in the past.

I think the market for acquisition opportunities is quite good.

The multiples for the targets have not yet seen a lot of increase, so the multiples are, frankly, from our perspective very attractive.

So there's both a good supply of candidates out there and a fairly good market multiple on the acquisition.

So I think there's a lot of leverage in acquisitions but as I think I've said on these calls, many times, acquisitions are opportunistic.

You can only do them when the seller and the buyer can get to a deal and you have to have a willing seller.

I think we see those things out there but timing will be a challenge.

Robert Norfleet, BB&T Capital Markets.

This is John Allison in for Rob.

My first question is in regards to the National Government segment, for the contracts that are up for rebid, do we still see the timeline to be within 2013, for these awards to hit and should we ultimately expect to see backlog growth?

Well, certainly, there are a number of big single contract awards out there that we would expect to get awarded sometime between now and the end of the fiscal year.

We're very conservative about the way we backlog those things.

So while there may be some substantial awards like the Kennedy Award that we announced last quarter, their impact on backlog is much slower because of the way we approach the backlog itself.

So giant leaps in backlog as a result of awards in the national government space probably aren't going to happen.

But I believe we'll be able to grow our backlog in national governments if things go like we think they will.

Okay.

Got you.

My second question, could you give a little color on the opportunities you're seeing in the Middle East, especially with the GES contracts?

Should we expect to see a ramp in award activity in 2013 here?

Well, the Middle East is a very strong market.

As I think I mentioned, we think between the Emirates and the Kingdom, we'll see something like $200 billion worth of awards in the next five years.

The GES contract is going quite well.

We continue to be the role model for GES Plus in terms of achieving what the intended outcome was.

We're doing major projects, entire feeds for Clean Fuels Programs almost entirely in-country.

I think that continues to enhance our reputation with Aramco and in the Kingdom more broadly.

Greg, do you want to comment?

Well, yes, on the GES Plus especially, and we're actually broadening our services to Aramco on the GES Plus, which it gives us a lot more opportunities than just the feed side or on the oil & gas side.

But also is that there are other companies that's taking a look at the GES model that we're in very good position to capitalize on.

So yes, we're quite strong on, particularly in Saudi Arabia on those opportunities.

And the UAE, where our business on the oil & gas side is picking up quite well, we're reaching out to more clients and we've had some nice awards here in the last year or so.

So very positive in that part of the world.

Okay.

One last one, if you don't mind, regarding the chemicals market, what do you see as Jacobs' areas of strength across the supply chain, such as ammonia, polypropylene, gas-to-liquids, et cetera?

What do you see as your greatest opportunity areas?

Jacobs has great, great strength in derivatives, ethylene and derivatives.

So polyethylene would be an example, EO, EG, pretty much all of the downstream from the ethylene cracker kinds of projects are Jacobs' strengths.

We've probably done more of those kinds of projects than anyone, particularly when you start thinking about in the Gulf Coast or in the US.

We also have tremendous capability in utilities and offsites, and bring a tremendous capability, not only domestically, but in terms of what we can put in India because the -- our Indian operation's been doing U&O work for 30, 40 years.

So we are really good at it and we can do it very, very cost effectively.

So we're not going to any ethylene crackers but we'll probably do an awful lot of what's left.

Gas-to-liquids, I think we have no particular gas-to-liquids expertise but there's so much associated with a GTL job that isn't the GTL itself.

Again, I think things like U&O, big markets for us, I think will be opportunities because of the scale of these projects for Jacobs' [pursuit] in joint ventures, so I think those will also represent some significant opportunities for us as a Company.

And then there's also the whole program and master program for these developments.

When you think about something like a whole new ethylene complex up in the Marcellus, there's a planning cycle and figuring out how to get that all done that might ultimately lead into program management role that's also something Jacobs is quite good at.

You don't know how -- you don't have to have ethylene technology to take on that responsibility.

So that's another area -- I just used that as an example of where we might be able to be a -- take a leadership role in the overall program.

So this whole chemical cycle is really, very good for us, and one where we have tremendous expertise and long-term client relationships to support our position.

Andrew Wittmann, Robert W. Baird.

John, you mentioned and Craig, you mentioned that G&A performance in the quarter was really exceptional.

I think we would all agree.

But on a go-forward basis, how sustainable is this level of execution?

Maybe more specifically in dollar terms, even as the Company moves into field services, are near these levels of run rate achievable?

As Craig had said earlier, the first quarter always has the advantage of all holidays because while that negatively impacts our billable hours and hours charged to projects, it also does help our G&As because those folks take the holidays and such as well.

So there's traditionally a little bit of a ramp-up in dollars from the -- our first quarter to the second quarter, first calendar quarter.

Our -- so we would expect to see a little bit of that, but certainly, I think the trend is, as a percent of revenue, will be flat to improving as we go forward, particularly since as we see the professional -- fuel services grow, you don't have the same G&A impact because you don't have the space, you don't have all the people supervision and such that goes along with growing the professional services side.

So as we see the field services revenues coming back up, the G&A percentage of revenues will trend down even more favorably.

But through the year, I think we'll see a little bit of step up in the second quarter, dollar-wise.

And then it will be flat to maybe even trailing down as we go through the rest of the year.

Helpful.

Thank you on that.

Craig, on the federal government work, we're past phase one of the fiscal cliff, heading into phase two.

Have you seen bidding activity or RFPs from the government changing their velocity now that we are at least past the first hurdle here?

Can you just talk about what the complexion of that business looks like today?

Visibility, et cetera?

Sure.

The business, interesting enough, is largely unchanged.

It didn't change a lot with the looming fiscal cliff and it hasn't changed a lot since this kick-the-can activity took place.

I don't know that we expect that it will, certainly not in this fiscal year.

It may be that we'll see some changes in activity as we going into '14 but I think it's too early to say with any certainty.

Tom, do you want to comment?

No.

I don't think that we've seen any change.

Certainly, I don't think it's driven by the fiscal cliff or the budget uncertainties.

But if there is a trend over the last two years, it's more on the federal side in terms of contracting strategy as they move from large single awards to MATOCs has actually extended the contracting cycle.

So I think we've seen over the last year and the last two years, even as we speak today, a lot of the contracts where we are the incumbent have gotten three months, six months, even nine months extension so the government could go through its bidding process.

On the whole, that's good for Jacobs since we're the incumbent.

We just carry on under the current contract for an extended period of time.

But I don't think any of that has anything to do with budget crisis, its fiscal cliffs, sometimes elections slow things down a little bit.

We maybe see a little bit of a slowdown but I put it in a little bit category, 30, 60 days especially since Obama was reelected.

So we haven't seen any evidence of it yet.

What about as you look maybe past February 28, if that's the date that Congress eventually gives us in terms of maybe finding out some budget certainty in terms of spending?

Does that release the valve on other projects that maybe have been pent up to take a longer duration to execute and just your view as to what could happen in the federal government if we get some clarity out of them?

I think that has a minimal impact on our business.

The nature of our business, the duration of these contracts, the type of work that we're doing are not amenable, frankly, to rapid change.

Most of these contracts, you can reduce the scope or cut back on the headcount but the work that's being done can't go away.

So I don't see any likely step change with more budget clarity for businesses like ours.

I think that might be different if you are in the hardware supply business on the defense side but the way our services business works, we're not expecting big swings one direction or the other.

Is that fair, Tom?

Yes.

I think one thing maybe we need to characterize our federal business a little bit.

Our federal business is largely not driven by big projects.

They're driven by big contracts, which have a long duration, 5 years, 8 years, 10 years to supply resources to enable government agencies to do what they're going to do.

Unless the entire mission goes away, there's some level of support that's required.

Now, budget constraints, we might see a 10% reduction, a 20% reduction in particular contracts as the missions of the agencies change or the budgets get tighter.

But the contract itself doesn't really vaporize.

We're not bidding on -- for the most part, with one or two exceptions, there are not a lot of single event big projects that are in our ongoing federal business.

Does that help?

Brian Konigsberg, Vertical Research.

I just wanted to touch more on the chemicals opportunity.

Obviously, there's a lot of enthusiasm for what's going on but I'm just curious what you think the actual gating factors are.

There seems to be a lot of projects being planned for the Gulf Coast, obviously, Texas, in particular, a bit of Louisiana.

The capacity to actually execute these projects, has that become a big issue to be able to procure the amount of labor needed to actually get these projects off the ground?

Maybe could you just give us some thoughts around that?

Sure.

I think that the capacity issues will be less significant in this cycle for some contractors.

Therefore, their customers than has been in prior cycles simply because a number of the big contractors, Jacobs included, have developed a significant capability to move work off the Gulf Coast.

So the historic constraints of everything having to be done on the Gulf Coast, I think those constraints will be less significant this time around, although there still will be some.

I think that there will be a point in time when projects begin to look expensive, and that some of the projects that might have been announced that were not in the leading part of the pack don't go forward.

But that's usually a couple of years into the cycle so I don't think that's a fiscal '13 or even probably a fiscal '14 issue.

But if you look -- if you go back to the bubble in 2007, 2008, before the bubble just completely collapsed, we started to see a few projects get extended because the costs were simply too high.

I think you'll see that again in this cycle if it continues like it appears to, but I don't think that's a near-term issue.

Got you.

Thank you.

Just secondly on the Middle Eastern opportunities, so I think you mentioned that you may be able to pursue some work outside of just the feed contracting.

Is that within the GES Plus framework, whether it be a PMC or PCM or whether it might be -- is that type of work falling within the GES Plus structure where it's only going to be several contractors competing for it?

Or does that fall outside of that GES Plus framework?

The answer to that question is yes, and by that, I mean it's both.

We have that ability to do those kinds of things under the GES framework, but we also see lots of opportunity outside that framework.

Greg, do you want to elaborate at all?

No, that's correct as far you've mentioned, Craig.

Again, the opportunities in the Middle East are numerous.

We're sticking to what we do.

The GES Plus is expanding and other GES-type contracts are coming out but the opportunities outside of that family of contract GES are quite favorable to us.

We have recently won some sizable PMC projects.

Chase Jacobson, William Blair.

So the one -- Craig, you talked about gaining market share a number of times on the call, and in a number of your different markets.

Can you give any color as to where you're getting the market share from?

It sounds like a lot of it's because of your cost advantage.

What is keeping your competitors from lowering costs or going after some of these contracts on price, just seeing that you're taking share from them?

Any color on that would be great.

Let me start with the second part of your question first.

Remember that, that public sector market has, for the most part, been a cost-plus market for 50 years.

What that's done is that it's basically set up these businesses, a lot of our competitors, to position where the government will pay you, whether it's local government or federal government, will pay you whatever your costs are plus a profit on your costs.

That's resulted in, frankly, fairly poor cost discipline in the public sector companies.

Maybe not so much the big public ones as in the rest of industry.

In fact, we find when we make acquisitions of companies who have traditionally worked in these industries, that their cost structure is often 25%, 30% higher than it needs to be or than it is under Jacobs.

So that being the case, we're now in a market where the customers are becoming sensitive to those issues.

It's starting to drive work toward the big contractors and specifically Jacobs, who have these relatively low-cost structures.

So the folks who are suffering most aren't necessarily the big public sector public company competitors of Jacobs.

It's the little guys, quite frankly, who are getting beat up pretty bad.

If you are a mid-tier or small infrastructure engineering company today, you're having a very tough time getting away from any -- other than win a little curb and gutter work, you're going to have a tough time growing your business and you're going to have a tough time holding onto shares.

So that really is the bigger part of where our market share growth comes in something like the Infrastructure business.

Does that answer your question?

Yes.

That was actually very helpful.

The second question I have in -- let's take one shot here on the acquisition front.

So after it was a little two years ago at this point, you've been building cash nicely since then, you've been talking about acquisitions.

You talked pretty positively about the environment for acquisitions in terms of multiples and the amount of companies that are out there, but at the same time, you say -- don't expect anything in the near to intermediate term.

Can we imply -- does that imply anything about the potential size of the next deal that you may do?

It doesn't -- it wasn't intended to, let's put it that way, right?

We continue to look at everything from small deals to fairly large ones.

Obviously, fairly large ones take longer to mature than the smaller ones do.

We're also looking largely outside the US, so things like due diligence and contracting requirements and local governments' requirements relative to acquisitions all factor into the timing as well.

It's certainly more difficult to do an acquisition in Brazil maybe than it is anywhere else in the world.

I don't know.

Because you've got all the Brazilian rules; you've got all the foreign corrupt practices work to do.

It's a big challenge relative to due diligence, and setting up the deal relative to buying a company on the Gulf Coast who has a particular expertise we like.

So a long way, a long-winded way of saying lots of prospects out there, a little more complex to do even when they're small than what they have been historically.

So we're being cautious about when we think things might happen.

Robert Connors, Stifel Nicolaus.

Within the US refining and chemical clients that you guys serve, just wondering what your market share position on the O&M side, when you look at different regions such as what is your market share look like for the Gulf Coast region and then compare that to say, like the PAD-1 and PAD-5 districts?

I can't really give you a good answer to that question.

We've tried to calculate our market share more than once.

It's very, very difficult to get good data to let you determine your market share.

I would tell you that my estimate of that is that in all cases, we're low single digits, maybe on the Gulf Coast, low double-digits.

It's a huge business and there are lots of people in it.

You have to have the perspective that in our industry, generally, we have about, as a Company, we have about a 0.2% market share.

So even with our big customers, individual customers, it's very difficult to figure out what our share of their CapEx actually is.

So I'd love to answer that question but I don't know the answer.

Okay.

That's helpful, but did -- when do you guys expect the turnaround work to pick back up?

I think you had indicated that earlier in 2013.

Then regarding turnaround and also some of the maintenance contracts, is there a -- are any of those coming up for rebid anytime soon?

Let me take the turnaround question first.

Turnarounds are generally awarded on a turnaround by turnaround basis so each turnaround is its own competition.

Sometimes you get them sole sourced, sometimes you don't.

The turnaround season will start when the weather warms up, for the large part.

So we are expecting strong turnaround activity to begin in the -- in our fiscal third quarter and continue through the summer.

That's one of the things that makes the second quarter a little weaker than we would like it to be, is we don't have a lot of field construction activity and field turnaround work in that January, February timeframe.

But there's every expectation as we sit here today, at least, that it's going to be a good, solid turnaround season.

On the maintenance contracts, generally maintenance contracts have something like a three-year term.

So there's always something coming up for rebid, either ours or somebody else's.

That's just part of the ongoing business.

That's -- our approach is to keep about a year of the maintenance contract in backlog, until we get to the end and then we see what happens.

Okay.

If I could just squeeze more one more in, is that although with field services ramping in, maybe a little bit of margin decrement from that, I think the one thing that's escaped, escapes is that field service, the cash flow characteristics are much better.

So I was just wondering, can you get to the net working capital position as field services rises into late '13 and '14 that you enjoyed back in, say, '05, '07 timeframe?

Yes.

In fact, usually field services are cash neutral as opposed to our professional services.

So as we see that ramp up, you won't see a corresponding ramp-up in receivables and working capital needs.

In fact, on some of the outside the maintenance but just on as we go from -- into the detailed design and construction, often we can wrap the detailed designs into payment terms we get for the overall cash flow, particularly as the field services start up.

So it can have a little bit of a benefit even on the professional services side as it relates to the project.

So when you look at our different businesses, the businesses that have a higher component of field services tend to have better DSOs and such than the pure professional services parts of our business would have.

General profits in the industrial business as well, so private versus public also tends to have slightly better DSOs.

Getting back to '05, '06 and such, we are more in the international arena, particularly more in the Middle East and such and there, just practices tend to stretch out receivables a little bit.

So you get a little bit of a balance or there -- but I think certainly that's the direction we would expect to see the working capital, the receivables moving toward, back toward as we see the business pick back up on the field services.

We've come to our last question.

Stewart Scharf, S&P Capital IQ.

You mentioned very positive on many other segments across Oil & Gas and Chemicals, Infrastructure, improvement in PharmaBio and so forth.

I'm trying to get a feel for what the risk is or what would be the greatest surprise to you as far as something that -- what areas would -- that you wouldn't expect something to go wrong?

Or you see the strong segments continuing these strong while the others become strong, so that all segments are strong at the same time?

Or I just wanted to get a sense of what your -- what would be a negative surprise?

Certainly, a negative surprise would be if the outlook for our key customers were to turn sharply down or they would start to have big cash flow challenges and we start seeing project cancellations, like we did in the '08 timeframe.

That -- the industry deals, at least we deal well with, what I would characterize as gradual change because we can adapt.

But when you have four or five customers cancel 40% or 50% of their work, those kinds of things are pretty traumatic for the system.

So if as a result of European economic crises, some failure of our government to deal with the fiscal cliff, the [captains] in the industry became dramatically more negative about the future and started canceling projects, that certainly could be a risk.

I talk with the CEOs of our customers with some frequency.

I was with several CEOs when I was in Australia and China recently.

That's not the outlook that's being described to me even in the Mining & Minerals industry.

That's not the outlook I hear.

So I don't have any reason to suspect that is coming.

But I think that could be a dramatic -- if you're looking for one, that could be the dramatic impact.

In terms of the growth of the markets, we don't ever expect all of our markets to be growing solidly at one time.

In fact, we tried to build an engine here, if you'll forgive the analogy, that's got eight cylinders and needs five or so to run to grow well.

That's really where we are today.

As long as five or six of our markets are growing nicely and our share of that market is what we think it should be, we're going to grow nicely as a Company.

We'll always have a market or two that's not as strong or even weak negatively in that group of markets somewhat.

Does that answer your question?

Yes.

Regarding the target 15% earnings growth, you mentioned over the next few years on the average, would that imply that you're looking to be closer to the mid-teens more consistently?

Or do you see the potential for it getting back to that 20%-plus growth in five or six years ago?

I think you'll see periods where the trailing growth rates are in the high teens, low 20%s.

It will be from a combination of strong markets and good acquisition growth.

But our expectation is that, over the long term, it's going to be plus or minus that 15% -- well, 15% plus, I hope.

It will be a combination of organic growth and acquisition growth.

Like I say, when you get in a strong upsurge market like we had in that 2006, '07, '08, timeframe that's when you'll see some of those growth numbers going to spike up.

But of course, you'll pay a price for that when you get the kinds of numbers we have today.

Yes.

We would actually rather not see those kinds of bubbles because the reaction is usually negative afterwards.

You've got to recall that when we were having that 20%-plus trailing compounded growth rate, the annual growth rates individually were up in the 30%, 40%.

That is very tough to sustain, not only because of the required growth for us but also the capital spend of our customers that drives that growth.

So we'd rather see a little bit more moderation than in the markets than boom bust cycles that you often, that you've seen historically.

This will conclude our question-and-answer session.

I would like to turn the conference back over to Craig Martin for his closing remarks.

Well, thank you all.

I think this was another good quarter for us.

As I said, I was particularly proud of our team on the cost control side.

We had a good sales quarter.

We're looking forward to another good quarter and from a sales perspective as we go forward.

Still a challenge or two in terms of the construction side for this next quarter.

But I think the uptick that John described in the out quarters will be a real positive for us.

I think we're in a great, great position to see some good growth for the next several quarters and maybe even the next several years.

Thank you all.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.