雅各布工程 (J) 2013 Q4 法說會逐字稿

Good morning and welcome to the Jacobs Engineering fourth-quarter earnings conference call.

(Operator Instructions) I would now like to turn the conference over to Michelle Jones, Vice President of Corporate Communications.

Please go ahead.

Thank you, Gary.

Statements included in this presentation 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 forward-looking statements.

When used in this presentation words such as anticipate, estimate, expect, seeks, intends, plans, believes, and similar words are intended in part to identify forward-looking statements.

Some of the factors that could cause or contribute to such differences are listed and discussed in Item 1A, Risk Factors, of the Company's most recent annual report on Form 10-K for periods ended September 28, 2012.

The statements regarding the transaction with Sinclair Knight Merz are also forward-looking statements and there is no certainty that the transaction will close or that the expected results will occur.

These factors are not inclusive and the Company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements that are not contained in this presentation.

Readers of this presentation are encouraged to read carefully the Company's most recent annual report on Form 10-K for the period ended September 28, 2012, including discussions contained in Items 1, Business; 1A, Risk Factors; 3, Legal Proceedings; and 7, Management's Discussion and Analysis of financial conditions and results of operations contained therein; and other documents the Company files from time to time with the US Securities and Exchange Commission for further description.

I would now like to turn it over to our EVP and Finance Administration Officer, John Prosser.

Thank you, Michelle.

Good morning, everyone.

I will briefly go through the financial highlights for the quarter and then I will turn it over to Craig Martin, our CEO, to review the operations of the quarter and look at a business overview.

Going to slide four, financial highlights.

As was reported this morning, or last night, EPS for the quarter was $0.84.

This is nice growth over the fourth quarter of last year, which included an unusual gain, but excluding that gain the growth is well over 13%.

The earnings for the quarter were $110 million, $110.8 million.

For the year EPS was $3.23, also a nice gain over the last year.

So the net earnings of $423.1 million is a record, exceeded the peak that we had back in 2008.

Backlog year over year has grown nicely.

It is at $17.2 billion and good growth, as I will talk about in just a few minutes, in both field services and technical professional services.

The book to bill for the year was 1.11, so a little bit over 8% growth over last year.

Continue to have a very strong balance sheet.

Cash position at the end of the year was $1.26 billion.

Our net cash was over $800 million, so we are at a very strong balance sheet position.

We are initiating our guidance for fiscal year 2014 as a range of $3.35 to $3.90.

This range includes the anticipated closing of the transaction with SKM that Michelle mentioned, that we expect to close mid December.

This range also shows nice growth for next year, but we are also seeing some weakness that will impact our first quarter.

Some of the things that we see that are negatives for the first quarter; one is the typical vacation and holiday season that we see around the Christmas and New Year's timeframe.

And that is the same this year.

It has been that way for the last couple of years, you can see it.

And also with the timing of the closing of SKM, we will pick them up right in the middle of that vacation and holiday season.

So while their contribution for the year certainly is going to be nicely positive, their impact on the first quarter is going to be negative.

Also, there will be continuing pressure from transaction costs as we finalize and close the transaction.

You all remember that earlier this quarter the government had a shutdown.

And while that wasn't a big impact, it did have an impact on our operations for this quarter.

So you take all those items, and while we see the first quarter with some weakness, we still believe that the year will be a very good year for us.

Moving on to slide five, this is just the history of growth.

You can see that net income curve is back up over the previous record of 2008.

While we have dipped below the 15% target earnings, we believe, particularly as we look at the growth next year and moving forward, that we will get back up onto that 15% growth line in the very near future.

Moving on to slide six.

The backlog showed good growth, a little over 8% year over year, and growth in both field services and professional services.

We are also seeing that impact on our revenues as well.

The mix is moving back toward that -- closer to the 50/50 as would be more of a historical mix between professional services and field services.

So we think that we are seeing the pickup of that, but the field services backlog does tend to be a little more lumpy than the professional services.

We are seeing that impact in the growth trends and the backlog as well.

With that I will now turn it over to Craig Martin to review our growth and business overview.

Thank you, John, and good morning, everyone.

We are now on slide seven where we talk about our growth strategy.

I think you have all seen this slide many times in the past.

I'm going to talk about each of the first four bullets individually, so I will talk about our business model, our diversity, our geographic presence as a part of that discussion and where we are going with acquisition.

And maybe take a minute or two on where we have been.

Then I also wanted to mention the cost situation, as we continue to have what I consider to be excellent cost control of the organization right now.

Our folks are doing a very good job of keeping their costs down.

And considering that we have had some project activity moving to the right, the fact that we have kept our cost posture down I think positions us very well for the competitive scenarios that may be out there as we look forward.

So I think that is going to be another positive for Jacobs as we look at it.

Moving on now to slide eight.

This is our relationship-based business model.

It is essentially what I think of as a virtuous circle.

We have this long-term relationship approach to our clients.

It builds trust, allows us to improve our delivery to the customer, and adds superior value.

As a result, they have high repurchase loyalty.

That drives our growth, lowers our cost, limits our risk.

All of that being steady earnings growth, which we can then reinvest to build those relationships.

All-in-all I think that just continues to be a positive for us as a company.

I will point out a few things that have happened in the quarter that I think reinforce that.

But I would mention at this point that our repeat business for the fourth quarter of 2013 was 94.1%, so really, really solid repeat business once again for the Company.

Turning now to slide nine, you can see how our business breaks down by the end markets.

Not a lot of news here.

A slight increase in the amount of business on the process side and on the industrial side.

A little decrease on public and institutional, which I think is consistent with the conversation that John just had.

As we look forward I think the outlook for this business is pretty good, and I will talk about each of these areas of our business individually.

So now turning to slide 10, these are the public and institutional areas of our market; starting first with national government.

In spite of what is a very difficult environment out there, I think we are doing quite well.

We had eight awards in the quarter that certainly drove a positive outcome.

We see a lot of activity in the defense sector in the UK, particularly in areas like land systems, and of course our environmental cleanup business there is still lots of opportunity there as well.

So while the outlook I think from you all about the national government's market is more negative, our outlook is not that negative.

Certainly there are challenges.

We had one of those with the shutdown earlier this year, but I think the overall outlook is that we are going to be able to continue to build a stable and growing business, although not by huge margins, just on virtue of our great performance and our low cost.

When you look at the infrastructure business that is just a terrific business, short term and long term.

We think it is going to be a strong market for us in the coming year.

It certainly seems to be strong right now.

There is a lot of investment out there that is required to sustain that business and it seems to be strong geographically almost everywhere we are.

So strong in the US and the UK; strong in Hong Kong; strong in Australia, particularly important if the SKM deal goes through; and then the Middle East is a big positive for us right now.

We have won a bunch of work there.

I think we announce the Qatar Rail job during the quarter.

We think that is going to represent a really nice growth market for the Company in the infrastructure business.

Then, of course, we are applying our infrastructure business to other markets and doing so quite successfully.

You might also note the growth in the telecommunications business, another place where we announced an acquisition in this last quarter, and I will talk about acquisitions again in a little bit.

On the building side things are looking better.

We continue to become the most significant player in the whole mission-critical technical facilities arena; things like data centers are a great strength.

And that is a business that is projected to triple in the next five years.

We see that market going to something like $80 billion, so the services part of that is still very attractive opportunity for us to grow.

We see growing opportunities in the healthcare arena as well as in education.

And we have done a nice job of diversifying our business in the buildings arena away from the federal sector, so that is a positive as well.

Buildings is another area where there is very significant growth in the Middle East and that is exciting for us because that is essentially an untapped market for Jacobs.

I think we will see some nice growth from that as well.

When you look at the backlog for this set of markets you can see that we had excellent backlog growth.

We had a new record backlog in this sector for the fourth quarter of 2013 at $8.1 billion.

I think we are doing quite well in what many people think is a difficult market.

Moving on now to slide 11, this is the industrial markets.

Let me start with PharmaBio.

It is getting better.

The product pipeline is a bit mixed, but there is capital investments particularly in the biotech world.

We are seeing lots of investments in India and Asia.

The India market is projected to grow pretty significantly, and our global reach and innovation is really a key issue for our clients.

I don't expect to see a lot of pharma business in places like the US or Europe, but I do expect to see significant growth elsewhere.

And our capability in this market, coupled with our geographic reach, is key to our ability to continue to grow in the pharma space.

Mining & Minerals is growing for us.

We have said that it would and it continues to do so.

We are particularly successful lately in doing what we said we would do here, which is to start to take sustaining capital work and get the kind of money that the customers are going to spend moving toward Jacobs.

I would point out the announced win with Codelco in Chile, which is a small and sustaining capital win, as a really good example of where we are going in that business right now and where we are going to be able to find growth that may allude some of our competitors.

I think the greenfield business is still going to be week, so it really is going to be a services-based market rather than a big EPC market for the next little bit.

And that explains part of why the overall backlog declined a little.

Moving down to the other category, so Power, Pulp & Paper, High Tech, Food & Consumer Products.

We have characterized that as mixed, although we did get pretty good revenue growth in this area from a quarter-over-quarter basis for the trailing 12.

So that is a positive.

We have a lot of nice alliance relationships with our customers and there is decent capital spending in these markets.

We are growing our share of power in particular and I am pretty pleased with the progress we are making.

It is just geographically not as broad as we would like it to be.

Then we had some pretty significant work-off in the high tech arena, and that also impacted backlog because we haven't been able to replace that EPC work at this point in time.

But, overall, the industrial business actually looks okay for us as we go forward and I think our penetration of that small cap and mining and minerals will be key to what is a good outcome in industrial.

Moving on now to the heavy process business, so this is slide 12.

Refining is strong.

We have done extremely well in the refining sector.

There is a lot of activity in low sulfur gasoline, so-called Tier 3. Some 85 refineries are affected and the project sizes are in the $200 million, plus or minus, range.

That is an ideal spot for Jacobs so I think we are going to continue to do very well there.

There still are some CapEx and crude slate change projects, as well as a few safety-related projects out there.

All-in-all the refining business looks like it is going to be better than we expected, say, a year ago as we look forward.

On the oil and gas side that market remains very strong.

It is a global market.

We are still a very small player in that market, but I think we are going to see an increasing amount of work for Jacobs as we start to take share.

Our upstream units are doing quite well in terms of taking on new work and successfully completing that work, which is a key lever to expanding our share of those customers' wallets.

We see a lot of activity, a lot of significant opportunity, and these are big project opportunities now, in the Middle East and in Australia, as well is in the unconventional gas in the US.

Then, finally, looking to the chemicals business, also a very strong market.

We see a lot of activity there.

The whole process arena is one that excites us a bunch and the chemical is probably the strongest single piece of that.

A tremendous amount of FEED and pre-FEED work in-house as we speak, so I think we will see very strong growth there.

We also see strong growth in Asia and in the Middle East, so the process markets for Jacobs look like they will be a real positive.

The backlog is going to tend to be a little lumpy, so you can see our quarter-over-quarter backlog there was no real growth, but year over year we are up about 9%.

If you look over two years ago, it is up 31%.

So I think the story is good.

I think, because there is a fair amount of EPC here, the backlog growth will tend to be a little on the lumpy side.

Now moving on to slide 13, this is just a quick overview of our acquisition activity.

As you know, we have been very busy.

We had a number of announcements of acquisitions in the fourth quarter, things like Ilitha, SKM, Compass, [Bouxhi], Guimar and [Trumpettiere], all really significant.

Several of those help us in the oil and gas market.

We have some other activity there that we think is going to be a positive for us going forward.

Some infrastructure, some mining and metals, some telecom, a penetration of our Brazilian business to start to grow in Brazil, and a strong opportunity to build a Class A license position in China.

All those things are products of our acquisition activity up to now that I think are also going to be good leverage for 2014 and 2015 and beyond.

As we look forward, the geographies that remain very interesting -- certainly China, South America, Australia are all very interesting of a geographics point of view.

I think there will be some opportunities in the Middle East and Africa as well.

From a market standpoint, we remain very interested in oil and gas.

Niche mining acquisitions; the infrastructure business will continue to be very important to us.

And we're going to be taking a hard look at whether or not there is a good acquisition out there in the power business or not.

We think that is one of the businesses we are not in that would be a leverage point for us going forward.

So moving now to the summary, why Jacobs?

It is sort of our commercial.

Our relationship-based business model works.

This is slide 14.

I told you about the 94% repeat business.

I think our diversification is a positive for us.

We have got a great balance sheet at $1.3 billion, almost $1.3 billion in cash; $800 million and change in net cash.

Our cost position is, without doubt, the industry's best.

We have been able to demonstrate year-over-year growth, 13.8%, between 2012 and 2013, if you take the [metzo] thing out.

And we are forecasting pretty decent growth for fiscal 2014, particularly in light of John's comments about how difficult the first quarter is going to be.

So with that we will get to your questions.

Gary, let me give it back to you.

(Operator Instructions) Jamie Cook, Credit Suisse.

Good morning.

A couple questions obviously on the guidance.

I think the Street was disappointed here.

Could you just provide a little more color?

You cited a number of items that are going to impact the first quarter in terms of seasonality, transaction costs associated with SKM, government shutdown.

Can you just provide a little more color or can you quantify those items so we can get a better feel for what the first quarter is and how we think about the remaining nine months of the year?

And then also, could you help us understand what you are assuming SKM contributes to the total year?

I will take the second question first because we are not going to break down at this point SKM from the overall guidance, because it is just part of our overall guidance that is based on our anticipated flows in mid-December.

But it is accretive for the year and it will continue to be accretive, but it is only for basically the three quarters of the year.

The first-quarter weakness, typically we have seen, particularly the last couple of years, the holiday and vacation season around Christmas and New Year's always has an impact.

You can go back and look and kind of see what that has been the last couple of years from our fourth quarter to our first quarter.

As the transaction costs -- well, a lot of those have already been expensed.

They are behind us.

There will be just -- there are continuing costs that are being incurred as we come up to the various activities around closing and the filings and dealing with courts and dealing with shareholders and everything else that goes around with the SKM transaction.

And also, as Craig mentioned, there were a number of other transactions, a couple of which, while they are smaller, will be closing or have closed this quarter, so they have an impact this quarter as well.

When you look at the SKM closing, the timing of the closing is going to be probably absolutely the worst time from a contribution in the first quarter, because if we close on the schedule that we anticipate it will be right before Christmas.

And so while we will have them in our financials for a couple of weeks, it will be right when they are going on vacation and the holiday season.

And being primarily in the southern hemisphere, it is also the summer season for them, so it is right in the middle of their summer vacation season as well.

But, John, can you just -- I understand what the different factors are but two things.

While you won't break out the items, I am assuming EPS in the first quarter is down from last year; is that fair?

Can you help us with --?

Yes, (multiple speakers) that is what I was getting to, Jamie.

(multiple speakers) All these things will have an impact of probably somewhere between $0.10 and $0.15 over what we would expect to see from just a trend or a flat comparison to the fourth quarter.

Okay.

Okay, that is helpful.

Then I guess my second question is it just relates to the margins that we have been seeing if you look at your margins in total.

And I understand you have mix factors with field services being up more as a percent relative -- field services being up more year over year versus the technical professional services.

But the margin trend in the back half of the year, I know there is some items in there, have been down versus the first half of the year.

Can you just give color how we think about margins going forward given the competitive environment you are seeing and your ability to be more cost effective relative to your peers?

Do you think in total operating margins -- let's take the first quarter out of it because there is some one-time items in there, but do you think margins year over year, operating margins should improve year over year?

Thanks.

With that I will get back in queue.

No, I think the trends, as we see the field services pickup -- this year field services were like 47% of our revenue, so it has picked up.

Even in spite of that change, even from the third quarter, our margins picked up a little bit even with the impacts of the holiday season and things like that.

But I would expect to see, as we trend through next year and you will have the impact of SKM coming in and the amortization of intangibles and things like that, that will actually bring their historical margin trends down a little bit, I would expect to see relatively flat margins, maybe a slight improvement.

I don't think we are going to see a lot of degradation from where we are now, but I don't see a big growth in margins this next year.

As we move out I think we will see a little bit better, but I think we are still in kind of a transition from the front-end engineering and such getting into the field.

So I think you are going to see a relatively flat margin trend.

And is that inclusive of the first quarter, just to clarify?

First quarter, the margins might be down a little bit.

But full-year flat to up, is that inclusive of the first quarter or is that the nine months?

Yes, yes.

Okay.

All right, great, thanks.

I will get back in queue.

Vishal Shah, Deutsche Bank.

This is Susie Min for Vishal Shah.

I had a question on your book to bill.

It seems to be improving and it sounds like a part of it is from the way the projects are being managed in phases.

So wanted to reconcile that with the commentary on projects potentially moving to the right.

Then I have a follow-up question.

I think book to bill has been good for a while now and we remain pretty happy with where we are.

Obviously the ramp up in backlog that would be driven by EPC has not appeared in the numbers and that is largely a product of things moving to the right a little bit.

As we look at the outlook though for FY14, we think that movement to the right is largely behind us.

I don't mean largely behind us like tomorrow largely behind us, but I think as we get through the first fiscal quarter and get into calendar 2014, we will start to see those EPC releases and then we will start to see the -- actually see some backlog acceleration.

We are particularly upbeat about what we are seeing in the US and Middle East in that regard in both chemicals and refining.

So I'm not sure that answers your question.

If it doesn't, please elaborate, but I'm feeling pretty good about getting close to the end of this moving to the right stuff.

That is very helpful, thanks.

And then you mentioned large project activity in the Middle East and Australia as it relates to oil and gas.

I just wanted to get some clarification on what types of projects you guys are looking for and potentially timing on those projects?

Sure.

Largely, we are looking at business in the upstream areas.

So it is oil and gas-related; in fact, largely gas-related, a lot of new production, straddle plants, [vast] treatment cleanup, some very substantial projects in the Middle East, some pretty substantial projects in Australia and frankly, there may be some pretty substantial projects in the US as well.

Although I'm not quite as positive about those as I am the other two.

Okay, great.

Thank you.

Andrew Kaplowitz, Barclays.

Good morning.

It is Alan Fleming standing in for Andy.

Thanks for taking my questions.

Wanted to follow up on a question around the guidance.

The range is a bit wider than we are accustomed to, even maybe this early in the fiscal year, so wanted to see if you could comment on what is driving that.

Is the government uncertainty getting worse or is it just still very difficult to predict as we sit here now or is there something else that we need to be thinking about?

I think there is a number of factors that are driving the wide range.

Certainly the weakness of the first quarter is part of what is driving the downside of that wide range.

We would be way more optimistic -- way might exaggerating -- be more optimistic about the year if the first quarter weren't as weak as we expect it to be.

On the upside I think there -- one other downside factor is certainly we don't know what the government is going to do after the first of the year and what impacts that might have.

I think we have done pretty well in dealing with those issues up to now, but they are very unpredictable.

And I think it is hard for us to judge what the impacts of government action might be, positive or negative, frankly, as we look into the second and third quarters of 2014.

On the upside, we are actually very, very upbeat on the SKM deal.

It is a little bit early yet to say with certainty how that is all going to work out -- when we are going to see the integration cost falloff, how the intangibles and amortization of those are going to affect the numbers.

So there is a lot of things going on yet that we have some uncertainty about.

Of course, the markets that we have acquired here, one is the mining and minerals business, and as we all know that business is challenged.

We think that the combined Jacobs SKM companies are extremely well positioned to leverage that, but that is not a certainty at all at this point.

So I think the SKM thing could easily be a factor in pushing us toward the top of the range.

I think the federal government issues could be a factor in pushing us to the bottom of the range.

Also, the factor of this first quarter is a factor in all that.

So long-winded answer to say the range is wide because we see uncertainty in a couple of directions and so the potential is anywhere from a low number to a high number relative to where we are today.

I will just remind you that last year the range was at $0.50 compared to this $0.55.

So it is not really that much different than what we have done historically, particularly at the beginning of the year.

Okay, I appreciate that.

Maybe an unrelated follow-up, but we do give you significant credit for I think your relationship-based model.

But when I think about Jacobs through the last North American up cycle as things started to improve in refining you were able to I think book some larger projects.

So as the petrochemical momentum continues to improve can Jacobs win some bigger projects?

And are there some larger opportunities on the horizon as you look at 2014?

The answer to that is absolutely.

I think there are some significant major projects on the horizon.

George Kunberger, who is our Head of Global Sales, is sitting here with me.

George, do you want to elaborate?

I mean without getting specific about what you are referring to for a few years ago, while I would characterize today's marketplace as compared to four or five years ago, when you are referring to the one big project I think you are thinking of those aren't necessarily out there.

But there is a large volume of projects that are sort of just a little bit below that, maybe half that size in size.

But a large number of them, as opposed to where there were -- a few of those were big ones, but only a few.

So I've certainly -- personally where I sit relative to the chemical business, as Craig said, in the US and the Middle East and even to a degree in Asia the prospects are pretty broad and pretty rich and good size.

And, yes, I do think that we will have an opportunity to capitalize from a construction perspective on a large percentage of them, or at least our share of them.

If George only gets our share, I will be disappointed.

I was padding my bet with my boss here, but, no, he's right.

All right, guys.

I appreciate it.

I will hop back in line.

Tahira Afzal, KeyBanc.

Good morning, gentlemen.

First question is in regards to SKM.

Maybe you can talk a little bit more about that.

I know it is an employee-based company and I'm hoping you can kind of talk on a fairly broad basis about redemption incentives, etc., that we should assume as we go forward and assuming the deal is closed.

There is probably not a lot we can tell you in that regard.

We are aggressively approaching, making sure we retain the key leadership in SKM as a part of the transaction.

It is employee held.

On the other hand, the employee ownership is individually quite small.

So even given the size of the transaction, it is not like we are making people incredibly rich and they're going to run off and buy houses in the South of France.

But we are working hard to make sure we retain those folks.

I think I have mentioned this on this call before; our retention of executives in acquired companies is one of the great success stories of our company.

We generally have managed over the years to keep 90% of the key executives in the companies that we have acquired for five years or more.

And I fully believe that we will be able to implement our approaches and create the opportunities for these folks in SKM that will keep them in the Company and put them in leadership roles as we go forward.

So I think retention, while it is always a challenge, is something we manage very carefully.

I believe we will be able to deliver the right package for the folks here and that they will be excited about being a part of our future.

Okay, great.

I guess the second question is also tied to SKM.

I know the amortization number is nothing that we can really talk about till the deal closes and we see that.

We have always seen that be the case.

But there seem to be some articles out there that suggests the EBITDA margins are fairly higher for SKM than for the rest of your company.

And so that would seem to suggest that either SKM is contributing materially for 2014 or that there is a lot of amortization perhaps associated with the Company.

But to the extent you can comment it would be really helpful.

Well, comparing SKM to Jacobs, SKM is largely a professional services consultancy firm, whereas Jacobs is an EPC firm.

That is one of a leverage opportunities in the transaction longer term is to move more EPC and EPCM into the combined companies, but that would suggest that in terms of margins that SKM's margins across its revenue would be a little higher than Jacobs because they don't have the field services component to the extent that Jacobs has it.

And so that does represent a positive for us in terms of the acquisition.

Things like amortization of intangibles, integration costs are all factors that have yet to be worked out and can't be worked out, frankly, until the transaction closes.

And so getting to any more detail at this point would be premature.

Got it.

Okay, thank you.

Steven Fisher, UBS.

Good morning.

Just looking at the guidance for next year still coming in a little below the 15% on EPS growth, so I guess I'm just wondering what do you think it will take to get you back to that 15%?

Is it just more faster backlog and revenue growth?

Is it margin mix?

Is it cost cutting?

Where -- which one of those is most going to get you back to the 15% growth?

I don't think that the 15% growth number is going to be driven by cost cutting.

We are just not going to save ourselves into 15% growth.

I do think that as the markets start to -- particularly the heavy process market, starts to move from FEEDs to EPC we will start to see that growth start to occur.

I certainly haven't given up and 15% growth is well within the range of the EPS numbers we have given you coming out of the box here.

So I'm not at all pessimistic about the potential for 15% growth in the relative near term.

And I think that it will be sustainable at that level or higher for several years thereafter.

Does that answer your question, Steve?

Yes, it does.

Thanks, Craig.

Then just on pricing; wondering if you can just comment a little bit about what you are seeing in both public sector and private sector markets.

I am wondering if some of the challenges in the public sector market are equally offsetting the private sector improvements, or is it more one leaning more towards the other.

Certainly we are seeing pricing pressure in the public sector markets -- part of it anyway, mostly the federal government arena -- that we have not traditionally seen.

So that business is more challenging.

It isn't affecting our ability to win work.

I think you can see that from the backlog numbers, but the margin that is in that work is certainly not as strong as it might have been a few years ago.

On the opposite hand, things like the private sector businesses, the heavy process market, we are seeing improvement in margins but not significant ones.

It is still more -- because this stuff keeps moving to the right it is still a more competitive marketplace than I would have told you a year ago I thought it would be at this time.

And so we aren't seeing the improvements in margins that I would have expected by now.

We are seeing improvements.

Our margins in that business are moving up.

They're just not moving up very fast and so we haven't quite seen the benefit from that.

How does that all add up in the aggregate?

In the aggregate we are seeing slight improvement, very slight improvement in aggregate margins, but it is in the 5, 10 basis points kind of improvement.

Not any big number.

Okay, that is helpful.

Thank you.

Andrew Wittmann, Robert W. Baird.

Good morning, guys.

So I wanted to dig into the SKM strategy a little bit more clearly.

You mentioned here that the mining focus -- can you talk, Craig, about how you get comfortable with that, that the mining maybe the bottom is in or that you at least priced the bottom in?

And maybe specifically comment on the [fast] joint venture, as we understand it that was a substantial portion of the Company's EBIT, and kind of your outlook for that specifically would be helpful I think.

Okay, let me try to start with a big picture view of SKM.

Very attractive company with a long track record of both growth and profitability that we like a lot.

As I think I have said on these calls many, many times, acquisitions are opportunistic.

You can only do deals when there is a willing buyer and a willing seller, as hostile deals just don't work in our marketplace.

So the timing of doing a deal might not be ideal from stepping into robust markets, but the long-term strategy for doing so still makes a tremendous amount of sense.

So while we think there will continue to be weakness in the mining and minerals market, and particularly that is going to impact Australia, we think this deal has such positive long-term benefits for the Company and no negative short-term benefits other than the first two weeks of the deal, as John pointed out, that the reasons for doing it are undeniable.

As to the fast joint venture, I can't be specific about that.

I think that would be overreaching my ability to talk about that where we are.

I can say we have evaluated the book of business at SKM and we are comfortable that the impacts of the changing marketplace will not materially damage the value of the asset.

Now that is sort of double talk I guess in a way, but that is really as much as I think I should say.

Andrew, I would like to make -- just add a little bit of comment to that.

Historically, one thing you have to look at with SKM is they really started in the infrastructure and water, wastewater business.

They have a very strong, mature position in Australia, in Southeast Asia, in those markets beyond just the mining and minerals.

So this acquisition is just not a mining and minerals.

It is a nice position and their focus in mining and minerals complements ours very nicely, but they also round out our business in Australia.

They had a new market in Southeast Asia that is complementary to some of the things we have been doing, so it goes beyond just mining and minerals.

I think there has been a little bit too much emphasis put on the mining and mineral side of the acquisition as opposed to the broadening of our overall business space.

And actually the broadening of our base in Australia to get us away from just mining and mineral.

John makes a good point; that is a real strength of this company and more than half of it is involved in other than mining and minerals work.

That is a good point.

Thanks for that color, guys.

Maybe, John, just to kind of dovetail on to that and looking at the SG&A here, as you are looking at SKM, looking at some of these other smaller deals, can you help us get comfortable with what the underlying kind of exclusive of heavy M&A activity is in the SG&A line here so we can get a better focus on a go-forward basis as we look into 2014?

Well, there is nothing to say.

Some of that is not going to continue into 2014 as well, but looking back over this whole year it has probably been something in the $0.08 to $0.10 impact across the whole year.

Okay.

Then maybe just can you talk a little bit about the overall utilization levels?

I remember in spring of this year it seemed like many of your employees, especially on the professional side, were kind of billing a lot of over time.

Have you brought in more people to kind of relieve that burden?

And where do you see yourself today on the utilization curve?

Any comments on that would be I think helpful.

Utilization has continued and does continue to be high, but again it is driven largely by FEEDs and the kind of activity that I described earlier in the call.

So we aren't yet seeing the pressure of phases three, four, five of projects -- or four and five, I guess, to be technical about it.

What they call the execution phases.

And that is where the biggest push for engineering hours and then construction capability comes.

So because we are still kind of seeing those projects moving to the right, the big push in that area has not happened.

We are still working a fair amount of overtime.

We are probably down a little bit.

And we really haven't hit the peak hiring activity that we expect to come.

Okay, great.

Thank you very much.

Luke Folta, Jefferies.

Good morning, gentlemen.

First question I had was on the public and institutional backlog.

You have posted growth in that and in recent quarters you have talked about some share gains in that business.

I wanted to understand, the growth that we saw this quarter, do you think that that was more associated with continued share gains in this business or new growth?

And any color you can give on what the US versus UK split was?

Let me answer the second part of the question first.

That business is still dominated by the US, so most of what happens, including most of what happens in backlog, is a function of what happens on the US side.

In terms of -- what we have done there is very little what I would characterize as new business, so when I think about the federal government business in the US in particular, it is not like the government is creating new kinds of work for us to do.

So almost everything in the federal government arena is about market share.

And, moreover, when you look at the sort of overall contraction of the federal marketplace coupled with the shift toward more small business awards and fewer large business awards, the pool of opportunity that we are looking at as a company is clearly smaller year over year and probably has been getting smaller now for several years.

So the improvements in backlog that you see there are clearly share gains.

It is a product, I think, of really good execution of projects and really effective cost management that is allowing us to take that share from the competition.

There is really not new business.

I mean it might be new to us, but it wasn't new to somebody.

Does that make sense?

Yes, that is helpful.

Thank you.

I guess the second question was just on the presentation that you have got out there, on the process page you make some reference to LNG and it hasn't been something that I thought you were much associated with.

Is that more related to the SKM acquisition and upstream opportunities that would feed LNG opportunities, or do you have some sort of direct leverage there now?

No, we do not have any direct leverage in the LNG marketplace, but increasingly as we are involved in unconventional gas, as we build our portfolio in conventional gas, we are getting closer and closer to the LNG supply and receipt.

And what happens in that market becomes more relevant.

I'm not suggesting for a minute we are going to become an LNG lump sum, turnkey contractor, that is not us.

But there will be opportunities in niche kinds of activities the LNG market, small-scale LNG for example, and a lot of the cast of things that have to happen around an LNG plants that are right up Jacobs alley.

Does that make sense?

Yes, it does.

George, do you want to elaborate?

Yes, just to elaborate a little bit on that, Craig.

I mean in the LNG world, as Craig said, there is a couple of avenues.

There is certainly the infrastructure and overall development of gas fields collection and distribution of fields associated with LNG in general.

The installed capital base of the LNG facilities that you can look at in Western Australia and are coming online in Eastern Australia, plus other parts of the US, represent not immediate, but certainly in the not-too-distant future, a large opportunity for us to try and capitalize on the continuous presence and support of those capital investments as they come online and go into the future.

And also, if you look, without getting specific, at a lot of large energy companies there is a number of strategies out there to monetization of natural gas in ways other than just large LNG export facilities, which is what Craig was referring to.

There is opportunities there for us to play in that marketplace as well.

Great, thank you very much.

Jerry Revich, Goldman Sachs.

Good morning.

Over the past couple of quarters you have had excellent momentum in your chemicals business.

Can you just talk about how much visibility you have?

What is bid activity like currently?

And I am assuming the comment on the soft first quarter probably doesn't extend into this business, but can you just say more?

Sure.

The soft first quarter is mostly a function of the things that John has already outlined, so it is not in any sense a function of our expectations in the chemicals market one way or the other.

We think that market is incredibly robust and a huge positive as we go forward.

And I'm going to again ask George Kunberger, our head of global sales, to talk more about the chemicals market.

George?

Yes, I think we have good visibility on the opportunities out there with all of our core clients and key clients of course.

And, quite frankly, with a number of what I might -- I don't know how to best characterize them.

Not secondary clients, but clients you would not necessarily traditionally think of in that space.

The real question is when do the actual capital decisions get made and the approval, as Craig has been talking about, for these things to go into detailed design and construction.

I certainly do feel from the information that we have, what Craig has been saying that these decisions are getting to the point where they are going to be made.

Will all of them be made?

I don't think anybody in this conference call would think that every single one of those projects that have been announced are actually going to happen, but a large percentage of them certainly seem like they are happening.

And that is buoyed by the fact that, like I said, there is some other companies that we would not traditionally think of that are actively looking at major investments in the same space, which, to me, makes me feel like that marketplace is going to be strong as we have been anticipating for quite some time.

Thank you.

In the infrastructure end market in the US can you talk about the timing of some of the larger bids?

Are you getting visibility on some larger projects coming up for bid maybe in the second or third calendar quarter of 2014?

I would not characterize -- our infrastructure business is definitely continuing to improve as Greg said.

The improvement and the outlook for improvement is not necessarily driven by some large types of projects.

There are those out there for sure, but those are not driving our positive outlook for 2014 in that space.

What is driving it is, quite frankly, there is a lot of states and a lot of municipalities that are starting to re-spend -- starting to spend, not re-spend.

Starting to spend to improve their facilities and do highways and do bridges and do transit systems that they haven't been able to spend for quite some time in some large metropolitan areas around the South, Southwest part of the United States.

And so that is actually good news in the sense that that is stable, ongoing work at the state level that is starting to occur not broadly around the entire United States, but certainly in some very significant areas.

In addition to a few of the large iconic projects.

We are not looking necessarily to have to win big projects for 2014 to have our success.

We are really looking at sort of a baseload business.

The larger projects will be a little bit more icing on the cake I would say.

Thank you for the color.

In terms of opportunities on SKM, you outlined over time moving that EPC type business or layering on your EPC capabilities on that franchise.

Can you give us a sense how you're thinking about timing and what are your goals post closing?

Like I say, it is probably a little premature to talk in too much detail about that.

We believe that we bring very strong capability in construction to the partnership that SKM and Jacobs have formed here, and that the leverage of that will happen fairly quickly.

With respect to the mining and minerals area, we think the first place where that leverage will show up, however, is in that small capital arena where Jacobs has a remarkably solid reputation and SKM has enormously well-respected capability.

So we think it will be more like the Codelco win that I talked about in Chile as areas up front.

As our customers in that arena begin to move back into big EPC Greenfield, the leverage of SKM and Jacobs to do EPC becomes very significant.

That is probably more of a 2015 factor and beyond than it is a 2014.

With respect to their buildings and infrastructure, or water and wastewater businesses, there I think the leverage will come more quickly.

They bring tremendous capability in those areas.

Not only capability that we can leverage in the geographies they currently serve, but capability that we can leverage in geographies that Jacobs has where we don't have that capability.

I would expect EPC and EPCM opportunities to become more significant to us in the infrastructure space, but probably on a scale basis those EPC opportunities won't be as significant as what will happen in mining and minerals over time.

Okay, thank you.

Michael Dudas, Sterne, Agee.

Good morning, everybody.

Craig, just a couple follow-up comments about the pace of the refinery regulatory spend that you are going to see in the US over the next couple of years.

And, secondly, with regard to Canadian oilsands, some of the thoughts on your customer base given pipeline uncertainty, natural gas potential investment, US success in finding and delivering also.

Some thoughts on that and how it's going to impact your outlook for the next couple of years on the booking side.

Sure, let me start with the refining arena.

The Tier 3 gasoline rigs have a very short [view].

So short that there is some question in our mind whether the work can even get done in the timeframe that has been allowed for it.

So we are seeing very significant activity already in terms of people moving toward making selections and getting started on execute phases of these projects compared to what a normal refining investment cycle might look like.

So I expect the impacts from Tier 3 gasoline regs to be very meaningful in 2014 and 2015, because almost all this stuff has to be done by the end of 2017.

With respect to the balance of the business upstream, I think we are going to continue to see good investment.

I think we are seeing some changes in approaches.

For example, and I will go all the way up to the oilsands, there is clearly a movement now towards more modularization and more flexibility in terms of things like the well pads.

We are seeing that sort of move toward modularization and high levels of flexibility across the whole gas and oil business, at least the onshore aspects of that.

That is going to drive a lot of investment as we see it, mostly driven around capital efficiency and the issues that these customers are trying to achieve.

And in some cases, also driven around the fact that the payout on some of these wells in the unconventional space, for example, is rapid and short, so having the ability to move facilities is significant.

Jacobs, as you know, is pretty well positioned from a modularization, dealing with those kinds of issues, so I actually think the markets are going to play pretty well in terms of where we are as a company.

Did I answer your question, Mike?

Yes.

How about some of these SAGD opportunities and what some of the bigger Canadian companies are thinking about?

We are seeing a fair amount of activity in SAGD in particular.

We just went through an analysis, as we do periodically, of sort of where does the price have to be for the customers to see adequate returns.

We are still seeing a return on investment numbers that are north of 16% at current prices, so the economics for investment in the oil sands are actually quite good.

Again, it is just a matter of how much leverage can you get, so things like modularization of well pads really raises the leverage for these customers in terms of the amount of capital they have to put in.

And, therefore, it solidifies these returns I think for the long term.

I don't think we are going to see the [2007, 2008] boom in SAGD in oilsands generally, but I think that is going to continue to be a very solid business.

And we have clearly taken a leadership role in that part of the industry.

Excellent, Craig.

One just follow-up for John.

Have you decided what the mix of financing will be for the handful of acquisitions that you are closing this quarter?

Bill, it will come from our existing cash and our existing lines of credit.

You will see at the end of the quarter the cash will be down and the borrowings will be up.

But the exact mix will depend somewhat on where they are closing and just interest rates and FX exposure and things like that.

Perfect.

Look forward to seeing you guys next week.

Thank you.

John Rogers, D.A. Davidson.

Good morning.

Craig, I just want to go back to some of your earlier comments, and I guess John as well, about expecting to get back to that 15% or greater growth it sounds like second half of fiscal 2014.

Are you assuming additional acquisitions in that, or are you saying you can get there with what you have got on your table now including SKM?

I think with what is on the plate now, either deals that are ending and should close in the near term or -- and I would put SKM as an example of one of those -- or the little ones we have already closed coming up to this point, when you add those things together getting to that 15%-plus in the second half of the year is highly likely.

Okay, okay.

I don't think we need another big deal or even a bunch of little deals to make that happen.

Okay.

I am assuming that also includes some of the accretion from things that have already been completed as well.

Your comment about 10% organic growth this past year, I assume that relates to net income?

Yes.

Actually, I think if you take out the one-time gain, it is 13.8% net income growth.

Okay, okay.

So the difference being the acquisitions that you don't comment about being accretive?

And that was virtually all organic when you get right down to it.

The deals that we closed last year were really pretty small and their contribution toward earnings was not significant.

Okay.

If we look at a little bit further over the next couple of years, with the deals that you have done and your push -- a greater portion of your work being international versus the last couple of cycles, how should we think about the margin opportunities in all of that work?

I mean will you be doing the same level of construction or field services work outside the US that you do inside the US over time?

That is sort of a yes and no answer.

The reason I say that is it is very geography specific.

So we will be doing the same sort of thing in Canada that we do in the US; in fact, already are.

I think we will be similarly positioned in Australia.

But probably in other parts of the world, say, Western Europe, North Africa, and the Middle East, probably not a lot of direct hire.

So there you are going to be looking at more of an EPCM kind of business.

Where the revenue will flow as a consequence of that is subject to some debate, because sometimes customers put all that on their paper and so we don't use -- it doesn't go through our books.

And sometimes they put it on our paper and it does go through our books.

So I think the mix will be different depending on where you are in the world and I think the contracting strategy will be different.

So it is difficult to say what impact that will have on the relative margins as a percent of revenue, for example, depending on what our scope is and how it is accounted for.

Does that make sense?

It does, that is very helpful.

Lastly, if I could, your comments on the power market; being more interested in that again or being interested.

Are you thinking about that in terms of that it is a depressed market, or are there actual -- do you think there is opportunities near term out there?

Well, our view of the market is that it is another area where there are long-term demands for investment that are being undermet at this point in time, and that that investment will drive a good business.

And I'm looking at this now in the five-, 10-, 15-year kind of horizon, not the next quarter or next year kind of horizon.

So we think the power business is a good business that Jacobs should be in, and I don't mean by that lump sum, turnkey, gas-fired cogen.

That is not what I'm talking about at all.

But I think there is a good business out there for a company like Jacobs with our business model, but we are really going to have to make an acquisition to make it happen.

We are not going to be able to bootstrap that business.

And so that is why I made a point of mentioning the power business as an area of acquisition, both so you would know where our thinking is, but also so that people who are in that business listening to this call will know we are interested.

All right, thank you.

Appreciate the color.

Brian Konigsberg, Vertical Research.

Good afternoon.

Just following actually on the M&A line of questioning, so after SKM is closed you will have I guess some modest amount of net debt.

How do we think about your willingness to leverage the balance sheet from here?

Can you give us a range of where you would go to lever for the right asset?

We have always said that we were willing to leverage our balance sheet and we weren't afraid of debt.

We just, for our business, debt only comes about because of acquisition.

You put that on top of the comment that Craig said that almost all the acquisitions are opportunistic in that it takes a willing buyer and a willing seller in order to make it.

If the right opportunity comes along, we certainly have the capability of leveraging our balance sheet well beyond where it will be after the SKM transaction.

So if we had $1 billion or $1.5 billion of net debt for the right acquisitions would be something that certainly we would consider.

Got you.

That is helpful.

Our base business continues to be a good positive cash generator and we will continue to be able to use that cash to leverage acquisitions.

It is just the timing.

If we build the cash up, we will use the cash.

If we build -- if we have an opportunity for an acquisition where we don't particularly have the cash balance, we will use some leverage and borrow it and pay it back as we generate the cash going forward.

That's good.

Fair enough.

The other aspect, Brian, of that that I think is important understanding is sometimes it is not the ability of the Company to find or generate the cash to do these deals.

It is the resources to manage the integration.

It is not like Jacobs sits around with 50 or 60 executives standing by to go do a deal when one comes along.

And so each deal puts a strain on the organization, and that may actually be more of a determinant to how fast or how much that we might ever have than actually the deals themselves would be.

Does that make sense?

That does make sense.

I guess just following on that; with the SKM deal, do you anticipate that the strains associated with managing the integration would maybe put a pause in the M&A timing because you are trying to integrate a $1 billion-plus asset?

I certainly think it is unlikely that you would find us doing another $1 billion-plus deal anytime soon.

Certainly there are lots of little deals that won't be impacted by SKM that we could continue to look at.

Things in the telecommunications space, for example, would be unimpacted by SKM.

Another big deal outside the US would certainly be something we would have to look at hard at before we would decide to do that.

Got you.

Then, just secondly, Craig, you mentioned a lot of opportunities in the Middle East with large project work.

Do most of these opportunities reside in the GES Plus program, or is it more broad than that?

No, it is more broad than that.

It is broader than Saudi Arabia and certainly broader than GES Plus.

It is activity in Oman, Qatar, Saudi Arabia, the Emirates.

It is pretty broadly spread over what we think of as the highly attractive countries in the Middle East.

Okay.

Thank you very much.

Stewart Scharf, S&P Capital IQ.

Good morning.

Regarding your mining and minerals business, what changed from the last quarter was it went from strong to growing?

Was that specifically attributed to the SKM deal, or the one key point that changed was the asset optimization of the key client concern?

Could you just elaborate a little bit on that?

It is an easy conversation to have.

When we were talking about what word to associate with the market, the general feedback was that trying to say the market is strong wasn't a very good characterization because the market is not strong.

And that a better word for our position in the market, which we believe is a growing one and solidly growing one, was to switch to the word growing.

So there wasn't anything meant by that than to switch from trying to explain that it is strong for us even though it is not strong for the world to just going to we are going to grow in the marketplace.

Okay.

Especially in the oilsands are you seeing any change in trends as far as delayed projects or are things generally trending favorably?

I would say things are trending favorably.

George is here with me.

George, what do you think?

It is a little mixed I would say, not unlike a lot of other places in the US and other places in the world we have been talking about here today.

The clients are being naturally considered about their investments and that is also true in the oilsands.

It is interesting up there; some of the larger, more well-known customers are being very considered.

Have a very strong commitment to the oilsands over the long run and have ongoing activities in development and starting of their projects that we have been involved in and continue to be involved in.

There are some additional, again, sort of second tier -- I hate to use that word-- but different clients than you might normally think about that are looking at investments as well in the oilsands business in addition to the traditional big energy companies.

Which again adds to my confidence that the overall viability of the oilsands business over the medium and long term is very strong.

That is a business that those clients up there have to develop.

It is an important part of the economy and they will find a way to get the oil out of the country one way or the other.

It will take longer than maybe some other ways.

But they are all continuing to study and invest at a nice moderate pace, I would say, versus a hectic pace, which I think is, quite frankly, healthy in the long run.

Just to comment on that, I agree with George.

I think one of the things that we have learned from being up there now for 20 years is that when you see non-typical investors it is usually a good indication of an ongoing solid capital base.

And when the non-typical investors start to run away things tend to turn down.

That is certainly what we saw in the 2008/2009 timeframe and what we are seeing today is more typical of what we saw in the 2005/2006 timeframe.

Okay, thank you very much.

Sameer Rathod, Macquarie.

Good morning.

Thank you for taking my questions.

First question I guess return on invested capital.

You guys have done several acquisitions here, some quite sizable.

What do the return on invested capital profiles look for these companies over the next few years?

And if we think about acquisitions Jacobs has done over the last 10 years, have ROICs been generally trending lower or higher?

Well, long term it is hard to measure specific returns on acquisition by acquisition, because the historic pattern is that we integrate and so you lose some of that specific identification on the return.

But I think that as we look at them and study them they certainly have trended along what we expected from the acquisitions, and over time as we looked at the markets they have come into and development of those markets they have trended well.

I mean there is one or two that haven't done as well as maybe what we expected, but overall I think our growth, as near as we can judge from trying to split those out as we study, the returns are much more positive than what we get from having the cash in the bank.

With our long-term organic growth in that 10% range, or plus 10% range, those returns are probably closer to what we would determine, the mid-teens to upper teens.

Okay, thank you.

I guess my next question is as I think about the next three to five years in terms of the project pipelines that Jacobs is looking at, or any engineering construction firm, what we know is obviously interest rates have been artificially low due to Central Bank's involvement.

How do you think about I guess rates going up and its impact on your pipeline of projects?

Are a lot of your projects dependent on cheap financing and do you think projects will get delayed in the next three to five years if rates start moving back up?

Thank you.

I hesitate to speak for our clients in this regard, but I would have to say that most of our clients are looking at their investments as long term and short-term interest rates aren't a big factor in their decision to invest.

That might be true of smaller players, but when you look at big oil, big mining and minerals, big chemicals, big pharma, any of those major customers in this regard, I don't think they are deceived by short-term interest rates as a key criteria for their investment decisions.

So I don't expect a nominal or reasonable rise in interest rates to have a materially negative impact on new investment.

Obviously, if interest rates go to early 1970s level that will change the game entirely, but I don't see a reason to think that we are talking about those kinds of numbers.

Okay, thank you.

Have a great day.

(Operator Instructions) As there are no further questions, this concludes our question-and-answer session.

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

Thank you, Gary.

Thank you all for joining us on the call.

We are really excited about the prospects for the Company in the coming year and beyond.

I think all of us will be pleased with where the Company is going and the results that we are able to produce, and I look forward to seeing many of you next week.

Have a great week.

The conference has now concluded.

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