雅各布工程 (J) 2014 Q2 法說會逐字稿

Good day, and welcome to the Jacobs Engineering fiscal year 2014 second-quarter conference call.

All participants will be in listen-only mode.

(Operator Instructions).

Please note this event is being recorded.

I would now like to turn the conference over to Ms. Michelle Jones, Vice President of Corporate Communications.

Please go ahead.

Thank you, Betty.

Statements included in this webcast 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 you should not place undue reliance on such statements as actual results may differ materially.

There are a variety of risks, uncertainties and other factors that could cause actual results to differ materially from what is contained, projected or implied by our forward-looking statements.

For a description of some of the risks, uncertainties and other factors that may occur that could cause actual results to differ from our forward-looking statements, see our annual report on Form 10-K for the period ended September 27, 2013 and in particular the discussions contained in Item 1 Business, Item 1A Risk Factors, Item 3 Legal Proceedings, and Item 7 Management Discussion and Analysis of Financial Conditions and Results of Operations, as well as the Company's other filings with the Securities and Exchange Commission.

The Company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements that are discussed on this webcast.

With that I would like to turn the call over to John Prosser, Executive Vice President of Finance and Administration.

Thank you, Michelle, and good morning, everyone.

I will go over the financial highlights for the quarter and then I will turn it over to Craig Martin, our CEO, to review our growth strategies and a business overview.

If you go to slide four, as you will see and as you saw in the earnings release, we had a disappointing second-quarter reported earnings $0.63 per share, $83.5 million for the quarter.

These numbers reflect and include a net of about $0.19 of unusual items which I will talk a little bit more in a minute.

On a more positive note, the backlog at the end of the quarter went back up to a record high and continues to grow and ended the quarter at $18.4 billion so that is a good sign for the future.

A good book-to-bill ratio for the trailing 12 at 1.13, continue to have a strong balance sheet, cash position, while it was at just under $700 million, while it was down a little bit from last quarter, it reflects about $110 million of paydown of the debt that we incurred with the SKM acquisition and also use of about $65 million for a smaller acquisition that we closed during the quarter.

We have revised our 2014 guidance to a range of $3.15 to $3.55.

This guidance excludes the impact of the unusual items I referenced above or earlier and also similar items that we had in the first quarter.

Just by way of clarification, if you'll recall the first quarter we had a net of about $0.05 of negative items that was $0.10 charge related to the closing costs and operations of SKM for the last couple of weeks of the first quarter that was offset by a tax benefit from a tax settlement and this quarter the $0.19 that I referenced.

So the guidance includes or excludes about $0.24 in the first half.

Going to slide five, looking at the unusual items.

While the quarter was solid absent these unusual items, what were included was about $0.10 related to a number of projects in Europe that had adjustments in reserves that needed to be taken related primarily to project performance or risk terms.

We had an unusual impact on carryover from the Christmas holidays, New Year's holidays and also had a weather impact that was much higher than usual.

This was primarily in the Midwest and Eastern part of the US and up in Canada.

It affected both the professional service activities because of office closures and people unable to get to work and also had an impact on field activities and so had an impact on our field revenues and also some of our field fees.

SKM related items were about $0.07 below what we had anticipated.

While SKM was accretive for the quarter and added about $0.05 net, because of unanticipated higher holidays and vacation levels and particular weakness in the Australian mining and minerals market, the resulting earnings were well below our expectations and that $0.07 impact from SKM.

On the positive side, we did sell some technology.

It was technology that we had some interest in that sold to a technology company and the gain on that was about $0.05.

So the of that was about a $0.19 impact on the first quarter.

The second half results as we look forward and while we haven't included in the guidance, we do see the need to do some restructuring.

Part of that is being driven by activity levels in Europe and the need to make some changes there.

There is some other items and other parts that are by themselves small but when you add them up and look at them, it gets to be a little bit larger.

And also with SKM related acquisition, our integration costs and the opportunity we see to accelerate the integration, we see a lot of opportunities to improve the overall cost basis by moving a little quicker on our integration.

There is going to be a little higher than maybe we originally anticipated, in fact, much higher than we originally anticipated in the integration and restructuring cost related to SKM.

Offsetting that, the underlying business outlook remains solid as demonstrated by the record backlog.

Just to kind of recap a little bit on SKM.

As I said earlier, it was accretive in the second quarter.

The integration is moving along.

We are seeing a lot of opportunities for synergies and actually they are exceeding our expectations and that is causing us to want to accelerate some of the actions.

Those actions will have a short-term impact on the remainder of 2014 but it will give us a solid foundation going into 2015 and so we think the contribution from SKM could be even more positive than what we anticipated in the original acquisition.

Also we are seeing significant sales leverages particularly in South America and Asia where we are seeing a lot of opportunities where the combination of their skills and our skills are giving us opportunities that just weren't available to either SKM or ourselves prior to the acquisition.

As I said earlier, we had a strong backlog growth that was up about 10% year over year.

It was also up quarter over quarter.

Field services were basically flat with -- you get the rounding, you see it shows that it is down a little bit but that is basically just rounding.

So it was pretty flat year-over-year and the professional services did have a nice growth of around 14%.

So that includes also the impact of SKM, but it is both the impact of SKM coming in but also the strong growth in our underlying backlog.

So with that, I will turn it over to Craig to go through some of the growth strategies and overview.

Thank you, John, and good morning, everyone.

We will start on slide eight, growth strategies.

You have seen this slide largely before that I'm going to talk about the first four bullets in a little more detail later on.

Our business relationship model continues to be a differentiator.

We have good market diversity and I will talk about how we are leveraging that.

We have good geographic presence as well.

We've got a good solid cash position both for acquisitions and to pay down our debt.

And the bullet I won't talk more about after this slide is the last one, continue to drive down costs.

The market remains price-sensitive.

We still have not seen that point in the marketplace where price is not an issue and where we are starting to see margin expansion other than in the most minor way.

So it is really important that we drive down our costs.

In addition, we do see substantial synergies from SKM and we think we want to act more quickly to obtain those synergies so we are pushing hard to get those quicker and in greater magnitude as we look forward.

We are also putting an intense focus on our operational efficiencies.

John has talked about the restructuring.

That will also give us the opportunity to correct a couple of project performance issues that led to some of the problems that we talked about earlier.

Moving on now to slide nine, this is our relationship based business model.

You can see that it is pretty much what we have always described, what I think of a virtuous circle of customer relationship development, good outcomes for the customer which leads to more business for that customer.

I am pleased that again this quarter our repeat business was over 96% so we had another strong quarter in terms of customer development, customer relationships, and repurchase loyalty.

Moving on now to slide 10, you can see how the business breaks up by markets.

This is pretty much the same as last quarter so there is not a lot of movement in any of these numbers and I will talk about each one of these in more detail in the upcoming slides.

So let's turn now to slide 11 that is the slide titled Public & Institutional.

Let me walk through these markets and give you a sense of what is going on.

In the national government's market, things are definitely improving.

The budget is providing some funding certainty.

We are starting to see a lot of projects get released.

There is money out there that is unspent at this point in the US Federal budget and our customers are pushing hard to get it spent before the end of September and that is a real positive for us.

Major expansions in the Asia-Pacific area for US military, it is one of the places where the synergies that we got with SKM are going to be a big benefit to us in terms of our ability to attack those markets and grow our business in Asia-Pacific for the Federal Government.

On the UK side, UK defense remains very buoyant and there are a number of major opportunities probably more opportunities than we can chase to support the UK Defense Departments at a very high level.

We continue to seek good business in the UK in nuclear cleanup.

You will recall that we acquired [Snobards] recently, a construction capability added to our cleanup capability in the Sellafield area.

There is $4 billion to be spent there of projects that we think Jacobs is in excellent position to win.

And we are starting to see another batch of spending in environmental remediation in the US and so we think there is going to be some decent opportunities in that area as well.

Finally, we finally managed to penetrate the intelligence community through an acquisition.

It has been a very difficult thing to break into the intelligence community but we are now in a very outstanding position and I think we will see significant growth from support of the intelligence committee based on our strong skills in that area.

Moving on now to infrastructure, we have described that market as strong.

It certainly is.

You can see that our comment on road, rail, on airport opportunities are abundant in particular the US and UK markets are very strong right now.

So there is a lot of good activity there.

We are seeing lots of activity in water projects globally particularly in Asia-Pacific and the Middle East.

This is a strength that we got with the SKM acquisition.

Jacobs had a small capability in water and wastewater prior to the acquisition.

We are now one of the dominant players in the industry globally.

So we think we are going to see a nice opportunity to continue to grow the business in water projects and we already made a couple of small announcements in that area since the SKM acquisition.

In telecom, we see a lot of investment coming.

There is just an enormous amount of activity there and we are on track to see that become a $1 billion business for Jacobs.

So I am very excited about telecom.

It is one of the areas we are going to consider strategic niche investments.

And then gas distribution, the whole pipeline safety area is another growth opportunity for us.

We are doing a review of our prospects in that business already.

We have already won two of the bigger programs but there are many, many, many more programs of substantial size to be won and it is going to play very well to Jacobs strength in that regard.

Moving on to the buildings business, this for us I remind you of every quarter, that is driven by business buildings with technical content.

So for us it is buildings where what is on the inside is more important than what is in the outside.

High tech is a big business; I will talk more about that more in a minute.

Aviation, scientific, education in particular secondary and tertiary education, healthcare, hospitals and general, lots of activity for us in this area and areas where we have real strength.

The fact that we are in a tech building differentiator for us is a positive across almost all the markets and we think about things like data centers, mission-critical facilities, that is a tremendous strength of Jacobs, probably the leader in the industry there and we expect $30 billion of growth in that industry between now and the end of 2020.

Again, these last two categories, both building and infrastructure, we have had tremendous impact from the SKM acquisition because it has been a significant add to our capability.

We are doing a really good job of positioning and getting joint wins in that part of the business.

The other good news point here is the backlog growth.

If you look at the backlog numbers, we have both good quarter-over-quarter and year-over-year growth in backlog.

I think that sort of goes against the general belief that these are weak markets.

Whether they are or aren't, globally we are clearly in a position where we are growing our share and taking position in the public and institutional marketplace.

Turning now to slide 12, this is the industrial area that we talk about, kind of a mix of the stuff that doesn't conveniently fit anywhere else.

Let me start with PharmaBio.

That market is improving for us.

The project pipeline is still a little mixed but it is driving capital investments and we had a couple of announcements last quarter that I think are worth pointing out.

We won again Facility of the Year for Novartis in 2013.

I think that is our sixth or seventh Facility of the Year win in the PharmaBio business.

We were also awarded a developing country's modular program with Pfizer that I think will turn out to be a very strong program over time and probably more noteworthy than the press release would suggest on the surface.

Our clients are investing a lot in India and Asia.

You can see we see significant growth in the India market and frankly our know-how, our ability to deliver things like the Facility of the Year and our geographic reach are key to winning work with these customers and we are very well positioned across the globe to continue to grow with the PharmaBio customer.

And then given our dominant position and our ability to do modular and that sort of thing, there has been some good news, some of the mergers and acquisitions activity in the pharma industry looks like it is going to be a very strong plus for us.

So we see there is some significant opportunities going to be created by some of these recent merger acquisitions that should leverage up into a number of projects for Jacobs in the Pharma space.

Moving on to mining and minerals again, we say it is growing and that contravenes conventional wisdom but for us, it continues to be a share gain and we believe we are continuing to grow our share in the marketplace.

SKM's capabilities are very complementary to ours and so we are seeing ourselves as better able to compete for projects around the globe and the good news is on the big project side, there are now a few big projects in the proposal phase, still in the study and FEED stage of those proposals but the prospects for major opportunities are better than they have been in the last few quarters.

On the sustaining capital market, we have done very well.

We talked already about the [Kalama] win last quarter but we are now seeing pretty substantial sustaining capital opportunities in the $500 million plus sort of scale and we believe that is a real strength of Jacobs and that we will be in a wonderful position to take advantage of those opportunities and should be able to win more than our share.

As we have said all along, that sustaining capital part of the business has been an underexploited part of the mining and minerals sector and we intend to continue to take advantage of that in our growth.

Then as I mentioned earlier, we do have a very clear full spectrum service capability today that is moving us to be the dominant player in the mining and minerals industry in both Australia and in South America.

Moving now to the all other category, power, pulp and paper, high tech, food and consumer products, it is kind of a mixed bag.

There is good news and bad news in those markets depending on which ones you look at.

Some of the better markets right now, the food and consumer products, fast-moving consumer goods, MCG they call it, is pretty strong for us.

Those markets are becoming very India-centric.

By that I mean that the customers want to center their development there and their leadership of their programs in India and then leverage the rest of the world.

Our position in India is relatively unique in that we are a full-service company in India which positions us very well to take advantage of these international alliances that want an India-centric focus.

A lot of money in CapEx in terms of industrial facility upgrades.

We will take advantage of that and we are doing well in our limited position in the power market.

A nice announcement for the EDF nuclear new build market last quarter puts us in a wonderful position to take advantage of nuclear new build in the UK.

We are seeing increasing demands for power work in the Middle East and the SKM team brought us a very strong niche in the geothermal industry.

So another positive for us.

Overall the backlog is flat quarter-over-quarter and I think given the general perception of those markets, that shows we are doing a good job in sustaining our business there in spite of weak markets.

Moving on now to slide 13, this is the process part of our business.

You can see backlog is up 16% year-over-year.

I think that is a very good story.

Starting with refining, there is a new area of focus on these reliability and safety projects.

This comes under the general heading of ISA 84.

It looks like the capital spend there will be $20 billion over the next five to seven years.

It is largely a controls issue which plays to one of our strengths and it is very intense pro services activity relative to big construction EPC projects.

So we think that is going to be a real boost for our refining business as we go forward.

Lots of CapEx being spent in the US, Middle East and Asia.

The usual things that you hear about crude slate changes continue to be a factor as people swing from light sweet liquids to heavy sour crudes.

A lot of general activity in terms of just creep upgrade, in terms of refinery capacity.

So it has generally been a good business.

It looks like it is going to stay a good business.

There is also lots of potential activity in bigger programs in Asia and South America and certainly in Brazil where they are predicting a huge investment, our position there with our acquisition of Guimar puts us in an excellent spot.

We talked before about Tier 3 gasoline opportunities.

Most of those have not yet been awarded, something like 60% of his opportunities are yet to go.

Of the awards that have been made, we have won over 50% of the Tier 3 opportunities.

So as we predicted, that is going to be a good business for us.

Most of those are still in conceptual and FEED stage so there is a lot of perspective opportunity.

Oil and gas, it is a strong market globally.

We talk about it a lot.

I think the good news there is we had two very significant wins in the quarter that we have been able to announce.

BP's Khazzan program, which the first phase is $2 billion in Oman and the expected investment is $16 billion.

Jacobs has won the contract there to support BP.

And then here in the US we won ConocoPhillips Lower 48 program to support them in their onshore investments.

Both of those are pretty significant I think in terms of our ability to continue to grow the oil and gas business for Jacobs.

In the oil sands, we are seeing lots of focus on innovation and capital efficiencies and we really have a strong offering there both in terms of our [Gen-10] separate processing facility and modular delivery of the well pads.

There is every reason to think that we are going to be able to continue to be the dominant player in the oil sands and continue to grow our business.

Everybody knows about gas monetization.

There is a lot of activity there.

The good news there is that there is some increasing opportunity for us.

We are still not going to be a major player in the LNG game but we are seeing opportunities to support LNG projects, opportunities to support the customer on the owner's engineering side and opportunities to do balance of plant off-site utilities' supply to the LNG facility itself.

We see a lot of opportunity in pipeline services.

We have made a significant acquisition there as I think you know from last quarter.

There is a ton of money going to be spent and we expect that that will be an area where we will be able to capitalize on it pretty significantly.

And then chemicals is very strong.

If you think back at one time this was 12% or 13% of revenues, today it is 22%.

The US expansion in chemicals is enormous and a lot of that is driven obviously by the low-cost gas that is coming off the conventional/unconventional gas exploration and development.

But the good news about that is in addition to ethylene, which is the big driver, there is a significant amount of derivatives business and that is an area that plays very strongly to Jacobs' capability.

We continue to believe we are going to be able to be successful in executing a number of sizable derivatives projects based on this ethylene expansion.

We have tons of projects in PRE-FEED and FEED, and lots of projects out there in front of us.

The methanol business also looks to continue to be a strong business for us and we are finally starting to see a very few jobs being released to execute or that we are being told to be released to execute in the next couple of quarters.

That is a real positive for us because it indicates that a big part of these jobs are moving forward and that is where the big impact on the P&L will come.

So overall, the process business looks like a positive for us as we look forward.

Turning now to slide 14, we continue to have a strong acquisition pipeline.

We are going to be very niche focused for a while, mostly concentrating on North America and on the upstream and telecommunications business where we think there is a lot of leverage.

The acquisitions that we have made recently, the Eagleston acquisition in the pipeline business, very synergistic from day one, terrific acquisition.

We have been able to take a significant share of the opportunities into the Company that would not have otherwise been opportunities we could chase as a part of expansion to the supply of a number of our refinery companies as well as some major compression and pipeline projects planned for Canada and the US.

We also have announced the FNS acquisition.

That is the intelligence community related acquisition that I mentioned earlier.

Really important to us to be in that club.

If we are as successful as I believe we will be with that acquisition, we will be able to expand our presence in the intelligence community very significantly and we are really excited about the leverage that that acquisition represents.

As I said, our focus going forward is pretty niche oriented.

We don't really have any major acquisitions in the plan for the foreseeable future, not to say that something won't come along but that is where we are at the moment.

Turning now to slide 15, we have had a history of solid growth.

We've got a good strong relationship based business model with 96% repeat business.

We've got diversified markets, geographies and services that fuels growth and limits exposure.

It works for us.

If you look at the public sector backlog growth, I think it is a clear indication of how we are able to leverage our diversification.

We've got a good, solid balance sheet to expand our business both organically and through the right kinds of acquisitions and when the times are such we don't need all that cash, we've got a debt reduction program that is working well for us as well.

John mentioned that earlier.

Our cost position continues to create a competitive advantage for us and the restructuring and integration actions that we are talking about really are going to fuel 2015 growth so I am pretty excited about it.

If I were to summarize, we certainly had a disappointing first half.

That is behind us now and we are taking aggressive action to deal with that and position for the future both through the restructuring which will address and improve our cost posture and address the project performance issues as well as driving SKM.

SKM's, the synergies are well above what our expectations were when we put this deal together both cost synergies and our opportunity to obtain savings and market synergies in terms of leveraging new business.

So we are accelerating our actions to get those benefits even more quickly.

When you couple the things we are doing in terms of taking action with 11 straight quarters of greater than 110% book-to-bill and record backlog, I think we have a very solid outlook going forward.

I am not happy with our first half but I am pleased with where we are as a business.

With that, Betty, we will open it up to questions.

(Operator Instructions).

Andrew Kaplowitz, Barclays.

Close enough.

How are you doing guys?

We are doing okay, we could be doing better.

We would rather have better numbers for you.

I hear you.

So, Craig, maybe you can give us some more color on the reserves and the projects you took in Europe and why do you think they are really one time in nature?

Can you elaborate on the restructuring you are going to do that really will make these projects one time in nature going forward?

We can't elaborate very much on the projects.

The projects are very likely to be -- in fact some are -- in litigation and to talk about them in any detail would expose what we believe our position is going forward so I can't unfortunately give you a lot of detail.

As you know and any time we run the business, we are going to have ups and downs in projects but the magnitude and the timing of these was just unusual and not typical of how we run the business.

It happens from time to time; you have been around since 10 years ago and probably remember other times when this sort of thing has happened to us.

It is pretty rare.

We intend to keep it pretty rare.

But we've got a couple of minor changes -- not so minor but some minor changes we need to make in Europe to make sure that this doesn't recur and we are going to do that as a part of the restructuring.

I know that is not a real great answer but it is probably the best I can give you, okay?

Yes, yes.

And I understand.

I mean were these fixed priced projects or were they cost reimbursable and the customer disagreed?

Any color there?

I can give you a little bit of color but not much.

The projects for the most part had features that are unusual for us and in terms of liabilities we have signed up for or the way in which the cost reimbursable part of the project works and that has created part of the problem.

Got it.

How significant is this restructuring, Craig, and what kind of benefits do you expect on it in 2015?

I am not yet in a position to quantify the benefits in 2015.

We think that the restructuring charges will be on the order of magnitude of $0.40 in the coming two quarters so it is a significant number.

Okay.

Just shifting gears, even excluding these unusual items, you did lower your full-year guidance quite a bit.

What really is going on here?

Is that really just you started the year pretty slowly and revenues have been slow to pick up?

Is it SKM really is that a big factor there?

Maybe you can give us a little more color on what really happened?

It is obvious that you started the year slowly but anything else beyond that?

I think the slow start to the year is certainly a factor.

The timing of the SKM acquisition just the dime that it cost us in the first quarter is a factor and SKM continues to be a little bit of a factor going forward.

As John pointed out, we are not yet realizing all of the effects at the bottom line that we expected to get from SKM.

On the other hand, we are pretty confident we will get those and in fairly short order.

Part of what we have done is accelerate our restructuring and integration of SKM to capture that sooner.

Normally in these situations you don't ever hear us talk about restructuring charges for acquisitions because we take a very leisurely approach to doing that so as to make it as little pain as possible.

Under the circumstances with the weak markets particularly in the mining and minerals area, we are accelerating the integration that we would do anyway and so it is going to pile up in one or two quarters and that is a big driver.

But it should give us late 2014, 2015 kind of timing where we will see SKM at or even above our original expectations.

Okay.

I think it is right to say that it was a bit of a surprise to you that mining weakened in the quarter again.

Is that fair at SKM?

I wouldn't say it weakened again.

It has remained weak.

We continue to see the outlook for mining and minerals as strong sort of fourth quarter 2014 for calendar quarter of 2014 as stronger or maybe I shouldn't say strong yet.

But the challenges have been pretty significant in Australia and we are doing a good job of dealing with those but one of the things that we have got to do to deal with them effectively and maximize our profitability is downsize our operations particularly in the functional areas.

Thank you, Craig.

Steven Fisher, UBS.

Good morning.

First, Craig, just to clarify that problem project, that has now been completed?

It is in commissioning so it is not quite done but close enough.

It is not just one project, understand.

Okay.

But in other words, you are not expecting any further cost impacts in subsequent quarters for those projects specifically?

No, we think we have a very good handle on where we are.

Some of this is going to -- I am confident will go to litigation so the final outcome may not be known for several years but we have a good, strong position and I am comfortable with our reserves.

As I said in my closing remarks when I said this is behind us, I truly believe that is true.

Okay, great.

I know you mentioned restructuring actions are going to fuel fiscal 2015 growth but you are not ready to quantify the benefits yet.

But if this is really just sort of an SG&A issue and your gross margins are kind of still on track and revenue and backlog are still okay, now that you have a more depressed 2014, I mean is there any reason that we shouldn't be assuming that 2015 is going to be an accelerating growth year in terms of even better than your typical or your targeted 15% growth?

As John tells you, we don't give guidance for 2015 just yet but I am very optimistic about what 2015 looks like.

Okay.

Is that a backhanded way of answering your question?

Yes.

In our view, I don't see any reason why off a depressed year it shouldn't be a very accelerated year if it is really restructuring within your control.

But I guess we will see how that plays out.

But I guess I'm just kind of wondering how we should think about cash generation and usage over the next few quarters and I guess with the stock under some pressure here, might it makes sense to authorize a buyback?

We will continue to utilize and monitor our cash very closely.

We will look at the long-term uses of cash depending on what the stock does.

As we have said before, we always monitor that and have discussions at both management and Board level anticipating how we should use that cash but we have great uses of cash just with paying down the debt and getting us in a better position that we generated from SKM and there is still while we are not focusing on large acquisitions, but there is still a number of niche acquisitions in a couple of markets that are very interesting that we also will want to take advantage of and we think those are at prices that are favorable uses of our cash as well.

So we will continue to monitor that and depending on the circumstances make what we feel is the right allocation of the capital.

We continue to look at sources and uses of cash with the Board on a frequent basis and obviously we are going to be alert to doing the right thing with the cash at the right time.

Okay, thanks a lot.

Tahira Afzal, KeyBanc.

Good morning, gentlemen.

I guess my main question is -- as Jacobs is clearly exceptional at integrating and it seems like our expectations in our SKM are now perhaps a little more driven by a more sort of accelerated integration.

So I guess just looking back in terms of how much is (inaudible) SKM and outcomes that we see around that versus what you today, are there some lessons in terms of the (inaudible) that you feel you have learned through the process and we should assume those have been applied to your smaller but more recent acquisitions?

With respect to the SKM acquisition, first of all, there is everything we see about it when we look at the numbers even where we are today, it is going to be a very good deal for the shareholders so I have no lack of confidence in that situation at all.

If I have criticisms of the way in which we handled the acquisition, we knew the mining and minerals market was weak.

We knew it would have an impact.

I think we could have been more aggressive about obtaining the synergies and doing the integration than we were and that is not normal for us but I think in this particular case, we probably should have taken a harder look at it, maybe gotten after it a big quicker but we are going to remedy that this next quarter.

Got it.

Okay.

And a second follow-up question, Craig, is really on your end markets.

You seem to be pretty bullish incrementally on the midstream side and we see that in the recent acquisitions you have made.

If you look at the petrochem side, as you said, projects seemed to have been slower to roll out but we are hearing positive (inaudible) when we add a decent earnings season.

So any incremental color you can provide and I know you already have in terms of some of those field services activities and the timing as you see it today?

I think my view and our view of the petrochemicals business is pretty consistent with what we told you at the end of the first quarter.

It is a good, strong, robust market.

The customers are being very conservative about releasing projects.

But I think the optimism that you are hearing from others is probably mirrored by our own and my point and in my prepared remarks about the fact that we are actually starting to see some of these projects go to the execute phase detail, design and construction, is an indication that things are starting to unblock or open up and we are going to see projects go into execute and that will be a positive for us and obviously others in the industry who have that kind of work in the FEED stage today.

So, yes, I think the market is finally starting to open up and release the bigger parts of the programs and I think that will be a positive for us and the other competitors in the industry.

Thanks a lot, Craig.

Michael Dudas, Sterne, Agee.

Good morning, everyone.

For John or Craig, so if I look at the guidance today versus six months ago and given the commentary you have made and the answers to some of the questions, with the vast majority of it would be the integration surprise issues relative to SKM?

Looking at the guidance, we are really excluding some of those impacts.

Certainly going forward, the lower rate of earnings that we saw this last quarter are affecting the second half but we will get to those and get that straightened out.

I think some of the other items that Craig has alluded to, things have been a little slower getting started so as far as some of the awards in the petrochemical area and other areas, the softness in the market in Australia that affected SKM.

So I think that also the pricing, the margins six months ago, even three months ago, we felt we saw a little bit better improvement in margins and this market has stayed more competitive longer than what we would have anticipated.

And so while that is probably dampening our short-term outlook a little bit as well.

So I think and also if you look at our guidance, which we have revised but I always talk about midpoints and such but you guys have gotten out ahead of us by a fair amount as well so I think that you were a little more optimistic than we were even in our past guidance.

Do you mean me specifically, John, or everyone?

He is picking on you, Mike.

(multiple speakers)

That was a general comment when the Street is $0.08 to $0.10 above our midpoint, that seems to be a little bit high.

And theoretically the midpoint would still be in the original guidance range that you put out six months ago so I get that.

That is the bottom to it yes, it is there.

Okay, fine.

For Craig, so again, to finish up my thoughts on SKM, when you said the expectation for the integration and the opportunities are greater today than you had thought six months ago, and I know you won't quantify it, but is there an order of magnitude that you can show or provide us that level of comfort -- is it because of the markets you are serving are going to get better or that the cost structure combined with the margin pickup is really going to drive a lot more returns and earnings growth from this acquisition in 2015?

I think it is a little bit of two different factors, Mike.

First off, we are starting to see big projects in the mining business.

We are starting to see our strategy to do sustaining capital pickup and I think we are going to see improvements in mining and minerals business, a big chunk of which is SKM related that are going to drive improvement.

The other thing I see is very significant opportunities to reduce structural costs and that is not unusual.

We often see that in acquisitions particularly in industries like infrastructure where SKM is very big.

We usually honestly take a fairly leisurely approach to getting those savings and our view here is that the timing is such that we should just go ahead and get them in a much more aggressive way and get that bottom-line impact sooner.

So it the combination I think that is a positive as we go forward and that combination I think is going to be what has got a real positive impact for 2015.

Did I answer your question?

Yes, I think that is fair.

Just one final follow-up.

You mentioned in your prepared remarks on the pipeline opportunities.

What kind of share do you think you have now and is it a very competitive market out there for you and of these large programs that are coming up for bid, do you have the manpower capabilities to gather an inordinate amount of share of that type of business because it seems like it is going to be a very large opportunity in the next few years in the US and North America?

I think our share today is low single digits, maybe less if you can imagine that.

It is a big market and we are still not a big player.

But I think our opportunity to leverage up and to take share there is very significant.

The impact of acquisitions like MARMAC and Eagleton are pretty significant on our credibility with those customers.

And in some ways, it is not different than the comments I made earlier about the intelligence community.

Pipeliners see themselves as a club and if you are not a pipeliner, you are not in the club.

So we went out and became a pipeliner by acquisition, and I think the leverage that represents is huge.

We have seen the Eagleton acquisition grow by 10%, 12% in three months, just on the back of us being able to leverage them into two projects.

So I think the outlook is very positive there.

It's a huge market and I believe we'll -- that is another place where I am looking to have a $1 billion business in the not-too-distant future.

I'm looking at the guy who runs it right across the table from me at the moment, and he is nodding his head yes.

That is encouraging.

Thank you, gentlemen, appreciate it.

Brian Konigsberg, Vertical Research.

Can you actually maybe just touch on the market and pricing dynamics that you have seen so far?

Some of the larger ones that are coming to market, it seems like the terms in the US anyway are a bit more hybrid in nature, people taking on more risk.

But how are the pricing that you are seeing for the projects that you are pursuing?

We are seeing the clients try to push more risk onto their suppliers, so that is a battle we are finding constantly.

So far, it is a battle we are winning, but it is a battle we have to fight every time we look at one of these projects.

That is partly an indication that the market is just not yet truly as strong as any of us would like it to be.

So margins are running faintly better quarter by quarter, but by that I mean very faintly.

We are talking about 0.10 of a basis point or less kind of growth in a quarter.

So it is not a robust market yet by any means.

It is not dirt cheap like it was after the bust in 2008, but it is pretty skinny.

And I think that is going to continue as more of these projects get released into detail, design and execute.

As the demand for a capability when you are in execute is four times what it is when you are in FEED.

And I think that is a very significant difference in terms of the supply of capability on the Gulf Coast.

And then of course as we move into construction, the trucks and labor issues will become very significant and that is another factor that will ameliorate this terms issue because willingness of our competitors to take risks that we won't take will go down rapidly when there is no people to do the work.

Got you.

I apologize if you touched on this at all but just as far as government work and the transition to MATOC type of competition structures, maybe just talk about the dynamics with the overall market in general and the spending that you are seeing and your ability to take share and what is the value proposition you are offering to get that share which I assume you are doing?

Our share growth is actually quite good.

I actually had some data, I don't have it in front of me today that looked at our share of growth in DOD and NASA, those two Federal markets combined over the last 10 years and we have sharply increasing growth.

We more than doubled that business and if you look at some of the major players who had significantly more share than we did say a Lockheed Martin or Northrop Grumman, their shares have gone dramatically the other way.

So we clearly are taking share.

We are doing that on the basis of a really spectacular track record of sustained superior performance.

So when our customers in that business look at our past performance, they see a really strong almost unblemished past performance record and then we manage to be very cost competitive and in a MATOC world, the advantages of those two combinations are really difficult to beat.

When we have both the best price and the best technical offering, we win.

And so our share on the MATOC side has been good.

Where we have had single award contracts converted to MATOC, we have lost some share but where others have had single award contracts converted to MATOC, we have gained more share than we have lost on our single award contracts.

So the net effect has been an opportunity to grow market share and our team has been very successful doing that.

I am very proud of them.

Great.

Thank you very much.

Appreciate it.

Luke Folta, Jefferies.

Good morning, Craig and John.

I guess first question I had was I am interested in what you have got planned for the outlook on the telecom space.

And I know you said you want to get to $1 billion in revenues in that business at some point.

Can you give us some sense of following the acquisitions that you have made recently, kind of where we are in terms of the size of that business?

Also it seems there is just a massive amount of growth in that business on what they call small cell or distributed antenna system side of the market where we are seeing a bit of shift in spending into those buckets.

Do you currently have leverage to that aspect of the business?

We do.

We have a -- I would characterize it a modest gas offering as we sit here today and we continue to expand that offering.

There are a number of small players around the North American geography, the US geography who have good skills but no reach and we are rolling those up steadily now into a business.

I expect that we will be in the $300 million class fairly soon like maybe by the end of the year although don't quote me on that.

And I think we will see that $1 billion growth pretty fast thereafter because it is clearly a market where the customer is crying for additional capability and capability with US wide reach.

Yes?

Is it fair to assume that margins in that business are dramatically better than what you are seeing in most other markets because some of the comps out there -- it seems like some of the margins are into the 20s on an EBIT base?

I think it depends on the aspect of the service that you are looking at.

If you are talking about things like tower climbing and the work of direct installation, the margins are certainly better than our field services work generally but they are certainly not at that 20% level.

If you look at engineering services, network analysis those kinds of things, they command a very nice premium compared to more run of the mill engineering services.

Any sense of what the split is versus professional services and telecom?

Right now we are probably about 50-50 give or take.

Okay.

Thanks.

Just on the Tier 3 regulations, really nice win rate there, it seems 50% you said.

Can you -- you said 60% or so of what the projects that you think will come to the market have been -- haven't come yet implying that you have won -- or that 40 has.

Can you give us some idea what you have won so far?

Just trying to get a sense of what the scale is and what is still available out there?

Well, these projects, the programs individually run from $50 million to $200 million in terms of capital costs.

So just to use a hypothetical number, let's say that 20 projects have been awarded and we won 12 which is about the right ratio.

They will range in size from 50 million to 200 million maybe in a few cases 300 million so probably you are looking on an average there of let's use an average of 100 million just to keep it simple because that is $1 billion worth of work.

Unfortunately I have no customer who has let me announce that work yet so I am not able to give a lot more detail.

Okay.

That helps.

Thanks a lot, Craig.

Jamie Cook, Credit Suisse.

Good morning to you.

Sorry to belabor on the issues in the quarter but I guess, Craig, one thing -- you talked about the restructuring actions that you are going to take that should yield benefits.

Your backlog has been growing.

As we look to 2015 with the organic growth that you are seeing and the growth for some of the acquisitions plus the restructuring, do we get to a point where you should finally achieve I would hope beyond 15% sort of EPS growth because we continue to push that off every three to six months?

Then my second question is the issues really seem to be that you are having focus internationally whereas historically Jacobs has been more of a North American centric type company.

I mean does it make you think just doing business internationally is just a little more challenging so when we think of Jacobs as being a more sort of de-risking C-company, I mean that we should just expect a little more volatility or more of these hiccups relative to what we have seen with Jacobs over the past 15 years?

Thanks.

Let me answer the second question first.

I really don't think you should expect more volatility.

I think that we are continuing to contract on a basis that is consistent with our principal and that quarter in and quarter out we ought to be pretty predictable as a company.

I will say though as projects that we do get bigger, the chances of having an individual project that's outcome is material does go up.

So it is not a perfectly linear level of volatility going forward.

Does that make sense?

Yes, I guess so.

If you have a bad big project, it doesn't get offset by a whole bunch of other good projects.

Right?

Just usually you don't hear Jacobs having bad projects.

Well and we don't usually have them but I don't want to ignore the possibility that we could have a big job that didn't go well and therefore have an upset and I don't want to have told you that can't happen because it could happen.

But I don't think it is very likely.

I think the volatility that you have seen historically is the volatility that you are likely to see going forward.

Okay.

Okay.

Going back to the earnings growth outlook, like I said earlier, we are not ready yet to give FY15 guidance but I am very optimistic about 2015.

I think we have a real opportunity to do particularly well and obviously in my mind that is not ordinary growth.

So I guess another indirect way of answering your question.

Okay.

We have belabored the point.

Thanks.

I will get back in queue.

Okay.

Andy Wittmann, Robert Baird.

John, I just wanted to clarify in the commentary, you mentioned that SKM related is going to affect the second half yet in the guidance it seems like you are excluding some of a one-time items.

How should we think about that?

I just want to be clear that the SKM negative effects from restructuring whatever else are in fact added back so if that is the case, how does that affect the second half, is it just cash and then we are adding it back on the adjusted EPS level or how should we think about that?

What we are focusing on is the guidance on the second half is that specifically these restructuring charges both related to SKM and other parts of the business are not included in the guidance.

My comment was that SKM is not operating at the level that we thought they would this year that and will -- that probably will -- that has impacted our guidance going forward but that is included in our guidance.

Okay, that makes sense.

The operating side of SKM is included in our guidance at a lower level than what was in the original earlier guidance but the restructuring and integration costs still are outside the guidance that we provided.

Got it.

That is helpful.

Thank you.

Just thoughts on the problem contract.

Was that a contract that you recently acquired yourselves into through either Aker or SKM or one of the more recent large acquisitions or is this something that kind of was part of Jacobs the whole time?

Just out of curiosity.

That is a question I can't answer because it would be to revealing to the customers involved.

Got it.

Okay.

Just to be clear, this wasn't just one or two contracts, it was about a half a dozen contracts that impacted us at various levels.

There were one or two that were more significant than the others but in that charge, there is more than just a couple of contracts.

Got you.

Craig, in the past you have talked about the $1 billion plus large opportunities.

I think, John, in the spring you started talking that there would be --first you said 20-ish and then you said maybe more than 20.

Craig, just update there on large project gestation if you would and the likelihood for you to get your share or more than your share even this fiscal year?

The large contract gestation continues to be a positive.

I looked at a list yesterday in our sales review that must have had 25 projects on it and these were all the sort of big ones and our win ratios continue to be good in that regard.

So I am certainly very positive about where we are.

I don't know that we will win 57% of the big projects.

I think that would be unrealistic for us but I do think our win ratios will be pretty significant and more than adequate to fuel the growth that we are talking about.

Got it.

Maybe one final question here is just on the gross margins, they actually reported pretty well despite some of the other challenges.

Is that mix benefit from SKM or something else?

How do you explain that the gross margins were actually pretty strong?

We do get a mix benefit from SKM.

Their unit margins are higher than industry averages.

Offsetting that, their unit costs are higher than industry averages as well so the opportunity is to keep the margins up and the costs down and I think we will be able to do that.

Okay.

Thank you very much.

Vishal Shah, Deutsche Bank.

Thanks for taking my question.

I just wanted to clarify a comment you made on mining.

You said project activity is starting to improve.

I am curious whether you are seeing that in any particular part of the region and also whether it is any particular commodity type where you are seeing more activity?

Thank you.

Sure.

Regionally it is South America and Asia, not Australia, although there is one fairly big program in Australia I think we are going to see.

And then it is almost all copper.

Do you have any insight as to whether you are starting to see the impact of that in 2014 or is it most likely 2015?

I think the big impact is all 2015 and beyond because there is FEED and study work that will be pretty substantial first.

Were you able to hear that?

Yes, I appreciate that.

Thank you.

Okay.

There was some kind of noise on the line here and I didn't know if you could hear me.

That is great.

Thank you.

Jerry Revich, Goldman Sachs.

Good morning.

This is Matt Rybak on behalf of Jerry.

How are you.

You guys highlighted US infrastructure opportunities as a strong end market for you going forward.

I was just wondering if you could possibly quantify the opportunities you are pursuing over the next 12 months and touch on whether or not you are seeing any award delays ahead of the September highway build deadline?

I probably can't quantify any specific detail.

It is an improving market for three reasons, more activity on project finance, design build, PPPs, better focus on local tax revenues particularly sales tax to support expansions and of course, we do have a highways bill for the moment at least.

So all those things are positives for the market and we are seeing some decent growth.

We are also because of our positioning, I think we are taking a little market share.

So that is a positive for us as well.

So I am optimistic.

I think the Federal gyrations are less and less critical to the infrastructure market because of what the states and more importantly the local communities are doing to deal with their infrastructure issues.

People just get tired of waiting on the Feds for money and so we are seeing a fair amount of activity that is sort of independent of Federal funding and I think that will tend to continue.

The backlog is enormous.

I saw a study from I think it was Mackenzie just the other day and their argument is there is a $57 trillion investments in infrastructure globally that has to be made between now and 2035, I think that was the date.

I mean $57 trillion, that is a really big number.

So I remain very positive about our infrastructure business and I am seeing us start to get a growing share of that market.

When you talk about share gains, is that on any specific type of project or are you aggregating roads and bridges and projects of that nature together?

The places we are probably doing the best in terms of taking share are rail and water and wastewater.

Got it.

And then to switch gears just a little bit, you highlighted on the first call that you were seeing some project delays in the North America refining side and I was just wondering if you could provide us with an update as to how those projects are moving along?

The refining projects continue to progress.

Again, I think it is a little bit of the same outlook we have described across the whole hydrocarbons industry in the US where customers are reluctant to go into execute phase until they are very confident of the outcomes and the competitive situation in terms of what is the availability of supply.

But I think things like Tier 3 gasoline and ISA 84 in the refining business are going to drive people to invest and because that is a calendar-based issue in terms of having to deliver on those investments rather than one that is market-based, I think those projects will move forward fairly briskly but maybe not quite as fast as we would like.

Tier 3 in particular, I think I mentioned this last quarter, a number of our customers have been able to buy their way around the Tier 3 rules in the short term but in the long term, they won't be able to do that and that will push them to make the investment.

Did I answer your question, Matt?

That is perfect.

Thank you very much.

We have reached the end of our Q&A session.

I would like to turn the conference back over to Mr. Craig Martin, President and CEO, for any closing remarks.

I want to thank all of you for taking the time to talk with us.

It has been a tough quarter and a tough first half but I really do believe it is behind us.

I think we are doing the right things to get the business going in a very positive direction.

I think we have a terrific story in terms of backlog growth and our positioning in the marketplace and I think if you stick with us, you will be very, very happy with the outcomes as we go forward.

With that, thank you all.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.