雅各布工程 (J) 2015 Q1 法說會逐字稿

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

(Operator Instructions)

Please note this event is being recorded.

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

Please go ahead.

Thank you very much, Gary, and welcome to Jacob's first-quarter 2015 conference call.

With us today is our EVP and CFO, Kevin Berryman who will present the financial highlights for the quarter, Chairman Noel Watson will present our growth strategy and George Kunberger, our Executive Vice President of Sales and Marketing will provide a business overview and end market outlook.

Noel will wrap up the prepared remarks before we take queues.

As you are aware, we issued the press release last night and it can be found on jacobs.com along with the presentation we plan to review this morning.

As a reminder, statements made in this webcast that are not based on historical fact are forward-looking statements.

Although such statements are based on management's current estimates and expectations, which we believe to be reasonable 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 from what is contained, projected or implied by our forward-looking statements.

For a description of some of the 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 26, 2014.

And in particular, the discussions contained under item 1, business; item 1A, risk factors; item 3, legal proceedings; and item 7, management's discussion and analysis of financial condition and results of operations, as well as the Company's other filings with the Security 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.

The Safe Harbor statement can be found on slide 2 on our webcast presentation.

With that, I now would like to turn the call over for some opening remarks to Kevin Berryman.

Thank you, Michelle and good morning, everyone and welcome to the call this morning.

Before I kind of dive into some of the financial results, I though I would spend just a little bit of time and give you some introductory comments, given that this is my first earnings call with Jacobs.

A couple notes.

Certainly, I'm very excited to be part of the team here at Jacobs, a recognized leading company in the engineering construction space.

A couple of comments as to why I'm here and why I am excited: during discussions on the on boarding process with the Board and the Executive Management Team it was very clear to me that this was a team that was collaborative in nature, that it was a very talented team and that it operated with a very high level of integrity.

So certainly, that was very important to me.

But of course, that's probably not sufficient for someone to come to the Company.

There was a little bit more than that.

It was very clear to me also during those discussions that the team was very interested and keen on driving an even stronger performance agenda going forward and longer term.

I joined this Company because I think I can contribute and help drive the development of that performance agenda, which we all collectively believe is going to add significant shareholder value longer-term.

A couple comments about some of the changes that are going on in the Company: clearly, there's been some management transition, we're in the midst of a CEO transition, we're in the midst of myself coming on board after a very talented man, John Prosser, retiring after decades of service to the Company.

But I thought I'd make some comments as it relates to the Company itself and the talent.

Certainly, I want to communicate to you from my perspective there has been no loss of focus as it relates to what's going on in this Company.

I think some of that is associated with the talent that's in the Company.

Certainly, my initial perspective and ideas about the quality of the team has been, if anything, over, overly confirmed over my first three weeks plus here in the job.

And so the talent of the team is clear and the talent continues to deliver against its execution plan.

Also, some of that is driven by the leadership of Noel Watson.

I've had the pleasure of getting to know Noel over the last few weeks.

It's clear that he has a strong pulse on what's going on in the industry, what's going on with the team and what's going on with our sales initiatives.

And I think that he is providing strong leadership in this period of transition for the Company.

It is clear that this man has much energy, and certainly probably more energy than the collective energy of the Executive Vice Presidents in the Company, so pretty amazing and very much appreciating the opportunity to spend a little bit of time and work with Noel.

What does all of that mean?

What it means is that traction has not been lost in this company.

People are focused and they are executing and I'm feeling very good about where we are in this particular point in time.

So let me turn to slide 4, and in honor of Mr. John Prosser I will use his same slides in terms of the discussion of financial results.

In short I would say the Company delivered a very solid quarter.

Earnings per share were at $0.77, up 8.5% versus year ago.

I would characterize the quarter as relatively straightforward in that there was no real drivers pluses or minus within the context of that but there were actually some incremental cost headwinds that we realized and we're able to overcome during the quarter.

Certainly, some of that was associated with foreign exchange with the strengthening of the dollar over the quarter that had a slight headwind relative to our earnings per share performance.

And with the executive transition cost, there were some incremental costs.

So, if you take those costs together it's probably $0.03.

So our $0.77 reported would've been, given what we knew three months ago, probably would've been closer to $0.80.

Regardless of whether it's $0.77 or $0.80, I would say it's very much in line with the expectations that we had set for ourselves at the beginning of the quarter.

So, all in all a very solid quarter.

Cash flow remains strong in the quarter.

Our net debt figure of $80 million remained near year end levels and that is driven by the fact that we had $670 million in cash, which largely offset the outstanding debt by the end of the quarter.

I think our strong ending cash position really is a tribute and an indication of the evidence of the strength of the cash flow dynamics of the Company because this ending debt position was delivered, even as our share buyback program ramped up in its level of activity over Q1.

During the quarter, we brought back 2.5 million shares at a total value of about $113.7 million.

Program to date, we have utilized nearly 40% of the $500 million authorization and have spent about $192 million.

As it relates to what we're doing now, as it relates to our share buyback, you can assume that we are being more aggressive as we speak with our share buyback program, given the level of Jacobs' share price that we see today.

Relative to backlog, backlog rose to a record $19.1 billion, nearly up 6% from a year ago period.

And also up from the $18.4 billion last quarter.

I think this is a rather impressive indication of the opportunity for Jacobs, certainly when noting headwinds and certain of our end markets.

It is a testament to the diversity of our Company and the ability for it to have and the ability to grow even when market conditions are challenging.

In fact, the backlog growth was in spite of several cancellations that we saw over the quarter, some of which were not inconsequential.

Our sales strength then was able to overcome these cancellations, resulting in a very strong book-to-bill for the quarter of over 1.2 and a book-to-bill of 1.8 for the trailing 12 months.

Before I turn to my comments on outlook, perhaps we turn to slide 5 and talk a little bit about the backlog.

Certainly, through the details on the slide you can see the increase in the backlog was driven by the professional services area, which bodes well for potential future work for the Company.

Specifically, professional services backlog grew $900 million in the quarter or nearly 7.5% from the year ago figure.

Finally, some thoughts on our outlook, clearly, there are some headwinds that we are facing in certain parts of our business.

We all are hearing about oil and commodity prices.

There's no new news here and consequently, those are real and those will create some challenges for our Company as we work through some of the challenges that our customers face in those respective end markets.

That, combined with some FX pressure that we would expect to see over the balance of the year, assuming that the dollar remains strong and at its current levels or maybe even stronger, and the combination of these two things, results in us being more cautious in our outlook for the year.

We believe it is prudent to suggest therefore, that our outlook is more aligned with the lower half of our previous stated guidance last quarter.

However and nonetheless, diversity remains the strength of this Company.

It translates into the robust record backlog that I have previously talked to.

Our cautious outlook is therefore, more short-term in nature.

With two, two impacted probably more than the second half of the year as we work through realignment of our resources from weaker to stronger end market opportunities.

At the same time, it will be important for us to continue to be diligent and disciplined in the management of our fixed cost structure.

We need to do this always.

It's a hallmark of Jacobs and it's important that we do that to ensure that we have the right cost structure to be able to operate successfully in any end market environment.

Before turning over the floor to Noel, a few other quick comments.

I certainly am looking forward to meeting all of you, our analysts and our shareholders, in the near future as I continue to finalize my on boarding process.

A lot has been going on.

No, we haven't had a chance to speak yet but I look forward to more intimate discussions going forward.

And finally, before turning to Noel, a quick thank you to John Prosser who has been gracious in his support of me during my transition process.

I have been able to benefit from his sage council and it certainly is going to make my job going forward much easier.

So John, thank you for that.

Noel, over to you.

Okay.

Thanks, Kevin.

Why don't we go to slide 6. We're going to talk about the relationship-based business model but we'll do that when we get to 7. Kevin talked to some degree about the market diversity, and most of you know I've been around a long time, and it was many decades ago we decided in the last real bad downturn in the 80s, that it was important to be in more in single market.

So over the decades we have leveraged our diversity both in a wide variety of end markets, that George will talk about, and we've also have a geographic spread that really crosses the globe.

And so, those two things, we're very thankful for today because we do have headwinds in a couple of markets.

When I signed on for the job I didn't dream I was going to have $45 oil and $2.50 copper, but we do.

So it is a fact of life and we have to deal with it, but many of our markets are very strong right now and George will talk about that.

The cash position is good, and by the way, in a market like this it's a good opportunity to drive down costs and we're going to have to do that.

Now when we get done with that we'll move to slide number 7, our relationship-based business model.

This slide has been around about as long as I have and it hasn't changed.

It all starts with our relationship model, our drive to service a smaller group of clients, service them well, know their businesses well or as better than they do and do outstanding performance for them.

And when we get that superior performance, it comes with understanding them better than almost anybody else will, we get a continuity of business that is staggering.

And the trusted bills, the repurchase loyalty at bills, the lower cost of G&A sales that go with it, is a huge strength for our Company.

So even though Craig has moved on into retirement, nothing is going to change with the model.

So we're putting a lot of effort into steady earnings growth and recapturing the 15% that we talk about over the decades.

And with that, I'm going to let George talk a few minutes about market diversity, which is slide 8.

A few minutes, okay.

Well good morning, everyone.

It's George Kunberger.

I've met some of you and I'm delighted to be making my debut here today with my friend Mr. Watson and Kevin.

Let's start with slide number 8, which is our diversity slide representation.

You've seen this many times before.

It's obviously a slide that doesn't change a lot quarter to quarter because it's based on a 12-month trailing backlog.

So the map just doesn't allow.

However, I do want to point out a couple of things.

The diversification that it shows on the process side, the number there is about 46%, and for those of you who keep track of these kinds of things that number was about 48% last quarter on a slightly smaller revenue stream.

On the public sector side that number has increased from about 35% to 37%.

That's indicative of a couple of different things.

One, is a strengthening of public sector market, as Kevin talked about, and a little bit of the headwind impact that we have on the process side.

But it's more a factor of the fact that as we've evolved over 12 months has now represent the full 12 months of SKM being in the backlog, and so just the math drives the public institutional side up a little bit.

It doesn't necessarily represent the geographic diversification the Company has, but as you're well aware, we have this diversification of markets spread out across a wide geographical diversification.

So, it brings an added value and power to our ability to get after these markets.

I would say, just because I want to use this line, I've always looked at this picture as a bit of a rose.

And it can be plain rose but I would say that looking at it through the lens of $45 an hour oil it looks pretty darn nice to me right now.

Let's move on to slide 9 and lets talk about these various market sectors.

I like to start with the public and institutional.

As you know, we've started showing the backlog within these major market areas down the lower right-hand column.

As you can see, clearly the backlog in this particular area grew nicely over this last quarter.

That's actually at a rate of about 16% on an annualized basis.

I would say this market, I would characterize all of this as being good to strong.

Both really, on a geographical basis.

And I would anticipate, looking at our prospect list, that this kind of growth will continue on a relatively strong basis throughout the rest of the year for sure.

Going to the individual areas a little bit.

I like to characterize it like this.

All of these areas on this chart, on this page that we have right here, the markets are good to strong in various ways.

Just to give you some examples, if we look at the defense spending, defense spending has started to stabilize in the US and is ramping up in the UK and in Australia.

There are some very big programs associated with redeployment of bases in Asia Pacific, which as you well know, we're very well positioned both from a relationship perspective, a capability perspective and a geographical perspective to go after them, for sure.

If you look at the nuclear cleanup space, that's a growing marketplace both in the US and UK and we have a strong resume in both areas.

And as a marketplace that as you've seen some of our press releases in recent quarters on Sellifield as an example, we have an opportunity to continue to take advantage of that.

The transportation utility infrastructure market is good pretty much around the world.

There's been a lot of pent up capacity, as you all know, not only in the US but in the UK, in the Middle East, Australia, Southeast Asia, really pretty much all around the world.

And so while I wouldn't say this is buoyant off the pace kind of growth, it is strong study growth for sure.

Jacobs is well positioned geographically in all of those areas to get after that marketplace.

And because of our, I would say, our unique and wonderful business model, as I like to characterize it, we are able to get after that project and move our resources around the world to bring our best resources to bear to capture and bring those capture those marketplaces.

In the healthcare and education, a growth strength again, not only the US, but everywhere around the world.

And then in the area of, even like social development, there's a double-sided sword to what's happening in the oil business.

I won't get into the geopolitics of all that, I'm sure you're well aware of them.

But you look at the spending that's going on in the Middle East as they try to grow that part of the world on behalf of the citizens of those countries.

Tremendous amounts, in the order of $800 billion to $900 billion worth of expenditures planned over the next five to six years.

And again, for the reasons I just articulated, our relationship in that part of the world along with our capabilities, along with our ability to deliver those resources, really makes it a strong market place for us.

So overall, I have to say that I'm extremely optimistic about this marketplace.

I know it's strong.

It's not going to light the world on fire but it is going to be strong steady growth as we go through the rest of the year and I think into the following year, as well.

So let's go to the next slide which is what we call our industrial sector or market area, which of course has a lot of different factors to it.

I'll start with my old favorite PharmaBio.

I think as you probably know there's some exciting thing's going on in the pharmaceutical world today.

New discoveries in the areas of immunoncology which frankly, are going to make all of us in this room and on this phone call healthy and live longer.

There's tremendous discoveries being made there and of course, that results in real significant capital spending going on primarily in the Western world.

So, in the US, Ireland, mainland Europe, and of course, as you well know, Jacobs is a very strong contender in the biological marketplace and so we're well positioned from a skill set in that perspective.

As big pharma companies continue to divest and their distribution of their stable products in developing parts of the world and as we've discussed many times, we're well positioned to do that.

I would say that unlike in the past, the competition is starting to return to this space, to be fair.

I guess that they're coming back away from some of the other marketplaces they've been focusing on for a while.

So, we are seeing increased competition, which we haven't for a while.

But we are capturing more than our fair share of this market space.

So that's good.

Mining and metals, as Noel articulated, we are in a depressed commodity situation and I don't see that necessarily changing for a long time.

This marketplace will not be a marketplace that we see much significant growth in over the next couple of years, but that doesn't mean it's not good marketplace for us.

As you well know, you know we've positioned ourselves to start taking advantage of the sustaining capital in this market space around the world and we're having good success with all the majors in that area.

Both whether it's South America and Australia, specifically.

Some of the majors who are, frankly still making money even in this depressed commodity marketplace.

They're not making the money they want to make but they're still making money.

They are starting to at least study potential future expansion projects.

It will obviously, since their just in the study phase, it'll be a few years before we really see that translate into major capital expenditures.

I mean, overall, the capital expenditure rate in this marketplace is still going down but it will eventually turn around in a few years out as a result of some of these studies and as the overall global economy changes.

So that's good.

And then, because they're trying to get after better utilization of their spaces, there are a number of plum projects around the world that are in the brown field space that are really directed towards improving the utilization of existing assets.

And there are a number of those around that we're well positioned to capture and we're going after those.

Pulp and paper and high tech and consumer products, the new build and products in the UK, continue to be there for us and we're after those.

In the area of consumer products, as you well know, those lend themselves to alliance types of relationships and we are very good at alliances and those opportunities continue to be available to us around the world.

And in the high tech space there are a number of key clients.

You could just look at who's making money today it who's not and understand that that's an opportunity for companies like Jacobs to get after it and we are, for sure.

So let's move on to the process world.

So obviously, the process world is uncertain, for sure.

But uncertain does not make it back, necessarily.

You really do need to look at the various individual elements of this marketplace to look at.

Let's just start with the upstream, probably the most impact at globally for sure and more importantly look at its impact on Jacobs.

Obviously, Canada and the oil sands work is going to be challenged but because of the price of oil and the price of getting oil our of oil sands out of the ground up there.

But that does not mean that the market is completely disappeared and that good projects are not going forward.

And they are.

It's certainly going to be not as strong as it's been for quite some time.

In the US share oil business, as you all know, the companies are pulling in their horns and moving their resources to where there's more ROI types of basins, Permian Basin as an example and the Bakken.

But that overall business is shrinking a little bit.

But in the Midstream, Middle East and other places in the world, there is still spending going on.

Certainly not robust, but not a zero by any stretch of the imagination.

In the refining marketplace, you know that's even a little bit more mixed.

There definitely continues to be projects that are focused on improving the overall effectiveness and productivity of individual refineries around the world for some of our major clients.

Those projects, some have been delayed and some have not been delayed.

Obviously, each one of our clients are going through a lot of examinations of their capital expenditures pretty much as we sit here today.

But there is still a lot a very good ROI projects in the system associated with refining that are out there and we're involved in them and we certainly expect them to continue.

Then you look at areas like ISA 84, which is the process instrumentation driven safety upgrade.

A large amount of money needs to be spent, in the billions of dollars over the next few years.

We build a strategy and advance to get after this marketplace and that strategy has translated into some very nice wins already in this quarter.

So, a very good marketplace for us.

And of course, our old sustaining capitalization strategy is always there in these refineries although we'll pull back some.

We'll need to continue to spend money in the sustaining capital and we'll be well positioned around the world to get after that.

The chemical marketplace, certainly in our view, remains overall very strong.

The impact of the oil prices, the compression of the NAFTA price through gas, through natural gas will certainly have some impact on the, potential impact on the ethane jobs and potential spinoff projects like methanol, et cetera.

But overall, the generic chemical marketplace is remains very strong in all the areas where Jacobs plays.

This has been a market that we have won a number of major projects.

Some of which we've released, some of which we're not quite free to talk about.

In this first quarter, it's been a big part of the overall sales success that we've had.

So I don't see that necessarily changing.

There'll be some ups and downs and some starts and stops and projects get re-examined.

But over all, that marketplace will be strong for the rest of this year and into the next year.

So overall, I'd have to say I'm pretty darn bullish, and I just want to point out one other thing.

This growth that we've had over this year -- over this quarter has been completely organic in nature, and not impacted by any acquisitions at all.

And so, which makes me even more bullish about where were going.

Thanks, George.

Go to slide 12.

I keep forgetting to turn the mic on.

I apologize.

Slide 12 and acquisitions: we have a history of getting about a third of our growth out of acquisitions and long term we'll continue to do that.

At this point in time we're slow going acquisitions.

We're digesting what we have.

We're focusing on organic growth and we're going to be harboring our cash for the next big deal.

But right now, the acquisitions are basically on hold.

But long-term, we do need to make acquisitions to get to double-digit growth.

Go to slide 13 and I'll give you the sales pitch.

Our model works, it's good, we will continue with it on my watch.

All you have to do is see the kind of relationships we've got with many big clients, the successes we've had in far away places like Saudi Arabia, where we have an extremely strong relationship with Aramco.

And you can see the model works and we're not deviating.

Our diversification is a godsend right now.

Let's not kid ourselves.

If we were 100% in oil and gas, we'd be dead.

But we're not.

And so, with the success we've had in some of the businesses, particularly the chemical George talked about, and then all the public and infrastructure businesses, we don't need to have all eight cylinders working.

If we get five or six out of eight working we do just fine.

And we have that working today.

The balance sheet is good, we will use the current crises going on with some of our clients to focus on cost advantage.

We will be cutting costs.

We're not going to do anything draconian, but we are focusing on getting the cost out of the system to make us more competitive, particularly in the heavy process business where that's going to be a necessity.

And with that given, I think we're going to open it up for questions.

(Operator Instructions)

Jamie Cook, Credit Suisse.

I guess a couple questions.

One, Kevin, you talked about I think the second quarter being weaker because you're realigning some resources, et cetera, relative to the second half.

So can you talk generally what the cost impact or give more color on how we think about the second quarter versus the first and what your assumptions are for growth in the back half of the year?

For the acceleration in EPS in the back half of the year.

And then, I guess my second question is, sort of twofold, you guys went through a pretty dramatic restructuring last year.

Given the current environment, should we expect something more significant?

Can you talk about where you'd be cutting costs?

And then, I don't know if you can also talk just given the decline in crude prices when you looked at -- when you look at your addressable prospect list, how much of that do you think goes away?

Thanks.

Hi, Jamie.

Nice to hear from you.

Just a couple follow-up comments on your question.

As it relates to the Q2 versus the balance of the year, I think it really translates into the fact that with the cancellations we have to realign our resources.

And so, there is short-term pressures until which time all of that is in place.

The restructuring that was done last year, we've been able to deliver against that and we have embedded into the results the expectations that we originally had in terms of that.

So, we're not talking about another substantive restructuring but we are talking very disciplined, very focused, very targeted opportunities to make sure that we reduce our costs in order for us to be successful in any market environment.

And certainly Noel emphasized that as well.

So, I think the commentary is more about Q2 which probably indicates that seeing EPS growth versus -- in Q2 versus the balance of the year is more difficult, but we won't give necessarily any guidance specifically by quarter but give you a perspective that year-over-year growth in EPS is more challenging in Q2 versus the balance of the year.

And I'm sorry just because you brought it up and then I guess Noel will answer my second question.

How big were the cancellations in the quarter and then where were they?

I'm assuming it's across oil and gas, but if you could just --?

Yes.

They were basically in the broad gage process industry and they're about $400 million out of the revenue screen.

Okay.

I'm sorry, Noel, just sort of given -- sorry, my second question which I know you know.

Just how much of the prospect list that was out there, how much do you think goes away?

Is it 40% gone, 30%?

If you can just give us a feel?

I'm going to let George answer that one.

He's got better detail than I do.

Jamie, are you talking about specific to the prospect list in the process world?

Is that the nature of your question?

Exactly.

Certainly, the prospect list for the second quarter and third-quarter out, which is about as far as we can legitimately see as well, is very robust.

As robust as it's ever been, I would characterize it that way.

That being said, certainly even in the last couple of weeks, we've seen a couple of prospects that we had out there that have been postponed for a long time.

Those have been in the areas where I was talking about, where you just say like methanol or some of the projects that could get postponed as a result of the compression of NAFTA prices and natural gas prices.

But on the other hand, the secondary chemical marketplace around the world is very strong.

And continues new prospects, new opportunities continue to come onto that list.

So yes, certainly in the upstream, a little bit in the midstream and in the refining area, a little bit of pullback, but in the chemical it's more than offsetting it.

At least right now.

And we'll see what happens after all these companies announce earnings to decide where they're going to go after that.

But that's certainly where we see it right now.

And I think the other thing, Jamie.

In that area the same resources do a lot of this work.

Whether it's refining heavy process, those types of things.

And so they are very -- it's very transferable knowledge.

Okay.

All right.

I appreciate the color.

I'll let someone else ask a question.

Thank you.

Andrew Kaplowitz, Barclays.

Good morning, guys.

Maybe I can follow up on Jamie's question in the sense that as we move forward here, is it right to assume that in the current environment it would the more difficult to grow backlog for the Company even if your non-process businesses are doing pretty well?

Just wondering what you think this year?

I know you have a lot of prospects and stuff but as we're sitting here trying to figure out how to model this company, it seems like it'll be more challenging to grow backlog as a company unless you tell us that the non-process stuff can more than offset the process.

Well, what we'd say, Andrew, is this, right now, as George said, the prospect list is really good.

And so, sitting at this point we expect the backlog to grow.

I know with all the headwind things can change but as we look out over the next three quarters, we frankly, expect the backlog to grow, not shrink.

Okay, that's helpful.

And then, maybe if I could shift gears and ask you guys about margin?

How do we think about Jacobs' margins going forward?

Again, it's hard because we're trying to figure out whether this is your, a real downturn or nod in your process businesses.

And if you look at 2008 to 2010, Jacobs' margins dropped about 80 bps during that time.

How do you guys compare the current uncertainly today versus what we saw then?

And I know you talked about taking cost out, you've done restructuring.

So, how do we look at margin trajectory this year or next year?

Whatever you guys can give us.

Well, you know we can't give you a lot, Andrew.

Some of the markets that we're in, the oil and gas markets, certainly, the Canadian market and some of those, the customers are going to be relentless in driving our costs down and their costs down.

But if I look at it on balance, I frankly, personally, don't expect to see much of a significant margin reduction this year.

That's the way we've kind of looked at the data because while George talks about the process business, the margins may come down in refining and oil and gas but they'll come down some.

But the margins in the chemical business should stay strong.

And the margins in the public sector business are going to be good.

So, I am not looking at a drop in the margins on average.

Okay, that's great.

And then just a follow-up question for Kevin.

Kevin, you mentioned the $0.03 impact on the quarter for FX and then some management transition costs.

How do we look at the rest of the year for FX?

What kind of impact is embedded in the new guide of toward the lower end of your previous range?

Well, if I knew what FX rates were going to be, I probably wouldn't be working here.

I'd be on a beach somewhere with an umbrella in my drink.

But, notwithstanding that, look, the dynamic and the strength of the dollar certainly is having some implications for us in terms of what our reported earnings are going to be.

We had some of that already embedded and expected in the outlook that we have provided.

But certainly, the dollar has strengthened significantly over the course of the first quarter.

So I think what we're talking about is in the neighborhood of $0.05, $0.06, maybe $0.07, $0.08 for the full year.

So, it's not a huge number but it is a number that we're going to have to pay attention to and make sure that we drive our operating agenda to ensure that, that effect is minimized.

Okay.

Thanks, guys.

Steven Fisher, UBS.

Kevin, can you just help us reconcile the backlog growth in the quarter with the reduction in guidance?

I know you've got some FX.

I was thinking it was maybe margins but I know Noel just said margins are going to be flat.

So, is it timing of the expected burn?

Is there some other charges in there?

Can you just help us reconcile that?

It's pretty simple, Steve, and nice to meet you over the phone.

It is really about the burn rate in terms of our ability in the new business that has been booked and how our ability to burn it and when that starts.

And how, ultimately, some of the cancellations impact us in the short term.

So clearly, if this is something that Jacobs is used to and managing, but ultimately, it's really not about anything other than how the burn is going to flow through the year.

Was it the very long-term projects that have a long burn?

Or, is it that you put some projects into backlog that may not get started right away?

Let me say, I don't think we've got anything in backlog that didn't get started that I know of.

Am I right, George?

That's correct.

If they're not starting we're very careful about not putting them there, Steve.

But some of these will be 36 month jobs.

So, the burn rate will start in preliminary engineering, engineering and then into the field and some of these backlog editions aren't going to see the field until what, the middle of 2016?

That's correct.

And also, in the public space, well not all of it.

Some of the public spaces are long-term five-year contracts especially with the federal government.

So they have a long burn rate on them.

That's more true in the federal space than it is in true in the state and local space.

But those have a tendency to be more book and burn so it's a little bit of a balance.

But there's some of that long term stuff in there.

And Steve, the other point to emphasize is that some of the short term is really oriented around some of the cancellations.

Not necessarily the burn going forward.

So, you know, you get $400 million of cancellations, you've got the project teams in place and when those cancellations come through you have to be proactive in making sure your costs get realigned.

Great, that's helpful.

And then, you guys have always highlighted in your slides the cost savings that you deliver for customers.

I guess I'm wondering at this point, what are customers asking you for at the moment?

I mean are they asking you to find step function increases in cost savings?

And how hard is it to find those savings at the moment to kind of bring costs in line with a much lower oil outlook?

Yes, Steve, this is George.

Well, so what they say is they want institutional changes that help them improve their overall capital efficiencies.

But what they ask for is lower pricing.

So, a little bit of both.

The lower pricing is easier, well not easier to respond to, it's easier for them to ask for.

The institutional changes on how they execute their work and their capital efficiency is really where the answer is.

And so they really are, in fairness, looking at both of those things to be honest with you.

The short-term impact of course is putting pressure on us to lower our prices, but they're also trying to figure how to be way more efficient in their overall capital utilization, for sure.

A little bit of both.

Okay, thank you.

Michael Dudas, Sterne, Agee.

Good morning, gentlemen.

First question for you, Kevin, you talk about meat for the net for the rest of FY15, cash flow expectations, are there any big working capital dreams or additions that you may see?

And should we continue to see continued strong cash performance net of course of not anticipating any share repurchases but prior to those types of spending?

Sure.

A couple of comments.

First, the operating cash flow characteristics of the Company remain strong.

And, I think, that one of the areas that we are, will be and have been focusing on is on the accounts receivable side.

Are you'll get the queue I think over the course of the next few days, but you'll see in there that our accounts receivable were basically in line with previous levels.

And it's certainly an area that is a big investment in our company and we need to make sure we continue to be diligent and drive that number down.

That's a focus in the Company.

So hopefully, we'll be able to see some improvements from that perspective over the course of the year.

As it relates to other uses of cash.

Really, CapEx is not a big number for the Company.

Acquisitions, we're going to be, I would say, thoughtful in that process as Noel suggested.

But we still have the flexibility to execute against that.

And the balance of the operations are well in hand.

We expect to see good cash flow, and of course, we will be at current share price levels more aggressive on the share buyback.

Thoughtful is a very good word I think.

He said it better than I did.

You've taught him well in three weeks, Noel.

For Noel or George.

Looking at the Company going into the last peak of 2007, 2008, you had Motiva, you had some big projects there.

You, in your recent trip to New York and Boston, you talked about how you focus on the small cap projects.

You know, going where people aren't.

Is that going to be beneficial as you ride through this cycle that we're seeing in energy?

Not just in your energy work but overall that'll allow you to generate the better performance maybe in this cycle than you did in the last cycle?

Well, as you know Mike, and you've known us well over the years, we're going to continue to focus on mid-cap sustaining work.

Those types of things.

And we got the system working really hard at that.

And there's going to be a lot more of that work around then there is the elephants.

I think we know that.

There's going to be some elephants offshore but there aren't going to be many onshore.

And so, that kind of plays to our strength.

But it's going to be a dog fight because competitors are going to come down and want our piece of the pie.

So they're going to come after us like gangbusters.

But we are well positioned.

And so I would say, that right now, I think you used the word downturn, we're not classifying this is as a downturn.

We've got headwinds.

But we've got some markets that are really strong, Mike.

And we think they're going to carry us through quite nicely.

I guess that would be one differentiating from where you're in 2015 versus exiting 2008 or 2009 given the acquisitions you've made and your geographic positioning, correct?

Yes.

Terrific.

Thanks, gentlemen.

Good luck.

Jerry Revich, Goldman Sachs.

Hello, good morning.

Revenue burn really accelerated in national programs in the quarter.

I'm wondering if you could just talk about the major programs that drove the year-over-year pickup and what the cadence for revenue burn looks like from here?

National?

Or were you talking up public and institutional in general?

So national, specifically.

National government.

Well, I'm having a hard time understanding where you get that data, exactly.

I mean the national government business for us has been stable that's for darn sure.

And our building sector which ties into the national buildings business has definitely been up ticking.

And I'm getting help here from Andrew Kremer who's been responsible for all this.

Andy, why don't you just go ahead and answer it.

Part of what we're seeing is reflected in the FNS acquisition, George, which has had a significant contribution this quarter.

Thanks, Andy.

Did you understand Andy's answer about FNS?

So the year-over-year growth in national government program revenue was driven by acquisitions?

Go ahead, Andy.

We had FNS was a significant contributor.

That was a fair-sized acquisition and it caught into afterburners this quarter.

It's been a terrific result for us.

Okay, thank you.

And then for downstream, given I guess the change in cadence due to cancellations, can you just talk about how you expect the revenue burn to shape up over the course of the year?

Based on the prior comments it sounds like second quarter looks like the first quarter.

But maybe you could provide some more color and then talk about, is there a visibility on a pickup in the back half?

In downstream revenue burn specifically.

Gary, you want to talk about it?

As we announced a major award and the downstream site.

As Noel said, we will go from early engineering and it will be towards the middle of next year before we start going to the field and doing a lot of procurement.

But you know when we see these cycles like this, and you see our clients starting to cut some jobs and reduce costs, historically, that's been favorable for us.

We pick up market share with this brownfield work and this sustaining capital.

And we've been seeing that.

We've been really focusing on that and so you should see a steady book and burn with the exception of some of those major projects that are 3 -- 3.5 years long.

Okay, thank you.

And then maybe lastly on chemicals, maybe you could just touch on the cadence of that?

It sounds like you have visibility on revenue burn accelerating over the course of the year.

But maybe, Gary, you might be willing to flesh that out for us a bit more?

Well, again, we're in the sustaining capital in brownfield, both on refining and chemicals.

A large part of our business, the small cap projects, it's our sweet spot.

And so, with the exception of the big cape ex projects, it's pretty consistent as well.

Okay.

Thank you.

Robert Connors, Stifel.

I just wanted to get a sense of when we'd start to see the benefits of the cost reductions take hold and whether you expect that to pass to the bottom line or will most of it be passed on at lower prices on projects?

Well, we like to say it's all going to go to the bottom line.

But that's probably not right.

I think what we're going to see is a combination.

Certainly, in some of the areas and particularly, the big oil guys are going to press us for price reductions and we may have to give a little bit.

But we do believe that some of these cost reductions will go right to the bottom line.

Now, if it's 50/50 or 70/30, I'm just not that smart.

Okay.

Then, it's not only commodities falling but I suspect a lot of craft labor rates will also come down quite a bit too here in North America.

And this is positive in the long run for future downstream projects.

But are you being asked right now to redo any of your downstream feed work to account for what is going to be some coming slack in the oil patch?

Gary, I'm going to give that one back to you.

As Noel mentioned earlier, some of our skill sets are transferable and so we are starting to shift some of those resources from the oil patch to our sustaining capital business and downstream.

The projects that are underway in the field, they're not canceling those.

They may slow down the rate of spend with those construction resources, but they're not getting canceled as much as the projects that are in the study phase or the feed phase.

But long term, it should create some lower pricing but it's still a tight marketplace.

There's a lot of craft shortages out there and it is escalating.

So, it's going to be tight for a while.

So it'd be your position, Gary, that the craft labor rates are not going down?

They're not going down in the short term.

Tahira Afzal, KeyBanc.

First of all, congratulations.

Good quarter given the circumstances.

Thank you.

So, I guess, the first question I had was when you looked at revising and putting out a cautious outlook, from my experience, clearly you've seen some cancellations.

But in essence, even if you are more on the front-end side tend to be a little later cycle.

So how did you go about the process based on the feedback you started getting from some of your customers, and you've sort of extrapolated on that?

Or have you actually tried to go through all your prospects and really see what is likely to get pushed out against those?

Well, I have to be really honest with you, Tahira.

I'd say we did a lot of detailed work and then we threw a dart.

To be very honest with you.

It's that kind of time.

We tried to nail down the forecast and figure -- and you know we finally decided we can't.

Because there's too many moving pieces right now.

And remember, we're only a couple months into this decline.

And so, where it's going to land, where it's going to stop, how long it's going to be, I got the Vice Chairman of Chevron sitting here with me and he kept telling me at dinner last night the real question is how long.

And by the way he's not smart enough to answer that so I'm certainly not.

So I think that's how we got added.

This was not a precise exercise.

We tried to make it and we couldn't do it.

Got it.

I would augment that to basically the collective wisdom of the team.

We've had a lot of discussions over the last three weeks and I think Noel is entirely accurate in his representation of there's been a lot of key variables that we need to keep track of as it relates to what the momentum is in our business in certain end markets.

And look, we feel comfortable with what we're telling you.

Certainly, could it vary from what we're talking about given the dynamics in some of the end markets?

Of course.

But we're going to be diligent most importantly in terms of our management of our fixed-cost structure which will allow us to be successful in any of the environments going forward.

Got it.

Okay.

And so, Kevin, the second question is for you.

Number one in regards to that.

Is the low-end of the guidance then what you think is, does that incorporate the worst-case scenario on the macro side that you came up with?

And then, number two, you're clearly coming from an industry, different industry with hopefully some new insights as well you can bring on the cost-cutting side.

So would love to get some sense of what you think could be brought in that's kind of new on the cost side as well.

Thanks for the question.

Three weeks in, I will tell you that it has been very exciting to jump in with both arms and legs to learn the business and I certainly feel as if I'm getting a good grasp of some of the core tenets of the business and some of the challenges and some of the opportunities.

I do believe that collectively the team is having a good pulse on what's happening in the market and things that we might want to be considering in terms of driving improved levels of performance.

I would tell you it's too early for me to give you any serious and discrete things that we will be talking about in the future but I do believe there are opportunities.

And it's certainly why I came in my opening comments and I think the team believes the same.

As it relates to the guidance, look it is what it is, we are comfortable with that at this particular point in time, and we will update it as we get more information over the course of the balance of the year.

Thank you, Kevin.

Thank you, Noel.

Tahira, that's John's way of saying we're not going to give guidance within guidance.

John, I'm trying to keep from saying it.

But John would tell you I would always persist in asking.

We do know that by the way.

Even I know that.

Vishal Shah, Deutsche Bank.

Hello, this is Chad Dillard on for Vishal.

Could you speak up a little bit?

We're having a hard time.

How much revenue in 2015 has already been booked into your backlog?

And then also, could you give us a color on your mix between service or maintenance projects versus book-and-burn projects?

So just a quick comment.

I would say roughly the number is 65%-ish, and so we feel pretty good about the momentum behind some of the backlog that has been communicated in some of my comments and George's as well.

And then can you give color on the breakdown of your prospect list between process and non-process opportunities?

George, take that.

Will you?

Absolutely.

So in the process world and that's been in process than say public and institutional.

It's I'd say slightly favored but only slightly favored in the public sector.

And then when you would lump in the with the process world the other sort of related process industries like Pharma et cetera, it's probably a 50/50 balance right now.

Okay.

Thank you.

Anna Kaminskaya, Bank of America Merrill Lynch.

Good morning, guys.

My first question was just around your cash balance.

How much is it in the US and how much is internationally?

Just thinking about how much cash capacity you have to for buyback in the second quarter.

Would you want to finance it with a free cash flow or maybe add a little bit of debt on your balance sheet?

And how much would you be comfortable in carrying in terms of leverage?

Much of our cash is outside of the US.

But we ultimately have the ability to bring cash in to certainly fund what we expect to be doing as it relates to our share buyback.

So we're not stealing incremental pressure as it relates to that.

In terms of the leverage factor going forward and where are we comfortable.

Certainly right now at a net debt level that's approaching zero, we're certainly not over levered by any stretch of the imagination and we're comfortable that we have the firepower to execute against any acquisitions that may occur, even though we will be thoughtful relative to that, and any share buyback work that we're executing against.

Great.

And then if I think about the mix impact on your margins maybe longer term.

Let's say public outgrowth process, would that be margin dilutive?

I know you probably don't disclose margins by segment, but how should I be thinking about the mix impact on your margins longer term?

Well, we're not smart enough, this is Noel, again.

We're not smart enough to do the difference.

We don't think the mix impact is going to be measurable.

So you think your margins are somewhat comparable between process and public?

When the mix comes down and it's all over the world, yes.

Okay.

Thank you very much

Andy Wittmann, Robert W Baird.

Hello, guys.

Thanks for taking my questions.

Just looking at the trajectory of field services revenue over the last few years, we saw it starting it starting to ramp up, and in this quarter it's down, it looks like it's down organically year-over-year.

I guess just from the cycle point of view, you guys made it clear that you don't think the cycle is over, but where are we in the cycle?

Are we reentering it a period where we're going to stay in long periods of feed and not make investment decisions that can lead to field services construction work?

Some of your thoughts around that I think would be appreciated.

Gary, you want to try that?

I think probably one of the biggest reasons for the decline year on year is we had a very large field service presence and business in the oil sands that's been reduced somewhat with the CapEx reduction.

It's somewhat offset with our growing focus of maintenance services.

Both targeted at turnarounds and brownfield work.

But in terms of taking it from feed to construction, it's pretty much the same ratio we've been experiencing for the last year or year and a half.

It's just these are large projects and they take a while to get through the engineering phase and the procurement phase to mobilize the construction.

It's probably going to be the same.

Although you'll see incremental growth in our maintenance business.

We are taking market share.

We've announced some and there's others that we can't announce, but we are growing the number of sites that we're providing maintenance on.

But it sounds like if oil and gas are upstream and the sands is in the area that was a big contributor is falling off, does that mean that the overall shift between field service and TPS now then favors TPS?

And then, does that have a positive implication on the margins do you think going forward?

I would say that while the oil sands span the CapEx is down there's still a lot of sustaining capital work there.

So, we have a significant presence plus our focus is to taking more and more sites within the chemicals and refining is happening.

So it'll be the same more or less mix that we've had.

It's not going to be a huge shift.

We're redeploying those resources.

Got you.

One of the questions that was touched upon earlier was some of the federal contracts being longer in duration.

I think a few quarters ago the Sellafield one was one of the more notable contracts you guys have booked.

At the time I think the funding level of that contract was not fully funded or it was substantially unfunded.

Has the funding for that work been coming through and are you doing work on that one today?

I'm curious on your thoughts on that one.

This is Phil Stassi.

The funding for that project is here and there are some additional ones.

Sellafield is very active.

Those projects are not only planned but most of them are funded.

And, as you probably know, we've invested pretty heavily in Sellafield.

Opened a new office and did an acquisition of a maintenance and construction contract there.

So, we're getting ready for the load there and the work is funded for the most part and is lining up.

Got you.

And the second-quarter comments to the year-over-year growth might not be very significant.

Was that based on the adjusted EPS of $0.82 or was that based on the GAAP EPS of $0.63?

I just want to make sure that we're clear on that one.

Thankfully, it's the adjusted number.

Okay.

Had to make sure.

And then final question here for me.

We're over a year now with SKM.

That was a big acquisition.

Thoughts on where you stand today and have you been able to deliver revenue synergies?

Or is the outlook for revenue synergies offset acquisition starting to materialize today?

Yes, let me answer that.

We view SKM as a big success.

Obviously, they had a big mining business and it's being impacted by the $2.50 copper and all of that.

But the infrastructure side of the business is singing.

And we have been able to do a fair amount of synergies.

We have a pretty good airport business in North America and the UK, and what we've been able to do, we've been winning airport work right and left in Australia recently.

So we view that as the big success.

Okay, thank you.

There's still things to do in terms of the integration and that's not totally complete but it will get complete this year.

Thank you very much, Noel.

John Rogers, DA Davidson.

Thanks for fitting me in.

I guess first, George, you talked about the various end markets but geographically are you seeing a big divergence in your customer's response to the market?

In any particular major market sector you're asking?

Or particularly process?

I guess more on the -- probably on the process side and especially Europe, Middle East, but also the industrial side.

Yes.

Well yes, I think that's a very good question and that is accurate.

I mean, if you go around the horn, what's happening in Canada is very different than what's happening in the Middle East relative to this marketplace.

Dramatically different, right?

And then if you go to Southeast United States, which is pretty predominantly a lot of chemical business, and northern Europe, which is chemical as well as some upgrading of efficiencies within refineries.

So yes, it is different geographically and how the plans are responding to it for sure for different reasons.

I mean what Aramco does versus other major oil companies have different motivations behind their capital expenditures and why they're doing these projects.

So yes, it is quite different.

And fortunately, we're positioned well in most of those plays.

And how would you characterize those differences?

Well, okay.

I mean the oil sands business, I think we all understand oil prices are down.

And if you look at the Middle East, the Middle East can pump oil out of the ground much more cost effectively than other places in the world.

They have a lot of social infrastructure ambitions that they need to fund and want to fund on behalf of all the citizens in that part of the world.

So, they'll progress with projects in order to drive those that development regardless.

I won't get into other geopolitical considerations.

It's beyond my scope of knowledge, but I think you understand what I'm talking about there as well.

So yes, very different.

Yes, and I think even if you go into Morocco where you know we're just finishing about $6.5 billion worth of work and we got another big phase starting.

You know that work is moving forward nicely.

And so the demographic issues or geopolitical, and however you want to name them, are very different across the globe.

Okay.

And Noel, can you give us any update or comment on the CEO search?

Well, I wondered when you were going to ask that.

I'm having too much fun.

We canceled it.

No, that's not right.

The reality is we're started, we're having weekly phone calls, we're getting into the meat of really getting on with it.

And so I would say by the next phone call, which is three months from now, we ought to be pretty well complete.

I hope so anyway.

But he is having a lot of fun.

Thank you very much.

Adam Thalhimer, BB&T Capital Markets.

I wanted to ask one more question about guidance just to make sure I'm clear.

Because you talked about Q2 not a lot of year-over-year growth which implies an acceleration in the back half and I'm curious what's driving that?

Is it the backlog growth you had in Q1?

Certainly, that's part of it.

The very strong level of sales bookings that we had in Q1.

Kind of the strongest sales level that we had in I don't know probably six or seven years would be my guess in that quarter.

So very, very strong and for that will ultimately allow us to finish stronger in the year than the beginning of the year.

So that's certainly part of it and then the other part is what we've already talked about in cancellation of some of the projects and the realignment of resources back against where we're seeing momentum.

And that just is put some pressure on the short term.

The other dynamic is, we are going to be reducing our cost structure, our fixed cost structure, to recognize some of the headwinds and that will kick in later in the year as opposed earlier in the year.

All of those things add up to the commentary and the kind of directional guidance we've given and that's basically it.

Okay and the only other question I had was just on, what are you hearing from on the infrastructure side, what are you hearing from your people in DC?

Is it time to get excited about a highway bill or some kind of solution on that front?

Do you want to try that, Andy?

Yes, so the answer is yes.

We're seeing recovery on the transportation front in a number of areas.

One, the improvement in state budgets as well as a little bit more certainty in the budgeting process in Washington with the mid-term elections behind us.

But also, just with cheap gas and people driving more mean the dollars per gallon that goes into the federal coffers stays the same.

So there's more money going in.

So whether they get a transportation bill passed or not, there's certainly more money going into their coffers which is getting spun back out into these projects around the countryside.

I think you got to remember if you go look at the budgets within the individual states, they're up fairly dramatically over the last three to four years.

So even here in California, our Governor found a way to have a lot of money to spend.

Okay.

Thank you.

We taxpayers don't like that, but that's the fact.

As a business we do.

Robert Norfleet, Olympic Global

Hello, this is actually Nick Chin for Rob this morning.

Thanks for taking our call or question.

I know we touched on it a few questions ago but I just wanted to go back to the SKM integration.

I was hoping you could give some more details around the restructuring.

Number one, how much of the cost savings were realized in Q1?

And then also, what sort of annualized run rate for these savings should we expect?

I don't think that ultimately the cost savings were disclosed in the discussion relative to restructuring but we have realized our run rate at this particular point in time in Q1.

And we expect that run rate to continue through the balance of the year.

If you look at our SG&A costs in the quarter is really driven by a full quarter of SKM in the numbers and effectively our restructuring benefits were able to offset all of the other inflationary costs and other dynamics that we have to manage in a $13 billion company.

Great.

That's really helpful.

And in terms of the downstream markets, I know that we talked a little bit about it before.

I was wondering if you could give some more details in terms of refiners spending in order to comply with the new T3 standards.

We've been talking about tier 3 spending for quite some time and it hasn't, as you well know, manifested itself as fully as we anticipated.

That was primarily because of delays in the compliance dates that a lot of these refiners were able to take advantage of as well as being able to trade credits off.

So it is been pushed out.

We worked on a lot of those projects in the study phase and some actual projects but it will be just more stretched out through over the next two or three years then towards the aggregate or concentrated spend that we once anticipated.

But I'd say it's been offset by the ISA 84 spending for sure, which I think in the long run is actually going to be a greater amount of spend and we're even better positioned to do that work quite frankly.

That's really helpful.

Thanks again, guys.

Okay, perhaps we'll take one more call.

Paul Dircks, William Blair.

Just briefly here to follow up on the SG&A expense in the quarter.

I know you guys had mentioned that there was some management transition costs.

Were there any other drivers of that dollar amount which is actually above what we had anticipated ourselves?

And also, how should we expect the trajectory in an absolute dollar basis of SG&A expenses to go over the balance of FY15?

Well I'll reemphasize what we just talked about.

Really the driver to SG&A was the full-quarter impact of SKM for the first quarter of 2015.

As you recall, SKM came into the portfolio of Jacobs right near the end of the first quarter last year.

So that really is the driver to the figures.

We don't give specific guidance as it relates to the SG&A numbers going forward.

But clearly, we're going to be taking steps to ensure that we're disciplined in the management of those costs.

Again, because we want to make sure that we're going to be able to be successful in any environment which we're going to need to be competing.

Okay.

Thank you.

Okay guys.

We're going to have to terminate.

We've got a Board meeting we got to go to.

We got people standing in the hall.

I'm sorry we can't answer all the questions, but Kevin is here and he'll take all your questions so just give him a buzz, okay?

We thank you for all your interest.

We're excited about what's going on.

We feel good about what's going on.

Obviously, we're a little disconcerted about some of the unknowns but we're going to power through all this.

So thanks, again, and have a good day.

Bye now.

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