雅各布工程 (J) 2015 Q2 法說會逐字稿

Good day and welcome to the Jacobs Engineering Group Incorporated's Q2 2015 earnings conference call.

(Operator Instructions)

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

Please go ahead.

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

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

Noel will wrap up the call before we open the lines for questions.

As you are aware we issued our press release this morning 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 materially 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 one, business item 1-A, risk factors; item three, 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 SEC.

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 is found on slide 2 of our webcast presentation.

With that, we are on slide 5, I would like to turn the call over to Kevin Berryman.

Good morning, everyone.

I'm pleased to be with you for my second earnings call with Jacobs.

We have a lot to cover this morning so I will dispense with any introductory commentary as it relates to the quarter and jump right in as it relates to our review of results for second quarter of 2015.

And as Michelle noted we're on slide 5. And to start I would like to take a few quick moments to discuss our GAAP related results.

As noted on the slide we certainly were able to deliver increases in our operating profit and earnings per share figures for the quarter 2015, second quarter of 2015 versus the prior-year period.

In addition our balance sheet remained strong at the end of the quarter as evidenced by the fact that we were able to have $465 million in cash at the end of the quarter and $290 million in net debt by the end of the quarter.

These figures were able to be delivered even though we had a significant wrap up in our share buyback program and we had a record buyback of roughly $140 million in the quarter to ultimately realize a $7.3 million program to date reduction in our shares as it relates to the program through the second quarter of 2015.

I will not plan to spend a lot of time discussing variances versus year ago on a GAAP related basis given that a lot of the variation year-over-year is driven by large, discrete items between the two years.

I will however plan to spend a little bit more time talking about the results in our adjusted figures, and I believe that will give you greater clarity on underlying trends and dynamics regarding our business for the second quarter.

But before turning to slide 6 to do that, I thought some commentary on our revenue changes versus year-over-year is important, given that our revenues actually decreased 8.6% versus the year ago period.

Certainly, foreign exchange, as noted on the slide, represented the single largest drag on our sales in the quarter, accounting for 5 percentage points of the full year-over-year change.

In addition we also had pass-through revenues that were also down year-over-year, and they represented an additional 3 percentage points of the drop in revenues.

As you already know pass-through revenues tend to have lower margin levels than the rest of our business and as a result of this, this fall in sales did not have a material impact on our profitability in the quarter.

So as a result our net underlying organic growth ex foreign exchange and the pass-through revenues was effectively flat versus the year-ago period.

This flat growth was supported by the diversity of our portfolio, with stronger certain end markets offsetting weaker ones.

Our growth was still less than we would have expected for the quarter.

In short, expected improvements in our revenues associated with our strong backlog transitioning to an effective higher level of burn did not yet materialize and gain the longer-term momentum that we do ultimately expect.

As a result we have taken additional actions to mitigate the impact of this shortfall by instituting a formal restructuring program that is meant to further align and simplify our business, resulting in reduced costs and increases in our simplicity and alignment in the organization.

This program reduced our GAAP reported results by $0.08 in the quarter, resulting in our adjusted EPS figure of $0.72 for the quarter.

A quick few comments on the restructuring initiative.

This program is expected to continue into Q3 and Q4, and we would expect to provide you a more robust update on this initiative at our Q3 earnings call.

I would also like to clarify our revised guidance for the year.

Our guidance as noted in the press release has been provided on an adjusted basis, which excludes any impact of our restructuring efforts and the costs associated with those efforts.

Of course any benefits associated with our restructuring initiative will be included in the results, although the vast majority of the expected savings of our restructuring initiative ultimately will be realized in the full-year 2016 versus 2015.

So turning to slide 6 and using the adjusted Q2 2015 figure of $0.72 to discuss our results versus year ago, you will recall that we had several discrete items that impacted the year-ago quarter including SKM profitability, weather and holiday related costs, European project issues, all of which were partially offset by a gain associated with the sale of certain intellectual property.

When adding the net impact of all of these items back to the profit a year ago, adjusted earnings per share was identified as being $0.19 higher than the actual GAAP figure reported of $0.63 year ago.

So I would like to compare the two figures of adjusted EPS of year ago of $0.82 versus the $0.72, and that translates ultimately into a 15% reduction in the operating profit levels for the year Q2 2015 for the period 2015 second quarter through the first, excuse me, second quarter of 2014.

Let's talk a little bit about that variance.

First, you will note on this slide that we have not adjusted this quarter for any impact or current quarter results for weather and/or holidays.

Even though in our analysis we have estimated the impact of these issues to be similar in 2015 Q2 to the results of Q2 2014.

The fact that the impact year-over-year is somewhat similar is not surprising given the challenging weather that you all recall that we've had, especially for you on the East Coast.

This represents a 7 percentage point differential in OT growth year over year simply because we have not adjusted for the impact of these issues this year while we did last year.

Our plan going forward would be not to adjust for these types of items in the future.

In addition included in the second quarter 2015 are higher than normal employee benefit related costs and costs associated with our executive transitions.

While these are real costs that we incurred in Q2, the majority of the increase are unique to Q2 and expected to be lower going forward.

These people related costs account for another 7 percentage points of the variance year-over-year.

Finally, our operating profit in Q2 2015 was also impacted by the strong dollar, which contributed another two percentage points of a fall OP versus the prior year period.

So given the nature of these items that impact the comparability of the adjusted figures versus year ago, we believe that our Q2 results are indicative of a stronger level of profitability a straight comparative would suggest.

It supports the view that our underlying profit level is relatively flat year-over-year after recognizing that many of these specific items are expected not to be continued over the balance of the year 2015.

So before turning the call back to Noel, a final word on our backlog which is exhibited on slide 7. As noted backlog grew 2.4% year over year and remains near record levels.

This backlog represents a book to bill over the trailing 12-month period of 1.05 as shown on the slide.

Importantly our success in selling work is resulting in our backlog remaining at this near record level and gives us continued confidence that our longer-term growth prospects are robust.

Our diversity in our portfolio enables us to manage through certain end-market headwinds.

The strength in our backlog this quarter is certainly indicative of this as our continued record level, near record levels, was delivered even though we continued to see cancellations in our backlog specifically in the Canadian region.

On a positive note we would expect the cancellations related to the price disruptions in the oil market are now largely behind us at this particular point in time.

So, while shorter term pressure remains given the certain disruptions in certain of our end markets, longer-term we continue to remain optimistic given our strong backlog positions and continued robust level of prospects.

So that concludes my remarks on the quarter, and I'll turn it back over to Noel.

Thank you, Kevin.

Let's go on to slide number 9, the growth strategy.

We talked about this a lot and I will just summarize it again.

The relationship -based model is still the model for the Company and works very well for us.

A lot of these record sales that you see going on right now or near record backlog are partly because this model is working very well when put together with our sales model.

So it is the strategy that keeps us close to our clients, trying to deliver superior value to these clients and make it work.

And so that model remains intact and we believe it's working well.

One thing we are doing, we do have a lot of diversity in the markets as you'll see in a few minutes when we go through that.

These three are on the next page, but we do have a lot of end market diversity which gives us a lot of strength when some of our markets aren't as robust as they once were or certainly as we thought they were going to be even 90 days ago.

And I'm talking about the oil and gas market on that, and we'll have Gary Mandel discuss that in a little more detail.

We still have good cash, we have not been in an acquisition mode here in the last few months as we try to deal with the headwinds in the market and certain other things, but certainly long-term as we go back to double digit growth we will be back in acquisition market.

But what Kevin said was when we discovered what was happening in the oil price and the other commodity prices, we have realigned our cost with the environment.

To put it kind of simply we have taken this opportunity to make some changes.

If you go on to page 10 what we have here is our end market diversity.

We'll talk in a little more detail.

The backlog is good.

You'll notice we got it split in three different parts there, downstream, upstream, chemicals and as no public institution.

It is a nice split.

It hasn't changed a lot over the past couple three years, but it does give us the diversity we need.

And I think we've said many times to you folks on the phone we'll never have all these markets singing together.

If we get five or six of them singing we're going to be doing just fine.

First off I want to talk about the heavy process business which include chemical, industrial, public, and institution.

We got Gary Mandel sitting in a construction trailer in Oman, and Gary I'm going to give it to you for a few minutes, okay?

Thank you, Noel, and good morning.

As Noel said I am calling in from Oman; hopefully you can hear me okay.

I'm visiting one of our oil and gas upstream projects.

It's a multi-billion dollar gas project here in Oman.

We're in the middle of the construction phase.

It's one of several we have in the Middle East.

The Middle East continues to offer robust opportunities for us in the upstream sector.

And as you know, we've been reporting that we're growing our Middle East operations year-over-year, so we're well-positioned for that.

Overall our process business is mixed.

Primarily due to oil prices causing our owners and clients to reevaluate their cash flow, their ongoing projects.

It's causing a little bit of recycle and some delay decisions and in some cases some delayed investments.

However, as we mentioned, our strong client relationships help us take advantage of these cyclical swings in the energy prices.

And we have a unique ability to power through these cycles with our focus on Brownfield sustaining capital and maintenance.

While the drop in price of oil is causing a slowdown in some CapEx projects in one part of our business, the chief feedstock translates into opportunities in other parts of our business such as chemicals, which is really robust and I'll come back to it.

We continue to see a lot of good prospects in this market as evidenced by our continued sales progress and our portfolio is balanced and positioned for growth.

When we look at refining on the CapEx side we're seeing some mixed signals here as our clients are evaluating their cash flow.

However, on the OpEx side, on servicing the installed base, the maintenance, the turnarounds, that is still stable.

The maintenance in Brownfield provides sustaining work.

We see that increasing both in the number of sites that we've been awarded as well as the number of proposals that we are pursuing.

When the cash flow is affecting our owners, one of the benefits we obtain from that is they start to reduce their supply chain.

They start to leverage suppliers who can service more than one facility.

We picked up several sites this year and hope to pick up more, because we're better leveraged with our big footprint and our capabilities to service multiple sites for a single client.

The number of sites in the US and Canada is increasing.

We've seen an increase of over 15% of the sites we've been awarded year to date.

As well as the operation and maintenance spend is still estimated at about $30 billion in the Gulf Coast region alone, and I'll come back to a similar spend in Canada where we're well-positioned.

In short, we continue to see investment in North America, Europe and the Middle East.

Although certain projects are being delayed, there still remains investment in plant conversions and expansions to optimize feedstocks and to enhance plant performance and profitability.

In the Middle East we're seeing opportunities for reconfigurations and compliance programs.

Our ability to leverage these opportunities with our global footprint and our heavy process capability is a key discriminator for us.

Through our core client relationships, our alliances, our framework agreements we continue to participate in much of the refined product activity across the globe.

Lastly on refining, we are focusing and helping our clients focus on upgrades, operating efficiency, safety regulations, and energy savings.

With reduced cash flow they're trying to get more out of their assets.

While we're seeing pricing pressure we're still winning, both EPC and EPCM contracts, especially for the refinery upgrades and improvements.

Our cross posture, our strong safety performance, our ability to leverage our global resource base, is helping us to continue to win work.

We have participated in our value plus savings program.

We've been able to document and save our clients with our innovative solutions, project delivery models, global sourcing, $5.8 billion to date.

This helps us continue to get in front of our clients and offer lower-cost deliveries in this time of low oil prices.

In North America we have several billion dollars of TIC under contract today along these upgrade and operating efficiencies; so the work is continuing.

When we move on to oil and gas, again the CapEx is mixed mainly due to the cash flow from the lower oil price.

However, OpEx is stable.

Oil prices are starting to stabilize a little bit, however we're focusing more of our energy and resources in sales efforts on the brownfield and enhanced recovery projects.

As I mentioned in the Gulf Coast we are seeing $35 billion of spend on operating and maintenance in Canada.

As you know we are the dominant player in Canada in maintenance and turnarounds and that activity continues.

Long-term growth of oil production is possible, albeit at different cost levels.

Our unique position is helping and working with our clients through innovative project execution modules, modernization, global sourcing, to enable them to continue to focus on their operations and enhance their production.

One of the things that I'd like to share with you is we have many global EPCM agreements in place for this install base.

It allows us to leverage the sustaining capital opportunities that are out there.

We're still winning work, we expect the industry to continue to spend albeit concentrating more on the lower margin operating expenditure side of the equation than the capital expenditure.

Even when prices go below the marginal cost of operating oil fields, many producers opt to keep them going and store oil as long as they can when they expect prices to increase.

Because it's more costly to shut these facilities down and restart them later.

Jacobs, with these agreements in place, with most of the major oil companies including the national oil companies continue to provide EPC and maintenance opportunities to this installed base.

We're heavily involved with these plans, we're constantly reevaluating and estimating the cost of these additional revamps and debottlenecking, and so again we're well-positioned for that.

When we look at chemicals, you see the chemicals is 23% of our process segment.

It is the strongest segment in our process business.

It's primarily division by the feedstocks today.

We've had several awards in the quarter and we hope to announce several more that are in the pipeline.

Broadly, chemical investment remains strong globally.

Pure chemical companies seem to be benefiting more and outpacing the integrated companies.

We continue to be enthusiastic with the chemicals end markets and our pipeline continues to be robust.

The low oil prices and cheap feedstocks are driving more investment with these clients.

Some global energy companies are reevaluating their next phases.

These investments are in competition with other parts of their business.

So, we've got to continue to help them find lower-cost to deliver these projects.

As I said with innovative project delivery solutions, modularization, global sourcing, and the like.

Jacobs has a strong chemical resume plus a global delivery.

These are our key strengths.

For many of our clients this is an area that is growing and they are looking to direct more of their limited capital spending to this segment of their business.

So that turn means more opportunities for Jacobs to help our clients grow their chemical businesses.

We have relationships with over 25 global chemical companies with standing master services agreements representing a significant portion of this global chemicals spend.

I'm bullish on that.

George will talk about the robustness of our pipelines and our prospects.

Our activity is strong, we continue to win work we, continue to position for work, we have a very good footprint on our sustaining services, our maintenance, our turnaround business, and I think this will allow us to continue to grow that backlog as we move forward.

With that I'll turn it back over.

Thanks, Gary.

George Kunberger, who is our EVP of Sales, you're on George.

Thanks, Noel.

Good morning, everybody.

I would like to take just a few moments to talk about two important factors, one the industrial sector and then I want to talk a little bit longer about our public and institutional business.

So on industrial, which is slide 12, let me just make a couple points and then we will move on to the public sector part of the business.

As you well know, those of you who have been followed us for long time, the industrial sector is an important, not necessarily a large robust part of our business, but still nonetheless a very important business which represents about, if you look at the numbers right now, about 10%, a little over 10% of our backlog and about 12% or 13% of our trailing 12 months of revenue.

But we're going into a couple sectors, let me just make a couple points.

On the bio pharma, area those of you who have been maybe watching shows like 60 Minutes have been following some of the tremendous developments in immunotherapy that have been going on in medicine around the world.

That is now starting to cascade into significant capital spending plans on the part of all the big pharma businesses around the world.

I've heard quotes, and I wouldn't under lie detector tests swear to this, but certainly our clients talk about those numbers being in terms of four to five times the capital spending plans on big biotech project plans over the next ten years than we saw in the 1990s and early 2000s.

And of course as you will know Jacobs has been a long-standing, strong player in the pharma business.

We remain that way today, we've expanded our presence to be more than just US and Western European-based, it's now to us being truly global.

So we're well-positioned, and indeed while we're not in a position to announce specifics because the press releases are out, we have been successful in winning several nice large projects on a global basis that hopefully we'll able to talk more specifically about in the coming weeks.

So pretty bullish on pharma, it's only 4% of our backlog but it is a growing business and we continue to be in a very strong position.

I won't say a lot about mining, it really hasn't changed in the last three months.

I don't anticipate that the situation in mining is going to change dramatically.

Our position remains as it's been, good strong sustaining cap development.

We are participating in the various studies that are ongoing.

And a couple big capital projects -- and there are a couple still out there that are being considered.

We are positioned well to compete.

I don't think there's going to be a big change in that business over the next year for sure, but it is an important part of our business and it will be certainly in three or four years when the commodity prices turn around.

Full paper high-tech consumer products, you all know we've been a big alliance player which feeds well under our consumer products business and our high-tech business around the world.

We have a little bit, and Noel is going to get mad at me for saying this, but we're not really known as a power player, and I'm not really saying we are, but there is a lot of money being spent around the world and we're positioned in each market that really are going to be an important part of our sales for the six to nine months.

Those are specifically some of the new builds that are going on in the UK.

We're not necessarily in the power hour island part of that, but certainly in the OSBL part of that.

And then in areas like the Middle East where there's lots of nation building going on, there is a lot of what you would call broader utility work in support of some of those facilities, new cities, new industrial manufacturing facilities that we are actively engaged in.

So power in the broadest sense of the word is not a small piece of our business, and we are going to be making some nice sales going forward.

So that's really all I wanted to say about the industrial sector, but I obviously want to spend a little bit more time about our public and institutional business.

It's a big part of our business, it's a growing part of our business, and I think it's an area that we're looking to stabilize our finances and our growth as a Company certainly over the next six months and as the process areas Gary just talked about start to recover and we grow again in that area.

First of all on the national government side this business today -- well first of all it constitutes a couple governments; its US government as you all well know, it certainly is UK government, and Australia and a couple other governments, but primarily those three.

The spending forecast in the US and the UK and also in Australia from an MOD Department of Defense area is actually forecasted to grow in 2015 and even further in 2016 by about 8% each year.

So it's sort of bottomed out and it's starting to grow again.

The pattern of spending in the federal government, specifically in the US, has become very backend from a fiscal year perspective than it has been in recent years.

And the case in point, if you note that our -- actually our backlog is down a little bit quarter over quarter, but if you look at our federal business today we are at an all-time record high as far as the number of opportunities that we have submitted specific proposals on and are awaiting decisions that will happen between now and the end of our fiscal year.

That actually represents about $5 billion to $6 billion of revenue just on pending opportunities in that particular business, which is our technology business.

And of course as you well know we generally do pretty well there, so our conversion rate is high and so we anticipate that to be a big part of our sales in the second half.

But it's not going to end at the end of this year.

There is another $4 billion to $5 billion with a prospect that is in near-term; in other words we'll be submitting proposals on those between now and the end of this calendar year.

So those will be this fiscal year, for those will cascade into FY16 as far as opportunities for us.

So our federal government's business is robust and growing, and we anticipate it to be very strong through the second half of this year and into 2016.

On the infrastructure business as you well know that's a pretty broad geographic or global business for us.

Big business in the UK, we have big business in the US, we have a growing business in the Middle East, and of course a very large business in Australia and New Zealand and then supplemental businesses in some of the developing areas on an opportunity by opportunity basis.

That overall business I wouldn't -- it's certainly not as robust as the federal business, but it is continuing to grow as I've shared with you on some of the conferences that we've had in the last two or three months.

I look at that at a 3% to 5% growth on an ongoing basis nice steady-state.

It ebbs and flows a little bit, UK right now is particularly strong as an example as we go through the new water amp six programs and the new programs on transportation spending.

The US continues to be a little challenged but not as challenged as it was two or three years ago, but certainly the government spending in support of transportation projects is a little soft so it's more about taking market share in US Senate is about just writing a strong market.

The Middle East, because of the things we talked about several times, the spinoff of their big oil projects to fund all lot of development of cities and industrial facilities, thank you, always need a little help from your friends.

Spinning off a lot of projects and because of our cross-selling across our various lines of businesses, we've been able to bring a lot of that work to bear in the Middle East.

And of course Australia -- the government in Australia is using funding on infrastructure really to fund the from the growth of the overall economy there.

So that business continues to be strong and growing since we bought SKM a little while ago.

So I feel strongly about the infrastructure business going forward, and it continues to say steady-state like I said 3% to 5%.

Business is pretty similar to the infrastructure business, it's a steady growth business.

It is also global in nature for us.

We have continued to do a lot of work in the US for the federal government and various municipal governments and state governments as well as hospitals and schools and things like that around the country.

But as you well know as a result of the acquisition of KlingStubbins a few years ago we have opened our selves up into the private sector part of that business, and so the opportunities continue to grow there.

And then we've been able to take that capability and spread it again into the Middle East, into the UK supporting their building business over there, and very definitely into Australia to support buildings business associated with things like airports and schools and hospitals there.

So that business is a global business for us, and it is also continuing to grow again at a pace of about 3% to 4% I'd say year in and year out for right now.

So overall it's a good steady-state business, really highlighted by the federal spending both in the US, UK and Australia.

And I would anticipate, although I won't promise that our backlog will continue with what I said about the federal spending on those big projects.

Indeed holes in the government doesn't delay their decision-making in the last part of this year which is always possible, we should be seeing continued growth in our backlog going into 2016 in that sector.

That's pretty much what I had.

Thanks, George.

Go to slide 14 and we'll wrap up so we can open up for questions.

The portfolio diversity that both Gary and George had talked about does remain a strength.

And even though we're facing headwinds in oil and gas and some of our big clients have cut back some of their spending, the opportunities out there are strong.

Strong as I've seen in a long time.

The backlog is strong.

We're doing a lot of effort today realigning the cost structure with what we see the Business to look like over the next 12 to 24 months.

I'm a big believer in don't let an opportunity like this go by, so we're working hard and dropping our real estate costs, and we've already done several internal reorganizations to cut costs and make the Company more efficient, as Kevin was talking about earlier.

We have adjusted the outlook for the headwinds we see and we are positioning our self for a better second half and a good 2016.

And that's the game plan we have.

As most of you know I'm not the long-term solution to Jacobs.

We are heavily involved in the CEO search.

That has gained a lot of momentum.

I spend most weekends interviewing somebody.

I would say we're in the downhill run on that and we'll be coming to close on that probably over the next couple months.

If you turn to slide 15 it summarizes mainly what I said, and I'll quit on that note and turn it back over for questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Andrew Kaplowitz, Barclays.

Hey guys, good morning.

Kevin, can you talk a little more about the decrease in the overall guidance that you had?

Obviously you had talked about the low end of the range last quarter, which was $3.35.

The midpoint of this range is $3.05.

How much would you say is currency versus slow burn rates versus lower margin?

I don't know if I need exact EPS, but just thought process on that $0.30 lower at the midpoint?

Look, Andrew I probably won't go to the level of detail that you would like, but let me give you some kind of perspective as it relates to that.

Certainly, as communicated in our comments, we did see continued cancellations in certain parts of our business, certain end markets, and that is putting pressure on us again as it did in Q1 relative to our revenues.

And while our underlying revenue stream was effectively flat, it certainly wasn't what we wanted to see in Q2.

So we'll face some pressures as it relates to that backlog and when it starts to burn versus kind of the near team issues again associated with some of the restructuring, excuse me associated with some of the cancellations.

So I believe that at the end of the day we're looking at a situation where our medium- and longer-term views remain quite positive certainly as it relates to the ability to win the work as George and Gary were outlining.

But also in addition to that the prospects continue to be pretty robust and we're thinking that that translates well into our backlog in the back half of the year.

And as you recall in Q1 we talked about that.

So the diversity of our portfolio we believe allows us to exit some of these challenges in certain end markets in a stronger position because of that.

So I think if you look at our range, effectively Q2 certainly was a little bit lower than what we would've originally anticipated.

I've talked about some of the drivers there it is what it is, and so that is certainly part of it, but I think the other piece of it is really that we're not going to necessarily see the burn get to a level where it's able to offset some of the short-term mitigating pressures that we see.

And I think that's the rationale for us to really be cautious in terms of our guidance.

And I do want to insure that you guys got the commentary as it relates to that guidance and that it does not include the costs associated with the restructuring.

I know there were some questions relative to that, but it does not.

And while we hope to see some benefits on our restructuring this year, the bulk of that will occur next year.

Okay that's helpful, Kevin.

And then maybe this is for Noel, do you still expect -- last quarter we asked you about overall backlog growth for the year.

And you said you still thought that we could see overall backlog growth.

Where are we today sort of with that question?

I guess the conviction level around public and institutional in particular sounds pretty high.

Do you think that that can get you over the hump to have backlog growth this year?

What I'd say to you is the sales process is working well.

So we are selling work almost at record level.

The prospect list is long, these numbers on the technology group in particular that George highlighted, the $6 billion in proposals outstanding and our win rate has almost always been above 50% on those types of things.

It bodes well for continuing backlog increase, certainly even with the headwinds coming out of oil and gas, I don't think it's going to damage that outlook, okay?

I think we're going to continue to see backlog grow.

If we continue to sell like we're selling it should be pretty solid.

Got it.

And Kevin just a clarification.

How much were cancellations in the corner?

It was $400 million last quarter.

It was at similar levels to last quarter and it was primarily in Canada.

Okay, thank you.

Jamie Cook, Credit Suisse.

Hi, good morning.

How are you?

I guess a couple questions, and Noel I don't know if it would be more fair for you to answer this rather than Kevin, but I just sort of sit here and from covering you guys for a long period of time we're going on a second sort of sounds like significant restructuring again with little color on the cost and little color on the benefit and we just haven't seen this ever from Jacobs.

So can you while you don't want to give numbers, and hopefully you'll give that next quarter, can you talk about what the issues are outside of macro?

Because you've been through macro headwinds before.

Is it related to the acquisitions that you've done?

Is it related to the work structure within Jacobs?

Is your -- should we think about some changes to your business model relative to how Jacobs performed before?

I'm just trying to get some color because it just strikes me as we haven't seen this from E&C Companies nor have we ever seen this from you.

So I guess that's my first question, and then my second question is related to the CEO search, it's been going on for some period of time.

You talked about interviewing people on the weekend.

So does that imply its probably -- there's a higher probability it's an external candidate relative to an internal candidate?

Well right now we're doing both.

We've actually interviewed both internal and external on the weekends.

And we're moving forward on that.

Right now we just need to get the closure on it.

And what George would say we are in endgame, we're getting close to endgame.

We've got the candidates listed, we've been interviewing.

And we're moving forward with it.

As I think we told you before as fast as we can but we're being deliberate and we're going to do it right.

But go back to the restructuring for a minute.

What we take a look at -- first thing we said is with these headwinds we know we've got -- can we get some cost down?

And the answer is yes, we can get some cost down.

The real statement -- there's one place with the leases and all that, there's a bunch of costs going to come out there.

And that probably doesn't even get into the restructuring charge.

But as far as consolidating divisions, we've consolidated four divisions.

And by the way, some of the costs were in this quarter, some are going to be in Q3, but those benefits probably aren't going to manifest themselves until 2016.

Whether it was taking a look at the business climate, looking at where we are, some of the acquisitions played into this conversation, but I wouldn't say it was acquisition-driven.

It was just taking advantage of a situation and saying okay, what can we do now to make this Company leaner and meaner and more cost-effective going forward.

And like I said the businesses is there, every picked customer we got in oil business is doing that.

And maybe they followed us, maybe we followed them I don't know.

But it seemed like the right thing to do, and sitting here today I'm absolutely convinced.

And by the way we started this right after the last phone call.

But I guess are you --

We waited nine days to do this.

A whole bunch of this is behind us already.

But the better case will be a little while coming.

Are you at the point where you're questioning Jacobs business model, whether it's still the right business model?

I mean the bare case is that the law of large numbers is starting to work against Jacobs.

You need more base hits to grow.

You need bigger acquisitions to grow, which every Company goes through, right?

So I mean is there anything you're contemplating within the Business model, like material changes are portfolio rationalizations even though you don't want communicate it today?

No.

The simple answer to that is no.

We'll get a new Boston here one day, maybe that person would want to make some changes I don't know but sitting here today no.

All right I'll get back -- sorry, go ahead.

This is Kevin and just let me make some commentary as it relates to the initiatives that you were asking the question about.

While we haven't provided a lot of color, we will provide additional color.

As we're going through the process and gain clarity, we believe that the efforts that we're embarking upon are going to be productive, that we'll get a very good return against it, and we will provide that update as it relates to the Q3 earnings call.

There is more to come, and certainly not ready to talk about the specificity of the full program because we're still working through it as Noel suggested, but it will provide a good return without a doubt.

All right, I tried.

I'll get back in queue, thanks.

Brian Konigsberg, Vertical Research Partners.

Hi, good morning.

Maybe just first starting, I believe Noel you made the comment that you believe the cancellations and the process businesses are largely behind you.

Maybe you could expand on that?

Why do you have confidence that we won't see more cancellations there?

I'm going to let Kevin answer that because he made the comment.

Okay.

There you go, Kevin.

Okay.

I think if you look at the Q1 and the Q2 cancellations that we've had and Gary, certainly feel free to jump in if you have any additional color commentary, but we saw some fairly large, primarily US process related in Q1 and in Q2 another chunk and it was primarily Canadian related obviously, which is as you guys well know is largely upstream related activities.

So as we've been talking with our customers ultimately we understand those cancellations, and while there certainly are always adjustments to backlog relative to the economic of projects and whether they change over time or increasing in capital, and things are fluid always within the construct of that I would say that we think that material impact relative to the change in oil prices is largely behind us.

That doesn't mean there won't be further cancellations just because normal course process of people working through their projects, but the adjustments as it relates to the oil price situation is largely behind us.

Yes, just to add to that I think the shell shock of the oil price forced some of these things to go on and some of these things that we've taken out of backlog, they're all already be reevaluated by our customers.

So I think those projects are there, it's only a question of when and timing.

Got it.

And secondly on this commentary in regards to OpEx versus CapEx, I think in your experience in the recent quarters OpEx has actually held in well.

We've been hearing some contrary commentary maybe from some of the equipment providers saying some of the project owners where they can make quick cuts it's really on the OpEx side where the CapEx actually takes a little bit longer.

I was just curious, so are you not seeing any of those type of trends impacting your business in regards to the backlog burn in the quarter, it slowed down.

Was that OpEx or is that CapEx driven?

Gary?

You want to try that one?

Did you hear?

Yes I would say with respect to OpEx we look at that in several ways.

One is we're inside the facilities providing day-to-day operation and maintenance and running the plant and repairing and replacing materials and equipment as needed.

There's also OpEx associated with schedule turnarounds.

And some of our customers have deferred turnarounds from spring to fall, et cetera but they cannot defer them in perpetuity.

We help plan their turnarounds and so we're seeing the turnaround season coming up and we have identified the turnarounds we're seeing that.

What we're looking at on Brownfield, and that may be where your equipment suppliers are commenting, on the Brownfield we're doing some refurbishment of equipment, we're sending it out, getting refurbished, turning it in.

Not necessarily replacement in kind with new equipment and new models, and maybe that may be part of the difference of the different feedback you're getting.

But we have boots on the ground in these facilities doing the sustaining services, the maintenance, the turnarounds.

And just on the slow backlog burn in the quarter, that was mostly CapEx oriented rather than OpEx?

To the earlier question as well when the shock of the oil price hit and the cash flow became evident we sat down like many of our competitors with our clients where we have these frame agreements.

We reevaluated their portfolio of projects.

They couldn't all go forward; while they have good ROI they just didn't have the cash for all of them to go forward.

So we helped them make decisions and jointly come up with which ones would go forward based on economics and which ones would not.

Now the ones that are going forward are continuing to go through all the phases of EPC.

I think it was the recycle and the reset of taking 30/60/90 days to evaluate their portfolio projects.

Understood.

Thank you.

Jerry Revich, Goldman Sachs.

I'm wondering if you could talk about based on contract timing when you expect revenue burn to accelerate in the chemicals business?

It looks like this was the second consecutive quarter of modest sales decline.

Should we think about tough comps over the balance of the year I guess based on the contract structure, when should we expect that business to accelerate?

You're talking about on revenue burn now?

George why don't you take that?

Yes, well if I look at what we have it's going to be near the end of this calendar year I would say where the projects that we have start to move into the field in a substantial way.

Okay.

Thank you.

And that probably goes for both chemical and some of the bio pharma work.

Yes, it's all across the board.

It's mostly -- that would be true across even the bio pharm, but mostly he gets how the process works, but that would be true across the bio pharma as well.

Okay.

And then on the infrastructure business you're seeing a nice pick up there.

Can you just orient us how does the contract structure look like over the balance of the year?

It looks like you're up about 14% revenue burn in the quarter.

Are you seeing similar levels of strength heading to the back half of the year?

Yes.

As I said our infrastructure business is a global business, and so it ebbs and flows.

When the US gets a little softer the UK is quite strong right now and it's really what's driving that.

That and Australia is driving a lot of our infrastructure spend.

So yes I see it continuing to grow incrementally over the rest of the year, maybe a little bit more in UK, a little bit less in the US vice versa, but yes I see that continuing to spend.

It's a sort of a short burn business to a large degree for us.

There some big large projects buried in there, but for the most part it's continuing spending from a professional service basis.

So it's a book and burn business to a large degree.

Okay, thank you.

And lastly on the separate environment where your customers have slowed down their pace of awards, you typically have higher bid costs.

Can you quantify how much of a drag that was for the margin in the quarter?

Or maybe touch on it qualitatively?

I don't think we had any significant effect from higher bid costs in the quarter.

We run that B&P, which we call a bid proposal count very tightly and we parcel out that money very carefully.

The bidding costs did not go up.

Thank you.

Tahira Afzal, KeyBanc.

Good morning, folks.

First question is really for Kevin.

Kevin, can you comment on the free cash flow outlook?

Any color there would be helpful from a 12- to 18-month perspective?

Sure.

I think as we probably talked in the past we believe that the underlying business provides us the ability to ultimately have a conversion factor versus net income of at least one.

And we do expect that to be the long-term dynamic.

We haven't provided any context as it relates to the nearer term, but I would suggest to you that certainly the trailing 12 months is a pretty positive number where we've had a conversion factor of net income to cash flow, free cash flow of 1.4 times.

So certainly that's not going to be the number we end up for the full year, but certainly we have the ability to do that.

That will be our expectation to drive towards the longer-term.

Got it, okay.

Noel, if you look at what you talked about, and we hear this from your clients on their calls about the supply chain, better managing costs to take costs out of a project.

How do you place yourself -- I know you guys have saved your customers a lot of money, but some of your peers have been doing larger projects clearly have a lot of experience from first-hand experience of building large projects.

So when you go out to bid on some of those project management roles and design roles are you kind of seeing the same amount of enthusiasm from your clients?

Are you seeing a little more competition there?

I would say that probably there's not a lot of change in my mind because of the model.

One of the strengths of the model is certainly with the core clients and the key clients as we define them, we are ahead of the game in knowing what's coming and what's happening and we do have a lot of long-range contracts in place.

It doesn't mean we get this work without competition because there is always competition.

But I don't see the workforce changing dramatically and I guess I don't see the competitive landscape changing significantly.

George, would you comment on that?

I would agree and as a matter of fact I would -- we over the last three or four years have moved into a larger project space on an average than maybe we have traditionally been, to be quite frank with it.

So almost the opposite of what you're saying.

I don't want to over characterize that, but we certainly have been moving into the larger projects based on occasion where it makes sense for our ability to deliver.

And our clients.

Got it.

Thank you, folks.

Steven Fisher, UBS.

Thanks, good morning.

Your professional services bookings seem pretty low.

I calculated a 42% year-over-year decline, but not sure of how the cancellations and FX place through that.

So I guess what do you guys have as the booking numbers and professional services and what's really driving that.

Because I think professional services historically tended to be more stable during these volatile commodity price times.

Steve, this is Kevin.

I'll take a quick crack at that.

The cancellations were primarily in the professional services piece of our backlog.

So that certainly had a roll as it relates to some of the numbers that you are alluding to.

Okay, but even if you add back $400 million you'd still be down pretty significantly and below one on book-to-bill.

I mean are you not -- is there a share issue going on?

I know you just said you don't see a change in the competitive environment, but it just seems a little surprising that the professional services is kind of trending a little more weakly at this point?

On the sales side, Steve, it's trending fine, but we have made these backlog adjustments.

And I think if I had the data here in front of me I could dissect it.

On the big work we've been selling recently, with the exception of one big ad where we got a big program going into backlog, the Pro service new sales has remained quite strong.

So this has got to be harbored in the cancellations and maybe even some backlog adjustments.

Okay.

It will be on the cancellations.

Can you give us what the actual new award number was in professional services?

I don't have that here.

We'll have to get back to you on that.

Okay.

And just shifting gears, in terms of the guidance for the rest of the year, what would you say are the most critical things that have to happen to hit those numbers that you have now?

Is it mostly those federal awards, is it some of the chemical stuff that you talked about sort of converting into revenues in the latter part of the year?

What are the most critical things?

The federal awards will go to backlog.

They probably won't have much effect on the businesses this year.

They're next year's profits, but we're going to sell them this year.

The thing that we have to do to perform the way we're talking right now we just got to continue to sell well, buy more of the book and burn work and the infrastructure.

We need to continue to gather these maintenance contractors and execute these turnarounds well and make a good solid profit there.

A lot of what goes on toward the end of the year to be honest with you is already in hand, we just need to get it done.

Okay, thanks, guys.

Vishal Shah, Deutsche Bank.

This is Chad Dillard on line for Vishal.

Just wanted to go back to the comment about OpEx versus CapEx and the opportunity you see there.

Just given that it seems like OpEx is holding up a little bit better are you seeing any increase in competition and seen any pricing pressure on more of the maintenance side?

Hey, Gary try that.

Is there more competition on the maintenance side?

I'll take that.

There is competition.

I do see where our customers are cutting back on their cost, as you've seen.

They're cutting back on their resources.

They're looking to shrink their supply chain where we have a tender outstanding now for nine sites.

There's actually five incumbents to be replaced by one contractor.

And so the incumbents while they're competition they don't have the wherewithal, the breadth or depth to move into 9 sites.

We have a proven methodology to take over new sites from a Friday to Monday and transition the people into work, et cetera.

So while there is competition out there I think if you're too narrow and too limited geographically or regionally, it may play against you as their trying to consolidate these contracts to fewer people.

We've had a good win rate as I mentioned.

We're continuing to win.

I think our breadth and depth as well as our safety performance is enabling us to bode well in that.

In that same vein how are you bidding in terms of pricing?

Are you seeing that you need to go a little bit lower?

Are you able to hold and then maintain prices?

Again I think you leverage their spend and you come up with some targets.

The labor is the labor, we're able to leverage our tools, our equipment, our insurances, those type of things.

We're able to arrange some transition costs and put some incentives in place.

So it's a basket of things.

If I share anymore I'm giving away our secret sauce.

Got it.

Okay, thank you.

I'll get back in the queue.

We're not cutting our price dramatically to win the work is that right, Gary?

That is correct.

Thank you.

I'm glad that's the answer.

Andrew Whitman, Robert W. Baird.

Maybe one for Kevin here.

I was just -- we talked about the cash flow earlier and I think since you've come in as CFO, Kevin, you've talked about the potential maybe the desire to take working capital out of the business.

As I look at the working capital balance here, and forgive me we don't have the full balance sheet so I have to ask some of these, but cash is down quarter over quarter pretty materially but your working capital balance is not.

Should we assume that your AR and unbilled AR are up in this?

Maybe you can give us some flavor on that?

And is there any problem contracts or anything that we should be watching for in those AR if they are up?

Couple comments.

First thing is second quarter of every year tends to be the low watermark as it relates to the cash flow dynamics of the Company.

If you go back and you look at history second quarter tends to be a little bit less positive relative to the dynamic versus the full year.

So we saw that again in Q2, so the figures for the cash flow in second quarter were somewhat similar to the Q2 results that we've seen in the past on average.

However, you have to take into account that we have the $140 million on top of that in terms of the share buyback, and consequently the combination of those two things resulted in the cash flow dynamics you see in the net ending cash and net debt that we saw at the end of the quarter.

We do believe that there are opportunities for us to be more diligent in terms of the working capital.

That is not easy to do.

That's a lot of things that we've talked about in the past as it relates to pick and shovel work and driving efficiencies and productivity and the enhancement of our toolsets to support our teams and their ability to get reductions in receivables and get paid quicker.

We'll look at the other side as well as it relates to Accounts Payable, and those initiatives are in the process of certainly beginning to be formulated and rolled out into the organization over the back half of the year.

So not a lot in terms of the implications for our year-to-date results or the results in Q2 but I think collectively the teams around the globe think we can do better there.

And to the extent that we have a small change in our working capital levels that ultimately provides us a great opportunity to increase our free cash flow from our operation.

So not a lot yet, but we expect that we'll continue to develop that pick and shovel plan and be able to deliver incremental benefits longer term.

Okay.

My second question was on the margin percentages as we look out for the balance of the year.

The margins have been I guess kind of holding up so far.

Sounds like your pricing view is that it's -- you're not cutting wildly price.

You mentioned a little bit on the fringes and refining I think in the prepared comments.

But just given kind of the guidance level should we expect that margins are maybe kind of down for the rest of the year?

I guess that would be driven by utilization until you can get the restructuring costs more where you want them.

Is that a fair way to think that margins are probably down here for the balance of the year?

No, I don't think so.

First of all the utilization has been running almost at record levels.

I mean we've dealt with those big kids already.

So the utilization is doing just fine.

There's pricing pressure.

There always is.

You've certainly seen what's happened in some of the oil field services company where they've gotten from the owners, and what we do in a situation like this is we try to find a way to deliver real value without just flat cutting our price.

So those negotiations are ongoing and I think we're probably being reasonably successful getting that done.

I don't think we're going to be looking at significant drop in the margins this year.

I'm not going to sit here and tell you it's a wildly optimistic business, but I'm just sitting here watching what's happening and I -- we are getting better at getting more profitability into these jobs.

I hope no customers are listening to that, but we're doing a little bit better in that way and we are doing more full service jobs which contain the fees even on the pass-throughs.

So I think all those tend to counterbalance each other.

And we are going into maintenance season which while it's low margin business against the pro-service base the margin will be up.

Thanks.

If you'll afford me one more, Noel, I wanted to get your thought, as this actually is kind of strategic as it relates to the CEO search.

But just given that the end markets certainly in the near term aren't giving you a whole lot of opportunities for organic growth, maybe they do over the long-term, kind of dovetails into Jamie's question.

Is a 15% EPS growth target a prerequisite for that CEO to buy into?

Or is a thoughtful CEO approach that maybe focus is more on higher returns, slower growth.

Is that a viable alternative as you're looking for the right candidate?

I don't think, and I didn't mean to cut Jamie off, I apologize.

What I would say the relationship model issue, right now we're not making any changes.

New team comes in reevaluates, who knows but it doesn't seem like anybody we've been talking to thinks that's a bad idea.

How you approach it, can you get a little more money out of the exercise, here's a 15% passe, you notice we didn't talk about that today.

We have to reevaluate that when we get this thing, the market's stable up a little bit.

Certainly double-digit growth with an acquisition program that makes sense is in the cards.

I don't have any doubt about that.

But whether the 15%, which we've hung on to for over two decades is the magic number, time will answer that question.

Thank you for your thoughts.

Anna Kaminskaya, Bank of America, Merrill Lynch.

Hi, guys I just wanted to quickly touch on your cash flow deployment.

Can you remind us how much is left in your buyback and how do you think about given where multiples are now for some of the energy assets you were previously interested in those, how do you weigh kind of your stock valuation versus going more maybe actively on acquisitions in the next year?

This is Kevin.

Just a couple quick comments.

First, we are focused really in the nearer term as it relates to the initiatives that we've already discussed over the course of this call which is about driving alignment and simplicity into our organization, which we think translates into our ability to have a stronger foundation which once we do do acquisitions and we believe that that fundamentally is part of our strategy longer term, we're going to be even stronger as it relates to delivering the benefits associated with those acquisitions.

But in the nearer term as we've talked we're continuing to I would say hit the pause button on the acquisition front so that we can focus on those other initiatives relative to restructuring.

Having said all of that, we continue to be a nice cash flow business and consequently combining that with the fact that our share prices have been under pressure versus historical levels we will continue to be proactive in terms of the execution of our share buyback program.

I think through the end of the second quarter we had utilized I want to say $330 million plus of our share buyback authorization, which is $500 million.

So at the clip that we were in in second quarter certainly we're going to be done relatively soon and we'll certainly have other discussions with our board as it relates to next steps regarding them.

And just as a quick follow up what are your general thoughts on just introducing dividend given you have diversified business model, pretty stable cash flow, and I think one of very few E&C Companies that is not being dividend at this point?

Okay this is my question.

We at the Board have alternatively looked at dividend policy maybe every few years, and I think once we get a new Chief Executive on board and we do look at the strong cash, we will probably do a total reevaluation.

In fact if I'm still around we will do a total reevaluation of what this means in terms of dividend policy versus stock buyback versus acquisitions and figure out how we handle that.

So I think what we need to get the new Chief Executive on board.

We're certainly not to do anything before that person shows up, and then I think a total reevaluation of what we're doing on that would be in place.

Thank you very much.

[And that's not a promise of anything except go up].

Great, thank you very much for your time.

Michael Dudas, Stern Agee.

I'll let you guys off here, it's been a long call but I appreciate all the added color in the conference call from Kevin.

And Noel, you said if you were around when you answered that last question.

What do you mean by that?

(Laughter) I will be involved.

Let me rephrase that, okay?

Thank you.

(laughter) I figured as such.

Good luck, gentlemen, thank you.

You're done?

That was it.

No, no you've exhausted.

We're done.

Got to get going.

John Rogers, D.A. Davidson.

Hi, good morning.

Couple of follow-up things.

First of all maybe for either of you, in terms of the restructuring that you've talked about, I know you're going to give us cost details in the quarters ahead, but are you anticipating any revenue impact?

Very marginal.

Okay.

It will barely be visible.

Okay.

And secondly I guess Noel, you talked about the strength in the opportunities and seeing if it was as good as like you've said in the past.

What's your sense, what are the customers waiting for?

I mean is it the stabilization of energy prices?

Higher prices?

Better economic outlook?

By the way it's anybody's guess and I've got a 45-page report sitting in front of me from our consulting group on exactly that issue.

And the bottom line is I think they want stability.

Whether the oil price -- and the oil price will stabilize somewhere.

In fact if anything comes out of this report I've been reading it's oil prices are going to stabilize.

Nobody's quite sure where.

We've got a supply/demand imbalance now, we've got excess oil coming out of the ground versus what's being consumed.

Part of that is driven by slow economies including China.

Everybody blames China for this, and I guess I'll blame China.

So we've got that imbalance.

But we have had a very fundamental change in the dynamics of the energy market in the last five or six years, and I think what we're seeing now is there's going to be a rationalization of this and I think out of that will come stability.

But that goes to both natural gas and oil.

And we've had heads of big oil companies say a couple years ago, one of the guys said he thought the natural price for crude oil in a pure market-driven economy was $70 a barrel.

Is it still $70 a barrel now that fracking costs are down approaching $50?

And so I don't think we know.

I think the one thing I'm pretty sure of personally is we won't see $100 oil barring a war or something.

So I think we're going to see oil settle somewhere probably above $50 and certainly below $100, but I don't know I'm not any smarter than anybody else.

But I think the owners need stability.

Anything moving from $100 to $40 to what was the low price, $37?

I don't know.

$100 to $40 back to $55 and you know our stock's tracked it every day.

It's kind of embarrassing, but that's what happens.

I think they need stability and so even though we've been awarded projects the start-up phases are slow.

Okay, thank you.

And Kevin if I could real quick what was the FX impact on backlog?

Don't have the number in front of me, but ultimately certainly given the impact it certainly was of FX for the quarter, it certainly was an impact.

I can get back to you on that number.

Okay, appreciate it.

Thank you very much.

My guess is that it wouldn't be too far off of kind of the revenue numbers.

5%?

But the mix is not too dissimilar.

Okay, thank you.

Robert Norfleet, Alembic Global Advisors.

Hi guys, this is actually Nick Chen for Rob this afternoon.

Thanks for taking our question.

I was wondering as it relates to the SKM acquisition could you just say if there's any details around additional cost savings there?

And also I know that you guys are hitting the pause button on acquisitions, but looking longer term what are some of the potential opportunities you might see to expand in that market, which sounds pretty robust right now?

Let me -- you deal with this.

I'll do the long term, you do the SKM thing.

Sure.

As it relates to SKM as you know the SKM operations are fully embedded into the organization right now.

And so we're stepping back as it relates to the pause button that we talked about relative to acquisition.

And that is allowing us to drive alignment benefits and efficiency benefits into our organization through the simplicity and realignment initiatives that we talked about.

So certainly SKM is part of that.

It's not the driver behind it, but certainly it is part of it.

And so we believe that that will translate into our ability to continue to have some benefits relative to the pieces of the business that came from SKM just as we can get the same benefits from the rest of our total portfolio.

So I wouldn't characterize it as SKM specific, but certainly it will be involved in the process.

Yes, and on the longer term, we sat here for years and said we want to be in the upstream energy business, it would be a strange time to say that.

But we are.

We actually have been quite successful in becoming fairly dominant in the upstream energy business.

Take first of all Canada, which obviously isn't doing great right now, but more importantly what Gary said, it's out in Oman.

I'm on a $1 billion job from one of the measures.

That's upstream as they get, and we've got a lot of upstream energy work in Saudi.

So when oil prices stabilize we're still going to need more energy, there's still going to be a lot of drilling.

My guess is some time in the future we'll be looking at that again.

We've been very successful more recently in acquisitions in the government arena, which have done extremely well.

And so we'll probably be looking at things like that.

And I would guess we will always be looking at things geographically.

After years of working we finally bought a license in China and that's the only acquisition we've done in the last three to four months.

And we did buy that Class A license in China so we can actually be better able to serve our clients in China.

I think that's where we'd be going on it.

Okay, great.

And this is my last question and then I'll jump back into the queue if there still is one.

But just in terms of the Tier III standards it seems like there hasn't been as much activity in that area as we might have expected.

Do you have any sort of updates there?

I think as we -- and we've talked about now for a few calls the Tier III lost a little bit of its steam because the individual owners had an opportunity to buy credits and extend the deadlines for incorporation.

So while that work is still going on it's certainly not at the pace and at the peak that we anticipated it was going to be when we first started talking about that about a year and a half ago.

That's great.

Thanks so much, guys.

So we're getting near the end of our time.

I want George to go out and sell some more business here shortly.

So we'll take two more calls.

Robert Connors, Stifel.

Gentlemen, can you hear me fine?

Yes, we hear you fine.

Okay, great.

In order to be brief here, it sounded like the chemicals, the process backlog was up quarter over quarter I calculate anywhere from 8% to 12% largely driven by chemicals.

Just wondering if you can talk qualitatively about these projects, if they were in fact chemicals other than just the fact that they benefit from low feedstock prices.

Where they ethylene-based?

Where they polyethylene and derivative-based?

Any commentary around that?

I'm going to let somebody smarter than me -- George, you go ahead and take it.

You're sitting here.

They were certainly chemical based to a large degree and they were not necessarily directly ethylene and polyethylene-based.

They were -- the secondary chemical marketplace is also very robust marketplace driven by the low cost of energy and general demand for products around the world.

But neither of those we were talking about were ethylene or polyethylene-based.

Okay.

Any breakdown as far as North America versus international?

Probably not.

But that marketplace that I just described stays -- well the secondary marketplace stays pretty robust in the US and over in Asia specifically.

Okay.

And then I don't know if you have this number in front of you or can just talk to it, but just wondering how much of your -- when you look at your prospect list of chemical exposure how much of it is for integrated oil companies, the IOCs of the world where they're seeing CapEx pressures outside of just what's going on in the chemical space versus just pure chemical companies?

The answer to that question is a little hard to give you.

There are as I'm sure you're aware some very large petrochemical -based opportunities that some of the big integrated energy companies are talking about and those are in the $20 billion kind of number.

So that's skews, just to answer your question that would skew everything towards pretty much the petrochemical base.

But that aside I'd say it's pretty evenly based between petrochemical and (technical difficulty).

Certainly some of these new big awards we've gotten are outside the integrated oil structure.

The recent ones as I said, but a couple from a prospect perspective there are some big projects being talked about I'm sure you're well aware.

You put that into the mix it skews everything dramatically.

But that aside I'd say it's even more evenly balanced.

Great.

Thank you, gentlemen.

Justin Ward, Wells Fargo.

Hey guys, thanks for taking my question.

Just a quick add-on to the CEO search question line.

Is it important to find a candidate with a proven track record of successful acquisition timing and integration?

Is a high on the priority list or is it still primarily about prioritizing the customer relationship skills?

Certainly it would be nice to have a proven acquisition record, but we've got a good team in-house that knows how to do that.

We probably are focusing more on other things.

We still would like to get a person that's been in the job before.

That's still one of our criteria.

We are looking at people that got really good people skills both down because we're a pure services business.

Whomever we bring in has got to have good people skills both within the organization itself and with the customers.

We're not necessarily looking for a chief salesman, that's not what I got mind.

But you do have -- sorry George.

(laughter) But what we are looking for is somebody that's got good people skills, good leadership skills, a proven acquisition record probably drops down the list.

Thanks a lot, guys.

Hey guys, I think we'll quit.

You wore us out.

We do appreciate your interest.

We do believe the Business is solid, the sales are strong, the diversity is good, and we're looking forward to delivering on a promise.

And thanks for all attending.

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