雅各布工程 (J) 2015 Q4 法說會逐字稿

Good morning and welcome to the Jacobs Engineering fourth-quarter 2015 results conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Kevin Berryman, Executive Vice President and CFO.

Please go ahead, sir.

Thank you, and good morning and afternoon to all.

We welcome everyone to Jacobs' fourth quarter FY15 earnings call.

I will be joined on the call today by Steve Demetriou, our new President and CEO, and as you know, our earnings announcement was released this morning, and we have posted a copy of the slide presentation to our website, which we will reference in our prepared remarks.

I would also like to remind everyone that Jacobs is hosting a webcast presentation to the financial community tomorrow, beginning at 8:00 AM Eastern standard time, where management will discuss our FY16 initiatives in more detail.

Of course, we invite you to join this event, to hear more about the important changes that we are making in the Company going forward.

Before starting, I would like to refer you to our forward-looking statement, which is summarized on slide 2. I will provide our customary review of our forward-looking statement.

The Company requests that we point out that any statements that the Company makes today, that are not based on historical fact, are forward-looking statements.

Although such statements are based on management's current estimates and expectations, and currently-available competitive, financial, and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause actual results of the Company to differ materially from what may be inferred from the forward-looking statements.

For a description of some of the factors which may occur, that could cause or contribute to such differences, the Company requests that you read its most recent earnings release and its annual report on Form 10-K for the period ended October 2, 2015, including Item 1-A, risk factors; item 3, legal proceedings; and item 7, management's discussion and analysis of financial condition and results of operations contained therein for a description of our business, legal proceedings and other information that describes the factors that could cause actual results to differ from such forward-looking statements.

The Company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements, whether as a result of new information, future events, or otherwise.

With that, I will now turn to the agenda for today, which is shown on slide 3. Steve will begin with a discussion on his first impressions since joining Jacobs three months ago, followed by his thoughts on our 2015 performance.

I will then present the financial details for the fourth quarter and the full year of FY15, including an update on our restructuring initiatives, our share buyback program, and our backlog.

Steve will continue with a market update for each of the business sectors, provide his thoughts on our outlook for FY16, and also discuss the recent reorganization that we announced.

He will then conclude with some closing thoughts, before we open it up for some Q&A.

With that, I will now turn the call back over to Steve.

Thank you, Kevin.

I'm now on slide 4, and I want to welcome all of you to our FY2015 year-end and fourth-quarter earnings call, my first since joining Jacobs.

As Kevin mentioned, we'll also be hosting our annual investor presentations in New York and Boston tomorrow, and hope that many of you can join us.

Kevin and I will be accompanied by the four lines of business presidents, Terry Hagen, President of Aerospace and Technology; Andy Kremer, President of Industrial; Gary Mandel, President of Petroleum and Chemicals; and Phil Stassi, President of Buildings and Infrastructure.

All four of these gentlemen are here this morning to assist during the Q&A session.

When offered this leadership position by the Board of Directors to become the next CEO of Jacobs, I knew I had an opportunity to join and lead a great Company.

What I've learned in my first few months has exceeded the expectations as it relates to the strengths of Jacobs and the opportunities to improve and grow.

For most of my first three months, I've traveled across the globe to meet numerous Jacobs employees and customers, across many of our market sectors.

I've experienced a safety commitment that's best-in-class, built off a beyond-zero program that our customers value, and which demonstrates a true culture of caring for and commitment to our employees.

I'm excited about the talent that exists at Jacobs, and the superior engineering, construction and technical services capabilities.

And our portfolio of customers and end markets served, is among the best and most diverse in industry, a huge strength that we need to do a better job of leveraging for growth and demonstrating the benefits to our shareholders.

What has also been exciting to learn during my initial months of engaging with employees and customers, are the numerous opportunities to improve and grow Jacobs.

First, it's clear the Company impressively grew over the past several decades, as a result of numerous organic and inorganic initiatives.

More recently, however, it's faced challenges to sustain that growth, and it's now time to develop a new strategy that will better focus our employees, create value for our customers, and benefit our shareholders.

This new strategy will clearly be aimed at profitably growing Jacobs, and to become a top quartile performer, including in terms of shareholder return.

While we develop this strategy over the next six months, we are implementing enhancements to the way we run our business.

This includes a better focus on our global lines of businesses, which provide opportunities for increased accountability and transparency.

Further optimization of our cost and working capital, and an upgrade of our tools and processes, to further strengthen the delivery of projects to our customers.

With the arrival of Kevin as the new CFO at the beginning of this calendar year, with the CEO void being filled after a fairly long search, and with the new lines of business structure now fully announced, there's a renewed energy and sense of urgency driving our Jacobs culture and business results across the globe.

Turning to slide 5, let's get down to business on presenting and discussing our financial results for the fourth quarter.

We're pleased to report our fourth-quarter earnings at $0.80 per share, which is toward the higher end of our forecasted range.

Including a one-time tax benefit, adjusted total FY15 earnings came in at $3.08 per share, down 7% versus FY14.

We continued to see adverse market conditions in multiple sectors, particularly in oil and mining commodity markets, and these were major contributors to the year-over-year decline in both the fourth quarter and total fiscal year.

We also faced competitive pricing pressures and cyclical economic patterns in certain key markets, which negatively impacted our revenue mix and unit margins.

However, I'm impressed with how the Jacobs leadership team worked quickly and effectively to implement the restructuring initiative earlier in the fiscal year, as a counter-action to right size our cost structure against lower industry demand and margin pressure.

Kevin will provide details of the successful restructuring benefits, to ensure we meet or exceed previous targeted savings.

I'm fully supportive and engaged in this initiative and working with our leadership team to identify and implement additional efficiencies in the face of very uncertain near-term market conditions.

Also helping and maintaining a fairly stable quarterly earnings performance across FY15, were some positive dynamics in our pharma, bio, infrastructure, national government, and specialty chemical sectors.

Several major wins occurred in these businesses, that helped to maintain our backlog, and provide some offset to challenges we'll continue to face on the commodity side of our business in 2016.

These wins included in total contract values, a near $1 billion project for a top global biotech company, an $800 million win for a significant international chemical facility expansion, and a $550 million US Federal Government support services contract.

And given our positive cash flow performance, Jacobs continued to enhance shareholder value by completing the first $500 million share buyback program announced in 2014, and initiating a second $500 million buyback initiative during the most recent quarter, which we plan to execute in a balanced approach over the next three years.

Now, I'll turn it over to Kevin to provide more detail on the quarter and the final FY15 performance.

Thanks, Steve.

So let's flip forward to slide 7, where I will first discuss our financial performance for the 2015 fourth quarter.

Revenue for the fourth quarter was $3.1 billion, and earnings per share was $0.80, which was, as Steve noted, at the higher end of the guidance we provided at our Q3 earnings call, and comfortably ahead of consensus.

While we continue to see macroeconomic headwinds and continued commodity weakness that have impacted certain of our end markets this quarter, it is important to note that on a constant currency basis, our revenues actually grew at a rate of 2%, benefiting from the previously disclosed additional week in our Q4 results in 2015.

During a year of volatile end market dynamics, the Company was again able to leverage the strengths of its diversity, and simultaneously manage costs, resulting in one of the strongest underlying absolute levels of quarterly adjusted EPS performance during 2015, with our Q4 adjusted EPS coming in at $0.80 per share.

Please also note that the quarter adjusted EPS figure also includes a negative foreign exchange impact of 4% from the year-ago comparable figure.

One of the key messages that we would like to convey to you this morning, is to note that this year ended up being a year of stable results for the Company.

While certain of our end markets continued to face challenges, our diversity and cost reduction initiatives allowed us openly to deliver consistent results.

In the first instance, our diverse portfolio, and specifically the stronger elements associated with those less-challenged end markets, helped mitigate some of the pressure on our revenues and gross margins associated with some of the more challenged markets.

In the second instance, our lower SG&A costs were supported by the increased benefits of our restructuring over the course of the year, as evidenced by our continued reduction in our SG&A expenditures during the quarter.

Finally, our continued strong cash flow during the year supported our aggressive execution of our share buyback program, also supporting our adjusted EPS performance, as compared to the comparable year-ago period.

So let's turn to slide 8, where I'd like to highlight our performance for FY15.

Total revenues were $12.1 billion, and when adjusted for foreign exchange translation impacts versus the year-ago figure, was flat.

Again, an indication of the stability of our performance this year.

Adjusted net earnings were $411 million, representing an adjusted EPS of $3.26 for the year.

While our adjusted EPS is reported at $3.26, please remember that the only difference between our reported GAAP and reported adjusted figures is the restructuring costs associated with our aggressive steps to streamline our cost structure.

It's also important to remember that the $3.26 figure also includes the large discrete tax benefit item that we had in Q3 of $0.18 per share, resulting in us showing the underlying adjusted EPS figure here noted on the slide of $3.08.

Consistent with the Q4 results, the stronger US dollar impacted our results for the full year as well, driving 3% of the reduction in our EPS for the year.

While the ongoing headwinds already discussed influenced certain of our end markets, Jacobs' diverse portfolio helped mitigate again the impact of some of these pressures.

In addition, our positive efforts to reduce the cost and better align our operations with the current global environment supported the Company's ability to deliver the adjusted operating profit figure of $600 million for the year, savings from the restructuring built over the course of the year, with nearly 30% of the original expected savings from the restructuring realized during 2015.

The building of the savings during the year was critical, and was a primary driver to the Company's ability to report relatively stable operating profit over the four quarters of the year.

Cash flow also remains strong for the Company, with cash flow and year-end debt at $365 million and $137 million respectively.

Cash flow conversion versus our reported net earnings approached 1 for the year.

These figures remain strong, even though the Company remained aggressive in the execution of its share buyback program during Q4 and the full year.

I will provide a brief update on the program later in the presentation.

Not unexpectedly, we continue to have ample reserves of cash and low debt, thereby providing the Company with substantial flexibility going forward.

Importantly, a strong cash flow and balance sheet remain a hallmark at Jacobs.

Turning to slide 9, I also wanted to give you an update on the restructuring effort that was announced earlier in 2015.

As already communicated in our prior earnings call, the focus of our restructuring has been to simplify Jacobs globally, and to enhance our overall cost effectiveness, especially given some of the market pressures.

We believe our efforts will provide an ability to Jacobs to deliver satisfactory profit levels, regardless of the economic environment in which we are competing.

As the restructuring has gained momentum, we are actually now forecasting one-time costs associated with this to be between $205 million to $230 million, and importantly, our annualized savings are now estimated in the range of $150 million to $180 million on a full-year basis.

Consistent with our original intent, the effort is focused on reducing our fixed cost infrastructure, primarily in labor and real estate.

The plan is now expected to reduce over 20% of our fixed overhead labor cost, and is impacting nearly 15% of our real estate portfolio.

As you also know, we recently announced a significant reorganization of the Company into four global business lines.

While the recent reorganization was not driven by a focus on cost savings, we also believe the new organization will result in improved simplification, focus, and alignment, all of which will result in ongoing further cost efficiencies.

Finally, we also expect that much of our original efforts in the restructuring will be largely completed by the end of our Q1 FY16, but that certainly will not prevent us from continuing to drive for further cost efficiencies longer term.

So let me turn to slide 10 to discuss our ongoing return of capital to shareholders.

The first component of this, the 2014 $500 million share buyback, has now been completed.

A total of $422 million was spent in FY15, fully exhausting the original authorization level.

As you recall, the Board also authorized a second buyback in July of 2015.

The second buyback component, announced during our Q3 earnings call, also totals $500 million.

Consistent with previous guidance, and Steve's comments, we will be taking a more balanced approach to the second $500 million buyback authorization, and our expectations are that this authorization will be utilized more evenly over its three-year term.

We believe this initiative shows the confidence that our Board and executive leadership have in Jacobs, its future, and the Company's ability to generate continued long-term sustainable cash flow, resulting in our flexibility to support both growth, and return of capital to our shareholders.

Before turning it back to Steve, I would like to turn to slide 11, and make a few brief comments on our backlog.

Our total backlog remains at $18.8 billion, an increase of more than 2% year on year, and flat versus our backlog that was reported at the end of our third quarter.

You will note that the backlog split for field services and technical professional services currently equals $11.7 (Sic-see presentation slide-11 �$11.7b�) and $7.1 billion respectively.

Note that our professional services backlog has been impacted primarily by our heavy process and mining and minerals business, and our strong field services backlog is being driven by our developing strength in our pharma bio business.

Our backlog at the end of the year again exemplifies the benefits of our diversity, where certain of our stronger end markets have been able to offset some challenges in others.

Importantly, the backlog level has been negatively impacted by foreign exchange translation changes by nearly $200 million versus the Q3 figures, and over $600 million versus the year-ago backlog figure of 18.4 (Sic-see presentation slide-11 �$18.4b�).

Taking these figures into account, the backlog on a like-for-like basis has actually increased by $1 billion versus the year-ago figure.

Finally, our trailing 12 month book-to-bill currently sits at 1.04, slightly improved versus the last quarter results.

With that, let me turn it over to Steve for some further discussions on our end markets and our outlook for 2016.

Thank you, Kevin.

I'm you now on slide 13.

As we move into the 2016 outlook, I'd first like to update you on our end market diversity, and give you a brief overview on how these markets are impacting Jacobs as we start the new fiscal year.

As you know, we're one of the most diverse EMC companies, and our cost reimbursable contracts continue to represent 83% of our revenues.

As I referenced in my opening comments, our revenue mix continues to evolve.

For total FY15, oil and gas, refining and chemicals represented approximately 43% of total revenues, down from 48% in FY14, but within that group of businesses, chemicals increased.

Buildings and infrastructure grew from 17% to 21% of total revenues, and national government grew from 18% to 22%, both being notable increases that offset the declines in upstream oil and gas, and certain mining sectors.

Starting with next quarter's earnings call, we'll discuss our end markets by new four lines of global businesses, consistent with our new organization structure.

This new segmentation will be consistent with the way we'll prioritize and focus growth initiatives, while also providing shareholders better clarity on the performance and benefits of our diverse portfolio.

However, for today, consistent with how we've previously discussed our markets, I'll now provide an update on how we see things trending in FY16.

This next slide starts with our process segment, which includes the oil and gas, refining, and chemicals sectors.

As we look to FY16, the outlook continues to present a mixed bag.

As you all know, the significant decline in oil prices has had a major impact on our customers' cash flows and capital spend, especially in the upstream side of the oil and gas sector.

It has been reported that CapEx at the large integrated oil companies was down more than 20% in 2015, and there are reports of further CapEx spending declines in 2016.

As a result, this has negatively impacted our backlog and margins in this sector.

However, we do believe we're near a bottom, and demand will stabilize in this new fiscal year.

We're specifically seeing an impact in the Canadian Oil Sands market.

However, our team is doing an excellent job, and in the region, refocusing on smaller sustain capital and maintenance work, and is increasing market share with our clients.

Even in the face of low oil prices, we're continuing to see investments in selected regions such as the Middle East and Africa, where we're building upon our local presence.

Lower crude oil feedstock costs have had a positive impact on independent refiners' margins, and we're seeing a steady business in this part of the process segment, with a strong backlog of sustaining capital and refinery upgrade projects.

We're also seeing opportunities to help our customers in their product flexibility, operating efficiencies, and compliance with safety environmental regulations.

The strongest part of our process segment is in the chemicals sector.

We are in the mix for several interesting growth prospects across the globe.

In fact, we were just informed of a major win with one of the largest petrochemical companies, which we'll provide further information about later in the first quarter.

In summary, our process segment has faced significant headwinds.

However, with our geographic and end market diversity, coupled with our sustaining services focus and based on our strong track record of success, we believe we're poised to start experiencing overall growth in the back end of FY16 in the process segment.

So now onto slide 15.

Our industrial group is highlighted on the next slide, which includes our pharma bio, mining and minerals, specialty chemicals, and manufacturing markets.

In the pharma bio space, we're clearly experiencing a strong growth, and our backlog has significantly increased from a year ago.

Increased M&A consolidations are occurring and driving select opportunities for Jacobs to help clients with portfolio consolidation and optimization.

Aging populations, emerging market expansion, technology advances are all driving a transformational growth cycle in the pharma sector.

We have strengthened our leadership focus and multi-office strategy to go after this strong growth potential, and we're well positioned with our China and Southeast Asia presence, in addition to our well-established US and Europe capability.

In specialty chemicals and manufacturing, we are facing solid market opportunities.

This involves several smaller sectors, including pulp and paper, consumer products, and inorganic chemicals.

Several of our pulp and paper clients and expanding offshore, and we're leveraging our strong domestic position to follow these customers in their overseas expansions.

We're increasing focus in consumer products globally.

Also, as part of our reorganization, we have put our global specialty chemical technologies under one leader to create synergies.

This includes our Comprimo sulfur, Chemetics sulfuric acid, and our phosphoric acid technologies.

We believe this will enable Jacobs to participate more broadly in our customer projects, by leveraging our specific strengths to help customers who benefit from our technologies.

In addition to this, we're also seeing strong consultancy activity in power, especially in Asia-Pacific, where we're looking to increase our market share.

We do continue to face challenging times in mining and minerals.

After slashing CapEx in 2015, our customers are expected to remain extremely cautious in their 2016 spending.

We are promptly mitigating this with market share growth and sustaining capital projects, and are well positioned in our pursuit of the few large projects in South America and the far east.

The bright spot in this sector is in our fertilizer activities, where we have a strong position in Morocco, and are developing opportunities across the globe.

On the next slide is our public and institutional group.

Our national government business is picking up momentum, and is positively positioned in 2016.

While challenges exist with reductions in government spending and delayed award cycles, we're continuing to gain market share to offset these dynamics, and believe that the recent federal budget deal provides stability over the next few years.

We are well-positioned with our long-standing relationships, such as NASA, as well as for emerging opportunities in commercial advanced technical facilities design, along with build and operations work for aerospace, automotive and energy markets.

The strategic investments over the past few years are starting to show benefits, including the largest of those, our acquisition of FNS as part of our intelligence community and cyber security growth strategy.

The well-funded national security priorities are expected to provide growth for our Jacobs Technology Group.

Our expansion investments in test and training range operations and maintenance, especially for the US Army, are providing good growth opportunities in this sector.

Also, we're experiencing positive trends in the nuclear sector, associated with new builds, primarily in the UK.

Our infrastructure business is experiencing good growth opportunities across the globe, led by our strong position in transportation, including highways, rail and aviation.

We are hoping the news associated with a potential US federal highway funding bill will provide the stimulus to drive growth for Jacobs, and we're well positioned in the UK and in Australia for several highway opportunities.

The rail and transit markets are fairly robust across the globe, particularly in high speed rail.

And in aviation, where we have a leading planning and asset management practice, we're positioned positively for many of the expansion initiatives, especially across US, UK and the Middle East.

Also positive for our infrastructure group is continued growth in environmental and water.

We're also expecting steady growth opportunities in the building sector, specifically in aviation, education, healthcare, and mission-critical end markets.

Leveraging off our infrastructure relationships, we're seeing increased activity in the buildings component of aviation.

In the UK and certain US regions, we're also seeing a trend to upgrade educational facilities, and we're pursuing numerous opportunities across the globe in healthcare.

In Australia, we're well positioned for the potential Education City project in Melbourne, which if funded, could present Jacobs with a significant role over a long period of time.

Mission-critical should continue to be a high growth opportunity, where, for example, we have a strong position with one of the largest cloud storage owners in this business.

Although we are experiencing positive trends across our public and institutional businesses, with the slowdown in the industrial markets, we're seeing some margin pressure as competition refocuses on this growth sector.

On slide 17 I'd like to briefly discuss the recent reorganization of Jacobs, which represents the first step in our transformation.

In discussing some of my initial impressions of Jacobs earlier, I mentioned several enhancements to improve our Company.

To meet the improvement goals, we announced the realignment of our leadership structure around four global lines of business.

One of the important changes is the integration of the sales organization into these global lines of businesses, to more deeply embed and strengthen the partnership between winning business and delivering projects.

To ensure consistent support for the new business structure, the four lines of businesses will be strengthened by newly-established global centers of excellence for sales and for project delivery, which will focus on standardizing and optimizing our processes, tools and systems, to ensure we have the highest global capabilities across Jacobs.

I would also like to note that the reorganization provided the opportunity to further lean out our overhead structure, and drive further cost savings.

We believe that this significant change in leadership focus and accountability will be a key driver in profitably transforming Jacobs, and will be integral to outperforming the market over the longer term and will provide greater clarity to our customers and shareholders.

I'm confident that the improved business line structure and cost reduction initiatives will preserve the best of the past, and better position us to enhance our already-strong competitive position.

Ultimately, greater accountability, efficiency, focus, simplicity, and transparency will drive stronger, more profitable long-term growth.

So turning to slide 18, when we pull it all together for FY16, we believe we will continue to face a very challenging global environment, with uncertainty and limited visibility in several of our markets.

It is clear that in petroleum, mining and general industrial commodity markets, our clients are waiting to decide when and how to spend their cash.

We do believe that declines in some of these end markets have either hit, or are close to bottom.

On the flip side, we believe that our buildings, infrastructure, pharma and federal work will provide growth opportunities in 2016, thus balancing and demonstrating the strength of our diversity, which provides the ability to deliver stable earnings in uneven market conditions.

We expect fiscal year first quarter to be our most challenging quarter of the year, with EPS below last year's first quarter, but a more stable situation to then develop as we move further into 2016.

For total FY16, we're providing initial guidance between $2.80 and $3.30 for adjusted EPS, which we believe to be a prudent view, given the current uncertain global environment.

In response to this uncertainty, we will continue to take every step possible to drive further cost efficiencies that lean out our overhead structure, without impacting our ability to win new business.

We will be disciplined to ensure we capture the full year remaining incremental 2016 savings associated with our 2015 restructuring initiative.

And although our recently announced reorganization was about strengthening our leadership culture, providing much-needed focus and accountability, we expect it will also yield additional cost savings as we move through FY16.

In addition, we'll continue to evaluate our office footprint and procurement processes, to seek further cost savings opportunities.

There's a clear energy building across Jacobs and with our customers.

With the senior leadership now clarified, and the reorganization fully executed, there's a new culture of intense focus, higher accountability, and excitement building across the Company.

The majority of the heavy lifting associated with the restructuring has been executed, and although there will be additional cost initiatives, our focus is now pivoting toward flawlessly executing projects for our customers, and profitably growing the Company.

So now, to slide 19.

To summarize, FY15 posed a difficult environment and the Company took key steps to proactively mitigate the challenges.

Looking to FY16, we expect continued uncertainty and an uneven economic environment to persist.

We currently expect FY16 results to be softer in the first half, but the second half to be stronger as cost saving benefits are realized and market conditions begin to improve.

The new business structure that we implemented at Jacobs simplifies the Company globally, and will ensure a stronger leadership team is in place to focus on our long-term strategic objectives.

To further support this, greater clarity on strategic growth is needed, and a deep dive strategic review is under way.

We will provide some additional comments on this in our investor presentation tomorrow morning, and discuss our thoughts on how we will drive strategy.

We believe the initiatives we have undertaken, and those we continue to implement here at Jacobs, are aligned with shareholders' interest, and will ensure we are well-positioned to drive long-term profitable growth.

Thank you for listening, and we'll now open it up for questions.

(Operator Instructions)

Our first question will come from Jerry Revich of Goldman Sachs.

I'm wondering if you folks can talk about the range of expectations embedded within your guidance for revenue burn and margins.

Kevin, if you could just frame that for us.

And maybe secondly, there are a number of moving pieces between the cost reduction efforts and on one hand and the pricing pressure that you cited in the prepared remarks.

Can you flesh out for us how we should be thinking about gross margins and SG&A to sales on a run rate basis, post the restructuring?

Thanks for the question, Jerry, and good morning to you as well.

Look, I think we won't go into a lot of details here, but I will tell you, clearly, that our efforts on the restructuring are resulting in what we believe will be some fundamental changes, and our SG&A costs going forward.

By default, if we're successful in doing that, which obviously we're assume and we are telling you we feel good about that, that implies given our guidance that there is some pressure on our gross margin.

And I think that clearly the dynamics as it relates to certain of the end markets that are under pressure are those places we see it most, and so effectively, at the end of the day, the guidance would suggest that we're able to maintain our EPS levels, given the fact that we're able to reduce our SG&A, which offsets some of the gross margin pressure.

Okay.

Thank you.

And the follow-up, on the chemicals business, your business picked up well ahead of your peers and has been a good growth driver the past couple of years.

It obviously slowed this year.

Can you talk about how much visibility you have on that picking up in the back half of FY16?

As I think the prepared remarks described, is it a timing of a couple major projects, or could you give us some more color on what you're seeing in that end market?

Why don't we have Gary Mandel answer that question?

Our pipeline of chemical prospects is probably more robust than we've seen in several years.

Through Q4 and through November of this year, we picked up some wins, some of which we can announce, some Steve mentioned, we'll announce in Q1.

We see a lot more opportunities, and we're able to leverage with the new line of business structure those opportunities globally.

So there's a lot more communication and focus on that, since we have a single head of chemicals globally.

And so we feel some of those are in the prefeed feed stage, but will convert in the second half of the year, and that's why we told you we believe the second half will be more robust.

Thank you.

The next question will come from Steven Fisher of UBS.

Great.

Thanks.

Just a quick follow-up on the chemicals question first.

Just thinking back to 2013 and 2014, I know you had a number of chemicals prospects as well, and some came through but others were lost to competition.

So I guess I'm curious how you think things might be different this time around, and how the confidence you have that business will actually start picking back up in the second half of the year?

Thanks.

This is Gary again.

There was a lot of competing projects a couple of years ago, and if you'll remember, we had some project cancellations as well.

We're seeing a different environment here.

There's more pure play chemical companies that are pursuing these projects.

With the low feed stock and the pricing improvement in supply chain, we see them going forward.

Our estimates are matching the customers' estimates.

We believe they'll get sanctioned and move forward, especially looking at the US, the Middle East and Asia.

We see a lot more projects in those three areas, and the dynamics are such that we believe they will move forward.

Okay.

And then just a question on the guidance.

Can you just give us a sense for the overall direction of revenues in FY16, and then perhaps the cadence?

I'm assuming it's going to be negative in the first half of the year, year-over-year and then picking up positive.

And maybe you could just talk a little about the mix, how that might be different 2016 versus 2015, and how that specifically might be playing into your margin trajectory?

So Steven, let me take that.

This is Kevin.

So, a couple things.

I think what we would suggest is certainly at the gross margin line, there's going to be some pressure.

That would imply that there will be some pressure on the top line.

But as you know, we focus more on the gross margin because of the pass-through dynamics, and what not, relative to how that flows through revenues.

But certainly, there will be downward pressure on revenues as well, and I would suggest to you in the first part of the year, we're still comparing to the first part of 2014, which was still on a downward trajectory, as it relates to some of the businesses.

So yes, the pressure will be larger in the first half of the year.

To the point that Gary has been alluding to and responding to, the first few questions, certainly, there are differences in mix that will be developing longer term over the course of the year, and certainly, we're expecting the chemicals will be stronger.

We also believe that some of the other businesses will be more stable, and have upward trends, as well.

But that will offset some of the continued challenges that we think we'll have, certainly in the first part of the year, in mining and minerals.

And remember, we're still comparing to a mining and minerals number in the first quarter of a year ago, that was still on a downward trajectory.

So yes, there's some mix dynamics going on but all in all, I would suggest that there is going to be some pressure on gross margin, and on the revenue side, and probably largest in the first quarter, first half of the year.

How about on the field services versus professional services?

Is that -- obviously your backlog in field services picked up.

Is that going to be associated with some margin pressure, as well?

Well, the good news is that some of the field service work is in the pharma bio space, which is generally a little bit better in terms of the field service margin.

But yes, there will be some impact there, as well.

Okay.

Thanks a lot.

The next question is from Tahira Afzal of KeyBanc Capital Markets.

As I look at the biotech and pharma side, clearly there's a lot of momentum there.

Would love to get an idea if you're seeing any competitive pressures there.

It's one of the markets I think there seems to be sustainable momentum and I'm curious if you're seeing some of your more -- you have a pretty strong position there, but would love to get a sense competitively how that's holding out.

This is Steve here.

You're right, it is, I'd say on the top end of the exciting and growth markets that we're experiencing right now.

As a result, I would say it's the least of our concerns from a margin standpoint, and we're more focused on how do we properly resource and capitalize and capture all the growth that's in front of us.

Got it.

Okay.

And from the incremental savings you're generating, Kevin, are most of those sort of being passed through to investors?

How should we think about the visibility of those on the margin line?

As we have communicated in the past, Tahira, we will give you a perspective of what the savings are.

We also have said to you that not all of those savings are going to actually be seen on the P&L, because we will reinvest some of it back into our business.

Certainly some of our investments in our people and our systems are some of the things that we have talked about will be required to be done.

But we'll provide that clarity as we work through the course of the year, to give you a little bit better sense.

The good news is, is that the savings are coming through, and it provides us the flexibility to do some of those things that we need to do, and at the same time offset some of the pressure points that we've talked about.

Got it.

Thank you, folks.

Next we have a question from Andrew Kaplowitz of Citigroup.

Nice quarter.

Kevin, can you talk about Jacobs' backlog as we go through 2016?

You're actually maintaining sequential backlog on the strength of the pharma bio stuff that you talked about in 4Q, given the increased currency headwind.

When we look at 2016, can you maintain or grow backlog on the strength of the industrial or government or pharma bio portfolio, or maybe the downstream maybe you talked about starting to improve?

Let me start off, and just give you my perspective of the backlog.

When you look at our backlog, or I analyze our backlog over the course of the last year, it's basically in the flattish side, up slightly, and the major story is a significant reduction in our backlog on upstream, on the petroleum side, and a significant increase in the specialty industrial side of our business, led by the pharma bio.

In between all that, I'd say is a good solid performance of backlog from the rest of our business, including some of the refining and chemicals side of our process, our building and infrastructure, solid performance in our technology, aerospace and technology group showing good strength.

The mining decline actually had occurred starting a year ago, so when you look at our backlog, it's not that heavily impacted, because we felt a lot of that deterioration in the past.

And so right now, it's all about winning new business, and I think we gave you a flavor in our opening remarks, there's a lot of energy, excitement around all four of these sectors that we're focusing on, and yes, we do believe that we have excellent prospects to continue to strengthen our backlog over the near term.

So that's my perspective of the backlog.

Okay, Steve.

Look, you have a fresh set of eyes as you look at the Company.

You have obviously talked about restructuring.

You've upped your costs and benefits there.

But Jacobs has been a Company over a long period of time that's done a lot of acquisitions, with arguably, some people think not as much integration as maybe needed to take place.

When you step back and look at the business, and you talk about the strategic review that you are doing, is that one of the areas where you could take significant cost out over the next year, or just sort of consolidating internally and moving forward, how do you look at that?

It's a good question.

My first three months, I've been doing a lot of digging into the acquisitions, and since the beginning of the Company there's been approximately 70 acquisitions over the course of the many decades.

And that's been a lot of what makes up Jacobs today.

When you look at the most recent acquisitions, they were among our largest.

And I do believe that there's still meat on the bone with regard to driving efficiencies and synergies.

The Company was very focused on aggressive growth.

Frankly, as we all, the leadership team look back at the acquisitions, we feel like they were excellent strategic acquisitions, but we could probably have done better on the integration side and driving the full benefits of cost synergies.

And so the good news is, some of that's still there, and we're focused on those, and as part of our strategic review, we'll be -- if and when, as and when we get back into the acquisition initiatives, to have a much more robust Best-in-Class integration process in the Company.

Got you.

Kevin, just one clarification.

The $100 million in restructuring costs you had in the quarter, is that all in SG&A or the vast majority?

Could you give us that number, of that $100 million?

Is it all SG&A?

Just think of it basically as SG&A.

It's almost entirely SG&A.

There's a piece that probably goes up in the gross margin.

But for your modeling purposes, is not worth talking about.

Thanks.

The next question comes from Brian Konigsberg of Vertical Research.

Steve, maybe I just wanted to press a little bit more on the commentary around just the oil and gas spending.

You noted that you think that we are near a bottom.

When you make those comments, are you kind of aggregating what you're seeing chemical with oil and gas, or are things in downstream that might be still offsetting upstream, that might be coming down?

Maybe give a little more clarity on what gives you confidence we are seeing a bottom and are there offsetting components to that aggregate number you're talking about?

That's a good question.

And my comments on hitting the bottom and stabilizing is more from a Jacobs position in that industry.

And what gives me confidence that we're near bottom, and should see a stable profile, and in fact maybe some momentum by the second half, is that most of our activity is focused on refining and chemicals.

In the upstream we've got a good position on sustaining capital and maintenance, and most of the major project work, that's behind us.

And so when we look at our backlog and we look at the initiatives that are in front of us, what gives me confidence is the fact is that we're well positioned in that refining and chemicals sector.

We all recognize that there's a lot of uncertainty on oil prices, and there's reports that things could get worse before they get better.

But as we look at our mix of businesses and prospects, we feel like we can operate through that uncertainty pretty successfully.

Got it.

And secondly, you also made a comment about just working capital and thoughts on potential opportunities on that front.

You are a little bit asset heavy relative to your peers, from a working capital perspective.

Maybe could you talk about what components you think you might be able to make progress on?

And just in this type of environment, how realistic is it to push on the customer base to allow for a better working capital dynamics?

I'll start, and let Kevin build on this.

But again, as I come into the Company and look at what we've been focused on, working capital was not at the top of the list over the last couple of years, compared to some of the other key initiatives that the leadership was focused on.

And we've now all brought that to the forefront, and have put that as one of our key objectives and driving working capital improvement and really the specific component is accounts receivables.

And when we analyze our working capital, even in this difficult environment where customers are looking to stretch, et cetera, we believe there's significant improvement opportunities over the near term.

And so we expect to see that be a very successful trend in 2016.

Thank you.

Next we have a question from Michael Dudas of Sterne Agee.

My question for you, Steve, my first question is, I look on slide 17 about the transformation, and how you set up the Company division and structure.

Can you share a little bit how you look at incentivizing the management teams and structures?

Are you looking at return on capital targets?

Obviously, safety's going to be very important, but are the earnings?

Margins?

How they are being viewed by success, and how that, on a bottoms up basis translates to some of the bottom line growth you're anticipating for the Company over the next three to five years?

Thanks, Mike for that question.

And that's a really key question and something we've focused heavily on over the last couple months.

So when you look at slide 17 and you see that organization led by the four business lines, one of the first key changes is that these four Presidents have P&L, balance sheet accountability at a much more focused and transparent way than we've had in the past in the Company, and that cascades down through their leadership teams and the organizations.

And so, as we look at how we're setting up the incentives and goals for management, the short-term annual incentive is going to be focused on operating profit and working capital.

And it will be focused where these leaders will have a component that is total Company, and a component that's based on their lines of business.

And both the terms of operating profit and working capital.

As we look at our long range incentive around equity, that current program is going to be tied to EPS, and it's going to be tied to shareholder return, relative to how the market's trending.

That's the first phase of what we've done and implemented, and I think made a major enhancement to incentive and accountability over the near term.

Once we complete the strategy work by mid-year, out of that strategic plan, we'll most likely focus on potentially an additional metric or two, that we need to be accountable for.

And that's where potentially a return component could be introduced to one of our key focal points and metrics that are going to drive the Company, and we'll see what comes out of that strategy work.

My follow-up would be, as you look the first three months at the organization and in your strategic review, how do you view the risk tolerance and the risk profile of Jacobs' current book of business, and how you think it should be going forward, as the investment community and marketplace looks at a lot of cost plus, risk profile quite low.

Is that something that's a core concept?

Is that something that might adjust, given what's happening in the marketplace in some of your key growth driving in the market going forward?

One of the strengths of Jacobs over the years has clearly been our reimbursable -- large reimbursable portion of our portfolio, and as I talk about preserving some of the past, that's clearly one of the things that we want to continue to be viewed by our shareholders, and continue to have a smart, intelligent risk profile.

I use that word intelligent risk, that as we've reassessed things in my first three months, we may have been overly conservative on some opportunities that we're clearly capable of executing and still maintaining a very prudent risk profile.

So I expect in the outcome of our strategy work by mid-year, that we're going to identify some additional opportunities that aren't currently in our mix, but will still be viewed by our shareholders and our Board as being prudent risk opportunities.

Look forward to seeing you today.

Thanks.

The next question will come from Anna Kaminskaya of Bank of America.

I guess it's a follow-up on the previous question, but wanted to get more color on your announcement of having dedicated full service units in the US.

Is it more to drive more synergies or cost savings or -- hello?

Can you hear me?

We're here.

Or are you looking to grow it as a standalone business, where you maybe do more work as a high construction business with larger construction projects?

Would appreciate any more color on that.

I'm going to start with just a quick introduction and turn it over to Gary Mandel, to talk about that since a lot of this starts in the process side but cut across the entire Company.

I hate to say this because a lot of people think you can only do one versus the other, but this is within where we clearly see, first and foremost, growth.

It's driven by growth, but also offers us the opportunity to drive some synergies by putting it all under one leader.

Let me turn it over to Gary to enhance that.

Thank you, Steve.

It is a growth strategy, as evidenced by our increasing field service component that Kevin talked about that.

As many of you who have been tracking us for a number of quarters, we had a lot of projects in pre-feed and feed that are now going to the execute phase, where we will be delivering the construction.

But it's also a strategy.

We talked about the headwinds in our upstream oil markets, including the Canadian Oil Sands.

One of the primary drivers for us in Canada right now is sustaining services and maintenance, and so it was an opportunity to put this under one leader, to synergize the resources, to take care of our sustaining services and maintenance, but also grow the construction element as we're starting to see the projects get into the execute phase.

Would that business be also doing construction part of the projects, where you were not involved in the feed side of the business?

We actually have several of those opportunities under contract today, and are pursuing others as well.

Great.

And just a follow-up on your cash redeployment.

I think you said you would be more measured on buybacks.

So does it mean you have a higher appetite for acquisitions over the next year, and if you do, where would you be focusing on?

And I guess going back to Steve on just the M&A process, besides the integration post M&A, do you envision any changes to how you source the deals or do due diligence, do a separate corporate development team to focus on M&A?

Any color on that would also be appreciated.

So I'm going to continue to come back to that I think we're going to be in a much better position to explain all of this over the course of the next six months, as we complete our strategy, because I think you'd want that to be strategically driven, versus some initial opinions.

But I will say that it's clear as I've come into the Company in the first three months that as we get into M&A in the future, that we will want to do two things.

We'll want to have a very robust internal M&A capability, with clearly the businesses identifying the opportunities, but have a robust and experienced internal execution M&A team, that takes those great ideas coming from the businesses, and drive those.

And I think that will be an enhancement potentially from the way we've done it in the past.

But then marrying that is that we're going to want to have an improved integration process in the Company.

And the good news about all this is that all of us have a lot of experience in this, and so this is something we know and we'll be able to implement.

And so the most important thing is, let this be strategically driven coming out of our strategic plan, and at that point, we'll have more to talk about.

What about just M&A appetite, or is it similar that we would have to wait a couple months?

Again, M&A will need to be part of our long-term portfolio of growth initiatives, to complement our organic.

And so when will that occur?

We don't know yet today.

There are some very small initiatives that we're working on.

I think we feel comfortable that if we make some very small bolt-on initiatives, that those could be easily absorbed by our Company.

But as far as anything that's material, that will come out of our strategic plan.

Okay.

And just clarification.

How much of buyback is in your 2016 outlook, if any?

Well, Anna, this is Kevin.

As we suggested, we will be measured and kind of ratably spend against our $500 million over the three-year term.

Okay.

But it does include some assumption for buyback?

Yes, it does.

Thank you.

Thank you.

Look forward to seeing you tonight.

The next question comes from Jeff Volshteyn of JPMorgan.

Continuing on the subject of realignment, so the senior leaders are in place.

How much work would you say is there left for building out mid-level management teams under the new structure?

In other words, the centers of excellence that you've identified, and other key functions, have they been already built out, or is it still an ongoing process?

As far as the reorganization, it's been completely announced, and people in the Company know where they fit.

So I would say that we're 90% complete, and the reason why I say 90% is because we have identified that in a few areas, we're going to want to bring in some additional capabilities to enhance this reorganization.

And you have talked about it in the centers of excellence.

The leaders have been announced.

Their teams are in place.

But when it comes to sales center of excellence and project delivery, we potentially are going to add some capabilities within those organizations, to make sure we can drive to best-in-class.

But for the most part, we're now completed in our reorganization and everyone's focused on executing projects and winning business.

Very helpful.

And then a question on power markets, particularly in Asia-Pacific.

Can you comment on what type of projects are they sizable and kind of overall backlog and maybe a bit of color on nuclear.

I know it's in a different segment, but any nuclear projects that you're working on.

Andy Kremer is going to take that question.

Thanks, Jeff.

In the Asia market specifically, our role is primarily working on the owner advisory side, consulting, front end conceptual work.

It doesn't have a huge impact on backlog, because it's a professional technical services market for us.

We're not into new build construction in Asia, although the level of activity there is certainly driving a lot of professional technical services.

I'll turn to Phil to talk about the nuclear new build.

So we have -- this is Phil Stassi.

Good morning.

The nuclear new build programs, particularly in the UK, are robust.

We are heavily involved in all of the major programs that are taking place there, primarily in the civil structural side of this, but certainly in the planning and the support areas of those projects, and we've been involved in those for the past year and a half or so.

And in addition, regarding power, just general power, geothermal and hydroelectric is also an area of expertise that came out of the SKM organization.

That's not only in South America, but also in Southeast Asia.

The big projects are in the UK, and the nuclear new build.

The other projects, as Andy stated, are more in the consulting side.

Perfect.

Helpful.

Kevin, one last sort of a housekeeping question.

Can you share some of the assumptions for foreign exchange, maybe tax rate and share counts for the first quarter, and perhaps throughout 2016?

I won't probably give you as much as you want, Jeff, but let me give you some comments.

I told you collectively that I think we can do a better job in terms of driving an ETR that is lower than it has been historically.

I think that continues to be the case.

You might recall that we had a 32.5% number in 2014.

We're well below that in 2015.

I don't necessarily believe we'll get to the same level of 2014 in our -- excuse me, 2015 numbers in 2016, but they'll be below our 2014 figures, absolutely.

So I think there is a continuation of our efforts to drive down our effective tax rates over time.

We have some tax planning initiatives in place, and we believe that some of those will come to fruition, maybe even in the first quarter, but that's too premature to talk about, at this particular point in time.

But the ultimate message to you is that we believe we can effectively drive down that rate longer term, certainly from those 32.5% numbers that we saw in 2014.

And your assumption for foreign exchange?

Look, we're not assuming a fundamental talking about the FX being a fundamental change from where it is today.

So look, I think we're envisioning foreign exchange to be some challenges, perhaps, in Canada, little bit of challenges versus Australia and UK, and euro versus the year-ago figures, but not materially different from where the rates are today.

Thank you very much.

Very helpful.

And this will conclude the question-and-answer session.

I'd like to turn the conference back over to management for any closing remarks.

Okay.

Thank you for being on the call today.

I look forward to spending time with all of you in the future and seeing some of you over the next day.

Take care.

The conference is now concluded.

Thank you for attending today's presentation.

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