Jacobs Solutions Inc. (J) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Jacobs Engineering's Fourth Quarter 2015 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also 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, Laura and good morning and good afternoon to all. We welcome everyone to Jacob’s fourth quarter fiscal year 2015 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 08:00 AM Eastern Standard Time where management will discuss our fiscal year 2016 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 facts are forward-looking statements. Although such statements are based on management’s current estimates and expectations and currently available competitive, financial, and economic data, forward-looking statements are inherently uncertain, and involve risks and uncertainties that could cause actual results of the company to differ materially from what may be inferred from 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 02, 2015 including Item 1-A, risk factors, Item 3, legal proceedings and Item 7 management’s discussion and analysis of financial conditions 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 fiscal year 2015 including an update on our restructuring initiative, our share buyback program and our backlog. Steve will continue with the market update for each of the business sectors, provide his thoughts on our outlook for the 2016 fiscal year 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.

All right, thank you Kevin. I'm now on Slide 4 and I want to welcome all of you to our 2015 fiscal year end and fourth quarter earnings call, my first since joining Jacobs. As Kevin mentioned, we will 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 & Technology; Andy Kremer, President of Industrial; Gary Mandel, President of Petroleum & Chemicals, and Phil Stassi, President of Buildings & Infrastructure. And 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 have exceeded the expectations as it relates to both the strengths of Jacobs and the opportunities to improve and grow. For most of my first three months I travelled across the globe to meet numerous Jacobs' employees and customers across many of our market sectors. I have experienced the safety commitments 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 in markets served is among the best and most diverse in the 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. While recently however, it has 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 the 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 is 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 of 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 towards the higher end of our forecasted range. Including a one-time tax benefit, adjusted total fiscal year 2015 earnings came in at $3.08 per share down 7% versus fiscal year 2014. We continue 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 market 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 in maintaining a fairly stable quarterly earnings performance across fiscal year 2015 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 will 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 $550 million U.S 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 in 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 2015 fiscal year performance.

Thanks Steve. So let's split 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 comfortable ahead of consensus. While we continue to see macroeconomic headwinds and continued commodity weakness that has 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%. That is benefiting from the previously disclosed additional week on 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 ultimately to deliver consistent results. In the first instance, our diverse portfolio and specifically the stronger elements associated with those less challenged end markets helped to 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 cost was 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 the fiscal year 2015. 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 cost associated with our aggressive steps to streamline our cost structure. It is 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 not showing the underlying adjusted EPS figure here noted on the slide of $3.08. Consistent with the Q4 results the stronger U.S. dollar impacted our results for the full year as well driving 3% of the reduction in our EPS for the year. While the ongoing headwind is 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 on the restructuring built over the course of the year was nearly 30% of the original expected savings from the restructuring realized during 2015. The billing 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 remained strong for the company with cash flow at year end debt at $365 million and $137 million respectively. Cash flow conversion versus our reported net earnings are close to 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 our program later in the presentation. Not unexpectedly we continue to have ample reserves of cash and no debt thereby providing the company with substantial flexibility going forward. Importantly, our strong cash flow and balance sheet remained a hallmark at Jacobs. Turning to Slide 9, I also wanted to give you an update on the restructuring effort that was announced during the year in 2015. As already communicated in our prior earnings call, the focus of our restructuring has been to simplify Jacobs globally and to announce our overall cost effectiveness, especially given some of the market pressures. We believe our efforts will provide an ability for 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 to $180 million on a full year basis. Consistent with our original intent the effort is focused on reducing our fixed cost infrastructure primarily our labor and real estate. The plan is now expected to reduce over 20% of our fixed overhead labor costs 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 our 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 restructuring will be largely completed by the end of our fiscal Q1 in 2016. 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 were spent in fiscal year 2015 full year stock being the original authorization levels. As you'll recall, the Board also authorized a second buyback in July 2015. The second buyback component announced during our Q3 earnings call also totaled $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 the first authorization will be utilized more evenly over a three-year term. We believe this initiative shows the confidence that our Board and the 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'd like to turn to Slide 11 and make a few brief comments on our backlog. Our full backlog remains at $18.8 billion an increase of more than 2% year-over-year and flat versus our backlog that we supported at the end of our third quarter. You will note that the backlog for field services and technical professional services currently equals $11.7 billion and $7.1 billion respectively. Note that our professional services backlog has been impacted primarily by a heavy process in mining and minerals business and our strong field services backlog is being driven by our developing strike [ph] 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 than others. Importantly, the backlog level has been negative 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 billion. Taking these figures into account, the backlog on a like-for-like basis has actually increased by $1 billion versus a 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 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 are one of the most diverse E & C 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 with total fiscal year 2015 oil and gas refining and chemicals represented approximately 43% of total revenues down from 48% in fiscal year 2014. 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 the 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 fiscal year 2016. This next slide starts with our processed segment which includes the Oil & Gas Refining and Chemical sectors. As we look to fiscal year 2016 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 were 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 are near the bottom and demand will stabilize in this new fiscal year. We're specifically seen an impact in the Canadian oil sands market, however, our team is doing an excellent job in the region of refocusing on smaller sustaining capital and maintenance work and is increasing market share with our clients. And even in the face of low oil prices we're continuing to see investments in selective regions such as the Middle East and Africa where we're building upon our local presence. While our 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 in refinery upgrade projects. We are 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 will 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 are poised to start experiencing overall growth in the backend of fiscal 2016 in the process sector. So now on to 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 significant increased from a year ago. Increased M&A consolidations are occurring 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 the strong growth potential and we're well positioned with our China and Southeast Asia presence in addition to our well established U.S. 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 are expanding offshore and we're leveraging our strong domestic position to follow these customers in their overseas expansions. We're increasing focus on consumer products globally. Also as part of our reorganization, we've 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 spend. We are partly mitigating this with market share growth and sustaining capital projects and are well position in our pursuit of the few large prospects of South America and the Far East. The bright spot in this segment 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 shares 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 and commercial advanced technical facility designs along with building 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 accusations 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 have test and training range operations or maintenance especially for the U.S. army of providing good growth opportunities in this sector. Also we are 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 physician and transportation including highways rail and aviation. We are hoping the news associated with a potential U.S. 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 railway 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 where we are positioned positively for many of the expansion initiatives especially across U.S., UK and the Middle East. Also positive for our infrastructure group is continued growth in environmental and water. We are also expecting steady growth opportunities in the building sector, specifically in aviation, education health care and mission critical end markets. Leveraging off of our infrastructure relationships, we’re seeing increased activity in the buildings component of aviation. In the UK and certain U.S. reasons we're also seeing a trend to upgrade educational facilities and we're pursuing numerous opportunities across the globe and health care. In Australia we are well positioned for the potential education city project of Melbourne which have funded quick present [ph] 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 store donors in this business. Although we are experienced in positive trends across our public and institutional businesses with a slowdown in the industrial markets we’re seeing some margin pressure as competition on the refocuses on this growth sector. On Slide 17 I would 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’ve mentioned several enhancements to improve our company. To meet the improvement goals we announce 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 the 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 provides the opportunity to further lean out our overhead structure and drive further cost savings. We believe that this significant change in leadership focus on accountability will be a key driver in profitably transforming Jacobs and it will be integral to outperforming the market over the longer term and will provide greater clarity to our customers and shareholders. I am 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 report altogether for fiscal year 2016 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 and mining and general industrial commodity markets our clients are waiting to decide when and how to spend their cash. We do believe that the clients 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 fiscal year of 2016 we're providing initial guidance between $20.80 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 leaned 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 fiscal year 2016. In addition, we will continue to evaluate our office footprint and procurement processes to seek further cost savings opportunities. There is a clear energy building across Jacobs and with our customers, with the senior leadership now clarified and the reorganization fully executed there is a new culture of intense focus, higher accountability and excitement building across the company. The majority of our 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 of our customers and profitably growing the company. So now, to slide 19. To summarize 2015 fiscal year post a different environment and the company took few steps to proactively mitigate the challenges. Looking to fiscal year 16, we expect continued uncertainty and an uneven economic environment to persist. We currently expect fiscal 2016 results to be softer in the first half, but the second half to be stronger as cost savings benefits are realized and market conditions begin to improve. The new business structure that we implemented at Jacobs simplifies with 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 underway. 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 continued to implement here at Jacobs are aligning 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.

Thank you. [Operator Instructions] And our first question will come from Jerry Revich of Goldman Sachs.

Thank you. Good morning. I’m wondering if you folks can talk about the range of your expectations embedded within your guidance for revenue burn and margins, Kevin, if you could just frame that for us? And maybe secondly, there are number of moving pieces between the cost reduction efforts on one hand and the pricing pressure that you cited in the prepared remarks, can you flush 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 and resulting in what we believe will be some fundamental changes and our SG&A cost going forward. By default if we're successful in doing that which obviously we are assuming 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 or those places we see at most and so effectively at the end of the day, the guidance would suggest that we’re able to maintain our kind of 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 a follow-up on the chemicals business, your business picked up well ahead of your peers and has been good growth driver over 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 fiscal 2016 as I think the prepared remarks describe, is it the timing of a couple of major projects or can you just give us some more color on what you’re seeing in that end market?

Yes, why don’t we ask Gary Mandel to answer that question?

Yes, 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've 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 is 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 pre-feed feed stage, but we 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.

Great, thank you.

And 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, 2014, you had a number of chemicals prospects as well and some came through, but others lost to or 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 that business will actually start picking back up in the second half of the year? Thanks.

Yes, this is Gary again. Yes, there was a lot of competing projects a couple of years ago and if you remember we had some project cancellations as well. We’re seeing a different environment here. There is more pure play chemical companies that are pursuing these projects with the low feedstock and the pricing improvement and supply chain we see them going forward. Our estimates are matching the customers' estimates. We believe they will get sanctioned and move forward. Especially looking at the U.S., 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, I mean can you just give us a sense for the overall direction of revenues in fiscal 2016? And then perhaps the cadence and I’m assuming is going to be negative in the first half of the year, year-over-year and then pick up positive? And maybe if you could just talk a little bit about the mix how that might be different 2016 versus 2015 and how that specifically might be playing into your margin trajectory?

So Steve, then let me take that, this is Kevin. So a couple of things, I think what we would suggest is, certainly at the gross margin line there is 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 we’ll be developing longer term over the course of the year and certainly we’re expecting that 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 will have certainly in the first part of the year in mining and minerals. And remember, we’re still comparing to our mining and minerals number in the first quarter a year ago that was still on a downward trajectory. So yes, there is some mixed dynamics going on, but all in all, I would suggest that there is going to be some pressure on gross margins and on the revenue side and probably largest in the first quarter, first half of the year.

But 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.

And the next question is from Tahira Afzal of KeyBanc Capital Markets.

Good morning, folks.

Good morning.

You know if I look at the biotech and pharma side, clearly there is a lot of momentum there. I would love to get an idea if you’re seeing any competitive pressures there, it is one of the market that I think there seems to be sustainable momentum and I’m curious if you’re seeing some of your more - we have a pretty strong position there, but would love to get a sense competitively how that is holding out?

Yes, 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 and as a result I would say it’s the least of our concerns from a margin standpoint and more, we’re more focused on how we properly resource and make sure we capitalize and capture all the growth that is in front of us.

Got it, okay. And from the incremental savings you’re generating Kevin, most of those sort of being pass through to investors, how should we think about the visibility of those on the margin line?

As we’ve 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, but we will reinvest some of it back into our business, certainly some of our investments in our people, in our systems or some of the things that we’ve talked about will be required to be done. But we will 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.

And next we have a question from Andrew Kaplowitz of Citigroup.

Good morning guys. Nice quarter.

Thank you.

Kevin, can you talk about Jacobs' backlog as we go through 2016? You actually maintained sequential backlog on the strength of the pharma-bio stuff that you talked about in 4Q, given an increased currency headwind, so when you 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 that you talked about trying to improve?

Let me start off and just give you my perspective of the backlog. When you look at our backlog or I analyzed 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. And in between all that, I would 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, 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 the 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 is 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 is my perspective of the backlog.

Okay, Steve so could you give a fresh advice as you look at the company, you guys have honestly talked about restructuring, you’ve upped your cost and benefits there, but the Jacobs have been a company over a long period of time there has been a lot of acquisitions with arguably some people think not as much integration as may be union to take place, so when you step back and look at the business and you talk about the strategic review that you guys 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 and my personally – much I have been doing a lot of digging into the acquisitions and since the beginning of the company there has been approximately 70 acquisitions over the course of the many decades and that’s been a lot of work is makes up Jacobs today. And when you look at the most recent acquisitions they were among our largest and I do believe that there is 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 looked back at the acquisitions we feel like they were excellent strategic acquisitions, and 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 is still there and were focused on those and as part of our strategic review will be if and when as when we get back into the acquisition initiatives to have a much more robust best-in-class integration process in the company.

That’s it. 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?

Yes, just think of it basically as SG&A. It's almost entirely SG&A. There is a piece that probably goes up in the gross margin, but for your modeling purposes is not worth talking about.

Great, thanks guys.

And the next question comes from Brian Konigsberg of Vertical Research.

Yes, hi good morning.

Good morning.

Steve, maybe I just wanted to push a little bit more on the commentary around just the oil and gas spending you noted, do you think that we are near a bottom, when you make those comments are you kind of aggregating what you’re seeing in chemical with oil and gas or are there things, downstream that may be still offsetting upstream that might be coming down, may be give me at little more clarity on what you see your confidence you are seeing a bottom and are there kind of offsetting components to that aggregate number you are talking about?

Yes, 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 are near bottom of and should see stable profile and in fact may be 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 recognized that there is a lot of uncertainty on oil prices and there is 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, may be can 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 kind of push on the customer base to allow for a better working capital dynamics?

Yes, Brian I’ll start and let Kevin build on this, but again as I come into the company and look at what we have 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 were now 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 we analyze our working capital even in this difficult environment where customers are looking to stretch, et cetera, we believe there is 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.

Good morning everyone.

Good morning.

My question is for you Steve, the first question is, I looked on Slide 17 about the transformation and how you set up the company with division and then structure, can you just say how you look at incentivizing the management teams and structures? Are you looking at return on capital targets? Obviously safety is going to be very important, but are the earnings, margins, how they’re being viewed by success and how that’s on a bottoms up basis translate to some of the bottom line growth that you’re anticipating for the company over the next three or five years?

Okay. Thanks Mike for that question and again that is really a key question and something we’ve focused heavily on over the last couple of months and 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 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 manual 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 is based on their lines of business and both the terms of operating profit and working capital. And 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 is trending. That’s the first phase of what we’ve done in implementing and I think maybe major enhancement to incentive and accountability over the near term. Once we complete the strategy work by mid-year, other than strategic plan will 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 team focal points and metrics that are going to drive the company and we will see what comes out of that strategy.

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 cash that is 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. But I used that word intelligent risk is that as we reassess 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.

That's it, look forward to seeing you today, thanks.

Thank you.

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

Good morning guys. I guess this is a follow-up on the previous question, but I wanted to get more color on your announcement having dedicated field service units in the U.S., is this more to drive more synergies or cost savings – or hello, can you hear me?

We’re hearing.

Are you looking to grow it as a standalone business where you may be do move work as a direct high construction business, but larger construction project, I'd appreciate any more color that?

Yes, I’m going to start with just a quick introduction and turn it over to Gary Mandel to talk about that, that's a lot of this starts on the process side, but cuts across the entire company. There is, I hate to say this because a lot of people think you can only do one versus the other, but this is one where we clearly see first and foremost growth. It is driven by growth, but also offers us the opportunity to drive some synergies by putting it all under one leader. So, let me turn it over to Gary to enhance that.

Thank you, Steve. Yes, it is a growth strategy as evidenced by our increasing fuel service component that Kevin talked about that. As many of you have been tracking us for a number of quarters, we had a lot of projects in prefeeding fee that are now going to the execute base where we will be delivering the construction. But it is also a strategy we talked about the headwinds in our upstream all 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 base.

So would that business be also doing construction part of the projects where you were not involved from 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 quick follow up on your cash flow 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 then 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, you do a separate kind of corporate development team to focus on M&A? Any color on that would also be appreciated.

Yes, so I’m going to continue to come back to the - 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 would want that to be strategically driven versus some initial opinions. But I will say that it's clear as I've coming 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 will want to have a very robust internal M&A capability with clearly the business is identifying the opportunities, but have a robust and experienced internal execution M&A team that takes those great ides of coming from the businesses and drive those and I think that will be an enhancement potentially from the way we've done in the past. But then marrying that is that we are going to want to haven an improved integration process in the company. And the good news about all this is, all of us have a lot of experience in this and so this is something we know and will 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 will have more to talk about.

And what about the just M&A appetite or is it similar that we would have to wait couple months?

Yes, again M&A will first of all need to be part of our long term, 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. I mean we - there are some very small initiatives that we’re looking on. I think we feel comfortable that if we made 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 a clarification, how much of buyback is in your 2015 outlook if any?

Well, Anna this is Kevin. Look 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. Look forward to seeing you tonight.

Right, thank you.

And the next question comes from Jeff Volshteyn of JPMorgan.

Good morning. Thank you for taking my question. Continuing on the subject of alignment, so they were senior leaders in place, how much work would you say is there a less to 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 it is still an ongoing process?

Yes, as far as the reorganization has 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 just, you talked about 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 could drive the best-in-class. But for the most part we’re now completed in our reorganization and everyone is focused on executing projects of winning business.

Great, 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 given your kind of overall backlog and then may be a bit of color on nuclear and I know it is in a different segment, but any kind of nuclear projects that you are working on?

Okay, Andy Kremer is going to take that question.

Yes, thanks Jeff. So in the Asia markets specifically our role is primarily working on the owner advisory side consulting, trying conceptual work. So it doesn’t have a huge impact on backlog because this is 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 it 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 those projects and we’ve been involved in those for the past year and a half or so. And in addition regarding power, general power, geothermal and hydroelectric is also an area of expertise that came out of the SKM organization and that is not only in South America, but also in Southeast Asia. So the big projects are in the UK and the nuclear new build and the other project as Andy stated is more in the consulting side.

Perfect, that's helpful. Kevin one last sort of a housekeeping question, can you share some of the assumptions for foreign exchange maybe tax rate and share count 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 have 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 that continues to be the case. You might recall that we had a 32.5% kind of number in 2014. We are well below that in 2015. I don’t necessarily believe we’ll get to the same level of 2014 and our - 2015 numbers and 2016, but they will 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 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 assumptions for foreign exchange?

Look we are not assuming 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, a 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 would 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 has now concluded. Thank you for attending today’s presentation. You may now disconnect.