Jacobs Solutions Inc (J) — Q2 2015 Earnings Call Transcript

Thank you very much, Andrew, and welcome to Jacob’s second quarter 2015 conference call. With us today in the room is EVP and CFO Kevin Berryman who will present our financial highlights for the quarter; Chairman Noel Watson who will present our growth strategy; offsite in Oman, Gary Mandel, our Executive Vice President of Operations; and onsite, George Kunberger our Executive Vice President of Global Sales and Marketing will provide a business overview and then market outlook. Noel will wrap up the call before we open the lines for questions. As you are aware, we issued our press release this morning and it can be found on jacobs.com along with the presentation we plan to review this morning. As a reminder, statements made in this webcast that are not based on historical fact are forward-looking statements. Although such statements are based on management’s current estimates and expectations, which we believe to be reasonable and currently available competitive, financial and economic data, forward-looking statements are inherently uncertain and you should not place undue reliance on such statements as actual results may differ materially. There are a variety of risks, uncertainties and other factors that could cause actual results to differ materially from what is contained, projected or implied by our forward-looking statements. For a description of some of the factors that may occur that could cause actual results to differ from our forward-looking statements, see our annual report on Form 10-K for the period ended September 26, 2014. And in particular the discussions contained under Item 1 - Business; Item 1A - Risk Factors; Item 3 - Legal Proceedings; and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations; as well as the company’s other filings with the SEC. The company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements that are discussed on this webcast. The safe harbor statement is found on Slide 2 of our webcast presentation. With that, we’re on Slide 5. I’d like to turn the call over to Kevin Berryman.

Good morning everyone. I’m pleased to be with you for my second earnings call with Jacob’s. We have a lot to cover this morning so I will dispense with any introductory commentary as it relates to the quarter and jump right in as it relates to our review of results for the second quarter of 2015. As Michelle noted, we’re on Slide 5. To start, I would like to take a few quick moments to discuss our GAAP-related results. As noted on the slide, we certainly were able to deliver increases in our operating profit and earnings per share figures for the quarter 2015, second quarter 2015 versus the prior-year period. In addition, our balance sheet remains strong at the end of the quarter as evidenced by the fact that we were able to have $465 million in cash at the end of the quarter and $290 million in net debt by the end of the quarter. These figures were able to be delivered even though we had a significant wrap-up in our share buyback program and we had a record buyback of roughly $140 million in the quarter to ultimately realize a 7.3 million program-to-date reduction in our shares as it relates to the program through the second quarter of 2015. I will not plan to spend a lot of time discussing variances versus year ago on a GAAP-related basis given that a lot of the variation year-over-year is driven by large discrete items between the two years. I plan to spend a little bit more time talking about the results in our adjusted figures and I believe that will give you greater clarity on the underlying trends and dynamics regarding our business for the second quarter. But before turning to Slide 6 to do that, I thought some commentary on our revenue changes versus year-over-year is important given that our revenue actually decreased 8.6% versus the year-ago period. Certainly, foreign exchange, as noted on the slide, represented the single largest drag on our sales for the quarter accounting for 5 percentage points of the full year-over-year change. In addition, we also had pass-through revenues that were also down year-over-year and they represented an additional 3 percentage points of the drop in revenues. As you already know, pass-through revenues tend to have lower margin levels than the rest of our business and as a result of this, this fall in sales did not have a material impact on our profitability in the quarter. So as a result, our net underlying organic growth excluding foreign exchange and the pass-through revenues was effectively flat versus the year-ago period. This growth was supported by the diversity of our portfolio with stronger certain end-markets offsetting weaker ones, our growth was still less than we would have expected for the quarter. In short, expected improvements in our revenues associated with our strong backlog transitioning to an effective higher level of burn did not yet materialize and gain the longer-term momentum that we do ultimately expect. As a result, we have taken additional actions to mitigate the impact of this shortfall by instituting a formal restructuring program that is meant to further align and simplify our business, resulting in reduced cost and increases in our simplicity and alignment in the organization. This program reduced our GAAP-reported results by $0.08 in the quarter, resulting in our adjusted EPS figure of $0.72 for the quarter. A few comments on the restructuring initiative. This program is expected to continue into Q3 and Q4 and we would expect to provide you with a more robust update on this initiative at our Q3 earnings call. I would also like to clarify our revised guidance for the year. Our guidance as noted in the press release has been provided on an adjusted basis, which excludes any impact of our restructuring efforts and the costs associated with those efforts. Of course, any benefits associated with our restructuring initiative will be included in the results, although the vast majority of the expected savings from our restructuring initiative ultimately will be realized in the full-year 2016 versus 2015.

Hey, thank you, Kevin. Let’s go on to Slide #9, the Growth Strategy. We talked about this a lot and I’ll just summarize it again. The relationship-based model is still the model for the company. It works very well for us. A lot of the record sales that you see going on right now were near record backlog are partly because this model is working very well when put together with our sales model. So it is the strategy that keeps us close to our clients, trying to deliver superior value to these clients and make it work. And so that model remains intact and we believe it’s working well. One thing we are doing is we have a lot of diversity in the markets as you’ll see in a few minutes when we go through that, the sphere on the next page. But we do have a lot of in-market diversity which gives us a lot of strength when some of our markets aren’t as robust as they once were or certainly as we thought they were going to be even 90 days ago. I’m talking about the oil and gas on that and we’ll have Gary Mandel discuss that in a little more detail. We still have good cash. We have not been in an acquisition mode here in the last few months as we try to deal with the headwinds in the market and certain other things, but certainly long-term, as we go back to double-digit growth, we will be back in the acquisition market. What Kevin said was when we discovered what was happening in the oil price and the other commodity prices, we had realigned our cost with the environment. To put it simply, we’ve taken this opportunity to make some changes.

Thank you, Noel, and good morning. As Noel said, I’m calling in from Oman. Hopefully, you can hear me okay. I’m visiting one of our oil and gas upstream projects. It’s a multibillion gas project here in Oman. We’re in the middle of the construction phase. It’s one of several we have in the Middle East. The Middle East continues to offer robust opportunities for us in the upstream sector. Overall, our process business is mixed primarily due to oil prices causing our owners and clients to reevaluate their cash flow and ongoing projects. It’s causing a little bit of recycle and some delayed decisions and, in some cases, some delayed investments. However, as we mentioned, our strong client relationships help us take advantage of these cyclical swings in the energy prices. While the dropping price of oil is causing a slowdown in some CapEx projects in one part of our business, the cheap feedstock translates into opportunities in other parts of our business such as chemicals which is very robust. We continue to see good prospects in this market as evidenced by our continued sales progress. When we look at refining, on the CapEx side, we’re seeing some mixed signals here as our clients are evaluating their cash flow. However, on the OpEx side, the maintenance and turnarounds that are stable. The maintenance in brownfield provides sustaining work. We see that increasing both in the number of sites that we have been awarded as well as the number of proposals that we are pursuing. We have a strong chemical resume plus a global delivery. These are our key strengths. We are bullish on the chemicals in-markets and our pipeline continues to be robust.

Okay, thanks, Noel. Good morning everybody. I would like to take just a few moments to talk about two important sectors; one, the industrial sector and then I want to talk a little bit longer about our public and institutional business. First of all, on the national government side, this business today constitutes a couple of governments. It’s U.S. government, as you all well know. It’s certainly the U.K. government and Australia and a couple of other governments, but primarily, those three. The spending forecast in the U.S. and the U.K. and also in Australia from an MOD as Department of Defense areas is actually forecasted to grow in 2015 and even further in 2016 by about 8% each year. So it’s sort of bottomed out and it’s starting to grow again. The pattern of spending in the federal government specifically in the U.S. has become very backend from a fiscal year perspective than it has been in recent years. Our backlog is down a little bit quarter-over-quarter. But if you look at our federal bids today, we are at an all-time record high as far as the number of opportunities that we have submitted specific proposals on and are awaiting decisions. So our federal government business is robust and growing and we anticipate it to be very strong in the second half of this year and into ’16. Overall, it’s a good day-to-day business and really highlighted by the federal spending, both in U.S., U.K. and Australia.

If we can go to Slide 14 and we’ll wrap up so we can open up for questions. The portfolio diversity that both Gary and George talked about does remain a strength. We’re facing headwinds in oil and gas and some of our big plants have cut back spending, but the opportunities are strong. The backlog is strong. We’re making efforts to realign the cost structure with what we see the business looking like over the next 12 to 24 months. We’re working hard in dropping our real estate cost and have done several internal reorganizations that cut costs and make the company more efficient as Kevin was talking about earlier. We have adjusted the outlook for the headwinds we see and we are positioning ourselves for a better second half and a good ’16. As most of you know, I’m not the long-term solution of Jacobs, and we are heavily involved in a CEO search. That has gained momentum, and I spend most weekends interviewing candidates. I would say we’re in the downhill run in that and we’ll probably close it over the next couple of months.

Hey, guys, good morning.

Good morning, Andrew.

Kevin, can you talk a little more about the decrease in the overall guidance that you had? Obviously, you talked about the low end of the range last quarter which was 335 to - and the midpoint of this range is 305. How much would you say is currency versus slow burn rates and versus lower margin?

Look, Andrew, I probably won’t go to the level of detail that you would like but let me give you some perspective as it relates to that. Certainly, we did see continued cancellations in certain parts of our business, certain end-markets, and that is putting pressure on us again as it did in Q1 relative to revenues. While our underlying revenue stream was effectively flat, it certainly wasn’t what we wanted to see in Q2. So we face pressures as it relates to that backlog when it starts to burn versus the near-term issues associated with cancellations. At the end of the day, we’re looking at a situation where our medium and longer-term views remain quite positive, as it relates to the ability to win the work. The prospects continue to be pretty robust, and we think that translates well into our backlog in the back half of the year. So I think if you look at our range, it’s effectively - Q2 was lower than what we would have originally anticipated. I’ve talked about some of the drivers there. It is what it is. That’s the rationale for us to really be cautious in terms of our guidance.

Okay, that’s helpful, Kevin. And then maybe this is for Noel. Do you still expect - in the last quarter we asked you about overall backlog growth for the year and you said you still thought that we could see overall backlog growth. Where are we today sort of with that question? And I guess the conviction level around public and institutional in particular sounds pretty high. Do you think that can get you over the hump to have backlog growth this year?

The sales process is working well. We are selling work almost at record levels. The prospect list is long. These numbers on the technology group, in particular, highlighted by the $6 billion of proposals that we have submitted and are awaiting decisions. It goes well for a continuing backlog. Even with the headwinds coming out of oil and gas, I don’t think it’s going to damage that. We’re going to continue to see backlog growth. If we keep selling like we’re selling, it should be pretty solid.