Jacobs Engineering Group Earnings Call NUGGETS: Field Services Forecast, Operating Profit
On Tuesday, Jacobs Engineering Group (NYSE:JEC) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Field Services Forecast
Jamie Cook – Credit Suisse: Just two quick questions. One, your field service backlog in orders have been growing nicely. Can you give an update on how you think about that translating into revenue growth, whether we should start to see that, when we should start to see that accelerate? Then just my second question, on the margin front, I mean outside of last quarter which you explained, the margin issues in the last quarter which you were right were one-time issue, we continue to see margin improvement coming out of Jacobs. Can you talk about the trajectory over sort of the next 12 months and is there any reason why that can’t continue, because I’m just thinking, with the field services revenues coming online and with some margin expansion it could set you up for a good double-digit growth here, ex any acquisitions which would be additive?
Craig L. Martin – President and CEO: Let me take the first part in terms of where we think the field services thing is going and where the ramp up looks like it is and then I’ll let John talk about the margins. We didn’t update the field services data specifically for today’s call, but when I look at the data that I get from our guys it looks like the slope really starts to pitch up right after the end of the next quarter. So if you look at the data starting Q2 of fiscal ’13 you see a pretty steep ramp up of the actual execution of field services backlog and it ramps up steadily based on what we see right now for the whole next year. So, we’re feeling pretty good about where that construction business goes. Now that’s a mix of a ramp up on our maintenance business and a ramp up on direct hire construction work. But between the two, in the next couple quarters, we’ll start to see additional ramp and it will start to show up in revenue in about that same timeframe or a little after. John?
John W. Prosser, Jr. – EVP, Finance and Administration: Yeah, on the margin look forward, we’re in a pretty good position. We’re seeing slight increases in our pricing in the markets and some markets better than others. So, from the professional services side the trend is positive. What you’ll see though is as that field services starts to move into revenue and the mix moves off of this fairly hypo service mix that we’re in right now, that will be a slight dampener to that growth, so I would say at this point over the next 12 months or so that we’d see maybe a slight improvement in the operating margins, but an improvement in each of the pieces of the margin, but the mix will probably keep modest growth, if any.
Jamie Cook – Credit Suisse: Okay. And then, I mean…
John W. Prosser, Jr. – EVP, Finance and Administration: And that’s on a percent, the dollar obviously with the growing revenues will be growing nicely.
Jamie Cook – Credit Suisse: Okay. And then sorry, I mean, your commentary on mining, I guess, still sounds positive, I mean, geographically can you talk to. I mean, is there any slowdown at all that you’re seeing geographically given some of the project pushouts we’re hearing about or on the margin are you more conservative about prospects in 2013 versus 2012 and then I’ll get back in queue? Thanks.
Craig L. Martin – President and CEO: Great. Question, Jamie. Thanks. There certainly is some movement in terms of projects, and commitments in CapEx, in particular, Australia is troubled more so I think than most the rest of the world. There is a lot of games being played in Australia vis-a-vis the political situation and various taxes and royalties on extraction of resources, and I think, a couple of our customers are seeing that as an issue for where they’re going to invest, and so I’d put Australia a little bit on the negative side, or at least not as positive as some of the rest of the world. On the other hand, Chile is going gangbusters. We’ve got a couple of big projects. Codelco has given us a huge job that we – that they continue to expect to move forward and so do we. There are a number of other prospects like that. When you look at the economics of the whole copper situation, there is two things that are driving copper which is still a big part of our mining and minerals business. One is that, the overall price trend in copper has been up now since the end of the GFC. So, if you go back to something like 2009, January 2009, and look at copper prices then, which were about a $1.20 and look at where they’re today at $3.44, the overall trend is up. There’ve been ups and downs in that trend. Copper obviously has been up in the $4.50 range briefly, but it if you look across even a five-year spectrum, the copper prices that we’re looking at today something in that $3.50 range are pretty consistent with historic copper range in prices. There’s also clearly a diminishment of stocks, so we’re – if you remember I mentioned last quarter, Cadelco is out buying copper on the spot market to fulfill its commitments. That’s clearly driven by a steady decline in the grades of copper that are available, and how much ore has to be processed to produce a pound of copper, and that driver alone forces significant investment in the copper business just to make stable amounts of copper. There is no growth in the demand, there’s still a significant growth for projects because of this deterioration of ore body globally. All that’s a long-winded way of saying, we think that business is still very robust. We think it’s going to continue to be very robust, but I think you’re going to see movements about where these big companies invest based on things like costs and tax regimes, and certainly as I said that’s what’s been affecting Australia.
Tahira Afzal – Keybanc: Congratulations on a good quarter. First question is, you said fiscal third quarter was very much in line with your internal expectations, and when I couple that with your book-to-bill being strong so many quarters in a row, I guess I’m having difficulty really reconciling all of that which is really incrementally more positive with a wide guidance for the fourth quarter, so perhaps if you could shed a little more color on the near-term uncertainties you’re seeing?
John W. Prosser, Jr. – EVP, Finance and Administration: We traditionally and historically have kept our guidance fairly wide even as we’ve come to the end of the year. I think I’ll use the analogy of a bell curve. The middle of the guidance range is more probable than either the – as we get out to the end. So, I think we’re just keeping with our past practices and kept the guidance fairly broad, and I think we’re not going to give guidance within the guidance, other than having said what I said.
Tahira Afzal – Keybanc: Mr. Prosser, I can always count on you for not diverting from your policy. Second question is, if I look at – you know I don’t want to dissect between your gross margins and your revenue growth, but really focus on your operating profit which is I guess the way you look at it, and that’s grown year-on-year 10%. Going forward, as you look at the moving parts on your revenue side and mix shift, how many quarters do you feel that we might be out right now in terms of getting back – your operating profit back to that sort of 15% year-on-year growth trend?
Craig L. Martin – President and CEO: Well, I think our belief – and it’s still early days, we’re still assessing what we think ’13 will look like, but our expectation is that we’re going to see that 15% kind of growth plus or minus as we go forward into ’13 and beyond. There’s nothing about the business as we see it today that we know to be a challenge. We’re making that, absent what’s happening in the U.S. and European economies. There is a big uncertainty in that number, in that economic situation right now and we’re still affected by that. So as we look forward, there’s a lot of indicators that are positive for that sort of 15% compound growth. There’s couple of indicators that are negative and we’re going to be looking hard at that over the rest of this quarter and the early part of the next quarter, certainly before we talk to you again to get a stronger and clearer view of where we think we are. But I am upbeat about what I think FY ’13 looks like.