Jacobs Engineering Group Earnings Call Nuggets: SG&A Impact, Mining Backdrop

On Tuesday, Jacobs Engineering Group (NYSE:JEC) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

SG&A Impact

Jamie Cook – Credit Suisse: I guess two questions, just I’m trying to understand when we think about the mess in the second quarter what specific to the second quarter versus what impact sort of your future outlook, so one John when you think about, how large was the SG&A impact related to increased hiring et cetera and how do we think about SG&A going forward and then my question is on the margins and field services and technical Professional Services, what markets were the margins lower specifically and then it’s confusing because at the same time Craig, you made a comment during your remarks that you see, it sounded like you thought margins would be getting better, so I’m just trying to understand the two if that makes any sense?

A Closer Look: Jacobs Engineering Earnings Cheat Sheet>>

Craig L. Martin – President and CEO: Let me address the last part of your question first. What we see is, we look out is that margins in the gas sold category are starting to firm up. Now that takes a while to work its way through backlog, so the weakness that we saw in the second quarter isn’t inconsistent with what I think we’re seeing going forward, but it takes a little time for those margins as we sell them to work their way into backlog and the weaker margins from sales in earlier periods so work their way out. So, that’s really why I’m expressing a little optimism looking forward and you’re not yet seeing it in the numbers?

Jamie Cook – Credit Suisse: Which markets specifically are as sold margins getting better, I am assuming it’s the private segment, but any color there and I guess I’m just surprised that the margins surprised you in the second quarter on the downside, what were you forecasting relative to what came in?

Craig L. Martin – President and CEO: Okay first off, in terms of markets, it’s largely the private sector markets that are in fact getting better and to talk more specifically, certainly, mining and minerals is improving, the upstream oil and gas business is improving, chemicals is improving, refining’s not quite so much, sort of that all other category not so much, PharmaBio pretty much constant, not much change there, but that’s one place where margins never really went away. So it’s that side of the equation, it’s kind of – in the markets that I described is very strong in my earlier remarks, are probably where the margins are more likely to move up sooner, and are doing so, compared to ones that I didn’t describe as strong. Does that make sense?

Jamie Cook – Credit Suisse: Yes. With regards to second quarter, where were the deferrals, and how big were those deferrals, and then the last question, I guess I am still surprised the margins surprised in the quarter. Let’s take the gas margins out of this. I guess I am surprised, it surprised you because Jacobs didn’t get surprised. I am trying to figure out what you were assuming, relative to what actually came in. Then the last question on the SG&A, if you could just quantify and when those people are expected to be allocated to other projects?

John W. Prosser, Jr. – EVP, Finance and Administration: In terms of the factors that drove the quarter negatively, they are all about equal contributors, give or take. Looking forward, the weakness in margins that was specific to the month of March, I don’t expect most of that to recur. So, that were sort of onetime events that we didn’t take.

Jamie Cook – Credit Suisse: Like I mean, why would the margin issue just be specific to March? Was there something specific to Jacobs I guess, or you know, margins came in lower, because of something Jacobs specific, or was it market related?

John W. Prosser, Jr. – EVP, Finance and Administration: No, Jacobs specific.

Jamie Cook – Credit Suisse: Okay. So it sounds more like an execution? I mean, I don’t want to make a big deal out of this.

John W. Prosser, Jr. – EVP, Finance and Administration: I don’t want to make a big deal out of this either. There certainly were a couple of execution issues in there. There were also some issues with federal rates and making adjustments to those rates. I mean, a whole bunch of little things added up to the miss in March.

Jamie Cook – Credit Suisse: But to be clear, it sounds more Jacobs specific versus market related, which makes sense relative to the guide in the back half. That’s perfect.

Mining Backdrop

Rodney Clayton – JPMorgan: It’s actually Rodney Clayton here for Scott. So, first can you talk a little bit about the labor and regulatory backdrop within you mining business? I guess anecdotally, hearing some comments that things may be tightening a little bit in that market and have there been any discussions about any delays or scope reductions that you’ve heard about there?

Craig L. Martin – President and CEO: Not at this point in time, there has been not been any of that. I have to tell you, my conversations with our mining and minerals customers are very much them taking a long view. Some of these projects and programs take 10 years to fully develop and they are just – they are not swinging their decisions around short term kind of issues. We’ve at least one major mining project that – it will take 10 years to produce its first piece of ore. So when you have those kinds of investment horizons, the kinds of things that we’re hearing about from the regulatory environment or otherwise, are issues I don’t want to say they are not, but they are certainly not negatively impacting investment decisions that we’re seeing.

Rodney Clayton – JPMorgan: Secondly, if we look at your government business there. I mean you mentioned a couple of things that I thought were interesting, one being that you are well positioned in some of the better funded areas. Should we expect a meaningful, I would say mix shift in your mix of may be agencies or types of projects within your government business; and then secondly on the GoCo opportunities, are there any particular areas where you’re seeing, maybe a possibility for outsourcing, whether it would be disposable facilities on the radioactive side, or anything of that nature? Any color you can give us there would be help.

Craig L. Martin – President and CEO: Let me talk first about GoCos as we’re seeing a number of interesting GoCo opportunities in the U.K. and these are fairly significant projects. In some ways they are a little bit of the big event kinds of projects that I’ve talked about us not focusing on, but they are nice one when they come along and we see several of those in the U.K, we see couple of those in the U.S. and we find that we’re uniquely well-positioned because of some of the work we’re doing with the government today in terms of GoCo type operations in the test and evaluation world and in the nuclear materials world, in terms of the weapons complex in the U.K. I think those things are helping us position for some major GoCos that we might not have otherwise looked at, so that’s a chunk of what’s driving that whole area, but I think as you know we’re much more focused on getting market share day by day and I think the more interesting part is this whole business is breaking up what it’s historically been, big single award contract into multiple award task order contracts, that’s letting us penetrate a lot more locations and we are finding ourselves able to take share, almost everywhere we’re successful and getting in, so the net effect of that I think will be continuing growth in our National Governments business for sure, probably not double-digit kind of growth, but certainly a growth.

Rodney Clayton – JPMorgan: One more if I may, you touched a couple times loosely on Argentina, can you just talk a little bit about maybe preliminary what your customers or how their approach to that market is changing in light of the nationalization project there or initiative there?

Craig L. Martin – President and CEO: I would, but I don’t yet know what their thinking is going to be. That’s why I phrased it as question. It’s an area that we’re going to have to explore. I’ll be talking to some of those customers over the next couple of weeks. At this point in time, I don’t know to what extent it’s just in Argentina specific issue in the minds of our customers and therefore, frankly not a big deal or whether it’s got have a broader implications for our customers or they think about investments, joint ventures, that sort of thing, just too early to tell in that regard. Certainly, we had a prospect there, we’re probably not going to see come to fruition and that was a disappointment for us as a company, but I don’t think it’s certainly doesn’t swing the needle for us as a business.

Rodney Clayton – JPMorgan: Okay, that’s what I really wanted to know, I guess it sounded like it’s not going to be a major issue for you on may be what you projected 2012?

Craig L. Martin – President and CEO: It will have no impact on our 2012, it just has an impact on our outlook for the South American market in the refining and chemicals world.