Jacobs Engineering Group Inc. - Shareholder/Analyst Call

Nov.22.11 | About: Jacobs Engineering (JEC)

Jacobs Engineering Group Inc. (NYSE:JEC)

November 22, 2011 8:00 am ET


Andrew F. Kremer - Senior Vice President of Global Sales

Craig L. Martin - Chief Executive Officer, President and Director

Gregory J. Landry - Executive Vice President of Operations

George A. Kunberger - Executive Vice President of Operations

Thomas R. Hammond - Executive Vice President of Operations


Unknown Analyst

Stewart Scharf - S&P Equity Research

Scott J Levine - JP Morgan Chase & Co, Research Division

Craig L. Martin

Good morning, everyone. Thank you for being here. We're going to take a few minutes this morning, and I'll kind of walk through the numbers, as usual, and give you a little background on the market, that sort of thing, and then we'll take some questions. When we get to the question section, please wait for the mic. This is being webcast, so we need you to ask your question to the microphone so the world can hear what your question was.

Before we get started, let me introduce a few of the folks that are with us here today. Hopefully, I won't miss very many people. Let me start first with Tom Hammond. Tom Hammond's our EVP of Operations, 1 of 3. Next to him, George Kunberger. George is our Head of Sales, so he has all the real information. Over here is Gary Mandel, also EVP of Operations. And between George and Gary is Greg Landry, the third and final EVP of Ops. And further back, we see Nazim Thawerbhoy, our Chief Accounting Officer, and then Kevin McMahon, who heads up our Infrastructure business in North America, another guy with really good insight in terms of what's going on. At the very back of the room, John Prosser, our Chief Administrative Officer and Chief Financial Officer. John will be leaving us, so Nazim will answer all your financial questions. A great idea to see if they both speak with the same voice.

In addition to that, I don't see where he's sitting, Vinny Mangiere. Are you there? There's Vinny over there. Part of our New York team here. Mike Cavanaugh up here in front. Mike, hold your hand up. Stan Rosenblum is supposed to here. Did Stan make it? I guess not. Did I miss anybody? Michelle Jones, where's Michelle? Way in the back. Michelle's our Head of Marketing and Communications. Did I miss anybody else? Okay, let's get started.

So we start with the usual, the forward-looking statements disclaimer. You've seen it before. You know what it means. We'll move on from there.

Just to put a context on things, something we don't do as often as I think we should is to remind everybody about who Jacobs is. Right? We are a global provider of technical professional and construction services. We are a technical professional services company. We provide a very broad spectrum of services from fairly advanced scientific and technical consulting, through engineering, into construction and then on into maintenance. We have a broad group of customers. So it's an industrial process, institutional public client business, very diverse in that regard. I'll talk more about that. Increasingly, we are geographically dispersed, and all together, that adds up to about 60,000 people and their families who are part of the Jacobs family.

So why Jacobs? I mean, why should you guys be interested? What's the real story? Here are what we think are some key messages about why Jacobs. It starts with our relationship-based business model, I'm going to talk about that a little bit more. Our diversification, both in geography, services and markets, really does drive both our growth, and it drives our opportunity to limit exposures. We've got a great balance sheet, a strong cash position. And we're good at controlling costs, and I've got to talk about that much after this moment. But one of the strengths about this company is its ability to keep its costs low relative to its competition, which enables us to be more profitable in any given level of pricing, and we think that's an important position to be in.

So let me talk first about our relationship-based business model. We've created this little graphic to try to explain how that works. You can actually go into the graphic, anywhere you want, and start to see how the model builds on itself. So let's start here with our employees and their business of getting to know the clients. Our relationship-based model says we get very intimate with our clients. We understand what they need and how we can best deliver that. That creates superior performance for them. It puts us in a cycle of continuous improvement. As we add them, the value that's being created for the shareholders' standpoint, we get their sort of positive circle for our employees. That's superior performance, builds trust with our clients. As we build trust with our clients, they're more open. They're more willing to share what goes on with their business. That gives us an expanded share of their wallet and results in significant repurchase loyalty, all driven by the superior outcomes the customer gets from our intimacy and understanding of what they do. Repurchase loyalty mix for a steady, profitable, growing business and our shareholders, we think like that. They see a steady profit growth, a low risk profile. That should result, we think it does in investor confidence and loyalty give us good financial strength, lets us reinvest in the business in forms of systems, tools, acquisitions, those kinds of things, and the circle repeats.

And so we think of this as sort of a virtuous reinforcement of what we do, all driven by this relationship-based model. And the relationship is about more than just the client. It's about our relationship with our owners, our relationship with our employees, as well as our client relationships. At the middle of that is providing superior value for our customers, and we think we've got good metrics to demonstrate that we do that. Right now, our client survey scores average above 91%. We get more than 92% of our business as repeat business. That's business from existing customers, people we worked for in the last 12 months that we're working for again. And this year, this end of September 30, we saved our clients $3.7 billion. We get at that number by going to the client with what we believe our savings that we've created and getting the client to sign off on those savings and agree with it. So every bit of this is documented. It's signed off by our clients. It's up about 20% year-over-year.

So last year, we were about $3 billion, FY '11 we were at $3.7 billion. We hope to have an even bigger number in FY '12. This is a particularly important thing for us as a company because it's a very key measure of the value we drive in the relationships. And if you think about a reimbursable contractor, one of the key things that the customer wants to know is that you're being careful with their money. And that's one of the ways we can build trust, is by demonstrating that we're more interested in doing the right thing than doing more. And a great and significant part, I won't say all, but a significant part of that $3.7 billion was from projects that we told the customer not to do. So the impact on our business was actually negative. Those our man hours that we didn't get to spend. But the fact that the trust that, that builds with the client is very significant, and it's part of a very powerful story we have to drive repurchase loyalty.

Here's our market. This is generally the pie. We'll go around this pie. But to give you a little more detail about the pie as we go through it, so we're going to break it up into its sort of constituent sections. So let me start with public and institutional. About 43% of our business split between national governments, the infrastructure business and the buildings business. The key kind of aspects of what's going in the market, we call national governments mixed. National governments for us, for the most part, is the U.S. government and the U.K. government. There's also a little Australia and some other things blended in there, but those are the 2 big components. And it's split in 2 parts. There's an environmental piece, and the research, development, test engineering, scientific and technical services piece. The environmental business is actually picking up a bit in the U.S. compared to our history with it over the last few years. And of course, the environmental business in the U.K. remains very strong. So it's a very active aspect of our business.

RDT&E, research and development, test engineering, not quite as strong. I'd best characterize it as steady, but we're doing pretty well in terms of holding our own in that business. And then MATOCs, multiple award task order contracts, that's what MATOCs stands for, represent a real opportunity for us to gain share. A lot of contracts that have been the province of an incumbent and very difficult to win away from that incumbent are now going multiple awards. And so multiple contractors win contracts, and then we get to compete for individual task orders. The power of that for us is they're quite good at competing for task orders, and it lets us take share in parts of the business we couldn't access before. Now obviously, where we’re an incumbent and its contract goes MATOC. We have to defend the share, but we're pretty good at that as well. And there are a lot more contracts who are not participating in than we are, so we see this as a real opportunity to gain share in that business.

Infrastructure is kind of a mixed bag. Good strength in airports, rail, water and wastewater, a lot of things that are funded by users as opposed to relying on government funding. Our state and local clients have an interesting problem, tax revenues and the like, but they are looking at some new ideas. And one of the ones that we think is going to be particularly powerful for us is outsourcing of government services to contractors. We've been doing that in the U.K. for about 10 years. We're one of the leading providers of outsourced services to county governments in the U.K. We've just won some outsourcings here in the U.S., Sandy Springs in Georgia. We think that's a trend that is likely to grow. And then because there's no money, we're seeing a lot more activity and public-private partnerships and design build, many more opportunities on the Street. We have positioned ourselves to be the low-cost supplier of services to the customers here who are either the concessionaires or the design build contractors. And that's proving again to be a pretty good business for us.

And then the buildings business is strong partly because of where we're positioning the buildings business. We are a technical buildings company, not a general building contractor or engineer. So it's not highrise office buildings or multifamily real estate residential. It's things like education facilities, health care, science and technology, R&D, schools, jails and prisons is one way to think of it. It's a really good business for us, and we're particularly excited about what's going on in the IT space, IT and cybersecurity. Lot of money being spent now in cloud computing, in dealing with the security issues, and we're particularly well positioned as a company to address that market, especially after the acquisition of KlingStubbins. KlingStubbins is probably the premier architectural and engineering practice in this business. So it really strengthens our offering on the design side. We're sort of the largest player in this area now, and so we think there's a real significant opportunity for us.

If you look, there's the backlog history for the last 3 years. You can see the backlog is down year-over-year from $7.4 billion to $6.7 billion. A lot of that is a result of timing of recompete. Our backlog policy says that we only backlog up to the point of a recompete if that's closer to us than standard number of backlog terms. If we were to fully backlog the work we expect to win and recompete, and by the way, we have a 95% win rate in recompete, we'd add about $700 million to that backlog. So our backlog in this sector would essentially be flat if you take that into account. So that's the public and institutional business.

Industrial business is a smaller part of the business but more -- a very diverse business. As you can see, it's PharmaBio, mining and minerals, pulp and paper, power, high tech. It's pretty much all other. As a market, a good business for us. PharmaBio is nice. There's a lot of activity in emerging markets. And because of our strong relationship with these customers in the PharmaBio side, we're their contractor of choice for that emerging markets work, and we're in a position in places like China and India to serve those customers very effectively.

We have a really unique position here. For the most part, the major players in pharmaceutical are Jacobs and no one else. There are a fair number of smaller players, but the first-tier players, we're the only one. So we think that represents a pretty unique position for us.

Mining and minerals, a very strong market. I mean, just about as hot as it can be. It's a market, as you know, we're fairly new to after the acquisition. But the demand for commodity materials, iron ore, copper, metallurgical coal, all that's driving huge new investments. And what we like about this market, what attracted us in the first place is the behavior of the major customers. They are very much like big oil and that they are very loyal to a relatively few number of contractors, and I think our relationship-based business model will position us very well to have a significant share of that business. We expect that to be a strong growth market for us going forward.

And then finally, sort of all these other things, power, pulp and paper, high tech. Pulp and paper is back, as back as it's probably ever going to be. So that's good news for us. We're, again, one of the few players left in the pulp and paper market. We're doing well in power, and you'll note that it says, in supporting cast work. What I mean by that is, our focus is not on the power island, whether it's the reactor island, the gas turbine power generation or coal-fired, our focus is on the balance of plant. So utilities, off-sites [ph], substation work, that sort of thing. And we're doing very well at building a business around that part of it. You won't see us prominently featured in anybody's discussion about power, but it's starting to generate a nice amount of business.

And then consumer products, pretty flat market but very amenable to alliance relationships and driving a lot of activity in emerging countries. We're starting to do work in places that will be long-term benefit to the company on the back of these alliance relationships with these customers.

You can see the backlog data here, nice growth of backlog year-over-year. Now even if you extract the Aker acquisition from that, it's still nice. That takes about $600 million out, so you still have 100% growth of backlog in this business year-over-year.

And then finally, here's the process business, starting with refining, kind of working from the bottom up. Mixed market, there has been a pickup in projects overall for us. Environmentally-driven, revamp, small-cap work, sort of things that we really like to do. We're also seeing a lot of activity in diesel conversions. And we are seeing the next round of environmentally-driven projects, which has always been one of Jacobs' strengths in both 10 parts per million sulfur in gasoline and the EPA's new vapor pressure rules. Both of those will change gasoline configuration. So between that and the diesel conversions, we think we're going to see a lot of small- and medium-sized projects in existing refineries. And that's one of the places that's special benefit for Jacobs. So that business will -- mixed is a good word for it. It's going to be okay, it's not going to great.

Oil and gas itself, very strong. The oil sands are booming. We have all the gas work coming into the business. That's also very exciting. On the oil sand side, we're continuing to win FEEDs. So our backlog of projects that are likely to go into the detail design as an EPC continue to be strong. We expect most of those projects to move into detail design, and we expect to start to see construction work maybe in the second half of '12. So it should be some good additions to backlog on the field services side later in the year.

We are also some interesting activity on onshore gas. It happens that Jacobs is particularly well positioned to deal with onshore gas. And there's a lot of money going to be spent in Eagle Ford, in the Marcellus. We're very well positioned for that. The customer relationships that we have are driving us into those locations with our big oil customers, at least the ones that are investing in shale gas. And we think that's going to be a good positive market for us. Estimates are that just shale gas alone will drive $75 billion in investment in the U.S. So an interesting market opportunity and one where we're particularly well positioned given the overall oil and gas markets and optimum strength of Jacobs.

And then finally, the Chemicals business is as good as it's been in my career, just very, very active. And my career in the Chemicals business is only 17 years long. So it's not like I should go back to the '70s. But shale gas is driving a lot of activity because you have cheap feedstock. We're also throwing off a lot of natural gas liquids, which are highly desirable from a chemicals point of view. High value-added chemicals, by that I mean secondary and tertiary chemicals. Specialty chemicals has always been a Jacobs strength. A lot of our customers are moving toward, trying to make those kinds of projects and monetize the value of their assets. So they're value-added structures for those customers, and therefore, good things for us.

There have been a number of new ethylene crackers announced. We aren’t in the ethylene business, don't expect to be, but we do expect that will throw off a lot of other business, secondary olefins and then specialty chemicals. And as I said, Jacobs is particularly well positioned to benefit from that.

If you look at the backlog, here, we're coming off the huge high from the 2007, 2008 time frame. Backlog bottomed, and now you can see backlog is on a growth track again as we go forward. So that's sort by markets.

Just quickly by geography. I won't cover all of these bullets. North America, good. Certainly, oil sands are very good. Shale gas is very good. We're seeing some opportunities in the Government business. And the Infrastructure, unfortunately, is still under pressure, but I think we'll be able to carve out some niches that will help us to be successful. South America is a mining and minerals play for us today, and there's lots of opportunity there. But we're also seeing those consumer products companies and the pharma companies looking to invest. An area of particular interest is Brazil. So we'll be trying to figure out how to both be in Brazil and make money at it. And neither one of those things is easy to figure out to do. So we'll see how that unfolds.

Going out to Europe and Africa. Europe first. Infrastructure, which is largely a U.K. business for us, not so good. Again, the real key is there tend to be things that are driven by user fees, Water business being one of the best examples of that. Fortunately, we're doing very well in the Water business. So I think we're going to be okay in the U.K. But it's clearly under pressure. There are lots of bright spots in energy. Nuclear business is probably the strongest of the U.K. than it is anywhere. And we're benefiting again from that on the balance of plant side, have good relationships with the key customers in both the U.K. and the key providers of technology that support that. We see a little sustaining capital work around the North Sea. That's a positive for us.

Moving to Africa. Our relationship with OCP in Morocco remains very strong, and they have a very significant investment program out in front of them. And we have an insignificantly small presence in South Africa, but it does look like we'll be able to leverage that into some mining and minerals opportunities. So overall, that part of the world is a mixed bag, but I think we'll do okay.

Looking at the Middle East. This is a booming market for Jacobs. Our strategy to make an acquisition and be on the ground worked very well. The high point certainly is the GES plus contract. And we're seeing a lot of activity on GES plus, and we expect to continue to see a lot of activity on GES plus. The competition is relatively limited. There's only, at this point in time, one other contract licensed under the GES plus agreement. We expect there'll be one more relatively soon, but maybe none beyond that. But on top of all that, you've got major investments as well. Things like the Sadara program that we announced recently are examples of those kinds of opportunities. And the nice thing about GES contractor is you're able to compete both for the In-Kingdom GES plus kind of work and the Out-of-Kingdom projects like the ones we're doing for Luberef or Sadara. Good business, I think, and I think Jacobs has done a particularly good job of being well positioned for that going forward.

India. India has always been a very important market for us. We're now the largest engineering company in India, both whether you consider the public or private sector engineering companies, about 4,000 and change people. We've done very well on the Infrastructure side since our acquisition. We continue to do well in oil and gas and all the related Heavy Process businesses. And the strength of our India operation is it's both capable of delivering complete projects for foreign direct investors in India and for Indian companies investing in India. And it's also a very effective and cost-efficient back-office operation, high-value engineering center for the rest of our customers globally. So it's giving us a lot of leverage around the globe. And increasingly, that leverage is important in Southeast Asia, Australia, as a place to get resources that really aren't available locally.

China and Southeast Asia. China mostly, really a business for Jacobs that we got when we acquired Aker. So we now have a strong presence in Shanghai, as well as an operation in Hong Kong. The Shanghai operation is right up the center of Jacobs' business with its core client. So pharma, specialty chemicals, big areas of activity there, and we're doing quite well in winning that. There are some new client opportunities coming out of that market as well. So I think that business is going to be good for us, and we'll provide more leverage for the rest of the company than its size would suggest.

And then finally, Australia again, a white-hot market both in oil and gas and in mining and minerals. We're in a great position there on both ends of that business, more so on the refining side of oil and gas and then in mining and mineral side and things like copper. But it's a really strong business for us, and we think we're going to continue see a lot of significant growth, particularly as we can bring resources from other parts of the world to Australia and help us execute effectively.

And then we don't want to miss out on acquisitions. We've been very successful in acquisitions with the KlingStubbins here from, what, 17 days ago or thereabouts being an example of that. The acquisitions market continues to look very robust, lots of good companies for sale out there, and lots of pricing that makes those things attractive. And so we think we're pretty good at acquisitions. If you look at our growth history over the last, I don't know, 18 years, we've had good organic growth. But we did add quite a bit through acquisitions, and there's something like 65 acquisitions the company has done in that time period, 5 last year alone. We think that's going to continue to be a great vehicle to help drive growth as we go forward.

What are we looking for? We're looking for the emerging markets geographies as a top priority. We're looking at the businesses that we think are hot, oil and gas, mining. You're seeing a little bit of a separation from these geographies. The IT services business continues to grow for us. I mentioned earlier cybersecurity, data centers, those kinds of things. I think there's continuing to be a great growth opportunity. We'd like to find a good business in power. That one probably doesn't have a lot of prospects in the near term. The good companies here aren't for sale or are overvalued. And then we'll always do the new kind of niche additions anywhere in the world that we think add to our capability, improve our position with an existing core client or could add a core client to our -- and that's the key here.

So now let's look at the numbers. Here's the numbers year-over-year. $2.60 against last year is $1.96 or $2.44 if you take out the VOM, $330 million versus $306 million because that leaves the VOM out. Still got a nice net cash balance, and of course, backlog is up nicely from last year and up sequentially as well. Here is the earnings history. Remember, we tried to assure you of 15% compound growth. These are the 10-year compound growth curves. We're at 15.9% as we end the year. We're predicting to be somewhere between 14% compounded and 15.5% compound depending on where in the range we fall in fiscal '12. And there's the guidance for fiscal '12, $2.80 to $3.20.

There's the backlog numbers overall. What's relevant about this is that 9.1, that is record technical professional services backlog. That exceeds any time in our history. And so we think that's a really good harbinger of things to come because technical professional services backlog is what comes first. The field services backlog is what tends to follow. So this number bodes well for the outyears and for the growth of that number as we move out into the future.

So why Jacobs? 15% compound growth rate, a very unique in our experience, focused relationship-based model, broad service offerings, critical scale. I'm not sure what I mean by that, but at least, we're big enough now and broad enough diversity geographically to make a real difference. We own a great reputation in the industry. There aren't very many people who can boast our quality scores or our safety performance. And we still have these long-term client relationships that drive a baseload of business that's very powerful for us. So I think our history is stable, growth is a good one. I think we're going to be able to continue that into the future.

So with that in mind, I'll take questions. Remember to wait for the microphone before you ask your question. Got one up here.

Question-and-Answer Session

Unknown Analyst

Craig, just a couple of questions for you on the industrial business. One, you saw great backlog growth, as you said, excluding Aker. Can you -- I mean, obviously, you're not going to keep up that level of growth at you're smallest segment, but can you keep up that kind of sustained backlog growth? And then where did it come from? Was it mostly mining? Was it mostly your industrial businesses? And then just kind of separate unrelated question in industrial. I think I remember you saying that you kind of thought oil and gas back in '07, '08 was sort of a bubble that just kept on giving and eventually was going to explode, but you don't say the same thing about mining. And I know you haven't owned it for that long, but at the same time, your tone is different around mining. You think -- it seems like you think it can last. So if you could talk about that.

Craig L. Martin

Sure. Start with the first question about industrial. I certainly don't think we're going to have double-digit, well, whatever it is, 100%, triple-digit growth in backlog in the industrial businesses. But I do think that we're going to get significant growth in those markets. I do think it'll be more mining and minerals-driven than driven by the other markets, but I think there's still some pretty strong opportunity in terms of our position in the power business to help drive that and our position in the pulp and paper business to help drive that. So it's not an all mining and minerals kind of expectation. With respect to my excitement about mining and minerals, obviously, it's a very hot market now. It's very much commodity-driven. At dinner last night, I was talking to somebody about my belief in the demographics drivers of an economy. I think the demographics for China and India are so strong that commodity materials demand is not as likely to fade as, say, the refining bubble than the U.S. did. But I think more importantly, for us as a company and talking about mining and minerals as Jacobs, we have a huge opportunity to take share. This is a business that has very few competitors, and they're almost all focused on big event projects. And as you know, that's not the way Jacobs looks at this. We look at this as a sustaining capital business. So what we look, first and foremost, at the mining and minerals industry is, how much asset is already on the ground and what can we do to be a participant in that existing base of assets. So we're working really hard to develop small capital alliances and strategic relationships with these big mining customers, and we're sort of the only one talking about that. So when you have a conversation with a big mining house, even at the highest levels, when you say, "Well, here's our business model. Here's what we're trying to do." They're going, "Oh, that's easy." And I think that gives us an opportunity to get into those smaller project Baseload business and eat up market share from underneath. I think I've talked in these meetings years ago about a PACMAN strategy. We like gobbling up market share from small projects up. Now on top of that, we've got a good reputation in big projects. So we're able to compete for the biggest jobs globally with the Fluors and the Bechtels of the world, but we're also position to do this little stuff that they generally don't have any interest in and don't like to do. So I think even if the market fades a bit, and no doubt it will, right, I mean, it can't stay this strong forever, our opportunity to see our share continue to grow and that drive growth in our business is still pretty high. The other aspect about the business is a little bit like the upstream part of oil and gas, and the upstream part of oil and gas never went away. And if that, as you mine copper, it gets harder to mine and more expensive to process and somebody has got to do the work to make that happen. And that's true of almost all the minerals that we're talking about out there. So there's also this underlying aging of the ore body just like the souring and heavying of crude that's going to continue to drive investment in that business without necessarily needing an expensive market for the raw material. Did I answer your question? Next? Yes, sir.

Scott J Levine - JP Morgan Chase & Co, Research Division

Scott Levine, JPMorgan. On Upstream Oil and Gas, the business was a considerably larger piece of your total business during the peak of the last cycle. And I'm just wondering your thoughts on whether as a share of your total business, you see potentially approaching those levels and within what time frame as a follow-on to that. Could you elaborate some of the opportunities you see in onshore gas for yourselves and possibilities in the oil site, potentially acquisition or otherwise, and whether you see the mix of upstream business broadening dramatically versus where it was 2, 3 years ago?

Craig L. Martin

Okay. Let me start with sort of where I think the Oil and Gas business, as we have it today absent any acquisitions, is likely to go. A lot of that bigger piece of the pie was driven by what was going on in the oil sands. I think the oil sands will be a little more moderate in the rate of their expenditure as we go forward. But I actually think we're capturing a little more share than we did in the last cycle. So I would expect that the effects of that part of the upstream market on our numbers will be somewhat similar to what you saw before, that the share of upstream as a percentage of the total will grow, and I think you'll really start to see that as construction revenue starts to flow through the books. Remember, that's a revenue base chart and we do a lot of construction in the oil sands. So that's really what drives that percentage and will drive that percentage up. I would say that even today, as you look at the numbers, that the market share we have in the oil sands is as high as it's ever been. That's still lots of opportunity because high in that context is still low-double digits. But there's still opportunity there to grow. With respect to onshore gas, which I think was the second part of your question, we're being very effective in winning on onshore gas work. There's a couple of reasons for that. Some of the customers that we do a lot of work for downstream have strong relationship with us and limited downstream work. And they're actually guiding us to their upstream partners onshore and helping us to win projects on that side of the business. So the fact that we're not globally perceived as a top echelon player in oil and gas isn't impeding our growth on the onshore gas side. The second part of that is it happens that Jacobs' skills for onshore gas are particularly good. We've had strong skills in gas compression, liquids removal, sulfur removal, all those kinds of things for a long time. We've done billion-dollar straddle gas plants. So our qualifications are also pretty good. So you couple the general push we're getting from our customers on the downstream side into their upstream business with really strong qualifications, and we expect to do very well. The other side of that is it is a very local business. And so customers in the Marcellus want to do business with companies in Pennsylvania and New York. That's why the Eagle Ford want to do business with companies in Texas. And the benefit for us is we are more geographically distributed than our competition and any major competitor, for sure, in the U.S., and so we have the resources on the ground. We have an office in Pittsburgh. We have an office in Philadelphia area. Our competition doesn't. And so we also get the leverage of localness that's important to these customers, particularly big oil as they start to try to convince the community that this is a good idea for the community. Doing business with local companies is perceived as a positive. So we think that part will be good. And if I missed, was there a third part of your questions?

Scott J Levine - JP Morgan Chase & Co, Research Division

Onshore oil [indiscernible].

Andrew F. Kremer

Yes, onshore oil is something we're exploring. That really, more than anything, is the Bakken in terms of new things, but we've always been able to do a modest amount of onshore oil work for our customers. The onshore business is something that, again, Jacobs being local from a geographic point of view, is a leverage point. So having offices in place like Denver are a positive. But I think to take advantage of the Bakken, specifically, we're going to have to develop a presence in North Dakota. And that's something we don't have at the moment. But we are certainly looking at it. Another question?

Unknown Analyst

Could you comment on the delay in the Keystone pipeline and what kind of effect it might have on the oil sands?

Craig L. Martin

Yes, sure. My view of the delay on the Keystone pipeline. First of all, in my view, it's completely a political decision. There are no technical issues with the pipeline. That means to me that eventually, it will get authorized. Partly for no other reason, the job creation aspects of the pipeline are such a positive for the U.S. I do believe that there will need to be some vehicle for moving product from Canada to the United States in North America, but I think there are some other options including increasing the value of the product in the location where it's made. So chemicals, investments and upgraders in Canada could turn out to be a bigger market because of the absence of the pipeline, maybe, maybe not. But I do think eventually the pipeline will be approved, and I think our customers have a longer view of things than maybe they once did. The big players in the Canadian oil sands today, Syncrude and Suncor being the 2 strong domestic players, they've been in this business a long time. And they're really starting to get what I will characterize as an Exxon-like attitude. We're in it for the long run. It's not for what was -- the Saudi refining minister once said, "The business isn't for the faint of heart or the short of breath." and I think that's exactly the way some of our oil sands customers start to look at their business. It just isn't something that you oscillate on today's oil price. So I think the long-term impacts of the Keystone pipeline just are negligible. Short term, we'll be behind the eight ball or longer, and we'll miss the opportunity for the jobs creation that, that could be. And that part, I think, is really unfortunate part for the economy because we need jobs. Another question? Back here first, and then Michelle [ph] up here.

Unknown Analyst

Craig, you talked about a record technical professional services backlog. Can you characterize the mix and the quality of that professional backlog versus the last peak back in 2007, 2008?

Craig L. Martin

Sure. I think the single biggest differences in the backlog technical services backlog today from 2007, let's say, is mining and minerals is there. It wasn't there at all. So it's almost -- not completely there, but almost to 0. And the refining piece of that is much smaller. So there was -- if you remember in that time frame, we had Motiva, we had some huge refining projects and backlog both on the professional services side and the field services side. Today, we don't see that. So the mix is different in that regard. But otherwise, it's pretty much the same.

Unknown Analyst

And how about the margins or the mix from TUPA [ph] in a pretty strong market we had '06 through '08? And where do we stand on that curve today given your professional backlog?

Craig L. Martin

Our margins are still in terms of unit margins, still pretty weak. They're well off where they were at the peak. But the good news is they've now been flat for about 4 quarters, 5 quarters, and that's usually a very good sign. So we're not seeing additional margin compression. We're just not yet seeing any margin improvement and I don't know when to call the turn on margin improvement. So the margins that are in backlog today are certainly lower than they were in 2007 in the aggregate.

Unknown Analyst

Craig, chemicals in 2001 was a very good and important market for you. You took share. There was work in a variety of geographies and different types of projects, expansions and restarts. How do you see 2012 and chemicals shaping out relative to what 2011 was in terms of all those different factors?

Andrew F. Kremer

Well, I think the chemicals market will be stronger for us in '12 than it was in '11. I say that absent some kind of upset in the economies globally. But there's every reason to think based on what we see the prospect pipeline, the way our customers are behaving and talking about projects, every reason to think that Chemicals business is going to be very robust in '12. So better than '11, as good as '01. I'm not so sure what to say. I didn't think '01 was all that strong. I have to go back and look. The last really strong chemical cycle that the company experienced would have been in the '96, '97 time frame. So this is a relatively good market compared to anything we've seen in a decade or more. That answer your question? Okay. Other question? Yes, sir.

Unknown Analyst

Craig, you mentioned your success in the Middle East. You've had lots of success there. You were a relatively late entrant into the Middle East, and it's a tough market, and you still have had a lot of success. So first, can you talk about your pricing and margins? Have you had to do it on pricing and margins a little bit to get into that market? And maybe just give us a little more color on why you've been so successful when a lot of others have actually lost a lot of market share in the Middle East lately?

Craig L. Martin

Sure. I think I'll give a lot of credit to our Chairman as having been the leader for our expansion in the Middle East. Noel has done a great job building personal relationships. But what I think is really the strength is that we went at the Middle East the same way we go at everything, and that was we decided to be on the ground, local, doing what I'll call for better words, the junk work. So we bought a company. We got on the ground. We put 800 people in place. We started doing the little stuff, and we started adding Saudi's to our workforce and driving a localization of the business. And we did that knowing at the time that our customer, predominantly Aramco, was very much looking for local supply. A lot of pressure to deal with unemployment problems in Saudi Arabia, a lot of interest in doing that. So our strategy there was just like the one I describe from mining and minerals a little while ago, get in on the ground, do the small stuff, deal with the junk work that nobody -- none of the big contractors are interested in and that can't be exported and drive that position. And I think our influence was incremental in the idea of GES plus because I think our customers saw in our business model what they wanted from other contractors, and that drove a consolidation of the local industry. And so I think the reason we've been successful was the same reason we're usually successful. We were willing to get in, in a junkie dirty part of the bottom of the food chain of projects and do that work and do that well. We also brought to the party, of course, significant world-class capability in places like Houston, at Leiden, at Manchester. We're doing Out-of-Kingdom projects. And the fact that we were liked for becoming local gave us leverage to do the Out-of-Kingdom stuff that we wouldn't have had otherwise. I mean, we just did another showing up from Houston. Then me, too, I think we had the outcome you might expect. But the combination of being on the ground and having those relationships and working hard every day to do the $50,000 project and the $5 million project gave us a different credibility with the customer when we said, "Oh, and by the way, we've got a great operation in Houston or a great operation in Manchester. Maybe you should look at that, too." So I'd characterize it as standard Jacobs, honestly. Mike?

Unknown Analyst

Just a very quick follow-up. Are margins in your Middle East business similar to margins in the rest of your Heavy Process business?

Craig L. Martin

I would say that for the most part, that's -- the answer to that would be yes. There are -- when you compete for the big Out-of-Kingdom work, that really becomes a workload battle between who has the most and who has the least. We also see a certain amount of behavior out of our established competitors on Out-of-Kingdom work, quite honestly trying to keep Jacobs out. So the bidding can be more aggressive on some of the Out-of-Kingdom work than it probably will be on the long run. The In-Kingdom work is more a function of the capability to deliver it as been a pricing issue. Right now, with only 2 GES contractors, there's more work needing to be done than the 2 contractors could combine -- could do on their best deck. So right, there's really not that same price competition. In fact, the rates on GES plus are pretty much fixed. So margins, overall, not that different than process industry margins globally. Yes, sir.

Unknown Analyst

If I can just ask a follow-up on GES. Do you have 800 -- what's your -- do you have a target to increase the number employees in...

Craig L. Martin

Oh, absolutely.

Unknown Analyst

And maybe can you tell us how big an increase that is?

Craig L. Martin

We would expect in 2 to 3 years to get to a couple of thousand people.

Unknown Analyst

Okay. And then you also commented that you thought it may only come down to 3 players as opposed to the original 5 that they're discussing. Maybe can you expand on that at all? And they were talking about 1 million hours -- 5 million hours over 5 contractors. Does that means it might be 5 million hours over 3 contractors?

Craig L. Martin

That's, in fact, what we think it means. GES plus actually was originally -- the old GES contract was about 16 or 17 contracts, and they were doing about 0.5 million hours a piece. So the old numbers were maybe 8 million hours actually. It appears to us there will be 3. It also is -- the message we're getting from the customers is there may not be 4. I'm not saying there won't be, but I don't think the customer feels the need to have more than 3. So we think the outcome could be a positive in terms of the bigger share of those total hours, again, driven by the ability of the 3 players to do all that work. I'm quite confident if the 3 players demonstrate they can't staff up fast enough or can't find the technical resources to do those projects, that Aramco will add a fourth or a fifth or a sixth player so it gets enough capacity to do all the work it needs done. But at least right now, we're hearing 3 might be it. Right here.

Unknown Analyst

I would like to talk about your overall margins for a second. If we were to think about the next 2 to 3 years, what do you think the margin opportunity is? What are some of the headwinds and tailwinds? It seems like there is some pricing competition going on, especially on your public side. You also talked about other margins, and the backlog today are lower than they were at peak. But the mining acquisition you made seems to be have pretty high margins. Can you talk about the margin differential there and what we can expect going forward?

Craig L. Martin

Sure. Let me talk just broadly about margins. And then with respect to the public sector, I'm going to ask Tom Hammond to comment because Tom has the responsibility for most of our public sector business. Overall, margins are -- as I said, the overall unit margins are flat, but they're at a relatively low level historically. It's clearly a mix of higher margins in the public sector businesses and lower margins in the private sector ones. That's been traditional. It's still traditional today. On a gross margin point of view, from a net margin perspective, those businesses still are much closer together. But I would tell you, even on a net margin basis, the public sector business will have a slightly higher net margin than the private sector ones do. I expect to see some improvement in margins in the private sector as we go forward because people are starting to a load up. The business is robust enough that we're starting to see a little more selectivity. We're starting to see fewer bidders, and I expect those margins to firm over the next 12 months or so. But in the public sector, it's not so clear. Tom, do you want to comment with -- can you bring Tom the mic?

Thomas R. Hammond

The public sector business for Jacobs, first of all, is a very diverse collection of activities, and so the margins reflect that. There's a significant amount out of work directly for the federal government and also for several of the state governments that's based on what's called FAR pricing. And those margins are basically set by rule, and they're unaffected. We are seeing on the federal sector a little more cost pressure on the margin side. Some of the contracts are coming in, in terms of the lowest-priced qualified bidder wins the work and the government has limited ability to kind of adjust for value. I think the advantage to Jacobs is in that space we are far and away running the lowest-cost operation compared to the competitors that have traditionally operated in that space. In the Infrastructure business, on the design build projects, if you win the work, the margins are generally higher. However, it is a little bit more of a price competition, and we're following contractors bidding the work. You probably have to bid and win in 1 out of 3, 1 out of 4. So maybe the success rate isn't what we'd always like to see. But once you've won the work, the margins are considerably higher than, say, work solo on a services-only kind of environment. In the buildings and infrastructure business, well, and particularly in the Infrastructure business, that's spread across a lot of different states and localities. There's a mixed answer to that question just because of the huge diversity of the business. In some places, there is severe pricing pressure. In other places, it's not so great.

Craig L. Martin

Another question?

Stewart Scharf - S&P Equity Research

Stewart Scharf, S&P Capital IQ. Can you talk a little bit about the deficit reduction plan and sovereign debt issues and what impact it might have in a worst-case scenario? And also, is there any work at all in Japan regarding infrastructure rebuild and so forth?

Craig L. Martin

Okay. Well, first question, the potential economic crisis, right? I'm not an economist and I'm not sure I appreciate how the banking system works. So it's difficult for me to say what all that could mean. My view is that it is more storm than substance and that it's unlikely to affect our business significantly absent some sort of collapse. And of course, if there's a collapse kind of after all, I don't know what the world in an economical collapse would look like. But you can expect lots of challenges. So it a little bit depends on where you are. I think the economies in Europe and the U.S. are going to be weak. I think they're going to be weak for a decade. That doesn't mean we can't grow our business so long as they're somewhere in a range of reasonably stable. So quite honestly, we're sort of assuming that there's no big bust coming, and that absent the big bust, we can continue to motor on. Our expectations for our business in Europe are not particularly high except to the extent where we're working for clients who haven't sold assets but they have to keep and maintain. And that business will continue to be good, just like it always has been in the past. Second question? Japan, yes. The reason I couldn't remember the question is because I don't think about Japan, which probably is the answer to how much we're going to do, right? No, we don't see anything for us in Japan at all, frankly. It's a difficult market in the best of times, and the Japanese contractors are quite capable of doing what needs to be done and will do so very collaboratively. So I think the opportunities for Jacobs are nonexistent. I couldn't speak to some of our competitors like Fluor or Bechtel. Maybe they've got some kind of role there. But certainly, we won't even look because we think the chances are so weak. Another question? Up here.

Unknown Analyst

First off, I appreciate the additional backlog disclosures. It's very helpful. So of course, I'll ask for additional level based on that. It seemed -- I guess the process and the public institutional backlog. There's 2 questions. One, on the process backlog, can you give us any -- I mean, you've had some really nice project awards and announcements in the Middle East, and you've talked about the progress you've made there. Can you give us any order of magnitude indication of kind of how much backlog there is, whether it's in the Saudi Arabia or the Middle East or kind of any indication of how to think about quantifying that. I mean, we can see from your 10-K the revenue. We don't really see it in the revenues yet. So I just want to -- just grasp for any indication you can give us. And then I have a follow-up on the public sector.

Craig L. Martin

We're probably not going to give you much direction in terms of guidance with backlog within backlog. Last night, somebody asked for additional guidance on backlog and Prosser wouldn't even let me answer before. He was hollering no. But Greg Landry right here is probably familiar with what's going on in the process business as any of our key executives. Let me ask Greg if he could respond to that question.

Gregory J. Landry

Well, we were very positive about the backlog in the U.S. I mean, that has, I'm just looking at the table here, 24 months ago, totally different story. Today, we feel it's a very strong business, and we're very well positioned to increase our business on the Gulf Coast. In the Middle East, it's just full out. On the broad megaprojects, we have a large project out of Manchester with Saudi. Actually, in Europe, mid-cap, some more mid-cap-type projects. We're very busy. The chemical guys are spending [indiscernible]. So looking into '12, we see a very strong Canadian into '13. And again, the U.S. is a shale gas. It's a product of the gas. It gives predictability on feedstock for the industry here and that’s what changes business completely.

Craig L. Martin

George Kunberger, Head of Sales for the company. Would like to elaborate, George? You've got anything you want to add?

George A. Kunberger

Well, no, I don't think I do. I mean, where we go is probably going a little bit too far from an information perspective. But I mean, certainly, as I told you guys, I mean, we're pretty upbeat about the Heavy Process business, certainly in the Middle East. All the things that Craig characterized about our position there and where that's go with us, we certainly agree with. I don't think I'm going to give you any more information than that though.

Unknown Analyst

On the public side, I mean, some of your peers have talked about as backlog has shifted away from -- more towards these IDIQ-type things. And as a result, we've kind of told by others that maybe that backlog metric is becoming less relevant to look at. I mean, how do you guys think about that as we see the decline for you guys from '10 to '11? Is that partly at work? And can you sort of remind us how -- I just don't remember how, to what extent does that backlog funded but not necessarily appropriated? Or how do we think about that in light of all the stuff we're reading in Washington?

Craig L. Martin

Yes, sure. Generally speaking, our backlog -- the way we backlog things is based on the type of contract and the expected duration and the funding availability. So single source kind of contracts. We tend to backlog either 1 year or 2 years, depending on the type of contract, but not the full term. IDIQ is we backlog what we expect to get out of the IDIQ, again, depending a little bit on whether that's positively funded or not positively funded. So our approach to backlog, while nobody in this industry does it the same way, so backlog figures were never comparable, our approach in the industry is probably about the same level of conservatism as most of our competitors might show. I actually think from our perspective, though, and remember, when I talked about that backlog earlier, there's about $700 million of work that would be in backlog today if we didn't have recompetes coming. So if you assess the likelihood of us winning recompetes, and as I said, we have a 95% track record, backlogs are not as weak '10 to '11 as it might otherwise appear, because there are a lot of major recompetes either in process now or starting in the next 12 months. And there's some of our major contracts. So as you look at public sector backlog, I think the numbers -- at least the way we do them, they're still very meaningful. And I think you can look at them with an eye toward where the business is going with some comfort. So I'm not sure that completely answers your question, but I think that's really where we are at. Okay? Right here.

Unknown Analyst

Can you discuss the issue of IT services and cyber. I mean, what do you all bring to the party than the more traditional people down in D.C. area?

Craig L. Martin

Well, with respect to IT services, cybersecurity -- first of all, I'm not sure anybody knows actually yet what cybersecurity is. And when I've asked some pretty expert people what do they mean when they talk about cybersecurity, I get different answers from different experts. But for us, what we're focused is the provision is sort of enterprise-related services and secure situations. So it's things like regional control centers for the Department of Defense. It's things like data centers for the likes of the big computing companies and the big cloud providers out there in the world. And so it's 2 businesses really. One business is the physical infrastructure, which is both a buildings business and an IT business in terms of installing the physical assets. And then there's the sort of provision to the consulting business that wraps around that. It is a business where the Beltway bandits get quite a bit of business but more so on the consulting side of that or in the direct provision part where we make the hardware and sell it to you and not so much in the services and physical envelope. So we think there's a niche here for us that's different than what most of our competition's doing, and we think we're particularly well positioned to do that, plus we see opportunities for acquisition that would significantly expand our capability in that regard. So that's really why we're getting excited about that segment of our business. Does that answer your question? Other questions?

Okay. Thank you all for being here. We appreciate it very much. Safe travels, and a great holiday period from now till the end of the year.

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