雅各布工程 (J) 2002 Q3 法說會逐字稿

Good morning.

I want to welcome you to this Jacobs Engineering Group third quarter earnings conference call.

This is call is being recorded.

Today?s presentation will be available for replay at 2p.m.

Eastern through July 25th at midnight.

You may access the replay by dialing 719-457-0820 and entering the passcode 600199.

Again, that number is 719-457-0820, and the passcode is 600199.

The presenters from Jacobs Engineering Group are Noel Watson, Chief Executive Officer and John Prosser, Chief Financial Officer.

At this time I?d like to turn the call to Miss Patty [Bruner] to read the forward-looking statement.

Please go ahead ma?am.

Good morning.

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.

Actual results may differ materially.

Information concerning factors that could cause such differences is set forth in Jacobs? form 10-K for the period ending September 30, 2001 under the heading ?Forward-Looking Statements.? The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

Now John Prosser, Chief Financial Officer of Jacobs will discuss the quarter?s results.

Good morning.

Welcome everyone!

I will talk about the financial highlights and then I?ll turn it over to Noel Watson to cover our growth strategies and a discussion of our model and business overviews.

Moving right along on slide 4, talking about the third quarter reports, hopefully you?ve all seen the news release we put out last night, but the earnings per share for the quarter was 50 cents and diluted EPS.

That?s up 22 percent over a year ago.

Net earnings were $27.9 million, up 24 percent.

We have adopted, as we reported earlier, we have adopted FAS 142.

It was effective October 1, 2001 for this fiscal year.

That adoption, while we haven?t restated the prior years, did have ? would have had an impact last year of three cents on the quarter and eight cents on the year-to-date numbers.

We have had continued strong sales activities this year.

We?ll give you the backlog in just a minute, but ? and we?d like to just comment that these were our earnings and backlog and everything are right in line with what the street expectations were.

We do still feel comfortable with the street expectations for the fourth quarter and the yearend of September 30th.

Those estimates right now stand at ? for the quarter ? a range of 51 to 54 cents for a consensus of 52, and for the year a range of $1.96 to $2.00 with a consensus of $1.98.

This quarter I?m going to focus a little bit more on cash and the balance sheet than I typically do on the conference call because, you know, with all the issues that have come up about earnings and manipulation and such that?s been in the press, for one thing is really if you focus on is cash, it?s one thing that has less susceptibility to, you know, movement or playing around.

Our cash is a strong [indiscernible] $50 million, about the same as last quarter.

Receivables were up a fair amount from the last quarter at $842, but if you look at our ? when you see our full balance sheet, when the Q comes out you?ll see that payables or accruals were up significantly as well, so there is a balance in, you know, the net receivables were only up about $15 million.

The debt is down for the quarter.

It stands at $118.1 million.

That?s down from $143.1 million at the end of last quarter, $184 million at the end of last fiscal year.

So we?ve made substantial reductions of debt both through the quarter and through the year to date.

Our cash flow from operations was approximately $30 million, and as I say, that debt reduced by about $25 million during the quarter and brings our debt to capitalization ratio at about 14.8 percent, which I think is one of the lowest in the industry.

Turning on to the next slide, slide 6, just say we like to share it just because it does show the consistent growth in net earnings over the last decade-and-a-half, you know.

The last number there is for the trailing 12 months and is consistent with our expected growth rate to be above 15 percent for the year.

Going on to the backlog, the backlog is reached, you know, again reached record levels.

The Professional Services backlog stands at $3 billion.

The total backlog is at $6.6 billion.

Net bookings for the quarter was right at $1.270 billion, which is slightly above ? about $100 million above the revenues we work off for the quarter.

I think the important thing to note again is that this ? these bookings were done without any single large contracts being booked.

The largest single contract booked in the quarter added about $50 million to revenues and that was a one-year on what we hope to be a 10-year contract at the Army Huntsville Arsenal.

It?s an ITS contract.

This was [indiscernible] during the quarter.

But there?s a lot of activity out there that added to our backlog without any single blockbuster win this quarter.

With that I?d like to turn it over to Noel Watson.

Good morning folks.

Let?s turn to page eight and we?re going to go through the strategies to maintain the 15-percent growth.

And I?ll focus on each one of these a little bit, so let?s go to page nine and talk a little bit about our relationship-based business model.

Those of you that have sat through these calls of us numerous times get a little bored in this section and I apologize for that.

John and I looked at actually cutting this short or bypassing it, but what we found is that about 25 percent of the people on the call have not been on the call before.

So, we decided to go ahead and go through the standard procedure and discuss the model a little bit.

We believe our model is unique, particularly unique in how we practice it.

When we talk about our relationship-based business model, as we showed on slide nine, we basically are deriving a little over 75 percent of our business from long-term clients where the relationships have been in place for many years.

Our basic drive in our model is to deliver superior value to these clients and we consider it a success when we have worked for these clients day after day, year after year, and some of these clients have been working with Jacobs for 15 or 20 years.

We may not have all their business when we had the relationship model, but what we will find is we will be one of two or three selected suppliers.

We also have a discrete package of business, which is about 20 percent of our business.

Discrete projects are projects where we are working for a client basically for the first time, or we only work for that client on a random basis but not continuously.

Discrete projects normally are reimbursable in nature.

We work for clients on a discrete basis either because we need the work, because we can generate a good profit, or because we?re trying to reel this client in as a long-term relationship client.

And then we do a few transactional projects.

Transactional, by our definition, is when we actually bid the construction on a fixed-price basis.

And you can see that sliver is very, very small, almost non-existent.

We rarely do that.

Sometimes we might do it for a very good client, but it is not a part of our business strategy whatsoever.

That?s our model.

If you look at the industry in general, you can see that the rest of the industry practices a much more transactional business model, even though most of our competitors do have some relationship clients, and all of us obviously chase discrete [indiscernible]-type projects.

I think the uniqueness for Jacobs is that we are very pure to our business model.

Ninety-nine percent of our business is either in preferred relationships or discrete projects.

It does give us better and more consistent earnings.

It does lower our risk, and by the way, it certainly lowers our sales costs.

Move on over to slide 10.

This is a diversity slide.

It has not changed dramatically since last time.

It does show that over the past four years we have dramatically changed our business mix and significantly reduced our dependence on chemicals and petroleum.

And while they are still big pieces of our business, we?ve had major growth in Federal programs and PharmaBio and Pulp and Paper across these eight markets that we serve.

This diversity has certainly reduced the cyclicity of our business.

We have identified groups of core clients and it has stabilized individual operations.

On slide 11 we talk about broadening life-cycle services.

That basically means selling more of what we do to individual core clients.

For certain clients we?re doing their maintenance business, which is about 10 percent of this slide.

We work very hard to then get a bigger piece of the spending pie.

For those of you that follow the business, you recognize that nobody has any real measurable global market share, so we measure our market share by what percent of the clients spend we are getting for our core clients.

And so we look very carefully.

If we?re doing engineering work, what are the opportunities to do construction and maintenance and consulting?

If we?re doing construction, how do we back that into project services and engineering and then downstream it into maintenance activity?

So we put a lot of effort into these 30 or 40 core clients who generate well over half of our margin in trying to get a greater share of their spend.

If you?d like to move onto the next slide, which is number 12, we talk about multidomestic network.

We?ve got offices in a dozen different countries and each of those offices is charged with making money in the local marketplace.

We do not consider ourselves an international contractor and 95+ percent of our work will be done in places where we have offices.

It gives us the advantage of knowing the local market, of understanding the subcontractors and the clients, and by the way, of keeping our risk posture moderate.

We are not a contractor that is doing work in faraway places for clients we don?t know in areas we don?t know.

When we talk about our multidomestic network, we do try hard to anticipate where our clients are going and get there before them.

And one thing on the multidomestic network, while we typically would expand the multidomestic network through acquisition, there are times like what we?re doing in Singapore right now where we?re actually growing it by brute force.

We had $1 billion worth of pharmaceutical work in Singapore; we?ve now created an office in Singapore to serve both the pharmaceutical marketplace and the heavy process marketplace out on [Juong] Island.

And we can?t talk about the business without talking about slide 13 and driving costs down.

The thing I?ll say is the business remains under tremendous cost pressure and we don?t have projects within Jacobs to drive costs down.

It is a way of life and we are always seeking ways to reduce our costs of doing business.

We believe cost discipline is a competitive advantage.

Besides just the brute force activity of taking the G&A costs down, we have now learned how to effectively share work from high-cost engineering centers to low-cost engineering centers.

So the cost of a billable hour of work in the Gulf Coast of the United States might be $75, in Bombay or [Mumbi] India it might be $20.

And most of our major projects now in both the U.S. and in Western Europe now contain an offshore component trying to drive the clients? cost of doing business down.

That helps the client.

The ability to work electronically also helps Jacobs move work from places that have too much work to places that don?t have enough.

So in a business that has traditionally been higher in fire, we are now able to stabilize the workforce more effectively.

Let?s move to slide 14 and let?s talk about the strong markets.

And if you go back to one of the previous slides, you?d recognize we operate in about eight markets.

We?ve got five that are hot and three that are not.

I could talk briefly about the three that are not, if you would like.

I can talk about chemicals, which is still a very big business for Jacobs, still a very significant piece of our revenue stream.

It has been very, very slow for 24 months.

What we are finding today though as we visit our chemical clients is that they are selling more product today.

Their volume is up and even their pricing is up.

I think the real question is, ?Is this just inventory replenishment?? or, ?Are these price increases they?ve been putting through really hold?? And if they hold long enough, that will generate capital projects.

But right now today, chemicals are still at the bottom of the cycle as is the pulp and paper business.

And while we do always have one or two big new paper machines that we?re designing or building, the business is very slow and exists at the bottom of the cycle.

We also have a high-tech manufacturing in the semiconductor business.

That has been bouncing along the bottom with a little optimism that showed up.

I think, last time we had the phone call that optimism has dwindled a little bit, but we do have a fair ? some work in this business.

I was going to say a fair amount; that?s not right.

We do have some work in this business.

Let?s move back to the strong markets.

We?ve talked about the three weak markets; let?s move to the strong markets.

Defense and aerospace remain strong.

The budgets in this country are up dramatically to $40 to $50 billion.

The biggest win in this sector last quarter was this IT contract.

We got Huntsville for the Army, which is a $500-million contract overall.

We?re going to be booking it at $50 million a year.

It was a major breakthrough in our new business line for Jacobs in the IT area, so we?re very pleased about that.

We won a couple of significant projects in the facilities market.

The facilities market, or the buildings market, remains very, very strong.

We are doing a lot of buildings.

They basically are high-tech buildings; they?re not commercial, but we?re doing a lot of ? several research hospitals.

We do a lot of work for people like the IRS and the FAA.

We do a lot of work for the Department of Justice in the new sophisticated detention centers or jailhouses.

And of course we?re doing a lot of schoolhouses.

During the course of the last period of time we?ve won some big work in that area.

And the major press releases we?ve put out last quarter was the Air Force military housing and also a fairly significant piece of work in Athens for the Organizing Committee on the Olympics.

If we go back to infrastructure, it remains a hot market.

And we did get the [indiscernible] work in Dallas last quarter.

We did get the MEMC work, or the maintenance work down in Florida on the turnpike.

We got work in the Bay area and we also got work in the Washington Metropolitan Transit Authority.

The infrastructure market remains hot.

There?s a lot of money coming into infrastructure.

We were worried for a time about the States and their ability to create the matching funds, and while that is a niggling problem, it is not seen to be a significant problem.

PharmaBio remains strong.

Our clients? stocks are depressed, as you all know, but their earnings are running at basically record levels.

Some of this is driven by the markets; some of this is driven by the concern of, ?Do they really have the research pipeline?? But the one thing that is happening is that we are seeing a lot ? we have a lot of business today and our prospects in this arena remain very, very strong.

Major wins during the quarter that we?re able to talk about were a module bulk facility for Lilly in Puerto Rico, a new program for Genzyme, a new program for [indiscernible] Smith client in Singapore, and a new program for Genzyme in Ireland.

All these were significant wins in the last few months that we?ve been able to report on.

But overall, the PharmaBio business remains strong.

The FDA is giving our clients a real headache in terms of the lead time they need to start their facilities to get them validated so they can actually produce the drugs.

So the FDA is forcing our clients to start their capital projects at an earlier date.

Of course, that is creating business for Jacobs, but it is giving our clients a headache.

And the petroleum market remains strong.

We released the press release last quarter, a program for BP in Houston and also a significant upstream program for Exxon at LaBarge out in Wyoming.

We have the engineering and design and procurement on a major re-injection program out there.

So while the petroleum markets is not booming maybe like the PharmaBio, we do have real steady projects coming at us.

The downstream is being driven by the Clean Fields Program, particularly taking the sulphur out of gasoline, taking the sulphur out of diesel, and also many environmental programs where we continue to clean up the refineries to reduce the pollutants that are emitted.

So in summary, we?ve got five markets that are strong; we?ve got three that are not.

The three that are not, there is hope, but they certainly aren?t generating big sales for Jacobs right now.

But the five that are strong are really strong.

Let?s go to this slide this time and talk a little bit about the corporate governance since it seems to be such a hot button since we?ve never done this.

We?ve been looking at the new proposals coming from Congress and the New York Exchange, a wide variety of independent agencies, and I thought it might be worth just a couple of minutes talking about our Board, its independence, the fact that we have nine outside Directors and with the addition of Craig to the Board, we now have four insiders.

We talk a lot about the Committees.

They are absolutely and have been for many, many years composed ? chaired by and composed of outside Directors.

If you look at the Business Practice standards, we?ve had a business conduct policy each of us has signed for as long as I can remember.

We have an integrity hotline for people to call in and talk about issues that they?re concerned about that they don?t want to come up to the hierarchy.

And a couple of years ago we put in a compliance officer to make sure that we are compliant with all the rules and regs, both accounting and legal as we look across the system.

Another strength of Jacobs in our ability to understand where the numbers are as we have a mix of both centralized and decentralized functions.

All of our Accounting, Legal, IT, Quality Safety, and Sales are hard-line centralized right here on the sixth floor in Pasadena.

And we have information flow that way.

We have chosen to centralize on a hard line everything that does not have a continuing customer interface.

The execution of the work is decentralized out in the projects, in the offices.

But all of the other activity comes in a hard line, so we have Accounting and Legal and IT, Quality Safety and Sales representation in all of our offices, in all of our project sales activity for this hard-line back here to California.

This gives us the advantage of understanding the numbers totally on the legal side.

No contract is signed in Jacobs without a legal book and only a group Vice President can sign a contract.

We do not have a willy-nilly signing procedure.

So the Legal Department, headquartered here in Pasadena, is reading all contracts in terms of legal activities and risks.

So those kinds of activities ? and by the way, this is nothing new; this is nothing we?ve put in place to take care of the current concern.

Most of these places ? these activities went in place in the middle 1980s.

But it does give us a balanced perspective.

I was talking to a very senior accountant the other day and I asked him about the transparency of the numbers and their ability to get at them within Jacobs and the ability of the senior management to see the numbers and understand where they?re all going.

And his statement was, ?We?re the best in class.? I will take that;

I?m not going to pass out any names or give anybody any trouble, but we?ve worked very hard over the years to make sure that we here in Pasadena understand what the numbers are and how the business is being run without getting between our people and the customer.

The customer interface must be dealt with locally.

We also have a formalized project review system that?s been in place again for many, many years, where every month, every significant project has people not directly in the line of the project reviewing the project, trying to understand where we?re going, what?s happening, what are the project issues.

And all this information that comes from these project reviews is reported on and these reports forwarded around the system to the senior management team.

I think the point I?m trying to make here with the current press on corporate governance, we have been working very hard, both on the governance side and in understanding our own numbers so that we minimize the surprises because the one thing that we as senior management don?t want, and I know that you, the shareholder, don?t want, is surprise.

We need to all understand what?s going on, and I think our history speaks for itself.

We have been able to do this.

Move onto the last slide.

We do continue to focus on our model.

We have no plans to change our model.

We believe it is the cornerstone of our success.

We think the diversity has helped to keep our stable earnings stream going back to that curve that John showed you about 10 minutes ago.

That stable earnings streams comes because we are diverse in our markets, our geographies, and the services we provide.

The balance sheet is good; we were pleased with our ability to pay down debt last quarter.

And we hope to be able to continue that this quarter and there?s no reason we can?t.

We continue to drive for at least 15 percent per year annual EPS growth.

That is something we?ve been talking about for years.

We have been able to achieve it.

It does come from a combination of acquisition and internal growth.

And I do believe we have the corporate governance thing straight.

We?ll continue to read these proposals that are coming up to see if we should be modifying anything we do and we have very good oversight in our projects.

And I think with that, that?s the formal part of this.

It took a little longer than usual.

I apologize for that.

We?ll throw it open to questions.

Thank you gentlemen.

Today?s question-and-answer session will be conducted electronically.

If you?d like to ask a question you may do so by pressing star, one on your touchtone phone.

Again, it is star, one for questions.

We?ll pause just a moment to assemble our roster.

We?ll take our first question from Don Zwyer with Lehman Brothers.

Good morning Noel, John.

Don Zwyer at Lehman.

You noted your cash flow from operations at $30 million.

That was down from the ? from the prior quarter and a year ago ? down from the last two quarters.

Was there anything in particular that tied up your working capital?

Was it just that your business is growing so much now?

Well, I think, as I said, the receivables were down.

Some of that was offset but there still was a net growth where over the last two quarters we?ve been actually getting cash out of the receivables because they?ve been coming down.

So I don?t think there?s anything significant in that.

It?s just normal business cycles and ups and downs.

But it?s something we continue to focus on and it did have a little bit of a negative cash impact this quarter where it had been very positive the last two quarters.

I think we?ll see that ? we hope to see that turn around this next quarter and continue down between now and the end of the year.

And is the Cap ex this quarter, $6.3 million, is that an unusually low number?

What do you think it?s going to look like the next few quarters?

Well, it?ll vary.

I mean last year we had a little bit higher Cap ex, and of course, certainly, since the beginning of this year we?ve been very careful with our capital spending.

Some of the things that we were spending the first couple of quarters still were commitments from last year.

But I think you?re seeing the effect of that this quarter.

Our Cap ex, you know, revolves primarily around, you know, IT and, you know, office spending, so when we put in a new office or consolidate offices, you know, you have a bunch of spending for things like partitions and desks and furniture and such like that.

And we did have a fair amount of that still going on from some of our acquisitions with consolidating some offices over the last year or so.

But I would say that, you know, on average, over the next three years, you know, some growth because of our growth, we should be having, you know, Cap ex in the $40 to $45 million range.

And there shouldn?t be anything unusual unless we actually go out and, you know, did something like acquire a facility or something like that, which would be out of the norm.

And the fourth quarter Cap ex should be around how much?

Probably around ? it?ll be up from this quarter.

It?ll probably be around $10 million.

OK.

One last question, your field work bookings down sequentially, has there been any delay in taking your front-end projects forward to field work?

No, I ? no, there?s been no ? the projects we have in the engineering that are on their way, I don?t think we?ve seen any delay in any of that that I can think of.

Craig, can you ?

No, I don?t think there?s been any at all.

So I shouldn?t read anything into field work bookings dropping?

No, no, I think it?s just ? it?s just the cyclicity of going on.

In fact, I guess if I had to have one win and one not be quite so good, I?d rather have the Pro Services good.

The field [technical difficulty] lag that as you well know by anywhere from six to nine months.

I would say that that?s just an anomaly that went on last quarter and I wouldn?t read anything into it at all, no.

OK.

Great Noel.

Thank you very much guys.

We?ll take our next question from Michael Dudas with Bear Stearns.

Good morning gentlemen.

Two questions, one, Noel, could you give us an update on integration and opportunities with regard to Stork, GIBB and your Delta Catalytic operations?

Have you got a minute or an hour?

OK.

Oh well, it?s up to you, Noel.

No, no, no, no, no.

Stork is done.

I think Stork has gone extremely well.

Stork is making money; the clients have bought in.

We were concerned that the business model would not play in Europe.

That is no longer a concern.

I would say that if I lived at Stork I think we?re extremely pleased with what?s going on in the Netherlands.

That seems to have worked extremely well.

Belgium has worked extremely well.

We are ? we had just a very small operation in Germany that we got as part of the deal and we are working with German strategy right now trying to figure out exactly what we want to do in Germany when we grow up.

We have 100 to 150 people in Germany.

It?s a country of 80 million people.

It?s the biggest industrial enterprise in Europe and we need to figure out what we?re going to do in Germany.

But I would say overall we?re very pleased with where Stork is.

GIBB ? GIBB is doing fine.

It?s gradually rolling out of the Jacob?s fold.

Their business is good.

We obviously, and I think I?ve told people this before, the Civil Engineering businesses, we need to work a little harder on those to make them a little more profitable and so we are working on improving GIBB?s profitability, which we will do.

But we?re pleased with where that?s going and it is profit ? it came in profitable and it?s still profitable and the profitability is improving.

Canada, we?ve only been in Canada, what, for six or seven months?

We?ve put up a senior management team up there.

We?ve put in some sales help.

The business up there is going to be just fine.

It is solidly profitable.

And I would say Stork is done as far as integration goes.

GIBB is close to done.

Canada is going to be done by the end of the calendar year I guess.

OK.

Thank you.

The second question, Noel, when you target the defense monies that are going to be spent over the next x-amount of years, where is Jacobs now better positioned than others to take advantage of that and where are some of the opportunities you think you can capitalize on with a little bit of help?

I?m going to ask Mr. Martin to answer that one, OK?

The critical markets for our ? from our perspective as we look at the defense spending going forward tend to be in the areas of test and evaluation and systems development where we?re really strong.

As you will recall from the [indiscernible] acquisition three years ago or so, we picked up a very strong capability in the whole area of test and evaluation of various systems for the Air Force, the Army, and the Navy now.

So we see a significant amount of opportunity to look at new systems for those clients as we go forward.

I?d say that?s probably our strongest position on the defense side.

In addition, we?re seeing our opportunities to support those customers on the IT side increasing.

This ITSS contract that we press released this quarter is a significant step in that direction.

We see a lot of opportunity there for us.

How about traditional Department of Energy, cleanup work or anything?

Everything?s working out well there?

Yes.

Thank you.

We?ll go next to Fritz von Carp with Merrill Lynch.

Good afternoon gentlemen.

Let me follow up on one of the ? one of the things you said.

You talked about Germany, or about Europe with Stork and how you were concerned about the business model?s ability to translate.

Could you just briefly give me a little color on what you mean by that?

How the business model ? is it the fixed price nature, or?

Yes, Fritz, Europe has traditionally been a very fixed price community, particularly the [continent] and so when we went into Stork, we ? and Stork was in a transactional mode when we bought them.

And so the question was could we take the relationship model to western Europe and make it work and the answer is, we?ve done it.

The clients ? it?s amazing and I?ve probably told you this before, but I went to a client Open house some time late last year and I couldn?t believe how pleased they were to see us, how pleased they were to have somebody there that was trying to do it a different way, and in fact doing it a different way successfully.

And so, I would say that while we had concern about our ability to make the relationship model work, that concern has absolutely evaporated now because the clients are buying in.

And now you need to understand, I?m talking about big multinational clients;

I?m talking about big oil and big chemical.

And when I was there in May, we were sitting down with the second or third largest producer of a given set of chemicals over there, without being too specific here, and negotiating an alliance to work in all nine other plants in eight of their countries in western Europe.

And so this guy is trying to bring his company together and it?s been put together by a bunch of acquisitions and so we just sat there at dinner one night, up in Scandinavia, and negotiated a deal because he wanted to do it a better way.

And the way they had been doing it wasn?t working.

So, I mean, it?s kind of surprising it went as well as it did.

I think it even went better than we at Jacobs thought it would, to be honest with you.

Well, that?s a good thing; that?s a good thing.

Let me ? excuse me ? on a different subject, let me ask you about two of the contracts you mentioned that seemed to be in different ? in new markets for you, the IT contract, the government contract, and then the Exxon upstream.

The Exxon upstream contract, is that ? I mean, you?ve been talking about trying to get into upstream oil and gas, you know, gas processing, things like this.

Would you say that this Exxon contract, is that what you were talking about?

Or is this fruit of that, or am I off base?

No, no, no, you?re head-on.

This contract came in through the Calgary operation and we?ve got both the Canadians and U.S. guys working this.

But this is exactly what we?re talking about and we are now flywheeling off of this and getting other contracts like this.

But this is a program out in Wyoming in an oilfield getting kind of cutting-edge kind of technology for the re-injection.

And it?s something that, you know ? this is exactly what I?ve been talking about.

Now, do you have the technology position you have?

I mean I know that some of the ? some of the, like speaking of Canada, one of your competitors up there bought a, you know, a SAG-D technology contractor.

I mean, do you have a strong enough technology position for upstream?

Well have a ? yes.

We don?t have any proprietary technology.

It all comes back to know-how, but the answer is ?yes.? Our guys in Calgary have very good, if not the best, practice of the open-arc technology of acid and gas re-injection ? acid gas re-injection, let me get it right, OK.

And so the answer is ?yes? we?re very pleased with that.

OK.

And the IT ? now this IT outsourcing, the DOD, is this a DynCorp sort of a market?

Is that the?

Well, it?s a ? we think, and I don?t know exactly what DynCorp does, but what it is, it?s enterprise-wide solutions, basically of a technical nature.

We?re not trying to run the PCs on the desktop and that kind of stuff.

We?re operating a cut above that.

But we look ? and maybe I haven?t told this story and it?s worth telling ? we look hard at making an acquisition to get into this business, particularly in the Military, and concluded they all wanted too much money for too little value.

So we gave our guys a lump of money last fall and said, ?Go sell some work directly.? And they went and sold some work directly, and I mean it?s a really neat story.

We evaluated and evaluated and then finally said, ?Go do? and we gave them a lump of money and said, ?Go try to get yourself in this market, guys? and basically they went out and sold two contracts in a matter of about six months.

And it is a business ? we do a lot of fairly sophisticated IT work as part of our existing contract, both in test and evaluation and in the weapons development part of our business.

And so, we consolidated this under one roof.

In fact, I was down with these guys on Tuesday talking about this.

We brought in a new leader from the outside who?s leading the charge in this business and we think this is a big growth opportunity for us.

Do you think ? now, is the IT market, is that a fast-growing niche of DOD outsourcing?

We ? I have read some data ? I wish I had it with me.

There?s some pretty well published data on that.

Yes, it?s growing at double-digit rates and we decided that with all the knowledge we had and with all the clients we had ? one of the contracts we won ? did we press release the special operations stuff?

Special operations stuff down to Tampa.

Again, they split the contract up and part of that became IT generator, so that ? it is rolling into a lot of what we do but we decided instead of just doing it as an adjunct to what we do, we would go out and take this market and tackle it direct.

OK, thank you.

And one last question.

What is the contribution from Delta, from the Canadian operations per share?

I mean, just so we can keep track.

Fritz, you know that we don?t break out operations after we?ve done it.

They are positive and they are contributing.

Is it ? is it ? is it safe to safe to ? now, I think before you had told us, eight to 10 cents accretion, is that correct?

Are we ? I mean, I know you don?t want to discuss it, but is that?

We are on target; we are on target.

Yes, OK.

Thank you very much.

No surprises.

Thank you.

Our next question comes from John McGinty with Credit Suisse First Boston.

Good afternoon, or good morning, I guess.

Let me just ask you a couple of ? one question is, from what I understand on Professional Services, and I do love your breakdown of orders and revenues and backlog.

That is fabulous.

But if we look at the orders in Professional Services in the third quarter, it was $776.

Third quarter a year ago was $542 and I?m just trying to understand, does the acquisition of Delta ? in other words, is that an apples-to-apples?

Because if it is, it?s a phenomenal increase, but I have a feeling that there may be some acquisition impact in there.

And if so, could you give us a ballpark number?

Delta came in in the first quarter of this year so they were not in last?

Yes, but how much?

I mean, Delta was what? $200 million in sales?

Well, the total was I think ? what we had said that they brought in about $400 million and I think it was about $100 million or $150 million of Professional Services and about ? the balance in field.

So, if we ? if we ? if we assume that it?s $100 to $150, then it?s maybe $30 to $35 million a year ago, if we assume it was spread evenly.

Any reason that it wouldn?t have been spread evenly?

The backlog is not necessarily ? it?s a point in time, you know?

No, no, I?m looking at the orders.

It looks to me like the orders, even if we ? even if we backed it up, your orders in Professional Services ? your orders in Technical Professional Services?

Oh, I see what you?re talking about.

?were very strong, as they have been.

I mean but, even if we add $35 to $40 million, you?ve got $776 versus $580, which is up 25 to 30 percent, and I guess my question is, getting back to kind of Noel?s answer to Don?s question, that ? is that as bullish as it looks?

In other words, is the lead such that what we will see then is a substantive gain in field service work going forward?

I mean it?s a very bullish number;

I?m just trying to see if I?m reading too much into it.

Yes, I ? well, I think ? what he?s basically saying is that this huge ? this $600-million increase in sale rate over a year, or however he?s calculating the number.

And the answer is, yes, it is pretty bullish.

I mean I?d have to sit and go through your arithmetic with you, which we haven?t done it quite like you?ve done it, but the answer is, that kind of increase, which is 25 percent increase in Pro Service backlog over the year is significant, and yes, Delta brought a piece of that, but that?s ? a lot of that is just Jacobs.

And Delta continues to grow and have good activity since we bought them as well.

No, but what I?m also saying is that that also ? that, given the normal lead, that?s also very bullish, but what happens on the other half of the camp in the next several quarters, right?

It should generate more field service backlog as we move forward and more field service revenue, yes.

OK.

Now, I love your slides and I?m looking at your slide number whatever it is, the one with the diversity, OK, and that?s for the 12 months ending June.

The interesting ? the question I have is, for the 12 months ending June, chemicals is 15 percent.

For the 12 months ending March, it was 18 percent.

And what I?m trying to figure out is the ? you said the chemical market?s lousy, but is it falling pretty significantly, or did ? is there some distortion through acquisition, or is the chemical market in fact going down when everything else is going up?

I was curious how that compared and I didn?t get time to look at that this morning.

Down three.

Petroleum was up three.

No, well?

I mean on your chart.

No, no, no, no, that?s fine and by the way, that might be real in terms of ? as you continue to work off some of the backlog in chemical, we are at the bottom.

We are selling new work, but I would say the sales pace in chemical, having been slow for as long as it is, I don?t think anybody would have expected that percentage to grow and I?m not surprised it fell about three percent.

And the increase in petroleum is beginning to reflect the clean fields work?

It?s reflecting clean fields work; it?s reflecting Stork; and of course it reflects ? yes, those would be the two things it?s reflecting because both of those, the clean fields activity and Stork both are picking up.

It also reflects Canada.

A little bit, yes, a little bit in Canada.

On the building, which is ? which is actually down a percent to eight percent, what portion of your building is some form of Federal versus State and local, you know, of State and local or, you know, school district, because that?s the concern everyone has.

The Federal government is spending a lot of money in the State and local, you know, they seem to be running out of money or the ? you know people ? I?m not sure they?re running out but that?s what people are worried about.

Can you give us some kind of flavor as to what portion of your building is Federal versus State, local or school or municipality or non-Federal?

No, I can?t answer that, but I would guess, Craig, 50/50 maybe?

Yes, probably 50/50.

Most of the Federal buildings work is in Federal on this chart.

Yes, yes.

Oh, it?s in Federal; it?s not in ? it?s not ? in other words, if you do a prison or a building for NASA or something like that, that?s in Federal programs, not in building?

It depends on the nature of the program.

It?s not a real clear answer.

But our buildings? business overall probably is about half and half.

Are you seeing weakness in the State and municipal and schools?

I mean I know you?ve won some, but I mean, as we talk about what?s going on?

There seems to be no weakness whatsoever.

John, you also have to remember on the schools, a lot of the work that we?re doing in the schools was funded by bond issues and such that are, you know, funding outside the normal course, you know, budgetary issues.

Would schools be a big chunk of the non-Federal stuff in building if it?s half?

I mean?

No, no.

Schools probably aren?t that big a chunk.

We?ve got ? you know we got the Jacksonville courthouses; we got the big research hospitals.

None of that is Federal, that?s USC, that?s Northwestern, that?s [indiscernible], that?s places like that.

Yes, but that?s going to be ? that?s not State and local.

That?s going to be, you know, colleges or?

That?s right.

We carry that in our State and local.

No, I know it is, but I mean it?s a different revenue pie.

Well, but I would say that probably on the buildings, we?re not doing a lot of what you call State buildings are.

No, not very much.

The State buildings are small.

The transportation business, a lot of that is for Departments of Transportation.

In infrastructure you mean.

Infrastructure, yes.

Is the infrastructure ? I mean infrastructure is a very small part of your business, I mean it?s nice because it?s new, but is it, given what?s going on with the State funding for different, you know, highway programs being stretched out and programs in Colorado and a host of other States being stretched out and cancelled, are you guys going along continuing to book good business because it?s such a small ? you?re so kind of new in it, with all due respect?

I mean you?re still kind of just kind of picking and choosing as you get into it?

Craig, I?ll let you try that.

As you can see, our press releases for infrastructure bookings the last quarter were pretty good.

What we?re finding is that the business is pretty decent.

There?s a lot of spending out there and we?re still a very small share player.

And so the opportunity to steal share in that marketplace is pretty significant.

OK.

And then just?

John, one other thing, with, you know, a few exceptions, most of the work we?re doing in both the facilities area and the infrastructure area focus on the design or construction management, so while we have ? and the field services there tend to be, except, you know, there?s always an exception though, they tend to be just the operating staff for them in the field and we don?t have the big [indiscernible] construction revenues because we?re acting usually as the [indiscernible] representative who are as an agency CM where we don?t have the field revenues passing through.

So comparing that to, you know, a revenue that we get from say chemicals or pharmaceuticals that have a bigger share of the total construction responsibility or field service responsibility, you know, it?s hard to compare them strictly apples-to-apples.

That actually would be a great slide for you next time, Noel, is to take your diversity slide and break it down between Professional Services and Field Service.

For each of these, at least, just give us a flavor of how that breaks down.

Shareholders? equity,?

Where are you, in [indiscernible]?

No, I?m asking what it?

It was in the press release.

I?m sorry, sorry.

You had me worried that we had forgotten something.

No, no, no, sorry.

Sorry about that.

And then Ireland, is your Irish plant, it is back on, it is ? you are ? the large semiconductor facility is going forward?

We?re not allowed to tell you that.

No, no, it is going forward, yes.

Thank you very much.

As a reminder, that is star, one for questions.

Again, star, one for questions.

We?ll go next to Steve [Colt[, Matador Capital.

Yes, good morning guys.

I wanted to touch on two things for a sec.

Going back to the ITSS contract, I guess and the IT services, I?m just curious.

I know that?s a new area.

It looks like it?s got good growth.

Who are you guys butting heads with there?

And do you see ? you know what type of pricing metrics are you seeing?

Is it overly competitive and does that relationship model that you guys are using does it seem to work?

It seems to work very well and signing two contracts so quickly, but how do you see that going forward?

Well, the competitors are who you might expect in the industry, people like CFC and Verian.

But frankly, we find that our business model works very well there.

We get close to these clients well ahead of the actual procurement cycle and understand what there problems are, providing them with insights about how the problem should be approached.

And that positions us very well.

These are all standard Federal procurements, so we go through the full RFP and the whole presentation process.

And our ability to position in advance of that helps us be effective.

OK.

And I think you mentioned earlier, was Enterprise related ? are you guys ? you?re not managing desktops or maintenance or service of desktops.

Could you just expand a little bit more on what you?re doing?

Are you doing systems integration work?

Or, what are you doing there?

It?s a full combination of maintenance of the system backbone, the network infrastructure, some systems development, some actual software work in support of various enterprise-related activities.

There is probably some peripheral, you know, desktop support, but it?s incidental to what we?re doing.

OK.

And going forward do you expect to sign up two contracts every few months?

We hope so.

It?d be great if it were true.

And one last question, just on margins, I think you mentioned in your opening comments that it?s kind of an ongoing battle between pricing pressure and reducing costs.

How is that ? can you give me a little bit of perspective over the last, I don?t know, six to 12 months on how that relationship has worked and some of the opportunities that you have going forward to continue to make that relationship in your favor?

Well, I think it?s probably fair to say ? generally if you follow the industry you recognize that the industry is in a bit of turmoil and there has been some up and down in the pricings.

But my opinion is, pricing has firmed a little bit.

If I look at our margins per billable hour and that kind of stuff today versus a year ago, they?re all a little bit better.

Obviously, like most businesses, the pricing is set by the competition.

But it seems to me the competition in general ? now there are places where this is not true ? but in general we?ve got a little more sense in our pricing structure and it?s certainly better than it was three or fours years ago when we had some crazy stuff going on in our business.

But our pricing is not going down; if anything, it?s getting a little bit better.

And our cost posture, obviously, we continue to hammer away at that and try to beat the inflation out of the cost growth.

Very good.

Thank you very much guys.

We?ll take our next question from Chip Whitman with GE Asset Management.

Chip, are you there?

Chip left!

Mr. Whitman, your line is open, please go ahead, sir.

We?ll take a follow-up question from John McGinty with Credit Suisse First Boston.

Yes, just a quick question.

Noel, you scared me a little bit, which you don?t normally do, talking about a German strategy.

It seems as if every construction company in Germany is going bankrupt.

I?m sure that?s probably not true;

I?m sure there are some that aren?t.

They all seem to be operating in exactly the wrong kind of market for you.

Are you ? you?re not, I assume, looking at buying any of these things, I mean, for God?s sake?

No, that?s one of the reasons ? go back to Germany.

I didn?t mean to scare you.

No, we?re not going into Germany with anything other than our model.

But you need to understand we?ve got some very large clients that spend a ton of money headquartered in Germany.

And we need to be working for those guys in Germany.

And if you follow our press releases, you recognize that some of the largest companies in the world are headquartered in Germany.

But no, we?re not going to buy a construction company.

These guys are going to have to solve their own problems.

We?re certainly not even ? that didn?t even cross our mind, by the way.

But we are trying to develop a position in Germany that would tie into Switzerland that was going to take care of both the big pharmaceutical guys and the big chemical guys.

And that?s what we?re really driving at.

We?ve been looking for two or three years now at a strategy that ties Switzerland into the Germanic ? into the German network because we?ve got a ? you know we?ve still got some really big companies headquartered in Switzerland that we ? that are clients of ours and should be bigger clients of ours.

And then we?ve got some guys in Germany that already are core client status and can be a lot bigger.

And we?ve been encouraged by these guys.

Who does that work now?

0:54:16 Noel Watson: It?s being done by a hodgepodge of little bitty companies.

And these companies are moving into consolidating their outsourcing and shrinking their engineering groups, which they are doing, by the way.

And if you go talk to the big guys, their engineering groups are on a downhill run in terms of size.

They are looking at how can we effectively utilize somebody like a Jacobs to give us a cost effective performance over here and give us a better performance.

And by the way, it will increase our business in other places if we make this happen.

So I?m not looking at 2,000 people, but I?d certainly like to have a few hundred in a couple or three selective locations in the biggest market in Europe.

Which you would probably do with your small acquisitions rather than trying to do it de nova?

Well, actually right now we just opened an office in West Germany separate from the one we have.

It?s a storefront now with three people in it, but we?ve looked at some acquisitions.

We haven?t found anything that really works.

OK.

And then one final question, the major acquisitions that are, you know, in the drug industry, are you losing any of your ? are your core clients involved in either side of that?

Well, the ? I guess to put it this way, we do very little work for Pharmacia and we?ve got some big work for Pfizer.

And while I don?t ? Pfizer what we?ve done is big work for them and we?re trying to become more of an alliance partner with Pfizer and do more of their work.

We haven?t gotten there yet.

So, in the mergers that are going on right now, what?s happening is positive for Jacobs because we don?t work for Pharmacia and we do work for Pfizer.

But they are not a ? not yet one of your 40 core clients?

Right, although they?re a very big client right now.

But we haven?t gotten into that type of relationship with Pfizer yet.

Great!

Thank you very much.

That is star, one for questions.

At this time there are no further questions.

Again, I would like to remind everyone that you may listen to a rebroadcast of this conference at 2p.m.

Eastern today through July 25th at midnight by dialing 719-457-0820 and enter the confirmation code of 600199 on your telephone.

At this time I?d like to turn the call back over to Noel Watson for any additional or closing comments.

Well, we went a long time.

I was a little long in my presentation.

I just want to thank you for attending and if you?ve got any further questions, you know how to get ahold of us, and I just want to thank you very much and we?ll see you at the end of the fiscal year in early November I guess.

That does conclude today?s teleconference.

Again, thank you for your participation.

You may disconnect at this time.