雅各布工程 (J) 2003 Q2 法說會逐字稿

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Good day, everyone and welcome to this Jacobs Engineering Group Q-2 earnings conference call.

This conference call is being recorded.

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

Eastern time today that April 24th at midnight.

You may access the replay by dialing area code 719-457-0820, and entering the pass code 132458.

Again, that number, area code 719-457-0820, and pass code number 132458.

There will also be a webcast of this teleconference which could be accessed by logging onto www.Jacobs.com.

At this time, to read the forward statements I would like to turn the call over to Ms. Patty Bruner.

Please go ahead, ma'am.

Good morning.

This company requests that we point out that any statements that the company makes today that are not based on his historical fact are forward-looking statements.

Actual results may differ materially.

Information concerning factors that could cause some differences is set forth in Jacobs' Form 10-K for the period ending September 30th, 2002, under the heading "forward-looking statements."

The company undertakes no any obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Now I'd like to turn it over to John Prosser, Chief Financial Officer;

Jacobs, who will discuss the quarter's results.

Good morning, everybody.

Thank you for joining us this morning.

I'll briefly go through the financial results for the quarter, and then I'll turn it over to Noel Watson, the CEO, for our -- for a general discussion of the business and the overview of the business activity this last quarter.

If you go to Slide 4 of 17, you'll see kind of the highlights.

We did have a good -- a record EPS and earnings again this quarter.

The EPS at 56 cents was up 14% from last year.

The earnings, at 31-and-a-half million were up 17%.

The backlog remains strong.

You did see in the web -- in the earnings release that we had a reduction of debt of almost $36 million.

The other positive in that was we also had an increase in our cash of just under $20 million, so we had a very -- another very strong cash flow quarter.

Debt to capitalization ratio continues to be low, and going down.

It's under 5% at the end of the second quarter.

The street estimates for 2003 right now range from 225 to 230.

While we're generally comfortable with this range, our guidance would be the middle of the range.

Looking at our next quarter, the street estimates range from 57 to -- 57 cents to 59 cents.

Here our guidance would be closer to the 57 to 58.

This guidance still is consistent with our expected 15% average annual growth.

Going on to the next slide, Slide 5, I'd like to show this just because it does show our consistent history of growth.

Really nothing much to say about it, but it continues to go in the right direction.

Slide6, talking about backlog, we did have a decent booking quarter.

We had a very strong booking quarter in our professional services.

The professional services, quarter over quarter, were up about 140 million.

You can see over last year, our -- the professional services are up 400 million, and the overall backlog is up about 200 million.

So with that overview, I'll now turn it over to Noel Watson to talk about the quarter.

Thank you, John.

I'm starting on Slide 7, and this is a summary of what we're going to talk about.

We're going to talk about our business model.

We're going to talk about the market diversity.

Our balanced growth.

How we're going to broaden our life cycle services, our multi desk network and we'll talk a little bit about costs.

But first let's go to the bits business model on Slide 8.

We practice what is a unique business model, as you look at these two pie charts here.

The one on the left is Jacobs, the one on the right is our view of what the rest of the industry does.

And we break projects down into three distinct categories, preferred relationships, discrete projects, and transactional projects.

Discrete projects are projects for clients that we haven't worked for before, or haven't worked very much for.

They're one-off projects.

There's no long-term relationship.

And then transactional projects, we define as projects where there is a -- a bidding element to the construction component, normally competitive.

It's a piece of the business that we shy away from dramatically, and we only take a little bit of this business in our global network.

If we look at the preferred relationships, though, we get about 80% of our business through some kind of preferred relationship.

This can be formal, it can be informal.

Most of them are formalized in some way.

We're generating 70 to 75% of our gross margin out of 30 to 40 clients, all through some sort of long-term relationship.

These relationships are rarely exclusive.

There can be a couple of us supplying services to a given client and the client will split a large part of the work between two of us.

Some of them are exclusive.

But we have geared our whole sales process and our whole execution process to working with these long-term relationships, and trying to drive Superior value into these core clients, as we call them .

The discrete projects are projects we take when we need work.

Sometimes we just take them to make money.

Other times, we take them very consciously trying to get another new client into a long-term relationship.

You don't ever start out in a long-term relationship.

They are evolutionary in character, and so it will start with a single project.

One of the benefits of the long-term relationship is that the work quality is typically better because you've learned to work with the client over a long period of time.

You both understand each other's strengths and weaknesses.

And so not only does it lower our sales costs, it gives us a higher percent of repeat business, and it gives us manageable risk.

We aren't in a high-risk venue with long-term clients.

We understand each other, and because of the long-terminate of the relationship, we have risk and reward properly balanced.

That's the driver on the business model.

Let's move to the next slide, which is our selective market diversity.

On this particular slide, we've got a pie chart from 1992 and we've got a pie chart from the trailing 12..

You can see the revenue stream has moved from 1.1 to 4.8.

More importantly, however, we've moved to 8 markets, all of them with a large amount of diversity, and by the way, the size of these pies moves up and down with the individual business climate.

Of particular note on this chart, however, is in 1992, petroleum and chemicals were 67% of our business, and today, while combined they still are our largest single market, it's only 36% of our business.

Another noteworthy event on this chart is PharmaBio (ph) (ph) to be 3% of 1.1 billion and today it's 18% of 4.8 billion.

So we've had dramatic growth in that market.

I think what the market diversity does for us, it reduces our cyclisity (ph) and it helps us stabilize our individual operations.

If you move to Slide 10, you can see that even though we've diversified dramatically all of our markets have grown over the intervening decade.

A good example of that would be the petroleum market or, as we've labeled it, oil and gas on Slide 11.

That market has grown and continues to grow to a point now where I believe if you go back to the pie chart market, you can see that it was 25% of our volume, but it's moved upwards toward $1.2 billion over the past foyer years, so four years, so it has been one of our very strong markets.

On Slide 12, we talk about broadening life cycle services.

Going back to the business model for a minute, you remember we discussed that we were going to work for this group of core clients and one of our drivers is developing more business with each of these core clients.

Some of these core clients, we started basically doing maintenance work or operations and maintenance, and today we're doing project services, construction, consulting, and ops and maintenance.

I think one of the key factors in our strategy with the core clients is to sell those clients everything that we do.

It does balance the short-term and the long-term needs.

It does take us to some degree out of the major capital project cycle.

When they stop building very large projects, let's say their business is soft for a while as some of ours are today, they move then down into the smaller project elements, so we have a continuing business base with these clients regardless of the total capital budgets, and that's the drive on the life cycle.

Services.

We talk about leveraging our multi domestic network on Slide 13.

We are a global company operation operating in dozens of countries.

We have offices in many countries that drive.

Of these offices is to make money in the local marketplace.

Secondly, we only have offices in countries where we think there's going to be business, and where some of our major clients are going to want to land.

And so what we do is we set up shop anticipating the future needs of these core clients so we can be there to help them, whether it's in Europe or in Asia, or other places in the Americas.

We try to get there in advance of the clients, so we can help them do their projects.

It also helps us with our multi-domestic network expanding our skills within the existing operating network which allows us to move pharmaceutical skills from centers of excellence to places that don't do it.

We move this data electronically.

We move these skills electronically.

So every part of the Jacobs network can service any one of these core clients as they move around the globe.

And of course it wouldn't be a decent conversation without talking about cost.

We operate in an extremely cost-competitive business.

As you know from looking at the numbers, the margins are not real high.

And so it's going imperative that we continue to battle the cost front and we continue to try to drive our costs down and we do this in several different ways.

We do it the old-fashioned way by just trying to lower costs and being very careful how we spend our money.

We do it for our clients in the development of low-cost engineering centers, primarily for Jacobs we have a very low-cost engineering center in India.

Where we have a thousand people who are servicing the rest of the network.

For those of you that don't know, labor in India, even professional engineering labor, sells for about a tenth the price it does in the Western world, so our ability to move work electronically into India, do a lot of the project work in India and then move it back gives our clients a huge cost advantage and it gives us a very competitive advantage-in the marketplace.

So it allows -- it works for both of us.

The clients get a better product and we make as much or more money.

So it works very well for us, and it keeps us very competitive.

We also, through our electronic network share work amongst the various offices.

This allows us to move work from offices that have too much work to offices that don't have enough.

It allows us to move work from places of technical excellence to places that don't have that specific technology to serve a client in a location.

So we work the cost front very hard, recognizing that we have to be very cost-competitive to deliver very solid value to our clients.

Moving away from that for a minute, and let's just discuss the markets.

I've got a Slide 15 that's got our strong markets on it.

And by the way, this slide hasn't changed in a couple years.

At the top here, we have petroleum.

I showed you how the petroleum market has grown over the past 3 to 4 years.

We still have a lot of work going on globally on the clean fuels program, and I don't know if you have picked up what our president and the United States announced here earlier this week.

He's now going to take the -- the low-sulfur diesel program -- low-sulfur program to off-road vehicles and eventually it's going to go to aviation, so we're going to spend this decade taking sulfur out of first gasoline and then diesel and then off-road and then aviation.

So it has created the kind of growth you witnessed on that slide I gave you earlier.

PharmaBio (ph) is here.

As you saw, we've had dramatic growth in PharmaBio (ph) and we see no end in sight, by the way.

We've seen probably a little bit of lull in capital spending over the past year or two but as we look at our prospect list today, it just looks like a lot of new activity coming.

And it's fueled by two fundamental things.

It's fueled by the recombinant technology or the biotechnology, if you will, that's driving just a lot of new drugs into the market, and we're getting a lot of work that's basically driven by regulation from the government.

They're driving the pharmaceutical companies to be more and more careful, and more and more precise in documentation of the work processes and how the drugs are manufactured, which is creating a lot of business for companies like Jacobs.

In the middle of this slide, I have infrastructure.

It's a market that we still list as a strong market.

It has slowed somewhat from its robust nature of a couple years ago, but we continue to sell more work than we're working off, and so this market is growing for us, albeit more slowly than it was a couple years ago.

It's a large market in which Jacobs is not a huge player, so the opportunity to grow this business is significant, and in the infrastructure market, we've got roads and bridges and airports and water treatment plants and the like.

But in the long term, this is going to be a growth market for Jacobs.

The buildings market is next on our list.

It's a market for Jacobs that is primarily public buildings, and public buildings like big research hospitals that are tied into universities but we're doing a lot of work building school houses and jail houses and courthouses.

We're doing a lot of work for our federal government right now in new border stations as we work the -- the homeland security issue, so we've got a lot of activity going on there.

This business continues to remain very, very strong.

And last on my list is defense.

Our defense work continues to grow.

Defense budgets continue to grow.

And that's ex all the money that's being spent on new bombs right now.

But all of our defense contracts right now seem to be in an up-tick, and there's a lot of work that we're chasing.

So we would expect this business to continue to grow at double-digit rates.

That's the strong markets.

I might comment just for a moment on our other three markets.

As you saw from our pie chart earlier, we have a lot of business in the chemical market.

This business remains very, very slow, but there are signs it's starting to turn up, and we think sometime by the end of this calendar year, and into next year, we will see a significant upturn in the chemical business and we categorize this as the heavy process business, so this will be in addition to the already strong refining business.

The pulp and paper business is at a low ebb, stays at a low ebb.

There's some spending going on.

We have a fairly dominant position in the pulp and paper business, so we continue to get new paper machines, paper machinery builds, that type of work, but the business is at the bottom of the spending cycle right now, and it's going to come out of that once I think the big paper companies are convinced that the growth is back in the economies of the Western world.

And then we have the high-tech work, which is primarily in the semiconductor business.

As you know, that has been very low in spending in the last year or so, and it continues low.

It will come back, but I just can't tell you when.

If you move to the next slide, we talk a little bit about investor appeal.

That is Slide No. 16.

I think the things that we talk about, and we talk to our shareholders and analysts, is our business model is unique and when we say it's unique, it doesn't mean other people don't do it, but it means we're unique in that we really conform and stay to the -- we stay to the model.

We're very true to the model, and so we have managed our risk and we've managed how we do our work for our clients very well.

Our markets are diversified.

It's diversified in terms of end markets, it's diversified in terms of geography, and it's diversified in terms of the services that we provide these markets.

So it's given us a wide range of diversity that has given us a lot of balance, that has allowed us to prosper even when business is kind of slow.

It doesn't mean the company's recession-proof.

I would never claim that.

But our ability to move from market to market, geography to geography, and service to service, does give us a lot of strength in the marketplace.

The balance sheet is good.

You can see that -- you listen to what John had to say.

We are going to continue to grow the business 15% a year at the bottom line.

We've been doing that for a long, long time and there's absolutely no reason that's not going to continue.

I think now what I'd like to do is turn this back to Steven to open it up so we can go into the question-and-answer session.

Very good, sir.

Thank you.

The question-and-answer session will be conducted electronically today.

If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

If you are using a speakerphone today, please make sure that your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal us and we'll take as many questions as time permits.

Once again, please press star 1 on your touch-tone telephone to ask a question.

We will take our first question today from Mr. Michael Dudas with Bear Stearns.

Gentlemen, Patty, good morning.

A couple things.

One, Noel, your impressions you're over, I believe, in Europe a couple weeks ago.

Any impressions on visible activity in that part of the world.

Well, there's still a lot of activity in Europe.

I think the economy has probably grown a little bit slower than the U.S. economy.

Germany, of course, we all understand has got some problems.

We have just a very small operation in Germany right now.

But generally, the big clients we service over there in Europe, which are primarily big oil, big chemical, and big pharmaceutical, you know, they're all spending as the needs of their business dictate.

And it isn't driven as much by the general economy as you'd think.

We do some public work.

You know, down in southern Europe, in France in particular but, you know, Europe just seems to be Europe.

It's moving along.

Business is doing just fine.

We're basically on plan in Europe.

Second question.

Give us a little bit of an update on how the process is looking around the industry for potential growth opportunities -- i.e., convictions -- and can you remind us on how comfortable you are taking the debt up on the balance sheet and what kind of ratio or metrics you guys look at.

Well, I'm not comfortable with debt.

You know that.

I see.

I see the balance sheet.

Sure.

And that's a fact.

But, no, the -- in a more serious vein, there's a lot of acquisition potentials out there.

You will recall we told you about a year or year-and-a-half ago that we were going to get the debt straight, and we're going to get the three acquisitions in a row we made integrated, which we have now done and we are actively in the hunt now for reasonable acquisitions.

We took the debt up on the balance sheet, in the middle 200 millions, and we did the (inaudible) deal about four years ago and we're certainly comfortable at that level.

So we are in the acquisition hunt.

There are companies available.

It's a question of sorting out what makes the most sense.

Thank you, Noel.

Our next question today will come from Mr. John McGinty (ph) representing Credit Suisse First Boston.

Good morning, Noel.

Hey, John.

How you doing, Bud.

Good.

Let me get right to the ugly question.

Orders.

Technical service orders were 680, down from 715.

That is up sequentially but it's down from the year-ago.

The field service orders, which can be more kind of volatile, obviously, are down as well.

I mean, total orders, 1204 versus 1276, the backlog is essentially flat sequentially.

Should I begin to worry because I'm not seeing the orders -- I mean, I know it's lumpy and everything but is there anything that was unusual.

Is there -- oh, yeah, we got a bunch of stuff but it just didn't land or -- I mean, I hate to say it but I've never heard you talk down a quarter before either.

Maybe that was just John's conservatism talking about taking a penny or two out of the -- out of the -- you know, the 230 to get it down to the -- you know, 227, 228.

Can you give me some comfort level on why I shouldn't be worried about the orders?

Well, we thought the orders were fine, John.

I mean, you've done a bunch of arithmetic on me and I don't have all the data here so I can't work it for you, but the -- and John says he can't.

But we thought the -- the business kind of bottomed about the end of last summer.

We have not changed our mind about that.

Okay.

We think the professional service orders were good.

We had a lot of activity in and our prospect list is good.

Okay.

So we feel, you know, pretty bullish about what's gone on, to be honest with you.

The fact that the -- the pro service backlog is up 400 million over the intervening 12 months is significant, in my mind.

We've had some construction contracts that are large in character.

They've been working down fast.

So that's part of the field service issue.

But we have not booked a lot of construction on the front end work for a lot of the activity we've sold over the past, you know, six months.

There's always about a six to nine-month lag between booking the professional services into backlog and then booking the construction, so as we look at that whole pattern, I think it's going to track the professional services, so we're pretty comfortable with what's gone on.

Any way I measured last quarter, whether it looked at the margin, which we don't publish that number, or just the raw numbers that you've seen, we were comfortable with the number.

So in other words, we should see, because of the -- of the lags, we should see a pickup in field service activity following the front-end stuff, as you said, that you've been booking over the last year, as we move over the next six -- six to 12 months?

That's the way it looks to me, yeah.

And on -- in a similar vein, if -- you know, on your prospect list -- okay? -- the technical professional services had a very strong bookings in the second and third quarter of last year, and then they've come off a bit.

Very, very lumpy.

As you -- as you're prospect list bigger, better, than it was a year ago or I mean is it continuing to grow or is it shrinking or are you still very comfortable?

I'm talking about prospect list on the technical professional services side.

Well, you know, John, I would tell you that as we look at our prospect list going forward, we've got a very robust list of prospects.

It's -- from a technical and professional services point of view, there's still a lot of low-sulfur diesel work out there to be done.

The pharmaceutical business looks quite strong.

We've got a number of major contribution -- competitions going on, in the defense arena.

So by and large, the prospect list looks good.

Some of these things are big events and, you know, they're going to, therefore, be a little lumpy.

But I'd say we feel pretty good about it right now.

So that is no problem there at all.

The problem is winning them but the prospect list is fine.

Well, and then just a -- I'll get back in queue but just the one other question.

Why -- why are we talking down the third and fourth quarter?

Well, John, we're really not talking them down because we're saying the same thing we said last quarter.

You guys just moved it up last -- between last quarter and this quarter.

All right.

I'll get back in queue.

Thanks very much.

John wasn't going to say that, by the way.

You guys -- you guys took us up last quarter, and he was trying to bring you back to what we told you last quarter.

No, but that's a very fair comment and I wanted to -- I wanted to at least get it out on the table and make sure that's what was going on.

Thank you.

And our next question today will come from Mr. Tom Ford representing Lehman Brothers.

Good morning, gentlemen.

Just a couple of questions.

First, Noel, you had mentioned that high-tech continued to be somewhat muted but I thought it was kind of interesting if you look at the pie charts relative to prior ones, it seems like it's share of revenue moved up.

Was there anything there at all, or I was just curious about that.

We have one big job going through the books.

Okay.

Great.

And so -- and we've got -- that's also one of the jobs where the field services revenues are tailing off, but we have one big job going through the books.

Okay.

And then can -- I know I thought last quarter, or last time I had talked to you, you had talked about specialty (inaudible) activity with respect to the chemicals showing signs.

Has that broadened at all or is this sort of this -- this consistent commentary from past periods that you had made with respect to the chemicals?

Oh, I think that what we're seeing on the chemicals is some gurgling out there.

Some of it is in specialty chemicals, some of it is in polymers.

I think the guys are all dealing with what they -- they're all worried about the economy, but generally it's better today than it was six months ago.

Okay.

And there -- it's -- I'm not sitting here trying to tell you the chemical business is well, because you guys know it's not, but we are doing some front-end work.

There's some modifications of plants going on, there's some capacity issues going on.

And some of these guys are actually making some real money right now.

Okay.

Great.

Just going off of one of the prior questions with respect to the acquisition activity, I know you had talked about there's a lot of potential out there.

I mean, with the strong free cash flow, I mean if the momentum continues here, you know, what is the thought in terms of do we -- do we continue to build a large cash balance or do we think about other things to do with the cash?

We -- we think about all those things all the time, but our current plan is we're going to put the cash back into acquisitions.

We're not trying to build a large cash balance.

We are trying to keep the debt in what we consider manageable ranges, and, you know, that's our -- and we try to define what a manageable range is, but no, we're not trying to build a large cash balance.

But we are going to drive the cash back into the growth of the business.

Okay.

Okay.

And just one last question.

I was just curious with respect to the G&A line in this quarter, there was something of a -- somewhat of a sequential up-tick.

John, was there anything unusual or anything of particular note there?

Well, this is typical of our second quarter.

Sometimes it gives massive acquisitions but the first quarter, the December quarter has a lot of holidays because of the Christmas and New Year's and the way we cut off our books, sometimes New Year's falls into the first quarter, sometimes in the second quarter.

But there's also a lot of vacation that's taken around Christmas.

So you get that coming back in the first quarter, so -- and there are no holidays in the first quarter.

I mean second quarter.

First calendar quarter.

So the -- there's always a little bit of a jump and that's the G&As, you know, the people that are taking vacation or holidays that are normally G&A people.

Uh-huh.

So they come back in, but -- so it's not that unusual.

One of the reasons our margin and our G&As, you know, do kind of track nicely because, you know, two -- well, what about 40% of our work being in the public sector, an awful lot of that, we get our actual G&As recoveries, and so the margin will fluctuate a little bit up and down just as our G&As fluctuate, and so they tend to track a little bit more than they would if we were, say, a hundred percent private sector where, you know, the -- you don't have that same kind of cost pass-through.

Right.

Okay.

Okay.

Great.

Thanks very much.

I would like to remind our audience that if you do have a question or a comment, you may signal at this time by pressing star 1 on your touch-tone telephone.

We'll take our next question today from Sanjay (inaudible) representing First Albany.

Great.

Thanks a lot.

Excellent quarter, guys.

Just a quick question here regarding your chemicals market.

You know, in terms of your long-term earnings growth of 15%, at least for next fiscal year, you know, kind of somewhat of a turn-up in that market, is that baked into that forecast or when we do see some sort of a turn-around in the chemical market that would be somewhat of an upside?

I'm not -- I'm going to try to give you too many upsides but let me go at it like this: We -- right now, we are running our business as if nothing's going to change.

Okay.

And we're controlling our costs that way.

If the chemical business were to tip up significantly --

Uh-huh.

-- and I mean we started doing a lot of front-end work on polymer plants and stuff like that, which is how it will start --

Okay.

-- there's upside to that, yes.

Now, providing there's not one of these other markets that caves away on us, which I don't think is going to happen, by the way, but the chemical market could be additive and it could be additive -- one of the things we've thought all along, it could be additive where we're already very busy, with the oil and gas business.

That would basically be along the Gulf Coast of the United States, and then the Netherlands and Belgium and German area..

Okay.

That's fair.

That's fair.

And talking about actually the oil and gas side of the business, are you already starting to book a lot of the front-end work for the diesel sulfurization or you do you expect that to really come in some meaningful marsh towards the latter part of this year?

We're starting to see a few of the front-ends on the low-sulfur diesel, ultra-low-sulfur, as they call it.

There are still some front-end projects that I'll expect to book in the second half.

Okay.

Detail design is probably late second half, we'll start to see more detail design work for low- sulfur diesel.

Okay.

Great.

Thanks a lot guys.

And next we will go to John Rogers (ph) with D. A. Davidson.

Good morning.

Hi.

Just following up on the oil and gas side of it, there's been some reports that there's a lot of pent-up demand, especially for upstream type work.

What are you seeing there, especially up in Canada with your recent acquisition?

Well, I guess it's a couple years now.

What we're seeing in Canada on the upstream side is kind of a mixed bag.

There's a lot of activity in oil sands area, but these projects are huge, frankly, and so the customers are grappling with cost issues in terms of trying to decide how much money to commit, and when to commit it.

So it's a little bit of a here and there kind of market, but generally it's quite good.

On the gas -- on the pure gas side, I think an awful lot of speculation about gas pipelines, both in the last from the Mackenzie dealt to

Right.

At this stage, you could best characterize those as speculation.

So in other words, at least a couple of years before we --

I would say not less than a couple of years.

There are a number of clients talking about lobbying efforts and trying to get floors on gas prices in order to finance the pipeline.

To get those kinds of things in place, I'm sure, will take 12 to 24 months.

Okay.

Great.

Thank you.

And representing Heartland Investments, Sandy Goldman (ph).

If there is a lot of infrastructure work in Iraq, or in the related areas, will that impact industry capacity and competition and pricing?

Well, I -- I think that -- that's a good question, Sandy.

Our position has been, you know, we're not chasing off to Iraq to go after it.

Number two, I hope all my competition does because, yes, it will affect capacity and it should make life a lot easier on the U.S. and western Europe.

And I would guess there's going to be a fair amount of work over there.

I don't know over what period of time, and I don't know exactly who is going to do it.

But I think there will be a lot of activity.

I think some of our competitors, (inaudible) country particularly in the infrastructure business, are over there chasing it hard, and we're going to stay home and take care of our customers.

So it could help in that way.

Okay.

Thank you.

And we do show a follow-up question now from John McGinty (ph) with CS First Boston.

Noel, on Iraq, I mean I remember '91, that was the biggest snare and delusion in the world in this industry.

Every stock went through the roof because we were going to spend tons of money in Kuwait and nothing ever happened.

Do you think this time is really going to be different?

I think it's going to be somewhat different because I think we're in the nation rebuilding and Iraq's a big nation, and so I think there's going to be a lot of activity for people in getting the power grid started and the water treatment plants running and then rebuilding of some of the infrastructure.

But how big it is and what kind of boom it is, I don't know, but I think several guys will get fairly sizable contracts over there.

Right.

On the oil and gas side, this is just a question.

I assumed -- it's a naive question.

I assumed we took the sulfur out of diesel fuel, we took the sulfur out of diesel fuel but obviously we were only taking the sulfur out of diesel fuel for on highway.

Right.

If we go off-highway, how is that sized relative to the on-highway?

I can't speak to it relative to the diesel (inaudible).

Gasoline -- the aviation fuel and the off-road diesel is about 20% -- 15 to 20%, as I understand it, of the fuel pool.

And I just don't know the --

Which includes gasoline?

Which includes gasoline, correct.

Okay.

So I couldn't tell you relative to just diesel but it's a significant fraction of the fuel supply that has to have the sulfur taken out of it.

Well, the dollar numbers that everybody used for diesel and gas were the same, so if it's -- if it -- if we assume, then, that that's 40/40, if this other is 20, I mean, that -- because I'm not sure what else is in there, right?

That's fair, though.

Right.

Okay.

So it's at least a 50% potential upside from where we were?

I mean --

I think it's probably in that range much.

Okay.

On the pharma, did you say, Noel, that you've got some big front-end work coming on the -- I mean either -- I mean the pharma has been one of your -- either it's been one of your strong markets or you just want to use that same slide over and over to save costs but is -- is -- are you really seeing a lot of front-end work on pharma from where we were?

Yes.

And what's it for?

We've got people that have moved into the business that -- through acquisition or other things that are facing the very difficult decisions right now that you can't be in this business without spending billions on capital programs.

Okay.

And you can look at the budgets of the big pharma companies and you'll recognize while they earn a lot of money, they spend a lot of capital.

Right.

And so, yes, what we have -- what we are seeing right now is a fairly -- is it fair to say significant up-tic in some of the prospects, Craig?

Yeah, I think it is.

If you look at the drug discovery process, our ability to invent new drugs is higher today than it's ever been.

Right.

Both from a bio tech perspective and from a chemical synthesis perspective.

And so there's just a tremendous number of new drugs in clinical trials, and frankly every -- every new drug is a new plant.

You just can't put a new drug in a hold facility.

So the -- the potential here is very significant and we're seeing a lot of projects in that category.

Okay.

And then final question, Noel, again, in the -- in the interest of -- of -- of cost saving and using the same script, this is -- I mean, how many times have we said that, you know, in -- at the end of the year, the chemical industry is going to start to pick up? (Laughter)

Well, I don't think -- I'm not sure how many times I've said it, but it is a little better now than it has been.

I mean, in other words, you're actually getting some -- you're actually getting paid to do real front-end work.

Yes.

More than you would normally.

I mean, or do they always give you -- do they always give you some kind of little bit of front-end work to do?

Well, when you're -- when you're going -- when you're going downhill, there's no studies.

Okay.

And them when you're at the bottom, maybe there's a couple.

And then when you tip up, the (inaudible) are always the precursor, both in the consulting companies and in the engineering operations.

And so we're seeing that up-tick.

Okay.

Okay.

So it -- it -- you may actually get that -- that coming back for you fairly significantly?

Yes.

It will come back and it always comes back and when it comes back, it will be significant.

Okay.

And then finally, the infrastructure.

To what extent -- you know, you once made a comment that, you know, you -- you -- you'd like to be, you know, 10 times your size and be a Parsons (ph) (inaudible).

As you were little, you could continue to gain -- I mean essentially gain share because even though the amount of work that's out there is coming down because of the state budgets and so on, you're coming from such a low base.

Are you beginning to get to the point where you're getting big enough that you -- that that is not -- not sustainable and that you have to be impacted by the lousy market?

No.

Okay.

No.

Actually, what we've seen, even in the last, oh, couple months is the U.K. rail program got derailed for a while because of the rail track bankruptcy or minimum --, as they call it over there, and now that's been put back on track with a new quo called network rail, I think.

And so the activity in the U.K. which went through a low ebb say six to nine months ago, has picked up fairly significantly in the last six months.

Okay.

And so no, we have not increased our size to a point where we're a threat/to the -- to a couple of the big guys, okay?

Okay.

As a final reminder to our audience, if you do have a question or a comment, please signal at this time by pressing star 1 on your touch-tone telephone.

Again, this is a final reminder.

And we will go to our next follow-up question, actually, from Michael Dudas with Bear Stearns.

Craig in your discussions with clients in the Gulf Coast, how are they filing about $5.60 natural gas and the prospects of probably a higher than anybody anticipated price level in the U.S. for gas?

And one, how is that going to translate to potential opportunities to do work as for Jacobs, and secondly, is Jacobs set up well to take advantage of ^ those companies going elsewhere around the world to find lower feedstock costs?

Well, let's talk first about the Gulf Coast clients.

By and large, the Gulf Coast clients that are exclusively in the chemicals business aren't very happy about the natural gas price, as you could expect.

Uh-huh.

Those that have a -- are integrated producers see high natural gas prices as an opportunity to bring more gas onshore, and fundamentally, the world is awash in gas.

There's plenty of gas out there.

The problem is getting it from where it is to where it wants to be.

And I think that will create lots of project opportunities on the gas side.

Some that we won't see much of, like big L and G facilities, and some that we will be able to participate in, like gas pipeline work and sour gas treating, that sort of thing.

But it is going to affect the level of chemical investment in the Gulf Coast relative to, obviously, lower feedstock prices.

As you go around the world, you know, you're going to certainly continue to see lots of chemical investment in places like the Middle East, where we're not a player, but I don't think that's going to materially affect our business position.

We've never been a player there.

You know, maybe someday, but I couldn't tell you what day that would be.

We have so many clients with such a significant base of investment in the developed world that the ongoing business requirements are more than adequate to keep us supplied with work for a long time.

Thank you very much, Craig.

And at this point, we show no further questions are in the queue.

Prior to returning our conference to Mr. Noel Watson for his closing remarks, I would like to remind everyone that you may listen to a rebroadcast of this conference beginning today at 2 p.m.

Eastern time through April 24th at midnight by dialing area code 719-57-0820, and enter the confirmation code 132458 on your telephone.

At this time, we will return the conference to Mr. Watson for his closing remarks.

Thank you, Steve, and first I want to thank you all for participating.

Just to recap for a minute, it was a good quarter.

When we went through the audit committee yesterday, the head of the audit committee asked me the very question, was it a tough quarter and all that kind of stuff.

And I said no, it's been just another routine quarter.

We've basically made all our targets and we got the growth we wanted and when we look at the sales activity, it looked pretty good, and certainly it looked strong enough to continue to sustain the growth.

So overall, we're very comfortable with what went down this quarter.

I want to thank you all again, and we're done.

We do thank everyone for their participation today, in this Jacobs second-quarter conference call.

Reminding you again that you may listen to this replay effective today at 2 p.m.

Eastern time through April 24th at midnight by dialing area code 719-457-0820, and entering your pass code 132458.

Once again, thank you for your participation.

You may disconnect at this time.