雅各布工程 (J) 2003 Q4 法說會逐字稿

Good day, everyone.

Welcome to the Jacobs fourth quarter earnings conference call.

This conference is being recorded. (Operator Instructions) I would like to turn the call over to Ms. Patty Bruener.

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 30th, 2002, 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 financial results.

Thank you, Patty.

Good morning.

I'll be going through the financial highlights this morning and then I’llturn it over to Noel Watson to talk about the business activity for the last quarter and the prospects as we go forward.

We're going to slide 4 on the webcast, just gives the financial highlights.

I'm sure you've all seen the press release, so I won't go into it in great detail, but I did want to point out we did have a good year and quarter.

Earnings per share were 2.27 for the year and 59 cents for the quarter.

That's up 15% for the year and 13% for the quarter.

The earnings were up to $128 million for the year, which is a 17% increase over last year, and $33.5 million for the quarter, which is up 16%.

So while -- and that's all within -- you know, within the range of our earlier guidance and expectations.

In the fourth quarter, we did begin to feel the effects of having a number of our projects that were slowly moving from the front-end feasibility phase to the detail design phase.

It appears that this trend may continue to impact our first quarter of 2004.

We are looking for a flat quarter from our fourth quarter to our first quarter 2004, and are expecting a range of between 57 and 60 cents per share for that first quarter.

Our guidance for the full year, looking at 2004, is for strong growth of between 10% and 15%.

Backlog and sales were very strong for the quarter, with a lot of the strength coming from the field services bookings.

While these are, you know, very good forecasters or indications of our future revenue stream, they will take a little longer to work off, and they won't really start -- we won't feel the effects of those until later in 2004, and into 2005.

You know, looking at the sales for the quarter, were also very strong and for the year.

If you look at our bookings for that, it's the highest level we've ever had for either a12-month period -- for a fiscal year, I should say, or for a quarter.

The net cash was -- continues to improve it was up $151 million for the year and $32 million for the quarter, with our debt coming down to about $18 million total debt.

If you go on to slide 5, just the history of our consistent growth, don't really have any comments on this other than it's something we're very proud of and it just Shows the consistency we've been able to grow out over a decade and a half.

Going on to the next slide, which is the backlog slide, as I already commented, backlog was up significantly from the quarter and also from year-ago period.

From last quarter it's almost up $500 million.

For the year it's up about $300 million, with a lot of the strength in the quarter coming from the field service bookings, the pro services or technical professional services were also up about $100 million for the quarter.

With that background, I will turn it over to Noel Watson to talk about the business.

Thanks, John.

I'm on slide 7, and I want to talk about our strategies to maintain 15% growth.

We're going to talk about the business model.

We're going to talk about market diversity.

We're going to continue about how we're going to continue to balance the growth, life cycle services, and we'll talk a little bit about acquisitions.

First thing I want to talk about is relationship-based business model that we show you on slide 8.

Many of you have heard this before, but I notice there's always about 20% newcomers on the call.

Also, I’ll take a couple of minutes to take questions after this.

We believe our business model, as we practice it is unique.

I have two pie charts, one showing Jacobs and one showing our view of the competition.

All of us have some preferred relationships, but we believe we're unique in the fact that we focus totally on the preferred relationship model and 75% to 80% of our business comes from that model.

When I'm talking about preferred relationships, I'm talking about long-term clients, I’m talking about formal alliances, I'm talking about people we have worked with for years.

We believe the benefits of the preferred relationship or the so-called relationship based model is a high percentage of repeat business.

It does give us a much more stable earnings pattern and the risk is much more manageable.

If you look at the industry model, you can see that our perception is all competition has some preferred relationships but none of them practice it like we do.

We also have discrete projects, and we must do discrete projects because that's how we get our new customers that we can drive into the relationship model.

We also do discrete projects just to make money or keep people busy, but it's a real part of our business and 25% to 30% of our business should always be on discrete projects.

And occasionally we do a transactional projects, but very occasionally.

And we define transactional as when we're bidding the construction on a hard-money basis.

As you look at the industry model, you can see that generally our competitors have a lot more transactional work than we do.

That's neither good nor bad.

It's just that we practice on the relationship model and we focus on it, and that's what we do.

If you move to slide 9, and you can look at the market diversity slide, a couple points here, in 1992 67% of our business came from heavy process.

And that’s chemicals and petroleum whereas today it’s 37%

If you go to the next slide, which is slide 10, you can see that even though we have dramatically reduced our dependence on heavy process, our chemicals and petroleum businesses have grown dramatically in the last ten years.

And it’s this typeof diversity that has allowed us to weather the difficult business climates that the world has seen over the past couple years.

While I won't say it makes us Recession-proof, it certainly makes us recession-resistant as you’ve seen from our numbers.

So if the view slides 9 and 10 together you can see that we have a very diverse business, much more diverse than we were ten years ago, and that has been the reason we've been able to create the stable earnings stream we have.

If you move to slide 11, which we titled ‘broaden life cycle services,’ our goal in life is to provide every one of these services to each of our preferred relationships.

In some of these relationships, we're doing engineering or architectural work, in some of them we’re doing construction and maintenance, so there's a huge opportunity in each of these preferred relationships to sell a broader pattern of what we do.

One of our key sales strategies is to measure the percent of the client's pie in each of these areas and what percent we have, and then devise sales strategies to go get more.

We are going to continue to grow the business by broadening the life cycle services.

Then we go on to acquisitions.

It's been a couple years since we made a major acquisition.

We spent about 15 months paying down debt so we got very solidly cash-positive and we are in the hunt of acquisitions right now.

We look at them in three different ways - markets, clients and geographies.

When you look at markets, we are in a lot of markets.

There are some markets we would like to participate in more than we do today, and high on our list would be the upstream oil and gas market and a much broader play for Jacobs in the infrastructure market.

While we have been looking at acquisitions in this area over the past six months and had numerous conversations with people, no deal has gone together.

Sometimes you look at it specifically for clients, you want to get it normally it's a group of clients, and most of our geographic expansion has been through acquisition.

Our major presence in Western Europe was all through acquisition.

Contrary to that, our embriotic operation in Singapore which is between 150 and 200 people has all been built by brute force.

We do it both ways, but normally our geographic expansion is through acquisitions.

I want to talk about the strong markets.

We have five of them listed here but why don't I start out by talking about the ones that aren't so strong.

The chemicals market continues to be in the doldrums.

While there continue to be signs of life in individual companies, it is clear that it is not roaring back anytime soon.

There is activity overseas, but if you look at it over all, it's perking along near the bottom with maybe a few slight up ticks and I can say the same thing for the pulp and paper market.

It’s been operating at the bottom - I've been saying this for three or four years now - it's been operating at the bottom almost as long as I can remember, but there are signs that it is picking up.

The one thing that's been happening in the paper and pulp market during this 3 to 4 year downturn is we have continued to garner market share.

So we have a lot bigger share of the pulp and paper market, albeit a smaller market today than it was 5 years ago, so we've continued to outpace our competition in that market.

The same would be true of the semiconductor market.

It has been slow, even though we've had some work going on, it has been quite slow and major fabs have not been released in the past couple years, although it does appear there will be quite a few fabs released over the next 24 months.

We'll just have to wait and see how that's driven, and of course in some cases it's driven by the general economy.

If I move from the weak to the strong markets, the petroleum market, both downstream and upstream continues to be very strong.

Upstream, as you know, everybody’s been hunting for oil and we’re not a huge player there.

Downstream, which would be the refining and the processing market, we are very strong and there's been a lot of activity there, driven a lot by clean fuels legislation both in the U.S. and Europe.

We've kind of worked our way through the clean gasoline programs, but today we're just getting started on the clean diesel.

Then after that, we'll have clean aviation and clean off-road.

As I've said several times before, we'll be busy for the better part of the decade on that kind of work.

The pharma-bio business remains very strong.

We have had problems getting it going because the clients have a lot of difficulty in sorting out exactly what they want to do.

The worst thing a pharmaceutical company can do is have a hot new drug and have no manufacturing capacity -- that's the best thing they can do, excuse me.

The worst thing they can do is build a plant that they don't have anything to put through.

So they’re always dancing on a knife edge on when to start the projects, but more of them are favoring getting started early.

We do have a lot of work in this area and we've been very successful selling work in this area over the past six to nine months.

The infrastructure business which slowed down to some degree in late '02 and into '03 has picked up a little bit again.

While it's not roaring along like it was in 2000 and 2001, it certainly is better today than it was a year ago, and we are picking up work and continue to sell more backlog than we work off.

The buildings business has probably slowed on us a little bit.

If you recall, a lot of our buildings work is for the government, and it’s for the GSA, and it’s for the Justice Department, research hospitals, and things like that.

That business, while still strong, is not as robust, and a lot of this has to do with funding.

There's still lots of projects to do, but there have been some funding delays in a lot of the things we do.

We look at the defense business, and of course that's just roaring along.

We have a lot every opportunities, we're selling a lot of work, we're being very successful in that area, and that gonna continue to grow at double-digit rates for us for a long, long time.

If you want to move to slide 14, these are major wins we had in the last quarter.

I think we got all of these press released, didn't we?

All but one of these has been press released.

Craig Martin, why don't you just take a minute and review these with these folks.

Ok,just to go quickly through the list, the first job on our list is the Saudi Aramco work, this is natural gas liquids and gas plant expansion that we're doing for the Saudis.

We're really excited about this, it’s $100 million worth of cost reimbursable services, Both feed and PMC work.

A nice win for us in world-class competition.

So it’s good news.

Next thing on the list is our DOE work as Oakridge.

This is the Bechtel Jacobs joint venture.

It’s doing the cleanup of the Oakridge site.

This is the extension of our existing contract to close that site.

So Bechtel and Jacobs will be there together until we close the site out completely.

For Sun Corp we have a couple nice wins this last period, both the firebag 3 work, which is mid-situ recovery of oil sands in Canada, and a modernization of the Sun Corp refinery in Denver, which is about a $200 million project.

So it's really nice to have this kind of business from Sun Corp

This is a customer of some 37 years, and this is kind of an example of how that relationship model continues to grow for us.

Scottish and southern energy, This is a project that will be press released next week.

This is a gas compression and storage project, where we're going to put gas into six caverns underground.

A nice win for us that combines the skills of the acquisition we made at GIBB a couple years ago and our skills from Leyden in the area of gas compression, gas handling.

Another nice job in the $200+ million range.

For network rail, we picked up two nice new assignments, one for doing what they call incremental output statements.

These are actually capacity statements that we’re designing for network rail.

The other for doing a consultancy agreement, sort of a multifunctional consultancy, as we call it, which actually allows us to do design and engineering work for network rail across the system.

For GlaxoSmithKline we picked up a QA/QC lab project in Singapore.

Nice job for us, from the standpoint that it's the first outright win for our Singapore operation that didn't require corporate support.

So it just shows how we're building our business in Singapore.

And then kinda last on the list for general service administration.

This is the kind of buildings work we look to do.

And we actually picked up both a new courthouse in Jackson Mississippi and the renovation and upgrade of the headquarters for the Social Security Administration.

One is about $100 million job, $125 million actually, the other is about $90 million.

So these are just pretty good examples I think of the kinds of work we're bringing in right now, and how our model’s working for us.

Noel?

Thanks, Craig.

I'll just finish up going to slide 15, which we haven't changed in a long time.

We will continue to focus the business model.

We're not going to move away from it It is going to be the cornerstone of how we run or business.

We will continue to diversify, both markets, geographies and services.

We need to continue to grow the business, so we're certainly looking at some new markets as I talked to you early about.

We're also looking at some new geographies.

It's clear there are a lot of geographies we’re not in and some of them look pretty exciting and we will follow our clients to those geographies., We’re not going by ourselves, but if some of our clients start to penetrate into eastern Europe, or places like that, we'll have to be there for them.

The balance sheet is solid as a rock, cash position is good.

We basically can do whatever we need to do.

We will continue to focus on growing the business 15% per year.

We've averaged better than that over the past decade, and we will continue to do that.

That will be through a mix of both acquisitions and internal growth.

And I think with that, I'll turn it back to the Q&A session.

We're ready to take them.

Thank you very much sir. (Operator Instructions) We'll pause for just a moment to give everyone an opportunity to signal for questions.

Our first question comes from Michael Dudas from Bear Stearns.

Good morning, gentlemen, Patty.

Three questions.

First, Noel, are the sellers of the engineering companies you're looking to acquire be more -- want more money, or is it -- what are some of the issues that seem to be bogging down the process?

Are there just too many opportunities you have to sift through?

Why don’t you just share a little more though on that.

Well, two things - yeah, they want too much money, number one.

Number two, we haven't found exactly the right fit yet.

As you well know, following the business as close as you do, there are a lot of opportunities out there right now.

And we have been in conversations over the past six months in four or five different situations, nothing quite right has gone together yet, but we'll continue to push it.

And like I say, there are lots of opportunities.

Second question, you've gotten some work in natural gas and NGL’s, you’ve talked about and this gas cavern stuff.

Can you talk a little about some of your skill sets and your opportunities regarding gas globally?

Well, where we sit on that is we've had pretty good skills in the Netherlands, and we have pretty good skills that came in with the acquisition in Canada.

And this is part of the upstream initiative we're trying to focus on.

What we were able to do in Scotland – it is Scotland, isn’t it?

Is that we were able to take the infrastructure business and cavern development that came out of the GIBB guys, and very soon the Netherlands came over and we had a neat qualifications package to be able to do that.

Of course, the gas skills go back to the Aramco contract.

We had good skills in gas processing.

We had done work for Aramco before in the past.

As Craig said, there was an absolutely global competition we won.

It's a good contract, we're pleased to be working for Aramco, but we're trying to push into those upstream areas.

This is by brute force right now.

If an acquisition showed up, it would be neat.

But if we can't do it by acquisition, we're just going to have to do it by ourselves.

Terrific.

Third question, regarding 2004 revenue flow and margins, is it a project mix issue or stage of mixes?

Can you maybe elaborate more, John, on what you said earlier in your discussion?

Well, it's a combination, as I said, some of the projects have taken a little bit longer to get started.

A good example was the New Nedford Turk that we talked about last quarter that we’d won, but then got protested and got delayed, because it just couldn't get started.

We've now resolved that, and while the level of work is not what we originally thought was going to go through our books, it's just taken six or so months longer for things like that to get started.

A lot of work we sold this quarter that related to some large construction and field services activities, we're still doing the front end and some of the design on really won't start hitting the books and going through the revenues until later in the year, and also, you know, it looks like the front first quarter's relatively flat with where we're coming from, from both a revenue and, you know, incomes outlook, but as we move through the year, we should expect to see, you know, both of those improving, and certainly as, you know, we start ramping up on some of the field services it will have a bigger impact on the revenues, have a dampening impact on the gross margins, but operating margins should still stay in line.

They'll vary a bit quarter to quarter, but it should kind of go in that kind of pattern.

Terrific.

Thank you, John and Noel.

Thanks, Mike.

We'll take our next question from Richard Rossi with Morgan Joseph.

Good morning, everybody.

A couple things.

First concentrating on '04 for a minute, can you give us some more color on how the SG&A line is shaping up for ’04?

I promised myself the first time somebody used the word "color" – [laughter]

It's Wall Street-ESE.

I Understand that Rick, but I had to say it.

I'm story to pick on you.

Well taken.

Ask the question again.

You want a little more color on what?

On the SG & A trend.

The SG & A trend will be flat, it looks like.

It’s up a little bit.

Obviously we have some salary increases going on, but we've looked at our numbers pretty carefully, we believe internally we did a very good job in 2003, and that will carry into 2004.

If you look at the trends that we look at, it looks like they'll be pretty good.

We have no major impacts going on.

Sometimes we make some adjustments in how we show our SG&As, but basically it’s going to be pretty flat.

No significant increase and we're not in any major restructuring or anything like that.

It's kind of business as usual.

We have no intention of changing the organizational chart, it looks the same.

We have no intention of changing that.

Looking at acquisitions and geographic positions, you've mentioned East Europe before and I know you have the Singapore operation, but as your clients move into China, and I'm sure they are, do you follow them there?

Is there anything unique about China that makes it more questionable for you?

Dealing with China specifically, we actually have a session scheduled on China here in about three weeks.

We don't have a ton of clients going to China yet.

We have a couple big chemical Companies going there and dabbing their toe in, but if you look at our core clients haven't gone to China in any kind of significant way yet, but they're going to.

I don't think there's any doubt about that.

And we’ve got to sort that out, we're just not sure exactly where we're going on that, but they're going to have to go first and it's got to be more than one or two.

We've also been looking hard at Eastern Europe.

As they come into the EU, what does that mean?

We have a fledgling operation in Poland of about 100 people basically doing infrastructure work.

It’s been there, actually it came with the GIBB guy.

Should we be fly wheeling out of Germany and the Netherlands, places like that toward Eastern Europe, and we're working real hard with our clients right now to see on they 40-odd really core clients they have, where they're driving to and where they'll be spending their money.

But the two places we have to look at very carefully are gonna be Eastern Europe and China.

Now, we do know in the pharmaceutical business, our clients are going three places – they’re going to Puerto Rico, they’re going to Ireland and they’re going to Singapore.

That's clear and that's where they'll spend the bulk of their money over the next five years.

No doubt about that.

Just a couple other quick questions about markets.

Let's start with pharmaceutical.

I think it's premature at this point, but any thoughts about what foreign entry of drugs into the U.S. might mean for your U.S. drug clients in terms of their capital spending plans?

I think it's premature at this point to understand how that might impact things.

We still have, you know, half the drugs in the world are developed right here, and they're spending a lot of money developing those drugs and it's going to take a ton of money getting them to market.

And the cost of getting them to market has gone up.

I don't think there's any doubt about that.

If you look around at what’s going on, not only do we have to design and build these big facilities for these folks, now they have to be validated.

So the percentage of professional services that go into a large pharmaceutical plant have probably gone up a third in the past five or six years.

So there's a lot more work for Jacobs and its competitors on any individual pharmaceutical plant just because of the requirements out of the FDA and et cetera.

So it's hard to say what the impact of these drugs will be that come in from outside, because somebody still has to develop them and somebody still has on to build the facilities.

Ok.

And one final question.

Clean fuels in Europe, how much business do you have on the books now for the European side of that business?

I'll let Craig take that one, ok?

Well without saying anything specific about the numbers here, our clean fuels business in Europe has gone quite well for us.

We have a significant share of the business there.

We're well along in the EFQD sort of progress, the European clean fuels quality directive, and so we expect that that business continue to be good.

We expect to see some construction work coming out of that business over time.

We'll be the construction manager, and I think our position is quite good, frankly.

Okay.

Without a specific number, is it a third of your overall clean fuels business, roughly.

Is it half?

Probably a little less than a third.

Does it get to be -

No.

Ok, wonderful.

Thanks very much.

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

Good morning.

In the third quarter, We talked about - and John you mentioned that the $240 millionTurk or corps of engineers or whatever it was project you won but did not put in the backlog because it was in some kind of dispute resolution.

Was it an order recorded in the fourth quarter?

Yes, it was, and it was booked at $120 million.

Wow.

So even -- in other words, I was -- that's a hell of a quarter you had.

I mean, not that that isn't a real order, but I mean, you know -- [ laughter ] -- to what extent the projects that Craig went through and listed on the slide where he kind of ran through those, were those all fourth quarter bookings, or were those bookings or were those bookings over the course of the year?

Almost all fourth quarter.

Wow.

Cool.

I always like a new slide.

With regard for the comments, John, that you made, where you talked about the reasons that were going to hit the first quarter, I guess what I'm trying to understand is to what extent was this unexpected?

In other words, the pushing out and kind of the scaling back of that Turk was something that you didn't expect until you saw it in the quarter.

Is this a natural sort of thing, or did a bunch of things come together?

It's just not something that I remember happening on a normal basis.

Do you consider it unusual, or is it just kind of a fluke of things coming together?

Well, let me take that one.

In essence, no one projects affects Jacobs' quarter or year.

You know that.

But what we saw as the summer moved on, the work did not ramp up as we thought it was going to during the summer and when we got to looking at it there were a whole bunch of projects that were spending more time in the development phase.

Take a look at the clean fuels work, for instance.

Clean feels work is all regulatory-driven.

There's tons of options on how to do this the best way, plus there's no return on investment for a lot of these oil companies so they have been moving very, very slowly as they try to figure out what exactly to do correctly.

So we're doing all the brain work right now.

That's also a small piece of the work and the way these contracts are structured, we don't make a lot of money when we do the brain work.

We make money when we get these into detailed design and construction.

So these things have just delayed, and it was a bit unforeseen, to be honest with you.

The work slowed particularly in July and August, and of course those are vacation months, but it slowed more than we anticipated.

And then as we go into September, it started to pick back up, and October it picked back up again.

So what we saw was just a bunch of projects that we just couldn’t seem to get started, and get started is not right.

We're working on them, were billing to the clients, the clients are paying the bills, but we couldn't get them to the next phase.

But I guess what I'm trying to make sure I understand, is your comfort that this is essentially a one-quarter phenomenon is based on stuff that you're already seeing.

In other words, the work that you're doing now and the timing and everything, you have a pretty good view of what's going to happen in the first half of next calendar year.

So, in other words, it's not like this gets better if these three things happen, but in fact you're confident by the time you get to the second and third fiscal quarter, these things will be back on track?

The trend today is on track, yes.

Okay.

I don't have to wait for anything to happen.

It is happening.

Obviously it has to continue to happen, but yes, it is happening.

It seems like we have broken the logjam on numerous of these projects.

Ok, and then your statement which was at the end that you've grown at 15%, you want to continue to grow at 15%, and so on, the only thing that's in contrast to that was John's comment where, for ‘04, you're blessing a 10% to 15% number.

The consensus number is at 14.9% so the question is, John, are you trying to get the people to back off, or are you just being your normal self on this?

Because we want to make sure we’re not, You listened to the call yesterday, obviously Noel, so that's what we're trying to understand.

They had to explain the word "color" to me.

When we talk about the 15% as we have all along, that's our long-term goal.

We've always said it would be plus or minus from that in any given year.

No, but what I’m saying is, you said --

Let me finish.

Sorry.

Sorry.

That's okay.

Specifically for 2004 we're guiding down.

With the slow start in the first quarter that we're seeing trail over from the fourth quarter of this last year and then the ramping up that it has during the year, we see 2004 is the year that may be on the lower side of that 15%, and, you know, right now we're guiding people down into the 10% to 15% range.

So it is a conscious decision that you would expect the consensus -- assuming they listen to you, to come down?

If you guys ever listen to me.

Well, what can we say?

Just two market-type questions.

If we come back and we look at -- you make the statement about the building market being slow because of funding.

That makes 100% sense, given state budgets, government budgets, and everything else, but you also make the comment that the infrastructure market which is perhaps even more funding dependant has started to pick back up.

Is that that you're picking share back up in infrastructure, because you are a much smaller player there than you are in other places, or can you explain that apparent difference between those two factors?

Well, I can't explain the apparent difference, but the facts are the facts.

The infrastructure market is much more of a state-driven market.

Whatever has gone on in the states, and we all have our budget crises, and individual states.

The work is picking back up, funding is starting to flow.

At the federal level, a lot of our buildings work is for the federal government, by the way.

These are U.S. justice systems and courthouses and border stations, stuff like that.

A classic example is we have a bunch of border work.

The funding just can't -- we have a core team working on it, we’ve had a core team working on it for 9 months.

The start of the real work is imminent.

By the way, it will show up this year, but we just haven't gotten there yet.

So it's specific to us probably more than it is -- and the nature of the work we have and the clients we have than it is the broad, you know, gauge economic situation within the country both at the federal and state level.

All right.

Final question, coming back to when you're talking about -- and I think -- I'm just trying to make sure I understand this one.

When I look at your slide number 9, see if you don't spend the money to update the slides, the words stay the same and you run into this problem, but under federal programs, 23%, which used to be the environmental and defense, but when you talk about the strong markets, you just have defense, are you ignoring the environmental market or just lumping it into the defense?

We're lumping it all together.

Ok, so it’s just a nomenclature you're not specific --

Yeah.

John McGintyGreat.

Thanks very much.

And with the first opening our next question with come from Sanjay Shrestha.

Thank you, most of my questions actually have been answered, but just a quick one here.

Noel, talking about you guys wanting to get into the upstream market, can you talk a little bit more about that and what you're hearing from your clients and what the opportunity is and what are some of the things that may unfold over the course of the next 12 to 18 months and things of that nature?

What we're hearing from our clients, particularly our big oil clients, this is a big oil conversation, and sometimes it's big oil, and sometimes it’s mid-sized oils, they are driving the bulk of their capital expenditures that direction, that’s where they’re making their money and with $30 oil, we’re all looking for oil and looking for gas.

We have big projects coming along, in terms of - even in North America, we're talking about two gas pipelines, one coming across Canada out of Mackensie Del, and one coming out of the North Slope.

We have projects like that that are evolving as we speak.

We've got the work going on as we look up into Canada, where we've developed a really good presence and have been really successful with that delta acquisition.

They're talking about billions upon billions upon billions going into the tar sands, and they're doing it both the way sin crude does it, which is basically building plants which mine the ore and take the oil out, and they're also doing a lot of S.A.G. work, which is steam-assisted.

And so there’s a lot of activity in North America.

Then if you go back and look at what's going on in Europe, last quarter we press released and had in our list one gas, which was a very large job for Shell which we bid with aMac and Stork and won.

So those are the things that we're currently getting into where we currently have the skill base to do it.

We're good at gas and we’re good at tar sands.

We don't do L & G, and stuff like that, and maybe we will one day but we don’t.

But we are very good at gas and very good at tar sands.

So am I hearing you correctly that here the opportunities in de-tar sands / community oil sands markets could potentially materialize in the '04 time frame?

Certainly we expect awards some time in the '04 time frame.

Again it's sensitive to a bunch of things, but we're very positive on that.

We’re putting a lot of sales effort into that, I might add.

Thanks a lot.

I really appreciate it.

We'll take our next question from Alex Regal with Friedman Billings Ramsey.

Thank you.

I'm just looking for some clarification on your '04 guidance, assuming 10% to 15% growth, what would that he be excluding acquisitions?

Well, we don't specifically have any acquisition built in or not built in.

We’ve always said that the acquisitions are just part of our long-term 15% growth.

So if we do something, that would impact where we might fall on that range, but we don't specifically carve out and say we're going to do this much from acquisitions or this much elsewhere.

As Noel said, we're looking at acquisitions, we may do one, we may not do one, but it would probably still be something that would fall within that 10% to 15% range.

When you think about '04, are you assuming a an improving economy?

And what kind of implication does that have on your 10% to 15% guidance?

We were asked that question at the board about a month ago, what are you counting on in the economy?

The answer is the economy is the economy.

What we're really looking at is what our customers are doing.

Remember, we're getting 75%, 80% of our business out of 40 or 45 clients.

SO we’re really looking at their spending plan specifically, for ’04 and then we look at how much of this work is actually already booked and moving, and general economy yeah, we can't have a major recession.

That would probably screw things up.

About whether the economy grows at 4% or 6% or 3% doesn't fit into how we plan this.

We're really looking at individual clients and their spending pattern.

Of course,the general economy could affect some of them, but if you look at our plan for next year, I would guess 95% of it we either already have the work or we have identified the work and are taking a probability of winning the work.

Without putting words into your mouth, it sounds like what you're saying is your visibility on the 10% to 15% growth is very solid at this point in time.

Is that correct?

We believe so, yes.

Excellent.

Thank you very much.

(Operator Instructions) We'll move next to Tom Ford with Lehman Brothers.

Good morning.

Noel, one question I had for you which I thought was kind of interesting.

All the defense stock has kind of rolled over with the concerns about spending, and so I was just curious if you could expand on your comment about multiple years of double-digit growth, and just in terms of how you're different there, in terms of the impact and the drivers.

Well, there's a couple things going on in the defense.

First of all we've had an I.T. initiative in the company.

We're doing I.T. work for the Federal Government and we announced a couple big contracts a year ago and so we are chasing some big contracts now.

That’s a business that’s got double-digit growth within defense alone as they outsource that kind of stuff no matter what they do.

So we have that kind of activity going on.

Remember we're not building fighter aircraft and we’re not building battleships.

We're providing services.

So we're seeing more of this being outsourced.

We're seeing a greater opportunity for us in the specific things we're chasing.

We have learned how to be very successful in winning this work.

Our win rate here is very, very good.

And we just got a good list of prospects as we look forward over the next 12 to 18 months.

Granted, the federal government's got a budget deficit and there's a lot of dispute about how much they're going to jam into defense.

In the end, that will have an effect on us, I don't think there's any doubt about that.

But if we look at identified prospects, and we lump also – I don't want to make the NASA people mad, but we lump the NASA folks into this defense and aerospace lump.

And if I look at that together, we've just got a good prospect list on stuff we can bid and have a high probability of winning.

To the degree the defense budget gets hit, maybe there might be some slide back, but it's not something that will be wholesale in terms of what you're looking at?

No.

In fact, if you look at next year, for instance, 90% of that work is already in backlog, or something like that.

These are long-term contracts.

When I'm pumping the defense market, I'm in the out years, because what we've got next year we've got.

Okay.

The other question I had for you was, it seems as though folks have a mixed view about China and whether it holds opportunity for them or not.

Not just the ENT companies but broader.

And so when -- your comment was that there was things you need to think about in terms of whether you want to go there.

Is there anything you can shed more detail on there?

Well, I think that our issue is as simple as this.

We need to have our clients over there doing significant things.

What we have going on today is a couple clients over there trying to build some big chemical complexes.

If I look at our pharmaceutical business, they're not going to China, they're not going to China for a whole bunch of reasons, including patent rights and intellectual property issues and that kind of stuff.

So we know that.

Our pulp and paper clients, they're not going to China.

Our pulp and paper clients are actually spending a lot of money in Europe right now but they're not on their way to China.

So we have got to find a group of clients that want to be in China and if we have long-term relationships with them, we have to be there to support them one way or another, but we're being very careful about China, and we've seen no compelling reason at this point in time to do it.

Now, our auxiliary movement has Been, of course, to continue to try to grow our business in India big time, which we’re doing and we have a lot of emphasis on India, and the Singapore initiative which has been very successful.

Actually if I look at it today, Singapore has been very successful and we probably need to have a bigger presence in Southeast Asia before we get to China.

I just don’t know but that's the way it's looking today.

OK.

Great.

Thanks very much.

Okay.

Marcy Amens with Bank One has the next question.

Hi.

I have two questions -- actually, three.

Before you talked about capacity in your industry and perhaps facing some constraints, I wonder if you could give us an update on that.

And you also talked about seeing salary increases.

I thought you were forming engineering centers in different areas of the globe, such as India, so that you could do projects around and maintain a lid on salary increases.

Can you tell us how this current situation is different from what you saw in the past.

Then the third question is regarding pharma QA/QC.

Can you give us time frames on that for your customers and where you might see opportunities to bring some of that business forward?

Alright, three questions.

The competition.

The landscape remains competitive, but I don't think it's as competitive as it was five years ago.

We've had a lot of consolidations in the industry.

We still have some industry players that are not operating at full tilt because of financial problems.

There's several big deals going on in terms of parts of companies being sold.

So the competition, while it's still very good and we have some really good competitors out there, and you listened to one of them yesterday, we’ve got some really good competitors out there but there aren't as many as there are five years ago.

So that's the competition on salaries.

My statement was the G&A’s in the U.S. and our G&A’s are dominated by our U.S. population, will be up in Western Europe just because of salary increases.

If you want to look at how we're actually doing or projects.

Every major projects along the Gulf Coast in the United States for the heavy processing industry has an Indian component.

It's our way of driving the cost of the client down.

We are now taking that ability to share work with the low-cost engineering center, which is primarily in Bombay or Mumbay if you will, and we're starting to do that out of Europe and we will do it out of Canada.

It has unique applications in Canada, because Calgary has been a boom – bust town forever.

When sin fuel spending is big or tar sand spending is big, Calgary runs out of people.

And then when it's not big, there's no Work for anybody and massive layoffs.

And we're going level our work load in Calgary by off-loading work to India.

That's under way as we speak.

And that’s something that the Delta Cadlitic people couldn't have done that without a major company like Jacobs who already has tie-ins to India.

And we know how to do the work in India.

So we're going to keep the cost of clients pretty flat over the next few years, maybe down, actually down a little bit.

Have you slowed down how much of your work you're moving through India, though?

No, we’re actually accelerating it. we're accelerating the work through India.

It's not accelerating dramatically, but it's more today than it was a year ago, and it will be more a year from now than it is today.

You get two problems with sharing work withIndia.

One is - it scares the beJesuses out of clients, if you let me use that word, but they're getting used to it.

And certainly big oil and chemical are not used to it.

And the second thing is we have to get our project managers, they have to run the projects without being able to touch the drawings every today, and they have to be able to look at it on the PC and the CAD files are transferring back and forth every night.

So it's an educational process within and it’s an educational process with our clients.

But we are moving more work there than we used to.

And we'll continue that.

Would you say that at some point in the future you'll reach a critical mass with the amount of people you have in India you'll be able to substantially offset some of these salary increases in the US?

Yes, I believe that's true.

The other thing we're trying to do is we’re trying to move a bunch of our overhead stuff to India, so one of these days all the bills are gonna get paid out of Bombay.

That’s going as we speak.

We're servicing some of our I.T. networks out of India.

They’re doing the same thing the software people are doing.

Will we ever be able to totally offset salary increases, only time will answer that question.

Let me take the third question.

The QA/QC, we call that basically validation, and one little minor organization we did in the past year, we reorganized all our validation activities in North America under one head because we view this as such a good market.

There is a lot of work to be done.

The biggest problem we have, by the way is not the work.

We can get the work.

The biggest problem we have is getting the people to do the work, and that’s going to probably set some limits on the growth of this business.

But if it takes 12% to 14% to engineer some of these plants, it will take 4% to 6% to Validate them, maybe more, it could go as high as 8% or 9%, so when I talk about our participation in big pharma projects have gone up, those are the kind of numbers I'm talking about.

Those percentages, could you tell me, exactly what they refer to?

The total installed cost.

If a guy has a $300 million program, let's say it takes 15% to engineer and construction manage it, and let’s say it will take 6% to 8% to validate it.

Those are the kinds of number we’re talking about and so that 6% to 8% service component is something that didn't exist a decade ago, it hardly existed five years ago.

It exists big time today.

That's a large retrofit market.

Do they have, you know, a drop-dead date like clean fuels Does, on getting that up to speed?

No.

These come with the new plants as they're constructed, and needed to be validated for FDA approval.

The validation has shown up as the world has become more and more worried about the absolute purity and lack of side effects coming out of drugs and making sure everything that’s done in the plant is done to a higher standard.

Actually your pharmaceutical products today are manufactured to a much higher standard than they were five years ago.

And this will grow quite a bit in line with the growth in the Pro Deoex, correct?

That’s right.

Cause those are even harder to validate.

Could you assume they have a higher Cost as a percentage of the total installed cost?

I don't know if that's right or not, but my guess would be yes.

But I'm just guessing now.

Okay.

Thank you.

We have a follow-up question from John McGinty with Credit Suisse First Boston.

Just a couple random follow-ups.

Noel, you talked about when you went through slide number 11, the broadening the life cycle, you talk about you're now measuring, or at least you said you were now measuring each piece you have and how far you are and where you are.

Can you give us any kind of metrics on -- I don't even know how you would do it, but what portion of penetration you have relative to where you want to be and the different pieces of it just so we have a way to watch your success as we go forward in this?

I would have to give you each individual client, and I don't --

Okay.

Just kidding.

I don't have that.

But what we are doing with each individual client, we have a pie for these activities.

Construction, project services, and ops and maintenance.

We know with some of these clients, we have all their engineering work and none of their construction.

Some we have all their maintenance work only and nothing else.

So we're measuring these things on a quarterly basis, looking at our penetration of these guys.

We measure the margin flow coming out of them, and we measure the penetration of the individual service.

Shouldn't you be able – and I’m not asking that – to somehow how to aggregate that just so you can show us the progress you're making?

I presume you're getting a lot more of the project service businesses of your client than you are the construction, which would give you opportunities, I assume going forward, to build the revenue from the existing base.

To that point, the answer is yes.

We probably could do that on an aggregate basis.

I'll tell you what we'll do, we'll look at it and see if it makes any sense.

If we could put it in some kind of form that made any sense.

But if you want to go look at that slide in particular we have a huge opportunity to increase the construction services dramatically.

If you look at the ratios within Jacobs and the ratios within some of the competitors, we have an opportunity to significantly increase our field services component.

And to that end, we made a reorganization about a year ago.

I'm not sure we ever even talked about this.

We could have.

We made a reorganization to focus on that part of it, because as this work comes in the door, we are determined to get an ever greater component of the field services business and drive those curves to a point where they're not about equal, but they're more in a 2:1 ratio of construction and maintenance to project services.

So theoretically if you did that, you would be adding 25% or so, or 22% conceptually to your revenues of the existing client base without any growth in the business per se.

Right.

Okay.

On clean fuels I wondered if -- could you give us the problem with clean fuels is it's always been nebulous, it's started, it's lumpy.

If we just take the clean fuels of the clean diesel, the clean gasoline, the clean Europe, let's not go into off-road or aviation, although if you have numbers, that's fine -- when did it start impacting your revenues?

Where is it in relation to peak or trough, and how long does it last?

In other words, are we looking at something that's bimodal, where gasoline was last year, this year, and then there’s a delay before diesel comes in, are we looking at something that’s at a plateau that wil last for another three or four years?, I'm just trying to understand how it affects Jacobs over time.

We always talk about it and talk about the numbers, but obviously we never get quantification, so I thought we could look at it relatively how it's affecting Jacobs.

You won't get any more numbers now.

The low-sulfur gasoline, the clean gasoline part of the business is well into detailed design.

We will start to see construction work in a pretty progressive arena pretty soon.

The low sulfur diesel, the ultralow sulfur diesel, as the companies like to call it, is just now moving out front-end design, and we're just beginning to get detailed design releases on the diesel side.

That probably means that low-sulfur diesel construction -- ultralow-sulfur diesel construction is a late '04-'05 kind of impact.

Which probably means then, from our perspective, we have a good two, three more years of steady work out of that business.

Before we talk about the things you excluded, the off-road diesel or aviation diesel.

And if there's an acceleration which some of the engine manufacturers hace talked about - of the ultra – in other words, the diesel truck people with pre-'02 engines will still be able to use the -- I guess the old sulfur level of diseasel, it's only the new low-sulfur that will go into the '07 engines in late '06.

If they change that rule, will that double the work of de-sulfurization that needs to be done in the near term?

Or, in other words, by the time you get done in '07, what portion of diesel will be ultralow sulfur as opposed to still the old stuff?

For on-road applications?

For on-road.

Most.

So even though they're still allowed to use it, most of it is gonna be ultralow?

Right.

Ok.

Final Question.

Noel, if we come back to chemicals, this is the first time I can remember you not saying, but down the road, there's a ray of hope.

Have you given up?

Absolutely not, but I've been saying that ray of hope thing so long, it's getting a little distant.

No, the chemicals will be back, there isn't a doubt in my mind about it --

But not in '04?

I mean, affecting Jacobs' results.

No, it won't have a big results on our results in '04.

We may sell some work in ’04, it has come back.

There's all this discussion about natural gas prices are all too high, it's all going offshore.

Those conversations go on and on.

If natural gas prices stay very, very high, more and more will be driven offshore, there isn’t any doubt about it.

And we'll be following a bunch of it.

But right now, the bottom line is, it's picking along at the bottom of the trough.

You know, we are getting some work, there ins’t any doubt about that, but certainly nobody will say the business is back.

Even if it came back in the morning, it will be front-end work and that type of work, through ’04 and then we'll feel the effects in '05.

Thanks very much.

We'll take our next question with David Usich with Sanders Morris Harris.

Just a quick one.

Just to follow up on that chemical and paper and pulp stuff, I'm convinced it will come back, myself, and it's been depressed so long, you can’t keep that business down without having to do something but get it back on track but generally speaking, the margins off the chemicals, pulp, paper, stuff like that, how would that compare on your work compared to some of this traditional work where you had seen the strength in the last couple years, if you would happen to see that business recover?

The margins across those businesses are pretty similar.

All of us that do refining work can do heavy process work, and we're pretty busy right now with refining work.

It's not that we don’t have more capacity, we do, but we're pretty busy.

So if we're out getting a bunch of chemical work, we’re not going to bid any cheaper than we’re bidding in refining work.

The margins in the end will be pretty similar.

And that’s true for the pulp and paper business too.

See, the pulp and paper business is very slow, but remember, the competition is less than it used to be.

Our market share is greater than it used to be.

And that's just because of some organic shutdowns of offices by some of the competition.

So the pulp and paper business continues to sell, the work we do will be profitable.

I apologize if thtis questions been asked, I jumped off the line for a few minutes, but as far as the impact of the office closures and all that, as far as its biggest impact on your numbers on a year-over-year basis and quarterly, are we pretty much getting close to the biggest impact and it will just begin to wind down from here?

I don't understand the question.

Office closures?

As far as the revenue impact of closing these marginal offices.

That's the last-time conversation.

No, the revenue impact has all been felt by now.

Great.

I'm sorry.

I apologize for re-asking, I had to jump off.

And it really wasn't that material when you look at the overall scope of things.

I appreciate it.

Thanks.

(Operator Instructions) At this time I would like to turn the conference over back to Noel Watson for any additional or closing remarks.

I just want to thank all of you for your interest, and obviously you've thought about the numbers.

And you’ve asked some very good questions.

We do appreciate that, in summary we did have a very good year.

We're looking forward to to a 10% to 15% growth this coming year, and we remain very positive about the business, and our long term growth objectives continue to be followed.

Thank you all again.

Good day.

That does conclude today's conference.

Thank you for your participation and have a great day.