雅各布工程 (J) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to this Jacobs first quarter earnings conference call.

This call is being recorded.

Today's presentation will be available for replay at 2 o'clock PM Eastern Time through January 29th at midnight.

You may access the replay by dialing 719-457-0820 and entering the pass code 139298.

Again, that number is 719-457-0828 and the pass code is 139298.

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

At this time, for opening remarks and introductions, I would like to turn the call over to Jule (ph) Stralich (ph).

Please go ahead, sir.

Thank you.

Before we start, I just want to say that the Company requests that we point out that any statement that the Company makes today that are not based on historical fact are forward looking statements.

Actual results may differ materially.

For information concerning factors that could cause such differences, the Company requests that you read its most recent annual report on form 10-K for the period ending September 30, 2003, including the management's discussion and analysis of financial conditions and results of operations contained area.

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

Presenting on the call today from Jacobs will be Noel Watson, Chief Executive Officer and John Prosser, Chief Financial Officer.

And now I will turn the call over to John Prosser, who will discuss this quarter's results.

Thank you.

Welcome to the Web cast.

I'll give a brief overview of the quarter and I'll turn it over to Noel Watson to talk more about our business strategy and the results of the outlook for the business or as we go forward.

Starting with Slide 4, as you will see, we did have a very strong quarter with the EPS at 59 cents which was up 9 percent over a year ago figures.

Record net earnings at 33.8 million which is up 12.1 percent.

Strong sales for the quarter resulting in a total backlog at 12/31 of 7.1 billion.

Also our cash flow continues to be good with an increase in cash for the quarter of almost $35 million.

We continue to see our long-term range growth rate averaging at 15 percent.

However for the 2004 year, our guidance is for earnings per share of between 250 and 255 this year.

We continue to see a little bit of the sluggishness in the ramp up of some of the work here going forward.

We haven't seen any cancellations or all -- just seems to be delays in getting the work going and moving through the system.

Okay, going to the next Slide continue to show our history of consistent growth.

Something we're very proud of and wanted consistently to continue to show.

On Slide six which is our backlog slide shows the increase in our backlog to just over 7.1 billion.

The professional services backlog is up also to 3.5 billion -- both show continuous good growth in those areas.

And with that overview I will now turn it over to Noel Watson to discuss the strategies for our continued growth.

Thanks, John, and good morning, all.

I'm on Slide 7 talking about what it's going to take today to grow the business an average of 15 percent at the bottom line as we move forward.

I think we need to talk about the business model a little bit.

We talk about this every time but every time I look at who dials into the phone call we have some new players so I'll take just a couple of minutes to go through this.

We basically have a model that we defined as a relationship based business model and over 75 percent of our business comes from preferred relationships and these relationships are long-term in character.

They generate a lot of repeat business.

They are based on our ability to provide superior value to our clients.

And there's only 30 to 40 clients that are generating about 60 to 75 percent of our business and then there's a myriad of smaller clients that are generating the rest of the relationship based business.

All companies in our business have some preferred relationships.

We look at these two models on Slide eight and the standard industry model, basically, most of our competitors have some preferred relationships.

A large part of the industry business is in more transactional models.

And we talk about transactional models as being where you're bidding the construction on a competitive fixed-price basis.

And all companies in our business have some discrete projects, for Jacobs' discrete projects or for clients we may or may not have worked for before but they are singular projects.

We do discrete projects for a variety of reasons.

One is we need the work.

Second one is to make some money, and of course, the third one is and probably the most important reason is you can't have a long-term relationship until you've done some discrete projects for clients and found that between the two companies there can form a strong bond where a superior value is generated for the client.

So you always need to be doing discrete projects for those clients to be moved into the long-term relationships.

What we find with our relationship based business model is that, obviously, the repeat business is very, very high.

It does allow us to have very stable and consistent earnings growth and we believe working with people you know on a long-term basis issue gives you much more manageable risk.

If we moved to Slide 9.

And we talk about the diversity of our markets, we have on here our 1993 revenue breakdown, which is about $1.1 billion in our last trailing 12 months right now and in 12/31/03 of $4.5 billion and you go and look at the percentages within these two pies, there's a couple of things that are fairly startling.

First one is back in 1993, 60 percent of our business was heavy process -- petroleum and chemical.

Today it's only 36 percent of our business.

Even though if we moved to a subsequent slide you will see both our chemical and petroleum businesses bigger today than they were ten years ago.

Other things that are significant is the PharmaBio business is more than doubled and our federal programs business is up dramatically.

So what we've been able to do over the intervening decade is not only grow the business in an absolute sense but we've diversified dramatically so that none of our business components totally dominate our business anymore, which gives us a very diverse business model and gives us a very stable package of business and package of clients that -- while we're not recession proof and I think we will prove that off and on -- but we are recession resistant because we've always got some of our businesses that are very strong, generating consistent margin.

If you move to Slide 10, it brings it into a little better visibility -- the fact that we diversified dramatically.

But, secondly, all of our businesses are significantly greater than they were a decade ago.

So looking at taking our process business down from 60 percent to in the 30s is significant even though we've continued to grow it during the intervening decade.

If we move to Slide 11, another part of the diversity story is the services we provide.

We provide a lot of home office and project services and that becomes 43 percent of the numbers.

We provide just about an equal amount of construction.

We have about 10 percent of our business in Ops and maintenance and about 5 percent consulting.

And I'll stop on the consulting for just a minute.

It's not a big piece of our business.

It isn't a highly profitable piece of our business, although it is getting better.

But it does allow us access high and early as we say to our client base as they're trying to define their projects.

We get involved in the business cycle very early on, as people are trying to figure out what the economics of their particular business are.

What cycle they're in and what they should be doing and so when you're consulting high and early like that with our client base it gives the rest of Jacobs an insight into what's going to go on in our particular lines of business.

And it helps us do preplanning for what's going to happen even if we don't work with this specific client we're doing consulting work for, we do have knowledge of the business in general.

So it allows us -- this diverse packages services allows us a broader service base to our client.

We always are trying to move from one of these high segments to another.

For instance, if we sold a client the Ops and Maintenance we are trying to then broaden that to construction and engineering.

If we start on the engineering side, we try to broaden it downstream next to do that construction and finally to do the maintenance on the plant.

So we're trying to provide this whole package of services to these core clients that we have.

And this broad package of services does reduce our dependency on the capital cycle per se.

Because it allows us to be intimate with the client in every aspect of the business.

If we move to Slide 12 and we talk about acquisitions, those of you that have followed the Company know that we have made acquisitions on a fairly frequent basis.

And even though it's been a couple of years since we've done because we did a rash of them in the early part of this decade and we needed time to sort out both getting those acquisitions integrated and getting our balance sheet back to sufficient strength, acquisitions are a part of our 15 percent growth cycle.

We consistently tell the community that you cannot grow a business, a services business, 15 percent a year long-term on internal growth alone.

You must, in fact, add acquisitions as part of that mix to get 15 percent growth.

We did make a small acquisition last quarter, Lee Fisher and Associates.

It was a strategic acquisition, trying to help us in our transportation business.

They are experts in airports.

They will be part of our consulting business and they will allow us to do more high front end early work in the consulting on airports.

And as you all know, airports and aviation security in these airports is going to be a big market as we move forward.

But acquisitions we look at -- they're driven by markets.

If we want to expand markets, they're driven by geographies.

Most of our geographic expansion has been acquisition based.

And we will continue to be in the acquisition market as we move forward and we have ongoing conversations as we speak but nothing significant has developed at this point this year.

If I move to 13, five strong markets are the same five strong markets they've been.

And I always talk about the weaker markets first, and the two weak markets of which are major parts of Jacobs' portfolio are chemicals and pulp and paper.

These are both businesses and where we got significant market share and when they're good they're very good and we're very profitable in those markets.

Those markets still are reset.

Both of those markets are GDP driven and if in fact the economy is coming back strongly, we would fully expect these markets to respond.

I was out looking at the stocks of some these companies the other day just to see how they're doing and, certainly, some of our chemical clients, stocks are doing quite a bit better.

This still has not transcended itself into any kind of significant capital spending wave in the chemical business.

Both of those markets -- pulp and paper, and chemicals -- will be back.

It's just a question of when and we would be optimistic sometime late this year early next year -- we will be starting to see major capital programs there.

We also have the high-technology market which is semiconductor-driven and we think that is rebounding.

We aren't getting a significant amount of work at this point in that market.

But we are optimistic and as we move forward through this business cycle, which is rebounding, we will be getting work in that market.

If we move then to the strong markets, the petroleum market remains strong.

It remains strong for us in the refining business both in the U.S. and Europe.

As the clean fuels program taking sulfur basically out of gasoline and diesel, aviation and off-road -- as those programs continue to move forward that market remains strong.

We have had some success in the upstream oil and gas although we're still a small player but that is a market that we're continuing to try to penetrate.

So the petroleum market looks like it is going to stay very solid if not spectacular for the foreseeable future.

The PharmaBio market -- I know it's a strong private sector market for Jacobs.

We can claim to be number one or two depending on the day of the weak and who's in the room, but we do believe we've got a very dominant position in the PharmaBio market on a worldwide basis.

This market is being driven by demographics, aging population, recombinant technology that's creating many new drugs.

We have a lot of work in this business.

We continue to get a lot of work and we have lots of good prospects.

So the future is very bright in a PharmaBio market.

The infrastructure business and the buildings business are both tied together because a lot of it is public funding.

These businesses remain strong.

They had a slowing period here about a year ago and they -- after kind of a boom period in the early part of the decade they slowed somewhat about a year ago, not to the point that we weren't growing in both businesses but they did have some slowdown.

It was driven by the financial problems in both the states and the cities but primarily the states and also some financial problems at the federal government level - a budget cut reallocated.

Both of those markets seem to be doing a little bit better today than they were even three months ago.

They still haven't returned to let say exactly where they were say in '01 but they do seem to be getting better and the prospects in those markets are strong and we do continue to sell and do more work in each of those markets so we're very optimistic there.

And then, in the defense business and we include aerospace in the defense business.

The budgets are high, the activity is high, there is a ton of activity going on, prospects are good.

This business should continue to grow within Jacobs at double-digit rates.

And I think we all agree with that.

If we move to Slide 14, these are some of the major wins that we've reported last quarter.

Big wins for AFCEE -- Air Force Center for Environmental Excellence -- but they've transcended far beyond environmental work and they're also doing all of the Air Force military family housing.

We won big contracts at both -- the top one is at WERC, and that's a global environmental contract that's going to be doing cleanup work all over the glove.

It's an IDIQ contract which means we've won big (indiscernible) and now we've got to get work under it but this contract will generate hundreds of millions of dollars of revenue for Jacobs over the next two years as well as housing contract.

I had the pleasure of meeting with a general in Washington and the head of the AFCEE a couple of weeks ago and military family housing is very high in the Department of Defense priority and they're going to get all of this money spent for it in the next three or four years.

And they're absolutely committed to that and when I asked a question like, well, is the rock getting in the way?

They say no.

The other significant wins were a climatic wind tunnel for Vistion (ph) planning and civil engineering program out in Riverside County.

We've got the Marine Corps, we've got the project management for PMEX on the platforms down in Mexico, we got some refining work from OKEVA (ph) chemical work out of Kerr-McGee and a large bankable feasibility study for a major new (indiscernible) on phosphate.

Altogether as John said earlier it was a good sales quarter.

Our second really strong sales quarter in a row.

And so we've been pretty pleased with that.

If we go to the next Slide which is Slide 15 -- not a lot is changed.

Our business model is our driver.

It drives our business, it drives our thought process, it drives the relationship of our client.

And we still continue to focus on a small group of clients and getting a large piece of their work.

We have diversified the Company dramatically and we continue to diversify on an ongoing basis.

Our markets are diversified, you saw our eight markets, our geographies which are basically the U.S.

Western Europe, southeast Asia, and India are strong geographies.

I would make a comment on those geographies for a minute.

You folks know what's going on in the United States.

We also think Europe is starting to rebound a little bit and our prospects in Europe seems a little better across the board than they were even six months ago.

And as I look out into the Indian Subcontinent, there isn't any doubt business is better in both Singapore and India right now than it was a year ago.

So we got a geographic activity going on.

We also have a diversified service portfolio that we're trying to market for these clients.

The balance sheet is strong, cash flow is strong last quarter and we remain committed to the 15 percent annual bottom-line growth.

That's the formal part of the presentation.

We'd like to now turn it over to anybody that has any questions.

[Operator Instructions].

Michael Dudas, Bear Stearns.

John, mentioned about, again, some of the release of the work being a bit slower than anticipated as your budgeting this year?

Is that causing some utilization issues at some of your offices?

I think what it is causing, Mike, is slowing the ramp up of hiring.

It's not causing utilization issues.

Utilization is just fine.

It's running at almost record levels, but it has to do both with some of the government programs and has to do with some of the clean fuels where people are still worried about the exact scope of the job and some of this we backlogged a year ago.

It's still a little slow in getting moving, but it's that is not creating any utilization problems.

Follow-up question.

At the end of the quarter, I got to assume this is a record cash bounce level John.

For the Company?

About 60 million?

I think it is.

No I think we were higher than that a couple of quarters ago (MULTIPLE SPEAKERS) couple years ago, few years ago.

How much cash, as the business goes or has the model changed a bit?

How much cash does the Company require to feel comfortable to operate the business and if we continue to get delayed on the acquisition front, it's a lot of cash to hold onto the balance sheet and dilute yourselves there.

I know it's not burning too much of a hole in your pocket but what kind of a capital structure on the balance sheet, who would be comfortable with a next generation to a more, a larger acquisition profile than would have thought?

Our operating cash needs are really not that great, because we did generate cash -- our biggest working capital need is receivables and that's partially offset by payables as we go through so the cash needed for operations is relatively modest.

But the cash we have there is for acquisitions, for dedicated acquisitions that -- we will be doing an acquisition in the near future.

That's just what we're looking at but you're right -- it is not burning a hole in our pocket.

We're not going to go out and buy something that doesn't make sense but the other side of the equation, we're going to continue to build that cash.

So when the right opportunity comes along we can take advantage of it.

You know, in this industry there continues to be a lot of consolidation, a lot of opportunities and sometimes it takes a while to convince a company that they really want to be bought.

And so -- and we have demonstrated, hopefully, we will continue to demonstrate the patience to do those things right.

Sanjay Shrestha, First Albany.

Just a couple of questions.

First one, want to get a follow-up on that acquisition in terms of the ongoing discussion that you guys have right now.

Has it been more along the lines of actually expanding your presence let's say, within the (indiscernible) infrastructure side or has it been more along the lines of maybe the geographic expansion or has it been across the board -- can you talk a little bit more about that?

Just in general terms, we've had conversations on the upstream business.

We've had a couple of infrastructure conversations and we've had a geographic expansion conversation.

So we've had ongoing dialogue in all three of those areas.

Nothing has come to fruition.

But the dialogue continues.

And one of these days something decent will go together where it's a win-win for both sides and -- but we do remain and it is probably worth repeating, we certainly are working hard to expand in the upstream oil and gas.

We're certainly working hard to expand in the infrastructure business and the infrastructure issue will not go away.

The infrastructure issue will not be solved by a single acquisition.

We believe that a couple thousand home office people at 2200 -- whatever we are -- we're still below critical mass both in the U.S. and Europe.

So we can see a string of acquisitions over a period of years in the infrastructure business to get us up to a point where we've got somewhere between 5 and 10,000 people doing that kind of work.

That's great.

How -- given what's going on an industry -- has the overall acquisition environment changed at all given that maybe some of these private companies have to be (indiscernible) public market and stuff like that?

Has that made this situation better or worse for you guys or no impact at all?

It's hard to say.

Those of us sitting around the table thought some of the people out there had glorified ideas about what they should be paid but we sat with an expert the other day and he said the pricing structure hasn't changed much, historically, so it is a question of being talking to people that aren't quite ready to sell yet and so we continue to look at that but there are tons of opportunities.

There's no question about that.

Right -- that's great.

That's great and, also, another quick question here.

On the last call I know you were talking about the Canadian (indiscernible) market and how attractive (indiscernible) the opportunity in '04.

Is there any update there?

Has anything changed or things continue to remain pretty pretty good in that front?

That continues to be a good market for us.

There's lots of activity with oil prices where they are, the economics of world (indiscernible) development are still very good so I see a continuing flow of work for operations [inaudible] Canada.

That's great.

One last question if you guys could.

In terms of ongoing activity over at NASA and what's going on there and opportunities and stuff like that?

Our work in the Aerospace and Defense arena is really quite solid right now.

Lots of activity.

We got a lot of proposals out.

Expecting some answers back on some major opportunities in the next quarter.

It's a good news business.

The Marine Corps work that Noel mentioned that we won last quarter is also good news -- that's an IT contract.

It's a successful reconvene and that means our IT initiative continues to build momentum, and we're excited about that as well.

Richard Rossi, Morgan Joseph.

Looking at those major wins -- obviously, the Air Force contract -- that's a great award -- but did you actually book much in terms of dollars instead of backlog in this quarter?

We booked the work contract, we did not book (indiscernible) Let me explain what we've got.

On the work contract, we won a prime contract.

Which has got almost unlimited capacity -- at least for current thought.

We then also won two contracts where we were subcontractors to minority businesses.

And then we won the (indiscernible) build contract.

We booked the work contract at about 300 million (indiscernible).

What about that.

And we didn't book the other work until we see some development on it my guess is we will book the other work the two where we were subcontractors and the housing contract -- my guess is, we'll book those this quarter if we start to see activity moving into them which we think we will.

So we took kind of a -- we split the baby on that.

We did not want to book at all because of the nature of the contract until we actually saw some real activity but I'm convinced in my own mind the housing will go like crazy.

And on some of these -- given that there's been this sluggishness to get some these projects going in several areas, as you take some of these wins on the private sector side, are you booking the whole value of the contract as you normally would or is there any sort of taking a little bit more conservative approach due to the slowness in (indiscernible) getting started?

This is Tom Hammond.

What we are seeing in the refining arena, all of the projects or most of the projects are regulatory driven.

We assume some certain timetables when we book the work that the owners would be trying to meet certain deadlines.

For whatever reason the projects are going very slow in their front end phase but the total projects are still of the same magnitude that we booked.

We had one project that (indiscernible) significantly a couple of quarters ago and we took that out of backlog, in fact.

So we still see the same volume of activity on these projects in the private sector.

It's just not happening as fast as we anticipated when we originally booked the work.

On those clean fuel jobs they still have the same drop dead dates, don't they?

Yes they do but they have some options of not meeting the product requirements and therefore not being able to sell into certain markets or they can blend around some of the requirements so there seems to be more flexibility from an operating standpoint that I think everybody assumed two or three years ago.

Because there's certainly not moving as fast as we all anticipated two or three years ago.

But what we are doing on them, we are studying them to death, trying to make sure that it has been absolutely optimized for the owner.

And while we have booked pieces of the engineering work, these things still haven't been totally booked particularly if we get construction on some (indiscernible).

So certainly we haven't booked on the construction or anything that are still (indiscernible) around in engineering.

All right.

Just one other question.

Any reason to be concerned about the increase in SG&A cost?

No.

Coming back down or is that the new run rate?

I don't quite know the issue, Rich, do you know (MULTIPLE SPEAKERS)?

If you look year-over-year the increase is about 5 percent.

Part of that has to do with some foreign exchange issues because there's a third of our business or so that comes mostly out of Europe and we all know what the euros' done over the last 12 months.

So you've got some of that but that also reflects that our margins and such as well.

The other thing if you look at just our run rates, it's really a very modest increase when you consider we continue to grow the business and it is growing at a lower rate than what our margins are growing.

If we look at our budgets for the first quarter we nail them right on the head so we did fine.

Lorraine Maikis with Merrill Lynch.

Just following up on Rich's question about margins.

On the gross margin line, do you expect to maintain these or do you expect that -- as we move through the year and maybe start working on some of the construction work -- that those will decline a bit?

Certainly as things move in the field they have a big impact on gross margins as the next change (ph) and so as we move in and see the revenues moving up from construction and field service activities, you will see a corresponding drop in gross margin.

But I would say, just to counter that for a minute, that probably isn't going to happen this year, probably going to happen next year so a next year event, not a this year event.

Most of these playing field programs (indiscernible) on the diesel side will not (indiscernible) until '05.

Okay and if we were to compare the clean gasoline and the clean diesel projects do you have an idea of your market share in clean gas and if the ramp up is progressing any differently -- how?

Craig will try to answer or he won't answer that.

That's a tough question to ask.

It'd be hard to put percentages on our market share.

I would tell you that we got a bigger share of the diesel work than we did of the gasoline.

As we have continued to improve our position with some our key customers.

Not -- when I say I can't put real numbers on that but it is clearly a positive trend in terms of our share of wallet or we're going forward.

Tom, you want to comment?

No I think that's about right.

We don't try to calculate it in terms of a total percentage, but I think our success rate on the diesel projects was at least as good as the gasoline projects if not a little better.

Does that answer your question, Lorraine?

Yes it does.

In terms of ramping up that work, do you expect to do a lot of the engineering work for in the construction in '05, or do you think it will be more delayed than that?

I think the answer is both.

The engineering should continue at the (indiscernible) at least through '04 -- keep in mind they have come down from ramping up to do the clean gas work so we're just moving from gasoline projects to diesel project primarily in the (indiscernible) sector.

And we don't anticipate that coming down in '04.

I think some of the delays are going to extend it out in time and the ramp up is not going to be as high as we thought, but it's going to last longer.

We think the field activities (indiscernible) are going to start at the end of this fiscal year but probably not make a significant difference this fiscal year, but should be a fair amount in the next fiscal year.

Chris Martin, Credit Suisse First Boston.

You guys gave guidance 10 to 15 percent bottom-line growth last quarter.

And then this quarter you've given the 250 to 255 and, basically, infers a growth rate of 10 to 12 percent ... ?

Yeah, it's the lower end of the range.

So you effectively guided down to the lower end of the range?

That's correct.

Excellent and then another question I have is the fuel services quarters are quite a bit lower than last quarter which is obviously a great quarter and then also Q1 of '03.

Is anything to be worried about there in terms of the lower orders or is it just a delay in the field services work?

I think it's just a delay.

There's certainly nothing to worry about there's nothing -- certainly if there is we don't know it, okay?

We'll put it to you like that.

Fuel services tend to be lumpier than the engineering just because they more likely come in in bigger chunks.

So you really can't go just on the strict quarter to quarter trend on those.

You really have to look a little longer in terms -- some quarters may look strong and others may look weak but no big things fell into that.

So really is -- we've cautioned in the past you shouldn't look at just quarter to quarter trends on backlog.

You really need to look over a little bit longer trend.

Tom Ford with Lehman Brothers.

John I am going to follow-up with the question and I am going to do exactly the opposite of what you said which is not look at near-term trends but the technical professional year-over-year was pretty solid.

I know you talked about a lot of things and I just wanted to -- could you summarize what you think is the step up?

What is kind of driving that year-over-year step up?

We're talking about technical professional services now?

I need to look at what data you're looking at.

I'll answer that.

I think it's being driven by a couple of different things.

I think it is being driven to some degree by some of these contracts we've won in the last two quarters and even I think it's driven to some degree by the AFCEE work -- I can't remember exactly what the split on the AFCEE backlog was but we are generating and we are ramping up the home office work hours right now a little bit as we speak.

We've ramped up through last quarter and we expect the ramp up to continue at a modest rate through this quarter and so we have been -- I think it goes back to the point that I think Tom was saying it, as we move from the -- as an example, from the gasoline cycle to the diesel cycle, we probably have worked off a lot of construction work which we did last year and that -- a lot of that construction work for the diesel hasn't gone into backlog yet.

So we're going to have to take a look at that and we also had a huge ramp up with this big win we had for (indiscernible) up in Calgary on this very large satellite (ph) gas plant which is a big engineering assignment.

So I think we've just taken the front end and we've got a lot of front end work which has just come in which if history repeats itself which we certainly plan on it happening we'll show up in a lot more field services as we move forward.

But we are ramping up the home office and we are in a hiring mode, generally, as we speak.

And in terms of the hiring mode, today, how does that compare to your mode or in terms of what you were doing say, two quarters ago or four quarters ago?

We're pretty flat in the middle of last summer in home office and so it's up from them and I can't give you any macro statistics except the hours are up and then, there's more people on the payroll.

Okay, and then real quick, when you talked about pulp and paper, I am just curious about what kinds of things you look at?

I know, depending on what parts of the business you look at, like the lumber side you definitely see commodity prices moving, and the stocks have reacted well.

You haven't really seen commodity paper prices move just yet, although people think that that's just sort of a question of timing not if.

But I am just curious about what kinds of things you look at or think about with respect to pulp and paper when that one really starts to step up for you?

It doesn't start to step up until they show up and say we want to do a new paper machine or we want to do a new mill and we've got some study work going on on some of these right now and we've had a fairly steady -- albeit small -- stream of paper machinery builds as some of the big consumer product folks have tried to make their products better.

But it would -- the business has been flattish now for the better part of half a decade now.

Since 96 -- so, longer than that.

So what we're looking at and a couple of things have happened.

Six or seven years ago, you folks that populate Wall Street accused the pulp and paper companies of not earning a return on capital and spending far too much capital.

The more current criticism that we hear is they're not spending enough capital and we have to start spending money just to stay competitive.

I mean so the stories have changed as I listened to them but I think first thing's that's gotta happen is business has got to get back up and their profitability has got to get back up and these are the big paper folks and you know who they are.

And I think and by the way, a lot of them are them are just into commodity paper but a whole lot of them are into specialty products too.

But while we see a slow but steady piece of work there there certainly hasn't been any buildup and we don't have sitting here today a ton of hot prospects sitting on our table.

We just don't.

So we don't think this thing is going to turn probably this calendar year.

We don't think so.

Just to clarify also, Tom, the wood product side is not anything we're involved in.

We're strictly on the paper towel, tissue, that part of the industry.

Okay, okay.

One other question I had was just going back to clean fuels.

You guys had thought that you probably had a similar if not better win rate in diesel.

The impression I've gotten and it is not universal, but some have noted in terms of the U.S., in terms of the equipment they use, and pulling the sulfur out and the quality type product that comes out, there's been a question as to whether the diesel upgrade is more complex as opposed to gasoline.

And I was just wondering whether if you think that that had anything to do with a relatively better performance by you?

We'll let Mr. Hammond discuss that.

Maybe it does have a little bit to do with the performance.

I would say the complexity of the projects for a company like Jacobs is not significant.

However, it typically involves a little larger vessels a little thicker walls on the vessel, more complex metallurgy, higher pressures and you're using hydrogen and that is difficult to deal with at high pressures.

So the complexity level is maybe a little bit higher and so companies -- larger companies -- like Jacobs might tend to get a little bit larger share of the work, but it doesn't put it into the category of what we would consider to be a very complex project technically, but modestly.

I guess somebody must have said this to the world because we've heard this now for a couple or three quarters.

And the last question, John, as you referenced to other questions a bit of a not necessarily a step down but a compression down of the range, I'm just curious about how you feel about it now in the sense that we've had a bit of a step down?

Is it something where you might come out to us next quarter and say, well, instead of 10 to 12, 13 -- it looks more like 10?

Or do you guys feel much more comfortable with the comments that you just made recent in terms of thinking that you've fully taken into account?

I'm not going to give guidance within the range.

The range is the range and that's what I said last quarter and that's what I'll say this quarter.

The comment on why we moved the range down to the lower part of the range from last quarter -- it has become clear that at least it doesn't look like we're going to have any significant input from any acquisitions this year where we had -- looking at the whole year we thought we might be able to get something done before the end of the years.

That certainly is part of it.

Part of it is -- that's right, the biggest part of it.

The other part is things, the ramp up on some of these projects continued to delay a little longer or be a little slower than what we thought they might have.

We are seeing an uptick in the professional service hours but not quite what we would have hoped and so maybe it has given us a little bit more caution on the latter part of the year but certainly we still see a continued strong prospect as we move through the year.

It's just we got a little more focus on it as we move into the second-quarter now.

David Ushak (ph), Sanders Morris and Harris.

Couple of questions on pipeline.

I know, Noel, you mentioned earlier you saw some encouraging signs coming out of technology and I know here in Dallas, Texas Instruments is (indiscernible) ship facility here, as you look at that technology area (indiscernible) is it going to be major projects? (indiscernible) domestically, internationally, or is it (indiscernible) just give me a feel for what the pipeline look like in that technology area?

(MULTIPLE SPEAKERS)

I think it's a little bit of both frankly.

There are a number of fairly significant new fabs out there in the marketplace.

The one you mentioned is one but there are probably half a dozen in either North America or Europe that are of interest.

But in addition the retooling and upgrading of some of these continues across the system and demand seems to be driving a little more activity there so the reason we're optimistic overall is really a combination of smaller projects and a few big elephants (ph).

And that is both domestically and internationally on the big elephants.

Our focus was entirely in the U.S. and Europe on the big elephant side but, yes, you're seeing big elephants both there and in Asia.

And then, Noel, you mentioned the chemical side of it pipeline to pipeline there.

Would stocks doing well is there any indication of that pipeline that there is some willingness to start letting funds go a bit?

We haven't seen any uptick in the capital cycle for the chemical companies at this point.

That doesn't mean there's no work, but it certainly has been at a level now and has been multi years.

In three or four years.

And we haven't seen anything of consequence at this point.

And then one last question on the acquisition thing.

It's not like as we looked at this landscape, there's been a heck of a lot of acquisitions and you guys to have been sitting on the outside looking in.

Is there some reluctance on the part of the owners looking at the outlook we're all seeing this engineering construction outlook (indiscernible) across a lot different fronts as far as spending and everything else whether it's here or internationally?

Is there some reluctance on the part of these owners to feel a necessity to amalgamate themselves with somebody given that more positive outlook, you suppose?

I think there's always that type of thing going on, but I don't think that's the issue as much as it is finding the right marriage.

I think everybody's -- need to understand our business.

It's populated by eternal optimists.

And so the outlook is tomorrow's always positive -- more positive than it is today and I had one guys that we were talking to say, well, Noel, we haven't had a good year but next year is going to be better so let's wait till next year and I said, we'll just indiscernible this year out of it and worry about the long-term because we're not going to pay you on (indiscernible) price of a one year performance anyway.

So but that has been a major part of the business but I think that's driving the issue right now -- I think what is driving the issue is we stayed of the market -- we stayed out of the market for a while and we consolidated the balance sheet and integrated the acquisition and so we are now getting back into it, and trying to talk to people, understand what's going on, find suitable prospects and put the deals together.

And as John said, that will happen.

We don't think now it's going to happen and certainly something will happen this year.

I'd almost bet on that but it probably won't affect the numbers a lot this year.

I appreciate it.

Good quarter.

John Rogers with D. A. Davidson.

Just one follow-up.

In the chemical side of it when the cycle starts recovering hopefully in the next couple of years, do you expect a lot of that work to be outside the U.S. and is that an advantage for Jacobs similar to what you saw in the PharmaBio side the last couple of years?

I've listened to this for a long time, how all the work's going to go overseas and I think more of it probably will this time.

I think if we continue to see the kind of gas prices we've seen, I think more of it will go overseas but that means it's going to go in some faraway places.

So in some ways we will have an advantage because we're much more global in character.

Certainly there's a group of firms in Houston that have no international presence at all that just won't be competitors anymore bit we will find global competitors to take their place.

So I don't think it presents us any real advantage, in fact if anything it might be a slight disadvantage.

And as part of it I mean -- if you're looking at geographic expansion or more geographic expansion in Europe or elsewhere, is that part of this strategy, just to give you the opportunity to go around the world more?

Oh, yes, absolutely.

Understand the geographic expansion will be driven by the clients we work for and if they're going to start sourcing the chemical plants in different places we will have to be there to help them.

Update and then one more follow-up question.

In terms of some of your engineering work you do in places like India and elsewhere, what portion of that, of your work is done there now.

How big and operation do those represent?

We got 1100 people in India and they are supporting us both in the U.S. and in Europe.

We do two kinds of work in India.

We obviously work the Indian market and we're the largest private sector -- contractor engineering contractor -- in India.

There's one other big competitor but it's wholly governmental.

And it's bigger than we are.

What we have found, though, that -- we got a sample statistic that we look at.

Half of the projects that we're working on in the Gulf Coast we've been able to win them and grow our business down there dependent on the Indian component.

So if you look at like that -- now it isn't a huge part of the business, on the individual projects maybe it's 30 percent of the work, but it does help give us a price advantage.

But looking at this particular study we did on the Gulf Coast half the work we got in that office is indigenous local work with no Indian component, the other half of the work in the office and this is one of our bigger offices we needed to have the Indian component to make it go and that's what made us competitive and it allowed us to do two things.

That allowed us to get the work and it also allowed us to grow that office in total, even in headcount, in an office in which we're hiring.

If you understand what I'm trying to tell you?

I think so.

But do you expect in that office or that portion of work that's being outsourced at least outside the United States will that much more rapidly than Jacobs as a whole or in line?

I don't know, I think it'll probably grow pretty much in line with Jacobs as a whole.

Because we will be outsourcing just selected parts of the work.

We won't be outsourcing everything, because we still got for instance in the pharmaceutical business the clients haven't gotten around to allowing us to outsource India yet.

Now I think the current pricing problems going on in the pharmaceutical business we will be seeing some pharmaceutical work being outsourced overseas.

That's what I think.

The guys haven't bought in yet.

So it is basically my heavy process work of refining and chemicals that the clients have decided they need good cost-competitive engineering and they are forcing people or allowing people like us -- take your pick -- to do a portion of that work offshore get the cost down and save both of us money.

Lisa Hinds (ph) with Alliance Capital.

Just going back to a previous question about guidance but how comfortable are you that you'll be able to re-accelerate your growth rate to mid teens for your long-term target (indiscernible)?

Well, we are totally comfortable with that.

As I said we cannot grow the business 15 percent a year internally alone.

We just don't believe that can be done, but we believe there's enough acquisition possibilities out there to give us the acquisition growth we need over the longer-term that we should get back into the mid teens.

The 15 percent rate, longer-term average, I am totally comfortable with.

So that actually implies an acceleration of above 15 for some length of time?

That's probably right.

If you go back and look at our history, we've had some years of 10 to 12 and we've had lots of years 17, 18, 19.

And just the other thing?

On competition for acquisition?

Are you seeing that more from existing players?

You know there's probably in the deals that we're looking at -- there's not a ton of competition.

Some of these companies have been up for sale recently and there's been a couple big deals up there that haven't gone forward or there's been some financial acquirers moving in.

But these deals have not gotten done.

And so there's not -- we're not in any of the deals that we're talking about right now, we're not in any competitive hard dogfights with a bunch of competitors.

We're basically dealing with groups of people where we're trying to get together on logic, culture, and price.

But it is wildly competitive if that's the question.

Okay and then, just in terms of the sluggish ramp up in spending -- do you have any visibility in terms of -- in the summer do you expect that's going to be picking up?

The ramp up in the (indiscernible) (inaudible) summertime?

Yes or any of the (indiscernible) services?

Current projects, yes, should start going into the field late in our fiscal year and really will have a very modest impact this fiscal year and will have more of an impact for us next year.

And finally on the paperwork that is slow now, how much visibility do you get into that in the sense that -- are you going to know if it'll be a three-month lead time before you know things or six months' lead time.

Well what will happen is all of a sudden we will have a bunch of study work.

Trying to figure out what kind of machines, and we get that ramp up study work we will tell you but it won't get back log, you won't see it in the numbers.

It will be -- there will be a year lag between study work and any real work so -- but we haven't got the (indiscernible) in study work right now.

[Operator Instructions]

Richard Rossi, Morgan Joseph.

Just another question on the chemical sector.

Hasn't really started yet but your thoughts on what the shape of that cycle might look like?

Is it likely that the clients once they decide they need to move forward on major programs will go wholeheartedly?

Or are we going to see this very slow buildup and push back and sort of the kind of environment we're seeing in (indiscernible)?

I think we'll see the clean fuel (indiscernible) myself.

I think -- and you know you don't know.

First of all, we can't get in their heads and whatever they're thinking today they may think differently tomorrow and typically they do tend to overbuild but they'll certainly start at tiptoe.

I think there will be a tiptoe through the tulips until they're very comfortable, they've got their margins and cash in position and then they will be looking at competitive market share and that kind of stuff and then they'll move forward dramatically.

But in the beginning it will be a tiptoe exercise.

So we're likely to seek a buildup on technical services on the backlog -- the chemicals first?

Yes.

Yes, they're not just going to let a bunch of big projects overnight.

It doesn't happen that way.

We will be in a rebound before we know we're in a rebound.

Stuart Sharpe (ph), Standard & Poor's.

Good morning -- I got on the call late -- I'm not sure you mentioned the total debt to capital and what did you see through the rest of the fiscal year after this quarter still seeing sustained, well, 10 percent?

Certainly yes earlier I did mention the cash flow.

IT was strong in the first quarter we had 35 -- just under $35 million of cash.

Our business will continue -- should continue to generate cash in line with our earnings until we do an acquisition.

You know our cash is primarily used for acquisitions and the debt level should continue to be modest.

It's around $18 million at the end of the quarter.

It should stay in that range until we do again at an acquisition and (indiscernible) on the size.

And a modest sized acquisition will bring down the cash, a larger size might bring down the cash and increase the debt.

So I mean that's the thing that will influence our -- any significant change in the debt side of the equation.

But other than that, I think we will just see the cash and continue to build and the debt stay about where it is because the $18 or so million debt that we have is mostly offshore things that are short-term -- don't have any real reason to pay it off.

It does fluctuate during the quarter.

Working capital needs, things like that, but it's been relatively stable now for what?

Three-quarters -- four quarters.

Lisa Hinds for Alliance Capital.

In terms of your backlog what [inaudible] (indiscernible)clean fuel projects?

We don't break down our backlog by market or by sector.

So --

There's not a huge percentage -- but we don't -- we don't even know the answer to that.

It's not a huge part of it.

That's all the questions we have for now.

Again, I would like to remind everybody you may listen to a rebroadcast of this conference at 2:00 Eastern time through January 29 by dialing 719-457-0820 and enter the confirmation code 139298 on your telephone.

And now, I'll turn the call over to Mr. Watson for any closing remarks.

First I'd like to thank you for listening to us today.

It's always a pleasure to talk to you.

We continue to look forward and we would reaffirm as one of you asked the 15 percent long-term annual growth rate even though this year we're probably not going to make that.

And that's all I've got to say.

I just want to thank you.

Good day.

That concludes today's teleconference.

Thank you for your participation.