雅各布工程 (J) 2004 Q2 法說會逐字稿

Good day everyone, and welcome to the Jacobs' Second Quarter Earnings Conference Call.

Today's call is being recorded.

Today's presentation will be available for replay at 2 PM Eastern Time through April 29 at midnight.

You may access the replay by dialing 719-457-0820 and entering pass code 641242.

Again, 719-457-0820 and pass code 641242.

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

At this time, for opening remarks and introduction, I'd like to turn the call over to Toddy Burn

, please go ahead.

Yes I'd like to read the forward statement for Jacobs this morning.

The company requests that we point out that any statement made in this presentation 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 request 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 condition and results of operations contained therein.

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

And now, John Prosser, Chief Financial Officer will discuss the financial results.

Good morning.

I like to go over the financial highlights and then I'll turn it over to Noel Watson our CEO to cover our growth strategies and the outlook and review this quarter and also the outlook for the future.

If you go to slide four on the webcast, the highlights you can see there, again we have a record earnings this quarter.

EPS of $0.61 or net earnings of $34.8m, which was up about little over 10%.

We continued to have strong bookings in our backlog and we had a record backlog of $7.2b at the end of the March quarter and our cash balance continues to grow with an ending balance, a net cash balance of $152m.

As our backlog slows, our sales have been strong for the last three quarters, however, there continues to be a lag in the near-term conversion of getting work released.

Well our long-term average growth rate target continues to be at 15% per year.

Our earnings guidance now for 2004 is between $2.44 and $2.50 a share.

Going to the next slide, looking at our long-term growth history,

we continue to be very proud of.

We've added a little -- check a little charge in the quarter on this one just to highlight the fact of our historical growth rates.

And each one of these bars represents the trailing five-year average compounded growth rate for that year-end.

And you can see that even though what five-year periods you take over the last five years within well above the 15% that we talked about as being our long-term target.

Going on to the next slide, which is our backlog slide six.

It continues to grow, a good growth with year-over-year and also growth over last quarter.

And with quarter-over-quarter growth being over $100m of increased backlog both in total backlog and in professional services backlog.

Our other backlog, our construction backlog this quarter was relatively flat.

With that, I will turn it over to Noel Watson to discuss the business outlook.

Good morning folks.

I'm on slide seven.

We are going to talk a little bit about the strategies to maintain the 15% growth.

And the four things we want to talk about are the unique business model, the selected market diversity, the balanced growth that we have and foresee, and more acquisitions fit in the growth story.

On slide eight, we talk a little bit about our relationship-based business model and for those of you, who -- that are new in the phone call, we basically work in a model, we define as relationship based.

And the primary driver in our model is that we are delivering superior customer value and about 75% to 80% of our business comes from these long-term relationships.

We don't do a lot of one of a kind projects and we don't chase their lot of work just for the sake of getting an individual job.

However, we do chase individual jobs in the hope that we can bring a client into a long-term relationship.

But if you focus on slide eight for a minute what you can see is that, if we are capable of delivering superior value to our clients, and when I talk about superior value I'm doing an outstanding job on budget and schedule and the plans work adequately as it given.

What we're trying to do is give them the extra mile, so that they feel like they have really been helped in giving a competitive edge with their projects, and if we are able to do that, and if we are able to drive our client survey scores into the 90% range what we find is the tremendous amount that repurchase loyalty is created and this repurchase loyalty which is about 80% of our business, the long term clients leads to very consistent and stable earnings, we are actually getting more work with the same client on a day-to-day basis.

We really control our risk, and I'll stop the risk conversation for just a minute.

Its not that we operate a business without risk, but when we're operating in a contractual relationship with the same clients day after day, year after year, what we find is that we are able to manage our risk extremely well, and so we don't have a lot of big hitters coming at us like some of our competitors do.

Then the other thing that goes on is that it allows us to lower our cost of doing business.

One thing that comes out of all this is that if you look at our long-term relationships our top 30 clients generate 63% of our gross margin, and our top 50 clients generate 75% of our gross margin.

So, we are focused on a relatively small client base that are generating the bulk of the margin and the profit for this corporation.

Now the obvious way to grow the business is twofold from this point.

One is we get more clients into the fold and the second one is we get more of the individual client spend time.

Let's move to slide nine for a minute.

What we have here are two pie charts, one in 1993 and one for the 12 months just ended.

You can see how the dimensions of the business have changed over the intervening decade.

If you go back to 1993, you can see that 63% of our business is heavy process, petroleum and chemicals.

Today you can see that is only 37% of our business.

So, we've been extremely successful in diversifying this company from one that was totally dependant on our heavy process business for our earnings to one that has got a broad base of markets we serve many of which are strong right now and some of which are not, and I'll come to that in just a minute, but it does give us a market diversity that allows us to roll through the ups and downs in the normal capital spending cycle.

It does have the effect of reducing the overall cyclicity of our business and it helps to stabilize our individual operations.

If you move to slide 10, which is just add jump to the previous slide that shows that even though the chemicals and petroleum or the heavy process business is a much lower percentage of the pie today, it still has grown dramatically over the intervening decade and as you move through this chart you can see that hightech has become a significant piece.

We had no infrastructure business 10 years ago.

We had practically no buildings business 10 years ago.

Our federal programs business is very strong and today it stands on equal footing with the petroleum business.

The pulp and paper business was non-existent 10 years ago, and our PhramaBio business is embryonic.

So, you can see that we not only have grown these individual business dramatically during the intervening decade, but we have diversified dramatically, so we have a much more stable pad on which this company is built.

If you move to slide 11, we talk about acquisitions, we talk about the long-term growth targets for this corporation being 15%.

Some of the previous slides John went through prove we've been able to sustain that over an extremely long period of time.

But acquisitions are always a part of this mix.

What we know is that we can grow a big services business like this in about the 10% range just on internal growth, same store growth, that type of thing.

We do need acquisitions on a fairly routine basis -- fairly routine patience to make this business grow to 15%.

We made a

acquisitions back in the early part of the decade, and at that point in time we made a very conscious decision about two years ago to stop major acquisition activity, and focus on integration, and making these acquisition work which we have done.

We also paid off all our debts, and as John reported earlier have a significant cash balance in the corporation today. we are back in the acquisition hunt, and have been for about six months now.

We are looking to these acquisitions in several different areas.

We look at them on our market basis, we also look them on a geographic basis.

I have reported before but it is probably worth repeating again, we have focused on two major areas of line to business.

One is the infrastructure business.

Today, Jacobs has an infrastructure business based in the US, and UK with couple of thousand people involved in about little under 10% of our total head count.

This infrastructure business needs to double, and triple over the next few years, and we will have to do that by acquisition.

And we probably will have to make multiple acquisitions to get where we want to go because it's easy to see right now instead of 2000 people in the infrastructure business, we should have 10,000.

So we are focused on trying to make a large infrastructure acquisition, but acquisitions takes two parties to make like somebody want to sell, and somebody want to buy, and the price being right, but we continue to hunt in that area.

The other area we are extremely focused on is the upstream oil and gas.

We do have some business in the upstream oil and gas, and we acquired the Canadian operation of McDermott about two years ago.

We see significant upstream oil and gas skills.

We also have some skills in the Netherlands.

But on a global basis we remain a bit player in the upstream oil and gas business, and so it is also an area for us to focus on.

We will be focusing on exactly the same clients, than we focus on for our down stream activity, it's a big oil company.

So there is a lot of synergy for Jacobs here to move into the upstream oil and gas business.

If we would move on to the next slide, and talk a little bit about what went on in the last quarter, and I will talk a little bit about these individual markets as we go through them.

The petroleum market remained strong for Jacobs.

We had a couple of big wins during the quarter, one was the large program for Flint Hills up in Pine Bend, Minnesota in the $300m to $400m range, and the other was the construction management, and project management, and a bunch of offshore platforms work for Pemex in Mexico.

This petroleum market which is primarily downstream, remains primarily a downstream market remains very strong for us , and in fact it's so strong we've run out of space in one of our major locations, and now have taken additional space to accommodate the project we've received lately.

The PharmaBio market which is our second strong private sector market remains very strong.

The individual companies go through their spending cycles, they will have a spending period in the big pharma company, a couple of billion dollars a year for two or three years, and then they will drop back.

This is all driven by both the drive for the aging population in the western world, it's also driven by the recombinant DNA technique, and the products that are coming out of the market - out of the research and development to the market, so we had a very strong business here for the past several years.

It looks like that's going to continue to be strong, the client mix will probably shift a little bit as we move to clients we have, with capital budgets that are ascending, while other clients budgets are descending.

But overall we believe that capital spending in the PharmaBio business is going to continually increase over the next several years.

I drop down to a couple of nice wins in infrastructure, one in Riverside County where we are involved in a $500m program for the county, and one for Network Rail, which is a UK organization that's doing a lot of revamp in the rail systems in the UK.

The infrastructure business was pretty flat in North America over the last 12 to 18 months, and large part due to the funding problems that we're involved in primarily State governments.

Also the Federal government was not increasing the matching portion coming down.

What we're seeing today is some of this money is getting released, and we're seeing an uptick in the number prospects, and we're seeing an uptick in the number of wins that Jacobs is getting.

So we are very optimistic for this market is going to continue to flourish, and is one of the reasons we are driving hard for major acquisition in this area.

The buildings market remain strong, although, it's flatter in the United States than it was two, three years ago, but it's still a growth market for Jacobs.

We want to really meet hospital jobs in France, and I won't try to say it, because my French isn't that good, but it is $100m program, and we also continue to win work for the NIH, National Institute of Health.

However, the hottest market we are in right now is Federal government.

And if you take a look, we've got two major wins last quarter, one at Langley for NASA, which is almost $1b program over a long period of time, and the other one's for the US Army up at Dugway Proving Ground, which is up in the salt flats in Utah, and that contract is almost $300m contract.

We continue to be inundated with opportunities with our Federal government, a winworth rate in the last 18 months to 24 months has been extremely high, and this market is going to continue to grow dramatically over the next few years.

We have some markets that aren't so hot.

We always talk about the chemicals markets.

We saw that was 13% of our business.

It remains depressed, although, there isn't any doubt that chemical consumption is going up dramatically, the earnings of the chemical companies are going up and their stock prices responding favorably.

We believe that chemical business will be back and we'll have significant opportunities in the next 12 months.

There has been some small signs and we have some small expansion work going on, we've press released some of that though, we haven't seen significant new expansion project yet.

We also have the pulp and paper business, where we are the dominant supplier of capital programs in North America.

That business continues to be at a very low ebb, although, even the pulp and paper company stocks and earnings are doing much better.

The hi-tech business, which is extremely focused business for us, continues to be reasonably flat at this time.

If you move to my closing slide, and then we'll throw it open for questions, which is, slide 14, we believe our business model and our adherence to it, gives us a unique advantage in the marketplace.

That's not to say other business models don't work, but we follow our business model very closely, we drive a lot of our business through repeat clients and our long-term relationships.

And going back to what I said before, we are to get 75% of margin out of our top 50 clients, and that client list is not changing a lot year-to-year.

It grows a little bit every year.

We have very diversified markets, we have very diversified geography, and we provide a wide range of services to these clients.

As John went through earlier, the balance sheet is good, the cash balance is $152m, it is strong, and we continue to focus on growing this business 15% a year.

With that said, we'll throw it open to questions.

Thank you sir.

The question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touchtone telephone.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment, We'll proceed in the order that you signal us, and we'll take as many questions as time permits.

Once again ladies and gentlemen, star one if would like to ask a question.

We'll take our first question from Michael Dudas with Bear Stearns.

Good morning everyone.

Hi, Mike.

First question, relative to the mix in the lagging of the release of revenues into the P&L, is that something because of the end market mix in the customers that you are serving now as opposed to the past couple of years, is that what's causing it or is it still just discreet, specific couple of major clients just not getting the revenues through to your P&L, and is there a catch up to that as you move through the next six to nine months?

There's a couple of things Mike that's pulled us a little bit, we've -- let us say we won a lot of Federal government work, and but we -- and some of the work we won, we haven't been able to even press release because there has been protest floating around.

We've been involved in more protests in the past 18 months than I can remember, the only one that was very public was the one we had, when we were talking about the New England turk ( Phonetic).

Well, we finally got that settled and work has began on that contract.

So, we've had some big Federal wins held up, because protest which we haven't experienced before.

Okay.

Now maybe that's because we are bigger in the Federal government and we are going to get used to this.

I don't know, but anyway that surprises a little bit.

We've also had a big low sulfur diesel programs on slow --

No.

And the guys on the diesel programs remember now, they don't generate a lot of profit for big oil so they need to be very careful how they spend their money and they had spent much longer in the early phases of these programs than we ever imagined.

And so will there be a catch up, yes this work will all roll through the books.

We've only had one slow down on a project of any consequence in the system in the last six months.

So these programs are still moving, but they are slow go.

But all the forecast we have looking at today, say they are going to tick up fairly strongly as we move forward toward the end of the year and on into '05.

And secondly to follow up with that, you've mentioned historically 10% organic growth and you need the extra for acquisition, on a normal year because of the catch up period and if you continue to have very -- looks like you have very good strong new order business, new records of first six months of the year.

Could without the help of an acquisition get you closer to the upper end of that range?

It is hard to say right now.

It would have to boom a little better than we thought.

But we got to jump 15% organic growth last year without any acquisition.

So, it is hard to say but I don't think we will get to 15% without an acquisition next year but we'll certainly get above the 10%.

And my third question is, looking at the different acquisitions that you have on your plate, is there any difference to the acceleration or deferral of the contribution to Jacobs whether it is in a heavy process infrastructure, I mean tight work is there, evenly - buying bodies and backlogs, is there any difference in how could better assimilate into the business to help to get to those targets?

How closer is, Mike I mean a couple of the acquisitions we've made, let's go back to the historical one we made in Europe, we bought a company that was losing money hand over fist.

It took a while to get that solidly profitable.

So, if you buy a company that is really in trouble, it will take a while to get it solidly profitable.

If you buy a company that is really generating solid profit line going in you know it is accretive almost immediately.

So it depends on the nature of the acquisition less than it depends on which market it is in.

Any sense of the nature that you are hooking at or

I am not going to be anymore precise in that.

Thanks Noel.

It is okay.

We will take our next question from Sanjay Shrestha with First Albany.

Great.

I have a couple of quick question here guys.

First one on the low sulfur diesel, is there like some sort of a time line where these guys have to absolutely move forward, given that the award being released has been somewhat slow?

This is Tom Hammond.

The way the regulations are awarded for diesel is that the mix from each company have to achieve certain targets.

But if the mix -- the diesel products are sold in the multiple markets, so an oil company can abandon say on road diesel and not make low sulfur diesel and sell into the off road market.

So, there is some flexibility in terms of which markets their products go to and also in terms of blending at the refineries in the terminals.

But there is an absolute date.

There is absolute dates for the low sulfur diesel for the on road products but they could choose not to sell on road product.

And some of them right now are questioning whether they should spend a lot of money in a hurry just to enter into what is probably pretty -- for them, a pretty marginal market.

But I think that was driving bit, but I think the absolute date out there are not fixed for the diesel.

Is that right?

Yes.

And so there is a drop in that data if you are going to market diesel to the truckers.

And that is the large portion of the work we are looking at.

But remember we are also going to get regulations on aviation and off road before long.

Okay.

All are going to go together sooner or later, but it is some of this uncertainty that made these programs drag.

Okay.

That's great.

And given that these things, low sulfur has to move forward, I mean I am sure the contract created with the Federal Government has to move forward.

The chemicals outlook could potentially get better here over the next 12 months, kind of a follow up on Mike's question actually, we may not get to that 15%, but would it be fair to sort of say that maybe the earnings growth in the fiscal '05 is likely to be higher than what it might be between fiscal '03 to fiscal '04?

Yes.

Okay.

That's great.

And another question here on the gross margin side, I mean it is a fantastic improvement here.

Is that mostly the mix issue or could we sort of expect the gross margin to at least you know, sort of like flatten from this 14.9% range or would it kind of come down once we get more into the field construction side of equation?

It will probably come down, when we get more into the field construction, you are right the margins looked very good last quarter.

That's partly because of the revenue stream, the other is the construction revenues are very flattish even though the proservice revenues were up over the last 6 to 9 months, and so I think what we're seeing there is that the margins wouldn't actually trend higher on proservice only, because remember proservice not only carries higher margins but it also carries higher cost, and so when you're looking at the gross margin numbers, even if you look at the bottom line numbers to a percent of revenue, it is very good for a company in our business.

Absolutely.

Absolutely and one last question.

Is there any more update in terms of the opportunity in the Canadian oil sands market.

Yes, I think we still see the oil sands market as quite a strong opportunity for us.

We've got a couple of customers who are continuing to spend pretty aggressively, although they are spending in smaller increments.

They are not releasing multi-billion dollar projects anymore.

There seems to be a good ongoing flow of work, so we continue to be very optimistic of our operations in Calgary and what they will be able to produce going forward.

In addition we've got this gas plant work that we're doing in a variety of places around the world.

That also looks pretty strong to us.

So, as we look at what it's going on in Canada for us, that is a pretty upbeat part of our business.

Okay, that's fantastic.

Keep up the great work guys.

We will take the next question from Lorraine Maikis of Merrill Lynch.

Thank you.

Noel, we had a $172m of cash on the book.

I know that you are marking that for acquisition, but is there a certain threshold that you would reach that you can say we've enough, now it is time for us to buy back from the stock?

We haven't had that conversation, but we'll have, if the cash continued to build Lorraine.

We'll have to at least at the board level have a conversation about either buying back stock or dividend.

The dividend laws have change and I've told the Street a couple of times that one of these days we'll sit down at our board and we haven't done it yet.

Now that the dividend laws are in place and the tax rates are different and we'll take a look at -- is the dividend a logical outcome of all this, my personal opinion sitting here today still is no, but that doesn't mean that we may not change our mind, and if we've got enough cash, I think we still, John and I have a standing authorization from the board to buyback stock, but we've no plans to do so right now.

We think the best way to handle the cash is to prudently invest it in acquisitions and grow with it.

We're still a long way from maxing out this company, and I mean a long, long way.

And so we've been just sitting on this cash, letting it accumulate looking for a deal that'll be very accretive to the company and good for the shareholders and good for everybody involved in growing with it.

And so our real drive is to put that money into an acquisition.

However, the theoretical question that continues to build and build and build, we have to do something with it, and the answer is probably yes.

Okay, and then bringing your guidance down from last quarter to this quarter, just wondering what the couple of major things were that changed during the quarter that made you realize that you wouldn't be as strong as you were expecting?

Well, a couple of things happened.

We went through the air and it's clear now that we're not going to get any acquisition checked this year.

Okay?

We knew the year internally was tough all along, but we're clearly not going to get any significant acquisition check, number one.

Number two, we are still going backward.

I think I answered Michael Dudas' question a few minutes ago.

We still released both in the refining business, particularly the Easter programs and some of these federal government programs which we encountered on winning it and we did win by the way, and that still hasn't gotten started, and so those two things and we've had some of that happen even in the last quarter that have dragged this out.

You know, another quarter on these upticks, but as we look at the forecast coming in from the system, everybody has got nice forecast and nice growth out there, but it has moved out about a whole quarter or so.

And then the final question, I guess.

What gives you confidence today that we won't be on the third quarter conference call lowering guidance again?

We're not going to have to lower it for the year I hope.

I would like to think we got that right, okay?

Okay.

Let's talk about that honey.

We sure are tired out of this quarter, because we don't like to do this and so -- go ahead John.

One of the things I think that gives us some confidence, if you look at our sales bookings for the last three quarters now, they've been well above the work operate, and so there is a way of building up that has got to come into revenues eventually.

I think it's actually somebody said it before.

We had a good, what is it, 9 months or 3 quarters sales.

And sooner or later, I have got to work its way through the buck, it just has to happen.

Okay, thanks.

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

Good morning, everybody.

Hi, Rich.

Let's follow up on that a bit.

We talked about the sulfur awards as being delayed etc.

How much of your backlog is involved in work in that market, that's getting pushed back, or isn't moving as forward as fast as you would hope?

I can't sit here and even answer that question, Rich.

I don't know but it's a fair piece of our business.

Go ahead Tom wants to try this.

Go ahead Tom.

You know, nothing is being - the programs themselves are going forward.

What has happened that's a little surprising to us, is that a typical logic, take a hypothetical $200m refinery program.

We probably stand from 3 to 6 months on what we would call a front-end engineering activity, which is to finalize the scope of the project and provide enough details for the client management to approve the project and release all the fund.

What we are seeing in any case is that instead of spending 3 to 6 months on this front-end activity, a lot of our clients are spending 6 to 12 months and so instead of releasing project teams with say a couple of 100 people on them, we are sitting there using 30 or 40 people to do this welding and engineering activities as opposed to moving into the more intensive activities, detailed design and procurement and obviously they told they know about construction.

I think one other thing to happen Rich; it's some kind of statement here.

Some of these diesel programs came on right after the gasoline programs were moving forward.

And I think it is the time maybe we thought that they showed up a little early because of the way the deadlines were set.

Well, now it's clear with what's happened that they understood what they were doing and our clients normally do.

They knew they had a lot of study work to do before they finalize the program and got to the optimum.

But I think all of this, you stick with it from a minute so.

As such deal with the refinery business in general, both in the diesel programs and the gasoline programs and the sulphur program, the fact remains this country is out of gasoline.

All you got to do is drive to the pump and say that you ran out guys.

Margins in the gasoline business are higher a day on steady basis than they have been in decades.

And so there is an issue working here, that not only talks about how we are going to get results from out of them.

The diesel or the gasoline or whatever we are going to do, but where is the incremental capacity going to come from, and remember we have got 3 complex clean fuels programs in this country that make just a simple importation of raw gasoline from other parts of the world difficult.

Not impossible because they are all -- there are carbon refineries in places like St.

and even in Humberside in the U.K., they can't import gasoline to the US.

But the bottom line is this country is out of gasoline.

Hopefully, the eventual uptick in that business, it is not too far over the horizon, but what do you do with this manpower and in the interim you were talking about on the not having the full group working on jobs because of this delay in releases?

Well, a lot of this launch, at this point in time, what we are doing is delaying hiring programs.

So it's not about a bunch of manpower sitting out with nothing to do.

This company has always people fully employed.

Is there a risk that, if you are sure that you are not the only company experiencing this is a risk that when these projects move forward that there's such a rush for people that-- what level of squeeze do you see possible on the manpower side?

The way the manpower will get squeezed in the heavy process business, if we had a chemical cycle riding on top of the refining cycle.

The chemical is --if we end up having a chemical cycle comeback strong, let's say not fine.

We will have manpower squeeze in the business.

Okay.

I can only wish that.

One another question about the backlog.

You have the two good bookings, one very large booking on the federal..

Part-7 Ticker-JEC

Besides, obviously you don't book all of that into the backlog.

Can you give us a sense of how much work that you have been awarded, these longer-term projects that you have been awarded?

Could you give us a sense of how much you haven't booked in the backlog on those jobs?

Our policy or the way we handle our backlog on the big pedal programs, pick on the O&M operations kinds of contracts, which these were, is that we book just one year's worth of revenue at a time.

So, it is always 12 months rolling forecast and even on the, more task order or scope kinds of contracts, where we book the full contract, we don't book any follow on options or anything other than the base contract year.

So, I think both of these, you know, I think that big one was an O&M type contract.

So, you know it is really just a 12 months at a time that gets put into backlog.

I mean do you book 12 months every quarter?

We always have a rolling 12 months, you know.

So you always have that rolling 12 months.

You don't work it down to zero and then book another year's worth?

No.

We book it every quarter.

Only if were coming up to a rebid or at the end of a contract, as long as it is, you know, all indications or even if there is a renewal period, if the client hasn't given us notice that they are going to up for rebid and such or given us notice that they are going to continue, then we will use that and just to keep an appropriate amount in the backlog.

So, we were not running it down and then booking it on the anniversary.

Unless, there is some indication that, if you feel it is going to rebid or there is going to be a material change or something like that.

Yes.

I think those are back, both the Dug Way and not the Dug way, but their own thing and then the big AEDC win we got last year, which was $2.7b.

Right.

Those things just to go in on a rolling 12.

Okay.

All right.

One final question.

Looking at your SG&A costs, yes, I have looked backed over the last few years, second quarter usually lifts up from the first quarter, but you know, the numbers just seem to be a little high to me, relative to what am I accustomed to seeing at the company.

Could you give me some guidance here on - - you know - - what's occurring on the SG&A side?

Well, as you know already, we sit on our costs pretty hard, but were laughing here at the table little bit, because we had all the senior management in this week and we called them exactly what you just said.

Little money leaked out the door last quarter and we need to fix it and we will fix it.

Okay.

So, it is not a structural change per se?

No.

Okay.

We have got some sales activities going on.

We were chasing a really charge contract that is impacting our sales cost right now some and we haven't made the necessary adjustments in the rest of the system to accommodate that, but we were working on that as we speak.

Okay.

Very good.

Rich - -

Yes.

For your information the structural thing that goes in the first quarter and second quarter is because the Christmas holidays and hence the first quarter always has a lot of holidays, which impact the G&As.

Right.

And where those fall and how they fall into the calendar months and such can even impact a little bit from one year to the next or where they fall in a week, how much vacation is taken around, can have an impact of a - - you know from one quarter to the next.

So, but there is nothing structurally changed or certainly nothing changed in our focus on G&A.

Okay.

All right, thanks very much.

We will take our next question from Tom Ford with Lehman Brothers

Thanks, just continuing on that question around the cost side, John, I was just wondering, looking at the gross margin trend, we had a step-up there and I know looking in the past, sequentially you see the same thing and I am wondering is that just - - is there anything other than seasonality and sort of relative revenue mix between front end and field behind that?

Those are the two primary things.

We always have, you know, little things that can impact the flow from quarter to quarter, but you know and the fact, you know, larger growing percentage of our business are, you know, fairly large percentage of our business about 35% to 40% is for various government entities, a lot of which is reimbursable and the rate of reimbursement floats with our actual G&A.

So, you know, that trend over time, fix up some of that slowing as well.

Okay.

And going back to another question about the backlog, I don't think you guys quantify, in terms, you know, expected burn rate, has that changed notably over time here?

You mean the burn rate and backlog?

Yes.

You know if you look at your backlog and what do you think that you can burn in the next 12 months, I think, has that slowed, has it remained steady?

Over if you looked out say over the last three or four -- if you look back over the last three to four quarters?

Well, you know it is a contract-by-contract activity and one of the reasons for instance that we only backlog a year of the O&M government contract is that would totally distort the backlog, we'll be backlogged a billion dollars.

Because it is a 10 or 12-year burn and the same was true with

steel which I think is a 12-year burn $2.7 b.

So then the mix comes down to the private sector work used to burn through faster than the government work.

But with some of the slow go's we had in both our big refining business which Tom explained to you and we have had some of the same kind of hiccups in the pharmaceutical business which has had -- the programs in the pharmaceutical business for Jacobs have gotten larger in the past five years.

And where we are either the dominant supplier and there is a guy down the street that plans to be the dominant supplier.

But let's just say we are the dominant suppliers.

So we are doing bigger programs.

These things have a much slower start because when these big pharma companies start to look at $300m to $500m at a pop,

helping a couple of pharma companies open up grassroots sites right now.

These things are evolving much more slowly than the smaller programs.

So I am not trying to double talk you here, but what I am saying is these larger pharma programs are developing more slowly.

We have explained why the refinery programs are there and we have also popped a couple of jobs in the backlog.

Not this quarter because I don't think we had any big drops in the backlog in this quarter, did we?

Nothing significant.

But a couple a quarters ago, we dropped in a big government contract from the air force which comes as a long period it is going work off very pretty slowly, so we have got all the different push-pulls going on in the backlog.

But I would say outside of it the refining work moving more slowly and the pharma projects being bigger and therefore taking a longer time in gestation, the government part of the business hasn't changed.

And so we have always once a year dropped in a big contract someplace.

That will be slow going and we have been backlogging just one year in the over end as long as I have been here so.

I don't think there is any change historically.

Right.

Okay that's helpful.

Thank you.

Going back to your comments on the end markets.

I know that you had said -- it's interesting to -- you had a few awards from chemical space and so I just thought it was kind of interesting that you are still referring to it as slow.

I guess -- have you seen anything even, you know incremental change there?

When you say slower are you really talking more towards the commodity side?

Well as you know the chemical market is a huge market.

As you know it is $2t market or something like that depending on what number you want to use.

What we have seen is an up tick in the de-bottlenecking and that type of project.

And I think we put out a press release on polypropylene de-bottlenecking here.

I think that went out here during the quarter and that is the kind of things that are coming in right now.

But nobody is running forward right now and saying we've got a build a new train for polypropylene or polyethylene.

They are starting to talk about it but it isn't happening yet.

And so we don't have that going, but what we do have going that is good and encouraging is that if you go look at the stocks of these folks and you go look at their earnings, they are better.

But we don't have any, which you would call big nameplates, major expansions on the books that I know of.

Do we?

None.

Okay and then just lastly.

Your reference being in the acquisition market the last six months, but I know one of the things that you talked about in the past was that it took quite a bit I guess in terms of jump-starting it.

And so I am just wondering, do you think you are at the point here in sort of ramp mode to the point where its -- splitting hairs, but I am just trying to get a sense from you if you feel that you are actively out and looking at this point versus I know just a couple of months ago you had noted that it just took quite a bit to sort of get that program restarted or prime the pump if you will.

Well I think that's right, I said that in the last quarter, I said that in one of the conferences, I can't remember.

And that's true.

We think that the pump is prime.

I mean we are very active right now.

We are having conversations, but they haven't gone beyond that.

So when you say --

Remember you got to -- going back what I said you know.

Somebody has got to want to sell, because we are not going in and make them all wealthy.

That's good to hear, and just to clarify - when you had noted earlier no earnings impact in '04 essentially, I mean you are not saying that there is no transaction to occur, it is just that it is to the point now or it is still late that we are --?

We are only half way through the year.

Yes.

If I announced the deal today and it will be July before we get it done.

Right.

I mean that's what I am saying.

I just wanted to clarify.

Great.

Thank you

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

David Yushak, Sanders Morris Harris.

Good morning.

Hi, great quarter guys.

The question I want to go back to - Noel you had mentioned earlier about your customers and how much profitability at different levels of measurement.

Has that list of customers been fairly dynamic over the last couple of years or are they just - or the name is just kind of moving around as to who is the most profitable as far as contribution margin at any point in time.

I am just kind of thinking if there is any newer customer that is going to come in or will become more important, or is it just moving the people around.

Well.

Two things, first of all let's take what I say - let's take a list of thirty, which is 63% of our margin last year.

That list of 30 has not changed a lot.

There are a couple of adds to it.

What happens within that list of 30, the top 10 in that list will change dramatically from year-to-year except for the federal government business.

Remember I have got a couple of our federal government clients like the air force and the Department of Energy and now NASA of course is becoming a very large customer for Jacobs.

So the government guys will stay pretty steady, the private sector guys outside of the big oil guys.

The big oil guys remain there relative positioned generally, although they also spend in cycles and some of our other customers, particularly our pharma clients, they have all moved to number one on the spend list for the private sector and the gross margin contribution and number five or six, almost year-to-year depending on the kinds of programs that are going through the system.

So those parts are dynamic.

Now we are adding slowly to this list every year, and so if I go back three or four years now and I look at the relative contribution, there will be on the thirty lists, there will be four new folks on the list of 30, but the relative margin contribution will almost be -- will first of all be different and the top contributor will be different.

The other thing is all of them, almost will be contributing more margins today than they were four years ago.

As you look at your new customers entering that top 30 become more important, relative to maybe lack of acquisitions over the short term then as you may end up spending more resources to become more active in new customer generation?

Well, there isn't any doubt the new customer generation becomes more important, becomes very important, once you use the word very.

And so we are actively working several fronts to bring new customers into, they won't be in the top 30 list anymore, maybe they will be in the top 35.

Bring new customers in there and by the way remember bringing new customers into these longer-term relationships.

This is an evolutionary process that takes -- it isn't measured in the terms of months, it is measured in the terms of years, and our big successes have been with clients that have evolved with us over a period of years.

So we have got numerous clients right now sitting there, who are generating a fair amount of margin for Jacobs that don't -- still we haven't developed them to a point where there is that real bond and trust where they will really move into a permanent relationship with us.

So that is an ongoing process.

As you look at that kind of population, does that look very comfortable to you as you see the potential coming out of that, does that look like it could be as dynamic as you said you mentioned four to five new guys come in.

Of course I can understand how slow that could be from the way you do business.

But I think as you look at your profile now, next to the acquisitions, it would seem customer development is probably just the key criteria right now?

Absolutely, but it is really development of existing customers.

The universal customers for us is not a universe of unknown customers.

It's people who are doing some work for today that we are going to do a lot of work for in the future.

So but projects become more important than customer growth.

Well absolutely.

As you look at the potential of new customers coming in with their projects versus existing projects from out of our current population of the top 30.

I guess I'm just thinking what is more relatively important?

Well, we give favored nation treatment to existing customers.

That's the way we deliver this superior value model.

And so, well I don't like to say that broadcastedly, but one of the reasons that we have a trusting relationship is they trust us to set these jobs well.

But existing customers that we're tying to bring into this relationship, we try to give the same kind of treatment.

But there was a way - the way we make this work in the longer run is, we've got to give very good treatment to the existing client base that fall into this long-term preferred relationship.

One last question on the upstream acquisition opportunities that you are looking.

Would those be new customers or extensions of customers who are doing things?

Right now what you have, you just need to need to get them a platform for upstream?

Oh, it is existing customers who we are looking for now.

We just need to get them in our upstream business.

Okay.

Thanks a lot.

Okay.

We'll take our next question from Christopher Martin from Credit Suisse First Boston.

My question has been answered, thank you.

We'll take our next question from John Rogers with the D.A.

Davidson & Co.

Hi, good morning.

Good morning John.

Most of them have been answered, but just a couple of quick things.

The other income in the quarter, what was that?

Actually, we generated that from the sale of some real estate in the UK.

Okay.

And if you look historically, our other income goes up and down as we've sold various miscellaneous assets and such, and we'll continue to do that.

Okay.

And, but I am assume you aren't assuming anything significant there for the rest of the year?

I don't think we have anything..

I mean, in terms of your guidance?

No.

Okay.

Okay.

And then the other question I have though is, if I look at your revenue over the past couple of quarters, it's been declining and primarily on the field services side, and is that just still just a timing issue the way these projects roll out, because you contrast, I know your backlog is climbing, but the actual new work bookings are - I don't know relatively flat just, with lower revenues, the backlog pops up and, I'm just trying to get a sense, what you see going forward?

For that we have to go ahead of couple of things as that I think we need to understand, we moved off some very large projects in '03 in the construction cyclone and a lot of the clean gasoline kind of came to an end as it's a big semiconductor work.

We are not in the field in any of the diesel work now.

Is that right now?

For all practical purposes or even though we've got a fair amount of construction work and we've got a backlog, we're not in the field in any of that work right now.

And that work isn't going to fields at the end of the year or early next year.

Next year?

Next year.

Okay.

And so, I think that you are seeing the natural lag as we move from one market to another and it's pretty predictable cycle.

Okay.

Would that then imply for the rest of the year that you're looking at essentially stable revenues of these levels?

I think where the stable revenues were up floor service revenues grew a little9 bit.

Okay.

We've got a lot of activity going there, but the uptick in revenue - - at a very, very top line which is always a

on our business, because that uptick will have to have more construction work fielding, which is going to happen in '05.

Okay.

And on acquisition?

Obviously an acquisition pops the revenues.

All right.

And I know you don't - it's hard to predict this and obviously margins are a lot more important, but in terms of this, the number of projects that you are out there looking at/or potential target projects, can you just frame it?

Or else is that getting larger, is it shrinking, is it flatter, is it - you are hopeful that it'll get bigger in '05?

Well I think by and large -

I mean in aggregate.

Yes.

Most of our business is, we see the prospect list improving.

Okay.

Okay and that's for both the technical and the construction work?

Yes.

Okay.

Great.

Okay, thank you.

We'll take our next question from Mercy Anon from BancOne Investment Advisors.

Hi, thank you.

Can you hear me?

Not quite.

Is that better?

That's better.

All right thanks.

I have a couple of questions, one along what you were talking about earlier with the gasoline shortage, I just saw the release this morning where one of the trucking companies was saying that the diesel fuel on the West Coast was $0.42 a gallon more than the national average and that is generally closer to $0.10 a gallon.

So, when you say these projects are being pushed out, you get any indications just because you can't afford to close down, because there truly is a volume shortage?

No, that isn't affecting the project and yes there has always been a spread between the gasoline and the diesel price in California and the rest of the country and it is worse today.

One of the reasons is that the product that's consumed in California is unique.

It's mostly made locally and it is difficult to ship in.

Secondly, is that the population in this State is growing and we are consuming more and for all practical purposes there has been no refinery capacity added in California for a long, long time and quite frankly this is what Noel alluded to earlier that the processing capacity of our domestic refinery is not producing as much as we are consuming, and there's a difference in product imports and it is starting to stretch this country's systems and the world systems.

One is the rest of the world is consuming a lot of petroleum products, especially like in China and so there is a lot of flushing around out there ready to come to the US.

And then secondly, the unique nature of our products as compared to -particularly the products that are consumed in the developing world.

I mean it is just a lot easier for international refiners to make the products for those markets.

So, eventually somebody has to give, I mean we could add some refinery capacity either in this country or somewhere else, or we could start buying vehicles that don't use so much gasoline or diesel.

I mean that's it in a nutshell.

And then when you look at the push out in these diesel projects.

It looks like some of the other suppliers, for instance the hydrogen producers that are going to need in these low sulfur programs, it looks like they're already set to ramp up.

So, do you see this only at the refiners and that the other parts of the project have moved forward and so they are on different time lines at this point?

I think we are just talking different language, to be honest with you, I think everybody is set to ramp up, we just need to get it ramped, but I think they are all tied together

.

Well, the hydrogen - yes, a lot of the projects that we are involved in have a hydrogen plant as part of it, but that's somewhere between 10% and 25% of the total project that we are looking at.

It isn't as vague an event as the overall event, but there is going to be a few hydrogen plants built as part of these programs as well, it will just go lot south.

You are talking about captive gas though you are not talking about pipelined gas or anything as for as, I mean hydrogen gas.

Yes.

Okay.

Most of these.

That will be the case for most of these refinery projects.

Okay and then your issue with the chemical companies not increasing CAPEX.

Would you say that you are seeing more of that with your chemical companies that have a high exposure to natural gas cost than other types of chemical companies?

I think it works both ways.

I think first of all the chemical market has been down and it is naturally a cyclical market and so it will come back.

We do have the natural gas issue, it's the secondary issue which may drive the chemical projects to different places, so the gas issue and I don't know what the gas is trading at today but I guess in the $5 or $6 range.

You might know better than me, but that becomes at a very high price for the chemical business and in the longer term it may drive more chemical business to the gas supplies.

So, I think two things are going to happen.

If we continue to see high gas prices in this country, we saw everywhere from a buck and a half to two and half for several decades, and now we are in this $5 or $6 range.

It is going to generate a lot of stuff.

It is going to generate a lot more gas explorations, it is going to generate more gas pipelines.

It is also going to - if it continues to stay there.

Some of the new chemical plants are going to built at the well, and in the Middle East, go to the Far East or some place like that.

Okay and speaking of the shifting customer base.

You know, I have been hearing about some very large complexes that are getting built in China especially on the chemical side.

I can't remember what's your exposure to China or do you have any...?

We have very little.

We are well aware of what is going on, in fact we are the banks engineer on one of those, but in general, we've had a couple of customers go to China, but we are not being pushed there by our clients, so some of these big clients we have, and I am talking about -- you know who our big clients are, or you can just go back to the press releases.

If some of our big clients made a major move in China, we would go with them, but right now, the guys we are working with are looking at other places, you know they have the big deals going in the middle east and they all went on hold a couple of years ago and that is particularly true in Saudi, where they look like, they are going to put the ton of money into Saudi on the chemical and the gas business.

And so it is a little uncertain, where the big spends are going to be, but we're in lockstep with about four of these big oil companies, doing a ton of work for them.

And if they decide they want to go some place, we will be there with them.

When you look at what is going on China, it looks like there is a preponderance of joint ventures as a way for companies to go in there.

Are your customers going in there on joint ventures and then happened to work with indigenous E&T companies?

I am only exposed to one of those.

And you are right, they are in joint venture with the Chinese, and they are doing work both offshore and on-shore, and the design institutes are doing a bunch of the work, yes.

Okay. and you are saying that the design institutes in China are doing this work?

Yes.

Okay. and then one more, paper and pulp, in that of line of business, are you seeing a big difference in the amount of interest in projects by customers that specialize in different grades, and I guess specifically, it would seem as though there is lot more opportunity for container board in the US, one the grades and are you seeing demand there?

Not really.

Okay, so you are not seeing much difference or you are not seeing any demand there?

A very short answer, but we see a fair amount of activity still in consumer products' grades like towel and issue.

We are seeing some interest and activity in very high speed machines for free

, but we are not seeing a lot of containerboard activity at this point.

Thank you.

Once again, ladies and gentlemen, star one if you would like to ask a question, will take our next question from David Kallus with

.

Mr. Kallus your line is open.

David Kallus are you there?

We will take our next question from Sandy Goldman with Heartland Investments.

Hello, I think they quit.

We will take our next question from David Yuschak with Sanders Morris and Harris.

Hello, follow up on the protest that you had indicated you are getting out of your federal awards that you have won, are you finding that the competitive landscape for larger deals is getting tougher.

So, you have to spend more resources, whether it is in the federal side or other parts of the business that it is just taking more to get these bigger contracts won as well as they can take longer because of that?

We are taking longer, we are very unfamiliar with this, but our government business as you know is growing fairly dramatically and you can see from some of the big wins we had we had probably stepped on some toes.

But as I go back and talk to our guys that are expert in this business, they say the number protests going at the government level aren't a lot different than they have ever been.

At the federal government level, and these are federal government contracts.

It is just that we've gotten caught up in them and it is a new experience for us and it does delay the work.

And so I don't think there is anything significant there, accepted in both cases, where we are involved in protest today that have not been adjudicated, we have bumped in and coming out.

And so we are the new kid on the block, and there have been protests.

As far as commercial business, is it taking more resources there to try to land the bigger jobs too, or is it just needed -- more economic activity...?

No, I think it is just taking more, there is going to be more economic activity but on the private sector side, because of our long-term relationships, our real sales activity goes into the relationship and the value equation we are delivering for the client on the current work.

Current work well, we get the next job, it is a pretty simple formula.

I appreciate it.

We will take our next question from Tahir

with Lehman brothers.

Yes, I hope all is well.

Good to know that.

I just had a couple of questions, number one, would it be possible to get a rough estimate on the pass through point end in terms of revenue and secondly in terms of G&A, and this is a follow-up I guess of the earlier question.

Do you see a return to a more normalized level of now let us say 110, 111 as opposed to 115 for the rest of the year?

For the first question, now that detail will be put out in our 10-Q.

We don't go beyond what we've already presented as far as giving additional detail.

On the second, I don't see the G&As just like that coming down, but we would hope that they would - - the growth would be relatively flat over the next few quarters.

Right, okay.

Thanks and just another couple of questions.

You mentioned earlier on that you have run out of space on one of your project and it was going at a very fast pace.

Has that also had a drive on the quarter or is that not a significant contributor?

No.

Not at all.

No.

That's just future good news.

That's what it is.

Okay.

Great.

And just in terms of Middle East, has any of the uncertainty played in terms of burn rate or perhaps in terms of security cost?

I don't believe that it's had any real effect on us.

You know, we're not in Iraq , we're not in Afghanistan, while we're doing some work for Saudi Ramco in Canada and we've got some phosphate work for the Saudis, but we haven't had - what's going on has not had any real effect on us here.

Our in country involvement in the Middle East is very low.

Okay.

Good.

Thanks.

That helps us a lot.

Thanks a lot.

We will take our next question from Steve Knoll with Imperial.

Good morning gentlemen.

Good morning.

Just a quick question.

With respect to the markets, it looks like there is a pretty optimistic outlook and that's not coming from you, that's coming from several sources recently, and there seems to be a concern with manpower and you have got a question earlier on your relationship with customers versus your nonrelationship with customers, and how that would - what would happen if you had decide and?

Is there an opportunity to perhaps raise prices with some of those nonrelationship based customers in the event that happened and what opportunity can you see coming from that?

We talked about that a lot.

The answer to your question is probably no.

Obviously, if we got in a real shortage of manpower, let us look ahead and let's put a chemical cycle on the refining cycle in the Gulf Coast, and if the question is will the prices go up, the answer is yes.

We are not going to raise it very much in a relationship client because those are long-term deals and we go through thick and thin with those guys but for that - you know 25% to 30% of our work that isn't tied up in some kind of long-term deal and we did get the people to punch, the answer is yes, the prices will be up all over country.

Okay.

Great.

Thank you very much.

Before I turn the call back over to Mr. Noel Watson, Chief Executive Officer, I'd like to remind everybody you may listen to the rebroadcast of this conference at 2 PM Eastern Time today through April 29 at midnight by dialing 719-457-0820 and entering confirmation code 641242 on your telephone.

At this time, I'd like to turn the call back over to Mr. Watson for any additional or closing remarks.

I just want to thank you all for you attendance and your support, and if you got any future questions, give us a call.

Thank you very much.

That does conclude today's conference.

You may now disconnect at this time.