雅各布工程 (J) 2004 Q3 法說會逐字稿

Good day everyone and welcome to Jacobs' third-quarter earnings conference call.

This call is being recorded.

Today's presentation will be available for replay at 2:00 Eastern time through August 3, at midnight.

You may now access the replay by dialing 719-457-0820 and entering the pass code, 786079.

Again, 719-457-0820 and pass code, 786079.

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 introductions, I would like to turn the call over to Jules (indiscernible).

Thank you Steve.

The Company requests that we point out that any statements that the Company makes today that are not based on historical facts are forward-looking statements.

Actual results may differ materially from the forward-looking statements.

For more information concerning factors that could cause such differences, the Company requests that you read it's most recent annual report on Form 10-K for the period ending September 30, 2003 and the most recent Form 10-Q for the period ending March 31, 2004, including in each case the management's discussion and analysis of financial conditions and the 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.

Now I will turn this call over to John Prosser, Chief Financial Officer, who will discuss the financial results.

I will go through the financial highlights for the quarter and then I will turn it over to Noel Watson who will go through the business activity for the quarter.

Going to slide 4, you can see that we did have reported earnings per share, diluted earnings per share of 52 cents on net earnings of 29.9 million.

These were right in the middle of the range of our previously issued guidance.

We did have a very good sales quarter with strong sales activity resulting in a backlog of $7 billion at the end of the quarter.

Backlog is after adjustment for about $310 million for items previously reported items that were taken out this quarter.

Just a brief breakdown of those items, the first thing was about $20 million that was taken out for the project that was canceled that we had announced on our earlier conference call.

This was in its early stages of engineering so we had not booked the full value of the project in backlog but the amount that was in there that was taken out was 20 million.

There was $150 million related to procurement activity on a project that the customer has decided to do that on their papers so that it won't be going through our revenues.

This has virtually no impact on our income because these are just pass-through costs.

Then the third item was we did review all of our large Federal task quarter contracts which we do periodically and looked at the capacity of these projects and contracts -- activity levels and get closer to the end and found that there was about $140 million worth of activity that would not be utilized, so we did make that adjustment.

At the end of the quarter, we had net cash balances of 146 million which is in line with previous quarter.

Looking forward, our guidance for 2004 for this year is between $2.22 and $2.28.

This is unchanged from our earlier guidance after reflecting the third-quarter results.

As we promised since our last conference call, we're looking into 2005.

We are looking for preliminary guidance in the range of $2.40 to $2.70.

This is kind of a total look forward including acquisitions activity that we previously announced.

Going on to slide 5, just to touch on this, this shows our earnings history in the trailing 5-year compounded growth rate while this year has flattened out in line with what we talked about previously, it is something we are very proud of in our long growth and growth rates.

Where I touched on the backlog, but this also shows the professional services backlog which continues to grow year-over-year and even with all of the adjustments, even the total backlog was up nicely from a year ago.

With that, I will turn the call over to Noel to discuss the quarter results and looking forward.

Thank you, John.

I am on slide 7 now talking about what we're going to talk about.

We're going to talk about our unique business model.

We're going to talk about market diversity.

We're going to discuss our balance growth and we're also going to discuss acquisitions.

Let's move on to slide 8 where we are talking about our relationship based business model.

We try to explain our relationship based business model is our whole purpose in life is to deliver superior value to our clients.

We deliver superior value to our clients which creates repurchase loyalty as indicated here on this slide and that leads to several good things.

It leads to consistent earnings; it leads to a lot of growth fueled by our clients; it leads to a manageable risk because we're dealing with the clients on a day-to-day basis; and because it reduces our sales costs it lowers our total cost of doing business.

Our goal in life is to work selectively for what we call our core clients.

We have a group of about 40 of these now and they are generating more than 80 percent of our business.

Those clients we work for on a long-term basis, and so not only is our goal to deliver superior value but as we teach our project people, the job working with these core clients is not to maximize speed but to keep the client in tow by delivering superior value on a day-to-day basis.

All of this rolls around and we reinvest our funds and the superior value cycle comes back again.

As long as we can continue to deliver superior value to these clients, they will continue to reinvest in Jacobs and our business will continue to move and grow.

Move on to slide number 9 where we talk about our selective market diversity.

We've got 2 pie charts here.

One 1993, one '04, with the trailing 12 entered.

And you can see the split of the various businesses.

You can see that between 1993 and 2004 we have added several lines of business and the pie has grown from a $1 billion pie to a $4.5 billion pie.

So the diversity of this Company has increased fairly dramatically over the past decade.

Even in areas where like petroleum, it was 36 percent of a business or about $360 million of revenue in 93; today it is only 26 percent of our business even though the revenue stream is over 1.1 billion.

We have managed to diversify away from our heavy dependence on both chemicals and petroleum in 1993 to a point where we have moved from about 63 percent of the total revenues to down to 38 percent of the total revenue, even though those businesses have grown dramatically in absolute dollars.

This diversity does reduce our overall cyclicity and it stabilizes our individual operations.

And while we will never claim to be recession proof, we certainly become recession resistant with this kind of diversity.

Let's move on to slide 10 and I want to talk a little bit about acquisitions over the course of the last few years.

I guess this slide has about 17 years on it to be precise.

I thought I might just talk a little bit about things we have done.

If you go back into the early '90s where we made acquisitions in the PharmaBio business, there were 2 to 3 different acquisitions there and those also took us into the UK and Ireland.

That was the basis for the large pharmaceutical business we have today.

Remember if you go back to the previous slide and you look at the 1993 revenues of 1 billion, we had 7 percent of that with pharmaceuticals which is only $70 million today.

Pharmaceutical is 15 percent of 4.5 billion so with 3 small acquisitions in the early '90s, 2 in the U.S. and 1 in Ireland we have built a very large pharmaceutical business to the point where we are either number 1 or number 2 in the business in the world, depending on how you measure it.

If you move on into the middle part of the decade you can see that we got into the pulp and paper business through an acquisition and our large buildings business today came as part of an acquisition.

It also expanded our geography into Southern Europe in France, Spain and Italy.

So at this point in time, we have operations in the UK, Asia, Ireland and France, Spain and Italy as we enter the middle '90s and late '90s.

As we move into the later '90s, you can see that we had acquisitions that made us a fairly significant player in defense and aerospace.

It also made us a fairly significant player in the infrastructure business and in that period of time, we acquired geographies from Australia, the Belgium, Netherlands, Germany and Canada.

The Canadian acquisition which is in the early part of this decade also put us into upstream oil and gas business in a significant way when we made the acquisition up in Calgary.

Then you move forward to where we are today where we announced a couple of acquisitions or investments here in the last 90 days.

One is part of Neste oil and gas up in Finland and also the Babtie deal in the UK.

So what we have strung along this curve is a history of how acquisitions have helped fuel our growth because of their ability to get us access to new clients and new geographies in addition to the technologies they bring themselves.

It has been a good story, these acquisitions.

These acquisitions laying on this curve here that we are looking at on slide 10, we characterize all those as successful deals.

If we move to slide 11, the strong markets and the weak markets for Jacobs have not changed now in about 24 months.

The nuances within the markets have changed, but the petroleum market right now, particularly the downstream part where we have a very strong position in refining is very, very strong both in the U.S. and in Europe and we have a large portfolio of business in this market.

It has been starting slowly as some of you know from listening to us over previous webcasts, but it is gaining momentum as we speak and we continue to sell new work almost every day.

This has been primarily clean fuels driven, both in the U.S. and Europe as they strive to take the sulfur out of gasoline and make our air cleaner but there are also the first beginnings of discussions about we need to do capacity in addition.

All of you have to go look at the gas pump and look at you're paying and certainly here on the West Coast, we're paying well in excess of 2 dollars a gallon and have been for quite a while.

The country is basically out of gasoline here in the U.S. and we are going to get new capacity from someplace and I think we are going to see numerous incremental additions here in the United States over the next 24 to 36 months.

Needless to say, this market is a big market for Jacobs and remains very, very strong at this point in time as does the PharmaBio market.

The PharmaBio market is a very global market for Jacobs.

We have almost as much work in Europe as we have in the U.S. as these large pharmaceutical companies through their recent state emergers over the last 5 or 6 years has become very global in character.

We have a lot of work in the U.S., we have a lot of work in Europe.

We are well-established in the hot points of the pharmaceutical investment period which would be places like Ireland, Singapore and Puerto Rico in addition to Continental Europe and the U.S.

SO the PharmaBio market remains a very good market for Jacobs.

The infrastructure market and the buildings market are very similar in character.

They are primarily public sector businesses, particularly the infrastructure -- a lot of it is dependent on state funding.

State funding has been a little slow because of the economic situation in this country but it is rebounding as we speak and our business is gradually improving in the infrastructure.

It is also improving in the buildings business which is probably more federally funded than the infrastructure business.

Both those businesses, buildings and infrastructure, who have been on kind of on slow grow growth over here the last 12 months are starting to accelerate as we speak.

Then we go to the Federal business, and our Federal business comprises not only our large environmental business at the Federal Government where we are cleaning up large DOE sites at Oakridge and Fernald and places like that.

It encompasses a large component of business for NAS and then a huge piece of business for the military.

This business has been very strong over the past year.

The prospects are extremely good.

We've got more sales activity in this arena in the last 90 days than I can remember.

And so the future looks very good for the Federal business and it encompasses all of those areas I just discussed.

The chemicals business we still list as a weak business.

Hope springs eternal.

We keep thinking it will come back, certainly there are signs that it is getting better but you would not call it in a rebound mode yet.

In the high-tech business which is a very limited business for us, we do some semiconductor work.

We do some test facility for automotive companies in test operations.

That business remains rather on a slow go with some very specific opportunities that are significant at this time.

And the pulp and paper business continues to remain in the doldrums.

While we get work and we continue to get work and people continue to upgrade some of the products that we are marketing, it is on slow go as we speak.

If you move to the next slide which is slide 12, what is new?

I though I would talk a little about 4 things that are going on here.

We discussed the Baptie acquisition briefly.

I think I would like to come back to that.

That deal has been signed.

We're waiting for regulatory approval and it should close about the end of the second week in August.

Somewhere in that point in time, Baptie is a group of about 3500 people, 3000 in the UK.

It gives us a very large infrastructure in buildings business in the UK when combined with our existing operations there of about 1000 people.

So we will be right at the top tier of the people in the UK doing this kind of business.

For those of you that have gone on our web page, you can see that it is a well-run company, solidly profitable over the last decade and it is certainly going to be very additive to what we do here at Jacobs and probably is the second or third step in a long journey that will probably encompass several years to become a really dominant player in the infrastructure business on a global basis.

We move on to Neste, where we have acquired a portion of their engineering division of about 400 highly technical people up in Helsinki.

This is a group of folks that not only do a lot of technical work, they actually have some technology per se.

But they are supporting a lot of Scandinavian oil, gas and chemical business.

This rounds out some of the things we have been doing with some of our other chemical business in Europe and it also gives us a very strong position to do front end work and a lot of the technology driven work for the big oil companies and the refineries and accessory operations there in Europe.

So we look at Neste not as adding profit as much as it is going to add technology know-how that is going to be synergistic with our operations on a European basis.

One thing we haven't talked about at all before is the Puerto Rican initiative we have underway.

For those of you that are not totally familiar with the pharmaceutical business, Puerto Rico is one of the hot spots for new pharmaceutical investment.

Pharmaceutical investment started going to Puerto Rico in the '60s because it was a tax haven and the Puerto Rican government had the ability to give large tax breaks to the pharmaceutical industry.

That has continued and it is now is one of the largest concentrations of pharmaceutical operations in the world.

There is just a lot of investment going to Puerto Rico at this point in time.

We about nine months ago or a year ago opened up a small office down there to support our Puerto Rican initiative and that office has continued to grow.

And at this point in time, we've got 3 or 4 significant projects in Puerto Rico.

There is going to be a lot of ongoing work down there and we think it is going to be a very strong market for Jacobs.

So that puts us in the 3 hot spots for the pharmaceutical business.

We've been in Ireland for many years and there is just a lot of pharmaceutical business going into Ireland.

We moved into Singapore about 4 years ago on the back of $1 billion worth of pharmaceutical work and we've got an operation there of about 200 people now and continuing to get work in the pharmaceutical business but also diversifying in the oil and gas business to support the big refining and chemical enterprises on Jurong Island.

Puerto Rico fills out the last piece of the pharmaceutical puzzle for us graphically by giving us the strong position down there so we can continue to support these core clients no matter where they choose to go.

Then the only other thing that I'd say would be new this quarter if you go back and look at our press release its a balanced portfolio of wins.

If I look at the sales over the last quarter, we had some nice Federal wins.

We had some nice wins in both the infrastructure and buildings business.

We did get a lot of oil and gas business, particularly in the refining business.

And we have also been successful in obtaining lately a couple of 3 significant pharmaceutical projects.

The whole portfolio of what is going on in the sales arena was pretty good last quarter.

Then just moving to the last slide, we look at the investor appeal slide -- our business model remains the same.

We are not changing.

We are going to continue to focus on the core clients.

We are going to continue to try to get a large piece of our business from 40 clients and of course that will grow to 50 clients in time.

And one way to expand our business is to expand our portfolio of services to that group of clients.

We will continue to diversify the business in terms of markets, geography and to some degree, services.

There are a lot of geographies we do not operate in and those all present opportunities for us and we will be doing that.

There is markets that we are not in and we've discussed some of those in past times but we have talked a lot about the major move in infrastructure that is now underway again with Baptie deal and we will be continuing to push on the upstream oil and gas as we diversify into that business, which is the largest private sector business in the world.

As you could hear from John, the balance sheet is good and we continue to strive to grow this business 15 percent a year over the next years as we have in the past few years.

I think with that said, I will turn it open to questions.

(OPERATOR INSTRUCTIONS) Michael Dudas with Bear Stearns.

First question for you.

John, you talked about 140 million of backlog removable out of the Federal task order work.

Is that work that is just not going to be completed within a time period of how you book backlog or is that business that is just not going to get done?

As we look at these task order kinds of contracts, we book at the beginning what we believe is the expected capacity to be earned over the life of the contract.

And periodically we do review that and particularly as we get closer to the end of the contract, occasionally we will find that we -- most of the time we will find that we are booked right up to the very top.

But occasionally, we will find projects or contracts where the for one reason or another the customers aren't using them up to what we originally thought they would use them.

They may have other vehicles so this is work that is just not going to be done.

Second question is, Noel, have you been able to place those extra bodies from a month ago and not so much in those projects but have the activity -- it seems like you had a good quarter in new business -- will that get some utilization up and get some revenue flow to the bottom line in 2005 versus '04?

Well, certainly some of those teams have already been placed.

We talked about on the suspensions on several different projects and the answer is yes, I think -- .

First of all, we have dealt with the overhead problems, so the overhead problem is history.

So the unabsorbed overhead thing is gone.

So the thing we're dealing with now is just getting these guys into productive roles and several of the teams have been placed.

In fact, one of the deferred projects has been restarted.

Good news.

Third, Noel, maybe elaborate a little bit more on the acquisitions that you are about to close next month?

Could you talk about some of the challenges and some of the synergy opportunities that these bring to you?

How much of the backlog is going to be added to the backlog as we look forward?

Is it more professional service, more construction -- how is it similar to what Jacobs has already in their infrastructure business?

Do you anticipated over the next 12 months that the businesses will be additive to Jacobs bottom line?

First of all, the Baste deal as with the Neste deal -- the Neste deal won't add much backlog -- that will be significant because remember it is just a partial ownership.

That Bapte deal will be all professional services.

And we haven't scrubbed what we will add yet but it is in the hundreds of millions, not billion, okay?

What see in the UK particularly it is extremely synergistic with what we are already doing there.

It is about 3 times bigger than what we are already doing but there is almost no overlap.

So it seems like in our existing operations over there where we are strong, they are striving to get into the markets and of course where they are strong and there are several places where they are just much stronger than we are, those are markets that in some ways seem locked out to us.

So the deal should be close to totally synergistic near as I can tell, Mike.

By the way it will be attitude.

We will have to go through the 141, 142 analysis as we have to take some of this backlog and capitalize it and then amortized off over the course of the project.

So the additive to earnings or the addition to earnings -- let me resay that -- the addition to earnings will get better as time marches on and so it will be ex in '05, and it will be 2-ex by the time we get to '06 or '07.

Just to reiterate that -- additions are included in our guidance so those are not additive to our guidances, those are included in our guidance.

Can you remind us how you plan to fund these acquisitions?

It will be cash.

Terrific.

Thank you gentlemen.

Richard Rossi with Morgan Joseph.

To clarify one thing, you just said that you have taken care of the underabsorbed overheads.

Does that mean that you have redeployed to some degree all of the people that were idled because of the cancellation?

It means a couple of different things.

First of add, the key people have been redeployed.

There has probably been some people that have been reduced for lack of work.

And the only place we continue to have some underutilized overhead -- and I probably overstated that a little bit earlier -- we still have some issues going on in France where one of the project problems was.

But that is small in comparison to the total issue but I think the thing that has happened is the key people have been redeployed.

There has probably been some reduction enforced in a couple of locations.

Okay.

To clarify on this '05 guidance just for a second, the 240 side of the range is -- am I right in assuming that that sort of takes into consideration a continuation of the slow buildup on a lot of these jobs especially in the clean fuels area?

Not much of a change in the pattern of the speed of the work done on those jobs as we had seen in '04?

The 240 side of it.

I understand the 240 side.

First of all, as John said it was a preliminary range.

We just started our business planning cycle for '05.

We have looked at these though and to the best of our ability at this point in time less the clean fuels issue, because that work is building momentum and I think that is going to be going gangbusters in '05.

It goes back to some of these other issues and getting the speed going on both the buildings business and the pharmaceutical business and some of those things that could add a slow there.

But primarily the buildings business -- if the buildings business continues to be very slow in its buildup, the direction is we could be at the lower end of the range.

Okay.

And then one final thing.

Did I detect and I may be very wrong on this, but I thought in the last couple of conference calls the hinting was that the chemical area was maybe edging towards getting better and you seem to have pulled back a bit on that comment.

Am I just reading too much into it?

You are reading too much into it.

Yes.

That's what I'm supposed to do.

You are reading too much into it.

The other thing that we have going on that goes to the lower end of range, we've got a big election coming up and we have got the situation in Iraq that continues to be there.

All of those things are affecting world business a little bit although I can't sit and point to the situation and say anything specific.

Okay, think you.

Christopher Martin with Credit Suisse First Boston.

On the canceled project that we talked about a month ago, was there any cost recovery on that project?

Anything baked into your contract that allowed you to get some of that back from the customer?

No.

Not at all?

Unfortunately the bane of our business has been cancellations like this because there are so difficult with the operating manager to deal with because you throw a big project team on overhead immediately and over the years we have worked very hard to put in phase down deals into our contracts and lost profits clauses and the things like this.

And the market in 99 percent of the cases just doesn't let it happen.

On a low sulfur diesel fuel work, we've talked a lot of the opportunity here in the states and I haven't heard a lot about the European opportunity.

Can you talk a little bit more about that and give us more details on the size of that market and the timing of when that work will come on?

Generally that the market is moving.

And the size of the market doesn't seem to be anywhere near as big as it is here in the States, even though the regulations are about the same as near as I can tell.

Am I right on that?

The regs are about the same.

I mean we've got work particularly in our Netherlands operation on quite a bit of that type activity but it hasn't generated the kind of business in Europe that it has here.

But it is moving forward and our Netherlands operation is very busy right now.

And then just a final question.

Of the 310 that was pulled out of backlog, can you give us a rough split of what was the technical professional work versus field services?

Most of it was field services.

Of course the 20 million that was the cancelled project was all professional services, but all the 150 that was the procurement was field services and most of the Federal capacity was field services as well.

Okay, thanks.

Lorraine Maikis with Merrill Lynch.

Thank you.

Just back onto the canceled project.

On the federal side, did that have to do with the delays that you had mentioned during the outlook conference call a couple of weeks ago?

On the Federal side, those weren't canceled projects, those were just capacities that we didn't see that we would fill up through the balance of the contracts in various cases.

But they really -- they might have been somewhat -- some of the might have been related, but most of them were not.

It was just a review we did.

Typically we do this periodically and look at it every quarter but really scrub it usually at the end of the year.

This year because of everything else that was going on, we took a much stronger look at it this quarter than waiting till next quarter.

Yes the delays last quarter, remember were primarily in the buildings business and none of those were taken out of backlog.

I don't believe.

None of that was buildings.

Within your 240 to 270 guidance, you had said that Babtie was in there.

Does that include the assumption of any other acquisitions during the year?

We always say that acquisitions are included in our overall growth but this is primarily based on what we see right now.

Just to clarify, you paid all cash for Babtie?

Well, it would be cash and debt.

So it would be some debt.

We haven't paid it yet because it hasn't closed but it will be a mix of cash and some debt.

Finally, have you had the chance to call around and sort of take the temperature of the capital spending trends at some of your other key customers after you had these delays and cancellations?

I think to answer that, we have seen no impact on our general business posture.

So we believe what has happened and I think we have discussed it on June 29, I think this is an anomaly within an existing client organization plus what is happening with the Federal Government.

We have seen no impact on the number of prospects, the number of pursuits we have now or other major clients with the work that is moving forward.

I think what you see in all of these large clients and you see it certainly big oil, big pharmaceutical and other places, they do determine how they're going to end in a given year and then they try to stick to it.

I think that is some of what we have seen, but we see no deterioration in the markets.

Thank you.

Tom Ford with Lehman Brothers.

John, I just want to make sure that I heard you right on this.

The guidance that you've provided at preliminary range for fiscal '05, that would incorporate the amortization expense associated with the backlog at the time the transaction closes.

Is that correct?

Yes.

Our early estimates -- we still haven't finished the complete study, but it includes that impact, yes.

Are you going to give us insight into the order of magnitude of that?

We certainly -- it will be disclosed in our 10-K and that is because that is part of the disclosure we have to give.

I don't know whether we will do it any time before that.

Okay, great.

Noel, are you concerned -- I know in the Scottish press there has been commentary about Jacobs taking over and concerns there.

Do you think that those are adequately addressed?

I've only read a couple of the Scottish press things.

You are talking about the worry that the Babtie organization -- headquarters operations was going to disappear and it is going to be run out of London?

Are those the comments that you are worried about?

That and I think there was some reference to concern about maybe headcount reductions on your part and but -- yes.

It concerns you obviously because on balance I thought it was pretty good press what I had read but I would admit to not having read everything.

But I certainly read the early press releases that forced us to trigger our release back about June -- in late June.

But the answer is no, because we're going to run our infrastructure business out of the Babtie organization in the UK so we don't look at huge redundancies.

I am sure that in some point in time, we are going to have duplicate services and those are going to have to be corrected.

But we don't make these deals with the intent of firing hundreds of people.

We never have and I don't think we are going to because remember, we are looking at an organization now where 80, 85 percent of those people are doing real work.

And unless there's overlaps in the real work which there aren't, those people doing real work have got good secure jobs for the long-term.

In fact, that is the value of the deal.

So the only place you will have any duplicate services would be in accounting and IT and things like that and we wouldn't think that would be huge.

Okay.

Sticking with acquisitions, I think last call Noel, you and/or Tom Hammond both referenced that Neste was expected to help in the push into upstream oil and gas and I'm just curious do you have an estimate or do you guys have a view on time frame in terms of how long that takes?

I think -- I went back and reread the transcript this morning before I got on the phone call to see what we have said and I read that.

And I think that probably was a hair overstated.

It will help in the upstream oil and gas just because of the geography and we're up there in the North Sea.

But this Neste deal is primarily a downstream deal.

I don't look for that to help us do a lot upstream except with the clients we know and the geography.

But where it is going to help us in the downstream is with the chemicals know how.

It is going to help with the oil and gas and particularly the downstream work all through Scandinavia, plus these companies are tied to other companies both in Western Europe and in Eastern Europe.

So it is going to help in the whole network there.

We actually see a lot of synergistic effect coming out of the Neste deal.

That then I think begs another question which is I think John had mentioned on the last call you were taking a third stake.

Can you highlight any milestones or things that you would be looking at in terms of whether you decide to up that stake?

I think we have to see how it goes.

The main thing we have got to do is see are we compatible?

Does it really help us like we think it is going to help us?

Can we take these very talented people that are part of Neste and will they help us in with our other chemical and refining clients?

I think if that happens then we would have to sit down with the guys up in Finland and say we would like more.

But we will have to see where that goes.

Okay.

John, how is that going to be accounted for just initially?

Is that going to be in other income line item on the P&L?

It will be as equity investment but we will carry it above the line.

Great, thank you very much.

Min Cho with Friedman, Billings, Ramsey.

Good morning.

First I have a clarification.

The first caller had a question regarding the replacement or your ability to redeploy the teams for the cancelled project.

And I thought I heard you say that one of the projects have actually been restarted.

You heard that.

So that is one of the suspended projects.

Was there a change in the scope of that project?

No.

No change.

Okay.

Also in terms of gross margins, the decrease in gross margins, is that still a mix issue or are you seeing any type of effect from commodity price increases in your field services work?

It is primarily a mix.

The predominant method of contracting is a reimbursable so while it may push costs up a little bit for clients it really doesn't have an impact on our profitability.

Particularly -- I’m sure you are talking about steel prices and some of those commodity prices that are going up.

That is not affecting us.

Also is there any way you can give us a rough breakdown of the key end markets that are currently in your backlog?

We don't break down our backlog by market.

Okay.

What about -- can you tell us what percentage of the backlog is expected to be worked off in the next 12 months or so?

What will happen, we are in the beginning of our business plan now, but the data we have in front of us says that about 65 percent of the rolling 12-months (indiscernible) margin, the 12-month margin forecast, 65 percent of that is in backlog as we speak.

All right, that's it.

Thank you.

David Yuschak, with Sanders Morris Harris.

As you guys started the year and looked at the pipeline of activity that was out there, how would you say maybe it has changed, or as you look at the start of the next fiscal year what that pipeline looks like in relative size compared to then; what may have changed that may give you some optimism that you could really begin to see a lot better booking rates than what you have been experiencing here of late?

Well, I would say is that if you look at it -- first off, if you want to compare year-over-year, and I'd have to go look at the slide here, but we've got quite a bit more backlog today than we had a year ago, like $500 million worth.

So the backlog, even with the backlog adjustments we just made, is a lot better than it was a year ago.

It is just bigger.

I'd say the second thing is that we still have the uncertainties that are created by the war and the elections.

The election uncertainty probably has virtually no effect on our private sector business.

It will have an effect on awards coming out of the federal government starting about the 1st of September through, let's say, March/April timeframe, maybe even a little longer even if the same administration wins.

So there will be an effect coming out of that this year that always happens in election years.

It's predictable; it doesn't affect a lot of projects, but there will be a contract or two that we have bid on whose award will be delayed for 2, 3, 4, 5 months, just because -- not because they're going to change who gets the work.

I don't mean to imply that at all, but just with the cabinet positions getting in place and the bureaucracy getting itself re-established, there will be some delays there.

But like I said, that will affect -- we're probably bidding 2 big contracts as we speak.

One of them well probably get let before this all happens and one of them will probably run into this morass come next February, March or April.

So we probably only got 2 big contracts that will get affected.

We have got one big proposal, really large proposal went in in the last 2 weeks, and there's going to be another one going in, I guess the date's October 1, roughly.

So those will get affected.

But take that off the table, as I look at the market today, I think one thing that is definitely different, a year ago the recovery was suspect; today the recovery is real.

I think that is a very real point.

I don't think we're guessing any longer about whether we've got a recovery going.

We have got a recovery going, and it will manifest itself and probably make more predictable the chances of sales success, particularly in the private sector.

So I think we're going to see an uptick there that is just very real, and that's different from a year ago.

So we're probably looking at it with more certainty, even taking the election cycle out of it.

I mean, we continue to see the Iraq situation, and I know everybody has got their own opinion on where that is going, but that too will resolve itself.

The war is over.

We are into the other part of it now, so I would say sitting here today the prospect list looked good at both times, by the way.

It looked good a year ago; it looks good today.

I think there's more certainty today and less speculation about the recovery.

So it's just a matter of getting more confidence and since a lot of the things you're doing are longer-term asset purchases by your customers, it's just a matter of maybe just getting through some of this uncertainty here short-term.

But certainly indications are there's a much stronger willingness to spend today than we'd say maybe 9 months ago, a year ago.

That's certainly the way I view it.

That was a very long-winded answer and I apologize for that, but I was rambling through my thoughts.

But yes, I told you everything I know.

One of the things that is kind of interesting, you've indicated on the call that your environmental business has really been strong here of late.

One of the things that has been kind of interesting, the SEC is supposedly now taking a much more serious look at environmental liabilities on the balance sheets of companies today.

You have got Sarbanes-Oxley thrown in there as well.

The question I have for you, is it very possible that we could begin to see a lot more clean-up activity coming out of the industrial and commercial markets than we had in the past, just because of the unwillingness of maybe some companies that want to -- have to address that with the SEC as well as Sarbanes-Oxley, as well as shareholders and so forth?

I'm just kind of curious.

It may be anecdotal, it may be just nothing at all, but I'm just kind of curious if there might be some potential motivation to get environmental ramped up even more with some of these things as possible stimuluses.

Well, my own opinion is, and I hadn't heard the SEC looking hard at the balance sheets, but that has been an ongoing problem for many years, is a lot of these liabilities aren't booked in certain places.

But I think it's anecdotal in character.

I don't think it's going to affect our business very much.

Our business is federal government driven.

The business here, particularly the Department of Energy, has been very strong.

It's pretty strong with the military, and we are expanding that business on 2 fronts, both into the Asian basin where the military is finally going to clean up a lot of the problems they have left over the last 40 years and particularly in places like Korea and Guam and places like that.

And also in Western Europe where there has been very little clean-up.

So we see the environmental business expanding across both oceans.

I don't think it's going to be a monster business across both oceans, but I think it is going to help stabilize it for the longer-term.

The business about the SEC forcing the companies to put all of their environmental liabilities on the balance sheet, which I guess they probably should;

I'm not an expert on that, but I don't think it's going to generate much business for Jacobs.

One last question.

As far as -- your burn rate has historically been 60 to 65 percent.

What kind of conditions could exist that your burn rate could slow, maybe say to 55?

Are you talking about out of the backlog?

Right, your burn rate out of the backlog.

If we only -- first of all, let's understand what I said so I get it right.

What I said was that 65 percent of our margin burn for the next year will be out of our backlog, which means we have got to sell 35 percent of the forecast.

We have got to sell and work off 35 percent of the forecast.

When you ask a question like if we went down to 55 percent of the forecast, that means I would have to sell and work off 45 percent.

So I do not quite understand the question.

What I was really suggesting is if backlog -- no, I'm looking at the opposite; stronger backlog, more business coming in that could cause this thing to slow.

Because you have got more business on there and, as a result, the life of that backlog stretches out, is kind of what I'm suggesting.

What conditions could cause more business to come in that could be more longer life, I guess?

Oh, I don't think it is going to change a lot.

What we have seen historically, 60 is kind of a magic number for us when we are looking at our forecast.

Any given year, we are typically working off about 60 percent of our margin, comes from backlog in one form or another.

If it moves up to 65, it means -- because probably what we're going to take out of backlog is relatively certain, and I mean relatively certain, it means we're only going to get 35 percent new work, and that is probably not a good thing.

It would be nice to have 45 percent of our margin next year come out of new work that we book and burn in the same year.

So if that were to happen and we were successful in winning a bunch of work that worked off very quickly, the chances are we will have a better year than we think.

You see where I'm coming from?

I think what will kill next year is if I can't sell 35 percent and I only sell -- go down to 30 percent and you'd have to deal with that in absolute dollars, my book and burn rate would be less than we have forecast; then the chances of going toward the lower end of the spectrum on the numbers becomes more real.

So what we typically find in an upswing cycle, the book and burn rate increases, it doesn't decrease.

When you are going in the uptick, you are more likely to book and burn more work than you are when you are in a downswing in the general economic cycle.

To take that one step further, by having it 65 now, it would kind of suggest then probably near the end of the slowdown?

Is that one way of looking at it?

Yes, that is a good way to look at it, actually.

I wouldn't even disagree with that.

That's all I got.

Thanks.

Sanjay Shrestha with First Albany.

Just a couple of quick questions here, guys.

I'm just trying to understand, obviously, it's still far out, 2005, but it seems like you're also being somewhat conservative here with the wide range of the guidance range.

But is there anything that you think about or potentially see that might even impact the low end of the guidance range based on what you can see at this point in time?

Well, right now, no, because we had the opportunity here to give you a wide range.

We gave you a wide range for that purpose.

Stuff happens, you know, and like I say, we've got an election, we've still got Iraq going on, but we have what looks like a very strong recovery going on if you listen to our government officials, and even the politicians don't disagree with it anymore.

So my reaction is that it looks like we got a strong cycle coming.

Anything can happen, but I think going back to one of the previous questions where the guy kind of said, compare last year to this year made me think that I hadn't really done that here.

But certainly, it does look like there is a lot more activity coming at us, and we do have a lot more confidence in the marketplace than we had a year ago.

Anything can happen, but there's nothing specific that I can isolate here.

That is sort of where I was going with that.

That's great.

Another quick question along the lines of oil and gas give the geopolitical environment.

Are you seeing increasing levels of interest or activities up in the tar sands area?

We see a lot of interest in the tar sands area.

We see a lot of people looking at new projects.

We see a lot of projects up there trying to get launched and certainly at oil anywhere in the $30 range, the tar sands are wildly economic.

So I think it depends on people's individual view of what oil prices will do.

But there isn't any doubt and we've done our own economics on this by the way and at $30, the tar sands are a gold mine.

Have you received any indication from some of your core client base that they might want to see you have a presence in China?

If so, is there anything that you are thinking of doing right now or you are doing at this point in time or that just hasn't come up yet?

We've had a couple of our clients talk about China but we certainly don't have anybody pushing us.

As a result of that, we are working a lot of other places before China right now.

We have had intense discussions even at the Board level on the timing of China and right now there is other priorities.

Okay, thank you so much.

Paul Mecray with Tower Bridge Advisors.

Two quick things.

The other expense in income category goes up and down like a yo-yo and was a negative this quarter.

Any explanation on that?

For a long time we had some stocks that we were selling and that is impacted by unusual transactions of sales of stocks or minor sales, dispositions of the real estate, things like that.

When we don't have those, we do have some expenses that get thrown through there, so will always vary up and down in the range of the up a million, down half a million from quarter to quarter.

So ex any capital gains on sales of assets, it could well more likely be a negative than a positive going forward?

Yes.

Secondly, do you anticipate a time a year or so from now when you will be able to identify the $20 million cancelled project?

Did I hear Noel imply that it might be in France?

Did you hear me imply it might be in France?

I don't think I said that.

What I said was we had excess people in France.

I did not imply anything.

No, I did not imply anything.

I said we had excess people in France.

Guys are correcting me.

When I said we had dealt with all of the unabsorbed overhead, they reminded me we still a problem in France.

So I fixed that misstatement, okay.

How about the identification of the project at some point in time?

No, never.

Okay, that is it for me.

Elaine Hong (ph) with Hong Capital Management (ph).

I wanted to follow up on the canceled project just with some additional questions.

We have been shareholders for a long time and when we looked back at the prior years, we don't recall any --at least to our knowledge -- any cancelled projects or any projects that had been delayed unexpectedly.

I guess when we look at the changing mix of your backlog, the question that we have is whether or not the actual mix itself is likely to perhaps present additional cancellations or delays in your projects on a go-forward basis?

Perhaps it is the additional business that you are getting in the government area, the military area but do you anticipate that the mix change itself might present you with more problems of this nature?

First of all, we went back through our data and we have never had to tell you about this kind of stuff before.

Because we always have projects that were starting and stopping.

So lets come back to that and in this particular case, because of the very specific situations that seems to the unique, we had a whole bunch of stuff come to halt and be suspended temporarily suspended, with the 1 cancellation.

If you look at our business in general, I don't see any change in the mix that would say this is going to become a greater or lesser problems than it has been historically.

In fact, with all of this diversity that we have created in the Company, both graphically and technically, our drive has been to have less reliance on single businesses and single geographies and with our 40 odd core clients, hopefully any one of those can't hurt you at a given time.

So we think this is a specific circumstance but I don't see any trend this way in terms of the business mix or anything else.

That is what we would be concerned about.

But going back to your statement earlier, you had said that the competitive environment doesn't permit you to impose any kind of contract provisions that would at least allow you to recover some or all of the costs of the delays if they were not something of your doing.

The question is, given the kind of relationship based clients that you have, why wouldn't you have more leverage to actually put contract provisions in that would at least allow you to recover part of those costs?

The problem you have, the industry hasn't done it a lot and by the way I have negotiated as you might expect hundreds of contracts over the course of my career and I always try to get that, in but I get whipsawed in lots of different ways because remember, very few of our relationships are absolutely exclusive.

Even when they are absolutely exclusive, they have got to be market competitive.

So what we are seeing is the clients will work with you in the phase down, if there is a suspension, but as far as your ability to recover your lost costs or the dislocation effect it has on your business, because the main effect it is having on our business is it is not going to generate any profits.

And it is going to take us 90, 120, 180 days to relocate this team, and then you've got to get that project started back up.

So maybe you've got a 3 to 6-month timeframe here of disturbance.

We just haven't in the history of the business been able to do that.

While we continue to try, we haven't been successful at that.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Stephen Fenaut (ph) with Imperial Capital.

A couple of quick questions.

You mentioned earlier about the book and burn being about 35 percent of your assumed guidance nest year.

Is that about accurate?

That is about accurate.

You also mentioned that in periods of economic expansion, there is usually an uptick in that number.

Can you tell us historically what that book and burn number as a percentage of revenue has been in the times of economic expansion or recovery like you're about to see?

Well, I'll tell you a story in a different way, okay?

Because I don't have the data to give you the precise answer, but what I will tell you is that over the course of the last decade our percent of margin in backlog, when you look against the numbers for the plans, have varied between 55 and 65 percent.

So you can infer from that what you want, but I don't have the precise data to answer your question.

But when we go forward with our business plan to the Board, I don't think in the past decade it has been out of that range of 55 to 65, which means in some years it's been as low as 55 percent, which means we have booked and burned 45 percent.

We typically make our plans, by the way.

This is the first year in a decade we haven't made our plan.

In fact, we typically beat our plans, for those of you that follow us know.

I would say that the range is 55 to 45, but I can't sit here and tell you from memory when the upticks and was the 55 in an uptick year or not.

I can't tell you that.

I just don't know.

Well, the movement from year-to-year is not big.

It's not like we're making these swings dramatically.

If you look from year-to-year, if they have change just a couple of percentage points, it is a pretty good movement.

If you hit the 65 percent mark, does that imply that you're going to hit the mid point of the guidance?

No, we are not giving any kind of guidance on our guidance.

That was a sideways question.

You can't get away with that one.

Great, thank you very much.

David Yuschak, Sanders Morris Harris.

Just on India prospects, what's your thoughts there as far as potential?

This is Craig Martin.

I think our prospects in India are quite strong right now.

We're seeing a little bit more business-friendly environment in some ways, a little less friendly in others, but foreign direct investments up, our work-sharing business is growing quite nicely.

We are finding more and more business to leverage India into more work in both North America and in Europe.

So our expectations for India are very positive.

That is offset, of course, by the fact it takes a lot of rupees to make a dollar.

I sometimes feel more comfortable being in India than I would be China, just because of the nature of how much you can make in China versus any other parts of the world, as far as an investor is concerned.

Yes, we certainly think India is longer-term both a great opportunity for us from this work-sharing point of view, but a terrific opportunity in terms of investment in country.

Big population, growing middle-class, all of the things that you hear about China are also true of India, and we have been there for 30 years.

I appreciate it.

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