雅各布工程 (J) 2004 Q4 法說會逐字稿

Good day and welcome to the Jacobs fourth quarter and year-end earnings conference call.

This call is being recorded.

Today's presentation will be available for replay at 2:00 p.m. eastern through November 11 at midnight.

You may access the replay by dialing 719-457-0820 and entering the pass code 833-605.

Again, the number is 719-457-0820 and pass code 833-605.

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

At this time I would like to turn the call over to Patti Bruner for the forward statement.

Please go ahead, ma'am.

Thank you.

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

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

For information concerning factors that could cause such differences the company requests that you read its most recent annual report on form 10-K for the period ending September 30, 2003, and the most recent form 10-Q for the period ending June 30, 2004 including in each case the management's discussion and analysis of financial condition and results of operations contained there in.

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 would like to turn it over to John Prosser, CFO who will discuss financial results.

Thank you Patty and welcome everyone.

I will briefly go through the financial highlights for the quarter and the year and then I will turn it over to Noel Watson to talk through the results and outlook of the business and do a general overview.

If you go to slide four, you will see as we reported this morning, that diluted EPS for the year was $2.25.

For the quarter it was $0.53.

This was in line with our previous guidance.

Net earnings for the year were $129 million and for the quarter were $30.5 million.

We did have a strong growth in our backlog.

Backlog ended up the year at $7.5 billion a very strong sales activity and strong prospects going forward.

We do have a strong -- continued strong balance sheet.

And even with the acquisition that we completed this quarter we still have a net cash position of $20.1 million.

And one milestone that we have met this quarter and this year-end is our stockholders equity topped $1 billion for the first time.

As we put in the press release, we are maintaining our guidance for 2005 in the range of $2.40 to $2.70.

And additionally we are giving guidance for the first quarter ended December 31, 2004 of $0.52 to $0.58.

Go to slide five.

This is the track of our earnings.

While this year was flat with last year which is a little disappointing when you look at the historical growth rate, if you look at the bars down in the corner, you will see we still have been able to maintain you know close to that 15% growth even with this flat year.

If you look back historically, our growth rate has tracked above that.

And certainly we would expect to get back on that growth track as we move out into the future.

Going to slide six, looking at the historical backlog and current year's backlog, we did have a very strong growth in the backlog.

About 350 million of the ending backlog is attributable to Babtie, the acquisitions are in if you take them out, we still have good backlog growth.

And particularly if you focus on the professional services backlog, you know, the growth there even excluding Babtie was well over 10%.

And, you know, Babtie added about 10%.

Virtual all of Babtie backlog is professional services backlog.

So the bookings for the quarter were strong and the bookings for the year were strong as well, even if you exclude particularly excluding Babtie.

With that I will turn it over to Noel Watson to review the other highlights.

Thanks, John.

I am on slide seven now.

We are talking about 15% growth strategy.

And I think we will just move on to slide eight where we talk a little bit about a relationship model, which we think separates us a little bit from some of our competitors.

If you take a look at the Jacobs basic business model, which we call relationship-based, we drive all our people to work toward long-term relationships with our client base.

So we are generating large percentages of our gross margin every year from a relatively small group of clients.

We think that by working with this smaller group of clients over a long-term basis we learn to understand their needs extremely well and we are actually able to deliver much better project solutions.

Which we think drives us into what we consider the corner stone of the relationship model, the superior value issue.

We think the customers that work with Jacobs and long-term relationships get better projects.

They get superior value.

And the economics of their business is enhanced.

When we are able, to deliver the superior value it generates all kinds of good stuff.

But primarily if you are looking the center slide 8, it generates a lot of repurchased loyalty which then drives the items at the top up there which are consistent earnings, more growth.

Certainly the risks are much more manageable when we are working with the smaller group of clients on a long-term relationship.

The contracts, the liabilities, the risks are well defined in these relationships.

And because we are not working with everyone out there, we have a much lower cost of doing business.

Which allows us to reinvest and continue to make the model go.

We have been working on this model basically all of Jacob's life.

We really defined it very well in the last decade.

And it is the corner stone of our business with our clients.

If you move on to the next slide, which is slide nine, this is a selective market diversity slide.

And we have a pie chart here for '93 and a pie chart for '04.

A couple of things stand out here.

One is if you look at Petroleum chemicals in 1993, it was 63% of our business, today it's 39% of our business.

So, while Petroleum and chemicals are still a very large piece of Jacobs' business and much larger than it was in 1993, our reliance on that particular market segment has been reduced and we have been able to diversify the business significantly which reduces the cyclicity of the business, number one, and it stabilizes the individual operations.

Why don't we stop for just a minute on this slide and I will talk a little bit about where we view the individual markets.

Petroleum market, we are primarily a downstream player.

It's very strong right now very strong in the US, very strong in Europe.

It's driven by regulation.

We are cleaning up gasoline -- but it's also driven by new capacity.

We are seeing the first signs in the United States of customers talking about adding capacity.

As you probably know, the US is out of gasoline.

We see that in the price at the pump.

We see that in the margins that our clients are getting from the refining parts of the company.

And so with the shortfall of gasoline in the United States, it does now appear there are going to be capacity additions.

Not in the form of new grassroots refineries but primarily in the form of additions and de-bottle necking activity.

If we move around the chart of the chemicals business, which traditionally has been a very big piece for Jacobs, it's quite small right now because the industry is still near the bottom of the cycle.

I was looking at our customers this morning that are public and certainly their earnings are a lot better.

Their stocks are performing better.

And we believe the capital cycle will be upon us in the near term.

We have some activity going on now.

But nobody would say we are very far off the bottom yet.

The pharm and bio business continues to be strong.

These companies we work for are earning a lot of money.

They are pouring a lot of money into research.

They are developing a lot of new products and so that cycle continues to go on.

And we are working for the pharma-bio companies in Europe, the US and in Asia.

Pulp and paper where we were quite strong is just a small piece of business.

It's been very flat for a long time.

We continue to have business here but one wouldn't call it a boom business by any stretch.

If I move on to federal programs that business is strong, remains strong.

We have a lot of work.

We have a lot of prospects.

The buildings business and infrastructure, I'll lump together for a minute, because they're both operating about the same way.

Both businesses are pretty good.

They are not great; they have been impacted by funding levels, primarily at the state and city level.

As you know, the state governments and even city governments have had a shortfall of revenue.

That has impacted this business somewhat.

But it looks to us like the worst is behind us.

And that business is starting to pick up.

It never got bad.

But it certainly didn't grow over the last 18 months like we thought it should.

And then the high-tech business, where we're doing automotive, wind tunnel testing and building plants like that, we're working for some semiconductor companies that remains a relatively small slice of our business.

It's stable but not growing at this point.

If I move on to slide 10, we have always said that acquisitions are going to fuel somewhere between one-third and a half of our growth.

And all I have here is a slide looking at the major acquisitions over the last 17 years.

If I go, starting if you want to look at Canada and upstream oil and gas, there near the end of the chart, which is on 102, which put us into the Canadian operations and into the Carson(ph) business up in Canada with oil prices at $50, that will be a big business.

And we are enjoying a lot of activity up there right now.

More recently this year we have moved into the UK with an infrastructure with the Babtie acquisition and you have moved up into Scandinavia both with the Neste Investment.

And some activity going on in Sweden supporting some of our core clients.

We might want to go to slide 11 and just look a little bit at the year in review.

What has happened in the past year?

We made three acquisitions.

We acquired the Fisher Associates, which is small airport consulting company.

They are very well known.

They are helping us in that business.

We consider that part of the infrastructure business.

We made another small investment buying about a one-third of Neste's Engineering Division, which is (inaudible) up in Finland.

This is a group of about 500 people that are very skilled in oil and gas technology.

We think this is going to be a major addition to our network of skills, particularly in Europe.

And we do believe it's going to generate quite a bit of synergistic work.

We have been into this acquisition into this investment, excuse me, for about for a better part of six months and it looks very good to us.

As does the Babtie, we're three months into Babtie.

We closed the deal about the 10th of August.

And it gives us a very dominant position in the infrastructure market, in the UK particularly.

And we have rolled that over to Ireland already.

And we look at the Babtie deal is being a very good deal, and a precursor of things to come because we do view the infrastructure business as the world's largest single business.

Moving down to get some geographic expansion during the course of the past 12 to 18 months, we did plant our flag in Puerto Rico primarily to serve the large pharmaceutical infrastructure there.

And we are being quite successful with that by the way we have quite a bit of work in Puerto Rico.

With the Neste Investment and also some work in Sweden and else where in Scandinavian countries, we are gradually growing a presence there.

Probably never will be too large.

But there still is a fairly large infrastructure of our clients up in that part of the world that we need to serve.

We now have, if I look at Eastern Europe and we don't have a real defined strategy here yet we have a couple of outposts in Poland and the Czech Republic.

About a 100 people in each place.

And we are looking very hard at where that's going, particularly as those countries roll into the EU.

And sooner or later we are going to have a fairly significant presence in Eastern Europe.

If I look at the businesses on slide 12, what we have here -- we received major work from both the Petroleum and pharma-bio clients over the course of the year.

These are items that were press released.

These are significant in character.

And certainly our Petroleum business is booming on a global basis.

Again, it's a downstream business.

But if I go look at our Houston operations, we built a building about four years ago.

We've grown out of that.

We've rented another building.

We've grown out of that.

We're look for space in another place.

The activity in the Gulf Coast right now is absolutely intense.

The PharmaBio business, each of these clients and I won't be specific with them, go through an acquisition phase which a lot of these folks have done.

Then they go through a no spend phase.

Then they come back to the spend phase, so we track these clients as they go through these phases and couple now are coming out of the no spend phase after they've been in a significant consolidation with their acquisitions.

And business is starting to flow in those areas.

Moving on to 13, we won a couple of good contracts in the U.K.

The BAA framework contract and the National Air Traffic safety contract, those are both significant contracts.

We're also doing quite a bit of transportation work like the LBJ Freeway down in Texas and also for the Federal Highway administration.

If you move to buildings, we're actually working on 26 separate hospitals in France.

The activity in the healthcare in France is significant, it's starting to pickup in the U.K. and, of course, we've been seeing significant healthcare business here in North America for quite a while.

We've got another group of wins here in the buildings business.

We've got some good starts with the National Guard across the United States.

We've got a lot of work with the FAA through some long-term contracts.

We won a major contract last year at the U.S. postal service and GSA has been one of our big clients for many, many years.

I go on to 14, where we're looking at the federal program.

We won a couple of significant contracts with NASA we're chasing some more big work there.

We want to work with the Army we want work with the Air Force in the environmental business.

So our success this year with the federal programs, particularly with the military and NASA, has been really significant.

Chemicals business, we list companies like Borealis and Rohm & Haas, both of with whom we have long-term relationships, and both businesses for both of those companies are picking up and we do quite a bit of work for Atofina in North America.

I think this all comes down to slide 15 where we believe the business model is the key to our success, it is unique, we are pure, we stick with it.

We are not out doing transactions.

And we're not chasing hard money bids around the world.

We just don't do that.

We have a pretty good portfolio of diversified markets including the geographies and the different services.

The balance sheet is good.

Our average annual growth rate, for almost any period you want to measure is about 15%.

That's at the bottom line.

We continue to focus on that number, while we have not done that in '04 we are certainly geared to get back on track in '05 and we look at it '05 as a start a new run.

And I think with that I'm going turn it back to the question and answer.

OK?

[Operator Instructions].

We'll go first to Michael Dudas with Bear Stearns.

Good morning, gentlemen.

Hi, Mike.

Hi, Mike.

John, could you tell us in the fourth quarter it seems like you generate some pretty good cash x the acquisition.

You talk about how much cash generation there was when you take into the account the acquisition and what the outlook might be for 2005.

The detail will be put - will be distributed in our 10-K.

So I'm not going to get into the detail elements of that at this point.

But obviously we do continue to have a good, strong cash generating business.

Typically our cash, our free cash is close to our net income.

Because the capital expenditures are in line with the depreciation, we do have a little bit of increase in capital expenditures this fourth quarter.

That was mainly having to do with some of the tentative improvements and such we had in some of these office buildings as we've expanded in the Gulf Coast.

The working capital needs, while they do come into play as we grow internally grow the business when you get right down to it, our net cash, our available cash tends to be our net income.

I don't see anything varying from that going forward.

Thank you.

Noel, could you maybe help us and tell us or share your thoughts on what the Delta would be or what the drivers are relative to your low end and high end on the guidance on 2005?

What are the handful of drivers or events that would cause it to tip one way or the other?

I think it comes down to in the end, as you know we suffered some setbacks here in the early summer and filling that bag of work up to speed in which that gets filled up and those teams re-deployed and some have already been re-deployed and some of the projects that went away are coming back.

I think it's the speed with which they come back.

So that timing is one thing.

I don't think that's the major thing, I think a lot of it depends, if we look at the go-ahead and we just finished a business planning cycle, we've got about the same percent business in backlog we normally have, the backlog sits pretty good rate now.

The prospect list is good.

I think the real key to whether we're at the top end of that range or not or near the top end is going to come down to how successful we are in the sales being over the next 120, 180 days.

The prospects are certainly there.

And if they come in, it will be a better year than it would have otherwise been, as for some reason we don't win some of these things we think we're going to win, we'll probably move to the lower end.

But I think the backlogs in place for this solid year right now.

I think the trimmings and deviation around the number will depend to some degree on how well the work comes in the next 120 days.

And how about the assimilation of Babtie?

Is that a factor?

No.

I think that Babtie is going to assimilate like a gunshot; they're a very well run organization.

We're going to start to find some synergies almost overnight.

We've already found, it's interesting we have already found synergies out of this Neste investment, which is peanuts compared to Babtie.

But we're already floating around some pretty big work and synergistically they took lay out of the Neste investing that could drop in the next 60, 90 days.

It almost surprised us, to be honest.

My final thought on Noel, if you look at your revenue pie chart and you look at the next six months of booking prospects, etc., where do you think we'll see the biggest increases or decreases in that pie chart over the next six months?

Where do you think most of the work opportunities for you will be coming through?

In your business?

Craig and I are sitting here pointing at the chart arguing over this.

We think there's going to be significant bookings in the federal programs.

We believe there will be significant bookings in Pharma-Bio.

And somewhere we think there's going to be significant bookings in infrastructure either in the U.S. or in Europe.

And the thing that will happen in the Petroleum business is that while we have booked a ton of engineering work, we'll continue to book the field services of these jobs move along and we begin to understand that, yes, we're really going to do the construction on.

Because we have booked a ton of engineering work for the refiners you know in the last year I guess is the right way to put it and I am looking around the guys are nodding their head.

The wild card would be if some chemical business showed up of significance, which it could.

There isn't any doubt; we have got a couple significant chemical programs we're chasing right now that weren't on the table a year ago .

Is that Gulf Coast or Europe?

Actually it's Europe right now.

Noel thanks a lot.

OK.

Our next question comes from Sanjay Shrestha with First Albany.

Great.

Good morning, guys.

Just a couple of quick questions here, kind of going back to that guidance number for 2005 again.

And taking into consideration the guidance of the first quarter here given the high end of the range of $0.58 or annualizing that gets it to $2.32 so it clearly seems like it's going to be a back-end loaded year.

Is that really a function of sort of like the burn on your backlog?

Sort of picking up in the second half of the year?

Or if you could elaborate on that a little bit that would be great.

Well, it's a couple of things.

Goes back to what I told Mike a minute ago.

There's some work that needs to be sold is get toward the high end.

We also have a bunch of backlog in place that's just getting moving.

We talked all last year about, you know some of the problems we had last year with the slow development particularly, in the refining business.

OK.

Well, that's just a tidal wave starting to roll through our system right now.

And that building momentum, as we continue to hire and move people, particularly along the Gulf Coast, we're also seeing a lot of activity in our Netherlands office, which is also heavily involved in the refining business.

So that's moving through like that.

So I think a couple of businesses is dependent upon getting the work in the door and making it go, which we think will happen.

Some of it is just backlog is just accelerating and we're still in a very strong hiring mode in several of our locations.

And in the end the hours drive the business.

OK that's great.

I was kind of referring more towards the high end of the ranges clearly we need to sort of go out there and win some business share.

But what is sort of like that low end of the range or the 240 kind of a number that takes into consideration in terms of how the year needs to unfold?

If we -- how do I say this right?

We would be very disappointed if we're at the low end of the range.

OK that's where I was going.

I'll start with that.

We don't intend to be at the low end of the range, OK but there's possibilities but I think right now where the business is moving it would look like the business is coming in and we have to win some work.

There isn't any doubt about that.

We think we'll win the work.

We finished the business planning cycle basically a month ago and sent it to the board here few weeks ago, actually last week, I guess.

It looks like the plan's in place to make go.

But again there are things that could happen.

We could run into trouble some place.

We could run into another raft of delays or cancellations.

I think the election, I don't care whether it's the democratic or republican, to be honest.

The fact it's probably going to be note, well, there is going to be no change in the White House helps, only because that puts a continuity into the government programs that you wouldn't have if you had a change in administration.

That's great.

One last question on the Babtie acquisition here, is there anything sort of you're looking at from a strategic standpoint to aggressively kind of go after the upstream side of the business or the oil and gas side?

We're still-hunting an upstream acquisition pretty hard.

We don't have anything in play, and we do we'll tell you, but we're hunting hard.

That's great.

Thanks a lot guys.

We'll go next to John McGinty with Credit Suisse First Boston.

Good morning.

Hi John.

First of all, just one numbers question John, can you give me on what on the cash flow statement what the sum of all of the acquisitions will be?

Detail will be in the 10-K.

It's close to $180 million.

All told.

OK, thank you.

With regard to the guidance -- and I guess a couple of points.

One, are we looking at, you know when you made the guidance last quarter, you said, "yeah, it's unusually wide" but basically you're forcing us to make the guidance a quarter early, so we're going to get away with it, so live with it.

OK.

We're now a quarter closer and the guidance is still a foot wide, -- 10 miles wide.

Should we -- first question is, is the midpoint of the guidance your most likely?

In other words, is it a bell curve around that, or does it skew more toward the higher end?

John Prosser First of all, John, as I told you before, we don't give guidance within the guidance specifically. -- Historically you know how we tend to do that.

So I think we have the range out there.

As Noel pointed out, there's reasons why we have, maybe have kept the range as wide as we have.

Because of some of the uncertainties or, you know things that we have going for the next three to six months and we think that there's a good likelihood, that we'll be able to get a positive incline but there is also likely here we will be below midpoint.

And that's I guess much of the guidance we're going to give.

Noel used the term which I understand what you mean in terms of a tidal wave of business, the stuff that you've booked the front end from.

But what wasn't clear to me is, has the back end -- in other words, the tidal wave of the business started or are you expecting it to start?

Because it was supposed to start a year ago on some other projects and it didn't.

That was kind of a problem.

Are we a little further along?

Has is started to -- started better this time?

Yes.

It's moving.

They are all moving.

They've all moved through their original phases, John.

OK.

And the projects -- first of all, there's some time deadlines in a whole bunch of this work.

On that, unlike other desulphurization stuff.

Yes, and so the time to study and look for the absolute, most economic solution has passed.

OK.

And so a lot of our clients took a lot more time than we ever envisioned, trying to get to the perfect answer.

I'm picking on them now a little bit and I don't mean to.

But get to the right answer.

OK, and so -- But that time has been burned.

And now there -- are delivery dates that have to be met.

OK.

And so now we're moving into almost what you would-what you would call, not almost.

What you call a conventional project cycle.

OK.

The process work is being finished.

Designs will be completed.

And the construction will be done.

Alright, and on the projects that were canceled and delayed, I know the canceled project is dead.

But have all of the delayed projects been restarted?

No.

Most of them?

No.

Any of them?

Yes.

Keep fishing.

We'll get there, John.

No. -- I think we told you we had a restart of one, almost 45 days after it got stopped.

Right.

It looks like a couple of the big ones are going to restart in January.

OK, --.

That's one of the issues we're struggling with.

It looks like they're going to restart if they do restart, it's good news.

OK, but -- that's not in the upper end of the guidance?

So that's -- in other words, you don't need that to get to the midpoint of the guidance?

John, the guidance is the guidance.

OK.

Hang on a second.

Wait a minute.

We only found out after the fact last time that early on last year there were acquisitions later in the year in the guidance.

OK?

Are there any acquisitions in the guidance?

Not the acquisitions you've made, any further acquisitions in the guidance?

No.

OK.

Then if I can just actually, ask you a question about the business, believe it or not.

The Petroleum business.

You talked about the de-bottle necking, the additions, those kinds of things.

Could you talk to us about, just what would an average project be for Jacobs?

In other words if one of your Petroleum customers wants to do a de-bottle necking in order to get additional capacity, is that a $50 million project?

Is that a $200 million -- It's going to go over the lot.

But what should we be thinking of?

I'm going to let Thomas Hammond talk to you.

Tom you got the floor.

John I think the projects range from $50 million to $500 million and it depends a lot on the exact nature of the project and it depends a lot on the refinery, the de-bottle necking or project it's going into.

Some of the things that are driving this besides capacity -- what we call capacity creep.

It's not brand new refineries.

It may not even be brand new crude units.

But a lot of refineries, particularly in the northern tier in the US, are looking at major projects.

These would be in the range of $200 million to $500 million each.

To enable them to process the crude that's coming out of Canada --out of the tar sands and the oil sands area.

OK.

And major modifications will be necessary to process that crude.

But obviously the money is being spent in Canada.

That crude oil's got to go somewhere.

-- It's cheap to do it in an existing northern tier refinery spending a couple of hundred million, then the ship at some where, or just no one's going to build a new one.

That's right.

The other thing is -- and there's been a lot of press lately around the world that we really don't have a shortage of oil around the world.

What we've got around the world is a shortage of refineries that can process the crude that's available.

Right.

The light, sweet crude is in short supply.

And a lot of the crude oil that's coming into the market out of the Middle East and out of Russia is heavier and is higher in sulfur, and major refinery modifications are necessary to enable these refineries to process that crude.

There's a huge economic driver to do so.

We were talking to one owner a couple of weeks ago.

That's looking at a program to be able to process Russian crude, and the spread between Russian crude and the crude they're buying today is $8 a barrel.

Wow.

So it's a huge incentive.

One, they can't find the sweet crude anymore.

Secondly, it's a huge economic incentive to try to process these heavier and sour crude's.

Great thank you. -- Then on the chemical -- Noel, you talk about the business picking up.

But since you are primarily a U.S. or European -- in other words, you're not going to go into the Middle East and into the Asia and so on.

Is there that much chemical work out there for Jacobs in Jacobs' geography?

Well, You got to look at it like this. 90% of the chemical infrastructure in the world is in the U.S. and Western Europe.

Yes, but.

I'll start with that, John.

So there's going to be a fair amount of work.

The new plants will not probably --certainly with $5 or $6 or $7 gas, whatever it is today.

We will probably not going to see a lot of petrochemical activity in North America and Europe.

It's going to go to the Middle East.

It may go to places like Singapore, certainly.

We got a couple clients talking about really big work out in Singapore.

And another major wave of expansions is out there in Jurong Island, whether that happens or not, only time will tell.

We would see that we will have to change how we approach the business a little bit when this spending wave comes back and we're very actively looking now it through a lot of this activity going into the Middle East, how are we participating?

We've been working on that for the last six months trying to get into this cycle and see where we would fit.

Because we're not going into the Middle East and bidding these jobs on a lump sum basis.

So You would partner with somebody?

We'd either partner or do the front-end packages. -- We have an outpost out in the Middle East, and Abu Dhabi.

The question is do we continue to fly over the Middle East, or do we go out there, and get actively involved in the work.

And also there's a lot of activity both in the feed packages and doing the P.M.C. work, out there.

Final question.

You talked about the federal program's strong and I think the word you used was that there was a lot of activity going on.

That was one of the things that hurt you at the beginning of last year.

Delays -- both in federal money being spent but also delays in being challenged on things and so on.

Is all of that gone?

Are we now flat out on the federal programs?

We're flat out, on all of those federal programs that we won.

Yes.

The protests have all been resolved?

Were they all resolved in our favor?

Don't ask me.

I'm asking the guys here.

I'm not asking you.

They were all resolved in our favor.

And - but -- We have a new wave of prospects we're looking at right now it's a very large programs.

Do you expect to be challenged on those, too, if you win?

You may or may not be depending on how clean the selection is, you know the big AEDC contract a year ago July, that we won, there was no challenge.

OK.

So I would say, a lot of it depends on the agency.

And the military seems to do better than the other agencies.

So -- there's still some issues on the state and local.

But on the federal stuff, be it building or whatever you're doing for the federal, that's strong?

Yes.

Great.

Thanks very much.

No doubt about it.

Thank you.

Next is John Rogers with DA Davidson.

Good morning.

John Prosser Hi, John.

John, I guess, first just, on the quarter, the SG&A levels were up quite a bit in the quarter.

Is some of that acquisition costs or what happened there?

Well most of it is related to the integration of the acquisitions.

Babtie - we have two months of Babtie in there.

Being focused primarily on pro services. - You know they -- don't have a real high revenue but they have more and more of their costs - SG&A costs.

So the big part of that increase, in fact almost all of that increase, is the fact that we have Babtie in there for two months.

So was Babtie dilative in the quarter?

No.

Babtie has -- Probably about two cents.

OK. -- I guess looking out into next year a little bit in terms -- over the past year your technical service has been growing much more quickly.

I know, you know some of that is the acquisitions.

But given the book of business that you're look at now and the opportunities out there, do you see the field services work catching up and getting to more even mix again, or do you think that's just something of the past?

No.

We would expect field services to catch up.

We'd really like to run our business about 60/40, field services to professional services.

OK.

I think last year we ran at 50/50.

Right at 50/50.

We would like that field services number to be higher.

And again, you got to remember in the field services, even on some of this big refining work we've got, very large contracts.

Some of the question always comes down to do the revenues go through our books or not?

Right.

So that question is always sitting there.

So we don't control that.

We may win the program.

But the revenues may never show up.

We would like to see this company run at 60/40 or 55/45 field services to pro services.

And based on the prospects that you're looking at now, the refinery work, some of the chemical work that you talked about the infrastructure, is that -- could we see it at that level by the end of this year?

No.

I don't think we'll get that level this year.

Certainly, where we're trying to drive it.

We have' got a couple of initiatives in the company to drive that actually.

It will depend to some degree -- in fact, in a couple of cases it's going to very precisely depend on -- we've got the contracts.

We're going to do the construction.

Where do the revenues flow?

If those revenues were to go through our books, you will see a bump in the ratio this year.

But it isn't going to go to 60/40.

OK, and I know that again it depends on what revenue flows through your books.

But if you got back to that level of mix, would you see the reported margins decline or stay where they are?

The absolute margins will be up.

The percentage will be down.

OK.

OK.

All right.

Particularly at the gross margin level.

That's the gross margin.

Yes.

Right.

At the operating margin, I think you wouldn't see the exchange.

I answered that too quickly.

OK.

So, It would be much harder to see at the operating margin than it is at the gross margin.

OK, and then one last thing.

In terms of tax rates, any changes there?

Given your mixes of business and things?

That's something we're evaluating.

We don't think there will be any significant change to the 35%.

But as we have gotten more global and more countries and more tax rates involved, it's something we're looking at very closely.

While there may be a little bit more volatility in it, we're not talking, you know, huge ranges.

But we are talking it might be up or down a little bit, quarter-to-quarter or year-to-year.

Right now for planning purposes, we'd say it's probably going to be about where it is this year.

OK, great.

Thank you.

Our next question comes from Tom Ford with Lehman Brothers.

Thanks very much.

Good morning.

Good morning.

Good morning.

So, John, I guess any questions on Babtie you're going to tell me to look at the 10-k, right?

Anything of great detail.

OK.

One question I do have.

I look at the overall backlog.

You had given an indication as to what Babtie contributed.

If I back that out, Jacobs' backlog was up I think somewhere around 2% sequentially.

Somewhere around that level is that right?

That's close.

Yes.

OK, and I am just trying to I guess reconcile that, Noel with your comments.

I mean, you seem much more optimistic today than you had been in some of the past calls about just looking at the forward view.

It would seem like you're saying if you just look at that organic or pre Babtie backlog level, would you expect that to continue to step up and at something of a better pace.

Is that fair?

What I say is --go and look at the back page of the press release where we have the pro services backlog, which has gone from less than 3.4 to almost 4 billion.

Half of that increase is Babtie.

But half of that increase is pure Jacobs indigenous backlog increase.

And that technical professional services backlog drives the business.

You have to sell that engineering work before you get the construction.

The construction may or may not go through your books.

But on most of these big contracts - and I'll look at Tom.

We're executing the construction.

Right?

Some of them aren't going through the books.

Yes.

The word most is subjective.

But yes.

There are a couple of very large programs where we're essentially doing all the work.

We're collecting all the margin we would ever collect.

But the procurement in construction revenues are not going through our books.

OK.

There are two or three of these programs where we have already booked the construction.

It may not even be booked.

Back that off.

We've been told we're going to do it.

Where we are in the booking process, it depends with signing contracts and that kind of stuff.

There's a large percentage of it where the decision hasn't yet been made.

OK.

By large, 25% of the projects, engineering projects that we're working on.

And these are pretty large, singular events.

The owner had not made the decision yet.

As to how they're going to handle the construction.

OK.

Great.

Thanks.

Noel, going back to one of your comments, I think John had asked about chemicals in particular.

When you were talking about the Middle East.

You are also-I also saw there's something in the press talking about your pre-qualifying for an upstream program management role in Saudi.

I was wondering.

Is that different for Jacobs to see your name mentioned in that?

Obviously they could just be throwing out names.

But is it different to see you guys in there, mentioned in it that light, in that part of the world?

Let Craig take that.

I think that's a progress step we're making along the lines of growing our business.

You know, we have established a pretty strong position with a lot of the major players in the upstream in the oil and gas industry.

We're starting to see that reputation carry forward toward opportunities in the Middle East.

We're going to focus carefully on things like front-end design and P.M.C.

You're not going see us over in Middle East there is a lump sum contractor.

But we see that as one of the growth factors for us for the next few years.

OK.

So it is kind of consistent with Noel's commentaries - commentary earlier that you're just spreading your wings, if you will a little bit.

Yes.

Following on that.

Noel, one of the things -- in reading some of the things on the Babtie website in the past and just looking at your chart in the presentation, you reference Babtie as essentially the U.K.

But you know it's clear that they were trying to make or had made inroads in places like Hong Kong.

And I think there were infrastructure projects in China that they had also talked about in terms of looking at.

And should I take it that, that could be something incremental or is that something that you guys just don't want them to do at all?

There's a little different situation in different places.

Hong Kong is a well-established operation.

There are probably about 250 people there.

It will be what the Hong Kong market supports it.

Hong Kong is not, as a lot of people believe, a stepping point for China.

Today if you want to go to China, you have to be in China.

Our view of China from an infrastructure perspective at this stage would be very limited and very opportunistic.

If they were the right thing, for the right customer, we might do it.

But that's not a focus area just yet.

OK.

OK.

Great.

And one last question John, to you, I know you hate questions on guidance.

But I'm sorry.

I'll apologize in advance.

In terms of the next quarter -- and I'm not sure.

I could be mistaken about this.

But it seems like the range is fairly wide.

And I was just wondering if you could discuss or Noel if you could discuss any factors influencing that range.

I think we talked about some of them.

Some of the factors that we've talked about for the whole year also affect this first quarter.

There are some of the uncertainties of how quickly jobs get taken off, how we get the integration of Babtie pulled right in.

So I think that's why we have kind of given them fairly broad range.

It goes back to, you know, what's going happen in the next 90 to180 days having a real impact on the year.

And the quicker those things get started, the quicker -- more likely we'll be to move towards the upper end of the overall range.

OK.

Would the integration of Babtie have any impact also?

The integration of Babtie is almost axiomatic.

It's going well.

We're integrating a couple units in the U.K.

We're going get some savings out of that.

In fact, just because there's going to be a bunch of synergy that go to work there.

But we're not going to see that until probably Q2, 3 and 4.

Right now for this quarter Babtie is going to deliver basically what Babtie can deliver.

And the improvements we're going to get -- and there's going to be several improvements.

We're not firing tons of people.

That's not the idea.

But they're all going to be incremental.

They're all going to be added.

We're going to get a bunch of savings out of things like insurance programs and stuff like that.

OK.

Thanks very much.

We will go next to Lorraine Maikis with Merrill Lynch.

Thank you.

Looking at Babtie's annual report in '03, it looks like they had revenues of about $300 million.

But we were a little surprised that the addition to backlog was only 350.

Could you talk a little bit about what you expect to Babtie's contribution to be in 2005?

First of all, you got to look at Babtie's business model.

They have a lot of smaller work in the infrastructure business.

So if they've got 300 million in revenue -- and I think that's about right.

I actually don't focus on revenues.

Having about a $300 million backlog seems about right for a company like that.

They would not have the ratio backlog that a Jacobs and Floor(ph)will have because they don't have some of the large, long-term contracts that Jacobs and Floor has.

So in that regard it would look to us like the $300 million is about the right number.

That would be our judgment, at least.

The second question was what are they going to add?

Is that the question?

Yes.

What did we say before about nine(ph)?

We haven't really said.

But since you said it will be.

And one of the reasons for that if you go look at Babtie's data, they were a lot more profitable on that.

They remember when they did away with the amortization of goodwill, we had to right up a bunch of stuff and then amortize it against the acquisition over a three-year period.

So Babtie's earnings with these subtractions and, of course, the interest charges that go in the deal too even though we use your own cash, there is a computed interest that goes here, but that thing will be growing fairly dramatically until they get up to the full earnings potential, over a period of about 24 to 30 months.

The revenue that they had for the two months that they were in our quarter was about $55 million, $54 million.

So that's the $300 million for us to launch.

And then can you just disclose for us the balance of that intent -- intangible asset that you plan on amortizing?

That will be all in the 10-K.

That hasn't been definitely sorted out yet.

We are still doing some of the purchase price allocation and finalizing some of the numbers.

Overall.

So, we will get -- all of that disclosure will be in the 10-K.

OK.

Just to clarify on the SG&A question which was asked earlier.

Part of that looks like it's coming from Babtie because of their business mix.

Can we infer from that Babtie will add to your gross margins and add to your SG&A expense?

Yes.

And being professional services they will have a higher average gross margin than our overall mix because we don't have the construction.

But they also have a higher G&A to revenues.

So, they will have an impact on both of those.

Thank you.

Our next question from Richard Rossi with Morgan Joseph.

Good morning.

This is actually Richard Pagett calling in for Richard Rossi.

Most of my questions have been answered.

But I wondered if you guys could comment on your acquisition pipeline and how business owners out there are looking at their valuation?

Well, the pipeline is good in the sense that we have been actively out there talking to targets and developing relationships.

As you know these deals happen when they happen.

This isn't a business where you could do a hostile deal.

As far as valuation in some industries we're seeing valuations very much in line of what we think makes sense for us and our shareholders in other industries, the valuations are sort of that around.

So, we will focus on the ones that make sense for our shareholders.

In terms of networking capital number.

Do you have that?

Again, because we are still finalizing some of the purchase price allocations, we don't have all of the working capital numbers sorted out.

So I hate to keep saying it, but it will all be in the 10-K.

OK.

And then what do you expect that to be out about?

It will be probably the second week of December or so.

OK, great.

That's it.

Thanks.

Thanks.

We'll take our next question from Stuart Sharp with Standard and Poor's Equity.

Good morning.

Hi.

Can you talk a little about the mix, and the margins in the backlog?

Do you see them improving and which areas have the highest margins?

The margins and backlog probably are pretty stable.

Certainly we don't see them going down.

You know they may be going down in an isolated location where there's either lack of work or extremely competitive.

Then they'd be going up in another location but in general, the margins and backlog are about stable I would say.

As you look to the individual businesses, at the gross margin level it changes fairly dramatically.

By the time we get down to the net margin level and subtract the G&A, the margin stays pretty constant over all of the professional services business.

The net margin.

The higher gross margin businesses typically carry higher G&A.

And so when you get down to the net and then you all the way to our bottom-line, our $30 million in a billion or two whatever that number comes out to be which is like 2.50% I guess something like that.

Those numbers come down from the individual businesses.

They will vary from year-to-year but there is not one business that would you preferentially say let's junk these others and go to that.

That just doesn't exist.

OK.

Do you have a weighted average cost of capital number?

Is that in the 10-K?

We don't disclose the margin and backlog.

No.

Weighted average cost is doubtful.

Well, cost of capital.

I'm sorry.

And again when you look at our balance sheet, we have a $100 million or $80 million of debt against a $1 billion worth of equity.

Our cost-to-capital is what you input to our cost of equity.

So, cost of debt is really pretty small.

OK.

Thank you.

We don't calculate that or put it out there.

OK.

Thanks.

We'll go to the next, to David Yuschak from Sanders Morris Harris.

Good morning gentlemen.

Good morning.

Good morning.

On the Babtie I think, John, you said it was $0.02 contribution in the quarter and about 55 million in revenue.

Was that level of performance for that short period of time a surprise for you guys?

No.

But that's about the dime or so for the year that we talked about.

Thanks.

So that's consistent with your thought process here on the get-go that is?

Yes.

Again it suggests may be your integration is going very well right there?

Babtie is doing just fine and they are delivering exactly what we thought they would deliver.

There's been no deviation whatsoever so far.

OK.

And then as far as Babtie is concerned, when you make an acquisition, you would like to also think about what are things there that they have that maybe are under commercialized or potentially leveraged that Jacobs could bring to the market place?

Given that relatively new market for you guys as far as the infrastructure in the U.K. and Europe.

What would you think as you put your plans out for Babtie to leverage that?

I think you said you can probably do something there to really get it fully utilized in the next 24 to 36 months.

What would those maybe two things be that you can get that thing there that quickly?

Well you know I guess there are two or three things that are areas that we think are kind of interesting.

First off, we had our relationship with Jacobs Infrastructure business.

And there's clearly some leverage there in that the business is that we were strong in where as this is where Babtie wasn't as strong.

The combination, we have a lot of leverage in just a basic infrastructure markets in the U.K.

But on top of that, Babtie brings some real presence in the nuclear industry in the U.K, which when we coupled that with what Jacobs brings from the U.S.

There's lots of opportunities for real growth in the Nuclear industry.

Both on the remediation side and on the development side of projects.

So we see some real leverage coming from activities like that one.

Then, of course, Babtie, -- part of the framework for expansion into Eastern Europe.

The nuclear side of it, you think -- that could be maybe a year out from now as you put the thing together?

Well, what I think pieces of it will start to show up in this fiscal year.

And it will continue to grow for two, three more years after that.

So that could be the real -- that plus Eastern Europe could be the potential up sides to the acquisition?

Well there's still a lot of organic growth to be had in the U.K.

So I wouldn't discount our abilities to just build a bigger infrastructure business in the UK.

We're by no means the dominant player even at this scale.

But looking at the next couple of years, though --, that Eastern Europe and nuclear could be some real nice add-ons to the business --.

I'd put the nuclear business first on that list then Eastern Europe as a secondary opportunity.

OK. -- In the SG&A, was there anything, John, non-recurring in the way of acquisitions-related expenses that we could take out of that number?

Not really.

OK, and then one other question.

You know when you take a look at your backlog from the various markets, you could argue for the most part there's the softness and some of us haven't recovered for several years.

Others have just been slow, ramping back up again.

If you were to take a look at that backlog today, is there any particular areas where you think that could be at risk for new bookings, that you maybe think, that are out there now that may not be out there for whatever reason?

Let me take that.

Let me think -- let me go first to the slide, OK.

I think the only -- you know, we are in a business where we need to win work.

And we need win; we need to sell, you know, a whole bunch of work this year. -- I think the way it looks to me if -- I'm sitting here look at the chart, we got business that are slow, chemicals and pulp and paper.

Of course, we don't have a lot in the plan.

And even the high-tech business, we don't have a lot in the plan.

So the business is going to be driven by the other piece of the pie this coming year.

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

And if I look at the other pieces of the pie, the work is there.

We've got the backlog in place.

We are in a very traditional situation as far as what we think we'll do next year and what our backlog is, absolutely right on target with our numbers.

And the prospects are there in the better markets.

Infrastructures building, site programs, pharma-bio and Petroleum.

We got just a lot of prospects.

And I think the variation in the year is going to be are we successful in dragging those in the door

OK.

I think they will move.

I don't think there is as much uncertainty - in fact, I would guess there's less uncertainty on these prospects now, than there has been in quite a while.

We've - you know -- we're going have a stable political situation in North America.

We now got the presidential election behind us.

We believe there's probably a little bit of wind at our backs.

I listened to a speaker the other day talk about being late cycle in character for our business.

And while we don't acknowledge that we do anything, but have stable earnings growth, there isn't any doubt, it's easier when the wind is at your back.

And it seems like we're a couple of years into this economic cycle now.

Business seems to be getting better.

Our clients are earning more money.

Some of our clients are earning record money.

So I think we have got the most favorable business climate we've had since, oh gee whiz, probably 2001, I suppose.

Before 9/11.

So the bottom line is it's the matter of the competition out there, and how bad they may want it versus you.

You got it.

It's just winning the business flat out.

Its just that simple.

OK, thanks.

That's all I got.

Thanks I appreciate it.

Our next question comes from Gregory Weirick with Westcap Investors.

Asked, and answered.

Thanks.

Thank you.

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

Just a couple of quick ones.

Did you say that after we get the $0.10 in 2005 that, that is in fact, building up to a more normalized run rate so that 2006 would be not just the growth in the business but 2006 would be at a higher rate when you recover up to whatever normal would be?

We're talking about Babtie now?

Yes.

I'm sorry.

Absolutely.

Yes, right.

When you look at both the interest charge, that goes against it the, cash we'll build in the company, and you look at how we're amortizing these assets, the answer is it's $0.10, and that gradually builds over a period of time to the full Babtie earnings.

Because that -- most of that amortization over a three-year period.

Although some of it stretches out beyond that.

But we're taking a very hard hit in the early years, John.

OK, alright.

Then the -- $0.10 is obviously is in the midpoint-- if you take the 10 cents out of the midpoint of your range, you've only got a 9% growth in earnings which seems like not a lot, talking about 2005 verses 2004 the, the midpoint of the range, from the two in a quarter.

Given the fact that there should be some catch-up, and is that because the business was just harder hit than we thought, or are you just being overly conservative?

I would say to you, John, we don't know.

And I'm being very blunt with you.

It was certainly here, we had a hit.

OK?

We stabilize the business.

We're back on track.

The work is coming in.

The hours in the offices are building up.

Babtie does contribute. 9% over 04 over 05 internal growth is not a great number and we agree with that.

Particularly from a depressed base I mean if this not a bad number...

Nobody's arguing that by the way.

You got to remember the impact of this -- of these projects and such is not completely over because that's hitting our first quarter and causing some of the lower expectations for the first quarter.

If things return to "more of a normal trend" in the second and third quarter, you're still not look at the whole year being improved, having the improvement on it?

We're coming off a weak first quarter, John no matter how you cut it.

I don't I don't care where it is in that range.

It is not a great first quarter so we're building through it.

So then the question is how fast does that curve ramp up to the rest of the year?

The other question is the one that's unanswerable; the other question is to what extent is your guidance conservative because you got burned four quarters in a row?

And who knows?

I think you don't like if you would be less than human.

Let's be serious now.

I understand.

Final question.

As you move into the infrastructure given Babtie and everything else, to what extent -- it's one thing to do infrastructure projects in the states but as you move over into new markets and, yes, you were there before.

But to what extent do we begin to shift from the relationship business to what extent do we begin to absorb more risk, at least in a lot of projects over there end up their pressure to put some money into it or get money for it.

To what extent do we change the profile of the relationship business, which has been the corner stone, as you put out and I don't disagree with you, to Jacobs' success?

Well, because we've been into game for three years, John, we've been through all of those public private conversation arguments.

We know how we are going to participate and we are not going to be driven to change the model.

We have figured that out if we hadn't, we wouldn't have done Babtie.

There's tremendous leverage in the infrastructure business in Europe, particularly in the U.K., for PMCM and people overseeing these large infrastructure programs.

For some reason I hope there's not too any Brits on the phone, for some reason the Brits think the American know how to do better than they do, OK and I'm not say we go do or we don't, but certainly there's that perception.

So with a large indigenous population of people in the infrastructure business in the U.K., a really good capability at PMCM work that comes from all of our businesses, we think that puts us in the cat bird seat to get some of these really big contracts.

In a role that fits the relationship model to the take.

Exactly.

Thanks very much.

OK.

Thanks.

And at this time we have no more questions.

I'd like to turn the call back to Mr. Watson for concluding remarks.

I thank you all for participating.

I recognize that there was a President on the phone during this, I mean a president on a news conference.

Bush's news conference started at 8:05 and I appreciate all listening to us rather than him.

You can probably pick him up on tape, too.

Thank you for your support and have a good day.

Ladies and gentlemen this concludes our conference call today.

We thank you for your participation and you may disconnect at this time.