雅各布工程 (J) 2005 Q2 法說會逐字稿

Good day, and welcome to the Jacobs' second quarter earnings conference call. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the call over to [Patti Burner] for forward-looking statements.

Good morning.

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 10K for the period ending September 30, 2004, and the most recent Form 10Q, for the period ending December 31, 2004, including, in each case, the management's discussion and analysis of financial conditions and results of operations contained therein.

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

And now, we'll turn it over to John Prosser, CFO will discuss financial results.

Thank you, Patti.

Good morning.

First, I'll go through the financial highlights for the quarter , and then I will turn it over to Noel Watson who will cover the business strategies and the business overview for -- and outlook.

Turning to page -- slide four, the reported EPS of $0.61 was in line with last year's EPS for the same quarter, same with the net earnings of 35.7.

Both of these were up from the prior quarter.

While the revenue -- while the income was flat with last year, the revenues did increase, and some of the contributing factors that kept the revenue -- or the income flat even though the revenues are going up, with the addition of Babtie, the intangible that we have to amortize have a negative impact a $2 million a quarter.

The added interest expense from the Babtie transition brings down the net income.

We're still in the early process -- the early cycles of some of our projects, and particularly in the oil and gas, so while the professional services revenue and activity is picking up, we still haven't moved in the field.

So there's a lag effect as to when those margins -- improvement it in those margins really start to being shown.

So while we are well on the -- continue to be on the recovery that we've talked about the last couple quarters, there's still room to move up.

Obviously, we've reported a very strong backlog, again a record backlog at $8.2 billion.

Strong sales for the quarter, and this is a good indicator for the future.

Our balance sheet remains strong, and our net cash position, which is cash less debt, is at 33, $34 million, down from last quarter, but still very strong.

Some of the factors contributing to the decrease in cash on the buildup in receivables related to the pickup in activity particularly the professional services activity is that it takes them a little longer to collect, and also the start up of a couple large government projects where you always have some front-end cash investment as you take over the transition and move into normal operations.

We see that we would expect this position to turn around over the next couple quarters, and that the cash flow for the year will still be strong as we've talked about in the past.

We did revise our earnings per share guidance for the year to 244 to 262 per share.

The knowing range -- really reflects the impact of higher interest rate -- excuse me, a higher tax rate that we've had this year over last year and also the continuing added costs that we're seeing from compliance with the Sarbanes-Oxley 404 regulations, and just the general market conditions.

The slide -- slide five -- it's just our history as obviously we've gone flat the last year, but even with that flat -- this flat period -- we still show a good five-year compounded growth rate just under 15%.

Slide six, we did this last quarter as well, just a comparison of this quarter to the prior quarter.

Obviously, since the June quarter of last year, when we had the lower operating results, we have been back on a growth trend and this just represents the quarter-to-quarter growth.

Clearly, at the operating profit line, we've shown good increases, and those somewhat offset by some higher other expense this year that related to some shut-down of some offices, actually moving from one office to another, having to take some write-offs on tenant improvements and leasehold improvements, and other miscellaneous expenses, but the increase from the prior quarter is right inline with what we have been talking about.

Going to slide seven -- the history -- our history of the backlog -- again, good year-over-year growth, also good quarter-to-quarter growth as well.

This continues to be a strong part of our positive outlook for the future.

With that, I will turn it over to Noel Watson to go over the quarter.

Thanks, John.

I'm on the slide eight now of eleven.

We're going to talk about strategies to continue to get a 15% growth, and we're going to talk about the business model, a little bit about acquisitions, about cost, and then some of what's going on in our individual markets.

Let's go on to slide [inaudible].

We talk about our relationship-based business model a lot when we discuss it with our investors, and we thought it's probably worthwhile here to talk about it here again today since we didn't on the last webcast.

Our basic model is that 80% of our business comes from preferred relationships of one type or another.

This can be long-term form of alliances, it can be with -- it can be just customers where we don't have formal alliances but we get the bulk of their work or where we're sharing the work with one other contractor, but 80% of our business comes from our relationship-based model.

And our relationship-base model basically focuses on the customer's needs, and we get the customers needs a little bit ahead of our own.

In that way, we develop an envelope of trust with that client so they keep coming back.

We also do about 20% of our business in discrete projects.

Discrete projects are projects with clients where we don't have long-term relationships.

We do discrete practice for a couple reasons -- we're trying to build long-term relationships in one case, and in other cases, we just take projects to make money, and that's part of what we're in business for.

And then we have -- in our model -- what we call very few transactional model -- projects, and I always describe those as where we've had to bid the construction on a fixed-price, competitive basis.

So we got about 80% in the preferred relationship, about 20% or more in the discrete projects, and just a sliver in the transaction.

We always compare that to our view of the industry model in general, and all of our competitors also have the same kinds of different projects.

But if you look at the industry model on the right-hand side, well over half of the work that goes into a lot of our competitors' shop is transactional in character, which means we're bidding the construction on some kind of fixed-price basis.

They all have discrete projects, and, by the way, all of our competitors have some strong preferred relationships even though they're not practicing the relationship model.

I think the key to our success has been our ability to bring these clients back and back and back, and we can only do that if we're delivering really solid value to those clients.

And that solid value comes in two ways -- it comes by our ability to just give them more of what they need and help them in the competitive side of the business; in the relationship model, it also means that we need to keep our costs under control.

While it's nice to have a good relationship, these clients aren't going to pay a huge premium for it, so it's very important that we spend a lot of time working on the comp side of our business.

And the comp side of our business comes in two ways -- it comes in how we handle our own G&A overheads, and that's the people that aren't working on projects, like me, and it also comes in how we execute their work, and whether we are able to execute that work on a very competitive basis.

Sometimes it means we're work-sharing with low-cost engineering centers, sometimes it means we're moving work electronically from places within Jacobs that have too much work to places that don't have a lot of work.

But we do put a lot of emphasis on the cost side of the business, and we do believe that helps us be more successful -- building a trusting relationship with these preferred clients, and keeping them coming back on a long-term basis.

Moving from the relationship model, I'd like to talk about acquisitions for just a minute.

We've talked about 15% growth for a long time, and we always talk about two-thirds of that coming internally and about one-third coming from acquisition.

The last significant acquisition we did was the Babtie acquisition, which closed last summer.

It was an acquisition that brought in a very strong infrastructure business, and that is being rounded out into the Jacobs' family as we speak.

We continue to look for acquisition in two different markets -- we do believe we need to have a much stronger presence in the upstream oil-and-gas, and we've been on the hunt for those type of acquisitions now for the better part of 18 months.

We also believe that we need to be a bigger player in the civil-and-infrastructure business.

We've kind of rounded out our scale in the European model, but we still are grossly undersized here in North America, and we've been looking hard for an acquisition in the infrastructure business here in North America for about the last 12 months.

So acquisitions will always play a part of our growth.

It will not be the dominant part, but certainly will be a significant part.

We also continue to grow our business internally as we try to take market share from our competitors.

I'd like to move then, to slide ten.

Slide ten is how we break down our revenue by the different markets, and I thought I might just work my way through each one of these markets, starting with petroleum on the right.

For those of you that drive cars, you understand the price of gasoline, and we know it's very high.

We know petroleum is in short demand, both as crude oil on the face of the globe, but also as gasoline in places like North America where there's been no significant capacity constructed over the last 15 or 20 years.

This market is extremely strong right now.

The clients that we serve in this market are making more money here than they have a couple decades, and it looks like it's going to continue.

So this is fueling, really strong spending plan, and so we see this as being a very strong activity for the rest of this decade.

It originally started out as we were looking at taking the diesel out of gasoline -- i mean the sulfur out of gasoline and then out of diesel fuel.

But this expanded beyond that since then , and now we're talking about capacity additions in small pieces, and we're also talking about changing the crude oil slate for a lot of these refiners.

So this is significant uptake in this market.

Moving around the chart, counterclockwise -- we've got chemicals, which has always been a big piece of Jacobs' business.

It's been very slack for a long time, and there are distinct signs of life both in North America and across the globe right now, and we would look for that uptake fairly significantly over the next 24 months.

Moving on to pharm and bio; it's a big business for Jacobs.

It's a strong business.

It's had a bit of a flat spot, and some of our big clients that were spending strongly have tapered off.

But we also are seeing some fairly significant increases and spending by clients who have been in merger activity over the last four to five years.

As they digested those mergers, they are starting to spend again, and so we look for this market to be strong and a big part of Jacobs' business for a long, long time.

Pulp and paper has dwindled down to a very small percentage of our market.

We still do a fair amount of this work.

We still do a fair amount of what is done in this business, and we have a strong position.

But it isn't a big market right now for Jacobs and it probably is not going to get a lot bigger over the next 12 to 24 months.

Federal programs which encompasses all the work we do for environmental cleanup for the Air Force, the military, for NASA, all that's rolled into the federal program as business, and it's extremely strong right now.

Our government is spending a lot of money, and we are a big participant in this business, and we look to this to continue to grow over the next years.

Buildings and infrastructure is still a public business generally both in the U.S. and Europe.

But as the case is in the U.S., it's not necessarily a federal government business but it's more maybe of a state government or a local government business.

This business went flat as the revenues and the tax revenues to the States dropped off here a couple years ago.

Its rebounding very nicely right now, and we're looking for this business to be a lot stronger in '06, than it was in '05.

In the high-tech business, we've got two things we do -- we do some work in testing for the automobile industry, and that's a sliver of business.

It's very steady, and we're very good at, and we also do some semiconductor work.

This business on a whole is pretty flat right now and not growing, and we probably don't see a lot of change in this over the next 24 months.

But, if you looked at the circle in total, we've got five businesses that are strong.

We got the chemical business which is rebounding, and we've got a couple like pulp and paper and high-tech that are pretty flat right now.

If you move on with me to slide 11, the investor appeal slide -- we think what drives this business is the business model.

One of the differences between us and a lot of people that practice this model is we do believe in it, we do practice it, and we are pure.

We do have very good diversity in terms of our markets we've just talked about and in terms of our geographies, which we have strong presence in the U.S. and Western Europe.

We may be that the largest American contractor in Western Europe at this point in time.

We also have strong operation in India and growing operations in both Singapore and Hong Kong.

So we have strong diversity when it comes to geographies, and, of course, we've got our standard services array that goes from the project services, it goes to construction, it goes to the maintenance, and we do have a consulting group that's doing quite well right now.

As John said, the balance sheet is strong and getting stronger, and we continue to believe that over the longer term, we will grow this business 15% a year.

I think with that said, we probably ought to throw this open to questions at this time.

(OPERATOR INSTRUCTIONS) .

Your first question comes from the line of Mike Dudas for Bear, Stearns.

Good morning, gentleman, [Patti].

Good morning.

Noel, you've talked in the past about your views on stock options.

Would you like to share your views on Sarbanes-Oxley?

We will answer Sarbanes-Oxley like this -- it's a set of rules that have been in place, and we will comply.

But that's about all I'm going to get into on that.

It's probably cost us a little more than we thought it would do by few million bucks, and I think that's fact, and I don't think we're unique in that.

But we're going to have all that implemented by fiscal year-end, and we will.

It's not like we are running into any problems.

It's just a little more detailed and a little more complex than we originally anticipated.

I think echoed by many of your colleagues around the world.

On the business front, where, in all these things over the next six to twelve month will Jacobs see the biggest uptake in either revenue or order flow?

And what is going to drive that -- like where -- what are some of the drivers of that?

Well, I think we are going to see -- I just went through the margins -- I think we're -- of course we're going to see strong uptick in the oil and gas, Mike.

I think that's just fact.

If things continue to look like they are with crude oil prices anywhere north of 30, I guess, in my opinion, we're going to see a lot of activity out there.

Gasoline at $2.50, or whatever it is where you live, is generating lots of margins for the refiners, and there definitely is a capacity shortage.

There isn't any question about that.

There's been no significant capacity build over the years, and then, of course, we've got the change in the feed stock mix.

I think we're going to see awfully strong movement in the federal programs group.

The federal governments of the world, particularly the U.S. federal government, we're also developing a big position in the U.K. now with the acquisition of Babtie.

I think we're going to see a lot of activity there over the next 24 months.

I think the buildings and infrastructure probably come next.

I think that is rebounding pretty nicely.

I've been talking to clients, I've been talking some of my peers in the business, and we are all seeing a fairly strong uptake there.

And I frankly think the pharmaceutical business is going to pick up a little bit.

I think the ringer in the whole catch is how strong is the chemical cycle come on and how fast.

I think that's a wait-and-see mode.

I've been predicting it's coming back for a couple of years for those of you that listen to me know, and I'm going to claim victory here in another quarter and -- but I think that's for the growth is going to come from, Mike.

The -- on the formal side, is that going to be new customers for you guys or different customers as opposed to additional ones you've worked with?

Well, they will not be the mainline customers to some degree that we had, although some of the mainline customers we've had are still spending heavily.

There aren't -- isn't anybody big out there that we haven't worked for at one time or another, so -- but it's is going to be people that are starting to spend again that we used to help that we are going to be helping again, but I don't see any brand new customers out there.

I mean, we've worked for all of the big pharm companies over the years.

It's just a question of their spend cycle is and what our success rate is.

Fair enough.

Thank you.

Your next question comes from the line of Sanjay Shrestha with First Albany.

Great.

Good morning, guys.

First one is kind of following up on that cycle comment.

Have you received any interest from your client base with you to sort of start maybe having a stronger presence in China, and if you have not, do think the potential upside for you guys is going to be sort of as big as it has been in the past given maybe that there are going to be some incremental opportunities in that part of the world?

I'm going to give that to Mr. Martin here.

He's our China expert.

Quite honestly, right now, we're not seeing a lot of pressure from our relationship clients for investments in China.

Okay.

The focus for most of our relationship clients right now is either domestic operations in the gulf coast, up in Canada, Northern Europe or in the Middle East.

There's a lot of pressure on the Middle East.

Frankly, there is a much business in the Middle East there aren't enough contractors to do it all.

So we're seeing a lot of increasing opportunity to work for our mainline customers on programs in the Middle East on a business basis that matches our relationship-based business model.

We're pretty excited about that.

That's great.

Just a quick question on the acquisition, obviously we've all heard that you guys have been looking at some potential oil-and-gas opportunities, and certainly appreciate the diligence on your part to buy the right kind of company, but what's sort of been push back here?

Is it that you just haven't found the right kind of company, or is it the prices haven't been right?

What's sort of been some of the holdup before we kind of hear an announcement of Jacobs that Jacobs bought this particular company?

On the acquisition front, let's talk about upstream acquisitions first.

The principal issue is getting the right company for the right price.

And we're very actively out there, talking to people in the marketplace, working relationships, and we continue to make what I think is going to be very good progress toward finding the right field.

But, there's a lot of enthusiasm -- let's say -- out there over the prospects in the upstream market, and it makes pricing a little more difficult to get to the range where we think our shareholders do okay.

On the infrastructure-side acquisitions which is the other place we've talked about a lot, the Babtie thing has gone, and we're actively out there again, engaged in conversation with people looking for the right field.

Oaky.

That's fair.

One last question -- I don't no if you guys want to get into this detail or not, but I was wondering how much of the growth in the technical professional services kind of came from Babtie?

And, tied to that question, when we look at this technical profession, this growth over 20% in the last two quarters -- I mean 2005 is what it is which narrows the range -- but when we look into '06, should we kind of conclude, given the growth we're seeing on the technical professional services, that Jacobs ought to be in a position to give that 15-plus percent earnings growth without any kind of contribution from acquisition?

You through a wringer in there.

Okay.

I can try.

Yeah.

I noticed you can.

We'll go into the backlog first.

The backlog has gone up about -- let me get back here to this sheet -- the backlog is up about 900 million, about 350 of that was Babtie, right over the past year.

Okay.

Okay.

Will we have a year where we get 15% without any acquisitions?

Yes.

Will we have a continuing string of years where we get 15% without acquisitions?

No.

And, so I think we've got to look at it like that.

I think, yes, we could have a year, we have in the past , we will again, where we get 15% purely on internal growth.

When we've got some strong markets and we've got a tail wind, but, longer term, we need to have the acquisitions to get 15%.

Okay.

That's fair.

Thanks a lot, guys.

Your next question comes from the line of David Yuschak with Sanders Morris Harris.

Congratulations, gentlemen, on a great quarter.

On resources, you know you mentioned earlier about how getting tied in the middle because of all of the demands for construction activity there.

As you look at your own internal resources, where do you think they may need to add more and maybe how quickly do you need to add those to take advantage of what looks like still very early stage of recovery -- or expansion, I'd say than recovery -- expansion in projects around the world.

Well, we think that the resource issue will be an issue before it's all over.

The technical people graduating from our universities and colleges, since, you know, the advent of the dot-com phenomena, going back almost a decade now, the number of the people that came out of college is down, and that's a fact.

On the other hand, because of our ability to use the electronic medium effectively, and I'm talking about wheeling work to faraway places, we are able to access the global resource now, and we couldn't do that ten years ago.

So, if you look at our business along the gulf coast of the United States today for instance, every significant project we have has a low-cost labor center involved basically for Jacobs [inaudible].

India is going to be a significant tool for Jacobs over the next decade as we build up our business -- our book of business, if you will -- and we outsource significant pieces of that to far away places.

It will be India first, and maybe someplace else second.

So, as we sit here today, certain of our businesses are impacted by the ability to hire.

That has not affected our oil and gas business on the Gulf Coast yet, but it might very well.

We are outsourcing or wheeling work to India as we speak, and 10, 15, 20% of these projects are being moved to far away places.

And that will continue, and we continue to build these resources.

So, as I looked at it going forward, we are not going to be impacted by shortage of resources over the next 12 to 24 months, but if we do have a really vigorous chemical cycle on top of this oil-and-gas cycle, it could become a problem out there in 24 to 36 months.

But, we've have been working hard on that problem, and we frankly are not going to let the resource issue get in the way of getting business.

Great.

Let me just follow up with a question on chemicals because with you, I wasn't expecting this comical thing to happen, and the question I got for you is how quickly -- how strong can this chemical recovery get , and where do you think your best position worldwide to take advantage of this chemical recovery, and just how quickly do you think it could develop, and how great, and what percentage of revenue we can look forward to getting out of you that backlog and revenue?

Well, I guess -- this is Craig.

The business itself can turn very rapidly -- the chemical business.

We've seen it accelerate very quickly, we've also seen it stop very quickly.

So, it's one of those things that there's a reasonable amount of unpredictability about it.

I think what we see is that it's starting to build, and I would characterize the rate at which its building is -- as smooth but not exponential.

So we're starting to see some activity, but it's not yet overwhelming.

For us as a company, certainly we will benefit in our principal market -- the Gulf Coast and Northern Europe -- from investments there in Brownfield's upgrades, capacity creep, that sort of thing, we'll also probably end up with a pretty strong position in the polymers end of the business.

We have a very, very strong reputation in polymers.

There looks to be a lot of activity in that area, and I expect we'll be involved in number of the polymers projects, both in our home geographies and in the Middle East.

One follow-up question on Babtie.

Obviously, it looks like you're having some very strong results coming out of your infrastructure business.

You indicated on a call too that you thought you could take Babtie into the Eastern Europe as well.

Where are you exceeding plan on Babtie, and where, maybe, are you taking these guys next as far as opportunity in next coming -- results coming sooner than later?

John, why don't you take that?

Well, we've been very pleased with the results from Babtie.

I'd say that we have a lot of Babtie-led foreign initiatives working right now.

We do have two small offices in Eastern Europe that we're watching to see if the business grows.

We've got an early gain, if you will, in trying to -- Babtie had a very small presence in India.

We've had a very large presence in India, although it being focused on the hydrocarbon industry.

We're looking at combining those operations and building a business in India that would mirror either our North American or European business i.e. across all of our business lines.

Of course, when you look at a country like India, it looks like almost unlimited potential in things like the infrastructure business.

So there's a lot of fronts that we're watching with Babtie.

Right now, I'd say the most exciting market is to get their U.K. base is to get through the election in the U.K., which as national elections tend to go, tend to slow things down a little bit, and see what the priorities of the next administration are, but we think there's a lot of room for growth in the U.K.

Okay.

So in affect to the election, you think initially it might be U.K., and then you expand the resources to elsewhere.

We're working on those other locations, but I'd say it's not like a frontal assault as we integrate Babtie into the greater Jacobs.

My own view is that we probably have more opportunities in the next 12 or 15 months in the U.K. than in the other locations, although we'll work both at the same time.

Okay.

Thanks a lot.

Appreciate it.

Been a great quarter.

Thanks.

Your next question comes from the line of Jamie Cook with Credit Suisse First Boston.

Good morning, guys.

Hi, Jamie.

Two quick questions -- one, can you talk a little bit about the range of guidance of 244 to 262.

I did expect us to narrow the range, but I guess I'm one of the few that expect you to go more towards the high end, so could you talk a little about the expections for the low or the high-end as it mainly -- the cost like Sarbanes Oxley that you mentioned or is it more some projects that are taking what longer to start up?

What I'd say, Jamie, it comes from two things -- basically the 36% tax rate is a reality for the year.

I don't think we were -- I know we weren't totally aware of that when we started the year.

So we've upped the tax rate about 1 million bucks.

Okay.

I mean about a percent, excuse me, which is a million bucks a quarter.

Okay.

And then we got the Sarbanes costs that will come in, and they've gone up.

I hate to advertise that to the world, and I'm not going to sit here and complain about it, but it's just a fact.

By the time we get into next year, there will be some ongoing Sarbanes costs, but we're going to get all this sorted out, and so it will be in a steady state.

So, I think those are two things that led to reducing the top side of the range.

And with the Sarbanes, you said it was about 2 million or so?

No.

No.

No.

I didn't say that.

No.

No.

I said the tax rate --

But I thought you mentioned in comments before, you alluded to a number with Sarbanes.

I know that you said the tax rate's about 4 for the year, but --

No, the Sarbanes costs are up between $2 and $4 million.

Okay.

More than we planned.

Okay.

And then, the next question, well, actually, you're not seeing any slowdown or any more cancellations or any delays in projects starting up -- just to clarify?

Well, I would say that some of these projects start kind of slowly, but we're in a pretty normal cycle, and there's nothing abnormal going on.

No, I think the project -- the kind of stuff we had going on 12, 15 months ago, these projects are moving now.

Okay.

And then, just my last question, just sort of knit-picky, I noticed the revenue breakdown between technical, professional services and field services for March of 2004 has changed.

I mean, it's different from your press release a year ago, so I'm just wondering if you could -- what that is.

We'll let Prosser answer that.

I'll tell you that.

I don't have last year's press release, so I'd have to go back and check.

I don't know of any reason why it changed, so I better -- I'll have to check on that.

Okay.

Great.

Your next question comes from the line of [David Callus] with [Fickley, Briant, Hamel].

Good morning.

Good morning.

Could you just review for me how we should think about the margin impact with the backlog?

A technical, obviously, up a lot moving to field services -- just walk me through how we should think about that of the next several quarters how you think that will affect the margins, rates [inaudible]?

Well, our anticipation would be this -- we have a lot of projects in early phases, and our business does tend to cycle a little bit in its reality in terms of -- we would expect the feed-flow out of the construction cycle to start picking up in the fourth quarter this year.

And, so all other things being equal, it seems like the revenues will probably pick up a little bit in the fourth quarter this year, on -- all through '06 and on.

We should see more construction fees starting to flow about the fourth quarter this year.

We've got several projects that are just now entering the field, and the feed-flow should be very strong a year from now.

And so I think that's the main change you're going to see in the margin outside of just general growth.

We're working it -- right now, most of the fees we have of flowing, are coming from our government work, which is a pretty steady state.

Our private-sector work tends to be more project- delineated, and so those fees do come and go, and we never get them totally flat.

And so we are seeing a fairly significant pick up as we look out there three to four quarters in the feed-flow.

So that is -- when you say fourth quarter, you're talking about your fiscal fourth quarter?

Our fiscal fourth quarter, yes.

So, in general, that's pressure on margins then, correct?

The mix changes to --

The mix will change a little bit, and by the way, the main pressure the percentage a little bit, the total amount of margin will be going up.

Okay.

Thank you.

Your next question comes from the line of Tom Ford with Lehman Brothers.

Good morning.

Thanks.

Good morning.

Hey, Noel?

Going back to one of your comments, you were talking about, I think, federal and infrastructure, saying that you thought it was going to continue to be quite strong.

And I was just wondering if you could give specific -- are there specific areas, agencies, and is that also -- when you talked about talking to some of your competitors and peers -- are you seeing anything on the state side as well?

Okay.

We're in buildings and infrastructure.

Okay.

Maybe I said that wrong, but we're talking about buildings and infrastructure.

I think we're seeing it a little bit across the board.

I think we got two things going on -- first of all, we got an election going on in the U.K., and there isn't any doubt until May 5th has come and gone that spending is slow, okay?

That's just a fact of the U.K. political climate, and considering we got 3,500 people during this kind of work -- or 3,800 -- whatever the number is, it's a big amount of people -- that will have an impact.

In this country, the revenues at the state level are getting better.

Bond issues are being passed, and so that affects both our buildings and infrastructure business.

And I think we are going to see that -- excuse me -- picking up here, as I said, in '06 -- and '06 ought to be pretty good year.

But we are seeing the state-level pick up, I think.

Okay.

Great.

Craig, you had mentioned that there's not a lot of pressure from the clients about China?

Right.

Do you have any thoughts or do you ask them why that is?

Is it that they're still trying to make a decision, is it that more of the decisions are coming out in favor of green field work in the Middle East?

What is it?

I think is a couple of things, Tom, but probably the most significance is the cost of feed stock, and the availability of feed stock, and fundamentally, for these chemicals facilities, feedstock availability and cost in the Middle East swaps anywhere else in the world.

And, what our customers are telling us is between investing in China, which is a feedstock-limited, and investing in the Middle East, which is not, the Middle East investments just pencilled that.

Right.

So, that's why we think we're seeing a lot more focus on the Middle East, a lot more money going to the Middle East, and less on China.

There are some primary-chemicals projects in China, but of course, those tend to be the jobs we don't have a lot of interest in.

Just following on that, do you have the -- sort of the blanket- or multiple-project award from Enron Co?

Was any of that chemicals-related?

It covers the spectrum of upstream oil and gas almost exclusively.

Okay.

And then, John, you had mentioned in your comments that there were some upfront investment-related elements associated with some federal government work, and I'm just wondering if that was a material -- did that influence the earnings in the quarter at all, and is that something where it's essentially a start-up process, but then, in ensuing quarters, you move to sort of normalized margin performance on the work?

It really doesn't impact the earnings as much as it does the balance sheet because it's the buildup of the receivables, the working capital that's needed to kick-off a project, also you'll notice our capital expenditures this quarter were a little bit higher than normal that related to tenant improvements and staffing up or equipping the staff on a couple of big government projects.

So, it's a normal, front-end kind of exposure you get as you bring a large transition in one of these big federal projects, but it really is a balance sheet issue more than a P&L issue.

-- and cash -- balance sheet and cash --

Yes, well, and cash.

And that's what the balance sheet impacts is it bills receivables, and takes down the working capital in cash until you get back into a more normal pay cycle and such.

Now, the capital expenditures -- those are up-front investments that are recovered over the life of the project, but that's just our normal kind of activity we have on any project or any activity.

It's just that it gets concentrated because these are fairly -- or very large projects.

Right.

Okay.

Great.

Then, just my last question, Noel, on the last call, you have highlighted that the quarter -- last quarter -- was extremely strong and didn't want anybody to extrapolate that awards-pattern out.

Although, the performance here was nothing to be upset about either.

I was just wondering if you thought -- I mean -- how did you guys think about your order activity this quarter?

Did it surprise you a little bit to the up-side?

Just curious.

No.

It did surprise us to the up-side a little bit, so I'll say the same thing I said last quarter.

Some of these things do tend to come in lumps, and so, having the backlog pop all the way up to 8 billion, and then then pop again to 8.2, is very significant, probably not repeatable in that type of growth though.

Okay.

Great.

I mean because we've got lots of backlog.

Thanks very much.

York next question comes from the line of Richard Rossi with Morgan Joseph.

Good morning, everyone.

Good morning, Richard.

Couple things -- first, on the G&A side, I was hoping that we would see a little more improvement in that ratio as you consolidated Babtie, but I'm wondering now, given its location and its expertise, whether there's going to be much of a corporate-expense savings on that side?

With any of these, there is savings.

Sometimes it takes a little longer as we transition Babtie onto some of our systems, and we'll get some G&A savings.

But that isn't done overnight, and a lot of that transition will be over a 12- to 15-month period before it -- so you don't see it in one great big lump, you see it more in kind of an incremental.

On top of that, you've got things like amortization of intangibles, you've got other costs -- in some of our other businesses as we wrap up, sometimes the G&A leaves a little bit before you actually -- the business picks up quite a bit.

So, we've got a lot of those things going on.

So, there's -- it's not just Babtie.

It's a number of things that go along with growth.

As all those favorable things develop , and you can leverage your SG&A further on higher volumes, is it totally optimistic to assume you can get under a 10% ratio?

We're right around that, and obviously, as we do more construction and that revenue grows, that doesn't generate the G&A that the pro services does.

So, right now, pro services is greater than 50% of our revenues.

If the construction got up to above 50%, you'd see the ratios coming down a little bit.

So, I will never say never.

As we grow the construction side of the business, you probably will see the G&A coming down below 10%.

On Sarbanes -- you may all chuckle at this, but I did see an article quoting some accounting people suggesting that Sarbanes costs could come down as much as 15 to 25% next year as general comment.

Obviously, a lot of that's just politicizing, but any thoughts that you can see lower cost?

That there are some one-time only charges here that might not re-appear on an ongoing basis?

Clearly, the first time through on Sarbanes is a more expensive proposition than the ongoing because we're last -- being with a September year-end -- we're one of the last year-ends to be affected by.

The first year, we're feeling those pains today where we would expect to see a decrease in those costs next year as we go from a first-time through to more of a maintenance-mode on some of the systems and documentation and such like that.

The audit side of it is going to be the thing because you don't get a reduction because you still have to do all the testing each year.

The way it's structured right now.

So, some of the cost -- our internal costs -- may come down a little bit, but the year-end costs, the audit costs of those things will probably stay about the same.

But, 15 to 20% is a reasonable number.

Certainly all the first-time stuff we're going through, we only have to do it one time.

So then it just comes down to the testing and remediation we have to do.

Okay.

Well, it's a positive note.

And, one final thing -- overseas on the refiners that do desulfurization, is there much of that in your backlog?

I remember going back a few quarters when we talked, I think, about them -- about Europe being behind us in that cycle, and there was a more to come over there.

Is that developing?

Actually, I'd say no.

I think, in fact, most of the desulfurization work is behind us now with a few exceptions like off-road diesel.

There has yet to be a decision on aviation gasoline and aviation fuel in terms of desulfurization.

But, in terms of a lag in Europe, I don't think we're seeing any lag there to speak of, and most of that work is well along in terms of where it stands in the cycle.

Okay.

Very good.

Thank you.

Your next question comes from the line of Alex Rygiel from Friedman, Billings, Ramsey.

Thank you, gentlemen.

Real quickly -- could you comment on the energy bill as it's written, and some specific opportunities that you see Jacobs witnessing over the next couple of years?

Oh, my.

That energy bill has moved all over.

Do you have a specific question within the energy bill that you'd like to ask me about because it's very broad?

First of all, I'm not looking for the energy bill generating a lot of specific opportunities for Jacobs, okay?

And, I don't know where they're going to land on alternate fuels and alternate energy and that kind of stuff, but, generally speaking, we don't view that as a big windfall for Jacobs one way or another , to be honest with you.

That's helpful.

Thank you very much.

In your next question comes from the line of Tom Mayer with Lord Abbott.

Hi, guys.

Actually, most of my questions have been answered, but just out of curiosity, without Babtie, did the topline grow this quarter?

Well, from what, a year ago?

Yeah.

Babtie's quarterly revenues would probably have been about 70 to $80 million.

Okay.

Great.

So, the answer is yes.

Absolutely.

Thanks a lot.

Your next question comes from the line of Lorraine Maikis with Merrill Lynch.

Just a follow-up on Rich Rossi's question about fleet fuel, you said most of it is behind us -- do you mean, most of the orders and bookings are in your backlog, or have you actually completed most of the work for that program?

I knew somebody would pick that up.

Most of the orders and bookings are there.

Okay.

And then --

When I talk about a lot of this work is tipping up, some of that work is going to field in the fall this year, particularly on the diesel side.

And, on the labor front -- that's a pretty specialized program -- have you seen any tightness there in terms of getting labor into that the oil-and-gas segment of your business?

Not right now.

We're doing fine.

Alright.

And just finely, on the operating margins, I know we've talked about Sarbanes-Oxley, we've talked about amortizations, some other cost-pressures here and there, but it sounds like so many of your businesses are in such a positive time in their cycles that we should be able to get some growth despite those pressures.

Just looking into 2006, do you expect to be able to gain any type of leverage on the margin-front with this increase in revenue?

When you talk about margin-front, -- are you talking about percentages, or are you talking about absolute margin?

You can talk about either one that you'd like.

You're going to get me a free rein?

I don't think there's any doubt we're going to get a lot of -- I'm talking about about absolute numbers now because the percentages -- I'm not sure how they're going to match the revenue stream.

There isn't any doubt with the way businesses look like they're shaping up , and with what I call a little bit of a tail wind going on, it looks to me like in absolute terms, the margins should prosper next year.

And, I think a lot of that is going to come out of the federal government with some of the works we've already sold, I think a lot of it's going to come out of the oil-and-gas business, and then, I think these other businesses I talked about -- buildings/infrastructure and bio-pharm -- are all going to be a little bit better.

And then, I also believe the chemical business is going to be a little bit better to a lot better by the time we're into the middle of '06.

Okay.

Thank you very much.

Your next question comes from the line of Bill Sutherland with Vinny and Scattergood.

Good morning.

Thanks for taking the question.

We're all focused on the chemical issue, but I'm curious, as you look at feedstock prices in that industry, is that a factor on how they're facing their expansion plans in your mind?

I think they're probably basing their expansion plans on the supply-demand relationship of the cycle.

They've been able to pass the feedstock costs on and with remarkable success.

While I haven't looked at the chemical earnings this quarter, certainly last quarter, when we racked them all up, they had monster quarters.

And they were able to pass all these chemical feedstock earnings on -- I mean, costs on.

So, I think that they are in that peculiar point they get into in the supply-demand relationship, they basically are starting to controlling the pricing side of it, and with that, feedstock prices, albeit they're the single most important operating cost, they're able to pass on but I do believe the feedstock prices are one of the reasons these guys are all looking very longingly at locating their next big complexes in the Middle East or at the head of a gas well or something like that.

And then, your own positioning being so strong in polymers, is that by design as far as where you think incremental demand is going to be, or is that just where you've always been?

That's where we've been.

Okay.

This's nothing particularly smart about this.

This is just where we've been over the history of the chemical cycle.

I got it.

Thank you.

You have a follow-up question from the line of David Yuschak with Sanders, Morris, Harris.

Let me just talk a little about the operating margin and the percentage, I think you basically peaked around 4, 5; 4,6; 4,7 area in the trailing 12 months.

As business gets stronger across the whole E of C space, does that suggest that maybe your customers are not as pushing you on price as much on the contract as much as getting the job done because of the need to get these projects up and started sooner than later?

That's an interesting question, and there's two answers to it -- historically, if you're in a pure, transactional business and not in a relationship-model, there's no doubt the pricing goes up as the demand becomes greater and the supply -- particularly of engineering -- construction resources dwindle.

For Jacobs, because 80% of our business comes out of these long-term relationships, we will get some uptake on our margin percentage on the individual contracts, but it will not be the dramatic.

It will be there, but it will not be dramatic, and I don't think it as I've looked at the history of the business of the past thirty years, these percentage numbers have been tight a little bit, but they do stay within a pretty tight range.

And then, one other question on a backlog -- as far as -- you've indicated that you were surprised a bit by the sustainability in the second quarter.

Where were the surprises coming from, and do you think you did borrow from the third-quarter debt, or is it maybe just an indication that a lot of these projects have been sitting there waiting for things to happen because, like you said, cash flows being strong in the process and basic industry sector.

Where do you think the strength could come from if you do think this maybe was a little bit of a surprise?

First of all, I don't think we borrowed from anywhere.

The numbers are straight up as near as we can make them.

As you know, there is no hard and fast rules on backlog like are on a lot of other things, so the thing we try to do is be absolutely consistent.

I think it surprised as a little bit more this construction on the oil and gas rolled into more of oil-and-gas project rolled into construction, so that picked it up a little bit.

As I look up the next three to six to nine months, I think it's going to be come very general from those markets I talked about.

I don't think there's any one specific thing that going to add a big pop to backlog.

I think it's going to be very general across the board.

Do you think on the backlog side that field services will become increasingly more important part of that backlog, and we should watch the professional services for maybe new contract activity and some of these areas of what its chemicals or the like?

Is that how I should look at it?

Yes.

I think that's exactly right.

I think the field-services number should be going up, and I do believe in things like chemical, the first thing we'll book will be the engineering when we start booking the project.

And then the backlog booking will follow as I think somebody said earlier, in a nine- to twelve-month cycle.

Okay.

That's all I got.

Appreciate it.

You have a follow-up question from the line of Jamie Cook with Credit Suisse First Boston.

Hi, guys.

Sorry.

Just one quick question, Noel.

Given the demand and the number of your end-markets, would you -- if all takes off with the chemicals, with the oil and gas, with the building infrastructure, would you consider holding off on acquisitions just because you guys would have so much on your plate?

I think, Jamie, to answer that question -- I think the answer is probably no.

Okay.

I think we made a mistake a couple, three years ago, and I lose track of time, but when we stayed out of the market because we made too many, and then we had a big lag time.

I think acquisitions need to be for Jacobs on a more steady pace, and so I don't think we're going to back away.

So, potentially, depending on what acquisitions happen in '06 or '07, you could have earnings growth north of 15% if you did acquisitions?

Depending on they play out, but you got to remember, with the new accounting rules, the acquisitions don't give you the full kick until a couple, three years out because of the way you've got to amortize the earnings.

The purchase intangible some.

Okay.

The purchase intangible.

Okay.

So, basically, I think to get the best affect -- in my mind -- to get the best affect out of earning -- out of acquisitions driving earnings, you've got to have a fairly steady stream of them coming in.

So, like when the Babtie amortization goes away, which it dropped down dramatically after about 30 months, it will start to pop the earnings at that point.

Okay.

Great.

Thank you very much.

[OPERATOR INSTRUCTIONS] You have a question on the line from Andrew Mitchell was Scotia Asset Management.

Can you just speculate how long some of these cycles -- or at least that part of the cycle -- the investment cycle from some of the businesses that you have -- you serve -- will it last?

Well, they all move in cycles, number one.

Looking at -- it is hard to speculate because we're looking at the strength of the business cycle in general when I come to buildings and infrastructure.

In the oil-and-gas, we're really looking at supply-demand.

We have a bunch of our clients that think that cycle's going to last until at least the end of the decade.

The pharmaceutical cycle has been a little spotty on us over the past decade because it's driven by two things -- it's driven by the R&D pipeline, which drives the new products, and it's also driven by the merger activity of the big pharma companies, and so we've seen their capital spend ebb and tide dramatically over the past decade.

It's hard to speculate in general.

The chemical cycle has a very defined cycle.

You can go look at that.

I don't recall exactly what it is, but it is very refined as the pulp-and-paper cycle used to be.

The rest of these are moving in -- while they are all very cyclical -- the cycles are hard to predict.

And the government cycle?

The government cycle right now, with the kind of deficit-spending we've got going on and what we see in the size of that market, I'm not looking for cycles in that business.

I don't think that's going to be particularly cyclical.

That should be -- we should be able to yank market share and yank business as long as we're good enough to do it.

Okay.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

I want to thank you all for attending.

We appreciate your time and interest, and with that, I'm going to close out.

You can always get a hold of John Prosser for questions.

[OPERATOR INSTRUCTIONS] Thank you for participating in today's Jacobs' second quarter earnings conference call.