雅各布工程 (J) 2005 Q3 法說會逐字稿

Good day and welcome to the Jacobs Third Quarter Earnings Conference Call.

This call is being recorded.

Today's presentation will be available for replay beginning at 2 o'clock p.m.

Eastern time through August 2 at midnight.

You may access the replay by dialing 1-800-642-1987 and entering the pass code 7618798.

Again, the number is 1-800-642-1687 and the pass code is 7618798.

There will also be Web cast for this teleconference which can be accessed by logging on to www.jacobs.com.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. [Operator Instructions].

At this time, I would like to turn the call over to Susan Herman for the forward-looking statements.

Please go ahead.

Good morning.

The Company requests that we point out that any statements 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, 2004, and the most recent Form 10-Q for the period ending March 31, 2005, including in each case the management's discussion and analysis of financial condition and results of operations contained therein.

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

I will now turn the call over to John Prosser, CFO, who will discuss the financial results.

Thank you Susan.

Good morning.

I will go over the financial highlights and then I'll turn it over to Noel Watson to talk about the business overview for the quarter.

If you go to slide four.

Obviously this was a very good quarter with our diluted EPS of $0.68, net earnings of $40.1 million.

This compares to $0.52 a year ago and $0.61 last quarter.

So good comparisons against both of those previous quarters.

Record backlog at 8.4 billion, on strong sales.

Adjusting for the one adjustment we talked about in the press release, that gives us sales just below 1.8 billion for the quarter.

Balance sheet continues to be very strong and good positive cash growth.

Our net cash, which is cash less bank debt grew to 87.2 million, which is an increase of over 50 million from last quarter.

We have narrowed our 2005 guidance for the year to 2.52 to 2.58, so we look forward to a good year.

Going on to slide five.

I am happy to point this out, because now the line has tipped back up after a few quarters of being flat and also you can see that our trailing five-year growth rate has tipped back up about above the 15% which is the goal we have for ourselves over the long term.

Going on to slide six.

Our backlog growth - very strong growth over the last 12 months and good growth over the prior quarter, as I pointed out a moment ago we did have a $150 million adjustment to the total backlog previously reported for scope evaluations and reviews of contracts.

We do this periodically and often we find that contracts, particularly ones that are at capacity contracts were given a capacity without a specific scope, often we have to re-evaluate those.

Sometimes they increase but sometimes they also do decrease and it becomes obvious that the scope is not going to be used so we periodically do review that and make adjustments to the backlog.

With that, as I say, we had a very good quarter.

I will turn it over to Noel to review the outlook and review the quarter.

Thanks John.

Go to slide seven for just a minute folks and I'm going to talk about these for the next few minutes and then we will throw it open for questions.

I want to talk about the business model, the different markets.

The different geographies, a little bit about acquisitions, and of course we have to always talk about costs okay.

Going on to slide eight.

I know many of you have seen this slide before, but we think it is worth reviewing, particularly in light of the way markets sit today.

On this slide we have our business model which we tabbed the relationship based business model and on the other side we have the industry model.

This left hand pie shows that about 80% of our business comes out of some type of preferred relationship.

Many of these relationships are formal and in contracts.

Others are just the way the work gets executed, but 80% of our business comes from long term preferred relationships.

Another 15 odd percent comes from what we call discrete projects; these are individual projects for clients.

They may be clients we've worked for before, but they are clients with whom we do not have and do not consider to have a long-term relationship.

And then just a little bit of our work comes from transactional projects, and these are one-off projects.

Sometimes they've got significant fixed-price components.

We try to stay away from that kind of business because we have trained our people how to work and how to operate in preferred relationships and so we try to drive as much of our business into preferred relationships as possible, although there'll always be a significant discrete project kind of activity because that's the growth that we're looking at because we always start preferred relationships, or always almost start preferred relationships with discrete project activity of one kind or another.

And then if you go to the right-hand side that's our view of the general industry model and what you'll see from this is everybody has a few preferred relationships.

The difference primarily between Jacobs and the industry in general is we shy away from transactional projects almost totally and the rest of the industry takes this type of project and pursues it routinely.

If we move from slide eight to slide nine, I will try to give a little review of the markets here.

These are the markets we're in.

You can go to the top there.

This is the trailing 12 on a $5.3 billion revenue pie and I'll start down on the right hand blue there with petroleum, because that's a very, very strong market today.

There's been a lot of activity in this market.

It is much stronger today than we anticipated it would be even six months ago.

A lot of what started out in the petroleum and downstream markets a couple of years ago in terms of clean fuels and taking the sulfur out of gasoline and then out of diesel fuel has now manifested itself into changing crude slate and also there are capacity issues all over the Western world.

We're basically out of gasoline in North America and we see some of the same kind of problem in Europe and because there are some margins in that business now for our customers, they're starting to look very hard at capacity expansions.

Now I'm not talking about new grass-roots refineries, I'm talking about incremental expansions in existing refineries.

As we move around that chart clockwise, we've got chemicals. it's always been a strong piece of Jacobs portfolio.

There isn't any doubt this business is coming back to life.

I would not considered it strong at this time, but it's certainly improving fairly significantly.

The pharma bio business remains strong.

It has its ups and downs with different clients.

It does not follow the business cycle.

It does follow the research and development cycle when new drugs get approved.

New plants get built and we've had a significant spending from three or four major clients, and in the last 12 months that's switched to three or four new clients, but this business remains strong and growing and it'll be a strong part of Jacobs portfolio for a long time.

The pulp and paper business, which has been depressed for several years now, does see some activity, but nobody would call it robust at this point in time.

Federal programs remains very strong both in the environmental business where we have strong position and in the defense business where we have a strong position and also we do a lot of work for NASA and I understand the shuttle went up successfully this morning and we have a lot of people involved in that activity.

Buildings and infrastructure, we tend to combine these businesses.

These businesses for Jacobs are generally in the public sector both in the U.S. and Europe and we are seeing more funding coming toward these businesses as we speak.

In the United States, for instance while the state governments when through a lack of revenue here a couple of three years ago, those revenue streams have strengthened here in the last 12 to 18 months.

We are seeing a fairly significant up-tick in this activity and we're also seeing a fairly significant uptick in this activity and we're also seeing a fairly significant uptick at the federal level particularly in infrastructure if we get the new highway bill out.

And then we move over to high-tech.

We're even seeing activity here.

Hi-tech for Jacobs basically is semiconductor and some test facilities we do for big auto and big aircraft and both those businesses are picking up some, although you see it's a very small part of Jacobs' portfolio.

If we move to slide number 10, and we'll talk about growing in our key markets.

We have a double color slide here for those of you viewing the web cast.

We have the dark blue, which is where we were in 1994, which is basically the U.S., the U.K., and Ireland and India, and then the lighter blue, which is where we are in 2005, where we have added Australia and all of Western Europe and places up in Scandinavia and certainly we've added Canada.

When we talk about our multi-domestic network, our basic philosophy is that we are going to work in geographies where we're located and we understand.

So our folks in Australia work in Australia and our folks in India generally work in India.

In Western Europe and in UK and Ireland the bulk of the work performed by our people in those locations is domestic and character and we charge each of these offices to make money in the local marketplace.

Also, they have to be available when our global clients show up.

So when an American client shows up in the UK or Ireland, we are there to help them.

When an American or European client shows up in India we're there to help them.

And by the way when these offshore clients show up back in the United States we're there to help them so we're working across oceans.

Sometimes we're doing these projects in two or three offices to give the clients exactly what they need.

If you take a look at the geography in general, the American market has gotten very strong in the last 12 to 18 months.

The European market is percolating along.

I wouldn't call it very strong, but it's certainly strong and we're seeing a lot of activity on the continent, particularly in the refining and chemical business.

I was in India about four weeks ago and it's interesting, India has finally recovered from the Asian flu that went all the way back to '97, and the market there is as strong as I've seen it in over a decade and we're also seeing a lot of activity in Australia, Singapore, and Hong Kong.

So geographically the markets we serve all are on an uptick as we speak.

If we move on, then, and talk a little bit about things I don't have slides for.

Acquisitions are always a part of our business.

We made the Baptie acquisition about a year ago and added 3 to 400 million to the revenue stream and added 3,500 people to Jacobs portfolio, the home office portfolio which now stands slightly in excess of 27,000 people.

We continue to look for acquisitions.

We are focused on acquisitions today in the infrastructure business and in the oil and gas business, particularly upstream.

We've got people that are chartered to go out and find acquisitions in both these markets, and when we find something that makes sense we will report it to you and we will get it done.

And the other thing that's very important to remember even in a strong market that our business continues to be cost driven.

We need to continue to work on the cost side of the portfolio.

It's easy to get very excited about all the opportunities out there and all the expansion that we can do to the business which we will do in a very organized fashion, but we all need to remember that costs become a very important issue.

So we continue to drive our folks to focus on the cost side of the business.

We continue to work share for our clients which means we are going to do -- continue to do a lot of work in low-cost labor areas like India for both our major European and U.S. offices and our Canadian offices.

It means that we are going to continue to move work electronically from places that have too much work to places that don't have enough work so that we can balance the cost side of the equation and keep our costs under control.

So costs needed to be remembered even in a strong market, because it won't be strong forever plus we can tend to maximize our profits by keeping a good eye on the cost side of the business.

So we as a company focus on that.

And then if you move to the summary slide 11, our business model, while it is not unique, it may be unique in the way Jacobs practices it, and we're dedicated to that model and even though the business climate is changing we are going to continue to focus on our core clients.

Both our diversified markets and geographies are strong and getting stronger and of course we have a diversified portfolio of services, everything from construction services, consulting, engineering, design, and science to service these clients with.

The balance sheet has gotten a lot stronger in the past year.

The cash position is strong.

The cash grow is strong and it does look like we're going to be able to continue the forecast 15% long-term earnings growth.

We may not get that every year, but the way the business appears today and the way the company is positioned there's no reason we shouldn't be able to grow this business 15% at the bottom line year after year.

That is the close of the formal part of the presentation.

We will now throw this open for questions.

[Operator Instructions].

Your first question comes from the line of Michael Dudas with Bear Stearns.

Good morning gentlemen.

Hi Mike.

Noel you mentioned in your prepared remarks about your offices making money on a local basis.

Could you maybe compare/contrast versus a year ago in however you want to describe it how many are making money relative to a year ago?

What utilization rates might be in these offices and is there much room for improvement going forward and on top of that, relative to backlog that's grown pretty dramatically the last couple of years, how's the availability of talented people to work off that backlog in a timely fashion?

Okay, if you take a look at the geographies, India is a pleasant surprise because about two to three years ago we were running India in about a breakeven and it's tipped up nicely and it's going to have a record year this year.

Record by quite a bit.

If you move into Western Europe, things were very slow, except in the UK and Ireland where we have made money pretty consistently, but the Continent's been doing just fine this year.

Canada is going to have a record year and of course we're going to have a record year here in the States.

So geographically, we're hitting on a lot of cylinders.

Europe, where we struggled a little bit in the past couple of years seems to be getting better and should be lot better as we move forward.

As far as the resources go, the resources are going to get short it appears which is going to drive us even more and more to move this work electronically to places where they are.

Even in India we may have to diversify away from our Bombay hub and move to other hubs over there we can get the talent for the back-office work that has become a very routine part of the way we do business.

I would say to you today that every major program off the Gulf Coast of the U.S. has an Indian component, and with that Indian component it's allowed us to become very competitive and remain competitive but resources will be an issue for the industry as we move forward, both in the U.S. and it appears it is also going to be a problem as we move through Europe.

And one follow-up, Noel.

You discussed a bit about the federal program or the state or the government work that you are doing in the U.S., I guess in Europe as well.

How much of a dramatic shift is this the fact that the states are getting better budgets and is there a lot more work that's being let and is this giving you an opportunity to really grab share in that market where you were kind of under the radar screen over the past few years?

I would say there's not a lot more work Mike.

There's more work.

Governments, even when their flush, they don't change dramatically their spending habits but there is more work, and yes, we are working very hard to take the market share.

Time will tell how successful we are.

When there's a lot of work it's easy to get a little more work.

Taking market share is always a little more difficult and but we're going to have to take market share in these markets, but certainly there is an opportunity to do that right now.

And one final question.

What's been the most surprising market to you guys over the last 6-12 months?

The oil market.

Oil sands?

No, no.

Just the oil market in general; the refining market.

I mean I don't think nine months ago we envisioned what is happening to that.

And on a scale of one to 10 what's the chance a new refinery gets built in the United States in the next five years?

How about minus.

Is there a negative number allowed?

Yes.

You guys will come up with.

Thanks gentlemen.

Okay.

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

Good morning guys.

Hi Sanjay.

Just a couple of quick questions here.

First one, Noel, you talked about in your prepared comments about wanting to make an acquisition in oil and gas being kind of the focus but obviously we kind of heard about you guys wanting to make an acquisition in that part for some time and certainly makes a lot of sense, but what has been the holdup here.

And number two, given that there is some much opportunity on that Canadian oil sands front and also some incremental opportunity on the refining front as you said do we really need that upstream acquisitions or can we gradually start to build that capabilities in-house and continue to build that side of the business?

Well that is a very good question Sanjay and the answer is we've tried the grow it yourself routine and we need to have a U.S. position in this.

We're pretty good upstream in Canada.

We have got a fair amount of upstream work in the Netherlands.

The oil sands as you know are going to be I think very active here over the next oh I don't know maybe all our lifetimes for all I know, but certainly we're seeing a lot of activity in the oil sands but we need to position ourselves for the long term and by the way this is a long-term game.

Of course yes.

The world is going to be plowing money into finding and moving oil upstream for the rest of our lives and then on and we need to do this correctly when we do it.

We have looked at doing it ourselves.

In fact ,we've tried to do ourselves with very limited success.

The thing that has made it difficult is to find the firms that fit very well and will help us get were want to be.

There are not a lot of players out there and there aren't big players, so even when we do this, it will have to be do it and then build and you maybe do two or three of these in that build.

And so we're just being very careful how we do it because it is important building blocks of what we're trying to do and it is not a short-term game and this will drive the bottom line not next year or the year after.

This will drive the bottom line out there four or five years.

We've got plenty of activity right now just in our normal business to drive the bottom line up to the growth targets we've got.

We've looking for long-term game when we look upstream.

Okay but it is not just a price point that has been unsatisfactory for you guys and the reasons why you have not been able to close some of these deals?

No, no.

It's a combination of this and I'm not saying people out there trying to sell don't have exaggerated views of what the companies are worth but that has not been the whole thing.

We have not found anything that just slips in neatly.

Okay got it.

One other quick question if I could.

When we look at the reclassification and backlog a bit into the field services, and you talked a bit about the cost control which seems like you've got it under pretty good control here especially in this quarter and now when we look specifically into 2006, and certainly seems like you've done a great job of converting backlog into revenues, so all that instrumental 15% should we think of it like almost one-to-one relationship on the top line vs. the bottom line growth given that there is more of a field services component kicking in which might carry slightly lower margin or do you think that you can actually do better on the bottom line than on the top line growth?

Oh we'll do better on the bottom line that we do on the top line we think and as we move ahead - maybe, I haven't run the counts on our numbers this quarter, but the secret to us and if we don't look a lot at the revenues you know Sanjay.

Basically it's the gross margin.

In a gross margin business, if we can grow the margin next year 6%, 7% or 8%, maybe 8 and keep the G&As down in the 3% to 4% range we'll get the delta we need on the 15%.

And at the top line you are right, there should be more revenue coming out of construction this year, which if you're looking at revenue alone, may drive us closer to a 15% increase in revenue to get a 15% bottom line, but I don't think it going to go that far.

Okay.

And frankly, I have not focused on it to be honest with you.

Okay that does it for me.

Thanks a lot guys.

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

Hi, good morning.

Hi Jamie.

My first question pertains to backlog.

Obviously, your backlog growth continues to exceed my expectations anyway and I was wondering when you look at these numbers were they in line with what you thought a little better and were there any large, unusual one time contracts out there or the magnitude of the size of the contracts are they bigger and longer, I guess?

There is no big one hitters in there Jamie and well three things, it probably exceeded our expectations a little bit too.

There is no big onetime hitters in there.

It's fairly routine backlog that's right.

There's no Johnson Space Center or anything like that.

Remember all that construction we said was coming.

Yes, I think Craig's got the right point.

We sold a ton of front-end work a year or two ago on the refining side and that construction is converting as we speak and it's converting into backlog.

Okay and then can you talk a little bit on the customer front?

Can you talk - have there been any significant change in customers that have moved from sort of the discrete side of the business to preferred?

Are you having any significant wins on the customer side?

Craig's going to answer that okay.

Jamie our business continues to be one that focuses on our existing core customers and our primary focus still is expansion of share wallet.

A lot of our business is coming from that arena.

We add one or two core clients to the mix every year and we're seeing that same sort of growth rate overall.

It is a core client business.

It is a relationship business and it's working just the way we outlined.

Okay and then Noel one last question just because we love to ask you about the chemical market.

Can you talk - I mean you seem so optimistic I mean when you look at this quarter versus last quarter, are you more optimistic?

Has the bidding activity picked up and I guess can you speak to sort of what geographies you're seeing that in?

Yes there isn't any doubt the activity has picked up.

The clients seem to be doing fine, although I've looked at this quarter's chemicals numbers.

You may have but I haven't, but certainly they seem to be doing fine.

We have won some work in Europe.

We'll get to some here in the U.S.

We haven't won anything - we're still not into the strength of the cycle yet but there isn't any doubt it is coming straight us now.

I think - even the doubting Thomases that use to sit around the table here with me have gotten over that.

They think the chemical market is going to be alive and well.

Okay great.

Nice quarter guys.

Thank you.

Your next question comes from the line of John Rogers of DA Davidson.

Hi good morning.

Hi John.

I was just curious.

I guess a little bit of a follow-up on the last questions.

The decline in professional services booking activity and backlog.

Do we have to worry about that's going to lead the slowing growth in field services 18 months from now or is it just temporary and just timing issues?

If you take into account the adjustments we talked about in the press release really the bookings for this quarter were still fairly good.

They still at least were at revenue levels so we do have some of the adjustments from the past, but I think the ongoing activity there is really no soft spot or trend there.

I don't think that's any cause to worry there.

We had to make the adjustment and it all happened in the pro service backlog but if you look at it quarter-over-quarter after the adjustments, it might have been flat for a quarter but I do not think it was down was it?

Okay and then just on the high-tech side of your business, are you going to be involved in some of these new fabs that are being announced?

Unless they're there for the core client customers, probably not.

Okay.

An awful lot of the fab work that's out there is for the foundries and Japanese and frankly their contracting style does not fit ours very well.

Okay but there's been some announced the last day or two that I think are for some of your core customers.

We'll very likely to be involved in those.

Okay great.

Thanks.

Nice quarter.

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

Good morning everybody.

Hi Rich.

As we look at these construction revenues picking up going forward as you work through that portion of the backlog should we be anticipating flattish to maybe even down - slightly down gross margins just by the nature of past revenues etc.?

We will see continued growth in the gross margin level, but what you'll see is the gross margin percentage will be down a little bit.

Right that's what I was speaking of right-

But given Noel's earlier comments and all we still-

Obviously gross profits will be up.

You will also see improving with the flattening of the gross margin percentage, you will see a little dip in the G&A percentage even though G&A will- either they continue to grow modestly at 2, 3, 4% or whatever but just because of the bigger backlog.

What we've always said when you get down to the operating level there is not a lot of difference and there is always variations from job to job and things like that, but trends there is not a lot of difference at the operating level between the different types of revenues.

That's at the margin percent level.

Yes, the gross margin percent level you will see that number flattening and actually dipping as we give more of a percentage to the construction.

Right now we are still running pretty close 50/50 between construction and technically other field services and professional services.

As you see that construction pickup and if it gets up over the 50%, you'll see the gross margin line coming percentage wise coming down, but you should still see with the growth anticipation you will see gross margin growing.

Okay.

The SG&A was the other line you got some leverage this quarter in it.

I'm just wondering whether costs on the Sarbanes side anything new there, anything changing?

Yes, it's still running.

Yes it's still running.

We're still going through there.

It was higher than we originally anticipated say a year ago, but I think that we have it under control and obviously we have all that activity as we go through - finish the audit this year for our fiscal year but it has added cost to the cost of doing business.

It's not a one-time shot.

There'll be some of those costs will continue on into the future.

You mentioned before that engineering talents is tightening and is likely to tighten even further and I'm just wondering because you also have a good component in India where the overall cost level certainly compared to the U.S. costs are much lower but are you seeing those costs per worker rising?

Are they starting to, because of the beginning of a tightness, are they starting to get increases in order to keep them at their shop?

Let me answer that question.

The decade we have been working with India, because of the way the currencies have moved we have not seen any significant change over there.

Sooner or later, there has got to the cost increases, but when you are working as far down the base salary scale as we are, they become insignificant, at least now when you're looking - even if you raise your costs in India 20%, they are insignificant compared to anything going on in the West because they're so low to begin with.

Plus if you look at what it costs to move the work electronically around, you have all those costs added in but we are looking at a billable hour rate.

We're looking at a factor of almost in order of magnitude - let's be general in character so I don't give away any secrets, but the difference in base salary rates and so whether it is 10 or 20% in India probably doesn't mean anything.

Okay and also regarding India, have we pretty much gotten past that point where a client would object to seeing some of engineering work go offshore if you were let's say a domestic client?

Well I think we're well past that in the context of private sector clients.

Now public sector clients have a different view and right now there is very little work being taken off shore for our public sector clients.

On the private sector side, from their perspective this is almost transparent, what goes on in India.

Okay.

Talking about the public sector for just for a second, highway bills coming up one would assume if it hasn't been passed today it will be passed hopefully before the recess.

I don't know which recess-

Yes, I'm curious about that.

That and the chemical market okay.

Is it fair to assume that these are really '06 and '07 building blocks on the business and really may be in terms of field work more '07 than '06 or could you see a real impact in '06 related to that bill?

Oh I think on the field side you won't see it until '07 but it certainly should stimulate some engineering work in '06.

The problem you've got any time you dump money on these transportation agencies they've got to figure out what to do with it and what we saw before I think you recall they had money running out their ears and didn't know how to spend it.

I don't mean to insult any of them.

But you've got to be organized to spend it well and so if the bill is up as much as people are talking about and I haven't looked at the latest version in a couple of weeks, it's a significant increase so I don't think it's just - the fact that Congress appropriates it does not mean it's going to come out the other end anytime soon.

So yes you're looking at a late '06, '07 event in my opinion.

Okay.

Just as an aside to and maybe I should really know this but do you do very much design build work?

We do very little in the infrastructure business.

We are part of the design build teams, so we have some design build contracts that where the prime but more often than not we work with a general contractor and we do the design part of it.

But once in awhile, we take the lead but that's the exception, not the rule.

All right and then one final thing the energy bill, finally hopefully again gets passed gets signed, but again, what kind of an impact on your business do you see if any?

We think that for our business it does not mean much.

Okay.

All right and that's it.

Thanks very much.

Thanks.

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

Congratulations gentlemen on a great quarter.

The question I've got for you generally you've indicated your burn rate's been around 60% on a longer term basis, because of the amount of projects that are out there and some sense of urgency in some of these things, is it possible that burn rate because it does look it may be accelerating a little bit here can that extend itself maybe beyond some of the areas of were you've been comfortable at a burn rate?

I don't understand the burn rate question.

I think the number we have used typically would be 50% of the look ahead 12 months is already in backlog.

That's kind of what I'm sensing in that maybe that potentially moves higher here as there's a sense of urgency to get some of these projects started up sooner than later.

I don't think so.

I think what we're looking at and we're just starting our planning cycle for next year in '06 and we won't get that work all done before the end of September but we're looking ahead and the preliminary data we're looking at right now is still talking about for next year we've got about 60-65% of the work-off next year in backlog today and I don't think that's going to change.

Do you Craig?

No.

It will be pretty constant in that range.

Okay.

Okay so that was kind of suggest from a resource issue as you talked earlier that if that's in fact the case then resources may not be an issue in the next 12 months as much as they may be after the next 12 months.

Well we think they're going to be an issue in the next 12 months.

I don't want to mislead anybody on that.

I don't think they're going to be a huge issue right away, but if in fact we've got the kind of cycle coming at as it looks like which means there's going to be a chemical cycle in here to somewhere.

Resources will be short in the heavy process business.

I think that also going to be short in the infrastructure business.

Okay and just to think about how you tackle that.

Is it more just logistics as you indicated earlier or is wages going to have to be the key to attract people to Jacobs versus somebody else?

Well there is any doubt there's going to be wage pressure and fortunately a lot of our work is reimbursable, but we still get hung up on old contracts so we have to be careful on that but there is going to be wage pressure.

I don't think there's any doubt of it.

It's starting to rear its ugly head right now.

So we're going to have some wage pressure going on.

And that's why the best thing we can do to control the wage pressure is to get this work moving to places where there is plenty of talent.

And there is plenty of talent in the world if you can just access and I think that is one of the things that those of us they're going to prosper in this cycle and not get caught in the box is we're going to have to get resources but they're not going to all be in the traditional location.

Some guys are going to go to Eastern Europe because they think that is better.

We're probably going to continue to focus on India for the bulk of ours, although we do have other low-cost centers like Mexico where we could do some work.

Now does resources also mean that there's maybe a premium placed on making acquisitions as well to get to resources?

Well the problem - acquisitions don't solve a resource problem because any company you're trying to acquire in this kind of market will already be full of work.

So it doesn't help you with your existing business.

It just brings more people into the portfolio and certainly it helps grow your business in total but acquisitions do not solve the resource problem because they bring work with them and they bring clients with him.

Now on the petroleum business being stronger as indicated here you've got business in upstream but with the strength in downstream being so strong, does that kind of put on the back burner the potential for upstream or how do you see that playing out here?

Well I think as we said earlier, the strength of the refining market is what we need going forward in the near term, but longer-term this is still a very big business in which we are a very small player and we need to expand our position in the market.

So the acquisition is important on the upstream side and it is a timing issue to some degree but long-term we need to grow in that business.

As far as the petroleum business is oil sands becoming more important to you guys as you see the business unfolding here recently as well as in the future or is it still going to be - that's not going to be as important as the downstream then?

Well I think the downstream end is still going to be the more important part of the petroleum business for us in the near term, but the oil sands are clearly a growth area.

We're very well-positioned in Canada.

Our customer relationships are very strong and so we're expecting very good growth out of that business.

I don't think it will overwhelm growth in the refining side.

Okay but it could be a pleasant surprise though going ahead?

I think it will be.

Well I think as long as oil stays you can read all the annual reports from the guys in Canada about where their breakeven points are, but as long as oil stays north of $30, those oil sands are very economic.

Okay then one last question.

I think you mentioned about Europe not being as strong.

What about Eastern Europe and your opportunities there because I don't think you're doing as much there as potentially could develop here in the next 6-12 years.

We've had Eastern Europe as a geographic target looking at it carefully for three or four years now.

We did not have a lot of our core clients.

That does not mean there's not a lot of European American businesses going to Eastern Europe.

We don't have a lot of our core clients going to Eastern Europe.

The more important geographic play for Jacobs today that is new is that we're putting a very focused effort into the Middle East.

The Middle East this time, because of the chemical cycle and because of the guys going there looking for low-cost feedstock, the Middle East has become a focused area for us because we've got a lot of clients going that direction saying can you help me but we're not getting that in Eastern Europe.

And so our focus today for geographic expansion is the Middle East.

Okay sounds good.

Thanks a lot.

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

Thank you, good morning.

Good morning.

Noel from your commentary it sounds like almost all of your markets are incredibly strong right now.

Can we start to assume that you will begin growing say '06, '07 at a higher level than your average 15% growth rate?

Well I'm not going to comment on that because I do not know.

Let me go back for a minute though Lorraine.

They aren't all incredibly strong.

I'm going back to this chart.

High-tech isn't incredibly strong.

Billing and infrastructure is improving and pulp and paper but the big markets are either strong or getting better.

That's fair and so could we grow better than 15%?

Sure.

Will we?

We will have to wait and see but there isn't any doubt we're getting a nice strong uptick in our market and as one of you wrote, I can remember which one of you wrote it, one of you folks that write on this stuff, we are seeing a convergence of the kind of activity we may not have seen since the '70s.

Whether that comes to play or not I don't know, but if we continue to see the kind of activity we're seeing now, we could see a very strong market, at least through the end of the decade and maybe beyond.

Okay and then just a quick update on the clean fuels work that you've been doing, would you say you are in the construction phase for most of those refinery projects?

Yes most of the clean fuels work is moving into construction and moving out of detail design.

Okay and you expect those projects to continue through the deadline in '06?

Oh yes.

Okay thank you very much.

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

Thanks, good morning.

Hi Tom.

Just a question to follow on.

I just wanted to get an idea from you guys.

Craig, your comment right there about clean fuels moving into construction was that - I mean looking at the resources piece is that the big help we're seeing now in terms of the field numbers stepping up in backlog?

Yes.

And so the question - what about-- because I know you guys had a really nice slew of oil sands awards and I was assuming that it would be like 12 months before that would start to transition into a field phase.

Is that right on my part?

It varies a little bit depending on the customer and the program.

Those will move into construction at different rates depending on which customer and which technology is involved.

Also remember, we have been actively involved in the construction world and the oil sands for a long time, so there's a fair amount of construction in our current numbers in that part of the world.

Okay.

Noel going back to one question, I hate to keep beating you on it but you guys always reference the 15% growth rate and then you always say that over the course of a cycle it is more like two-thirds organic, one-third acquisition, something along those lines but would it be fair to say that given where you are in the cycle that it is going to be disproportionately organic relative to over the course of an entire cycle?

Oh I would be surprised over the course of an entire cycle to be disproportionately organic.

There isn't any doubt -- well you've got to remember two things going on.

The acquisition world has changed as far as earnings go a little bit with the way they portion amortize the project profits.

So no longer, do even with Baptie coming in like they did a year ago you don't get the kind of kick in profit that you would have at three or four years ago because of the way the accounting rules are set up and that's about all I know about it.

Jonathan can give you a better definition of that than me

but if you look forward ahead it would be very difficult even in a very strong market, although certainly possible in a very strong market to get our 15% earnings growth all organic.

We're going to need to continue to sprinkle some acquisitions in there which we will do and certainly we could probably get one or two years - it depends on how strong the markets and nobody knows how strong it's going to be ultimately but certainly you can get one or two years at 15 percent organically without any problem.

Okay.

When you talked about the markets and the regional you had said that Europe seems to be improving as well, which is kind of surprising just because of all the headlines that you see in the press and I was just wondering can you be more specific about what in particular in Europe is going well for your or what is stepping up?

Well the thing that are doing well in Europe the infrastructure business with the acquisitions of Baptie & Gibb is going like gangbusters.

The work in the Netherlands is stronger now than any time since we've been in the Netherlands and I guess that is five or six years now.

Belgium is very solid right now.

In France, where we were in a loss position a couple, three years ago and it was more self-inflicted than it was anything else that has been resolved and that is coming back nicely.

So as I look at those operations there and then I look at Italy, which is doing just fine and has been for some time, I look at the expansions we've done into Scandinavian countries, the little piece of ownership we've got up there in Finland.

All of it seems a little better right now.

Sometimes we are outpacing the economy in general, and I think some of that is driven by oil prices and things like that because when we go to the business reviews, the growth rates get cited to as off the continent at least are any where from 0.5% or 1 or 2%.

They're not seeing the kinds of GDP growth we're seeing in here, except maybe in the UK and Ireland.

All right and then lastly - this is more of a hypothetical or what do you think, but it seems like you had referenced the Middle East in particular.

It seems like there's some customers out there that have come out and expressed shock at the cost inflation that they have witnessed and have seemed to imply that they are taking longer in terms of deciding whether to go forward with projects and I'm just wondering from your perspective, do you think that is more negotiating as opposed to actually taking longer or- I guess I'm curious about if you look at the very front-end work that you're doing right now, is that something that you are seeing where you have customers that are maybe taking longer before they go to the next step with you?

Well I don't know whether taking longer is the right word, but they're certainly going to take their time because those are big investments.

There certainly is cost inflation in the global hydrocarbons market.

I mean we've got capacity issues on equipment and things like that.

There isn't any doubt about that.

There's going to be engineering resource issues, and of course there's going to be construction resource issues.

All of these can be solved, but they need to be thought through very quickly.

I think what some of the customers are lamenting about is their ability to get lump-sum turnkey prices in the Middle East is becoming more and more difficult because the contractors are basically looking at the risks.

They're not sure where they're going to get the resources.

So there's going to be a lot of inflationary pressure on those prices over the next three to four years.

And so they are going to be thoughtful, there isn't any doubt about it but you've got to remember, they're going to the Middle East because the feedstock price is very, very cheap.

Right.

Now do you think that just on that one point I know that you're relationship driven, so it's not so clear-cut, but do you think that the transitioning to more of a cost plus nature, do you think that that helps you in the sense that it may be gets you involved in some areas where you would not be before because of the contract structure seeming to change?

Well absolutely Tom it does a couple of things for us.

With respect to our core clients we almost always have partners in the Middle East.

The contrasting strategy is now amenable to our base business model where was not amenable not because of our partner but because of their partner in times past.

In addition to that, even clients who are constructing their own facilities don't have partners with our core clients represent opportunities today because they're willing to contract on a reimbursable basis or on incentive basis that didn't represent opportunities a few years ago.

So it's really a fortunate confluence.

It will not last forever as the build out completes out there and we go through another cycle and things that I believe the industry will drift back towards a different model but I think we will be the beneficiary of that and we will establish some long-term positions as a result.

Okay great.

Thanks very much and congratulations.

Thank you.

Your next question comes from the line of Kent Mortensen with Thrivent.

My question has been answered thank you.

Okay.

Your next question comes from the line of Stewart Scharf with Standard and Poor's.

Good morning.

Most of my questions have also been answered.

Can you just talk a little about your asset expense for fiscal '06 and do you have any plans to change your plans to reduce the expense levels?

Yes we're looking at that very carefully.

Obviously, we have historically made those disclosures in our footnotes and if you look at that information, the total expense related to equity compensation has ranged from 10% to 17%.

Now part of that comes from options.

Part of it comes from our employee stock purchase plan.

The options have been in the 7% to 9 percent range, and the employee stock purchase plan is much more involved because of the short-term it's been in the 2% to 8% range.

We are looking very hard at moving the employee stock purchase plan into what would be a Safe Harbor structure so that going forward that would eliminate that expense or certainly minimize it and we also have been looking at our most recent awards have been leaning more toward restricted stock for the more middle management and retention kinds of activities, but still, we believe that stock options will continue to be a part of our mix, particularly for senior management because we believe that that is a better alignment with the needs of the stockholders.

So you'll see that that mix well be moving more in balance or there'll be more use of restricted stocksthan we have in the past.

Overall, we would like to drive that say 7% to 9% down a couple of percentage points over time, but is not something we will do it right away.

Thanks a lot.

[Operator Instructions].

We will pause again for just a moment to compile the Q&A roster.

At this time, there are no further questions.

Are there any closing remarks?

Yes, just to sum it all up we had a good quarter.

We appreciate your interest and we will talk to you in about three months at our year end.

Thanks folks.

Thank you for participating in today's conference.

You may now disconnect.