雅各布工程 (J) 2006 Q1 法說會逐字稿

Good day and welcome to the Jacobs first-quarter earnings conference call.

This call is being recorded.

Today's presentation will be available for replay today at 12 PM Eastern through January 31st at midnight.

You may access the replay by dialing 1-800-642-1687 and entering the pass code 4279312. (OPERATOR INSTRUCTIONS).

There will also be a webcast of this teleconference, which can be accessed by logging onto 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 Mike Pollock for the forward statement.

Please go ahead, sir.

Thank you.

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 10-K for the period ending September 30, 2005, including the management 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.

Now, John Prosser, Chief Financial Officer of Jacobs, will discuss the financial results.

I will go through briefly the financial highlights for the quarter, and then turn it over to Noel for discussions on the business and an overview.

Turning to slide four of our presentation, we did have a very good quarter.

We had a record backlog reported at $9 billion.

The balance sheet continues strong.

Our net cash position grew to $169 million, reflects the total cash on our balance sheet of 271 million.

And we did report for the first time on the net earnings and diluted EPS, including the effects of SFAS 123(R), and we used the modified retrospective application method.

The reason we point that out -- if you go to slide five, we give a little detail on what the effects of that are.

And using the modified retrospective method, we go back and adjust all of our history as if we had been reporting all along.

If you look at the column that has the reported numbers with 123(R), the earnings for the quarter were 43 million with EPS of $0.72, comparing to the adjusted first quarter of last year, when it was 28.9 million and $0.50.

Without 123(R), the results would have been 45.3 million or $0.76 versus the 32.5 million or $0.56.

With this good first-quarter results, we have reviewed and revised our guidance for the fiscal year 2006 to an expected growth rate approaching 20% before the effects of 123(R).

This is up from our previous guidance of approximately 15%.

Going to the next slide, the history of our consistent earnings growth, this slide has been adjusted to reflect the retrospective application of 123(R), so all these numbers are the numbers showing -- including 123(R).

I think what it does continue to show that we are back on a strong growth path.

And as you look at our trailing five-year compounded growth rates, we have gone back over the 15%, which has historically been kind of our target for long-term growth.

The next slide, slide seven, just looking at our backlog, compared to the year-end backlog, we are up about $400 million.

Our professional services is up slightly compared to a year ago's backlog, which was 8 billion, we are up $1 billion, and professional services backlog is about flat.

Now, I'll turn it over to Noel Watson for some further discussions.

Good morning and thank you, John.

Let's start on slide eight.

And as John explained, our long-term growth targets have been 15%, and we have been meeting those for a long time.

What I'm going to talk about here is several different activities.

We're going to talk about the business model.

We're going to talk about the market diversity and how it's driving the business.

We're going to talk about our multi-domestic strategy, acquisitions and a little bit about cost.

Let's spend just a few minutes on slide nine, on our relationship-based business model.

If you look at the left-hand pie, about 80% of our business comes from some form of long-term relationship.

Almost 20% of our business comes from discrete projects, and we define discrete projects as events -- they may be for clients for whom we've worked before, but there is no long-term relationship in place.

And then, just a very, very small number of our projects come from what we call transactional work, and we define transactional work as activities where we have actually had to bid the construction work on a competitive basis.

We do practically none of that.

We have focused our whole business around this relationship-based business model, where we are trying to drive value into our client organization so that, when we practice this model, we basically are working with clients on a long-term basis.

We understand their need very well.

And it does lower our cost of doing business and it does help improve the quality of the project work we do, because we are working with these clients on a long-term basis.

If I go to the right-hand side, we have the standard industry model -- as we see it, by the way -- and all of our competitors have some preferred relationships; they all do discrete projects.

But many of them do a lot more of the transactional type of work than we do.

And we are not saying that our model is any different, any better than the model you see on the right-hand side.

But what we say is our model on the left-hand side is our model.

We practice it very carefully, we adhere to it very thoroughly, and we think it's one of the key drivers in our success over the last couple decades.

If we move on to slide ten, we here are looking at our revenue breakdown by individual market.

And I'll start with the right-hand half of the circle here, which is chemicals and petroleum.

The petroleum business obviously is very strong.

For us, it's basically a downstream business with a small amount of upstream business.

We are seeing a lot of downstream work in the refineries across the globe driven by the high oil prices, which is driving people to look at alternative feedstocks.

It's driven by capacity shortages in various locations.

And a lot of the work that's going on today has been driven by regulation, which means we are taking the sulfur out of gasoline in Europe, Asia and the US.

It's a very strong market right now; it's a very buoyant market.

The chemical market, which is the other piece of this half, has been a strong business for Jacobs historically.

Today, it amounts to about 14% of our business.

The business has been relatively depressed for the last four or five years.

We are gradually coming out of that depression, and seem to be selling a little more chemical work every quarter, although nobody would call the chemical market robust at this point in time.

As we move around the chart going counterclockwise, we have got a small piece of high-tech business.

It's a very selective business for us, and it's not a big piece of our work.

But when we do get the some big jobs, they can be quite profitable.

Buildings and infrastructure I lump together, because they are basically public sector work.

We're working for government agencies.

We're working for Departments of Transportation.

This business is a strong business for Jacobs.

As you can see, it's about 16% of our revenue.

What we're seeing, both in the US and in the UK, where we primarily have a large infrastructure business, is we're seeing more tax money flowing into this business as we speak.

And so our sales work and our quantity of hours through the system seem to be going up every quarter.

This business should continue to grow for the next two to three years on a very solid basis, particularly in the UK, where they have won the Olympics and the UK government is going to spend a lot of money getting ready for the Olympics with new transportation systems, new stadiums and a variety of other things that are going to fund a lot of activity and probably be very beneficial to Jacobs over the term between now and, let's say, 2011 and '12, when the Olympics actually occur.

If we move up to the green slice of pie, if you got a color chart in front of you, federal programs comprise about 19% of our business.

Some of that is environmental cleanup.

A lot of that, however, is working for the military and developing weapons systems, operating their test and evaluation centers and a wide variety of other activity that we are doing for both the US government and other governments across the globe.

The pulp and paper sliver has dwindled down to 1%.

It's not as significant for Jacobs as it used to be.

We are still a very significant player in this business, but the capital spending cycle has been depressed now for a period of several years.

PharmaBio is a big business for Jacobs.

It went into a flat spot over the last couple of years, but we are now seeing a prospect list for PharmaBio that's about as strong as we've ever seen.

It's a different group of companies that spent in the last cycle, but this business is driven by the drug pipeline, and when new drugs are developed and patented, they need to get to market quickly.

And we see a lot of activity in this business as we look forward, particularly in the second half of this fiscal year.

So if I look at this market chart in general, we have some markets that are not buoyant, but all of these markets are on an uptick.

None of these markets that I'm looking at are on a downtick on this chart.

If I move to slide 11, we talk a little bit about our multi-domestic strategy.

We basically do work in the countries you see colored on this slide.

We are not doing work basically in developing nations.

Our basic multi-domestic strategy is to have an organization in a country and then do work in that country.

When big global clients show up in that country, we are positioned to do their work.

But we are not taking the folks in France, for instance, and sending them off to faraway places like Timbuktu to do work. 95% of the work that's done in France is built in France.

We find this multi-domestic strategy positions us to service these global clients as they move around the earth, and we have a large number of these global clients, about 40 of them.

And it puts us in position to deliver real value to them, because we know the marketplace where they are trying to build their clients.

If you look at a couple of the other activities I had on slide eight, acquisitions will always be a part of our 15% growth.

As you know from John's discussion on the balance sheet, we have been building small [cash hoard].

We have been in the hunt for acquisitions.

We have several small deals percolating along the way as we speak.

None of them have been announced yet.

The other part of our business is no matter how buoyant business is, we are going to have to control our costs.

As you know, if you have followed us for a long term, the margins are not fantastic in our business.

So one way to keep your profitability growing is to keep your costs under control, and we focus on that very hard.

We focus on keeping our G&A costs under control.

We focus in helping our clients keep their project costs under control by moving work electronically from places that have too much work to places that don't have enough.

And we also move a lot of work these days into our high-value engineering centers, which are primarily located in India, where we get a lot of leverage on the cost of a work hour for our clients.

We have about 1400 people in India now.

About half of them are doing work in the West, and it's all done electronically.

It's a skill we've developed; we can do it very effectively.

It saves our clients money and it also gives us another people resource to draw on.

If we move on to what is the last slide of the presentation, which is slide 12, we think the key things that are going to drive Jacobs today, yesterday and tomorrow are the business model.

We adhere to that business model very carefully.

We protect our clients.

We stay with our core clients, and we continue to grow our market share with those clients.

We have a wide diversity of markets, geographies and services, and we believe this is a strength.

The balance sheet is very solid, and we will continue to grow this business on average at 15% or better.

That's what I have to say in the formal parts of the presentation.

What I would like to do now is throw it open for questions.

(OPERATOR INSTRUCTIONS).

Michael Dudas, Bear Stearns.

In the press release, you mentioned about several important contracts during the quarter that you booked, and the process list remains strong.

Could you maybe go over some of the important contracts, which areas they were in, and were there any scope changes in the quarter that we should be aware of?

And what was that last statement?

Scope changes.

Scope changes?

Okay.

I think the quarter was a little bit remarkable in the fact that there weren't any huge contracts booked -- just a bunch of steady bookings coming in.

We had a very significant number of bookings coming in, in the oil and gas business, as one might expect, a few PharmaBio bookings.

We had some very solid federal government bookings that were both new contracts and extensions.

They weren't huge in character, but they were very solid.

So as we look at the quarter and the kind of bookings that came in, it was a broad array of bookings, none of them really large.

There wasn't a really large booking in the crowd.

Do you see any large bookings out on the horizon over the next two to four quarters that is a bit out of the norm, or something that could really change numbers [in a bit]?

We probably see some large bookings.

What is happening, though, today the way the clients -- let's talk about oil and gas for a minute.

These bookings come piecemeal.

We win the front-end work, then we win the engineering work, then we get the procurement and then we get the construction.

So a lot of these things are getting booked in three or four different pieces, so they don't all get booked at once.

So in that business, we are not getting any big singular bookings that we just put on the books like $1 billion of revenue; that just isn't occurring right now.

We do have some fairly big government pursuits going on, and we've got some very big pharmaceutical pursuits going on.

But my guess is the way the pharmaceutical pursuits will get let is more like the oil and gas, where we are going to get the engineering, then we're going to [get procurement], then we're going to get the construction.

So they probably won't come as big singular lumps, even though, when we look back on them they are going to be fairly sizable jobs.

And to keep on the oil and gas front, over the next two to three years, can you explain how the mix of the business that you're going to be doing will change?

Will it be less regulatory and more capacity on the downstream?

Do you anticipate, obviously, maybe some of the acquisitions you are looking at, will actually become a much more important part of that pie?

Yes, I think the answer to that is twofold.

The regulatory pieces of the business will be tending to drop out of backlog over the next four quarters or so.

What we are really looking at is the [crude slate] changes and capacity expansion, and there are solid programs in both those areas for almost every refinery of significance.

So the business is going to be good, and it's going to be driven more by the spread between the crudes and the opportunity to produce more gasoline.

Of course, as you know, we work mostly in the developed world, where there is plenty of opportunity for new capacity.

I think you may have seen this morning that one of our customers is reopening the Alliance Refinery in Belle Chasse.

So it's that kind of activity that will drive all kinds of work around the system.

With respect to the second part of your question, oil and gas will become an increasing part of our business.

We haven't made an acquisition there.

We continue to look for the right deal.

But the fact of the matter is it's a growing part of what we are tell you is the petroleum section of the business, and if we can't find the right deal, we will just bootstrap that part of the business.

Sanjay Shrestha, First Albany.

First of all, congratulations on a great quarter.

A couple quick questions here.

On the backlog front, obviously you guys are doing a great job here turning the technical into the field services.

But the technical/professional is sort of up very modestly year over year.

Now, Noel, I think you talked about some increasing activity on the chemicals and PharmaBios world.

So how should we think about that?

Should we think about that technical/professional services sort of going somewhat sideways here?

And you are still getting a lot more of the field construction, and vis-a-vis maybe why you might want to sort of get into sort of the whole acquisition mode and bring in a professional services company?

Or do you think there's enough opportunity that the technical/professional service should also continue to grow year over year?

I think that the technical/professional services is going to continue to grow.

I don't think there is any question about that.

We remain, as we've told you before, opportunity-rich right now.

And so there's a lot of opportunities to get work in this area, and I look at it, and I think, boy, 4.5 billion is an awfully big number and I'm (multiple speakers) staggered by the size of the number, to be honest with you.

But I think we've had very solid success in this.

What we saw in the last couple quarters, however, a lot of this work has converted itself to field services.

And that has been some of the [pop] in the total 9 billion.

But the professional services backlog continues to go up, and the work hours that we are putting through the books every quarter continues to go up.

So we don't need to make any acquisitions in that area to get the kind of growth we're talking about, certainly not in this market.

That kind of brings me to my next question, that you talked about some small deals that you guys are looking at.

Given the end-market dynamics right now, guys, has it changed your thought process, in terms of what might have been the previous thought as it relates to what kind of company you need to buy versus what you're thinking at this point in time?

Can you kind of go into some more details here?

Has this bought you guys some time, let's say, the valuation of [very rich] in the oil and gas side of the business, to buy somebody that you can sort of sit out and see if things change, and maybe be able to buy them at the lower price?

Well, we always like to buy them at the lower price.

But I don't think the fundamentals have changed.

We still are seeking a much broader position in the upstream, and we are looking at that both in the US and on a global basis.

We still believe we need to do something fairly significant in the infrastructure business, particularly in the United States, where we believe we are below critical mass and we believe we're seeing a wave of infrastructure spending coming at us that we may not have seen since post-World War II.

And we are seeing that in the US, we're seeing that in Europe, because the infrastructure has been neglected almost across the board in the Western world for decades.

So I think we still are hunting those two general kinds of acquisitions in different parts of the globe.

And then it comes down to the fact, can we find something that we can make a business case for that will make sense, that will allow us to expand our business?

And then for a reasonable price, because we are not going to pay huge premium prices.

But we think we can still do that, by the way.

But you are right; to get our 15% growth this year and next, whatever we are going to get, probably acquisitions are not a necessity.

But in the long term, they certainly are.

Given the outlook of the oil and gas industry right now, the level of comfort that you guys have that you will be able to find an acquisition candidate at a reasonable valuation.

If it's the right candidate, would you willing to kind of [walk] yourself up from like what you are willing to pay today versus three years ago?

Yes.

You are?

Okay, great.

One last question, then -- excellent cost control here, kind of like the numbers that we haven't seen since like, I think, 2001, a percentage of revenue basis.

Should we expect that absolute dollar number to kind of continue for whole 2006, or should we think about that as a percentage of revenue?

And is there any more room for that to go further down?

And was there any significant contribution from the Gulf region during the quarter?

Well, looking at our G&As, because of the changes in our revenue mix, you really have to be careful when you start comparing it on a percentage basis.

You really are better off, I believe, trying to look at it on just an absolute basis.

And I think we've had very good control and modest growth over this last year, and I think that we'll continue to see that.

Inflation will play some role in that; there is salary pressure right now.

A lot of that hits our cost of revenues, but also that floats down into our SG&A.

And there's always rent increases and things like that, that just fall into that.

So over the period, we would expect to see that grow kind of in line with inflation, but certainly we drive to keep that growth rate much below the growth in our markets.

You've done a great job with that.

And just a quickie on the Katrina-related opportunity that might have contributed to the quarter?

There was no significant Katrina-related opportunity contributing to the quarter.

Once again, congratulations on a great quarter.

Jamie Cook, Credit Suisse.

My first question -- I guess the first quarter was much stronger than I had expected, and you showed some very nice year-over-year growth, including FAS 123 or excluding it.

I guess, is there anything unsustainable or unusual in the first quarter?

No.

Well, then, let me ask you this --

A few words, I'm sorry, but it's about the only way to answer it.

You've got to remember, Jamie, the first quarter of last year was still part of our recovery from the 2004.

So I hate to say this, but it was a pretty simple comparison, based on where we were coming from.

I think you kind of have to look at it over the year.

And we are going back to what our historical rates have been, which is fairly steady growth.

Just because, if you look at -- excluding FAS 123, if you back out the first quarter and you look at your implied growth rate over the next nine months, year over year it looks more like 15% versus 20, and you got the bump in the first quarter.

So I was just trying to figure out whether we are really seeing a higher growth rate here, or whether you guys are just being conservative.

We are seeing a higher growth rate or we are being conservative?

That's an interesting question.

I think we can only go back to the press release on that, Jamie, in terms of we were looking at 15% year over year.

And by the way, the year over year did include a pretty weak first quarter of last year.

We now think we are going to be much closer to 20% year over year, still comparing -- still got the quarters the way they look.

We think that, if you look at it in that light, you are going to see some just fairly steady, not dramatic increases as we move forward.

You can do the arithmetic on this and figure out where it comes from.

And I think you look at our history, what we have traditionally done and, I think, where people missed it a little bit this year -- and I'm talking about the people that follow the Company -- they went back and looked at the first quarter of last year and said, well, maybe that's a [trend-wise].

And you've got to remember, we were just coming out of a bump.

But if you go back and traditionally look at our history, we don't have any what you would call cyclical effects pounding the stock like you do in some of the stocks, where you've got -- you sell more in summer than you do in winter or sell more at Christmastime than you do other times.

If you go back and look over the last decade, you'll see we have just been able to just tick it up a little bit every quarter as we went along.

No, that's a fair comment.

And then just my next question -- as you guys look at your burn rate over the next 12 to 18 months or so, are you seeing any change versus where you have been historically, in the 60, 65% range?

Oh, you're talking about the backlog?

Yes, I'm sorry.

No, we are right in historic parameters right now.

Barry Bannister, Stifel Nicolaus.

Petroleum and chemicals is doing very well, obviously, and it's 50% of the revenues now.

It was 33% back in '01 at the bottom and 66% of your revenues as recently as 1990.

Could it go back up to those over 55 to 60% levels, given the visibility and proportion of your prospects?

It would be surprising if it did.

The prospects are strong, but you need to remember our other businesses, including PharmaBio and Buildings and Infrastructure, should be pretty solid going forward.

We are probably looking, at the relative size of the business, as many prospects in PharmaBio as we have in petroleum right now.

And so I would be surprised if it ever went back to that number.

We don't have any preset conditions that we're trying to put on it, but we are certainly a much more diverse company than we were back then, and I'd just be amazed if it went to those kind of numbers, to be honest with you.

And it looks like a lot of the new capacity in refining is going into Asia, where the demand is, and in the Middle East, where the feedstocks are lower in price.

But how competitive is Jacobs with these national oil companies, vis-a-vis your existing competitive position with the major Western oil companies that may not be a player there?

Well, I think what I would say to you is that we basically or sticking to our core clients, and we are not chasing a lot of those national oil companies.

The only one of those big national oil companies, I guess, we've got a relationship with today would be Aramco, and we are doing a fair amount of work for PEMEX.

But remember, our relationship model says we're going to stick with the folks we know, and we're going to get a bigger and bigger piece of the pocket.

And that's certainly the strategy we are flogging today.

And then, just two quick cleanup questions.

What is the cost of capital hurdle rate for your acquisitions?

And is FASB 123 still a roughly $0.13 to $0.20 hit on the year?

We don't have a fixed published hurdle rate.

Our acquisition tend to be more niche acquisitions, so there's a lot of things that go into it.

But if you look at our growth rate and such, our average cost of capital is probably [saying a high major] is somewhere around 15%.

And certainly, we look at acquisitions more at how do they fit into our sustaining 15% growth rate than necessarily a hurdle rate up front.

What was the second question?

The other question was the FASB, the stock option hit.

Oh, yes, those numbers are still in the range.

I'm using $0.13 to $0.20, which was 5 to 8% of the last year's earnings base.

Right, that's just fine.

We haven't changed that.

Thanks, guys.

Super quarter.

Andrew Obin, Merrill Lynch.

To follow up Barry's question, in terms of your contract with Saudi Aramco, my understanding is that historically, those guys have pretty much been focused on fixed-price contracts.

And the fact that they are doing business with you guys shows a change in attitude; they are sort of willing to take more risk to get the quality.

Are you seeing similar shift from, I guess, not your customers but people who could potentially become your customers and maybe other parts of the market, where people are willing, where the customers are willing to accept more risk, which should enable you to do business with more people going forward, just because the demand is so strong?

The history of the business is pretty straightforward.

When the demand is strong and people are short, the customers modify their business model to get the people they want to do the work.

When there's an excess of capacity in our business and it's not strong, the customers -- a lot of them, not all of them, and certainly not the customers we work for on a day-to-day basis -- many of the customers revert back to the competitive hard-money bidding cycle.

So in a situation like this, a lot of people are just saying -- and I'm talking about our competitors now, excuse me -- are just saying, we are just not going to bid the work anymore because we don't need to because there's plenty of work.

People like Aramco -- and I won't zero in on them specifically -- need to look around at their [hole] cards and say, okay, how are we going to get our work done?

And how are we going to get out there and we're going to get the people we want to get the job done?

Because now they have to compete to get people to come work for them.

And so it does change the dynamics of the situation a little bit.

I think if you have been following the offshore business, you will see that after all those huge losses some of these companies experienced on some of these offshore platforms, let's say in the early part of this decade, they've sworn off lump-sum bidding those things.

Now, will that last?

Well, who knows.

But at least for the time, they've sworn off bidding them.

So that means that the buyers are going to have to deal with the contractors on a different basis.

Another side of this trend would be, why are we not seeing more just pure pricing in the industry?

And I understand that in particularly, you have a relationship business, and you're not going to jeopardize it just because you have a 12-month pricing opportunity.

But why should we not see, if we assume that this is a long cycle in terms of oil and gas upgrade, why should we not see more pricing going forward, just pure pricing?

Well, I think you will see some more pressure on pricing in general in the marketplace, in the industry.

And I think you will see contractors getting a little better margins.

But there is a limit.

Remember, there are companies like Jacobs out there who are not putting that much pressure on the margins, and there is still a fair amount of competition at a certain level.

So, while I think there will be expansion for the industry in their margins, I don't think it's going to be dramatic.

Richard Rossi, Morgan Joseph.

Following upon that last question, would it be fair, then, to say that given the favorable overall environment, that maybe the risks inherent in a lot of these contracts are being reduced because of the clients' change in what they are willing to give as concessions, rather than on the pricing side, so that maybe we don't so much see dramatic margin improvement via the pricing side, but the margin improvement comes because an engineering company like yourself is taking even less risk than you may have before, and your risk profile is generally lower than the industry's?

I think that's a good analysis, Rich.

I think the answer would be yes.

And certainly, one of our first steps in a stronger market is to get the contracts more in tune, so that these owners don't have a chance to own Jacobs if we make a mistake, as I tell them.

We don't want that happening.

So yes, we're out negotiating that every day, trying to get a little better contracts as we move forward.

Looking at gross margins near-term, obviously strong topline growth, more fieldwork, a change in margins -- certainly should not have been a surprise that gross margins were down year over year, given that very strong topline.

Is a 12.5% to 13.5% gross margin range a better range to look for in '06 and maybe going into '07?

I think so.

We don't give specific percentages, but with the mix changing and the growth and picking up more on the field services side activities, we would expect to see that coming down from the 14, 15% margins we've seen the last couple of years.

This quarter was just over 12.5, and certainly in that range is probably where it's going to be as we get more of this field service work into the activities.

And finally, a couple of questions on backlog.

Could you give us a sense of how much of the backlog is chemical now, versus -- either on a percentage basis -- versus, let's say, a year or 18 months ago?

I don't have that number.

It's up a little bit, but not dramatic.

We have not seen -- certainly, there was a period of time about three years ago when we weren't selling any chemical worker.

Today, we actually are selling a pretty steady stream of small stuff, but we're talking about 30, $40 million modifications.

We are not seeing yet the big capacity expansions -- from our clients, at least -- that would drive a big increase in backlog.

A lot of our chemical work is small stuff that we are just getting on a steady-stream basis from a wide variety of clients across the globe.

But the bigger projects, let's say the $100 million jobs, there's not a lot of those in the backlog.

Do you have any sense on just the general UK infrastructure work?

Are we talking about several hundred million dollars in the backlog, something of that size?

A lot of that is pro service backlog.

And I don't have a number, but two things -- it is substantial because of the Babtie acquisition.

You remember, we had Gibb over there, too, so we've got about 4,000 people [plowing] that infrastructure business over there.

And secondly, the UK is a buoyant market right now for infrastructure.

And then one final thing -- and again, I don't expect you to have the numbers, but if you can give us some sense of magnitude -- in your government work, your federal government work, your multi-year project, your multi-year contract work, obviously we don't see all of that in the backlog.

Is there a few billion dollars' worth of business -- if these contracts played out as one would expect, are there a few billion dollars' worth of backlog not reported because of the multi-year nature of the jobs?

Oh, I take a few billion is probably an exaggeration, the way we backlog it with our backlogging rules.

There's certainly some, because on these 10 or 12-year contracts we've got like down at Tennessee, we are only backlogging two years at a time.

Is that right?

So you've got some of those going on like that, and I think Johnson's backlog is the same way.

But a few billion would be too much.

Okay.

So under 1 billion, maybe (multiple speakers)?

Say, under 1 billion.

Maybe around 1 billion.

How's that?

That sounds good to me.

Tom Ford, Lehman Brothers.

Good morning and congratulations.

A couple of questions -- first, Noel, going back to one of your comments about infrastructure, you said that very strong -- let's see.

Don't have it word for word, but something along the lines of possibly not seen since post-World War II.

So I'm just kind of curious.

What does that mean in terms of comparison to like the late '90s upcycle, when we had the last transport bill?

Well, it looks to us like you've got a couple things working.

Now, this is speculation, so this certainly falls under the class of a forward-looking statement.

Okay?

Noted.

But we have got the UK, which in the late '90s wasn't spending.

So that's a totally different dynamic going on, in terms of both the transportation over there and, as I told one of their senior government officials in the office two weeks ago, you guys are going to spend more money on the Olympics that you ever dreamed.

And I think that's a fact.

In the US, we've got a really large transportation bill, as you know.

We've got the state governments, like we have a governor here in California, for instance, who has decided it's time to rebuild our roads.

And he's going to try to get reelected on that basis.

We've got that going on, plus the money going into the state coffers is really solid right now.

And I think there's a willingness around this country to spend more on this than we have historically, and I think some of this is going to get spent at the local level.

We are seeing all kinds of bond issues and county bonds.

And some states are doing it on a county-by-county basis.

Sales tax measures -- we have just got a lot of emphasis to rebuild our infrastructure.

And by the way, if you spend a lot of time in Europe, as we do, there's countries in Europe where the highways and bridges are just in a lot better shape than they are here in the US.

So I think that's what we mean by it.

Another question, just more broadly, in terms of the, I guess, revenue or backlog -- if we could connect the earnings revision up, in terms of what you guys are comfortable with versus a quarter ago, obviously you've got elements that are surprising you.

I'm just wondering, is it coming more on the field side, or is it the technical/professional side?

I don't think you can isolate it to one thing or the other.

Clearly, a lot of projects that were in study or in engineering or moving into construction -- and that's good news for the outlook going forward.

There's always the possibility that work just won't get done, or we won't get to do it, and we are getting a lot of clarity about that.

But there's also just a really solid -- as I think Noel has outlined -- a really solid prospect list across almost all of our business.

And it just bodes for a good, solid year.

One thing.

I think Jamie kind of asked you before, but I just want to make sure, so I'll ask it again.

Pardon me for it.

But in terms of this specific quarter, was the amount of walk-in work that you had -- was it notably different than anything you have seen in prior periods?

I guess I'm going to speculate what you mean by walk-in work, which is sole source kind of awards?

Or --

Yes, just maybe like a turn-around type activity, some type of fast burn, small projects?

That category of work was no different than usual.

There's a lot of activity out there.

Our relationships are paying off, in terms of lots of awards, and a lot of those are sole-source awards.

But there wasn't anything that kind of deviates from the way we run our business every quarter.

Two quick questions.

John, do you know -- I guess you'll put it in the Q, but I was just wondering about procurement revenue in the quarter.

Is it notably different than prior periods?

The reason I ask -- just as you guys have talked about this migration of parts of the work more towards the field phase, I'm just wondering if the procurement element has stepped up, as well.

I don't have the number, but with the field services revenue going up, I think, a couple hundred million this quarter over last quarter or something like that, I would guess that there's an increase in some of the pass-through and procurement costs.

I just don't have -- and that's just intuitive, because I don't have the actual numbers in front of me.

And lastly for you, John, on the option expense, two things -- number one, any way that you could restate the other quarters for us the way you did for 2005?

Or is that something that you were going to plan on doing as you go through the year?

It's in all of our historical Q's and annual reports; we weren't planning on putting it out separately.

And then, the last thing is, is there anything really seasonal to that, or is it going to be a fairly straightforward, consistent number each quarter?

Are you talking about the option expense?

Yes.

Going forward it will be fairly stable.

Looking historically, because it included more variable expense from the stock purchase plan, you'll see a little bit more variability quarter to quarter, because it was impacted by changes in stock price much more, because how the stock price changed over the six-month period of each of the stock purchase plan has more impact.

But going forward, since we have gone to a Safe Harbor on that plan, we are really only looking at the stock options.

And those tend to be -- they move and they change, but they tend to change with a little less volatility.

David Yuschak, Sanders Morris Harris.

Congratulations, gentlemen, great quarter.

I'm kind of curious.

We have been kind of operating on the assumption we are very early into a major capital project spending across the globe.

And I'm just kind of curious.

Noel, in your comments, you indicated that all of your markets were in an uptick in the quarter from a bookings point of view.

I'm just wondering, when was the last time you saw something like that?

Well, what I tell people is I haven't seen anything like this since the '70s.

I know some people have drawn some curves showing some other strong periods.

But we haven't seen the kind of market we are facing today since we went through the oil embargo starting in '73.

But you are not just talking about petroleum and chemicals as much as you're talking about whether it's pharma, infrastructure -- you're talking about the whole gamut is really --

Well, right now, we have an interesting confluence of events with the oil and gas is probably driving a lot of different things.

The pharmaceutical business is coming out of what is a flat spot;

I won't call it a slump, but certainly coming out of a flat spot.

And we see the buildings and infrastructure coming out of a flat spot, because the stateside revenues were down.

And we didn't have a national transportation bill.

And it's amazing; as I go around and talk to some of these folks in the States that are starting to build highways and bridges, how much they need the certainty of that national transportation bill before they start with their projects.

And so we have just got an interesting confluence of events going on, to be honest with you.

And I'm not complaining.

Well, I wouldn't complain, either.

I think it goes back to another question, though.

Does that mean that you're going to have to start maybe allocating your resources more to areas that are maybe relatively more important, as far as longer-term opportunities compared to some others?

Because resource allocation continues to be a major hurdle, it looks like, going down the road -- I'm just kind of curious.

Particularly the kind of nature of the broad-based opportunities you have out there -- what does that do for you in the way of resource allocation?

Well, I think you're going to look at two things.

First off, we are going to focus first and foremost on these relationship-based customers that we do business with year in and year out.

And they will be our priority, in terms of any resource allocation that we have to do.

But our focus is really on continuing to develop our ability to move work around the world, and to share work between locations that are not as strong but may have a high concentration of capacity available with work that is very strong.

We're also going to continue to develop our backoffice operations, with the high-value engineering centers like India and Mexico City, to supply resources to the business across the globe.

I don't see that as a big problem for us near-term, but we will be being selective, particularly selective in opportunistic projects, those discrete projects that we talked about.

And as far as that goes, you indicated maybe some big opportunities out there.

What market segments?

Would that primarily be petroleum more than anything else?

The big ops?

No, I wouldn't say so.

There's lots of good opportunities in the petroleum business for sure, but also in the pharma business and in our national governments or federal programs business.

There are really some terrific things going out there that represent really good opportunities for the Company.

So the big ops could be across several of your verticals at this point?

Yes, absolutely.

As far as international versus domestic, what kind of mix did you have there in the quarter?

I think it's probably pretty consistent with what we've seen, with the construction activity -- that primarily is focused on US and Canada.

But I think from a professional services and manpower, work power, workforce power allocation, we are still running about 35% outside the US and about 60 to 65% inside the US.

As far as federal programs, would you guys be getting involved in BRAC at all, too?

Because that could be a major cleanup project during the course of the next several years.

We will definitely be involved in BRAC; we are working BRAC already.

And I think that will be one of the areas where we see good activity in the US.

In the environmental cleanup end of the business, we see the US market as the market itself is not growing much, but still plenty of good opportunity to sustain a strong business.

When you look at places like the UK and the nuclear cleanup program there that we think will be over $100 billion, there's just a lot of opportunity in that end of our federal programs business right now.

And just a couple of just quick ones.

On the oil sands, is that going to be a bigger and bigger potential opportunity that could -- that time horizon comes sooner than later?

Well, the oil sands situation is nothing short of remarkable.

Everybody is looking at it.

There's lots of activity, lots of prospects being talked about.

But if there's a place in the world that's somewhat resource-constrained, it's Calgary.

So there will be their challenges, in terms of whether all of those ideas can get turned into projects as quickly as people would like.

But the oil sands are going to be very robust as a business for the people who are up there and who have a good track record with the customers.

And one quick question on the pharma.

Just kind of curious, because I'm not drug or healthcare knowledgeable at all.

But the big blockbuster drugs just haven't been out there.

I'm just kind of curious.

You had indicated things are changing in pharma.

In what respects are you seeing that changing that could create some improved opportunities after kind of a flattish performance?

Well, some of our customers have a pretty good pipeline of new drugs.

Now, they may not be the blockbusters that we have come to think of them, but they still take a new plant for every new drug, for all practical purposes.

And so every time there's a new drug, there's a new $250 million project out there.

And once a while, there's a new drug and there's a $1 billion project out there.

And there's enough of that out there to be what we think of as a pretty robust market.

So you are maybe saying that maybe more 250 projects out there than the 1 billion, just because you don't have the big blockbusters as much as you had in the past?

To be honest, I think there's always been more 250's than 1 billions. $1 billion projects in the pharma business are not all that common.

But there look to us to be a lot of these 250's, some 500's and a 1 billion or two.

But that area does look like it's coming back?

Yes.

(OPERATOR INSTRUCTIONS).

Stewart Scharf, Standard & Poor's Equity Group.

My question was partially answered, regarding oil sands.

But maybe you could elaborate a little bit more on that.

I don't know if you saw the 60 Minutes episode Sunday regarding the Alberta oil sands.

It was actually an interview with one of your employees.

It was a hardhat type of engineering --

I heard that;

I haven't seen it.

Best unpaid advertising we've had in a long time.

They said, I think, there was a 100,000 shortage of people up there.

Where do you fit in?

What piece of the pie do you have up there now?

And just could you elaborate on the shortage of workers?

Will, I think what you see in Calgary -- you've got to remember, Calgary is a town of 1 million people;

I suppose Alberta has got, what, 2 million people?

Something like that.

We are talking about spending just hundreds -- 50 to 100, $150 billion, depending on which number you believe and what timeframe you look at it over.

We will struggle to get the engineering done in Calgary, but certainly there is a global resource that can engineer all those plants.

And so, what we have to do -- and of course, we have clients who like to have it done locally and they are going to have to get around the issue.

Sooner or later, this work is going to get engineered in a faraway place.

And so the engineering capacity on a global basis will be there to do it, period.

The bigger problem will be the construction capacity.

It is not a wonderful climate to build stuff in; it gets a little cold in the wintertime.

And what we are going to have to do is build a lot more of the plants off-site and ship them in as much as possible.

And that modularization concept, which, of course, we are a big player in, in the pharmaceutical business and some of the oil business can easily be translated up there.

But what we are going to see is a lot of the build off-site -- we are probably going to see some foreign workers up there in the country, and that will be pretty traumatic for people.

But I think that's going to happen, particularly if the spending continues as we see it now.

But there are solutions to all this.

It's just that the government is going to have to engage with the industry -- and I do not know what they said on 60 Minutes, so I'm just telling you what I think -- engage with the industry to get the construction done.

But I think it's all very doable.

And just to clarify, what number are you using to get to the 20% EPS growth rate?

Are you using a 2.24 diluted fiscal '05 number after options?

The 20% is based on before 123 numbers, just for historic.

As we go forward and everybody digests it, we will probably change our base.

But it was clear to us that there's still some confusion out there between before and after.

And also we just -- the 15% was before 123, and the 20% is based on before 123.

So that would be the 2.57 for last year.

So 20% of 2.57?

Yes.

And remember, it was approaching 20%.

Tom Ford, Lehman Brothers.

Just two quick follow-ups for you.

Number one, Craig, when does BRAC become important in terms of when does it start contributing notably?

Well, it's a little difficult to say, because of the different models that are being used now for disposition of BRAC sites.

So it's going to kind of vary by location.

Some of these sites will go into more of a development mode, and others will just be the traditional sort of government cleanup.

We think that will start to affect opportunities here within another 12 months.

So it's in 2007, think about it as?

In terms of real work, yes.

And the other question I had for you was with respect to the transport bill.

I think you, Craig, or Noel, you had said to -- actually, I think I've talked to you about it before.

You were saying that you have to temper your enthusiasm in the near term, because it takes time.

Projects have to be taken off the shelf, dusted off and reviewed before you can see things kind of move through the process.

I think you were kind of implying that sort of the '07 timeframe maybe would start to be the point at which we would see something.

Is that still the appropriate way to think about it?

Yes, I think so.

We are actually seeing a tick-up in the work right now, and now we are talking about the US.

Okay?

Yes.

We are talking about the US.

We're seeing a tick-up right now, but as far as real work goes, it's an '07 timeframe.

And that's probably true of the UK, too, although the UK probably right now is a more buoyant market than the US for that kind of work, because they've got the Olympics deadline staring them in the face.

And that's rolling out of -- not only through all the Olympic facilities themselves but through the transportation systems, the new rail stations, rail lines.

You've got to remember they are rebuilding a depressed section of London with these Olympics.

So there's a lot of work to be done there, so that's probably a little more immediate.

(OPERATOR INSTRUCTIONS).

And at this time, gentlemen, there are no further questions.

Are there any closing remarks?

I want to thank you all for attending.

We appreciate your support.

And if you have any further questions, you give John or me or Craig a call.

Okay?

Thank you very much.

Ladies and gentlemen, this concludes today's Jacobs first-quarter earnings conference call.

You may now disconnect.