雅各布工程 (J) 2006 Q2 法說會逐字稿

Good day and welcome to the Jacobs second quarter earning conference call.

This call is being recorded.

Today's presentation will be available for replay at 2:00 p.m.Eastern time through May 2nd at midnight.

You may access the replay by dialing 1-800-642-1687 or 706-645-9291 and entering the pass code 7191638.

Again, the number is 1-800-642-1687 or 706-645-9291.

And the pass code is 7191638.

There will also be a webcast of 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 speaker's remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS].

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

Please go ahead.

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

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

For a description of some of the factors which may occur that could cause differences, the Company requests that you read its most recent annual report on Form 10-K for the period ending September 30th, 2005, and the most recent Form 10-Q for the period ending December 31st, 2005, including the management's discussion and analysis of the financial condition and results of operations contained therein.

For a description of Jacobs business, legal proceedings, and other information that describes factors that could cause actual results to differ from such forward-looking statements.

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

And now, Craig Martin, President and CEO; and John Prosser, CFO will discuss the quarter's results.

Thank you, Patty.

Also joining us this morning are Noel Watson, our Chairman; and Tom Hammond and George Kunberger, our two executive VPs of Operations.

First, I'll go over the financial highlights for the quarter, and then I'll turn it over to Craig to discuss the -- our growth strategies and give a business overview.

I'm sure by now you've all seen the press release.

We did have a very good second quarter.

The reported record backlog of $9.1 billion, very strong sheet position.

Net cash grew for the quarter to 255 million, that's cash less bank debt.

This is up from 169 million last quarter.

Our [pure buyout] cash balances were at 367 million.

Net earnings that were reported were reported including the effects of SFAS 123R, using the modified retrospective application method.

If you go to slide five, this is the results for the quarter both with 123R and without 123R.

We're showing both again this quarter just so that you can clearly see the transition as we have adjusted our past earnings for the past effects of the 123R quarter.

For the -- with the 123R, the quarter results were $0.74 compared to adjusted results last year of $0.48.

Without 123R, it was $0.78 compared to the $0.61.

Based on this strong quarter and the continued performance, our outlook for 2006 improves, and we're looking for something approximately around 20% or a little bit higher than that for the year.

Turning on to page six -- slide six, this gives us a -- tracking the history, this has all been adjusted for the 123R numbers.

It shows that with continued strong performance last couple of quarters, we're back up above the -- our historical 15% compounded growth rate for the last five years.

But it does continue to show that we're on a very good steady earnings track.

Slide seven, talking about our backlog growth.

Again, we had record backlog of 1.9 billion.

The professional services component grew to 4.6 billion.

This compares to 8.2 a year ago, the March period last year, and it's up from the fiscal year end as well.

The bookings this quarter were strong, but we also had very strong workoff which accounts for some of the modest growth that we had quarter-over-quarter basis, but most of that growth came from just fairly routine kinds of awards.

There was only one award that was in excess of $100 million, the rest being just normal kinds of bookings and small projects.

With that, I will turn it over to Craig to give us the overview on the operations.

Thank you, John.

Start off here on slide eight with our strategies to continue to maintain our 15% growth in the long run.

And nothing's really changing about our approach here.

We remain committed to our unique business model.

We are going to continue to diversify our markets and work multi-domestically, and I'll talk a little more about each one of those things as we go through the rest of the presentation.

We are going to continue to see acquisitions as a part of our activity.

As we've said, we continue to look for growth opportunities in the upstream oil and gas business and infrastructure business, and niche acquisitions that will help us grow our business either geographically or in specialty markets.

We continued also to focus on costs.

We're very interested in making sure that we don't let our costs balloon during a time when there's lots of activity out there in the marketplace, so we're keeping a hard focus on keeping our costs down.

We're putting a lot of energy in being able to move work around the world in order to benefit from available labor supply across the country.

So that'll be a key focus for us as we go forward.

Turning to slide nine, our relationship-based business model.

Let me start again by reminding you of the perspective at least we have on how the industry looks at the business.

Our industry tends to be a business that likes lump sum, turnkey, transactional projects.

Big events, often big events in far away places, and the better part of most of our competitors' business is made up of those kinds of activities.

They have some preferred relationships.

They do some discreet projects, but their focus tends to be on the big events, often lump sum key bidding events.

We look at it just the opposite.

We like the preferred relationship side of the business.

Today we get about 80% of our business from preferred relationships and the bulk of the remainder from discreet projects.

That's projects for customers we know, but from whom we haven't developed an ongoing discreet -- or an ongoing preferred project relationship.

We do the occasional transactional project only to keep our workload balanced or to be opportunistic about a specific issue or location.

But our focus continues to be on preferred relationships and the benefits that that gives us as a company.

And right now, the preferred relationship model is working very well for us.

Turning to the markets we serve, you can see the pie chart has changed just a little bit from the last time we presented it to you.

You've seen some growth both in the petroleum and chemicals pieces of the business relative to the rest of the business.

And I think that reflects the strong markets that are out there in the oil and gas world.

Starting with the petroleum side.

That's about a -- a third of that is upstream business, mostly in the tar sands in Canada and the North Sea.

Lots of activities both places.

Good prospects as well as a good backlog of business.

The balance tends to be refining in the refining centers around the world.

The Gulf Coast of the U.S., northern Europe, Singapore.

Again, lots of activity, driven predominantly by sour crude, capacity creep, and some environmental clean up related activities.

But all in all, a good business and excellent prospects looking forward with the customers that we serve day-in and day-out.

On the chemical side, we're seeing a little expansion to the business there as well.

Awful lot of activity for us at least in the area of polymers -- polypropylene, polyethylene -- both in the U.S. and in northern Europe, along with some activity in the Middle East.

So the oil and gas, heavy hydrocarbons business is being very good to Jacobs right now, and it looks like it will continue to do so in the future.

Moving around the clock, on the other side.

PharmaBio business, pharma is continuing to be a business that we're starting to see growth in.

There are a number of customers out there with sizeable programs and projects.

We are particularly well-positioned to serve those customers, and we expect to see continued growth out of the the PharmaBio business, driven by a number of biotech opportunities, some vaccines work that's out there.

The activity is generally pretty strong.

What we find is that amongst our group of core customers, it's different core customers at different times that have the pipeline to drive the business.

And right now, the biotech folks are probably the strongest of those in the pipeline regard.

Pulp and paper still pretty much what it always is.

Not much more to say about that.

Some day it'll be better, but I wouldn't be willing to bet on when.

Federal programs, as you know, that's really national governments because it's not just the U.S. government.

Really two parts to that.

One part is our environmental clean up business.

A good business here in the U.S., especially with the new round of base realignment and closure.

A lot of activity starting to show up in that regard.

In addition to that, of course, we're still doing clean up of the various weapons facilities and nuclear clean up work in the U.S.

Probably more interesting, though, for us right now is the opportunities that we see in the UK.

There's a very substantial nuclear clean up program.

We're in on the ground floor of that with some business we have today, and we expect that to be a very good market for a decade or more.

So we see a lot of opportunity for growth in the environmental clean up business, particularly driven by this nuclear clean up in the UK.

The other half of the business is supporting our DOD customers in test evaluation and scientific and technical consulting work.

Customers like NASA are very important here.

You may have noticed we had an announcement of another major win with NASA.

We continue to expand our relationship with that customer and grow our business across the board.

These contracts are particularly desirable because they are very long term contracts.

And while they don't add a lot to backlog, they do represent good future work for the Company.

The buildings business is another good business for us.

We're seeing a lot of activity, particularly in areas like health care where Jacobs is extremely well-positioned both domestically and in Europe, and we expect to see a continued opportunities for growth there.

We're seeing some resurgence of corrections work, and then our usual work to support government companies -- government customers in things like operations command centers, hush houses, test facilities continues as well.

Infrastructure business is another good business right now.

It's one of the biggest businesses in the world and represents a real opportunity for Jacobs in terms of growth both from an acquisition point of view and in terms of leveraging our skills and building our market share.

Plenty of activity out there, not only at the national government level, but a lot of counties and states both here in the U.S. and in Europe, particularly in the UK, are starting to fund their own infrastructure programs.

And that's generating a lot of interesting work.

Just here in southern California alone, there are three counties with billion dollar plus programs of their own, let alone what the federal government's providing.

So we see that business as being a strong market going forward.

And then finally, our friends in high tech, as you all know, that's sort of dependent on what a couple of key customers spend.

While we're optimistic about the prospects today, there's just not a lot of activity right there.

Moving on to our multi-domestic strategy.

We continue to look for the right places to put a permanent presence on the ground with idea of both being local to our customers and making money in the domestic market day-in and day-out, as well as serving those customers on a global basis who have facilities in that location.

You can see we're slowly expanding our geographic footprint, and we expect to continue to do so over time.

It does have the benefit of helping to balance our business in ways that will keep us, I hope, strong even when this big bubble in the oil and gas business goes away.

So we finally come down to the slide that I call the commercial.

We've a good business model.

We're diversified in terms of markets, geographies and services.

As John's pointed out, we have a good solid balance sheet, and we remain committed to 15% year-over-year growth in the long term.

With that, I'll turn it back to Brian and Patty for any questions.

[OPERATOR INSTRUCTIONS].

Michael Dudas, Bear Stearns.

Good morning, gentlemen, Patty.

Hey, Mike.

How you doing?

Have you been able to keep Noel out of your office these days?

No.

There's no chance of that.

Didn't think so.

But he's not forgotten, absolutely.

I hope not.

Who is that?

First question is, Craig, from your perspective, it's been a lot of news about this in the public press.

Can you give from your perspective the state of the U.S. refining industry and what kind of realistic solutions and what your customers are talking to you and other contractors about and trying to line up opportunities to possibly here and abroad for more imports et cetera, not only maybe from the refining side, but is there any ethanol opportunities that you're coming across as well?

Let me start.

I may ask Tom Hammond to comment a little bit.

We're seeing lots of activity from our core customers in terms of the refining business in the U.S. domestically, and it's taken the character of several kinds of work.

Some of them are still in consent to [cree] related work and doing the last little bit of clean fuels work, but the bigger issues tend to be looking for ways to expand capacity and ways to deal with cheaper crudes, meaning heavier and more sour.

And almost without exception at the major refineries across the U.S. we're seeing commitments to very significant expenditures.

There are programs out there that range from the few hundred million dollars in terms of construction cost to those that range in the $3 billion-plus in construction cost.

Some of these are purely crude related but carry with them some capacity of expansion.

Some of these are out right capacity expansions in the thousands and tens of thousands of barrels a day kind of capacity expansions.

So the business is pretty robust.

Tom, do you want to add anything?

No, I think you summarized it well, Craig.

We're in the final phases of the major regulatory projects that have been undertaken over the last half a decade or so.

We're seeing a lot of our customers evaluating major expansions to accomplish two goal.

One is to process the types of crude that is available, and the hardware in the United States not very amenable to processing the crude that's generally available.

And as Craig said, several of these projects, while they will convert the refineries to process different kinds of crudes will amount to substantial expansion of capacity.

It is -- it will be the equivalent of a few new refineries, but nobody's going to build a new refinery per se.

In Europe activity is driven, again, by changing crude slates to condition the European refineries to process Russian crude, and also, a major environmental program taking shape in Europe right now is implementing biodiesel.

And we're seeing several opportunities in the area of biodiesel for some of our customers in Europe.

As to the ethanol question, Michael, it appears to us that there will be some ethanol projects out there, but it's probably going to tend to be one-off in most cases, and as you know, that's really not where we'll be focused.

There may be a few of our major customers who begin to look at ethanol projects.

If so, we'll look at those with them.

But I don't expect that to be a big driver in our business.

And then can I have one follow up?

Relative to the $6 a share in cash that's on the balance sheet, you've done a tremendous job of generating cash to the cash account.

Could you refer or remind us again how you think you're going to be allocating that cash going forward, and has the Board had any different discussions regarding capital allocation.

John?

Well, I mean, as we've said many times before, our primary use of our cash is for the growth of the business.

Both through external acquisition and providing the working capital for internal project development, heavily focused on the external acquisitions.

And we continue to pursue those, and we believe that there are opportunities out there that we'll be capable to take advantage of because we have a good strong balance sheet and resources readily available to pursue them.

Beyond that, we really -- that is the primary focus of the cash.

And what areas, Craig, are you focusing on with some of the discussions out in the market relative to adding capacity, and to follow up, are there any capacity issues that Jacobs is seeing for yourself or competitors?

In terms of adding capacity, our focus continues to be on those areas where we don't already have a strong presence.

So in addition to continuing to try to boot strap our business upstream, we continue to look for niche acquisitions in the upstream marketplace.

And then as I think we've said more than once on this call, we need to be a much bigger player in the infrastructure business globally to really have the critical mass to compete at the highest level, and we're going to make sure we get that.

So those two activities will be sort of capacity related from an acquisition point of view.

To the broader question of what's going on in capacity, there's lots of demand for talent out there right now, and so all of us in the industry are working hard to get the right people and keep the right people, and it's a challenge, but we're being successful at this point.

I can't point to any particular customer that I know of.

George or Tom, you might weigh in who has specific capacity problems that are more significant than anybody else in the industry.

But it is going to be a time when there's going to be a lot of challenges of getting and keeping people compared to perhaps a few years ago.

Those of us who have operations in India.

Those of us who can wield work around the globe will be in a better position to deal with those capacity problems, frankly, than the smaller local folks who can't do that.

Thank you, gentlemen.

Thanks, Michael.

Sanjay Shrestha, First Albany.

Great.

Good morning, guys.

Couple of quick questions here first on the backlog trend, looking at both the technical professional services and the field services.

Certainly, you guys have done a great job here of converting the technical into field and that has shown a pretty nice growth.

But as we look beyond this point on a total backlog up 10% year-over-year, I mean, without an acquisition would that number go back up to 15 to 20% or is that kind of the number we're going to start to see given use?

You also had a nice growth in your technical professional service in the third quarter of 2005, and that's going to -- another growth in the field services backlog in Q3 of 2006.

Well, as we've cautioned, as we've -- getting into bigger and bigger projects, the backlog growth tends to be a little bit more lumpy.

Fair enough.

But also talking about that, we don't need 15% top line growth to achieve 15% bottom line growth.

And if we can grow our margins say in line with our revenues at about 10, 12% a year and keep our G&As in line, we can achieve the 15% growth.

Right now we're in a little stronger period than that so we're seeing a little bit stronger growth and we've had some lumpiness in the backlog.

Some quarters are stronger than the others.

But I think that something you had expected over time to see something in line of the 10 to 12% to keep -- to meet the 15%.

Over the long term, we've said that it's awful hard for us to grow more than the say, 8 to 10% purely on internal organic growth.

We can do it for short periods of time.

Obviously, we're doing it now and outlook because a couple of -- a few of our markets are very strong, and it's good for this year and into next year.

So the acquisition needs are not necessarily for -- I mean, for today and tomorrow, they are -- but they will need to be there if we want to continue that growth out into the -- the out years say beyond 2007.

Got it.

Got it.

Great.

And right along the line of margin enhancements, so the sequential decline here in your margins here from quarter-to-quarter, that's simply a reflection of the higher field services revenue in the quarter, and I guess maybe, John, you can elaborate a little bit in terms of what are some of the specific thing that you're looking at from a cost reduction standpoint to get that better leverage in the bottom line versus the top line growth?

Well, obviously, I mean, we did have a -- there is a mix -- our field services component has continued to grow, and so the gross margin sees that effect.

What we've -- we're a little disappointed in this quarter was our G&As grew a little faster than what we would normally like to see.

First quarter -- or I should say the second -- our second quarter, the first calendar quarter always has a little bit of a bump simply -- just because we don't have as many holidays.

You get things like salary increases and rent increases and things like that to put pressure on our second quarter.

It jumped a little higher, somewhat related to the fact that we are seeing salary increases across the board and demands of employees and it takes a while for that to move through and get into all of our contracts.

Certainly on the cost plus contracts it moves very quickly, but where we have rates contracts or things like that, it takes a little longer for those to get through.

So, I think what you would expect to see in the G&As certainly in the next couple of quarters would be a flattening -- flat or maybe even down a little bit as we absorb some of those costs and take measures to [inaudible] other G&As, primarily salaries because that's where the biggest part of our G&As is.

Got it.

And to kind of follow up on Mike's question, if I could, about the acquisition.

Obviously, you guys have been out on a look for the right acquisition, but I take it that you want it keep the valuation disciplined.

But, again, I've asked this a couple times before as well, but has anything changed in terms of your thought process here that maybe upstream oil and gas or maybe not necessarily infrastructure, would you potentially explore, let's say, looking at an acquisition in the power market given that maybe that market's going to start to see the cyclical up turn here as well?

Sanjay, we would certainly look at an acquisition in the power market, but only if we had the belief that the power market was going to be amenable to our business model, all right?

A cyclical upturn wouldn't drive our thinking, but a shift toward buyers and behaviors that would reward a relationship-based business model would drive our thinking.

And so the way we approach the power market is exactly that way.

We're watching the market, we're watching the behaviors of the customers in that market.

And in the event that we start to see behaviors that are consistent with our business model and opportunities for profitable continuing growth, then we'd start looking at a power acquisition.

Today we're not sure that business is there.

Okay.

Great.

And just to follow up on that and then I'll hop back in the queue.

In terms of an ongoing discussion that you guys have right now with some of your potential acquisition candidates, what's kind been the hold up here and maybe with -- and I guess except for today, but -- unexplainable.

But with the run on the stock.

Maybe potentially even being able to use the stock as a currency as well.

What's kind of been the hold up here from being able to seal a deal here?

Well, I'll characterize it this way, we'll do not deal before it's time.

And by that I mean, we've got to have a target that has become comfortable with being acquired, become comfortable with being acquired by Jacobs, has at least realistic price expectations in today's market, and there is a lot of fantasy sellers out there, okay?

Okay.

Fair enough.

And so it's bringing those things together.

And we, just to refresh your memory, we've had deals that took us a decade to bring to closure, and it's that kind of a market today.

And frankly, when business is good, people aren't as anxious to sell as when business is not so good.

So you got all those things adding up as factors that make it -- you have to be more patient to make a deal, but I'm confident we'll get some deals made and that our patience will pay off.

Okay.

That's terrific.

Good quarter, guys.

Thank you.

Thank you.

Jamie Cook, Credit Suisse.

Hi.

Good morning.

Hi, Jamie.

My first question, if we could just circle back to the rising labor costs or salary increases that you're talking about.

I guess when you're -- I understand there's some catch up period, but can you just sort of speak to the projects you're bidding on today.

What type of price increases you're pushing through, and whether or not we -- we think on a go-forward basis that we'll be able to cover this or perhaps even get a little more margin expansion?

Noel, you haven't talked yet.

Well, I think Jamie, on that particular thing, if you go back to the model.

The contracts are long term in character, they're generally reimburseable [to sort and character] so we will get the labor increases automatically.

Okay.

I mean, so every time we propose -- most of our contracts are open-ended, some of them have rate caps in them, but most of the stuff we get will be adjusted for the labor costs.

I think the thing that we see is where there is some ability to raise prices right now because the industry is very busy, but that ability is modest and part of it is because we have a lot of long term relationships that protect us through the downturn, so a lot of our increase in profitability -- and we are seeing a significant increase in profitability overall -- is coming from the increase in volume that's pouring through a lot of these long term relationships.

I was looking at the pie curve and it's interesting, chemicals is only 14% so it's a billion dollars.

So we've got a growth in our business almost the board.

But we will see some modest ability to raise prices, but it will be modest.

And then, Noel, I guess while I have you on the line, because we've talking about chemicals for awhile now, I guess -- can you just sort of expand on that a little, I guess, and specifically, geographically where you're seeing the, I guess, the biggest up turn?

We've got chemicals work in the U.S. and Europe, but it, again, will be modest because of the significant increase in feedstock cost.

And the big boom in chemicals is probably going to be in the Middle East.

It seems that way.

It's going to be fueled a lot by the Middle Eastern companies themselves.

We're also going to see a lot of western companies taking advantage of the low priced feedstock.

I mean, we're seeing the uptick here just because it's time, and we've got a fairly significant raft across the system of a modest sized projects, but the big capacity increase is going to be outside of the U.S. and western Europe, particularly fuels costs being were they are today.

And then last, John, I think I heard you say in the prepared remarks that we thought we could do -- have EPS growth of perhaps 20% or higher?

A little higher.

A little higher?

I guess -- are you signalling something?

I understand that's excluding FAS 123, but are we signalling something here?

I think no more than what we really signal in the press release too, which is that we -- last quarter we said approaching 20%.

This quarter we're saying approximately 20%, a little bit higher.

But, yes.

We're continuing to have a strong year.

Okay.

Great.

Thank you.

I just don't want you guys to get too wild about that.

Not us.

Not you.

Richard Paget, Morgan Joseph.

Good morning, everyone.

Good morning.

With your acquisitions, you said you're going to be targeting possibly the infrastructure segment.

Now are you going to approach looking at potential candidates from a regional standpoint or are you going to be looking at a skill set, whether it's highways or airports, to kind of round out your portfolio there?

George, do you want to comment?

Sure.

A little bit of both, I would say.

As we've looked at the infrastructure acquisition opportunities around the country and internationally, finding acquisitions that are national players that would make a contribution on a full national level has been a bit problematic, so we certainly have targeted a more of a regional philosophy, and strategy in that regard to bring a strong regional presence in areas of the country where those markets are hot today.

Southeast, southwest as examples.

In addition to that, we strategically also try to target additional capabilities and resources and talents in the areas and markets that are -- ares of that market that we are strong in today, and that is part of our acquisition strategy as well.

So both of those combined is where we are.

Okay.

And while we're on the infrastructure topic, have you guys started to see some of the SAFETEA-LU money get worked through?

Yes.

There's certainly the SAFETEA-LU -- I love the name of that particular bill.

There's certainly -- that money is working its way through the system.

It's working its way through the system at I would say its a normal sort of pace for the federal government.

But the overall business is not being driven by SAFETEA-LU alone.

It's a factor, it's a plus.

But if you look at that, plus what's going on at the state level, plus what we're seeing at the county and municipal level and in sales tax programs and bond programs, the business has been driven by a variety of sources.

Probably a little bit more diverse set of sources that we've seen in the past.

Okay.

Great.

That's it for me.

Thanks.

Thank you.

Alex Rygiel, Friedman Billings Ramsey.

Thank you, and good morning.

Few questions.

First, as it relates to the PharmaBio business.

Can you talk a little bit about the profitability of the customer base today versus the customer base a few years ago, and then compare and contrast that profitability with the petroleum market place as well?

Boy, is that a hard question.

George, you want to try to tackle part of that.

Thanks.

Profitability of the PharmaBio company.

I think that -- I don't think there's a single answer to that question, to be honest with you.

Certainly as Craig said earlier in his introductory remarks, in the biotech side of the broader pharmo business today, you obviously -- the major players in that business are experiencing significant profitabilities, as I'm sure you're all aware, and indeed that profitability and their expectations on their pipeline is fueling significant capital opportunities for us across the world.

On the pharma side, I think that's -- I would say it's more of a mixed bag, company-by-company.

There are certainly companies that are doing well in this marketplace despite the cost pressures that the industry and the federal government and -- are putting on them.

And then there are companies that are struggling with their profitability, primarily driven by a shrinkage in their pipeline over the last three or four years.

So it's a mixed bag on the pharma side.

There certainly are customer that are spending a lot with us and are looking forward to more robust pipelines, but there are some traditional customers that maybe are not spending nearly as much because of their pipelines.

And again, on the biotech side, that's very robust.

I'm sorry --

-- marketplace.

I think you may have misunderstood the question.

I was asking about Jacobs Engineering's profitability with regards to the PharmaBio customer base today, which is a little bit different than a few years ago, and how that Jacobs's profitability in the PharmaBio sector compares to the petroleum market place?

Let me weigh in on that one.

When you look at these businesses, there are very distinct differences in the way these customers buy from us.

And so, for example, when you deal with oil and gas customer, they have a style of making virtually all of the hours that might contribute to a project billable hours.

And as a result, you have relatively low multipliers and, relatively speaking, lower cost to serve.

When you look at somebody like PharmaBio who comes into the business from a more traditional buildings kind of mind set, there's a tendency to make less of what is required to do a project billable to the project.

As a result they play slightly higher multipliers, but they have a higher cost to serve.

That's a really long winded way of saying we add it all up at the bottom, sort of, net margin line, they're a lot alike.

The differences are not that significant at the net margin line.

They are fairly significant at the gross margin line.

Perfect.

And could you also expand upon what you're seeing out there with regards to base realignment and closure.

I know you referenced it as starting to pick up.

Can you explain that in a little bit more detail and also talk about how the DOD is actually letting out those projects whether or not they're smaller or larger?

There's really two or three kinds of things going on in BRAC right now.

First off, there's a big piece of BRAC that is actual movement and relocation of various units of the DOD from one base to another, and that's creating a lot of activity for our buildings business.

There have been some major wins, I don't believe we've press released them yet in base realignment and closure activity, preparing bases for new activity that we think are going to be significant.

So you've got that activity going on, and then you've got the whole clean up of the bases that are being abandoned, and that's going to take two forms.

It's still early days there.

One form will be be the transfer of the unremediated facility to a local development authority or a developer who will then remediate the site and build it out for whatever purpose, retail, housing, office, who knows?

Depends on the location, obviously.

And then there'll be some locations that are not amenable to that sort of strategy, and they will go for a very conventional sort of base clean up process and then a turnover after those facilities are cleaned up.

We expect to benefit from at least two of those areas, if not all three.

The issue with the one in the middle that I mentioned is it's going to be more of a local sale and be less dependent on the big relationship customers that we prefer.

So I think where we'll focus largely is the movement of troops to new locations and the clean up of those sites where it's a conventional remediation contract.

And there's going to be a huge number.

The estimate is in the 28 billion range.

Thank you very much.

John Rogers, D.A. Davidson.

Hi.

Good morning.

Hey, John.

I'm curious on -- just back to the petroleum segment.

The work that you're doing now, when did you begin bidding on a lot of this work?

Is this -- are these projects that were in process a year ago and with even higher oil prices that we're seeing now, is there another surge coming or are your customers incorporating 65, $70 oil.

Just trying to get a sense of what they're telling you, if anything.

I don't think anybody's using $70 for planning purposes.

Probably the most common number that you get -- you hear kicked around in the press is around is about $40 a barrel for planning purposes.

But from a revenue standpoint, the projects that we're working on today were probably started about three years ago.

And this is the final effort on the regulatory driven projects, primarily low sulphur diesel.

Those projects started about three years ago.

What we're seeing is the same customers are now gearing up and are in the early stages of projects to make their refineries amenable to the crude slates that are available today and in some cases capacity increases and in some cases substantial capacity increases.

Most of those projects are in the early days of engineering, in the first year of the project life.

And we see if the oil prices stay where they are that new awards will probably stretch out for another year or two before that cycle is complete in the U.S.

And what about up in Canada?

Well, up in Canada, the projects are driven by extracting oil from the ground and as long as the price of oil remains attractive they'll keep spending money indefinitely.

But are we still in the early innings in the ramp-up there, or --?

Yes -- well, if oil's at $70 a barrel, the level of activity has not peaked and once it peaks, it may stay at the peak -- well, it'll stay at the peak as long as oil's $70 a barrel.

Okay.

Relative to the amount of projects that are in Canada, the resource is unlimited.

And so as long as the price stays attractive, projects will continue to be funded.

It's more of a question of the resources needed to implement the projects in Canada.

Okay.

And then just one follow up.

On the federal side, as the activity levels in Iraq slow down and some of the spending there -- and I know you aren't doing work over there.

But will that effect your business as they deactivate some of those units?

Yes.

I think what'll happen, there's been a lot of money -- this is Noel.

There's been a lot of money diverted into the Iraq thing, and there's still a lot of pressure on the budgets with most of the major military customers in particular.

As Iraq winds down, there's going to be more money coming back into our standard projects.

So whether they're testing evaluations of the operations and maintenance or even in the environmental clean up.

Even though the environmental clean up hasn't been damaged anywhere near as badly in this Iraq situation as it was in the Kuwait thing back in '92, there's still a lot of the pressure on the government budgets because of Iraq.

And you see that in the deficit, but you also see that in how Congress is appropriating money.

Okay.

So the deactivation, I mean, shouldn't necessarily negatively impact your business.

No, it will positively impact our business.

Okay.

Okay.

Thanks, Noel.

Thank you.

Barry Bannister, Stifel Nicolaus.

Hi, gentlemen.

How are you?

Hey, Barry.

I get the feeling that Jacobs is well-positioned for all the compliance-related refinery spending that's already been occurring, and pretty well positioned for upgrades like the hydrocrackers that have been going into Europe and Asia, and the delayed cokers in the U.S., but when it comes to the Greenfield plants -- and according to Oil and Gas Journal, they expect in the next 10 years about 17million-barrels a day of new capacity.

When it comes to a Greenfield grassroots plant, are you well-positioned to get that business, given that it's migrating to Asia and the Middle East in terms of the capacity?

I think the answer to that would be no.

And that's a little blunt, I know.

But if you start talking about a 600,000-barrel refinery in -- someplace in China or someplace in the Middle East done on a grassroots basis that wouldn't be the place where Jacobs would be in the best positioned by any means.

Let me ask you it this way.

Given that a number of the capacity expansions that have already occurred have been in conjunction with European and U.S. major oil companies in Asia and there's talk in the Middle East, would you follow your customers into those regions on those projects if you could get a role?

Yes.

We do follow our customers.

I mean, that's sort of our fundmental philosophy here and as they generate capacity additions, new capacity, whatever they happen to choose to do, Jacobs is positioned to be a part of that.

Frankly, going off and chasing big grassroots refineries in far away places just isn't where our business model goes and there are plenty of people out there willing to do that.

So you would go after the service contract after the capacity is added more likely than actually being involved in the actual E&C of the grassroots refinery?

Well, there's several things we might do.

We might take a piece of the unit or a group of units and do the front end work, even do the PMC.

Some of these things are not really a one customer grassroots kind of deal.

It's more of the need to get two or three contractors involved, and we'll be in a position to take advantage of some of those things we think.

We're doing a lot of front end work for our chemical customers in that regard who are making investments in the Middle East that we'll support through the front end and the PMC.

What we're certainly not going to be is out there doing some sort of lump sum turnkey for any part of any of these facilities.

Okay.

Thanks.

That answers my question.

Appreciate it.

[OPERATOR INSTRUCTIONS].

David Yuschak, Sanders Morris Harris.

Good morning, gentlemen.

Good morning.

I'd like to drill down a little bit on your bookings in the quarter and how they may -- how I might see those things maybe changing in the next couple of quarters.

You'd indicated on the last call that bookings in each one of your market verticals was up in the first quarter.

I just want to get a sense as to what that tone was across the verticals in the particular quarter.

Well, obviously with the strong workoff, the overall growth was lower than it was last quarter.

And some of that just has to do with the -- obviously the amount of -- when bookings get timed and things like that.

But I think we're still seeing very strong prospects across our markets and all the markets, so it really is not -- I mean, obviously oil and gas is strong.

But, it's across the rest of our markets as well.

There is a lot of opportunities out there, probably in the markets that are soft, and the real little ones that have been soft for awhile, which are pulp and paper and the microelectronics side of the high tech manufacturing, but when you look at our -- and those are pretty small markets anyway, but when you look at the activity level, the prospects across the other businesses, they continue to be uniformly strong.

Okay.

And you'd indicated that there were a couple major potential bookings coming out of some of those areas that have been kind soft of late.

That's -- you're suggesting that's still -- potential for those major bookings are out there then?

In the future, yes.

Okay.

Now, as far as -- just step back a little bit and when you think about some of the spending that could be unleashed.

Because when you take a look at corporate America's balance sheet, I don't care whether it's energy or anyplace else, cash is still a relatively large component of many companies' balance sheets to unleash some capital projects.

Are you sensing at all because of the rise in oil prices and some uncertainty leading into the outlook for energy, at least over the intermediate term that that may be holding back some potential spending in other than energy sectors?

I don't think so.

Yes, I mean, it's not a major driver for us.

But I don't see that.

If I understand your question correctly.

So you're just saying despite some of the high energy cost, because -- versus even a quarter ago, I think a lot of people have been surprised by the continued strength in energy here -- that you're saying despite the high energy prices, a lot of the non-energy market segments you address, the interest for unleashing some of that spending is still high despite that -- the concerns.

That oil may be here for quite a long time.

Well, it may be, but I think if you look at the businesses that don't have hydrocarbons as feedstocks, all right?

Right.

Fortunately, those customers are the same ones that are benefiting from high oil prices.

Most of the rest of our businesses aren't really driven by energy-related costs.

So when you look at our buildings business and the kinds of buildings we're doing -- healthcare related work, corrections related work, defense related projects -- the oil prices don't effect them.

When you look at our federal business, the oil prices don't really effect the spending that we focus on in the federal arena.

So as you go around that wheel of markets, there's just not a significant exposure there to oil prices, except to the extent that there's just some general economic malaise that takes over, right?

Right.

And recessions are recessions.

Even there, as you know, we've managed to keep our portfolio a little bit diversified to catch that government spending that tends to be counter-cyclical.

Let me just then talk a little bit about the mix of business internationally versus domestic as well.

What kind of trends are you seeing there both in current revenue, current opportunities into the second half, international versus domestic, and maybe talk a little bit about potential bookings international versus domestic.

I would say that for rough purposes, the split of businesses internationally is very similar to the overall company.

Refining and chemicals is about the same on a revenue basis.

Work for national governments is about the same.

The buildings business is very strong internationally, pulp and paper is very weak internationally, and PharmaBio represents on a revenue basis about the same percentage and it's fairly strong.

The difference I'd say internationally as opposed to the domestic side of it is that country-by-country, there's quite a discrepancy between the overall mix and the average.

But on the average, which is primarily -- if I leave -- if I take Canada, which is a hydrocarbon business, the business in Europe represents -- and Asia represents the same pie chart as the overall company, except there's quite a lot of difference from a country-by-country standpoint.

And as far as the spending goes, the infrastructure business is very strong.

The buildings business is very strong.

The hydrocarbons business is very strong and the pharma business is quite solid.

Okay.

Now, as far as the -- given the strong burn that you had in the second quarter, would it suggest that your second half revenue levels may not -- this may be, at least in the short term, a high for revenues compared to what you might see if the second half?

We don't really focus on revenues, but I don't think there's really any indication that there's going to be any big change in it.

So, the tone of business out there's still let's get as much done as soon as we can, therefore the burn could stay a little higher and therefore just a matter of how quickly some of the bookings can come on relative to the anxiety about -- amongst you owners trying get a lot of these projects up and going and running.

Would that be a fair statement to say then?

I think if I understood you right.

There's not a lot of anxiety among our owners.

I think our owners are more and more moving at a very stable pace with a lot of gates in the processes and so, there doesn't seem to be a lot of anxiety among our owners out there.

They just -- I think the high energy prices are not effecting them a lot except for the chemical feedstock guys, and that's driving the business offshore.

But generally, our customers are just moving along more or less like they would if the energy prices were $30 or $25, or whatever they were, except for the guys that are directly effected by it in the oil and gas.

So we see what we've got is good, solid GDPs and across the [search that we didn't -- and that's the GDPs] growing in Europe right now, and so we've just got a very solid business climate, even if you take the energy out of it.

So you're kind of saying all your customers are really spending well, where maybe a couple years ago, some of them were spending well, and some were spending so-so, but the -- the view would be that we've just got more customers doing more things.

I think that's exactly right.

Let's modify that just a hair.

We have got a set of core customers doing more with a little bigger share and a few new customers that are adding to that equation is probably a better way to describe it for us.

Okay.

Good.

Appreciate it.

Thanks a lot.

At this time there are no further questions.

Okay.

Thank you all very much, we appreciate your time.

This was -- we think we had a really strong quarter.

We think we've got a really good outlook going forward, and we look forward to talking to you this time in 90 days or so.

Ladies and gentlemen, thank you for your participation in the Jacobs second quarter earnings conference call.

Today's presentation will be available for replay at 2:00 p.m.

Eastern time through May 2nd at midnight.

You may access the replay by dialing 1-800-642-1687 or 706-645-9291 and entering the pass code 7191638.

Again, that number is 1-800-642-1687 or 706-645-9291 and the pass code 7191638.

This does conclude today's conference call.

You may now disconnect.