雅各布工程 (J) 2006 Q3 法說會逐字稿

Good Day, and welcome to the Jacob's third quarter earnings conference call.

This call is being recorded.

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

Eastern Standard Time today through August 2nd at midnight.

You may access the replay by dialing 1-800-642-1687 or(706)645-9291.

And enter in the pass code 272-8028.

Again, the number is 1-800-642-1687 or (706)645-9291 and the pass code, 272-8028.

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

There are also exhibits available on Jacobs' website for this presentation.

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 [Patti Bruener] for the forward statement.

Please go ahead.

Good morning.

The company request 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 a description of some of the factors which may occur that could cause such differences, the company request that you read its most recent annual report on Form 10K for the period ending September 30th, 2005, and the most recent Form 10Q for the period ending March 31st, 2006.

Including the management's discussion and analysis of the financial condition and results of operation 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 I would like to pass the call to John Prosser, CFO, who will discuss the quarter's results.

Thank you, Patti.

After I finish going through the financial highlights, Craig Martin will give the business overview.

Also joining us today on the call is our chairman, Noel Watson.

If you go to Slide four, our third quarter financial highlights, we did have a very good quarter, a record backlog of 9.4 billion.

The balance sheet continues strong.

Net cast position was 231 million.

While this is down slightly from our last quarter, it's still a good growth from the beginning of the year.

Really this slight decrease is the result of the growth we've seen this quarter and particularly the growth in our receivables that we expect to see improved by the end of the year.

Net earnings for the quarter and diluted EPS include the effects of 123R using the modified retrospective application method.

If you go to Slide five, you'll see those results as they were also in the press release, both with and without 123R for comparison purposes.

Very strong quarter with net earnings of 50.6 million, earnings per share of $0.84 compared to last year's adjusted numbers of 36.6 million and diluted EPS of $0.62.

With -- we expect that 2006 EPS to show growth of between 27 and 30 percent over 2005 for this year before the effects of adopting 123R.

If you go to Slide six, our history of our consistent earning growth, you'll see that our trailing 12 months shows strong growth and this represents a return to our long-term 15% growth track.

While the five-year track is approaching 20% if you look at the ten-year track, we are over 15% as well, so the recovery over the flatness we saw in 2004 is behind us, and we're well back onto our historic growth rates.

If you go onto Slide seven, our backlog, again, strong growth in backlog, both in total backlog and also in the technical professional services.

Strong bookings for the quarter; our bookings were in excess of 2.2 billion, which is one of the -- Is the highest quarter we've ever had.

So it represents a good, solid foundation for our growth going forward.

With that, I'll now turn it over to Craig Martin to review the operations and results.

Good morning.

I'm just going to go through our discussion as usual about how we are going to grow at 15%; no real surprises here.

We're going to be committed, as we always have been and always will be, to our unique business model, we're going to continue to try to have the market diversity that keeps our growth balanced.

We are going to make maintain our multidomestic strategy; acquisitions will continue to be part of the mix, and we will continue to focus on driving down our cost of doing business.

Turning to our relationship-based business model first, we've talked about this a lot; the industry model, which is on the right of Slide nine, really characterizes no specific company industry but the industry in general.

Most of our competition is focused on project events.

So they're in this area of transactional project.

Lots of lump-sum, turnkey, competitively-bid construction, great big projects in faraway places for customers you don't know, or customers you do, for that matter.

Just generally an event-driven business.

All of our competition does discrete projects.

A little more of a customer familiarity there, a little less price competition, and all of our competitors have some number of preferred relationships.

But we turned the model upside down.

We believe the preferred relationships are the better way to run the business, so that's where we focus.

We get about 80% of our business, give or take, from these preferred business relationships around the globe.

We also do a lot of discrete project work; that tends to be for customers we know, and it tends to be repeat business.

But there will be a fair amount of price competition involved in the selection for that work on a services basis.

And we will occasionally do a transactional project when it suits our interest, and it's purely opportunistic for us.

The difference in these two models is one of continuity with the customer, focus on the customer, and we think that gives us a lower risk of doing business as we get to know the customers needs, their approach to the business well, and they tend to get to know us.

They can forgive our little errors, and they tend to reward us for the continuity and continuous improvement of the business.

Turning to Slide 10, we're going to continue to be a diverse business markets-wise.

I'll just go around the clock here and give you an update on how each of these businesses is doing.

The petroleum business -- the oil and gas business is quite strong.

You may recall about a third of that is upstream oil and gas work up in the oil sands of Canada, in the North Sea.

The remainder of that is downstream, refining and related work in North America, in northern Europe, and in Singapore.

This business is very good.

There is a lot of strength in the market right now.

There is a lot of projects out there; in fact, probably more projects that can get done given the available resources in the industry and the timing of the projects themselves, so business is very robust.

Not only in North America, and the places where we're on the ground, like northern Europe and Singapore, but then we also have a huge wave of investment in the Middle East driving spending as well, and we're beginning to have the opportunity to participate in a fair amount of that work.

So that business is very strong and the outlook going forward is very strong.

We're seeing a lot of activity in terms of crude upgrades, we're seeing some capacity expansions, we're seeing activity in the form of bio diesel and other environmental-related fuels projects, in addition to the sort of base business of just keeping these refineries running day in and day out.

Good business for us right now.

Chemicals business is also improved a bit; it's still not a very strong business in the established geographies, but there are a lot of small project activity, a lot going on in the way of of minor-capacity expansions and upgrades, and there is a very significant amount of spending in the Middle East driving a number of projects where we are getting involved in front ends and feeds.

Another good business area and one where we are seeing a little growth.

The Pharma bio business is also quite strong right now.

In Pharma bio, we are seeing a lot of activity related to vaccines, particularly in light of the avian flu scare and the activity going on with that.

And there's also a lot of biotech activity going on around the world right now, so we're seeing a number of large bulk biotech projects.

In North America, that is being complemented by work in the secondary manufacturing; [inaudible], sterile filling -- but that is pretty much limited to North America right now.

Overall the drug pipeline for customers is good, and frankly a new drug is a new plant.

So the business looks very good as we luck out for the next 18 months or so.

Pulp and paper is a small business for us.

It continues to be a small business and the forecast is it will stay a small business.

There is a little activity out there; there is some spending in the pulp and paper arena, but it is not going to be a big impact on our numbers one way or the other.

We'll keep 600 or 700 people busy day in and day out doing pulp and paper work, but that's about the scheme of it.

On the national government side, the business is really two businesses.

The first part is research and development test engineering, scientific and technical consulting, generally for the Department of Defense.

We have good activity there both for the DOD and NASA, and that business continues to grow as we expand our presence which those customers and their various services.

Lot of activity, and it looks like there's going to continue to be lots of activity although there may be movement back and forth from different branches of defense and NASA that will affect individual segments.

On the other side, it's an environmental cleanup business.

We are very active in the U.S. in the environmental cleanup world, and there seems to be a lot going on that will continue to keep that as a strong business.

The U.S. business will not be growing significantly as a market.

It will be more a matter of taking market share from the competition.

Where the real strength in that market is right now is the UK, who is about 15 years behind the rest of the world, if not the US, in nuclear cleanup.

And they really favor U.S. contractors for their expertise in cleanup.

So there's going to be a lot of activity in what we believe to be an $80 to $100 billion cleanup program in the U.K. over the next twenty years or so.

We are very well-positioned there because there have a strong presence in the U.K. market place and strong credentials in nuclear cleanup.

Overall, a good business with really good prospects going forward.

Add to that the effects on our business of the Base Realignment and Closure Act of 2005, and we're going to see a fair amount of activity in rebasing and supporting the base closure activity.

Some of that will be environmental, some of that will be in terms of expansion of existing bases to take on new troops.

Moving on to the buildings business; we are seeing a lot of activity in buildings particularly in health care.

As we look around the marketplace, in fact if you look at our press releases over the last few months, you'll see that there have just been a very significant number of health care projects.

And that continues.

We are all getting older, and the spending on health care looks to be one that will continue for some time to come as the baby boomers look to have more and better health care.

That activity is strong both in U.S. and Europe, and it looks like it will continue for some time to come.

Add to that our other -- businesses -- in terms of education, and corrections, and we see a lot of good building activity.

Remember that the buildings business for us is not your office buildings, your apartment buildings; it's technical buildings with some level of technical complexity.

Moving on to the infrastructure business; this is a transportation-related business for us along with some program management, construction management of major projects of the infrastructure arena, water and wastewater and transportation-related.

Good business right now, lots of activity in every geography in which we have the skills to support it, and a real growth opportunity for us as we see it.

One of the biggest businesses in the world and with lots of pent-up demand.

You take a trip from home to your office and spend two hours in the car, and it's pretty clear that something's got to be done to upgrade our transportation infrastructure.

We're seeing that money getting spent at the state level, the federal level, and now very significantly at the local level as various counties and jurisdictions around the world fund their own infrastructure improvement programs.

The final segment of our business right now is the high-tech business.

That component is composed of two parts.

One part is the wind tunnel business supporting automotive industry doing testing and evaluation work for the automotive industry.

Good business, small, steady.

We have a premier position in it.

We don't expected to generate a lot of growth.

The other side is the semiconductor industry, where we support a couple major clients in semiconductor manufacturing.

Active business for us right now, but no real major prospects on the immediate horizon.

Looks like it continue to be a good business, but probably not going to be a big growth business for us in the near term.

Overall, the markets are generally pretty good for us.

We are hitting on several cylinders here at one time, and the balance in our growth is pretty good.

We're seeing each aspect of our business grow, so we are keeping keeping the balance we'd like to have to deal with the potential for the petroleum bubble to burst here in one, two, or 10 years, whenever that actually happens.

Okay, moving on to Slide 11, we continue to focus on our multidomestic strategy.

The slide shows you where we were in '94 and where we are now.

Our focus here is to be local to our customers so we establish our operations in these countries and put them in a business that makes money day in and day out.

Our objective is to be successful with the local climate, local customers, understand how business gets done locally, so that when our core clients have an investment in one of these locations, we have both the local understanding of how to do business, and the global relationship with the core client.

That strategy has served us very well, and will continue to work that strategy as we go forward.

Finally, turning to Slide 12, this is where we give you the commercial and tell you why we are a great investment.

We do think we are pretty good company right now and a pretty good company to be looking at.

We have a customer-driven business model that works pretty well.

We're diversified in terms of markets geographies, and services we offer; we have a good, solid balance sheet; and we're going to be growing at 15% a year, year in and year out as long as we can maintain that growth and we think that's well out into the future.

And with that I will turn it back over to Patti.

We'll now take the questions and answers.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster.

And our first question comes from the line of Richard Rossi with Everest Maker West.

Good morning, everybody.

Hi, Rich.

A couple of things tied together in a sense.

The technical service backlog is moving up nicely, which is always good news.

But I'm wondering in terms of the issue of manpower and capacity, and I think you did mention in your comments, whether the conversion from these up-front jobs to full-field service jobs may start to stretch out a little further as we go on out over the next couple of years, and whether you're beginning to see that as an issue.

And in regards to this whole capacity issue relative to the strong business trend, how much pricing flexibility you're seeing in place now, and obviously, we would expect that pricing flexibility to improve as the cycle continues to grow, but whether there's a feeling to that before some of the big customers start to push back some of these projects?

Let me start with that part of the question.

There is clearly a belief, and I think we all share it here, that resource constraints, both in terms of labor availability and cost, and cost of materials and equipment deliveries, will in fact affect some of the projects and programs that are out there.

That really hasn't started to happen, but I think we expect that it will, and what we actually think that probably means is that this expenditure period is longer but not as robust as the statistics for projects in the queue would suggest.

For example, if you look at -- there's a diagram that gets passed out a lot about the oil sands work.

If you look at the diagram itself, there's this enormous peak of manpower required to do these projects here in about three years.

There's really very little chance that all that stuff will get built on the schedule that's being outlined.

But there's every expectation it will get built in time.

So what I think you'll see is that the boom in engineering construction work in the oil sands won't be as robust in the near-term as perhaps the list of projects would suggest, but it will last a great deal longer than the current schedule for those projects suggests.

That's the way it looks to us on that score right now.

Oil sands are very obvious.

How how about some of the other sectors?

Do you see -- I know you are your engineering talent is multifaceted, but do you see as much of a constraint on some of the other areas -- other industry sectors as you do in oil sands or oil and gas generally?

No, I think the oil and gas business and related businesses, Petrochemicals, for example, will be the most affected.

I think you'll see much less impact on things like the pharmaceutical business, partly because the geographies tend to be different.

If you think about it, pharmaceutical expansion tends to be in the Northeast U.S., Ireland, Puerto Rico and Singapore, and for the most part those places aren't competing for resources with the oil and gas customers.

So I think you'll find it very much by market and by geography more so than anything else.

All right.

You mentioned chemical activity in the Mideast.

And first, how much chemical work and front-end work have you booked in the Mideast and far, or at least in this quarter; and then how much of Mideast work is in your backlog in total?

We don't break out to the backlog by geographies, and right now, most of the work were doing in Mideast is front-end engineering or some PM/CM support, so it tends to be professional services and not the construction, so it's not a significant amount at this point.

But certainly we got a few hundred people working in the Middle East and they are staying pretty busy, so -- and some of that work is also spilling out into some of our other offices so it is a growing business for us.

It is a growing business but remember, we are brand new to the Middle East.

When we talk about a growing business and a lot of opportunity, we are starting from a base of almost nothing.

Okay, I'll get back in the queue, thank you.

Our next question comes from the line of Jamie Cook with Credit Suisse.

Hi, good morning.

Hi, Jamie.

Nice quarter.

I guess my question is when I look at your third quarter, I've never seen Jacobs beat by so much;

I mean generally, you surprise on the upside but not to this magnitude.

Can you sort of outline for me the major factors contributing to the upside in terms of size as well?

Was there anything unusual in here?

No, there's really nothing unusual in the quarter.

It was, believe it or not, business as usual quarter.

We have a strong billable hours, we got the benefit -- and this goes to Rich's question earlier -- we got the benefit of some salary growth and a little bit of margin expansion through the quarter, and it doesn't take very much in the way of margin expansion to grow the business nicely.

So between good billable hours and a little margin expansion and good overhead control, we had a good quarter.

Okay.

In terms of overhead control on the SG&A line, you were a little better than I thought.

Are we back to more normalized levels now, I guess as I look at modeling, going forward?

Well, the quarter by quarter control of G&As is one of those things that is an everyday activity.

As we point out pretty often on this call, we are very focused on trying to keep our costs down.

So we're going to do our best every quarter to get the costs as tight as they can be, and still let the business grow effectively, and I think you'll see us in the out-quarters continue to try to keep pressure on our G&As to keep them down.

I think we told you last quarter we weren't too pleased with our G&A control and the second quarter, we're a little happier with it this quarter, but we're not as happy as we'd like to be.

We're going to keep continue to keep pressure on our G&As.

But we're getting back in the range where we'd like to be.

Okay.

And I guess my last question -- I know you're not going to give guidance right now for 2007, but as I look at this I can make my own estimate on what the markets will do and the robustness of the market, and it doesn't seem like anything is deteriorating.

I guess when I look at the earnings growth on '06 to '05, taking out -- we can make adjustments for FAS 123, but is there anything that wasn't unusual in '06 that would for some reason limit the earnings growth that we should see an '07?

Is there anything else, was there unusual performance awards or anything to suggest that earnings growth should go down in '07?

I would say -- as I think I said earlier -- that the quarter and the year so far have been normal.

We were successful in getting into the business early in the cycle.

We have certainly benefited this year from probably being a little ahead of some of our competition in terms of getting work in the shop and adding to staff.

Now that we're starting to get to that point where we have a lot of activity, our customers are starting to look to a broader selection of vendors, so I'm not sure that the out year will be as strong as this has been, in fact I doubt that it will be.

But I think we will be able to maintain the kind of growth that we have always Park promised.

Okay.

So it sounds like '07 is a more normalized year back to the high teens earnings growth?

Yeah, I think so.

Thank you.

Our next question comes from the line of John Rogers with D. A. Davidson.

Hi, good morning.

Good morning, John.

Could you talk a little bit about acquisition, opportunities, and it's been out there as part of your growth strategy for the last couple years; you haven't seen much.

Is a just a function of the pricing that's out in the market, or finding opportunities, especially on the infrastructure side?

There's a whole set of things that are affecting the acquisition market right now.

First of all, it is a pretty robust market, and as a result, people have pretty robust ideas about what their businesses are worth.

And one of the things we have always said is that we are not going to overpay to do a deal.

There is no panic to get a deal done because the business is growing well without the need for acquisitions right now, so we are being pretty selective.

But the other aspect of it is that you have to find deals when they are ready to do, right?

Right.

In terms of these have to be friendly acquisitions, and you have to find a candidate that wants to be acquired at a price that makes sense, and sometimes in these strong markets, there is not as much interest or willingness to step into a bigger situation.

Everybody's feeling pretty comfortable where they are.

So those two things tend to add to an increased difficulty of getting things done.

I'm confident that we will get some deals done over the next 12 months.

I don't think there's any urgency on our part to get them done.

We don't feel like we have to have them done, by any means.

We've are going to find deals that we think represent fair price and for good return for our shareholders.

Is there a point at which your cash will grow that you would look at alternatives, either ramping up the organic growth, trying to expand internally, or look at buybacks or -- .

Well, we will always take a look at what we're doing with our cash.

We are believe that our cash today and for the foreseeable future will be needed for acquisitions, and we are going to hang onto it with that in mind.

If we ever did get to that point, and I don't see any time soon, we certainly would look at the alternatives of buybacks and dividends and that sort of thing and decided if any of that in our minds made sense.

But as we sit here today we don't see that as an issue at all.

And you don't have a complete balance sheet, but your receivables at the -- net receivables at the end of the quarter, where were those?

We don't release all the details, those will be will release our Q, probably next week.

Okay.

But it sounds as if you expect cash to build or as we close out this quarter?

We would hope to see it be a more normal growth this quarter.

Okay.

Thanks.

Part of the effect -- we constantly invest in our internal growth.

It's not a decision that we either are growing internally or externally through our acquisitions.

If you look at our history, a significant part of our growth has always come from internal growth and that does have a certain amount of working capital needs that go along with it.

That it does bring me to a part of a question I meant to address, John, and I didn't.

We would not have any interest in throwing a bunch of cash on organic growth to try to accelerate organic growth.

We've always believed that there is a pace at which you can grow the business in terms of development and management skills in a team, in the ability to execute well, and when you go beyond that, you get yourself in trouble.

So the one thing we probably won't do more so than we've done in the past is try to throw money in some sort of organic growth strategy.

Or in other words, get to the 15% just organically?

You know in the long run, we don't believe we can get to the 15% organically.

We will do okay in this marketplace for a while.

But in the long run, we think growth is closer to the 10% number than the 15%, and that's we're going try to pace our investments in organic growth.

Okay.

Great.

And congratulations on the quarter.

Thank you.

Our next question comes from the line of [Ian McPherson] from Simmons and Co.

Good morning, congratulations.

Good morning, Ian, thank you.

I guess one question touched on a similar topic earlier in regards to the constraints for executing the magnitude of projects you have on your horizon.

I guess a related question to that -- with some of the big oil and gas projects now, we are hearing of increasingly customers getting a little bit trigger-shy just with regard to cost inflations they're seeing on many of these projects.

What you see on that front with respect to projects that may be at risk of sort of falling off the radar just because of the price sensitivity of the customer right here?

Well, there's certainly going to be some of that, and I think it will be more of it as the cycle unfolds.

There are going to be projects that don't get done because of labor material costs pressures, and equipment deliveries involved in time-to-market kinds of projects.

So, yeah.

Our customers are going to try to be smart and they're going to try to make sure their project is penciled.

That probably means a longer capital cycle as opposed to things just going away and never getting done, but that remains to be seen.

Okay.

Could you maybe elaborate on how your relationship-based approach might inflate you in that regard, vis a vis, some of the turnkey contractors?

Well, certainly the approach we take insulates us from the cost risk.

And that's a good position to be in in today's market.

But we're with our customers on these projects is in a partnership mode, helping them to figure out what to do and when to do it and how best to get it done from a cost point of view.

So instead of being in a situation where the customer has a project and I have a price and we argue over that, which one's right, I try to jam in a bunch of additional margin and contingency and escalation in order to protect myself down the road, we're with our customers figuring out what to do, how to do it at the least cost, and what way to contract for it to represent the least risk to the customer.

And frankly right now lump-sum turnkey does not represent the least risk to the customer.

So it's just a difference in approach, and it tends to put us on the inside with customers on a portfolio project, and I think that gives us the opportunity to work on the ones to get done and help the customers decide what not to do.

Really.

Okay.

Can I just have one follow-up here -- looking at the margin, and I know they can be a little bit monthly quarter to quarter, but you are backed up over 4% on the operating margin line this quarter, and I'm just wondering if that is more of a function of [inaudible] control on your part from the management level or if there's something in the business mix, which of that would be the bigger driver in Q3 and as we look back to 4% to 4.5% type margins over the past couple years, is that something that we could realistically look for work going forward?

First of all, looking back at the higher margins, you have to remember those have to be adjusted for 123R for the stock option expense.

The 4% that we see here is primarily the results of two things.

One is the cost control on the G&A line, and also the improvement in the unit cost or the cost per hour that we are getting through the salary inflation multiple and a little bit better pricing terms and all that we're seeing just because of the strength of the market.

So, it's not a mix because at the operating level, we've always said that when you get through the G&As down the operating, the mix does not have as much effect as it does on the gross margin line.

But the continued G&A control and keeping those unit costs down, and certainly a little bit of improvement on the margin level from salary escalation on the multiplier effect there, and a little bit better pricing is what we're seeing.

All right.

Well, congratulations again.

Thanks.

Thank you.

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

Good morning, guys, and congratulations on a great quarter.

Just a couple of quick questions.

First, on this improving pricing dynamics that led to the performance in the quarter here, are you guys seeing that because of your relationship-based model and your reputation with your clients more specific to Jacobs, or are you actually seeing that across the board in the industry given that there is so many projects that need to be done, and clients are saying, hey, we maybe need to pay up a bit here to get the projects done on time and maybe ahead of schedule?

Sanjay, this is Noel.

I think what you're seeing is remember we've told you over the years with the relationship model, we don't have as much upside pricing opportunity as the guys in the peer transaction.

What we're seeing is a modest increase driven to some degree by our salary structure, because salaries are going up at a more rapid pace than they have over the last five or six years just because of the demand size for people.

But generally we are seeing a little modest uptake across the industry, but these clients that we sell to -- remember, they are Fortune Fifty guys, they are the toughest buyers on the face of the Earth.

So we are not getting huge price increases, particularly when you look at our reimbursable model.

We're getting some, but they are certainly they are not huge by any stretch of the imagination.

Got it.

And on of the prepared comments you guys made early on about the petroleum bubble, don't know how long that will last, and the labor market potentially extending some projects in, let's say, one of the Canadian Oil Sands markets; that's clearly going to keep them opportunity extended, but at the same token, that might mean that prices might stay elevated for a longer time than maybe previously anticipated.

Do you see that having any potential negative implications or impact to your other segments of business, maybe that are somewhat economically sensitive?

I think what we want to see here -- go back to what Craig said earlier, we're going to keep all these businesses alive and well and we're not going to move away from any of our other good businesses.

So we've got to satisfy these groups of clients.

Remember, we are not line of business-driven, we are client-driven.

So I don't see any negatives rolling over into the other businesses, Sanjay.

What we are going to do is take care of the Pharma business and the infrastructure business and the rest of them, with the same level of intensity that we're putting into oil and gas right now.

Got it.

A couple more if I could.

Is there maybe a slight change in the tune for you guys on your Pharma Biocide in the last few quarters than maybe it has been, or am I reading too much into that; and second, when do you actually start to see this cleanup opportunity in the U.K. start to sort of come out and hit your backlog?

Has there been any changes or is it still up more of an '07 type of opportunity?

Let me deal of Pharma part of it first.

I don't think at our tone has changed.

We went through a period here at about 18 months ago -- two years ago, I guess -- where the Pharma business wasn't very good to us.

We have these issues with project delays.

But the market is coming back very robustly as we sit here, and we see lots of good product pipeline kind of activity, particularly in areas like Biotech that we think are going to sport a very robust Pharma business going forward.

We are as upbeat about Pharma as we have ever been.

And if our tone doesn't seem to be -- .

Actually the tone is maybe more so than has been before.

Is certainly more positive than it was 18 months ago.

Yeah, that's where I was going.

We see the Pharma business right now as robust as we've seen it anytime in the last five years.

On the UK side, we have a few projects that we want, they're, relatively speaking, relatively small and represent sort of a foothold position for us in terms of establishing relationships, building our position with the various agencies in the U.K.

It's all the sorts of things you have to do to get yourself properly positioned for the bigger events.

The bigger events tend to be in '07 kinds of terms and beyond.

So there will be a lot of activity through the rest of '06, calendar '06, but we'll start seeing real significant events in calendar '07.

Got it, that's great.

Thanks a lot, guys, and once again, congratulations on a great quarter.

Our next question comes from the line of [Richard Paget] with Morgan Joseph.

Good morning, everyone.

Good morning.

We started to see some activity surrounding [Brack], there's been some recent awards.

I wondered if you guys could comment on what the competition is like, if it's a very conservative bidding environment, and are you guys expecting to start to see more and more of those contractors getting let out?

Yes.

First of all, to answer the last question first, we're expecting to see a lot of [Brack] activity, particularly the part of [Brack] the represents the receiving basis.

If you take, for example, Fort Bliss -- Fort Bliss is going to receive 60,000 new troops and their families, and there's a very significant program in Fort Bliss to prepare the base for that.

We actually were the first successful bidder on that program -- I'm sure it press release it already -- so we feel like we got in on the ground floor there.

It is a business where there are a number of very good competitors in the U.S. for that kind of work, so it will be hotly contested for years to come.

But it is going to generate a lot of work.

The best estimate we have right now for work that that's amenable to Jacobson -- things that we think we can access -- is about $28 billion worth.

So we see it as a very robust market and we continue to compete for nice projects in that area and will continue to be successful in winning those.

So there is that.

There will be pieces of that business that were traditionally interesting for us.

For example, environmental clean up on some of these sites that may well go a developer direction.

So that segment of business may be one we don't chase this time around.

The base locations themselves are driving a lot of activity and we are very well-positioned for it.

So you think if you do that front-end of work, it won't necessarily [inaudible] for the back in remediation.

We actually think in some cases, remediation won't be the most interesting part.

Like I said, you take the Fort Bliss case, they need 1400 new buildings at Fort Bliss.

So it really represents a huge opportunity for our business.

More so than it does for our environmental remediation business.

Now what we'll see on the remediation side is, some locations will be amenable to this developer strategy.

If you happen to have an army base that's being abandoned on a beach somewhere, you can find a developer who'll take over the base and clean it up at their expense as part of the process of developing the base.

We probably won't get involved in much of that sort of activity because it isn't consistent with our core client model.

In the other case, you're going to find some bases in the middle of nowhere that nobody wants to clean them up, and those will be cleaned up conventionally, and we will be a very active there.

So that's going to be a mixed bag.

Okay.

That's it for me.

Thanks.

Our next question comes from the line of Stewart Scharf from Standard and Poor's Equity Group.

Good morning.

Good morning, sir.

Can you elaborate a little bit on the engineering centers in India, and if you are expanding their, or other areas, how it's going generally?

Sure.

Craig asked me to take this one.

We're expanding pretty rapidly in India.

We've got two major centers in Mumbai, for those of you who haven't been to Mumbai, the traffic makes Los Angeles look like a picnic.

So we have two major and engineering centers in Mumbai, we've got one up in Delhi, we've got one in [Barota], we've got one in [Omnibob] and we're looking at developing two or three more.

Our headcount in India today is in the 1500 to 1600 person range.

Mr. Martin told the guys in planning session the other day he wanted a minimum of 5000 people in India in three years, moving to 10,000.

We look at that in two different ways.

One, it's going to provide a lot of engineering resource for the Western world and secondly, the Indian economy is hotter than a pistol.

So we have a strategy to have a very diversified operations in India geographically that will operate in the engineering centers where there's lots of graduates.

Nobody gives an accurate number on the number of engineering graduates from India in the course of the year, but I use the number 300,000.

And the numbers vary from 200,000 to 500,000.

So there's a huge resource pool there.

And we are going to round out India in a very geographically sensitive way, much like we have the U.S.

Okay.

And also, the situation in the Middle East -- where exactly are you in the timing and geopolitical unrest?

Could you comment on that?

Okay.

Craig gave that back to me to, since the Middle East is on my plate.

Our basic issue is that we have an office of 150 odd people in Abu Dhabi, we have about 100 people sitting in Saudi over near the refinery centers.

We're looking at a strategy to build on the ground in there.

We do have some competitive that have a couple to 300,000 people down there in the Middle East, and we're probably going to emulate them.

The work in Abu Dhabi probably will be heavily centered toward infrastructure and that type of thing, water resources, with a little bit of refining and oil, and of course the work in Saudi is going to be primarily oil-related.

So we intend to build an operation on the ground in the Middle East much larger than the have today.

Let's say we have 250 people down there, we're growing from an extremely small base, so we plan to grow that fairly dramatically over the next four to five years.

It is a new initiative for us, by the way.

We have basically not been active in the Middle East for a long time primarily because we're focused on other issues.

Okay, thank you.

Thank you.

Our next question comes from the line of Michael Dudas from Bear Stearns.

Good morning, gentlemen, Patti.

Good morning, Mike.

First question, John, in the 2.2 billion in bookings, any unusual or larger projects in that 2.2 billion?

And any scope changes from the backlog?

Well, we are and always looking at additional add-on projects.

More and more we're seeing projects issued in phases these days as opposed to maybe the past when people tended to give them in one lump-sum -- or not one lump sum -- one chunk.

But going through the backlog this year, there was nothing -- it certainly no blockbuster, it was mainly just business as usual.

There was quite a range of size of projects, and the front-ends that we were doing, some of which we could grow to be very large, some of which will be the more traditional size, but it's a good mix of projects across our markets and across size range.

Thank you.

And my follow-up question is along the lines of what Noel was just talking about a moment ago.

When you look at today's backlog and what the backlog could be over the next one to three or so years, where do you stand from a labor standpoint currently with Engineers Professional Service folk, craft labor, and how are you -- are you ahead of schedule?

And how much more difficult will it be for Jacobs to attract that type of labor to fulfill whatever backlog expectations that you all have out in the next three to five years?

Let me address the ahead of schedule question first.

The nature of our business and the margins in it are ones where you don't get ahead of schedule, all right, because ahead of schedule represents overhead.

And overhead, as you guys all know, we're pretty sensitive to how much overhead we have.

So what we have to do is get people into the shop when we have work for them, and the timing of that is pretty critical.

We have, to this point, been very, very successful in doing that.

We've expanded our headcount significantly, and we've been able to hire the people we need.

It isn't easy, but we have a very attractive business proposition for our employees, we have the sort of growth track that makes people feel comfortable that there is a future for them, and that helps attract the right talent.

In any given week, we might get a report from one of our offices were they hired a hundred people and lost 17, and that's the sort of experience we are having around the circuit because the competition for talent is tough.

But we are able at this point to fill our needs.

As we look out, We think we are in good shape.

We think we have a good story, we think we have the right amount of back office capacity to help balance the workload, we think we have the ability to shift work from locations that are in very high demand to locations where the demand isn't so high and balance our workload that way as well.

So we're feeling pretty good about our ability to handle the professional engineering resource required to do all this work.

The craft resources a bigger challenge, and we think that's going to result in things like more modularization, so we actually expect that the craft shortage will benefit us directly in the form of more work for our modular operations.

I think that's probably going to be true for some time to come, we will see.

So there are some challenges out there, but the work will get built.

Is again, the matter of timing in getting it built.

And one final question.

Noel, how is this cycle shaping up like the 1970's [inaudible]?

It seems -- I think the cycle is different from the 70's in terms of the 70's -- particularly in the late '70s -- both U.S. and Canada were heavily driven by government spending, government subsidy.

Remember, we're in the tar sands, that's when the tar sands really got started in Canada.

We're into oil shale in the United States.

There was activity overseas, that was significant, but the government was more involved in that cycle than they seem to be in this one, and this time -- particularly on the gas side which is kind of the explosive side of the cycle -- we're seeing big oil stepping up to the table and in many cases, midsized oil companies stepping up and saying, okay.

We need to clean up our gasoline pool and our diesel pool and that is government driven.

We need to change crude slate and expand the refinery capacity.

All those decisions are made by the companies themselves.

So in that regard, there may be a lot more stability to it.

Now I'm speculating because I don't think we know.

But it doesn't seem as frenetic, if that's the right word, as it was in the late '70s.

It seems to have a more stable growth pattern, and I think that's partly because we got very real companies putting very real money on the line thinking about where they're going, and that's why I think Craig is right.

If there is a demand for these projects, if we need more gasoline, these projects will get built.

Its only the time frame that will be a question.

Thanks.

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

Congratulations, gentlemen.

Your quarter certainly confirmed my optimism by a wide margin, and the second quarter wasn't always, so keep up the good work and we will keep it going.

Thanks, David.

A couple things.

As far as the quarter went, could you give us a sense as -- did business began to build as the quarter went or give us a sense as to the direction in the quarter and also maybe what your domestic/international mix may have looked like compared to previous quarters?

John, do want to comment on the mix issues?

I don't have the exact mix but we are seeing growth around the circuits.

I wounldn't say that there is any significant shifts in the mix or where the business is coming from certainly over the last few quarters.

Obviously here in the U.S, up in Canada and Europe are all showing good, strong growth not only in the oil and gas but also in the pharmaceuticals and infrastructure and the other businesses.

So it's not really coming from any significant change in the mix.

When I reflect on your question and just think about how the quarter unfolded month by month, there was just good, steady growth in billable hours and in nice uptake in unit margins, and progression was just what you like to be in the kind of business Jacobs likes to be.

So I can't point to any sort of dramatic shift or events or change of direction that occurred sometime during the quarter.

It just kind of continued to build throughout the quarter is what you are kind of saying.

Yes.

So it suggests the optimism for the fourth quarter unless there's some kind of shock.

On that U.K. environmental, just give me a sense to -- as that begins to build, would you be looking at maybe having larger contracts but the backlog would kind of just take bits and pieces out of that?

Give us a sense that some of these projects will end up end up having long life to them.

I'm just curious on how you see that playing out as far as its impact on the backlog.

A little bit will depend on the contacting strategy that gets used and a lot of this stuff -- the U.K. government is still working through its approach to the contracting strategy.

We may well see contracts that are like the ones in the U.S, where they select one or two or three companies and give them an indefinite quantity, indefinite delivery contract, which means that you now have a hunting license to go out and find work.

The work then can show up in individual bits.

So it could be a whole bunch of relatively speaking smaller events on the back of a big program-type award.

Alternatively, it could be a full sort of clean up assignment, where the whole scope is awarded as one program or project, and those two things will have different impacts on backlog in the short term.

The one will result in the program being booked;, the other will result in some estimate of the scope being booked and taken into backlog as the events occur.

So it's difficult to say how that will unfold until we know a little bit more, specifically how each event is going to be from a contracting point of view.

So you think that your first press release may be a guide -- when you do win an award there -- that maybe a guide as to whether it may filter out, or one large project; would that be your sense [inaudible]?

It's possible that a first press release would do that.

We've already press released some of these other awards in the area.

But the problem is that the pattern won't necessarily be consistent from program to program or project to project.

So I wouldn't draw too much of an inference from any given press release that all of the contracting is going to be on that basis or that all of the backlog will build in a consistent fashion, because we try to be absolutely consistent as a company in the way we report backlog by looking at these contracts in terms of what's really in hand, so to speak.

That let me go on to infrastructure then, because you've seen a lot more discussion here in the U.S. about privatizing infrastructure, something we see a lot here in Texas and the way things are being played out that private sector's being looked at as a way to get some of these projects done, and we're seeing reports that it's of a lot more interest maybe institutionally to do this kind of funding for infrastructure spending.

I want to get a view from you guys as to how real do you see that at the possibility, because in that particular case, business could get stronger as you get more private funds into this particular segment of infrastructure.

I think you're going to see a piece of that infrastructure business both in the U.S. and globally.

That is driven by various forms of privatization, public-private partnerships, some sort of design-build-operate-maintain type of contacting form.

And so I think those will be very visible, and there will be a significant piece of a market that goes that way.

I think equally likely, though, is that there will be a very significant piece of that business that continues to be designed and built in the conventional methods.

There just aren't that many projects that lend themselves to public/private part partnerships.

Or to private finance.

So the big event projects may well end up going that way, and a lot of the smaller projects that have to get done day in and day out will continue to be done conventionally.

We expect to participate in both kinds.

We will participate in the big event designed-build projects as either program managers or as designed subcontractors to the venturers, and then we will continue to be the designer and construction manager/program manager for this conventional projects, and both will represent growth.

The good news about public-private partnerships is that it brings more money in the aggregate to the game, which means more things will get done, in our view.

Well, that's the way I look at it, too.

The more financing that gets through the more that can get done.

One last question on the Bio-Pharma area.

You indicated Biotech being more interesting.

You're seeing a lot more interest in industrial biotech today domestically as well as internationally, something that's being led by ethanol expansions and so forth, DuPont taking talking about taking a serious look at industrial biotech.

Are you seeing anything from your view where there's more industrial biotech development potentially going on that biotech side of the equation for you guys?

You know, I think as our big customers have an interest and industrial biotech-type projects, we certainly have the skills and experience to serve that very well.

I wouldn't tell you that we are hearing a lot from our customers right now on that line.

But again, for Jacobs, this is a core client discussion, and if our core clients -- whether it's big oil or big Pharma or big chemical or big food and beverage -- have an interest in a new technology or a new direction for their businesses, we'll be there to support them.

Okay, I think that's -- Because at this point in time, industrial biotech is a small event but it could become significant in the next five years.

And you guys really feel like you have it capabilities to participate then?

We are definitely probably as good at biotech business as anybody in the business.

Appreciate it.

Our next question comes from the line of Barry Banister from Stifel Nicolaus.

Thanks for taking the call.

Part of your relationship model is rendering advice to customers, and I thought I heard you say earlier that some of your customers were balking at the price of engineering projects.

If one of the cost of delay is higher prices later, which would cause the cost to rise and you would need to price your field services appropriately, so are you actually urging people to wait, and are you conscious of the risk to the field services gross margin if they do wait and you don't raise prices?

I guess there are two or three questions there.

We are working with our customers to try to optimize their capital spin.

And it may be, in some cases -- without getting specific about a customer -- that it is in their interest to delay.

Or it may be in other cases that it's not.

And again, some of the issues that will affect that are the procurement strategies for the various aspects of the work.

So there isn't a universal answer to the first part of your question in terms of what are we advising our clients to do.

Its very client-and-project specific.

With respect to second part of your question, remember that our work, as we function out there in our relationship model, is cost-reimbursable.

So our exposure to field service escalation is very, very limited.

Virtually none.

But that exposure does exist for our clients, so the fact that delaying a project raises the cost of getting it done in the field, that's an exposure our client would have.

And we work with our clients to try to estimate that and factor it into the capital decision.

Let me ask it this way.

Your average growth margin for the company for the entire history of the company has been 13.5% with a deviation of 3%, so it's a pretty tight band.

Yet, gross margin two years into a strong cycle is slightly below the historical average.

So I was concerned about your willingness and ability to use price, or if something fundamentally had changed about your business.

When you are looking at the gross margin, it's definitely a mix issue, and our mix of field services to home office services is at its highest level in probably a decade or more, so some of that margin band has to do with the mix issue much more at the gross margin level much more than it has to do with what the absolute margins are, so, you have to factor in both elements, and as I said earlier, the unit margins -- if you want to call them that -- we're seeing some improvement in them, both because of the multiplier effect on salaries, a little bit better pricing, the changes when you look historically, that has to do with the mix issue and the fact that our field service activity and the related costs and margins are a bigger percentage of our overall revenue today than they were three or four years ago, or even further than that.

I can compare your mix to ten years ago but it's kind of interesting that if I look at right after Craig joined the company in 1995, you had SG&A down to 7.9% of revenues.

Is there any reason at all we can't go back to those levels?

There's been a lot of things added to the complexity of doing business.

Without going back and looking specifically ten years ago -- because I don't have that, I don't have that -- but there are certain things -- be it Starbucks, be it the fact that we are much more international, and the G&A had just the nature of doing business particularly in Europe tends to be higher than the way we're organized here in the U.S. for relative side of the operations, so there is a lot of things that have changed in the decade.

If you go back when Craig joined us a decade ago, we were still primarily a U.S. focused contractor.

We probably had maybe 5% of our business was outside of the U.S.

Most of that was in Europe.

Today, 35% of our business and people are outside the U.S, and just the cost structure is different.

So I think to say we never go back to the 7% to 8% range -- we're at 8.5, so were not that far away, but when you consider all the different things that have happened in the interim, I think we are doing very well.

If the mix were to change -- continue to change, and we got to 2/3 and 1/3 field services, then you would probably see that percentage going down.

Let me just add to that, would you please, this is Noel, the intensity that Craig is running the business with today has not changed in a decade.

What you're looking at is a different situation and a different set of numbers.

But the intensity on the cost side remains, in the guys go back and they're almost do zero-based budgeting every year trying to figure out where they're going to get costs out of the system.

I think John hit on a point.

Our cost in Europe are fundamentally higher, wether we like it or not.

And that's because we are operating in this multiplicity of countries.

And we end up with separate overhead structures almost everywhere we go.

And if you go back and look at when Craig joined the company, our offshore operations were in their infancy.

Noel, E&R had some favorable things to say about Indian engineers.

Do think you can get to 10,000 without an acquisition?

Absolutely.

We're past the stage in India where an acquisition or bulk would make any sense.

We've got the ability to hire people; we understand very intimately how business works in India; our operations have been there for more than 30 years, so we are very well positioned to grow without an acquisition in India.

If we made an acquisition in India, it would be for new skill sets or to serve a customer base that we don't serve today out of India.

It wouldn't be for bulk.

Okay.

Great, thanks a lot.

There seem to be no further questions.

Do you have any closing remarks?

If I could, we are coming off a good quarter and we're pretty proud of what we've accomplished, but as we look forward, the business is still the business we always describe to you all.

It is fundamentally a business that we're going to grow about 15% a year, year in and year out, some years we'll do a little better, occasionally a lot better, but in the long run, we are sticking to our knitting here with a 15% kind of growth longer term.

With that in mind, I guess -- unless, John, do you have anything to add?

No.

Thank you very much for joining us.

This concludes today's conference call.

You may disconnect.