雅各布工程 (J) 2006 Q4 法說會逐字稿

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

This call is being recorded.

Today's presentation will be available for replay at 2:00 pm Eastern time today through November 9 at midnight.

You may access the replay by dialing 1-800-642-1687 or 706-645-9291 and entering the passcode of 8158014.

Again, the number 1-800-642-1687 or 706-645-9291 and passcode 8158014.

There will also be a webcast of this teleconference and exhibits to support today's discussion, which can be accessed by logging onto www.jacobs.com. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the call over to Patty Bruner for the forward statement.

Please go ahead.

Thank you, Courtney, and good morning to all.

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

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

For a description of some of the factors which may occur that could cause such differences, the company requests that you read its most recent annual report on Form 10-K for the period ending September 30, 2005 and the most recent Form 10-Q for the period ending June 30, 2006, including the management's discussion and analysis of financial conditions and results of operations contained therein for a description of our business, legal proceedings, and other information that describes the risk 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'd like to turn it over to John Prosser, CFO, to begin today's discussion.

Thank you, Patty.

Good morning.

I'll go through the -- briefly go through the financial highlights and then I'll turn it over to Craig Martin, who is our CEO, to talk about the growth strategies and the business overview for the quarter.

If you go to Slide 4 that we have on the presentation, we're very happy to announce that this, by any means measure, was a record quarter, and diluted EPS for the year was $3.27, diluted EPS for the quarter at $0.97 were both very strong results and they both do include a $0.05 per share benefit related to various tax matters.

The net earnings in terms of dollars was $196.9 million for the year and $58.7 million for the quarter, up substantially from last year, both the year and the quarter.

And our backlog, we ended the year with a backlog of $9.8 billion, which is also a very strong increase.

The balance sheet remains strong.

Our net cash was at $341.9 million, up significantly from last year, about $200 million from last year and up about a little over $100 million from last quarter.

As we indicated in our press release, our fiscal '07 guidance is for earnings per share in the range of $3.75 to $4.05.

Turning to Slide 5, this just graphically represents our earnings growth over the last decade and you can see we're substantially back on the 15% growth track that we've -- at above the 15% growth track that we've had as our kind of target or goal for a number of years with this year being up, in the trailing five years, growing at a compounded rate of about 21%.

Looking at Slide 6, our backlog.

Again, we ended the year at $9.8 billion.

That's up a little over 13% from a year ago and up about $400 million from last quarter.

Also, continued strong growth in the professional services backlog, which is kind of the indicator of where our business is going.

With that, I'd like to turn it over to Craig Martin, our CEO, to review the quarter and our strategies.

Thank you, John.

Good morning.

We'll take just a couple of minutes to reiterate sort of our approach to how we're going to maintain our 15% growth rate, year in and year out, and there's five major focus points there.

We'll also take a few minutes to talk a little bit about where the markets are and what's going on as a part of that.

So turning now to Slide 8, we remain strongly committed to our relationship-based business model.

And we talk about this every conference call, but -- and frankly, nothing's changed about our approach.

If you look at the pie chart on the left side, we continue to be focused entirely on preferred relationships and repeat business that we hope we can turn into preferred relationships in the form of discrete projects.

So our business model is almost entirely around long-term relationships with our clients, preferably situations where we've negotiated some sort of basic ordering agreement or a supplier of choice agreement or an alliance or a partnership, our clients have lots of different names for it, that allows us to work for that customer on a continuing basis, understand the customers' needs better and provide better service, better results for that customer.

We avoid transactional projects sort of like the plague.

We'll do the occasional transactional project if we have to from the standpoint of keeping some people busy or if there's an opportunity that represents a high profit opportunity, but we really could do without them altogether and it wouldn't affect our business model at all.

It's just a small piece of our business and will continue to be a small piece or less.

That's contrasted, I think, against the industry model on the right.

And what we show here for the industry model isn't representative of any specific company or even necessarily representative of the industry.

It's just representative of the behaviors we see from a lot of our competitors.

They're very focused on transactional projects, these lump-sum, turnkey projects in faraway places, many times for customers they don't know well, sometimes for customers they do.

And the outcome of those projects could be good but it can also be very bad and we've seen that happen repeatedly in the industry.

It's a part of the business we're avoiding as we go forward.

So that's really where our relationship-based model is.

We haven't made any changes in our approach to that business.

Switching now to Slide 9, this is our revenue by market, $7.4 billion in the aggregate.

Let me go around the pie chart here and give you just an update on where the individual markets are and what we see going on.

I'll start with the Petroleum piece, the 38% pie in the lower right.

That's really made up of two parts, upstream work and downstream.

On the upstream side, we're working aggressively in Canada.

The oil sands are very active.

We've got a lot of work going on in the North Sea.

We're doing some gas and gas recovery work in the Rocky Mountains, and we're seeing an increasingly interesting scope of work coming out of Saudi Arabia, largely in the form of front-end design and project or program management assignments.

On the downstream side, there's lots of activity in the U.S. and Europe, in Singapore, and in the Middle East.

In the U.S., we're seeing the last of the environmental projects, particularly things like non-road diesel, are very active right now plus there's a lot of money being spent on capacity.

It's a little different time in the cycle than we've seen the last few years in that a lot of the projects that we're seeing right now are based on positive returns to shareholders.

These projects make financial sense, unlike some of the environmental work was just a cost activity for our customers.

In Europe, we're seeing a lot of activity in terms of conversion from fuel oil and gasoline to diesel as the demand for diesel grows.

In addition, there's a significant amount of activity in mandated fuels in the form of biodiesel and we're very active in the biodiesel business.

In Singapore, we're seeing capacity expansions, and in the Middle East, on the downstream side, it's front-end designs and PMC work.

So, that business is very robust.

It looks like, to us, it's going to continue to be robust for the foreseeable future.

Moving around to Chemicals, which for us is predominantly polymers and fertilizer work, we've got a lot of activity in the U.S. and Europe compared to the past.

It's still not a big business, it's still not extremely robust or anything like that, but they're seeing modest increases in the amount of work that's out there.

You can see that share of the business is growing a little.

In the U.S. and Europe, it's capacity creep.

In the Middle East, it's feed and program management contracts.

Other, you can see, has grown.

That's largely the result of our alliances in the food and beverage industry, which we don't separate otherwise.

That'll continue to be a good business for us but not particularly robust.

On the PharmaBio side, there's lots of activity in the U.S., in Europe and in Singapore.

Some of our customers have good strong drug pipelines, not all but some, and there's a lot of activity in vaccines.

The good news here is that there are only two players in this industry that dominate, and so as long as there's a good drug pipeline in one or two customers, there's a good flow of business for us.

On the Pulp & Paper side, the Pulp & Paper [bracket], believe it or not, at 1% is the best it's been in several years.

That's not to say much, is it?

But, actually, it's pretty good.

There is a lot of activity, particularly in the consumer products side of Pulp & Paper but even some activity on the forest products side.

Moving on to National Government now, that's two businesses really for us.

One is the research and development scientific and technical engineering work for customers like NASA, DOD.

That business is growing nicely.

Lots of activity last year, lots of activity coming up in the next year, particularly with people like NASA and the DOD in the U.S.

We've also started to penetrate the Ministry of Defense in the UK and we look forward to additional prospects there.

You may recall, a couple of years ago, we were pretty excited about our initial penetration in the IT world and we continue to pick up IT contracts in this area as well.

So that business looks pretty robust to us.

The other half of that business tends to be environmental, cleanup-related work.

In the U.S., that's for the DOE, cleaning up the nuclear sites and BRAC-related work.

Lots of activity in BRAC, both in terms of [inaudible] cleanup and also base support realignment work.

In terms of new buildings, good business overall with good growth, maybe not as robust as it's been in the past but still a good steady growing business.

The more exciting part of that for us, I think, is the UK nuclear business.

In the UK, they've just decided to start cleaning up their nuclear plants and their nuclear manufacturing facilities, both for fuel and for weapons.

It's forecasted to be a 75-billion pound program so close to $150 billion worth of work.

We're in a great position for some of this work.

We're already working on a lot of it because of our history in the UK.

We have a large UK presence, and U.S. contractors with experience in environmental cleanup, particularly nuclear environmental cleanup, are considered to be leaders for managing this work because of about a 15-year head start in doing it.

In addition to that, we're seeing a lot of activity in the Pac-Rim on base relocations, and we think that's going to be a strong business in this area as well.

Moving on to Buildings, there's just a tremendous amount of activity in healthcare, both in Europe and in the U.S.

We have a very strong position in the design of hospitals, on the mechanical-electrical side in Europe, a very strong position in the program management, construction management of hospitals in the U.S. and we're working hard to combine those businesses to get a stronger position overall in the healthcare market.

A lot of us are getting older and good healthcare in the form of good hospitals is going to be an increasing issue going forward.

We continue to see activity in other technical building types that suit our model.

Remember, we don't do the sort of high-rise office building, apartment complex, condominium complex kinds of projects.

We do the buildings with fairly high technical content inside, and that continues to be a good market.

In addition to the Buildings business, we're seeing a lot of activity in science facilities, and you may recall, we press released the ITER job, which is just an example of those kinds of projects going forward.

On the Infrastructure side, you'll recall that's a transportation infrastructure business, first and foremost, for us, although we do also some water and wastewater work, particularly program and project management and that kind of work.

Very active across the U.S., Europe and the rest of the world.

This is a business that I think everybody can recognize the demand because they can't get to work.

And we see that as an opportunity for the long term.

We'll continue to see good growth, I think, in the infrastructure business around the globe for years to come.

Our last little sliver is the High Tech sliver.

That's semiconductor and automotive test work.

The semiconductor part of that is very weak.

Our customers really aren't spending any money.

You've seen the press releases from those customers to tell you what's going on.

We do see a lot of activity though in automotive tests.

While it's a small market, we have a commanding share there and we continue to see a lot of activity in that small market.

So that's really where the markets seem to be as we go forward.

Overall, still a very robust marketplace.

Turning to Slide 10, we continue to try to be multi domestic in our approach, so we want to have on-the-ground presence, local presence, where our customers need us to be, we want to make money in these locations, year in and year out, and when the bigger projects show up, we're there to serve the customer with global expertise and local knowledge.

And we think that makes for a powerful model as our customers invest across the globe.

Moving on now to the Highlights slide, Slide 11.

I thought we'd take just a minute to talk about some of the things that happened during the year that are noteworthy.

There's lots more we could put on the list.

We've just picked a few highlights.

First off, we completed the Babtie integration.

That's been a terrific acquisition for Jacobs, a well-run business that continues to grow.

It is very much a part of the Jacobs way of doing business today.

We also completed three strategic acquisitions during the year -- an infrastructure acquisition in airport consulting in the form of Sypher up in Canada, part of our work to get kind of high and early with our clients in the infrastructure business in the airports part of transportation.

We made an acquisition with a company called Techna-West up in Edmonton, Canada to help us serve the oil sands better.

Clearly, there's attachment in Canada that we could be in that would allow us to grow our business with the oil sands customers.

In addition, there's an infrastructure component to Techna-West that might get us started a little stronger in infrastructure in Canada.

And then, the final acquisition on the list, the one we just completed, which is Linder.

It's an upstream oil and gas company based out of Metairie in Houston.

Metairie is near New Orleans.

This is one of the acquisitions we've been talking about for some time in terms of helping us get a better presence in the upstream business.

It's about a 300-person business today but Jacobs has over 2,000 people on the payroll today who have upstream credentials.

And now that we've got some visibility with the customers here through the Linder acquisition, we think there'll be a lot of leverage and a lot of opportunities for growth upstream.

During the last year, we've managed to increase our home office staff by 4,500 people.

You hear lots of talk about how difficult to hire people it is.

It is difficult but we're getting it done and we believe we'll be able to continue to get it done going forward.

We also reached record levels of workshare around the globe, both in India and between our offices, driven by a good volume of work out there and the fact that we're just getting better and better at doing workshare effectively.

And then, finally, a point I'd make about our backlog.

Our backlog continues to be composed of an awful lot of mid-size projects.

We're not dependent, partly because we're just not that transactional company that I talk about, we're just not dependent on the big events to drive our backlog and that continues to be good news for us in terms of creating a stable '07 as we see it.

Turning to Slide 12, this is my commercial slide, why I think we should be a good buy for the investor.

We do have a unique model, it doesn't subject us to the ups and downs of the lump-sum, turnkey marketplace, we're diversified in terms of markets, geographies, and services, I think we've got a good strong balance sheet, and we continue to deliver on our commitment to a 15% average annual growth rate.

So that's sort of where we are as we end one fiscal year and start the next one.

With that in mind, I'll turn it back to Courtney and we'll open it up to questions.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Sanjay Shrestha with First Albany.

Great.

Good morning, guys.

Congratulations here on a great quarter and what looks like a very fantastic outlook as well.

Just a couple of quick questions here.

Now, with some of these acquisitions behind us, in line with your overall long-term growth strategy, has it been fair to say that maybe for another year or two, maybe we're not going to be as active in the acquisition front?

Sanjay, I think what will drive our acquisition activity is opportunism.

And fundamentally, these deals get done when they're ready.

We've got our key leadership out there, talking to potential acquisition targets everyday and to suggest that there will or won't be more acquisition activity next year or the last year or the year before is hard to do.

We're talking with a number of customers, or potential targets I'll call them, in both infrastructure and upstream oil and gas, and there's every reason to think that some of these deals will come to fruition.

They may be small deals like this year.

They might be a little bit bigger deals.

But, in general, activity is going to be driven by when we can get together with the right company at the right price.

Got it, got it.

That's fair enough, that's fair enough.

Now, you guys were talking about the opportunity in the UK remediation market and how you were doing some work there.

When do you think that we'll see some meaningful scope of work kind of gets released related to that opportunity?

Is it really more later 2007 type of an opportunity?

Yes.

I think what you'll see in terms of big awards, major events will start in 2007 and carry out through 2008, 2009, even into 2010.

When you're trying to get $150 billion, plus or minus, worth of scope out there for contractors to do, it isn't an immediate sort of process but there have been several announcements recently in the UK government about the cycle for these awards, the timing for each one, in fact, I think you can look them up in the UK newspapers, the Financial Times or something.

And we think those things will be progressive.

That's sort of the big picture contracts, what I would call the Tier I contracts.

Then, underneath that are Tier II and Tier III contracts, and we're a very active player in those businesses already.

And what we expect there is that the volume of work for those businesses will just increase steadily as these awards take place.

Got it.

That's great.

One last question, then.

What is the sort of correction if you would on the price of oil, but the level of activity seems to be pretty robust for you guys and for the overall industry and the Canadian oil sands market?

If this trend on the price of oil continues to sort of dip down, is there a level where maybe that activity starts to slow down for you guys, as well as for some others, or is it really more of a strategic decision from the major oil and gas companies and as a diversification mode, the oil prices really need to go down pretty low before dynamics like that unfold?

Let me first give you a sense of what we think the economics are, and we're not an oil sands operator so we may not be entirely right.

But when our consulting people take a look at what it costs to build one of these facilities and then what it costs to operate it, operating costs are in the range, depending on whether you're mining the material or doing the steam-assisted gravity drainage side, anywhere from about $9 a barrel up to into the mid teens.

And then you have a capital cost recovery issue that adds anywhere from another 10 or $12 a barrel up to, again, the mid teens.

What that says is that mining projects probably continue to make economic sense on oil prices north of $25.

And steam-assisted gravity drainage projects probably continue to make sense for the most part at oil prices around $35.

So if you put those two things in perspective, that suggests that there are economic drivers regardless of the strategic ones that would support continued investment as long as oil prices stay above those levels, stay above $35.

Got it, got it.

That's great.

Once again, congratulations, guys.

Thanks very much.

Your next question comes from the line of Barry Bannister with Stifel Nicolaus.

Stifel Nicolaus.

How are you?

They'll never get that one right, Barry.

I'm sorry.

That's okay.

One of the questions I have is, there seems to have been in the last six years a disconnect between your EBIT margin and your sales growth.

It used to be prior to 2000 that when you got top line, your EBIT margin would go up, and as top line began to slow, EBIT margin would peak and maybe go down.

But there's been not much relationship in the last six years.

Every 50 basis points you can cut out of SG&A is going to add $0.50 to earnings.

I'm sorry to peel the onion so delicately, but what do you think you can do to SG&A?

Because that seems to be where you can get the leverage now that you move into field services.

I'm not looking for as much gross margin improvement.

Well, when you look at the mix, you certainly do see the G&A percentage of revenue going down as the field services increase.

Now, that's been something that's been historical for us, as well.

At this point, both of them, even though the field services is growing as a percent of the total, home office services, engineering services are also growing very fast, so we are seeing growth, absolute dollar growth in G&A's related to increased activity.

But we don't -- we have always taken a very strong focus on controlling those costs and keeping those costs in line and as we grow, not putting in -- not institutionalizing things that are only temporary or required to support the growth.

I mean, this last year, a lot of this G&A increase has been related to the added space we've needed for the people that we've added.

It's been the recruiting costs to bring those people in.

Those kinds of things, we watch very closely, so I don't see draconian changes in our G&A rates.

They will vary, and certainly as the home office services mix with the field services and field services grow, we will see a benefit on the G&A rate as a percent of revenue but you also see pressure on the gross margin as a percentage of revenue and the two go together, we would hope to see continued small improvements in the operating margins or the -- as you say, the EBIT numbers.

I mean, I'm just thinking, my model doesn't adjust prior years for one, two, three options.

However, you took off 150 basis points of SG&A in a year on an unadjusted basis, and if you continue at this rate and go through the 8% of revenues figure that you did back in '96, '97 and go back towards the -- oh, the 7% figure you did 15 years ago, I mean, the earnings leverage is enormous.

So I mean, so you feel that SG&A -- I guess my question is, do you feel that you've exhausted the SG&A leverage in the company, or can you continue to drive home that figure a little lower?

Well, Barry, we would never admit to have exhausted our control of SG&A and our ability to drive it lower because that's one of the things we think is central to the way we run our business, is keeping our costs down.

On the other hand, dramatic reductions of G&A, particularly given the difference in business mix today as compared to, say, '96 or '97, I wouldn't expect us to be back down in that 7% range.

We've brought on some businesses and grown some businesses that have, relatively speaking, higher gross margins and higher overhead costs to support them, the infrastructure business being a good example of that, and all of that's been added since that timeframe.

Okay.

Thanks a lot, guys.

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

Hi, good morning.

Good morning, Jamie.

Congratulations.

Thank you.

Craig, just to build a little bit on Barry's question but looking at it slightly differently, you look at Jacobs historically and sort of a good-bad news thing about Jacobs was your earnings always grow about 15% because of your business model, the diversification of the end markets that you serve, et cetera, and then you look at the end market strength that we're seeing right now, all markets are firing on all cylinders, we've never had this and we've exceeded the 25% in '06 and contrary to what you told me last quarter, the last quarter, you're going to do it again in '07 that you can grow between I think the guidance implies 15% to 23% or so.

So I guess, should we look at this as a new era for Jacobs if the markets continue at this rate, or what would prevent you from growing above the 15 -- from not growing above the 15% rate?

Well, I certainly wouldn't look at it as a new era.

You're right to describe it as firing on all cylinders.

I think you can recall the days when we used to say we got eight markets and if five of them are going good, then we can continue to grow the business at 15%.

When we get more than five, we grow faster, when we get less than five, we grow slower.

And I think that statement is still true.

So, to the extent that the markets remain robust and more of them than five or so remain robust, we're probably able to grow a little faster than 15%.

But there are other constraints on growth we have to be smart about.

Our business is one that you can take on work at such a rate that you start to have quality problems.

You can take on work at such a rate that you start to have safety problems.

And both of those things are bad for your long-term ability to grow the business.

So, there is a limit to just how fast we want the business to grow and how much growth the business can tolerate even in multiply -- in multiple robust market kind of condition without running the risk of damaging our relationships with these customers.

Remember that the good news about our relationship is they like us and they trust us and they'll treat us right, even if we screw up occasionally.

The bad news is if we screw up bad enough, we lose the customer and that's a big impact.

So we have to find the balance there.

Okay.

And my second question, when you look at the end markets that you serve, are there any end markets -- historically, you had a pretty diverse portfolio of markets that you serve -- are there any markets that were concentrating on more versus where we would be historically just because of the favorable pricing dynamics or opportunities versus historically or any markets that you historically wouldn't serve that you're considering entering into?

Let me answer the last part of that first.

There aren't any markets we have not served traditionally that we're trying to expand into unless you want to argue that our expansion into upstream is relatively recent.

With respect to the markets that we're in, there are none that we're trying to de-emphasize or others that we're trying to overemphasize, if you will, because we think the diversity of our business is part of that long-term strength.

And so, if we move away from customers, say, in pharmaceuticals because petroleum is very robust, when petroleum is not so robust, our pharmaceutical customers will have found other suppliers, and we just can't have that.

In fact, that's one of the things that we benefit from in a strong cycle like this, is that some of our competitors tend to concentrate their efforts more narrowly and they leave customers in those other markets for us to pick up.

We don't want to find ourselves making that mistake.

Okay, thank you.

Congratulations.

Thanks.

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

Good morning, gentlemen, Patty.

Good morning.

My first question, following up on that issue Jamie mentioned, can you give a sense of what your core customer base looked like a year ago and where it is today?

How much change has there been?

Sure.

Core customer base a year ago and today are virtually identical.

How do you look out '07, '08?

And first of all, on 2006, what's been the net addition or deletions to offices in Jacobs' system and where do you think you're going to be putting new offices or expanding the existing offices over the next couple of years?

Where do you see that in your forward budget?

Well, that's a hard question to answer.

In terms of new geographies, let's talk about that first.

Compared to a year ago, we have a much stronger presence in Puerto Rico to serve our pharma customers.

We have sort of a minor presence on the Pac Rim, Korea, Guam, because we see a lot of investments come in that direction, so we've got a little tiny toe in the water.

We're looking hard at the Middle East in terms of potential for expansion there.

Maybe not so much new geography -- we're already in Saudi Arabia and Abu Dhabi -- but certainly in terms of the level of support we're able to offer our customers there, we'd like to grow very significantly in terms of heads there.

We're doing things like opening other offices around the system to increase our catchment for good people.

It's part of how we're able to continue to grow the business in this market, is that we offer the employee-based opportunities to reduce their commute, work closer to home, that sort of thing, and that's working well for us.

We'll be doing more of those kinds of things.

Beyond that, it's pretty much the same model as always.

Where our core clients need us to be and where there's an install base of work, we'll show up.

Next question would be how's the competition level relative to some of the major end markets that you're in?

I know they're very diverse and they vary, but any new entrants, more aggressive entrants?

Is there still an expectation that there's a somewhat of a capacity issue from a contractor space and are clients feeling the pressure to lock in their better vendors with some of their new capital commitments?

There certainly aren't any what I would characterize as outright new entrants.

A couple things have happened as a result of our strength in the market.

Some competitors that were almost dead and gone have been revitalized, so that has created in, particularly in places like the Middle East, a little more competition.

But there's so much work, it doesn't affect our business prospects.

And some of the smaller players are able to take on more work because there's just more demand in the community in a geography than there has been historically and that gives the smaller players a chance to participate more aggressively.

So, in some ways, the level of competition has increased a little bit.

On the other side of it, though, in fact, our core clients are concerned about making sure they do have the resources they need to be successful and our focus is to make sure that we provide them for them because we believe if we're successful in an up market in supporting our core clients, they'll remember that in a down market.

And the folks that went away from their core clients to do the big events are going to find themselves with no place to come home to.

Two quick questions.

You mentioned biodiesel is a very hot market.

It's been a very hot topic amongst investors.

Who are some of the clients that you're working for or looking to work for in that market?

Are they part of the core constituency or are these some more of the discrete or newer customers to your services?

Bear with me a minute.

I'm checking to see what we've press released before I answer the question.

I don't want to get you in trouble there, Craig.

Well, and I probably can't be too specific because I don't see any --

That's okay.

-- press releases at hand, but let me tell you the fundamental driver for here is a core client of Jacobs, and we have both a business relationship in terms of the kind of preferred relationship that we have with that customer, as well as joint ownership of an engineering business, and they have a lot of biodiesel strength, and so we support them and we support their technology as it's licensed to other oil companies around the world.

So that's where a lot of our leverage in biodiesel comes from.

It's from a very strong single-client relationship that leverages in to some of our other core clients.

I appreciate it.

My final question is, relative to the Linder acquisition, you mentioned the processions you're taking there, adding to your strength in the Houston area, what type of clients?

Where are they working?

Are these newer clients?

Are they in different areas of clients that you're already working for?

What kind of strengths does this organization bring?

Well, the strengths they brought to us were long-term relationships with clients for whom we already work on the refining side and their long-term relationships were on the upstream side.

And these are big-name clients.

This is big oil, and these guys have a very solid relationship that's historically been limited by their ability to staff the work and their credibility in doing bigger programs.

So we think there's a lot of leverage in the acquisition.

Terrific.

Thank you, Craig.

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

Good morning, everyone.

Good morning.

You painted a pretty positive or favorable outlook in most of your end markets going forward but I'm starting to hear some grumblings about a possible slowdown in the U.S., commodity prices are coming back in, there might be some political changes in Washington.

Where do you see the kind of risks going forward?

I guess you characterized '07 as being stable.

Is that to suggest that growth might be slowing down?

I mean, I know it's some difficult year-over-year comparisons, but I wondered if you could comment on that.

Let me ask Noel to comment.

Yes, I think what we're seeing out there is the commodity prices are stable, we've got all the worry in the U.S. about inflation, and we've got the productivity issues that are out there right now.

But if you take a look at some of the fundamentals, and we can look at the U.S. and we're basically, and I've said this for many years, out of gasoline.

You can go to Europe, and what Craig was just talking about or Mike had asked about the biodiesel phenomenon and the fact that just millions and millions and millions of tons short of diesel and biodiesel, in Europe, it looks to us like there's going to be a leveling of the enthusiasm, but the stability over the long term to us right now still looks extremely positive.

You could have another war, you could have things like that, and who knows what that brings, and we don't get into that thing.

Oil prices are coming down to more rational levels which I think on an overall basis is probably good for the business because you've got to remember, those high oil prices are absolutely killing the feed stocks and the chemical business.

And so, that's probably going to help them, so on an overall basis, I think the boom side of it, a little leveling off is probably going to be very solid for the business.

It's going to make it a lot more predictable, and certainly the prospect list that we're looking at today is extremely solid looking forward. '07 is looking, as the guys have said, really solid, and we're already into what's going to happen in '08.

And so, we're looking ahead, I think, at a good long-term market.

In the end, if the legs in the oil and gas market will come down, and that's why we're putting so much emphasis into the infrastructure in the other markets, because we want to continue this growth path regardless of whether oil and gas is in a boom market or not.

So, are there any other markets where you might see it dropping down or leveling off?

Well, the pharma market is in an uptick, I think that's clear.

We went through a leveling period that showed in some of our markets in 2004.

The pharma market's in an uptick.

The chemical market has been kind of schizophrenic but we still think there's an uptick coming in the chemical market.

And with all these huge ballot propositions we've got going on, we see the infrastructure business growing pretty nicely, both in the U.S. and certainly in the UK, where we've got a big position.

You've got to remember the Olympics are still driving the UK, and in the United States, we've still got a very deteriorated infrastructure, particularly roads, bridges, highways and that kind of stuff.

So I think what we're going to see is, yes, the oil and gas markets certainly on the downstream will level out sometimes in the next few years.

The upstream business is going to be strong and I think that's gathering momentum because oil prices have stayed at this very elevated level for a very long time already, and so I think it's going to drive a lot more people into the upstream business and a lot of money in here.

So I think the mix is that, right now, it looks very positive.

Okay, thanks.

That's it for me.

[OPERATOR INSTRUCTIONS] And you do have a question from the line of Barry Bannister with Stifel Nicolaus.

Hi.

I understand your enthusiasm for upstream petroleum and would agree, but isn't it historically accurate that after a sufficient time, the demand for downstream petrochemicals does not go away.

Yes, they're squeezed initially by the feed stock, but absent to any change in long-term demand, eventually they get pricing power, and they, too, expand.

So wouldn't you say this is bullish for downstream expansion as it is for upstream rather than a segue from one to the other?

I guess in some way, I think that's a fair characterization.

We have said for some time that downstream in the form of chemicals particularly would come back and be a stronger market.

I think I told you earlier that we're starting to see that in the form of more activity.

I do think the locust of where the money gets spent will tend to be more where feed stocks are traditionally cheap, so you'll see more investment in the Middle East than you will in other places.

But I do believe we'll continue to see in the developed countries of the U.S. and Europe, North America and Europe, I should say, a continuing investment in capacity expansions, just things that benefit from an IRR point of view.

So, a long-winded answer to say, I think for the most part, the downstream business is a good business and will continue to improve to some degree, but it will have the cycles of the economy in general because it tends to be GDP-driven, and so it will be up and down over time.

I think we're looking at an up cycle as we sit here today.

Like all of you, we don't know how long that cycle will last.

Maybe it has something to do with feed stocks for petrochem being NAPTA versus gas in some peoples' choices, and you'd associate gas with more upstream development, whereas NAPTA might be more downstream?

I just don't know.

I think the drive now is going more toward gas, and certainly, that's what driving the Middle East, is all this flared gas is just sitting there, so the big chemical expansion certainly, I know certainly all the L&G stuff is going to come out of the Middle East.

And then, lastly, have you noticed a tailing off of your super-clean diesel spending such as the hydro treating for sulfur removal?

Have we just gotten to a point now where that's done?

And if we're starting to add Greenfield refineries, that's not your gig?

And I'm trying to figure out if the company is well positioned for future downstream work in the refining area.

Certainly, the on-road diesel programs are more behind us than in front of us.

Considerably more behind us.

We still have all of the non-road diesel yet to be done, and nobody has addressed aviation fuels and that will be a while before that gets addressed in terms of environmental considerations.

So, there is that business out there, and hydrocracking, hydrotreating projects are by no means significantly diminishing.

With respect to the major capacity expansions in both the U.S. and Europe, we're already a strong participant in a couple of those programs, and we expect to continue to be a strong participant in programs as we go forward.

A grass roots refinery in the middle of Russia someplace will not be a play for us.

Understood.

Thanks.

Okay, ladies and gentlemen, at this time, we have no further questions, and I will now turn back the call to Mr. Martin for closing comments.

We want to thank you all for dialing in.

I think we have a good story and a good set of prospects out therefor the future.

And we look forward to talking to you again soon.

Thanks, everybody.

This does conclude today's Jacobs fourth quarter earnings conference call.

At this time, all parties may now disconnect.