雅各布工程 (J) 2007 Q2 法說會逐字稿

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

This call is being recorded.

Today's presentation will be available for replay at 2:00 Eastern through May first at midnight.

You may access the replay by dialing 706-645-9291 and entering the pass code 4763899.

(OPERATOR INSTRUCTIONS).

There will also be a webcast of this teleconference, which can be accessed by logging onto www.jacobs.com.

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

After the speakers' remarks, there be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

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

Please go ahead.

Good morning.

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

Although such statements are based on management's current estimates and expectations and currently available competitive, financial and economic data, forward-looking statements are inherently uncertain, and involve risks and uncertainties that could cause the results of the Company to differ materially from what may be inferred from the forward-looking statements.

For a description of some of the factors which may occur that could cause or contribute to such differences, the Company requests that you read its most recent annual report on Form 10-K for the period ending September 30, 2006, including Item 1A, Risk Factors; Item 3, Legal Proceedings; and Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations Contained Therein; and the most recent Form 10-Q for the period ending December 31, 2006 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 release publicly any revisions or updates to any forward-looking statements, whether as a result of new information, future events or otherwise.

Now, I will turn it over to John Prosser, CFO, to discuss the quarter's results.

Thank you, Patty.

I'll go through the financial highlights, and then I will turn it over to Craig Martin to have a discussion of our strategies and business outlook.

Going to slide four, just to recap the quarter, we did complete our stock split on March 15, so all the earnings-per-share numbers have been adjusted to reflect that stock split.

Again, we had a very strong quarter, record EPS of $0.55, record earnings of $67.2 million, record backlog of $10.7 billion.

We continue to strengthen our balance sheet and have a very strong balance sheet.

Our net cash position, which is cash less bank debt, grew to $411.2 million.

As we noted in the press release, we have increased our guidance for fiscal year 2007 to a range of $2.10 to $2.25 per share.

Going to slide five, just tracking the earnings growth, particularly the more recent growth rates, looking at the bars underneath the graph, just gives you the five-year trailing compounded rate of growth.

Through the midyear, we're looking at a trailing five years of about 22.3%, which is above our historic rate of the 15%.

But as you can see from past years, there have been times when we have been closer to that 15%.

Going to the next slide, slide six, our backlog growth -- obviously this was a very good, strong backlog quarter, particularly focusing on Professional Services backlog.

It was up nicely, as was our total backlog, with backlog going to $10.7 billion, as I said earlier, and the Professional Services backlog moving up to $5.8 billion.

With that, I will now turn it over to Craig Martin to talk about the quarter and our outlook.

Thanks, John.

Good morning, everyone.

We are going to continue to talk about our growth approach and the things that are going to drive our growth.

We remain committed to our strategy to get us that sort of 15% [year-in and year-out] growth, and there are the five things that you see listed on slide seven that are going to drive that.

The first three, remaining committed to our unique business model focused on selected market diversity and growth through multi-domestic strategy, and we will talk about more on individual slides.

The last two, I thought I would just take a minute to talk about here.

We continue to focus on acquisitions as a growth strategy for the Company.

We completed the Edwards and Kelcey acquisition this month.

That adds another thousand to the Company in the Infrastructure business.

We are very positive about what that means for us.

We continue to look for additional acquisitions in both Infrastructure and in the Upstream world, as we think there's lots of good growth opportunities in both those markets.

So that will continue to be a contributor to our growth as we move forward.

We think we've got a pretty good list of opportunities out there, and in time, we'll continue to add to those acquisitions.

You will hear about those as we go.

We also believe that in order to be competitive in this marketplace, you have got to maintain control of your costs.

It's one of our big areas of focus right now.

We are in a good market; it's fairly robust.

Making our cost structure work in that marketplace is an advantage to us as we go into the market.

If, in the future, there's a downturn in that marketplace, keeping our cost structure down will be particularly important then.

Turning to slide eight, I want to take a couple of minutes to talk about our relationship-based business model.

Let me start first by talking about the industry model, which is on the right of that slide.

The industry model is one that's fairly transactional.

This pie chart doesn't describe any particular competitor; it's just sort of our idea of the average behavior of the industry.

But for the most part, our industry grew up, taking on projects on a competitive basis, generally lump sum turnkey, in relationships with customers, which were, to be kind, adversarial.

Price is always a big factor in those selections, and the industry works on that basis pretty much around the world.

There are other kinds of projects our competitors do and the industry does.

They do things called discrete projects.

These are projects for clients they know not maybe really well, but they know and they get repeat business from.

Generally some price competition involved in that as well, but not the lump sum turnkey construction risk.

Then everybody in the business has some preferred relationships.

Our approach is sort of the opposite, though, in terms of where our emphasis is.

We start with an emphasis on preferred relationships, and we get 75% to 80% of our business from customers that we work for day in and day out over the long term, some for as much as 50 years.

Our relationships there are based on a contractual mechanism that's usually long-term, in terms of a five-year basic ordering agreement, a supplier-of-choice agreement, a partnership agreement, an alliance agreement.

Our customers have all kinds of different names for it.

Usually, those are formal.

Sometimes, they are informal.

In almost all cases, the commercial terms are settled, and what determines whether or not we get the work is whether or not we have a team available with the skills that the customer believes they need.

It is a very good business model, very productive from our standpoint, in that those those long-term relationships let us serve the customers particularly well.

They let us eliminate the risks of serving the customer.

We understand what the customers' expectations are, and how to provide them with a uniquely superior customer value.

We also do some discrete projects.

That's really where our preferred relationships come from.

These are customers we work for with some frequency.

In fact, about 90% of our business is with customers we've worked for in the past year.

But these discrete projects may involve a little bit of price competition.

There will be generally more of the industry competitors involved, and that's where we find customers' behaviors and buying patterns will help us make them into preferred relationships down the road.

Then once in a while, we will do a transactional project, generally small and generally to meet our needs, film in a void in our work or a high-profit opportunity with low risk.

But we don't have any emphasis on that, and if that is zero in any given year, that's fine with us.

So that's how our model works.

Let me talk now a little bit about market diversity.

We are in a strong marketplace right now, in a number of markets.

What we have tried to do as a company is maintain enough diversity in the end markets we serve, so as to be relatively free from the dips and cycles of the various markets.

Let me kind of go through each one of these markets and give you a sense of where I think we are.

I'll start with the downstream side of the petroleum business, essentially refining.

It's a very robust business right now, around the world.

The forecast refining spending between now and, say, 2015 is $142 billion.

$27 billion of that will probably be spent in the US, $38 billion in the Middle East, $21 billion in Europe.

So it's a very robust market.

It's being driven by a number of factors.

It's being driven by capacity additions in a number of locations, particularly the Middle East and the US, where we're seeing a lot of activity with major expansions of refineries, major additions to refinery capacity.

It's also being driven by ongoing clean fuels work.

I know you've heard this story many times, but the clean fuels work is a work that will never die.

Right now, we're actively involved in the number of projects in the low-sulfur, non-road or off-road diesel, predominantly agricultural uses.

That will continue to drive projects for the next couple of years.

Then we have just gotten new legislation that requires the removal of benzene from gasoline, and that will continue to drive some projects as well.

So we see a lot of activity, both domestically in the US and in Europe in the refinery business, as well as growth opportunities for us in the Middle East.

Moving on to the oil and gas sector upstream, another good market for us.

You will recall that we serve that market predominantly in the North Sea and Gulf Coast and continental US and in Canada in the oil sands.

Let me start with Canada, because that's a very, very strong market right now.

There's something like $100 billion worth of identified projects up there.

[You are seeing up] most of those [pencil] at oil prices anywhere north of $40.

So we see a pretty robust market.

There are two or three really good competitors up there, but we all have established good relationships with customers.

There seems to be a lot of growth.

Costs of projects are going to stretch the spending out in Canada, but we actually think that's a good thing, in that we will be able to take advantage of that stretch-out and have a longer cycle in the oil sands.

The Gas business continues to grow for us, in terms of gas storage, gas compression, the work in the North Sea and secondary recovery.

So that business is quite good as well.

Then, of course, you will recall we made a little acquisition of an oil and gas company on the Gulf Coast in the first quarter of the year, and that acquisition's starting to produce business for us in the Gulf Coast offshore.

So we're continuing to see good growth in the Oil and Gas business, and we expect to continue to see that as we go forward.

We're also going to see activity in the Middle East, as we begin to establish our presence more firmly on the Oil and Gas side in the Middle East.

All in all, a big positive business right now.

Chemicals business also strong for us right now, a lot of activity in polymers and polymeric plastics.

That's an area where Jacobs has particular strengths and we continue to see a little growth.

There's not a boom market like the Oil and Gas Upstream or the Refining business right now, but it is more robust than it has been, and it looks to us like the spending is going to continue for the next couple of years.

On the Pulp and Paper, High-Tech Food and Consumer Products category -- that's sort of our catch-all.

Nothing really new to report there.

Those businesses are steady, but not a lot of growth.

Activity in Pulp and Paper is up a little bit, activity in the High-Tech -- meaning semiconductor -- is down a little bit, and Food and Consumer Products is pretty steady.

Moving on around to the Pharma/Bio sector, we again see a lot of activity in Pharma/Bio, driven by demand growth and driven by biotech and vaccines.

So those areas are keeping us very active in Pharma/Bio.

It looks to us like that business is going to be good for the long term, just because we all want more drugs.

So we're going to continue to see drivers in that industry as our populations age.

National/government businesses is two parts to that business, as you'll recall.

One part is research and development, test engineering, scientific and technical consulting.

That business is very active for us right now, got a lot of activity with NASA, in terms of three human space flight programs.

We've got a lot of work supporting the war fighter through our test and evaluation programs, and we continue to be one of the few providers of services in that business without any conflicts of interest, since we don't manufacture any hardware for the war fighter.

That gives us a very unique position, in terms of winning work in industry, and we continue to do quite well in that business.

The other side of that business is environmental restoration and cleanup, predominantly driven by nuclear and Department of Defense cleanup activity -- again, a good business right now, a lot of activity related to the Base Realignment and Closure Act in the US, and really terrific opportunities are coming up in the UK related to the nuclear cleanup in the UK.

You may recall we are about 15, 20 years behind in the UK, the the cleanup cycle in the US.

So there's a lot of opportunity for US contractors to go to the UK and bring the expertise we have here from having worked on this cleanup problem for a decade or more.

There's going to be something like GBP70 billion or about $150 billion spent in the UK on this cleanup; that's probably half of what will actually get spent.

We think we're very well-positioned to take advantage of that opportunity, both at what's called the Tier 1 level, which would be the prime contracts with the government, and at Tier 2 and Tier 3 levels, which will be subcontracts on these various sites.

We have a strong background in the area.

We have a huge presence in the UK.

We're very confident those things are going to turn into a good growth of business in nuclear cleanup in the UK.

Buildings business -- you'll recall the Buildings business for us is technical buildings.

It's things that are technically complex, where what's on the inside is more important than what's on the outside.

It's not office buildings and hotel highrises and apartment complexes.

It's facilities related to science, to healthcare, to criminal containment -- courts and jails -- that kind of building type, where there's a technical expertise required.

It's a good business for us right now, growing nicely.

In particular, the hospital segment of that business is very, very active.

For some of the same reasons that we see a lot of activity in Pharma/Bio, the push to improve the health system, to improve our hospitals is almost global in scope, and we're seeing lots of activity where it's important to us -- France, the UK, across Europe and all across the US.

The Buildings business is going to continue to be a good business, and we are excited about where we think it's going to go.

Then lastly, the Infrastructure business -- we have been telling you for some time that this is one of the biggest markets we are in, and that we think there's tremendous opportunity for growth, because it is highly fragmented.

We made the acquisition of Edwards and Kelcey here this month.

That will double our US Infrastructure business.

When you add that to what we have in Europe, we're beginning to get some serious scale in that business and some opportunity to really take some share.

So we are very excited about that.

It's predominantly roads and bridges, transportation-related infrastructure, although we see some opportunities in water and wastewater and the management of big programs, that sort of work, as well.

So overall, as we go through the markets, business is good.

It looks to us like it's going to stay good for the foreseeable future.

On to slide 10, our multi-domestic strategy.

We continue to be a company that focuses on being local to our customers.

So we want to have permanent presence where our customers have businesses, so we can support them day in and day out.

You'll recall one of the things that's important to us is the ability to serve a customer on small projects in their established assets that are on the ground in the local community.

We continue to look for opportunities to expand geographically in places that let us do that.

You can kind of see the contrast between where we were in 1994 and where we are today.

Right now, we continue to see the Middle East as a place where we probably want to get more assets on the ground and grow the business.

We think we can do that.

It will help diversify our business.

It will help stabilize the business and baseload it for the future.

So turning to slide 11, we have got to give you our commercial at the end here.

We think we do have a unique business model.

We're diversified in terms of markets, geographies and services in a market that's pretty solid.

We've got a great balance sheet, and we believe we can deliver 15% annual growth in EPS over the very long term.

So with that in mind, I'll turn it over to Matthew, and we'll take questions.

(OPERATOR INSTRUCTIONS).

Andy Kaplowitz.

My first question is around the UK nuclear opportunity.

I know you talked about it a little bit.

If we could get a little more detail on when you expect maybe the Magnox competition to happen?

You also, I noticed, pulled out of the Sellafield competition as a Tier 1 player, but I assume you can still do Tier 2 type work?

Yes.

Let me start with Magnox.

Magnox is in the process right now, making the initial competition.

This is the competition to own the PVC contract; I think that's the right phrase.

There appear to be two competitors for that work at the moment -- perhaps more, but we think there are only two, Jacobs and one other company.

The selection process is down to a fairly fine discussion of contract terms and pricing, and that should turn itself into a win or a loss for Jacobs sometime in the next 90 to 120 days.

Is that fair, John?

Okay.

We are reasonably excited about that.

We are sure that the competitor is also reasonably excited about that, so we'll see how that turns out.

He who shows up with the most money wins.

With respect to Sellafield, we look at Sellafield in terms of the complexity of the way in which the selection process was going to take place, the amount of time it would require.

It was pretty clear to us that trying to win Sellafield was going to be very, very costly and with very strong competition.

The win probability was pretty low.

When we looked at what they call Tier 1.5, Tier 2 and Tier 3 contracts, it became clear to us we were very well-positioned to take substantial work at Sellafield in that Tier 1.5 to Tier 3 level.

We felt like it was best to put our energies and efforts on that part of the business.

Sellafield is a huge program, and there will be lots of work there for us for a very long time.

Thanks, that's reasonable.

On Magnox, what is the size that we're talking about, again, of the potential contract?

Can you talk about that?

Well, it's 14 reactor sites, and it's split into two parts.

One of the challenges of evaluating it is determining what the future is.

Because one set of reactor sites -- the contract only last two years, roughly, and the other, it only lasts five.

Then you have to recompete.

So one of the challenges is predicting how much of that revenue you'll see over what period of time.

The other challenge is that the NDA is out of money, in some ways.

They get their money for this cleanup from revenues from these reactors and from fuel reprocessing, that sort of thing.

So it's difficult also to predict precisely what the fee flow is going to be.

That's one of the things that makes the decision to chase this work and how to price it very difficult.

I understand.

Last quarter, you had mentioned that -- you gave sort of a rough estimate of how many employees you might want to hire in 2007; you said 4,500.

Does that number still seem right to you, or are the markets more robust than you expected and maybe you could do more than that?

Just wondering about that.

I think the 4,500 is still in the right range.

We might get to 5,000 or thereabouts.

We are on track for about 5,000, if you look at our numbers on a year-to-date basis.

But it's not going to vary widely from that.

It's not going to be some number like 8,000 or 10,000 or some double-the-growth kind of number.

Steven Fisher.

Just a couple clarifications first.

You had some nice gross margin improvement in the quarter.

Could you just comment how much of that is from continued benefit from engineer wage inflation, or how much of it was a factor from India sourcing of engineers?

If you could just comment on that a little bit?

Well, we continue to get the benefits of the wage inflation.

We also continue to get the benefits of just the growth factor and the leverage we get off of controlling our G&A's and keeping our G&A growth below our gross margin growth.

That in itself will compound and get you a little bit better improving margin, gross margin or, I should say, operating margin.

So we're continuing to focus on that.

As Craig said, it's a very integral part of our heart and soul in continuing to control our costs.

In a growing market like this, we are getting the benefits of greater operation margins or gross margins, as far as just volume and then being able to get some some benefits because we can keep control on our G&A's.

So it was a modest growth.

There should be some combination of that.

We will continue to see, in this kind of a market, modest little incremental growth, probably, quarter to quarter, as long as we do our job and hold those G&A's growth down.

India is also making a contribution, because we're able to ship more work to India, and we're actually able to get a higher price for it in today's market than we have historically, partly because of the wage inflation in the local marketplace.

So it's also a contributor to why things are going as well as they are.

On Edwards and Kelcey, I'm wondering if you could comment when you might expect that to start being visibly accretive, and I'm wondering if any of your higher guidance was related to that acquisition?

Particularly with current accounting principles and such, it takes a while to get a company significantly accretive.

Edwards and Kelcey is a very nice operation, a profitable operation.

But as we bring it in and with the way you have to treat purchase price accounting, and paying interest on the debt as we pay that down, they will be only slightly accretive over the first 12 to 18 months.

We would expect, actually, to see better accretion through the growth that we can get from them than what they actually bring in the door to begin with.

So they really are not a significant factor in the guidance for this year.

Richard Paget, Morgan Joseph.

I wondered if you could talk about the US Infrastructure market a little bit.

I guess in the beginning of the year, there was a little bit of uncertainty about the SAFETEA-LU money, whether it would stay at 2006 levels or potentially -- or go to the 2007 levels like it was supposed to.

It seems, looking at some of the data, that in February, awards were down year over year, just based on state and local governments didn't really know what the ceiling was going to be.

Did you guys experience any of that, and have you seen the bidding activity pick back up?

Well, we didn't experience any particular downturn.

In fact, the business has been very robust for us, in terms of sales and opportunity growth.

Remember that the federal numbers influenced the total in the US much less significantly than they once did, because of so many state, county and municipal programs that have really big numbers attached to them.

You may recall talking about Southern California last quarterly conference call.

But just here in Southern California alone, every county in Southern California has a sales tax measure for transportation that is in the -- if not $500 million, $1 billion category.

So you get four or five counties together that suddenly decide they are going to drop $5 billion in the infrastructure marketplace, add that to our Governor here, the Governator's $200 billion and SAFETEA-LU, there's just a huge amount of money available for projects.

So you would generally say that the funding is still pretty strong and you didn't see any pause whatsoever?

We certainly didn't see it.

I'm not saying the industry might not have seen something like that, but if it was out there, we just blew right through it.

You also have to remember that we are still a relatively small player, and it is a very fragmented industry.

So we continue to take market share, and that's as much of a growth game as a growing total market level for us.

Given that comment with Edwards and Kelcey doubling your US presence, do you have more, I guess, room for acquisitions in that area?

Oh, absolutely.

I would expect over the next few years, we will do two or three more significant acquisitions or twice that many of smaller acquisitions.

There's still a lot of geography where we would like a stronger presence.

It's an industry that has not historically gotten the benefit of larger offices, and so it struggles with being as cost-effective as it could be.

The difference between a typical civil engineering 10-person office and a Jacobs 200-person office, in terms of profitability, is very significant.

So we think there's a lot of leverage to be had with scale in the business.

Archna Yelamanchili.

This is Archna Yelamanchili, in for Jamie Cook today.

I know you guys don't give specific backlog guidance, but considering your solid backlog growth this quarter in Technical and Professional Services, I was just wondering if you had a reason (technical difficulty) your total backlog growth will accelerate going forward?

I'll take that question.

Basically, the backlog was -- it was a good quarter, no matter how you calc; it was the second-best quarter we've had, I believe.

I don't think we're going to see particular acceleration in backlog growth.

The way it looks right now, we're going to see very steady and solid backlog growth, certainly enough to feed the revenue streams.

But I don't think we're in any asymptomatic curve or anything like that.

I think we're just going to see good, solid backlog growth through the rest of the year and on into 2008.

My second question is about your Upstream and Downstream Oil and Gas.

Last quarter, I think you mentioned that your split was about 60/40.

I was wondering if that's what is [similar] this quarter or if you have been concentrating more on Upstream now and what your expectations are for the remainder of the year?

In terms of the ratio of the two?

Yes.

Yes, I think what you'll see for the remainder of the year is pretty consistent with where we are now.

So it's about 60/40 today, and I think it will continue to be in that range, or maybe even a little more biased toward Downstream, over the next few quarters.

Our growth in the Upstream business will, of necessity, be good and steady growth.

But there is a strong market in refining right now.

I don't think Oil and Gas will overwhelm it in the near term.

Steven Fisher.

The decline in the field services revenues -- I'm wondering if you could just talk about what that was a function of.

Are you seeing construction project delays?

No.

A lot of that is very timing-related.

There are seasons when we do a lot of turnaround work, for example, and that drives the revenue up significantly in that quarter.

There are other seasons when we don't.

We have also got some clean fuels work coming to completion, and some work that hasn't yet started at a significant level in the field, and all those things conspire to make the Field Services number a little bumpy.

So nothing we should specifically extrapolate forward?

As a matter of fact, I'm very encouraged about where our Field Services backlog and revenue will be going over the next few quarters.

Just broadly, on the topic of construction project delays and rising costs, are you seeing that in any particular parts of your business?

Where is it more or less than others?

Well, we're seeing rising construction costs across the whole realm of our business, but in particular, Canada has been affected simply because of the volume of work and the logistics of working in remote environments.

There has been escalation in costs in the UK and mainland Europe, simply because of a shortage of, in particular, craft labor.

A lot of the work now done in Western Europe and the UK is done with Eastern Europe European labor sources.

There's a still a backlash of the Katrina affect affecting the US Gulf Coast, in terms of the availability of construction labor.

With the large spend in industrial projects, it exacerbates the situation.

But you mentioned earlier that in the oil sands, anyway, it will extend out the cycle.

It doesn't sound like you are seeing anything from this trend or dynamic that will really throw off the cycle.

Is that right?

Is that fair to say?

Yes, I think that's fair to say.

I think these cost issues across the globe are certainly affecting clients' willingness to continue to commit additional projects.

But the backlog of work that makes good financial sense from a customer's perspective is huge.

As a result, what we're seeing is -- what I think we're going to see is a longer cycle, a longer peak, maybe not as sharp a peak as we might have imagined a couple years ago, but a longer peak than what we've seen in the past.

I noticed that you booked (inaudible) chemical contracts in Saudi Arabia in the quarter.

Can you characterize your customers' businesses there?

How sizable are these players in that market?

Are these relationships where you could expect to see significantly more business in the future?

Yes.

The customers in both cases are customers that we know reasonably well and have done some business with over the years.

One of them has been a company with whom we have done business now for almost 20 years on a front-end sort of conceptual design basis.

Now we're working into bigger projects with them.

So those things are things we will be able to build on.

But clearly, the big dog in the Middle East is Aramco.

We continue to work hard to develop our relationship with Aramco and build on the work that we already have.

Andy Kaplowitz.

A quick question on currency.

Have you noticed any effect, or is there any effect on the numbers that we see in the quarter from currency?

It looks like there could be [a positive], but you tell me.

We do have about a third of our business that is outside the US.

You've got to remember, we operate in the local jurisdictions, so we don't get impacted by the revenue, because the revenue is offset by the cost.

So there has been some positive benefit from currency, but it's not significant.

It does affect our gross (technical difficulty) like in this last quarter, I think we had -- the euro was fairly stable, the pound was up and the Canadian dollar was down a little bit.

So you have (technical difficulty) and those are the three major currencies that we deal in and where we have the major operations with the Company.

John, I think you alluded to margins sequentially continuing to go up modestly; I think that's what you said.

I guess my question is really around pricing.

I know that you guys don't want to sort of say, hey, pricing is great, what have you.

But are the end markets strong enough now where, in general, you're seeing some pricing that you haven't seen before, say six months ago?

I'd say that certainly the markets are better, and to the extent you're in the process of negotiating an agreement, you can probably get a little margin improvement.

But the big majority of what we're getting is scale-related, it's labor-escalation-related and not so much pure pricing power.

Remember that we're at a little bit of a disadvantage to our competition here, and that we have long-term contracts.

So our opportunities to push pricing with some of our customers don't come along every quarter or every project; they come along every five years.

That's why we continue to believe that margin expansion for us will be -- I guess modest is an okay word.

Very modest might even be better, just by the nature of that business.

As these contracts come up, we are getting a little bit of pricing power, but it's not very significant.

Remember that we're dealing with very sophisticated buyers.

We're talking about companies like Exxon with hundreds of billions of revenue in a quarter -- I guess, $800 billion in a quarter -- and huge, huge resources in terms of procurement staff and ability to negotiate -- very tough negotiators.

So it's a still a commodity business in some senses, in that you [have] very sophisticated owners and lots of service providers.

I understand.

I guess Steven might have alluded to it before.

Your earnings guidance is up 5% for the year, about, at the midpoint of the range.

Along the lines of this pricing and these economies that you're getting on the G&A, when I look at that 5% rise, is it fair to say that maybe half of it comes from just better margins and half of it comes from better sales?

Is that the right way to think about it, or do we not want to get that granular?

Well, I don't think of it that way, so I can't get that granular for you.

What we are seeing in terms of why we think the numbers are going to be a little better as we look forward is looking at the pipeline of opportunities, in terms of what do we think the sales flow will be like; the degree to which we're going to get the billable hours and the work that we think we're going to get in the quarter; and than what we think margins and G&A's are going to be to support that.

It's a combination of all those things that put us where we are, in terms of raising our guidance a little bit.

Min Cho.

This is Min Cho for Alex Rygiel at Friedman Billings.

In terms of the backlog, is it safe to assume that the backlog continues to lengthen, given construction cost [craves] and the pushout of certain larger projects?

I know that usually about 60% to 65% of the backlog is recognized over the next 12 months or so.

Do you see that percentage coming down?

This is Noel again, since Craig's delegated all these backlog questions to me.

The answer is probably not.

Looking ahead in the rolling forecast, we are still 60%, 65% backlog.

If these things are stretching out, they typically probably don't get into backlog as early.

So I would say the percentages we typically operated on are not changing.

You have no further questions at this time.

Okay.

I guess that wraps it up.

We had a good quarter.

We've got great backlog.

We're looking forward to some good quarters out in front of us.

Thank you all for joining us.

Matthew, it's back to you.

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