雅各布工程 (J) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jacobs Engineering Group third quarter 2007 earnings conference call.

I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and answer-session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

The replay can be accessed by dialing 617-801-6888 toll or 888-286-8010, toll-free, and enter the pass code 69812422.

The replay will be available two hours after the call's conclusion and remain accessible for seven days.

At this time, I will turn the presentation over to Patty Bruner.

Please proceed, ma'am.

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 March 31, 2007 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.

And now I'll turn it over to John Prosser, CFO, to discuss the financial results.

Thank you, Patty.

I'll go over the financial highlights for the quarter and then I'll turn it over to Craig Martin, our CEO, for a discussion of our general business strategies and business outlook.

If you go to Slide 4 of the web presentation, you see the results, the highlights for the quarter.

These are also included in our earnings release that went out last night.

Again, it was a very strong quarter.

We had a record EPS of $0.61 cents, record earnings of $74.8 million, backlog reached a record $11 billion.

Our balance sheet continues to be strong and our net cash position position balance sits right at $407 million.

We are increasing our guidance and have increased our guidance for the balance of 2007 so that the outlook for the year is a range of $2.20 to $2.35 per share.

Turning to Slide 5, looking at the history of our growth, we talked about a long-term growth pattern of 15%.

What this shows in the bars under the graph is the trailing five-year compounded annual growth rate and, as you can see, over the last few years, couple years, we've gone above that 15% track and currently over the last five years are running at about 23%.

So very strong performance consistently over the last few years.

Next slide on Slide 6, our backlog, again, it's up, it's up about 17% year-over-year, up 3% for the quarter, up in both field services and professional services.

We highlight the professional services here.

They continue to grow.

They are up over almost 23% for the year-over-year and up slightly when you look at it quarter-over-quarter.

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

Thank you, John, and good morning, everyone.

I'm on Slide 7 now.

Our strategy is to maintain 15% growth on a compound basis year in and year out and you'll see that the bullets haven't changed much from the last time we looked at that slide.

I'll talk more specifically about the first three bullets there, our business model, our market diversity and our multi-domestic strategy.

I don't have separate slides for the last two bullets, so let me just talk about those for a moment now.

We continue to be focused on acquisitions.

Our areas of interest have not changed.

It's been a very successful part of our business up to now.

We get about a third of our growth out of acquisitions over time.

We're continuing to focus on acquisitions in the upstream area and in the infrastructure business.

The market out there is good and we think there are lots of good opportunities for additional growth through acquisitions.

We also remain focused on keeping our costs down.

We're particularly concerned about the possibility that this bubble will end.

In fact, we know it will end someday and we want to be well positioned in terms of not having added a bunch of structural costs we can't shed, so that we can continue to thrive and prosper in the downcycle just as well as we have in the up cycle.

Now, I'm moving on to Slide 8.

This is our relationship-based business model discussion.

I want to start with the industry model, which is on the right.

For the most part, our industry is a transactional industry.

It takes advantage of good times reasonably well, but it suffers a little in bad times.

The issues tend to be far away projects, big projects, lump sum turn key, those kinds of activities, that drive the variability in the industry model.

It is a business where the relationships with the customers tend to be better in the up cycle than in the down cycle, but overall it's still a highly transactional industry model.

Our model remains quite different from that.

We continue to be very focused on preferred relationships, long-term relationships with clients that endure year in and year out.

We still get about 80% of our business from these preferred relationships.

We get another 20% of our business or a little less from what we call discrete projects.

Those are customers we know and have worked for in the past.

But where we don't have an established preferred relationship.

And then from time to time, we'll find a transactional project or two in our inventory.

It's fairly rare, usually done when there's a particular opportunity or a particular need in the system to keep some people busy, something like that.

As you can imagine right now there, are very little transactional work in our business today, because the industry model isn't, is not, not driving us at all in that direction.

So it's a good time to be in the preferred relationships business.

There's a lot of good business out there.

Let's move on to Slide 9 and I'll talk a little bit about the markets.

Let me start with the downstream part of our oil and gas business.

Very robust business for us right now, continuing to be quite a lot of activity.

In the U.S.

we're seeing continuing work in non-road diesel programs to remove sulphur.

We're seeing a lot of activity in capacity expansions, so the business is very, very good in the U.S.

We're also seeing a lot of activity in Northern Europe.

Some of it has to do with conversion of -- from gasoline to diesel.

There's also some environmental work, and we're seeing a fair amount of new projects on the screen in the business in Northern Europe.

Singapore is also pretty active.

It's the third largest refining center in the world and we, over a period of few years here, have become a major player in Singapore.

We're seeing a good flow of business in that part of the world and then we're starting to see good activity in the Middle East for us.

On some of what we would characterize as the smaller projects, not the $10 billion stuff, but the $1 billion stuff, but it's a good place for to us be right now and a good growth opportunity for us as we expand.

On the upstream side of the oil and gas business, things are still very active in the oil sand, that's one of the big places we get upstream business.

It's also very active in onshore upstream in the U.S.

We're seeing a fair amount of activity in recovery of oil in the North Sea and in gas storage and gas compression, both in the U.K.

and in Northern Europe.

We're expanding there as well in the Middle East.

It's an active area for us in terms of growth.

We still have a very small market share in the Middle East, but there's lots of money being spent and looks like it's going to continue to be a lot of money spent there as well.

Moving on to chemicals, this business has finally started to show some real life.

You may have noticed we a lot off releases of new projects -- special releases for new projects in the last quarter.

There's more activity in the chemicals business right now than we've seen in a very long time.

It's not as robust as either the upstream or downstream oil and gas business, but it is a good solid business right now and there seems to be a lot of activity, particularly in polymeric plastics, PET, things like that.

So it looks like that's going to continue to be a good business as we go forward.

Pulp and paper, high tech, food and consumer products, not much news there.

Good, steady businesses, not any substantial growth that we see, should be able to continue to work at about the same levels that we have in the last couple quarters.

So it will be a good business, but not a source of significant growth.

Moving around the clock to the pharma/bio business, it's very active.

We continue to see a lot of projects.

The projects tend to be a little small in size than they have been in the recent past, but there's still lots of activity and we're particularly well positioned for the activity that's out there.

There's also a lot of work in biotech and in vaccines, and that plays to our strengths as well.

So this business continues to be one that's driven by factors related to drug discovery more than anything else, and we see a lot of activity from several good customers in the arena.

As I say, particularly in biotech and vaccines.

Moving around the clock to national governments, remember, this is really two businesses.

One side of the business is research and develop, test engineering, scientific and technical services to government customers, a very good business for us, one where we're fairly uniquely positioned in that we do not have any organizational conflicts of interest as compared to the big defense players.

So the people with whom we compete, we tend to be at an advantage just from the position we have in the marketplace, because we're not a supplier of equipment.

A lot of these contracts require that you find a way to be free of that conflict in order to be successful.

We also have a very, very strong track record in that industry.

Our past performance is considered to be one of the best of any of the suppliers and that's helping us to grow quite steadily in the research and development side of national governments business.

The other half of the business on national governments is environmental cleanup.

It has been a big business for us in the United States for a lot of years.

It continues to be a good business here, although the U.S.

environmental cleanup market is not growing and so the U.S.

market today is more of a market share gain than it is a growth gain.

What is interesting is the growth in the U.K.

Many of have you heard me talk about the fact the U.K.

is 15 to 20 years behind the U.S.

in nuclear cleanup and there is a brand new program there to catch up, so to speak.

We expect to see something like $300 billion spent at Tier 1 and another $300 billion spent at Tier 2 and Tier 3, which should result in a very robust market over the next 15 to 20 years in the U.K.

and we're actively participating in that market.

We've already announce add couple of significant wins.

Moving on around to buildings business, you recall this is a technical buildings business for us.

We don't do apartment houses or hotels or high-rise office buildings.

Our business tends to be technically complicated buildings, hospitals, courthouses, jails, that sort of thing.

And this business is very good around the globe, particularly the healthcare aspects of the business are quite strong right now.

We're seeing a lot of activity in the U.S., in Europe, in the U.K.

and Ireland and we're very well positioned to take advantage of the boom in the buildings business, particularly as I say, these technical building types.

We're also seeing a lot of activity in what I -- in science facilities, high energy physics, that sort of thing.

Another area of expertise for the company that's a very positive area right now.

And then last, but not least is infrastructure.

A business that we see continuing to grow steadily for a decade or more.

Lots of opportunity there because infrastructure, everywhere I go at least is in desperate need of expansion, improvement, repair, both new facilities and upgrades of existing facilities on the infrastructure side.

Remember, for us, this is mostly transportation infrastructure and so we're worrying more about the rail and road and bridge kind of end of the business than any other part, but we see lots of growth opportunities in that business as we move forward.

So overall, our markets remain pretty robust.

If you look at the nine slices of the pie here, we would tell you that eight of those slices have some good growth opportunities in them and we feel pretty good about where things are in the marketplace right now.

Moving on to Slide 10, we continue to focus on being where our clients need to us be and so our geographic focus is where our clients are making investments, or where we have the opportunity to develop new long-term preferred relationships.

There's nothing really new about this chart in terms of where we are, and there aren't any real plans to add much in the way of new about where we are, but we think we're in the right places to support our customers and their investments as a local supplier, as well as a global provider.

And that combination really helps us on this preferred relationship strategy.

We know how to get the work done in France and we know how to do big pharmaceutical plants anywhere in the world.

The combination is particularly effective in winning new work.

So I'll move on to Slide 11, this is our commercial.

We think we have a unique business model that works well both in good times and bad.

We have a diversified set of markets, geographies and services that we provide.

Our balance sheet's very strong and we continue to provide 15% or better annual EPS growth and think we can continue to do that well into the future.

With that, I will turn it over for questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Jamie Cook representing Credit Suisse.

Please proceed.

Hey, good morning, and congratulations.

Good morning, Jamie.

Thank you.

First question, just, John, I guess I'll ask you first, on the guidance for the full year, I understand you raised the guidance $0.10 on the low and the high end, but that implies a pretty wide range for the fourth quarter, a lot larger than usual.

So I'm just sort of trying to get an idea of what are the factors contributing to the wide range of guidance, what would get you to the high end versus the low end?

Well, we're not going to give guidance within guidance, you know that.

I think the thinking in a wider range is this is a volatile market.

We've been -- we've seen good margin expansion over the last few quarters, on the other hand, we also have seen some flat revenues, so I think there's some things that are playing both ways.

But I think more importantly is that while we feel compelled to give guidance to you folks, we don't feel compelled to give narrow guidance and you guys have to have some thought patterns and input into what you're putting out.

So you're telling us we need to do our job, John?

I guess -- all right.

Then let me ask the question on the third quarter slightly differently.

I mean your revenue growth was only up about 8%, which was below my assumptions.

Now, that can be distorted by factors et cetera.

And the margins were much higher.

I mean I think your EBITDA margins were 5.6.

Your net income margins were 3.6.

I haven't seen numbers like that in the past 12 years, so was there anything unusual in the third quarter?

Well, our professional services revenue continued to grow quarter-over-quarter and certainly year-over-year.

There has been a slowdown in the construction or field services activities, as we've come off, the activities have peaked kind of toward the end of last year in some of the clean fuels and some of the other large construction jobs, and we just haven't seen a lot of the front end work that we're working on now in both the upstream and downstream refining and even some of the chemical areas hasn't moved out into the field yet to any great extent.

So you're seeing a lull in the construction activities, which tend to maybe be a little bit more robust on the top line.

We do continue to see the backlog growing modestly in the construction activities and we still think that as we move into 2008, we'll see that construction activity picking up on some large projects as they move into the field.

The margin aspect continues to be the same story that we've had.

We're getting some modest price increases just because of the supply and demand activities in the marketplace, but we're also continuing to see wage escalation and with our multiplier effect, we get that benefit, the benefits of having more overtime and people working longer work weeks and such does help the margins because we can add hours and add billable revenue without adding a lot of the G&A.

But as we see the mix change it, does have an impact on the gross margins and also the G&A per revenue, simply because there is more G&A that goes along with the professional services than with the field services.

So it's really a combination of those and I think that, you know, we'll continue to see the professional services grow modestly, but I think as we go into next year, we'll see a much stronger growth on the field services side.

Okay, and then just my last question, I guess, Craig, to you sort of strategically, as you look at sort of the growth opportunities, I mean I think on the downstream side, most people would agree that we're probably in the mid innings of a ball game, probably in the earlier innings on upstream.

And, you know, power -- it appears to be sort of the next wave of growth.

So any change in your thoughts on power and anything that you can do to be more aggressive to increase sort of your participation on the upstream side in oil and gas?

Let me take the power part of the question first.

And we continue to watch the power market pretty closely.

We have some history in the business here and there and some of that is already starting to turn into opportunities for us that make sense, but I think we're still a little bit circumspect about the industry as a whole and as I think we have mentioned before, if we decide to get into power in a very big way, we would do that through an acquisition.

So where we sit today is we're keeping our eyes open.

We're certainly out talking with people about the business and what the opportunities might be.

We're participating in, in the business more in the European theater than here in the U.S., because seems to be a little more friendly, frankly.

And so we'll just have to see how that part unfolds.

But it appears like you're sort of warming up to potentially some sort of opportunity on the new generation side?

I --

I mean, or what segment within power would you be, I mean is it environmental retro fit, is it new gen, where in power would you be looking?

It would be new generation.

Okay, and I'm assuming -- would it be more nuke or coal?

Probably more gas and coal than nuke at this stage.

Okay.

And then last on the upstream side and then I'll get back in queue.

On the upstream side, we're getting pretty aggressive growth out of that business already in terms of prospects and in terms of some of the project types that we seem to be getting the front ends for.

I think we're going to be participating in that increasingly successfully over the next couple, three or four quarters.

In terms of being meaningful, depends on how the rest of the business grows.

We're trying to keep the growth balanced across all our markets.

We do continue to look for the right kinds of acquisitions to add to our capability there, and, you those things happen when they happen.

But we think there's a good growth opportunity for us in the upstream side for a long time to come.

And then, Craig, just sorry, last on power again, so I'm assuming you would be looking at players in Europe on the coal and the gas side, is that the way I should be thinking about it and then potentially bringing --

No, I wouldn't say that one way or the other.

We're looking still -- in terms of something like an acquisition, we would still be looking very broadly.

Okay.

And we're very, very early in that kind of a game, nothing to get excited about from that standpoint.

All right.

I'll keep looking.

Thanks, guys.

Bye.

From the line of Stifel Nicolaus with the next question, we have Barry Bannister.

Please proceed.

Hi, guys.

How are you?

Good, Barry.

Good morning.

Just a question, if I look at the March 31 pie charting and compare it to your June pie chart, you made the comment that upstream was strong and yet it fell from 14 to 11% of sales.

You didn't really highlight the downstream, but it rose from 21 to 25.

Seems incongruous with your M&A goals and the statements.

Is that seasonality, or what would account for that?

Well, actually what happened is, we've only been breaking out that upstream and downstream for the last couple of quarters and what we found is that we have been including some downstream numbers in the upstream numbers, so this number is more accurate than what we've been showing the last couple quarters.

It just was a reclass between the two categories.

Got you.

And when you talk about your shift in the mix, which is greatly affected the difference between gross and SG&A, into TPS, should we think of this market as for you at least more, more permanently shifted to TPS, given that the it's high margin, you do it well, and less interest in just low margin construction?

Or is it inevitable that you will progress into construction as a natural segue from the TPS work you're doing?

Barry, that's a market-specific kind of discussion.

If you look at the markets that are the private sector process markets, so that would be downstream and upstream oil and gas, that would be chemicals, and that would be pharmaceuticals.

Those businesses, we would expect and plan to have significant follow-on construction.

It's a good business for us from that standpoint.

The construction work is the kind of work we like to do, and it can be done with a balanced perspective on risk.

If you look at the businesses that are the public sector businesses, there the contracting strategy for construction is just not good, and frankly, there's lots of opportunities to lose lots of money on the construction side.

So what I think you're seeing in our business is as we grow businesses like infrastructure, you will see that growing almost exclusively in the technical professional services arena.

As we grow businesses like oil and gas, that will be a blend of professional services and field services.

That's a very interesting strategy.

New power generation is very transactional and has a large fixed component.

Why would that be of interest to Jacobs?

Unless it's on the T&D side in different kinds of work?

Barry, to the extent it stays highly transactional and very much a lump sum turnkey business, we're not interested.

What we are finding is opportunities to support customers who are in the power business, both in their new build and in their maintenance and small capital activity that isn't that way.

And that's why I was explaining to Jamie earlier.

We're looking at that business, trying to understand what's going on, looking to see if there is a shift in the buyer profile, and if there is one, and if we can take advantage of it, then you'll see us expand into power.

But if it stays lump sum turnkey, highly transactional, it will stay a business that we don't participate in.

There are a lot of in power that are in the design and consultant fee side and not involved in the construction.

So presumably if you acquired your way into that, you might be looking at that type of firm as opposed to just a pure heavy field constructor of reactors and coal-fired power plants.

Yes, I think, Barry, our approach towards acquisitions is always to look at companies whose profiles are similar to ours, whose cultures would be compatible with ours.

Being a heavy duty hard money contractor is a culture that we've proved by a bad acquisition 20 years ago, doesn't work for us.

And so we're very -- we would only be interested frankly in the sorts of companies that you describe, where their business model is close enough to compatible that they could be fully converted to a relationship-based approach.

And I don't think that would be a hard money field construction company.

Yes, I missed that one from 20 years ago.

I have the annual report, though.

I'm going to go look it up.

Go look it up.

It's not a secret.

Bye.

From the line of UBS with the next question, we have Stephen Fisher.

Please proceed.

Hi, good morning.

Good morning.

Your SG&A as a percent of sales was up a little over 100 basis points from last year to about 9.6% of sales.

Have you added anything structural in the quarter that's not likely to repeat in the coming quarters and where do you see that 9.6% going over the next year?

Well, I -- we haven't added anything structural as we've increased our size, we do continue to increase space, cost and such like that, and add staff and that has a certain amount of, as we grow our professional staff, we also grow some of the support services and such like that.

But we think it's been, we've been able to maintain a growth rate that's in line with the rest of our growth.

Compared to last year, the mix between professional services and construction was almost, was almost flipped from where we are today, where we're 55% professional services versus 45% construction, about a year ago we were at 45% professional services and 55% construction.

So that in itself has an impact on the percentages relationships, but we have been trying to, and focusing a lot on keeping our costs down and not building in structural things into our overhead that we won't be able to shed.

Now, space and things like that, you know, you have to be very careful how you add it and we have added space in a number of our places, locations, and we're consolidating offices in a couple locations.

So hopefully we'll be positioned even as we move forward and if this market, individual markets, regions, soften we will be able to react to that favorably.

So as you -- as we progress through the cycle here, might you expect that 9.6% to flatten out or maybe decline?

Well, certainly if we, if we go forward into next year and see the construction activity picking up, which we anticipate and see that balance narrow more around 50/50 or even getting back to where it was a year or two ago, you'll see the percentage relationships coming down.

Okay, great.

And then the reason for the slower pace in field services, are the projects that you have in queue, are they requiring more extensive up front work due to complexity, or is it due to project delays over costs and labor availability?

It's more the former than the latter.

What -- we're working on a lot of programs that are large compared to historical experience in the industry, and some of these programs have very long front ends, very long design cycles compared to the smaller projects of a few years ago, and that certainly has some impact on why the field services revenue seems to be a little slower incoming than we might all have expected.

Some of these projects just don't get -- they take a year just to do the front end work.

Right.

And in times past, that might have been four months rather than a year.

So that certainly is contributing somewhat to what's going on.

With respect to the challenges of getting materials and equipment and people to do the work, those challenges really don't seem to be driving either our backlog or our revenue issues as much, but they are also causing some customers to drag out the duration of some of their projects, and to commit to field services and construction-related costs later in the cycle.

And so that may be contributing as well.

So is that, what you just described, is that causing delays in putting work into backlog, or is it actually causing delays in projects once they are actually started?

They, there's not a lot of delays in projects once they are started other than sometimes you go through a reengineering cycle because the budgets are higher than the customer wants.

So you do get some delays in projects as you try to design to cost, so to speak.

But for the most part, what the costs are doing is flattening and widening the whole cycle in the industry.

There's more work than could be done than there are people to do it, so customers are spreading their work load out over a longer period of time and it's actually keeping the peak from being as sharp as it might have otherwise might have been.

Got you.

Great.

Thanks very much.

Great quarter.

Thank you.

Representing Merrill Lynch, the next question comes from Andrew Obin.

Please proceed.

Yes, good morning.

Good morning, Andrew.

Just a question in terms of, given what you highlighted about the structure of the backlog, how much visibility for backlog growth do you have over the next 18 to 24 months based on the -- A, based on the existing work and B, based on conversations with your customers?

Well, certainly, as we talk about these projects that we're already doing the engineering on, we have good visibility on those, and would expect those to be -- those are the things we talked about that will be coming in and worked off into the '08/'09 timeframe.

What we are seeing, as Craig kind of mentioned, that even as they are releasing some of the field services backlog, procurement, things like that, they aren't necessarily releasing it in one great big lump.

They are releasing it in stages as they get through the design phase and into identifying long lead items and things like that.

They might release some of the procurement before they have released the whole thing.

So a large project may come in in smaller increments than what would have maybe historically been awarded as one full project.

So you're seeing a little bit of that as well and I think at least from what we're hearing from our customers, there isn't, a reluctance or a concern -- that there's going to be continued capital spending and again, as Craig alluded to, they are stretching out some of their plans over a longer cycle rather than trying to force everything through and get it all done in the next say 12 to 24 months.

They are looking at a longer-term cycle that will hopefully keep this activity going a little longer than what maybe would have happened in a more traditional cycle.

Remember also, Andrew, that some of what goes into backlog is a function of how the client decides to, for example, procure certain things.

And even on a big job, you might have one job where $400 million goes into backlog for procurement of equipment and on the other, the parallel job, the customer decides to put that on their paper and nothing goes into backlog for procurement of equipment.

And so that, that does give a little bit of uncertainty to the outward look because clients can frequently do that.

You may recall a couple years ago we had to take $160 million or so out of backlog because a client changed their mind after we put the procurement in backlog.

Okay.

And just could you comment on the competitive environment?

Is the capacity in the industry still pretty tight or do you see other firms adding capacity and bidding a little bit more aggressively?

Are you seeing any of that?

We're certainly not seeing people bidding more aggressively.

For the most part, it is a pretty good market from that standpoint.

We don't see a lot of competitors on any of the projects where we have competition at all.

We see, still see quite a few sole source awards, not unusual for us, because of our relationship model.

But we're seeing other sole source awards in the industry that historically maybe we wouldn't have seen just because people are trying to get capacity from our competitors or from us in some cases.

So the competitive marketplace has made frankly the whole business a little more benign and a little less competitive than it might have been at a different time in the cycle.

Great, thank you very much.

And with Ferris Baker Watts, you have a question from Richard Rossi.

Good morning, everybody.

Good morning.

You obviously have covered most of my questions, but looking at the competitive marketplace, especially overseas, engineering talent, I wonder if you can spend a minute or two, and just sort of give us a picture of how that might have changed over the last year, year and a half.

Is it as tight overseas in terms of getting engineers as it is in the U.S.?

You know, the demand is kind of market-specific and different drivers are factors, depending on where you are.

Clearly engineering talent, while it's not easy to hire people, we and most of our main competitors are able to get the talent we need.

We've added about 5,000 people so far this year, and while that takes a lot of work to do that, it's feasible.

So I think the tightness is more a function of how hard it is than the lack of availability.

There are a lot of people coming back into the industry, a lot of the smaller players are losing staff to bigger players, but I think for the most part, we're able to get it done.

If you want to look at it from a geographic point of view, there's clearly a relatively tightness of supply in the U.S.

and in Canada.

In Northern Europe, the issues are a little different.

Mobility of individuals between companies is low, so the issues aren't the same there.

As you get into the rest of the world, you know, South America has become a great source of recruits, particularly in places like Venezuela, where a lot of engineers are being driven out of the country.

We're seeing a fair amount of ability to recruit in the East.

Our Singapore operation has almost doubled in size in the last 12 months.

India has become challenging, mostly in terms of wage escalation, but again, we've been able to almost double our operation there in the last couple of years.

So, it's a difficult market, but it's not something that really is driving our ability to grow.

I mean we couldn't achieve the kind of growth numbers we've reported out today if we couldn't get the people to do the work.

Another question, you mentioned the chemical sector finally really beginning to show signs of strong life.

Of your 2-plus billion in orders for this quarter, roughly, what did the chemical sector make up of that?

We don't break out orders by market.

You could probably do the math on it.

I haven't done that yet and get an estimate.

Neither have I.

I haven't sat down and cranked those numbers.

The -- I think what you would see, though, if you just kind of looked at the press releases, because I think we had six or seven press releases on awards in the chemicals business in this last quarter.

It will give you a good sense for where the business is going.

I think most of them unfortunately don't include contract values because our customers won't let us tell you how big the projects are.

But it will give you a sense of the kind of business that's out there.

Okay.

Actually that's about it.

Everything else pretty much was covered.

Thanks very much.

Okay.

And your next question comes from the line of Andy Kaplowitz--

Good morning guys.

You just mentioned that you hired about 5,000 people so far.

I guess we had talked to you on last conference calls and maybe you said that amount for the year.

It looks like either it's been a little easier for you to get employees or you think the markets are a little bit more robust.

I don't want to put words in your mouth, but just could you comment on that?

Well, yes, I guess so.

First of all, the markets are good.

We're pretty upbeat on where the markets are and where they are going.

From a hiring standpoint, our fiscal year is almost over, so the numbers we're talking about are plus or minus what we expected for the year.

And when I talk about 5,000 people, it might be 4,800 or it might be 5,400.

It's in that kind of range and that's where we think we'll finish the year this year as well.

So I wouldn't read into the fact that we're at 5,000 already, as more than we're kind of proceeding about in line with what we expected.

We got a couple months left.

It's the vacation season, so I'm not sure we'll see a lot of additional hires over the summer, but we'll see a few.

Understand.

Along those lines, oil's been basically a steady rise since we've last talked and I'm just wondering what are your customers saying to you?

I mean we talk about all these delays, potential delays and some delays in contracts coming out, but what about the opposite of way of looking at it?

Have some people try to increase their spending more quickly because oil is in the low 70s now?

I can't point to anybody or I can't say that I've talked to anybody in the last couple quarters, particularly in the last quarter, where I've gotten the strong sense that they are going to accelerate spending to try to take -- get into the market sooner.

Remember, these projects are -- they take a long time to get done and for the most part, these folks are planning their projects around some sort of benchmark price.

You know, say a benchmark price in the mid-40s.

And so the $75 of the moment, let's say, doesn't have a lot of impact unless it really becomes an obviously sustainable number and they raise the benchmark.

So until the customers see their benchmark at 55 or 60, I don't think they will change their project focus or their emphasis on the investment.

There's also a problem in our customers in terms of their ability to manage their end of the projects they release, and some of our customers are constrained by their own capacity more so than they are by the industry's.

Understand.

Maybe we could shift gears for one second and talk about the U.K.

nuclear cleanup opportunities.

You mentioned that obviously they are big numbers.

I don't think Magnox has still been awarded yet.

Maybe you could comment on that and anything else in the near term that we might be able to focus on in the U.K.

for you guys.

No.

Magnox did get awarded.

We were not the successful bidders.

It was Energy Solutions.

Got you.

That was the successful bidder for Magnox.

Now, we're a wired in participant in the recompete for Magnox, so we will be partnered with Energy Solutions when the next round of competition goes forward on the south portion of Magnox, which is in an 18-month timeframe, two years, is that about right, Tom?

Two years.

So we'll continue to work with Energy Solutions in the meantime and we expect to be a part of the winning team when the time comes.

But like I say, that's a couple years out.

There are other activities going on, but frankly, across the system, there's still an awful lot of work that's yet to be decided.

Considerable amount of that in Tier 2 and Tier 3 work.

We still don't have a selection on Sellafield.

I think that's probably next year sometime in terms of who will get that.

We're not competing for Sellafield, because we expect to be a major player at Tier 2 or Tier 1.5 actually in the Sellafield program going forward.

But if you think about $600 billion over the next 18 years, it's just a huge market opportunity.

Yes, it is.

Thank you.

And your next question comes from the line of Richard Paget representing Morgan Joseph.

Please proceed.

Good morning.

Good morning.

You guys have been talking about how the operating margin has benefited from the mix shift and you're getting some pricing as well as the multiplier effect.

Given that technical services backlog is still growing a bit faster than field services, is there still more room for this mix shift to skew more towards technical services, which I guess would suggest there's further margin expansion from this 5.6 level?

I mean is that fair to say?

Well, I mean, I don't think we'll see a significant change in the mix before we start seeing a move back toward the, the construction -- a little bit higher on the construction side.

But I think that what we're going to see on the margin is more influenced by the components of what -- of the higher wages, better control of the G&A cost relationships to the increased volume.

It has more to do with that than the mix between the two.

The percentages that the gross margin, the G&A, have a lot to do with the mix between professional services and construction.

The net margin has more to do just with all these other factors, improved margin percentage, the better use of overtime, the higher use of -- the higher increasing in salaries, and such like that than the mix between the activities.

Okay.

So given your comments on the strength of the market then, there still is room for expansion beyond this 5.6 level?

I think there's probably -- as I've said before, and I've missed it but, yes, there's always a little bit of room.

We're going to blindly continue to see the factors pushing that direction.

I mean what would you think peak operating margins could be?

We don't forecast.

We don't even speculate on that.

I guess we're kind of back to, like Jamie, we're going to make you work to get to that number.

All right.

Got to ask the question.

You've done a better job at it than I have.

John hasn't been right yet, so--

I guess, I guess that's arguable.

That's it for me.

Thanks.

Okay.

From the line of Friedman, Billings, Ramsey with the next question we have Min Cho.

Please proceed.

Great, thank you.

Couple of follow-up questions regarding the U.K.

nuclear opportunity.

Craig, obviously you're bidding on the Magnox south portion when that comes up for rebid and you're also bidding on the Drid contract, is that right?

Yes.

What about the -- I'm going say this wrong, is it Dune Ray -- Has that been bid, has that been out for rebid yet?

Actually our guy who kind of runs all of our European business is here.

Tom do you want to talk about this a minute?

This is Tom Hammond, our EVP of International.

Okay.

Actually that specific site, I can't recall whether it's bundled with some other sites or it's being bid by itself.

And I don't recall off the top of my head when that goes out for bid to be honest with you.

It's one of the smaller sites, by the way.

Okay.

Is there any interest in bidding for the NFL's one-third stake of the atomic weapon's establishment?

Absolutely.

Yes, okay.

Do you know what -- obviously it's a bid, so the dollar value is up in the air, but do you have an -- do you have a sense for what the revenue opportunity is, if you are awarded that?

That's really something at this stage we can't talk about.

Okay.

We're negotiating a nondisclosure agreement that goes with all these kinds of things and then there's a whole qualifications and bidding process and they will be releasing data about revenue and that sort of thing that will be -- unfortunately we'll have to keep confidential.

Okay.

So I don't think we can address what the potential of that is, at least not today.

Okay.

Then, Craig, one final question.

I'm not sure how easy this is going to be, but the U.K., the NDA activities are, or it's been stated about $140 billion in opportunity.

And you're talking about this $600 billion of opportunity, which is a much bigger number.

Can you just generally break out where that other $400 billion or so opportunity is coming from outside of the NDA?

Sure.

If you start -- well, it's not all outside of the NDA.

If you start with the NDA's current budget, which is -- as I recall is GBP 73 billion, so that translates to about $150 billion U.S.

Right.

That's all at Tier 1, because the NDA only sees that money once, as they pay it out to the Tier 1 contractors.

But the Tier 1 contractors pay out substantial parts of that to Tier 2 contractors and to Tier 3 contractors through either Tier 2 or Tier 1.

So about 80% of that gets paid out to Tier 2 contracts and about 70 or 80% of that 50%, depends on whose estimate you like, of that gets out to Tier 3 contracts.

So have what I'll call the multiplier effect.

$150 billion at Tier 1, another $120 billion at Tier 2, another $60 billion at Tier 3, so right there you're at about $340 billion, $350 billion.

And the NDA budget doesn't finish the job.

And frankly, it's probably also too low.

So the effect of all that will -- in our mind, is a plus or minus $600 billion opportunity over time.

Okay.

Perfect.

Thank you very much.

You're welcome.

And your next question comes from the line of [Shakira Afdal] representing KeyBanc Capital Markets.

Please proceed.

Congratulations on a good quarter.

Thank you.

Just had a couple of questions about some of the end markets you're looking to -- number one, upstream, could you comment a bit on what you estimate to be your market size currently -- sorry, your marketshare and where you would like to take that over the next couple of years?

Yes.

The best number I have seen in terms of the estimate of spending upstream this year is $327 billion.

Terribly precise number, but it was based on last year's $300 billion and a growth factor.

Got it.

So you can see it's a very large market.

Not all of that business is accessible to us, but if you look at our numbers, you can see we're about a $1 billion dollars of revenue in that business today, so if you assume that for people like us, maybe even 25% of that market's accessible, and would fit our business pro file, that gives you roughly a $75 billion, $80 billion market and we have 1/80th of that market today.

So our marketshare's pretty close to insignificant.

All right.

In terms of growth, a lot of it will depend on specifically where money gets spent and who it gets spent by, but we think we can do a little better than our 15% in that market, even though we might do a little worse than 15% in a couple of others.

So overall, I think we see our growth in that business as being good.

I wouldn't want to try to predict that it's going to be X dollars in X years.

Okay, but you think you could double, at least double your market share over the next couple of years?

Probably we could double our market share in a reasonable forecast period, whether that's two years or four, something in that range.

And then when I look at the infrastructure market, are you bidding on any of the major infrastructure bids, let's say the hybrid bids that are happening in the Middle East, I believe there are a couple in the Arab Emirate and if you are, could you give us some color on the potential size of those versus the ones that you are currently working on in the U.S.?

We've made a decision as an infrastructure player to stay on the design side of the business and design program management, construction management, the technical professional services side of the business.

So to the extent we get involved in these big infrastructure privatizations, toll road, big toll road projects, those sorts of things, it's generally as a subcontractor to a prime bidder.

So a McQuarry Bank or (inaudible) or somebody like that may be the prime bidder and we would just be the subcontractor supplying the design to that company who is bidding on the concession.

I understand.

So unfortunately I can't give you much insight into what's going on at the concession level.

Okay.

That's all I had in terms of questions.

Thank you.

From the line of Bear Stearns with the next question, we have Michael Dudas.

Please proceed.

Good morning, everybody.

Good morning.

Craig, where do your clients want you to go next?

Geographically?

Correct.

Interestingly enough, if you talk about next, it's more the Middle East than anywhere for us, where -- and you can argue whether we're there or not -- but we're only there in a small way at this point, Mike.

Correct, I understand.

And we're trying to get there in a big way.

So if that -- to the extent of where we think we'll see substantial geographic growth, we think the Middle East offers the most opportunity for us right now and we're seeing the most pressure from our clients to be there to support their investments, because a lot of our clients have decided their major investments are going to the Middle East as opposed to staying in the developed world or going to China or someplace.

There's still very little pressure from our clients to be in China.

I mean I can't tell you how infrequent still those calls are, so I don't see that as a big issue for us, as we go forward.

I think one of the bright spots that we don't talk about a lot on this call perhaps and maybe we should, is the degree to which our clients are investing in India.

And there's been a very significant increase in the number of Jacobs core clients who are making investment decisions in India right now.

Terrific.

I appreciate that.

Thanks, Craig.

You're welcome.

As a reminder, (OPERATOR INSTRUCTIONS) And your next question comes as a follow-up from the line of Barry Bannister representing Stifel Nicolaus.

Please proceed.

Hi, just a quick follow-up.

I guess one advantage of these longer cycle time work that you talked about with a large feed component is that you can probably just stand back and watch the construction costs rise and when the time comes to bid those, field service work, you can more appropriately price it as opposed to some of the EPCs that bid up front and then watch costs run away on the fixed component and don't book much margin.

So do you feel comfortable with, first your pricing power on these rising costs for field service when the day comes and, two, maybe to see the opportunity and try to make a little more money on actual construction, given that we've all grown spoiled on your high margins from the SG&A -- I should say the low cost of goods sold TPS work?

We're all a little bit spoiled by these high margins and we don't want to see them dissipate when field services begins.

So can you take advantage of pricing there?

The -- probably not is the answer to that question, and the reason is that unlike what still many of our competitors are doing, as we look at these construction projects, we're still looking at them on a fully cost reimbursable basis.

And so we're not taking the fixed price risk at any stage frankly, because we still see that as pretty unpredictable.

We're putting lots of energy, just into the estimating effort to try to get our clients the best possible budgets that we can get, but we're telling them and we're maintaining the position internally that the risks of fixed price are just too high.

I agree, Craig.

I'm not saying become a fixed price operator, but in a cost plus environment that's this busy, it would seem that your cost plus would have a little more plus.

So what I'm trying to figure out is now that you're progressing from this rich front end environment of TPS, could field services actually be a worthwhile endeavor from a profitability standpoint?

Well, field services has always been a good business for us and so I don't want to suggest that it hasn't been a good business or a profitable business.

It's been that way for decades.

There probably is, just like there has been on the technical/professional and services side, there probably is a little room for margin expansion.

But again, we're doing this work for the most part for our long-term customers based on preferred relationships, and we're going to have some of the same issues on the field side in terms of expanding margins, that we have on the technical/professional services side.

We do have long-term contracts.

We do have fixed commercials.

Those only come up for renewal every so often, and we'll get a little bit of incremental improvement as they come up for renewal, but I wouldn't -- John and I both agree, we don't want to get people overly excited about our ability to expand margins, because it just isn't consist went our business model.

We to be very careful not to gouge these clients or we could damage those preferred relationships for a very long time.

Sure, I agree with you.

I mean at 5.5% margin, I don't think anyone would accuse you of gouging, but it is nice to see that the field service work is going to be next and that you're conscious of these costs and pricing is reflecting that.

We are.

Okay.

Okay.

I think that's all we have time for.

We've come up on the 9:00 hour, so we'll call an end to the questions, if that's okay.

Ladies and gentlemen, at this time, I would turn the call over to Craig Martin for final comments.

Well, I just want to thank you all for calling in and listening to our story.

It hasn't changed very much.

It probably won't change very much going forward, but it is a good business out there and we're real pleased to be in it right now.

It's the sort of time it feels really good to be on this call.

Thanks, everybody.

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