雅各布工程 (J) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Jacobs Engineering Group earnings conference call.

My name is Katie, and I'll be your coordinator for today.

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

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

(OPERATOR INSTRUCTIONS) I would like to now turn the call over to Miss Patty Bruner.

Please proceed.

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

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 actual 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, 2007, 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, 2007 for a description of our business, legal proceedings and other information that describe the 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 statement, whether as a result of new information, future events or otherwise.

Now, John Prosser, CFO, will begin the discussion of financial results.

Thank you, Patty, and good morning.

I will be briefly going over the financial highlights for the quarter, and then I'll turn it over to Craig Martin, our CEO, to review the quarter's business overview and growth strategies.

Starting on Slide Four of the package, the financial highlights for the quarter, we had another very strong quarter.

Our diluted EPS was at $0.80 and the earnings were at $99.3 million.

For the year-to-date, excluding the one-time gain we had in the first quarter, the EPS was $1.55 and the net earnings, $192.3 million.

That one-time gain was $0.04 and $5.4 million.

Also, year-end -- or at quarter-end, our backlog was at a record $16.2 billion.

Our balance sheet continues to be in good shape.

It is very strong.

Our net cash position was at $359.5 million.

And we did in the earnings release and here have raised our guidance for the year to $3.00 to $3.30.

This is up $0.05 at both ends of the range.

Turning to Slide Five, this is a track of the history of our earnings, very consistent growth.

Obviously the last five years have shown a stronger growth than what is our normal outlook of 15% per year on average.

But it does show a very strong positive growth trend and reflects the strong markets that we've been seeing.

On Slide Six, looking at our backlog, again a very strong growth curve year-over-year.

We're up on the total.

We're at $16.2 billion, over $10.7 billion last year.

The last quarter we were at $15 billion, so we're up $1.2 billion from last quarter.

On the professional services side, we're at $7.6 billion, which is up from $5.8 billion last year, and $7.1 billion last quarter.

So, good strong growth in both areas of our backlog and in the total backlog.

Actually, as we've been talking about the growth in our field services from a growth rate, actually, it was a little stronger this quarter than what our growth and our professional services were.

So, with that, I will now turn it over to Craig Martin to review the quarter.

Thank you, John.

Good morning, everyone.

We're going to take the usual time to talk about how we're going to continue to try to grow this business and keep that 15% growth rate in the long term.

There are five things we think we have to focus on.

We need to remain committed to our business model which, we think, is relatively unique in the industry.

We'll talk more about that in a minute.

We need to continue to diversify our markets and focus on those markets that represent real opportunities for growth.

Again, I'll talk about that a little more in a minute.

We need to continue to have a multidomestic strategy.

We think being local to our customers continues to be very important to our position in the marketplace, as I think we've talked a lot, we're not interested so much in the big events as we are in the long-term local businesses.

So, we're going to continue to focus on that multidomestic strategy.

We're going to grow in the Middle East.

For example, you all heard about our acquisition of Zamel and Turbag (ZATE), which we think will begin to give us a real presence in Saudi Arabia and grow that business.

We're making slow progress in Asia, and we think we're going to continue to expand our base of operations there and grow in additional countries across Asia.

We're going to continue to make acquisitions.

it's a central part of our growth strategy.

Always has been.

Our focus continues to be largely in the Infrastructure and Oil and Gas arena, which we think have the most opportunities for growth and consolidation.

So, that will be an area where we will continue to focus, probably focusing more on opportunities in Europe, Asia and the Middle East than on the U.S.

for the time being.

As we complete the integration of acquisitions like Carter & Burgess, we'll come back to the U.S.

and continue to expand here, as well.

And then we always talk about driving down costs.

We think it's a critical advantage, particularly when this market goes away.

We know this positive marketplace is great for all of us, but it won't last forever.

And companies, they can control your costs and position themselves to be cost-effective in the down cycle do better in the up cycle, as well.

So, let's talk a little more now about our relationship-based business model.

I'm now on Slide Eight.

Remind everybody of what we call the industry model there on the right side of the slide.

For the most part, our industry continues to focus on events.

Now, in today's market those events aren't so much lump sum turnkey, but there still is.

Big projects and faraway places are the dominant mode of the work for most of our competition.

They also do discrete projects, and they continue to have some preferred relationships, and those pieces of the pie vary depending on the market climate.

But it's the big events that drive most of the players in our industry.

We continue to be focused in the opposite way.

Preferred relationships are our basic approach.

We get about 75 to 80% in any given quarter of our business for people with whom we have long-standing preferred relationships.

We go to great lengths to be sure that we resource for those customers over any other opportunity that might be out there.

Our priority is to serve our long-term customers, make sure they're satisfied.

And we think that will help us not only in this up cycle, but it will also help us be strong in a down cycle when and if it comes.

Well, there's no if.

It will come.

We'll continue to do discrete projects in an effort to find additional preferred relationships, and there may be the occasional event that makes sense for us as a company.

But they're likely to be few and far between.

Moving to Slide Nine, we also continue to try to diversify our business and have a broad spectrum of opportunities that we can work on.

We continue to think that not all these markets cycle together and that having a diverse group of markets we serve will help us.

Let me take you through each of the markets and how each market is performing today.

I'll start with refining the very, very good market as we sit here.

If you look at just announced projects, announced CapEx in the Refining area, I'll talk about CapEx first.

The big oil and gas companies, the big refiners, I should say more specifically, have announced a 30 billion a year CapEx spend.

And so there's lots of money flowing into Refining.

We have lots of drivers for that.

Capacity expansion is clearly a driver.

There's also a fair amount of environmental regulation that's driving refining spending.

The MSAT II program, the nonroad low-sulfur diesel, the prospect of low-sulfur marine fuels, bunker -- all are driving a lot of potential CapEx in Refining.

Moving to upstream Oil and Gas, a big, big, big market.

Again, if you take just the majors, they've announced an annual spend of about $80 billion in upstream Oil and Gas.

Looks like a terrific market for us.

And, you'll recall, we're still a very small player in that market.

So, we think there's a very significant opportunity to take market share, as well, and grow our business.

And in the Chemicals business, there's good investment in the Middle East and Asia, some investment in North America and Europe.

And so, it continues to be a good steady market.

Probably doesn't have quite the energy behind it in terms of growth that Oil and Gas and Refining do, but a good business overall.

When you look at overall CapEx for these three businesses, there's about $590 billion of announced projects -- $115 billion or so in the Oil and Gas, $475 billion in Refining and Chemicals.

If you weigh all that, according to what our consultants suggest is the likely project, there's still something like $200 billion, $195 billion in that range, of announced projects in this business.

So, we think this part of the diverse group of markets we serve is going to be pretty robust for a while yet.

Moving on around the wheel, Pulp and Paper, High Tech, Food and Consumer Products, that's our other category.

It's other because there's nothing going on.

It's not that there's not good business there, there is.

But the growth prospects there are just not very strong.

There's just not a lot of activity that's going to drive a major increase in our business as we go forward.

But it does keep several thousand people busy, and we love it for that reason alone.

Pharma Bio, about 9% of our business right now.

Steady, it continues to grow, although it's not as strong as it has been in times in the past.

We've had a good spurt of growth over the last year or two, but it looks to us like it's going to be a little slower going forward, not quite as active from a project perspective, maybe, as it has been.

Part of that, I suspect, is being driven by the election issues.

But it will be a good business for us regardless.

Just, maybe, not as strong in terms of growth perspectives as it has been.

Moving to National Governments, you'll recall, it's really two kinds of business for us -- Research and Development, Scientific and Technical Engineering Work.

A very good business for us.

We're getting steady, steady growth out of that business.

We're uniquely positioned as one of the few services-only providers to that industry, and it keeps us out of trouble and keeps us in a good position, because we avoid conflict of interests.

We have a lot of prospects in this selection process.

We're very optimistic about the possibilities of those projects being awarded to Jacobs.

So, we think we're in a great position as we continue growth out of the scientific and technical services side of our Governments business.

On the Environmental and related projects side, the more of the DOD side of the business, DOE side, in the U.S., the Ministry of Defense and The Nuclear Decommissioning Agency in the U.K.

In the U.S., the business is a steady long-term business.

We continue to see environmental cleanup work.

It's a good solid business from that regard.

Probably not a big growth business.

Probably the number of opportunities is going to be pretty steady for the next few years.

Certainly not yet a dying business, but not one that we expect a lot of growth out of.

The possible exception of that is that we continue to see a lot of activity related to base realignment and closure, both in terms of some cleanup work.

But as much as anything, troop relocation issues and the projects that go with that.

And we figure prominently in that base relocation kind of work around the U.S.

A really good position.

We expect good growth out of that.

The U.K.

business, one that we've been excited about for some time continues to be a very exciting prospective market.

There's still about $300 billion worth of workoff there to be done.

But the process of awarding that work is going more slowly than we expected.

And so the business is not as robust at the tier one level as we might have liked.

On the other hand, at the tier two and tier three level, business is going well, there's lots of activity, and we're well positioned in that business.

So, we continue to see good growth.

We're also pretty excited about the atomic weapons establishment and what's going on there.

You may have seen our recent press release about our expanded scope in that regard.

So, overall, the National Governments business looks to us to be another really robust market.

Good opportunities for Jacobs going forward.

On the Building side, remember, that's technical buildings, science facilities, jails, hospitals, healthcare-related work, that sort of thing.

Another really good business for us.

We see lots of activity in science facilities.

We see tremendous activity in hospitals and healthcare.

That's a particular strength for Jacobs both in Europe and the U.S.

And given the overall graying of the baby boomers, we think this is going to continue to be a very strong market, as well.

In addition, the U.S.

market for the corrections, jails, seems to be going through another cycle.

It looks like we've run out of room to put prisoners in.

So, we have to build some more jails, so we could put some more people in them.

That looks like a business that's going to be a little more robust in the next couple years than it has been in the last couple.

So, overall the Buildings market also looks to be a good market going forward.

Finally, the Infrastructure market.

This is a market we've told you we're very high on for some time now, and we continue to see no reason not to be very high on this market as we look forward.

There's every evidence that Infrastructure spending will remain robust through 2008 and 2009 based on what we can see.

Part of that is driven by residual backlog of projects, part of it is driven by the fact there's just latent demand out there, part of it is driven by the aging of our infrastructure, things like the I-35 bridge problem or the St.

Cloud bridge problem.

All of those things are factors that drive a demand for infrastructure that's just not unique to the United States, it's all over the world.

And that market, therefore, in our mind remains one that's very, very robust for a very long time.

And if you look at the evidence of how people feel about that, in the most recent data we have in terms of state municipal bond elections for infrastructure, 89% of those elections were approved.

And that's actually the highest level in the last ten sets of elections.

So, it really is indicative that there's lots of support for the infrastructure business globally, and we think that's going to remain a good business for us.

Part of that is also because it's a share business.

No one has any significant market share.

So, the opportunity for Jacobs to take market share and grow its business is really quite strong.

So, all the markets, I think, are pretty good.

We're diversified well in those markets, we'll continue to look at other opportunities to diversify our business across the markets.

Turning finally to Slide Ten, this is where we have our commercial.

We do think we have a lot of things going for us that should make us attractive to the investor.

We have this unique customer-driven business model.

We're a diversified company.

We're in a great market right now, with a strong balance sheet which should let us take advantage of that market in a number of ways, and we believe we can continue to grow at 15% a year or more forever more.

So, with that, I'll turn it back over to Katie for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Andy Kaplowitz from Lehman Brothers.

Please proceed.

Good morning, guys.

Nice quarter.

You guys reported about a billion dollars more of new awards than I personally expected.

A very robust quarter on the new awards side.

So, I'm wondering where it came from.

I mean, obviously, we see your press releases that are out there.

Were there any sort of large contracts that you weren't able to press release that were there?

Was it scope changes on existing projects?

I'm just wondering where the strength is coming from?

For the most part, the strength is in new awards.

There were no individual projects that would be on the scale of something like the Motiva project.

The awards continue to be in the project sizes that we consider smaller by global standards.

That doesn't mean there are not some nice-sized jobs in there, but the awards are probably more consistent with what we expect quarter in and quarter out as a company.

And I would tell you, even though there's a lot of things I can't talk about specifically because of the -- customer hasn't given us the approval, they were well diversified across our market.

So, there were good awards, whether it's National Governments, Refining or Oil and Gas.

I see, that's helpful.

So, even though you didn't press release that many oil and gas awards, it looks like that was still represented in the numbers.

It absolutely is.

Great.

And then, when you look at your guidance, obviously I know that you want to be conservative in how you look at fiscal '08.

I guess the question that I have is, so you've done $1.55 in the first two quarters of the year, and then if you obviously multiply that by two, you get close to the midpoint of your current range, excluding the $0.04 gain.

My question is, it seems like you're assuming not too much EPS growth in the second half of the year,versus the first half of the year, yet you have this tremendous backlog growth.

So, I'm wondering, are you just really being conservative?

Is there something you see that we should be aware of?

What's going on there?

Let me answer that, or try to, anyways.

Two things, one is this -- the backlog growth continues to be a little stronger on the field services side, which tends to be longer workoff.

So, the good news, it's a longer string of work, but it doesn't -- it comes in faster than it goes out.

The other thing is, we read the papers, we have an underlying concern of what's going on out there.

We aren't seeing it in our marketplace at this point, but we have to be realistic about the possibilities of changing and impacts of the economy, so if that translates into your comments about being conservative or just looking at the overall picture, you can interpret that.

But we think that in this economic climate a fairly broad range is appropriate.

And we also think that the only reason we give guidance is because we really -- it's hard for us to give enough details for you to have any other way to gauge the business, so we're trying to put at least a fence around what the street may be thinking about our prospects both on the positive side and negative side.

That's sure.

Thanks.

And then, maybe, one more question, if I could.

Are you guys seeing any signs of weakening in any of your end markets right now versus, let's say, last quarter?

I would say that weakening, probably, the answer with that would have to generally be no.

There are some markets where the rate of improvement in prospects, the rate of growth, isn't what it was a quarter or two ago.

I think I mentioned Pharma as an example of that.

So, you know, it's not the case that every market is booming everywhere.

Some markets relatively speaking are not as robust as they were.

Some remain as robust as ever.

And I think that's the advantage of the diversity we have.

Thank you very much.

I'll get back in cue.

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

Please proceed.

Good morning.

Good morning.

I wonder, maybe, if we could expand a little bit on backlog acceleration.

Growth has definitely -- the pace has picked up.

And I know you said it's the nature of the projects are a little bit longer and drawn out.

How should we think about revenue growth?

I mean, just given the way the backlog's coming in, it seems like revenue growth would have to accelerate, as well.

Yes.

We would expect particularly as the field services part of the backlog moves into the workoff, we will see an accelerated growth in revenues probably late in '08, maybe the fourth quarter and on into '09 and beyond.

We are seeing a nice pickup in the professional services at this point on the workoff.

And it's working off a little faster on the field services at this point.

But as we see that trend switch, we'll see the revenues pick up probably fairly dramatically.

Okay.

And then on the acquisition front you mentioned two key focus areas, oil and gas and some infrastructure.

How are you seeing sellers' expectations?

It seems oil and gas would still be very high, but maybe in some infrastructure pockets, expectations have come down.

Yes, I think what you find is that expectations have moderated a bit everywhere.

That's partly because of what's happened with credit and the sort of disappearance of private equity.

There was a point in time when strategic buyers like Jacobs were well below the premiums being offered by private equity.

And that drove the numbers up overall.

Today we're seeing that much less of a factor.

Pricing for us, obviously, is very event-driven because we're only dealing with one company or two at a time.

But overall, I'd say pricing has actually improved a little bit in spite of how strong the market is.

And that's probably also a little bit on the Oil and Gas side because some people had really unrealistic expectations, and no one met them.

And that helps expectations, as well.

I can tell you over the years we've had a number of deals go away from us because everybody had a big idea about what their company was worth, and then turn around and come right back at our pricing when they found it wasn't out there.

Okay.

So, you characterize it more of less competition out there versus maybe some concerns about the economy?

Yeah, I think it's more about less competition.

Certainly in the Oil and Gas side.

I think on the Infrastructure side, there probably are in pockets, some concerns about the economy, that would make isolated acquisitions a little cheaper because people have a little bit of fear.

But I don't think that's very significant at this stage.

Okay, thanks, that's it for me.

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

Please proceed.

Hi, guys.

When I look at your field services percent of the backlog, it's up sharply from four quarters ago, and seems to have broken out of a multiyear slide.

And yet, as a percentage of revenues, field service continues to decline for years and years in a row and even lately.

We associate field construction with being not a complete commodity because of the high value buildings you do, but maybe lower margin.

And one of the misconceptions on this stock was that a lot of analysts probably felt that as you moved into the field, your margins would come under pressure.

But in fact your margins are at 35-year highs, so should we read into this rising backlog that's field services and this decoupling with field service revenues that ultimately field service revenue rising will impact your margins?

Yes, as I've been saying, as the field services grows, the revenues will grow faster than if it was being driven by the professional services, but that will have a lower impact or a dampening impact on our margins.

At this point while historically we've seen that they carry very similar margins here recently with the run up in professional services driven by salary escalation and such like that.

The professional service margins have grown faster than the field services margins, and we would expect that as that field services grows, it will have a dampening effect, a flattening effect on the margin percentages.

But because of the volume effect of the higher revenues, it's still -- we should see growing margin dollars.

Yeah, because prior to that also, as the field services grows, the G&A as a percent of revenues will start coming down because there's very little G&A that gets attached to growth and field services.

You recently bought a Saudi Arabian engineering firm, and the Saudi king has said he wants to build six new cities.

There's going to be a lot of civil work that goes beyond just petroleum sector.

What's the breakdown of that Saudi acquisition's exposure to both civil, as well as, petroleum engineering?

This is Noel.

Let me answer that question in terms of -- we actually owned, purchased 60% of the Saudi firm, so it gives us control.

The exposure to the market is going to have to be expanded.

Today they're pretty much in oil and gas in Saudi, although we do have an operation in Abu Dhabi that's doing both building and infrastructure work.

We've been trying to position ourselves in the Middle East ahead, with the kind of diversity that we have everywhere else, so we would have Buildings Infrastructure, Oil and Gas both upstream and downstream, and Chemicals.

In the beginning, but it is a work in progress as we speak, but we believe we're going to have exposure to all these markets in the long term.

This is a long game.

This isn't going to happen immediately.

So, today this gives us 500, 600 people in the Middle East.

We're looking at having a couple thousand there by the end of the decade.

And moving on from there.

So, it's a long game for us, but we will have exposure to all those markets, and that's the game plan.

More so by bolt-on acquisitions than expanding the staffing of the existing firm you bought?

No, I would think as we move forward, we're going to expand what we have.

We're going to be putting Jacobs people in there.

We're going to be building these businesses on the ground.

So, a lot of the growth from this point forward is going to be internal rather than external.

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

Please proceed.

Hey, guys.

Hi.

It's actually Peter Cheng for Jamie.

How is it going?

You don't sound at all like Jamie.

Congratulations on a good quarter.

I guess regarding your comments on the acquisitions, probably not for downstream oil and gas in the U.S., what inning do you guys think we are regarding downstream oil and gas here?

At what inning?

It's not a way I'd normally think of it.

And I'm not sure I know -- I'm not even a baseball guy.

Maybe I should ask Noel.

I don't know if we were in the seventh inning stretch.

Would that be good or bad?

What do you think, Noel?

What I think is that we just don't know there's a lot of demand going on.

Oil prices are high.

It would be -- right now it looks awfully good.

There's nothing out there that looks bad in this oil and gas business right now except that history shows it will not last.

But right now, it is too -- you just can't predict it.

The prospect lists are still long and strong.

If you listen to the customers, one of the big oil and gas customers recently publicly announced a $125 billion five-year program in this area, which about -- that was between oil and gas and refining.

Which about 20% or 25 billion was going to go to refining.

That's pretty robust spending for a long time.

It's looking like you will surpass at least 2009?

I think 2009 looks solid.

On the upstream side, you have to remember, while the Refining tends to have various historic cycles, the upstream spending is there pretty much through the cycles, while they go up and down a little bit.

Even when oil was back in the teens not too many years ago, they still were spending significant money on the upstream side, finding new fields, developing existing fields and such like that, so that at least from our perspective, and historically looking at it, that tends to be a little bit less of the big cycles than you see in some of the refining or chemicals or some of the other sales and manufacturing on the producing side.

Great.

I guess, are you guys running into any kind of capacity constraints in terms of the employees in terms of work.

You guys have -- your backlog is up 50% -- it just looks like -- is there any problems going on in that area?

The business of getting the talent to do the work is a huge challenge in today's marketplace.

It's a challenge every day.

But what we're finding is we have to work is a huge challenge in today's marketplace.

And it's a challenge every day.

But what we're finding is we're having to work harder to do it, but we're getting the people we need.

It's a stretch, and we're having to get people coming back in the marketplace, we're having to put younger people to work in places where they wouldn't have been allowed to work in the past just because the customers wanted experienced engineers, there aren't enough of them.

So, that lets us put young college graduates to work on projects today that they couldn't have worked on five years ago.

So, we look at all the different things we're able to do.

We're getting the people we need to get.

So, that's great.

So, we're seeing some of it, [stealing] from smaller competitors that don't have a global scale and interesting projects to work on.

The team out there doing the work whines about how hard it is, but they get it done.

And I don't see any reason to think that's not going to continue.

Great.

Thanks again for the call, you guys.

Your next question comes from the line of John Rogers from D.A.

Davidson.

Please proceed.

Hi, John.

Hi.

Good morning.

You talked about margins in the difference between the professional services and field services, but if you look at your operating margins over the past couple years or so, they've grown pretty steadily.

And I'm wondering how much of that, if you look at it, is mix versus just better pricing?

In your case, because I know everything's essentially passed through, but you're keeping a higher margin, I guess that would be a form of price increases.

I think there are three things.

I'll leave John a chance to comment here.

But we are certainly continuing to see labor escalation that allows for margin expansion for us.

We also are getting some modest -- at least modest by what our wildest dreams would be -- expansion in pricing.

So, both those things are contributing.

We're using our facility utilization.

The things that drive our business are also quite good.

So, that's a positive.

And then we have changed our mix.

If you look at the business compared to any time in the past, we're certainly getting a lot more of our proservice revenue from relatively high margin businesses.

And that's part of why we think today, when you look at our proservices versus field services, at the net margin level, our proservices business, technical services business, is probably going to continually have a little stronger margin line than our field services business will.

John, do you want to elaborate?

No, I think that's about what I was going to say.

Also, when you look at it, over the last two years, the mix has changed quite a bit.

We're at 55% proservices now of the revenue.

And you go back a couple years ago, and we were just about the opposite.

We were 55% construction.

And as the mix and the combination of both the mix changing but the margins coming off of the proservices improving for these reasons that Craig just mentioned, and those are a driver much more for the proservices side than the field side.

We have seen a continued expansion in our margins.

And while the field service margins, maybe, have improved a little bit in the percentage, most of the pricing in the field services is done off of total revenue, where the pricing and the technical professional services is the done off of a multiplier of salaries.

So, as field costs escalate, and there's been escalation there, you don't get the leverage you get out of the professional services, because --

Well, I mean --

You're still getting that same percentage of just a bigger number.

Right.

But as material costs go up, the percentage should -- in theory would decline.

No, the percentage will stay about the same.

Okay.

And is your multiplier then on the professional services, it is expanding?

Only slightly.

There's a little bit there, but that's only a relatively -- probably between the three things that Craig mentioned --the salary escalation, overtime and -- which is better utilization of the G&A costs and pricing, the pricing is probably the lowest of the three as far as contributing to the improved margins.

Okay.

And I guess looking forward a little bit, Noel, you talked about, and I guess this mainly refers to the Middle East, but [expanding] with your people there, as you look at other opportunities, other markets to go into, are these -- do you expect to see higher margin markets or markets that offer higher multipliers?

Maybe just talk about what you're targeting.

Well, if you look at the markets we serve today, and just those, the multiplier is very significantly from market to market.

So, multipliers, for example, in the infrastructure market are much higher than multipliers in the refining market.

I mean, like, 15, 20% higher.

But the cost-to-serve are higher.

One of the things that's affecting our numbers is very hard to explain without getting into the exhaustive detail is how growth, for example, and infrastructure on the professional services side, affects the overall gross margin numbers and the net margin numbers compared to growth of professional services on the engineering side and the refining business.

There's all kinds of mixed issues going on in the context.

Pretty much across the board, there's a very minor expansion.

If you think about a multiplier of 2.0, maybe the multiplier's expanded to 2.05.

Okay.

That's the kind of expansion we're talking about.

Okay.

But as you look at -- you've talked a lot, Craig, I guess, about the infrastructure markets and where you want to expand.

Those markets in general offer higher multipliers or higher margins, you think?

They certainly offer higher multipliers.

So, just as to give a comparison, the multipliers in the refining business might be, I'm going to give you a range, 1.8 to 2.0.

And the multipliers in the infrastructure business, again I'll give you a range, might be 2.2 to 2.6.

So, you can see there's very significant difference in the multipliers.

Now, a significant fraction of that goes away in the cost-to-serve because the refining business allows a lot of billability -- accounting billability, computer staff billability.

Whereas in the infrastructure business, a lot of those things are overhead and are not billed.

So, at the gross margin level, there's a very significant difference between those businesses.

At the net margin level, it's smaller.

But I would tell you that Infrastructure in general carries a little higher net margins than refining because it's a public sector customer with a benign purchasing strategy, i.e., [we order qualifications and pay you what it costs plus the profit], versus a private sector business where you're dealing with some of the toughest customers in the world.

When you look across the industry, the net margin when you -- the operating margin really doesn't vary that much, depending on where you are in the cycle.

As you get into a market right now that -- you could say the ones that are really hot.

But most of them are all pretty strong.

But there's a little bit more upward pressure on, say, the oil and gas and refining and infrastructure markets than right now in pulp and paper or some of the markets that are a little slower.

So, there will be a little variance with where you are in the cycle.

But when you get down to the operating margin level, it really depends more on where you are in the cycle as to which of the better markets than the peer pricing in that market itself.

Okay, thanks, that helps a lot.

Your next question comes from the lining of Tahira Afzal from Keybanc.

Please proceed.

Good morning, gentlemen.

Good morning.

Hi.

Just the first question, in terms of your guidance, what has changed in terms of your expectations in this quarter versus the last quarter that increased everything by $0.05?

Well, we had a better quarter than we thought we were going to have.

If you take the $0.03 that we beat consensus, I mean, that's -- I'm being a little facetious, but that's part of it.

And the strong backlog, it just moves up our expectations for the balance of the year.

So, the backlog, you would say, for this quarter was a little stronger than your own expectations, as well?

Yes.

Okay.

And in terms of -- I was just at the URS conference, and they were commenting that they expect slowdown in the infrastructure space in the U.S.

in the second half of this year and the first half of '09, and that the state budgets that will be announced on July 1st would be the primary indicator of the extent of the slowdown.

I'm wondering how to reconcile what you think with what they're commenting on, whether there's material difference in the infrastructure side you compete in versus URS?

I'm not sure I could give you the answer because we don't understand fully the difference, either.

I pressed our own team very hard in advance of this call because of what Martin had to say.

And our view remains as we've outlined.

We see the business from where we're sitting as very robust.

Now, remember that we have a much smaller share of the market than URS does.

And we also participate in the market perhaps in a little different aspects of the programs and projects than -- in terms of what the actual underlying work mix is -- than maybe URS does.

So, we're not, perhaps, as dependent on state and federal funding for our business as Martin might be.

I don't know that, I don't know the details of his business.

But I think from our perspective, we see the market as very good for us looking forward.

Well out into '09.

Okay.

Great.

Very helpful.

The third thing I wanted to ask was from the Motiva project.

Will you be having any bonus incentives at any points on that particular project?

We can't disclose any of the financial terms for the Motiva deal.

But we -- all of our projects get recognized as they go, as there wouldn't be any expectations even if we did, or any sort of surprise.

So, it wouldn't be like a bump in any other quarters.

It's like a constant kind of profit recognition.

It will be as steady as the construction progress.

Okay, great.

And one last question in terms of the Saudi business.

I was wondering what the backlog of that is.

If available, and then the kind of margins that the business brings with that.

As far as the backlog goes, you can't find it in our numbers, okay?

So, just -- it's very, very small compared to the overall Jacobs.

As far as the margins go in Saudi, on -- when you're looking at the local currency, the margins are relatively decent for the local contractors because there's just a lot of work there right now with Aramco and [ZATE] and some of these other Saudi clients being the big payers and the big users of services.

And so, the margins in Saudi itself for the people operating in the country are pretty good.

So, I guess it would be fair to say that it seems at the moment more strategic with potentially a good contribution to your margins?

Well, it's strategic today.

You won't see it in our numbers this year or next.

It's a long game, as I said earlier.

As we look at the things that play out in Saudi, and the king in Saudi and plus the other Emirates and the other Gulf countries continue to spend very large amounts of money on developing their countries, and they're pushing a lot of money away from the oil and gas business into buildings and infrastructure, roads and bridges, universities, that type of thing, could build a permanence in the Middle East.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Michael Dudas from Bear Stearns.

Please proceed.

Good morning, everybody, and Happy Earth Day.

Happy Earth Day to you.

We didn't think you loved us any more, Mike.

(Laughter )

That's part of the question, do you skip the sense from your major industrial energy customers, a real concern and nervousness about carbon globally?

You know, you would have to say that everybody has concern.

You would also say that many of our customers are working on strategies to address carbon issues.

We've got a half dozen customers who are talking to us about various ideas for carbon sequestration, that kind of thing.

Certainly to the extent that those things are nonrevenue projects, there's a concern that CapEx is going to be driven into things that don't grow the business as opposed to things that do.

But I think, for the most part, our customers are very, very aware of what's happening in the marketplace, what the challenges are going to be, are doing what's right in the sense of what's economically intelligent to minimize their carbon gases and environmentally unfriendly actors and will continue to do so.

I think they're going to try to lobby for an intelligent response from a science and economics point of view, to the green problem.

But I don't think they're going to do anything foolish one way or the other.

I certainly haven't had anybody say, "Look, if this happens, we're going to stop doing projects, we're going to stop investing.

" We're going to let it take us out of business, so to speak.

I don't think our customers are thinking that way.

But Craig, I guess there will be for Jacobs over the next how many years a bigger percentage of opportunities for business because you could be helping these customers and spend their money where they really don't want to like you've done back in the '80s or '90s during the U.S.

refineries cycle?

Absolutely, Michael.

We see the whole process of environmental regulation, unfortunately for our customers, as a nice boon to us.

Because we think there's going to continue to be environmentally driven projects for decades, and we're a company that will benefit from those projects certainly.

Things just like the MSAT II with the benzene removal.

There's a whole slew of projects out there now that didn't exist 24 months ago, and I think that will continue with respect to greenhouse gases and carbon sequestration, and just how you get the carbon out of the gas before you sequester it.

Lots of interesting problems that will result in lots of interesting projects.

Your next question -- I'm sorry.

Did I make you mad, Michael?

I think he dropped off the line?

I guess he must have.

I'm sorry, your next question comes from the line of Jamie Cook from Credit Suisse.

Please proceed.

Hey, guys, sorry, I just had a quick follow-up.

Would you guys -- could you guys possibly give the breakdown regarding your expectations in the infrastructure market between what you expect the market to grow in '08, '09, and what you guys think will grow due to market share gain?

And sort of back to the baseball metaphor, maybe, a ballpark range on the expected growth range?

Really couldn't do that as we sit here today.

Haven't analyzed.

You have to understand that part of the issue here is the market is so big, and we're so small that what the market does from a growth point of view is not very relevant.

So, we don't really try to forecast market growth.

There are people out there doing that.

But we expect good solid growth certainly in line with our long-term expectations of that business for ourselves.

Okay.

So, it will probably be some kind of combination, I guess, between market share gains and, maybe that even, regardless of what the overall market grows?

Yes, I think for Jacobs to grow in infrastructure is almost irrelevant what the market does.

That's a wild exaggeration in a sense if it goes away completely.

But if the growth rate and infrastructure were 3%, or the growth rate and infrastructure were 8%, we'd still be able to grow our business by taking market share.

If the growth rate and infrastructure were minus 2%, we could still grow our business by taking market share.

And market share's not that hard when you're at the size we are.

And that's one of the differences, I suspect, between us and, say, URS.

Okay.

Thanks again, guys.

You have a follow-up from Andy Kaplowitz from Lehman Brothers.

Please proceed.

Just one quick question.

On the Canadian oil side, maybe, what I'm wondering is, you guys obviously have a strong presence there.

What are the chances of bigger projects coming out of there over the next couple years for you guys?

Andy, I don't think bigger projects are on anybody's screen.

The investments up there are going to be huge.

But most of these customers got badly burned in the last round of investments by sort of trying to spend $4 billion all at once.

And so, what we're seeing today is that these projects are being released in a much more of a phase sort of approach.

And even when they're bigger projects, they're being broken into pieces, and the pieces are being spread around.

So, the chances, again, of some sort of Motiva scale project for Jacobs or anyone else for that matter is probably not very high.

One of our customers has got a $4.5 billion program, but it's ten phases.

We're currently working on phases three, four, and we expect to be working on five, six, seven, eight, nine and ten.

But those phases are not committed at this point.

That tends to be more of the pattern we're seeing from the customer up there than the let's-go-do-the-$2-billion-XYZ.

So, Craig, you can have a good growth rate out of that business, but we shouldn't see some big Motiva-type thing?

That's exactly what I'm saying.

Got you.

And then maybe just one other quick thing on Pharma Bio.

It sounds to me like what you're saying is that that business is going to be relatively flattish over the next year or two.

Is that a fair assessment, or can it weaken a bit for you?

Or what should we be thinking for you on Pharma Bio?

I don't think it will weaken materially, but I do think flattish is probably a good description of where we think we are right now.

Okay.

Thank you.

At this time I'm sure you have no further questions, I would like to now turn the call back over to Mr.

Craig Martin.

Thank you all.

We're pretty pleased with the results this quarter, and we're pretty optimistic about the results going forward.

So, we look forward to talking to you in about 90 days, and hopefully we'll have good news once again.

Thank you all.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Have a wonderful day.