雅各布工程 (J) 2008 Q3 法說會逐字稿

Good morning.

My name is Cary and I will be your conference operator today.

At this time I would like to welcome everyone to the Jacobs' third quarter earnings conference call.

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

After the speakers' remarks there will be a question and answer session.

(OPERATOR INSTRUCTIONS).

Thank you.

Ms.

Bruner, please go ahead with your opening remarks.

Thank you, Cary.

Good morning.

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 One A, risk factors, item three, legal proceedings, and item seven, management's discussion and analysis of financial condition and results of operations contained therein.

And the most recent Form 10(Q) for the period ending March 31, 2008, for a description of our business, legal proceedings and other information that describes 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 statements whether as a result of new information, future events or otherwise.

And now I will pass it over to John Prosser, Jacobs' CFO, who will begin today's discussion.

Thank you, Patty.

I will briefly go over the financial highlights of the quarter and then I'll turn it over to Craig Martin, our CEO, for a more in depth discussion of our business overview.

If we go to slide four, the financial highlights, clearly this was a very strong quarter.

The EPS reported, the diluted EPS at $0.87, and for the year to date excluding the one time gain was $2.42 for the nine months.

Backlog grew nicely and ended the quarter at 18.3 billion.

We continue to have a very strong balance sheet and our 10(Q) will be filed by the end of the week.

You will be able to get the details there.

Our net cash balance as of June 30 was 496.8 million, up nicely from the last quarter.

And as I'm sure you saw in the press release, we have increased our guidance for the fiscal year '08 ended 9/30, to 3.15 to 3.40 per share.

That includes the one time gain that I mentioned above.

If you go to slide five, this is a tracking of our earnings growth.

The top line just shows how the trailing 12 months through June 30 compared to the fiscal year ends over the last ten years or so.

The bars underneath the graph show the five-year compounded earnings growth rates, and while we historically have said that we expect to be able to grow consistently at 15% per year on a compounded rate, clearly the last few years we have accelerated growth above that amount and that growth has continued through this quarter.

Looking at slide six, the backlog, a very strong growth year over year, also good growth quarter over quarter.

Strong growth on the field services side but also the technical professional services backlog continues to grow and I think speaks well of our prospects for the future.

Now, with that brief summary I will turn it over to Craig to talk about our strategies and our market overview.

Thank you, John.

Good morning.

And now on slide seven, I want to just run through our strategies for maintaining that 15% growth in the long run, sort of forever more.

And these haven't changed any.

You've seen them all before.

We remain committed to our business model, our relationship-based business model.

We are going to continue to focus on selected market diversity, trying to make sure our business is balanced across the markets, and I'll talk more about each of those in a minute.

We are going to continuing to grow through a multi-domestic strategy, and our strategy has been and continues to be to follow our core clients into geographies where they need our services.

That will continue to be our approach as we go forward, and we will be able to do that both through boot strap kinds of investments and perhaps through some acquisitions.

A recent example of that would have been the deal we made with ZATE in Saudi Arabia to give ourselves a presence in the Middle East in Saudi Arabia to match our presence in Abu Dhabi.

So that's an area where we continue to see opportunities for growth and we are going to continue to focus on that client driven geographic expansion.

Acquisitions are going to continue to be a part of our mix of business.

There's lots of opportunities out there right now.

It's an interesting time in the marketplace in that a number of mid-sized players who concluded that they can't compete with the global players.

We think there will be ongoing opportunities for additional growth from acquisitions.

Pricing is moderating, which we also think is a good thing.

And we are going to stick to our standard approach of dealing with these acquisitions by good companies on basis of their earnings, pay a fair price, get a cultural match and move forward.

And then finally, we still believe that keeping your costs down is a critical aspect of being successful in our business, and we hardly have a day now we don't focus on making sure our costs are tightly under control.

The boom we are facing today is a great thing to be in.

We are doing really well.

We can expect to continue to do well but we want to be positioned for the future whether it's as bright as it is today or not.

Moving on now to slide eight, talk a little bit more about our relationship based business model.

And let me start by reminding you of the, what we think of as the industry model, that's the pie chart on the right.

For the most part, our industry grew up focused on big events, and as companies in the industry got bigger, they focused on bigger events.

And to even today, most of our competitors are very much driven around big event projects, often big jobs in far away places for clients that don't necessarily build every day.

A lot of this work can be lump-sum turnkey.

Surprisingly in a market as robust as ours, we still see a lot of lump-sum turnkey opportunities out there.

Those obviously aren't opportunities for us but they are driving some of our competitors.

Our competitors also have a mix of business just like we do, so they do some discrete projects and they do have some preferred relationships, and the ratios of those numbers will vary by which competitor you pick, but the critical point is that they are all driven by the big event.

We take the opposite approach.

We try to build long-term relationships with our customers, sometimes 50, 60-year relationships, and maintain and expand those relationships as we grow as a company.

Today we get more than half our profitability from only 40 clients.

And those are our core clients.

We have preferred relationships with about 80% of our business and that keeps our business growing steadily and keeps us in a great position with those customers regardless of where we are in the market cycle.

A lot of the business we do with these customers goes on year in and year out, and is really base load business rather than big event business.

We also do discrete projects just like our competition.

This tends to be for customers we worked for before but with whom we have not yet developed that deep preferred relationship.

About 90 plus percent of our business today comes from customers we worked for in the past, in recent past, in fact, and we believe that will continue.

We may have the occasional transactional project in backlog.

It isn't a driver for our business.

We couldn't care less one way or the other whether we do or not, but there are occasionally opportunities to make a little extra money or to take a particular position that will result in a nice up tied for our shareholders.

So that's the business as we see it today.

The relationship based business model continues to be a strong model, and frankly we continue to see very few competitors in our space on a global basis.

Switching now to slide nine.

This is our market diversity slide, a revenue by market.

I'll take you through each of these markets and give you a sense of where we think the business is right now, and where it might be going.

I'll start on the refining side.

That's the downstream side of the oil and gas business.

Really robust business for us.

You can see right now it's about 32% of revenue.

There's lots of activity in that market.

And it continues to be very robust business as we look forward.

Just to kind of give you some high level statistics, there's a lot of activity in things like environmental projects, an example would be the MSAT-2 project.

There's something like 80 of those projects out there.

We estimate just that piece of business will be six plus billion.

We've got the business of taking the sulphur out of bunker fuel coming up under [Marpo] 4.

Our guys estimate that could be $80 billion worth of work.

There's belief that we are going to see some changes related to alternative fuels that could drive a huge investment as well, and in this case, an investment that will be made by our refining customers, we see that as another opportunity.

And just to give you a sense of where the market is right now, we went through a review of prospects here in the US and identified over $15 billion worth of upcoming projects in the next 12 months.

So we are pretty optimistic about the refining business as we go forward.

Globally that business is very strong as well.

Our guys estimate something like $195 billion worth of projects in the next few years.

Turning to the upstream oil and gas, as you know for us that's mostly the oil sands business in Canada.

It does include some work in the gas arena around the world, onshore in the US, onshore in the Netherlands and in the UK, and offshore in the North Sea.

Again a very strong business, even with the recent weakening, it's kind of embarrassing to go call, it move from 140 to 120 a weakening of oil prices, we see a huge amount of investment.

Again our estimate on the oil sands alone is something like $115 billion.

So we see that as a very robust market and we are continuing to see opportunities to continue to grow our business as well.

Turning to the chemicals market, another good market for us, about 13% of the business, the major CapEx in chemicals is for the most part going to the Middle East and Asia.

You won't see a lot of that kind of investment in North America or Europe because of the feedstock issues, however there is a fairly significant number of small projects and this sort of maintenance capital, base load capital that we talk about a lot.

One bright spot in the chemicals business is polysilicon.

We've announced one major win in the polysilicon area.

There are lots of opportunities out there and we see that as fueling some of the chemicals business as we go forward in addition to what's happening in the Middle East and Asia.

Public paper, high tech, food and consumer projects, sort of our catch-all category, there's not much story here.

Markets are not particularly strong.

There's not a lot of activity and we don't expect to see a lot of growth out of that aspect of the business.

Pharma-bio is softer than it has been.

It's about like what we reported a quarter ago.

There is some activity.

We have a commanding market share.

But we are not seeing a lot of growth in that market as we look forward right now.

So we think pharma-bio will be a little slow until the pipeline picks up and we start to see more project activity in pharma-bio.

National governments is another very robust market for us.

Remember it's driven by two parts.

One is the environmental clean up market, the other is the research, development, test engineering scientific and technical consulting.

Starting with the environmental business, it continues to be a good business.

The US business is steady.

The business in the UK is continuing to grow.

And we expect to see additional opportunities there.

There is still a number of the UK programs left to be competed or to be decided if they are not in competition.

And we think we will be able to benefit not only as a tier one contractor in that business but at tier two and at tier three.

On the research and development test engineering business, right now that business is very robust, particularly working for customers like NASA.

We've seen a lot of activity.

We will be very successful in winning recompetes.

We are being very successful in winning additional business for our Company.

We think that will continue.

There is some reason to think that in the out years, the shift of investment from Iraq to other issues may affect that business.

On the other hand, the last two times we saw such a shift we actually benefited from it.

So there's not any reason as I sit here today, to think another spending shift won't still be an advantage for Jacobs, given our fairly unique position in that market.

Turning to the buildings business, about 6% of our business, very active.

Some very significant wins in the last quarter.

The business is growing nicely.

You remember that this is technical buildings.

It's buildings where the technical complexity of the program is a critical factor in whether or not we are a player.

We don't do office buildings or hotels or apartment complexes.

So the kinds of projects we work on tend to be driven by the marketplace for those technically complex buildings, which is a little independent of the overall economy.

So things there include big healthcare work and big scientific and technical facilities such as the ITER facility in France.

And those businesses look to us to remain pretty solid as we go forward.

The last aspect of our business is the infrastructure piece.

Again, a good strong business for us, lots of activity there.

We seem to be doing very well.

There are two issues that seem to be driving it.

While we see some weakness in some of the states, Florida, Texas, in the US, in terms of the money they have available to spend, a lot of that's being replaced by local bond issues, a lot of bond programs out there.

The last bond cycle that we have data for, 88.9% of the bonds for infrastructure path.

There is also a lot of money coming into the system in the form of public private partnerships and toll road programs.

We just looked at a major toll road program in one of the southern states this week that represents a huge opportunity for us as a company, all driven by tolling that freeway.

Like I said, it won't be free any more after that.

So overall when we look around the clock at the business, for the most part, our businesses are pretty robust.

Our sales numbers are coming in good.

You can see the results on the revenue line.

We are exceeding our expectations for the year.

We expect that that should result in some pretty good performance in the out years.

With that, let me turn to our commercial at the very end, this is slide ten.

All the good reasons why you all should, an idea of investing in Jacobs.

We do have our customer driven business model.

It is important to us that we continue to do that.

It's the core of what we are accomplishing and it's building a terrific base business for us as we go forward.

We are diversified in terms of markets, geographies and services.

We are in what is a strong market still.

We have got a good solid balance sheet, and we believe we will be able to maintain that 15% average growth for a long time to come.

And with that I will turn it back for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Michael Dudas with Jeffries.

Hi, Patty.

First question regarding staffing, how do you guys look relative to your year end targets for home office and field personnel?

And do you feel you still have the capability to grow the billable hours at the home office or job sites and not add as much G&A, to the overhead given the expansive growth you've seen?

Mike, it looks to me like the continuing challenges of getting staff are going to be there.

It's been a tough market to recruit in for some time now, a couple years.

But we are able to get the people that we need to get.

I think we have a pretty good brand.

I think some of the story we just told in terms of the diversity of the projects you can work on, the sort of long history of success in the company, are certain to help us be more attractive to potential recruits, maybe than some of our competition.

So all in all, I think we are going to be able to get the home office staff we need for a long time to come.

And it is, it's a big world out there.

There are lots of ways to find that staff if it ultimately becomes a problem say in the US or in northern Europe, someplace like that.

The back office, our ability to wheel the work around helps us a lot in that regard.

We are not wheeling the work nearly as much as we could do if we needed to.

With respect to the craft side of the business, I think everybody is concerned about the availability of craft.

We have a lot of construction out there.

Some pretty significant projects, and recruiting craft is going to be a big challenge.

We are taking steps to provide for foreign workers and some of our locations like up in Canada, and we think the work will get done and we will find the crafts people to do it.

It will, without a doubt in my mind, impact schedules, it already has, we are predicting longer construction cycles for the projects that we are working on engineering in today than we might have three, four years ago because of craft availability.

But there's no reason to think that the projects won't get done, and at least at this point, customers aren't running away from projects based on the extended duration or the higher cost that that might represent.

My follow-up question, Craig, is in your, in your and John prepared remarks you talked about two issues, one on the acquisition side, companies are realizing it's much more difficult to compete against companies like yourselves, obviously this hiring issue is one of the drivers.

But secondly you said that the competition amongst maybe bidding and negotiating on projects from clients may not be as strong as maybe you would have thought.

Could you maybe kind of clarify those two issues, and is this going to lead towards a reasonable round of mid-size consolidation in the global business?

Let me take the consolidation question first.

I believe, and I think I see evidence when I'm out there talking to companies that might be interested in considering that as an alternative, that there is a movement in the mid tier kind of players toward being a part of a bigger organization because of the challenges of growth.

It's not just a people challenge.

It's a cash flow challenge.

It's a matter of retiring baby boomer shareholders.

There's a lot of issues that are driving that.

But what's pretty clear is that these mid tier companies are struggling to both grow, pay off their shareholders and recruit the talent they need for the next 10 to 20 years.

And we think that's a good thing.

Certainly it plays to our strategy to continue to use acquisitions as part of our growth strategy.

With respect to the bidding climate, certainly in the marketplace today the bidding climate is not as intense as it might have been a few years ago.

There are fewer bidders even on some of the-- certainly many fewer bidders on some of this lump-sum turnkey work, which should ask that it be made more profitable in the future.

We won't find out.

And certainly even on the services based business, the number of competitors for the bigger projects is down relative to what it might have been a few years back.

So it's still a relatively benign marketplace from a competition point of view.

That's not to say there's not competition.

There is.

But it's not as intense as we would see it in a down cycle.

Great.

Thank you very much.

Your next question comes from Jamie Cook with Credit Suisse.

Hey, guys, it's actually Peter Chang with Jamie.

You don't sound like Jamie, so I'm glad you told us that.

I think that's two times in a row here.

Yeah, I think you're right.

Real quick, I guess I just had a quick question on your guidance, I mean you guys have done, and congratulations on the quarter, but you guys have done about 40% EPS growth in the past three quarters and it looks like your implied guidance for Q4 is about 26% EPS growth.

Would you guys characterize that as somewhat conservative?

How should we be thinking about that?

Is that because field services in the backlog has picked up so much that there is going to be some margin compression?

I recollect that's part of it.

It's not margin concerns, it's just that the percentage margins are flattening, obviously they flatten this quarter over last quarter and such, but we decided over the last couple of years that we wanted to keep the guidance range fairly broad, and I think with the strong quarter we felt we needed to increase it this quarter.

And I think that it represents a range that certainly has some potential for upside but also there is some concerns just because there is some uncertainty out there in the market.

We are not seeing it significantly in any of our sales results or our backlog but it's still out there, and so I guess we've just decided to keep a broad range and keep it within what we think is a reasonable range.

And most of that concern, I suppose it would be in the infrastructure or the pharma-bio type markets?

Well, you could certainly say it could be there but we could also find that one of the major clients gets cold feet about their capital program and decides to go backwards.

I mean we haven't heard that.

We are not seeing it.

But I think it's prudent to consider given what's some of the things that are going on in the economy that we might see something like that, and we just really don't want to have a range that we have to be outside of.

Great, one last question.

It looks like Capex sort of ramped up pretty significantly.

It looks like it's at 87 million.

Was there some major investments that you guys were making?

A lot of that was, well really it's two areas driving that.

One is just the growth of people, additional capital that's going into tenant improvements.

We've expanded our real estate holdings significantly as far as lease space down in Houston, up in Calgary, and various other places.

We've had a lot of capital improvement dollars going into tenant improvements and furniture and fixtures and computers and things like that, as we bring people on.

The other area is, as we continue to expand our systems, drive our global financial system into acquisitions and such, we've continued to make significant investment there.

So it really has been driven by kind of plateau growth, step stair growth I should say, as we have to add people.

Great, well thanks guys, congratulations again.

Thank you.

Your next question comes from Steven Fisher with UBS.

Good morning.

Nice quarter.

Just the theme of my question here initially are slowing in Europe.

And I guess I'm just starting off, is your mix of business in Europe overall and in the UK specifically, similar to your company-wide mix?

And I guess I might expect that the UK probably could be less hydrocarbon driven?

Yes.

If you look at our businesses in the UK and on the continent, it is -- the mix the Company has is representative in terms of markets served.

So we serve most of the markets we serve in the US, we also serve those markets in Europe.

But the relative weight of the hydrocarbons business is lower.

To your point, it's significantly lower, for example, in the UK, it's somewhat lower in northern Europe, and it's very much lower in southern Europe.

Within the UK, it seems like things are slowing down.

How big a market is that for you in terms of revenues, and how much of your work there is maybe driven by Olympics projects, which may have a little bit more support to them?

Well, we don't break out the countries in that kind of detail, but the slow down in the UK has impacted the real estate market fairly significantly.

It hasn't had a significant impact on our businesses as we sit here today.

Again, remember we are focused on things like the infrastructure business in the UK, the scientific and technical building types, hospitals, prisons, laser facilities, those kinds of things.

The pharma-business in the UK has been soft for a long time.

A little better in Ireland, but a lot of the investment is not going to Europe just at the moment.

So it's a mix of business that's a little different than here but frankly we are growing nicely in both the UK and on the mainland.

I think that will continue.

Then in terms of the state budgets, you mentioned about the bond passage rate and opportunities, given that July 1 was the timing for most of the states to pass their budgets, what have you seen so far?

What's your take away from the process, anything that's surprised you?

You know, we don't have all the data in from what the various states have done, so I can't give you a complete answer to that.

But my sense in talking with our folks who are involved directly in those markets, is that while there is some softening in isolated locations, and more locations maybe than six months ago, the businesses is still pretty good.

Remember though that we have a very small market share in that particular area.

And so our opportunities for growth really aren't limited in any significant way by whether the market is 60 billion or 50.

Okay.

And then I guess, can you just touch upon I suppose beyond California and New York, what are your top four, five states for infrastructure today?

Beyond California and New York?

Florida, Texas would certainly be on the list.

Massachusetts, New Jersey, Maryland would all be pretty strong in that part of the world.

Arizona.

Nevada would also be strong.

Okay.

Great.

Colorado, Washington.

More than I bargained for.

I think the point of that is, we really are spread across pretty much the whole United States.

And yes, we have some that are stronger than others but we have a little bit everywhere, and that's back to Craig's comment about we are really looking at opportunities to grow market share as much as just participate in increased spending.

Right.

That's fine.

Just lastly I want to confirm what I heard you say about the fourth quarter.

It sounds like you have all the work in your backlog already to hit the numbers.

But you are maybe a little bit cautious in case of project cancellations, but just confirming that you did say you're not having any discussions like that with your clients today, you haven't heard of any people, any clients starting to talk about projects that might be cancelled.

Is that right?

Yes, I think that's right.

We talk with clients all the time about their thoughts, and certainly among other things we talk about whether these projects are going to go forward or not go forward and what their decision criteria are going to be.

What we are finding is for the most part these projects, if they are struggling as a project, if the project has challenges, what you tend to find is the same thing we've described in the past.

You tend to find not the outright cancellation so much as you find the well, let's delay this a little bit or let's scope this down, we will make this piece of the project a little smaller to make it manageable.

And so the project is constantly moving around in the scheme of things in term of the precise execution of the projects but when you sort of add them all together it's business as usual.

Does that answer your question?

Yes, it does.

I'll get back in queue.

Thanks.

Thanks.

Your next question comes from Andrew Kaplowitz with Lehman Brothers.

Good morning guys, nice quarter.

Wondering about your backlog, the last several quarters you've blown away our expectations in terms of reporting good backlog, and so this quarter again we've got a very nice number in there.

And so I guess two questions.

One is, I know you have relationship based, that's how you do, you get your projects, but how much of what we are seeing here is scope growth in existing projects and how much is maybe new projects with your same customers or different customers?

Is there any way to tell us that?

Craig threw that one to me.

Basically we are not getting tons of scope growth to get in there.

The big increase has been new awards or projects moving from the feed phase to the phase I, phase II, phase III, phase IV.

Remember, we don't backlog the downstream phases until we are pretty sure we've got them and are moving ahead on them.

So these projects get backlogged in phases but it's not scope growth, it's not like we have a $300 million job that's all of a sudden 500 and we are adding 200 to the backlog.

That's not happening.

I can't think of an example where that's happening.

So it's basically new work and it's also the extrapolation of the phases as we move downstream.

That's great, and Craig, is it fair to say that the strength still is coming disproportionately from oil and gas versus your other segments when I look at the backlog you reported this quarter?

As I look at it, I would say certainly oil and gas is one of the stronger markets.

Right, so it's certainly contributing disproportionately when compared to a market like, say, pharma-bio.

But we are getting some pretty strong contribution out of our infrastructure business.

I know the revenue numbers look small.

But remember that's almost entirely a pro-service business.

The national governments piece, the infrastructure piece, are also pretty solid growth elements as we go forward.

Gotcha.

Craig, it might be a little early but focusing on '09 for a second, obviously you've put up strong new awards so far this year.

Probably you will put up strong new awards again in 4Q.

And so, can you in 2009 do you think still grow your backlog versus 2008, given the growth we've seen in 2008 versus 2007?

We certainly believe that we have the opportunity to continue to grow our backlog based on what we see out there in prospect.

Beyond that we are not really giving any guidance for '09.

I didn't think you would.

Just one more follow up if I could.

So it doesn't sound like you're seeing sort of material delays in your projects.

Maybe you're seeing people sort of take their time but people worry about cost escalation and its effect on these projects, but in general the customers are sort of, they might be delaying something a bit but you generally see these projects go forward.

Is that a fair statement?

It is.

I will get back in queue.

Thank you.

Your next question comes from John Rogers with D.A.

Davidson.

Hi, good morning.

Good morning, John.

A couple of things, first of all just on the backlog again for a second, are you seeing projects extend out further?

I mean of the backlog that you have, the $18 billion, are they longer projects than you've seen in the past?

Is that part of the growth or is it -- is this all going to be completed over the next 18, 24 months?

I would say that certainly the size of some of our projects has increased, you look at a Motiva or some of these larger projects, does tend to be a little bit longer than what would be historically have been in our backlog.

But when you look at the biggest part of our backlog, as far as number of projects, they are still in that same scope that are 18, 24 months.

You look at the professional services side of the contract, that tends to be the front end part of that design and such, and other than some of the government contracts that go on for multi-years tends to be shorter.

And while the duration maybe has extended a little bit, it's probably not that much different than it was a year or two ago.

But I would say that projects in general are stretching out a little bit just because of availability of labor, availability of materials.

The getting in the queues and fabrication and shops and things like that, so what took 18 months or 20 months a couple of years ago might take 22 to 24 months now or even a little longer depending on what kinds of equipment, what kinds of specialty stuff or the concentration of labor or equipment that you need to put on the job.

Then secondly the, I guess Craig or Nolan, you guys were talking about the balance of your business, while revenue wasn't necessarily a good measure of relative contribution, still the oil and chemicals side of the business are disproportionate amount of it, and as you look at acquisitions and expansion, is it your intent to balance, to rebalance that portfolio?

Or is it across segments or are you looking, thinking more about multi-domestic guess is the phrase used, balancing it that way or is that a consideration at all?

No, it's definitely a consideration.

What we continue to look at from an acquisition perspective is markets that we think have solid long-term prospects.

So we are still bullish on the oil and gas business upstream because we remain a very small player in a very big market, and an acquisition or two could help us considerably there in terms of accelerating our growth.

We are also very interested in the other side of the equation, our growth in the government services side, our growth in infrastructure, our opportunities where we think again long-term pent up demands, very large markets and that will tend to keep the wheel in balance over time.

Remember, that part of why we have this market diversity is because we tend to see counter cyclical spending in some of these markets, so when things like oil and gas gets weak there tends to be an offsetting spending going on in things like infrastructure.

And you can recall back not so long ago, refining was 8% of our revenue.

And I suspect some day it will be 8% again.

I hope not but I suppose it could happen, and we want to try to have the balance in the wheel that let's us continue to grow even in those times.

Hopefully all the other segments grow more to--.

Amen.

We always said if you think of this as, I don't know, maybe we have nine cylinders now, so our analogy doesn't work, we used to say there is eight cylinders in the engine and if five are firing we can continue to make our growth targets, and it's kind of any five and I think to a large extent that's still true.

Great.

Thank you.

Congratulations on the quarter.

Your next question comes from Alex Rygiel with FBR.

Good morning and congratulations, gentlemen.

Thanks, Alex.

Craig, you mentioned earlier that at this time you were, if you were to see a customer get cold feet and pull back on CapEx, I guess your comment was, if you were maybe, obviously something would pull out of your backlog, if that were the case what market would that customer be in?

That's a good question.

Because it could be any of them outside of the government markets.

You rarely see that on the government side of the business.

What's the most likely?

I would say the most likely is oil and gas.

Would that be a relatively large project or a relatively small project?

To have any impact it would have to be a relatively large project.

To have any meaningful impact on a quarter, it would have to be a relatively large project.

But there's a remote possibility it could be in refining as well, I shouldn't say remote, there's a possibility it could be in refining as well, but an awful lot of the refinery work we are doing right now is environmentally driven and really can't go away, but there are some of these big (inaudible) projects or the capacity expansions and those could also be impacted on the refining side.

And if I remember, three or four years back when there were two projects being pulled out of backlog particularly in your pharma sector, they came back in, just in a different version, would that be the likely scenario for a project that we're hypothetically talking about here.

We are being very hypothetical.

That would be my expectation is that that work would get done in the future.

The question would be, would it get done in the same location and would it be configured in the same way.

And probably it would be a little bit of a different project and might well be in a different location, but remember we are being very hypothetical here.

Sure.

And in that customer's decision process right now, is he taking into consideration the higher material costs of the project at this time?

Is that significant or is it more a function of his internal cash flow position today and demand of the end product.

I have no idea what the customer is thinking to that level of degree.

I would expect that the cost of these projects is a factor if you are thinking about whether you want to continue or not.

Really the return issues are the critical ones, right?

Is this going to be a profitable investment for our company based on the facts as they exist today.

I think for the most part, our customers are concluding, yes, it's still a profitable investment or it's something I have to do because the law requires it.

Two more questions.

Could you define the size of a mid tier company?

Either in employees or potential revenue.

Yes, sure, I would guess the mid tier companies that we are talking about today are probably in the range of 2000 to 6000 people.

Could you update us on the acquisition of ZATE, any kind of integration or opportunities that you've seen in the last several months?

I will give that to Mr.

Watson since he's our expert.

I am the Middle East expert.

The acquisition of ZATE has gone well.

We have only had the deal closed since some time in April, and we just visited the Middle East and things are moving ahead rather nicely.

This is a long game.

I think we've said before, this isn't going to change the profit stream in Jacobs before the end of the decade.

It will be profitable but you won't see it in the numbers.

It does look like we have ourselves into a unique position in terms of, we are on the ground in Saudi, we have control of a really good organization, and we expect that business to double by the end of the decade, or by 2011, who knows where we go after that, a lot will depend on the market, so everything so far is thumbs up.

Excellent.

Thank you.

Your next question comes from Avi Fisher with BMO Capital Markets.

Hi, good morning, thanks for taking my questions.

You mentioned in your prepared remarks you are seeing some moderating in pricing but that's a good thing.

Wondering, doesn't that imply some slack in the system overall?

Why is it a good thing?

I'm not sure that's what I said, or maybe it is what I said but not what I intended to say.

Are you seeing moderating pricing?

In terms of turning down?

Well, let me back up a little bit because I'm just taking your comments and maybe I apologize if it's out of context but at least the producer price index for architectural engineering services shows weakening growth rates, and that would imply slack in the system and your comments sort of reiterated that.

So what kind of trends are you seeing in pricing?

Well, I guess it depends again, it's kind of market specific, but for the most part in the markets that I just described as robust, we are not seeing any significant moderation in the growth rates, and as a result there is lots of work being chased by relatively few people.

I think I commented earlier that the number of bidders on some of these lump-sum turnkey projects was lower, that we are not seeing the level of competition on individual project opportunities that we have seen historically.

So for the most part I would guess that it isn't moderating.

I think if you are in the arena say of the buildings business, particularly that part of the buildings business that is more dependent on commercial retail residential multi-family, that's a whole different world but that's not a space that we are involved in.

I did make a comment about moderating pricing with respect to acquisitions, however.

Okay, I'm sorry.

That is a good thing.

Gotcha.

I'm trying to reconcile your comments, your robust comments for the refining market with thinning refining margins at your clients.

Can you sort of discuss that a little bit?

Again, an awful lot of what our refining customers are doing are either to address thinner margins by getting lower cost crude.

There's a lot of these crude slate changes that's going on that are driving a lot of these major programs.

But then you have layered on the MSAT 2 programs for benzene removal.

You have the non-road diesel still as a fairly big activity in terms of sulphur removal, non-road diesel.

I think our refining clients are a little bit of a catch 22 here.

It's money they have to spend to be competitive in the future.

Because if you are the only refiner who doesn't deal with their crude slate problem, then you're refining margins, your (inaudible) spread is going to be ugly.

I think some of our customers who are pure refiners and aren't throwing off the cash flow that the upstream side of oil and gas represent, are finding themselves forced to make these investments in order to remain competitive and get themselves positioned in the marketplace.

But it's a tough time for refiners right now.

You have, switching gears a little bit, you have two elephant projects in your field service backlog that could represent up to 20% of the backlog.

And you've talked about as projects convert into construction and the impact that could have on margins.

But since these are long cycle projects and complex projects, do we expect that they would have higher margins for a construction business than we've seen in the past?

I wouldn't expect that if I were you.

Okay.

Remember that the customers here are highly sophisticated buyers, right?

They are some of the biggest companies in the world and they know what they should pay and they do have a slate of players to choose from even if they are doing a sole source negotiation, there is a bandwidth that you can't get outside of.

Because it's complex, just because it's big.

You do your best to get a little extra and maybe get a little extra but I think it's rounding error in the scheme of things.

One last question and I appreciate your taking them, and I think Michael alluded to this earlier, your SG&A costs came down quarter over quarter quite significantly from 10.5 ?

Was most of that some right-sizing in some acquisitions or where are you getting

Most of it is a result of the change in mix from, dominated by home office to an increasing share of field services.

Okay.

Thanks very much.

Next question comes from Tahira Afzal with KeyBanc.

Good afternoon gentlemen, congratulations on the quarter.

I had a couple of questions, but before I start I want to ask, I don't think you guys commented that pricing is going up at all and throughout the whole up cycle if I remember from any of your quarters.

But anyhow that's a different thing.

I just wanted to ask you a couple of questions in regards to, if you look back to the last election cycle which is 2004, and you compare it to what you expect now, is there any sort of slow down?

And I'm not talking about cancellations but any slow down that you could potentially see in terms of Federal spending based on any particular dislocation you think that people might be anticipating?

Well, the election results, regardless of who wins, there will be some period of time where, particularly releases of new programs and projects, ie new prospect opportunities, will decline.

We've seen that with every change in administration for as long as we've been in the business.

They all have to scurry around and get their new undersecretaries and assistant undersecretaries and so on, and in that period of time new business grinds to a halt.

Would that be sort of your first fiscal quarter of '09?

How should we look at it in terms of timing?

This is a Federal Government discussion we are having hear obviously, but it generally will be in the first or second calendar quarter that you will see the most impact.

There's sort of a scurry to get things done before the elections, so our fourth fiscal quarter, the third calendar quarter, might have more activity than usual in it because of the change in administration but then it will start to slow down.

Now what that impacts mostly is the timing of new awards.

So what it doesn't seem to have a significant impact on the work we currently have.

The work we currently have tends to be under continual resolutions.

It gets funded, maybe the amount of funding varies a little bit, some gets more, some gets less.

That hasn't been the issue.

It's just been the delays in getting new project opportunities kicked off and won.

I should look at it more as a timing issue.

And the effect of that is kind of in out quarters.

If I look at what you're talking about and what you are saying in terms of inflation, bottlenecks, etc., and how they are translating into cost increases on these projects, if you go back and you look at what price of oil, these projects become economical and you look at oil sands, buses, offshore, rest of some of the conventional projects that are out there in the oil and gas side, are you seeing any sort of feedback from sponsors on where these economical points fall now?

Well, the only data point I really have with any comfort is a conversation we had recently with one of our customers in the oil sands who continues to believe that $65 plus or minus, is the right break point for oil sands investments.

So clearly that's not a market we can be very concerned about right now.

I haven't had a chance to have a dialogue on the sort of deepwater, the high investment offshore stuff.

So I can't really answer the question with that regard.

I might be able to answer it next quarter though because I hopefully will have had a chance to have that conversation.

Lastly, looking at something in terms of I think what Steve asked earlier, in terms of Europe and you see what's and a few other builds are saying in terms of infrastructure, if there is a slow down over there, how much of the impact is something that you can push off to let's say the Middle East or something like that?

Are you sort of geared in that ready to transfer some of the momentum over there or would you just translate for the time being?

Again, it would be, the potential downturn in that business in Europe would certainly drive us to look for other places to keep our volume and our backlog up.

We have been working hard to position ourselves for example in the Middle East, not just in the oil and gas arena but also to get, start to get positioned for the infrastructure and buildings business.

And I think there's probably some opportunity to take advantage of that market, presuming oil and gas stays strong and therefore there's lots of money to invest, as we sit here today.

More particularly interested in some of the things that are going on there in the way of healthcare where we have a strong position.

We think that might represent some opportunities for growth.

Another aspect is India.

We clearly believe that there's going to be lots of investment in India.

It's a place where we have a good position already but I think we again, expand our position with respect to infrastructure and the technical buildings business and continue to find opportunities for growth.

If you look at your positioning in India versus some of your E and C builds that we usually come across, how would you regard that, is it the same kind of landscape or are you better positioned?

We are positioned differently.

I wouldn't say better or not.

For the most part, a lot of our competitors' position in India is purely based on back office engineering for major projects and programs around the world.

So their operations there are essentially dedicated to doing big projects in far away places.

We've positioned our India operation completely differently.

It is first and foremost a domestic engineering business like virtually all of our operations.

That's why we call them multi-domestic.

So a substantial part of our business in India is doing engineering for Indian companies or for foreign direct investors in India.

And then we layer on top of that things like the work sharing and back office engineering.

So our position is probably more diverse and more localized than most of our competitors.

And I guess my last question is, I would be more directed towards Mr.

Watson, are you sort of, any update on looking at the power sector again in terms of an acquisition?

I will let you take that one.

I will take that.

At the power sector, I think Craig said before and I certainly said it before, one day we will be in the power sector.

We are not rushing to go get there right now.

We've got so much on our plate, we've got so many expansion opportunities now within what we call the lines of business we are already in, including some of the geographical moves we are making in the Middle East and other places.

We tried to buy Stone & Webster what, seven, eight years ago, six, seven years ago now.

I remember that.

We didn't get it done.

We certainly would look at a good opportunity if it came by that made sense, but I think as Craig said before his priorities today are still the infrastructure business and the upstream oil and gas, and that's really what's driving the acquisition process today but we would look at other things.

Would you look at, on the power side, something, and I know you guys are very focused on your business model, would it be more along the lines of let's say a company like a Black and Beach type of company or would it be more of a construction oriented company.

It probably would not be a construction oriented company per se, just because the likely business model there is very transactional and we haven't had a lot of success in acquiring companies with that kind of a business model.

So we would be looking for a company whose culture is like ours, that is very relationship based, very long-term oriented.

I won't try to speak to which of those companies out there in that business might have that culture or might not, but certainly that would be our focus rather if the opportunity came, rather than some sort of a contractor.

Thank you very much, gentlemen.

Thank you.

It's beginning to sound like there are no more questions.

Your next question comes from Chris Hussey with Goldman Sachs.

I'm sorry, guys.

No, Chris, we love to here from you bud.

It's the shortest question after the myriad of questions you guys have been riddled with.

Maybe on the refining business, what percentage of that 32% is US versus outside of the US at this point?

I'm thinking here.

We don't break it out so I don't have the numbers right in front of me.

I guess as close as I can get is certainly more than half is US but without going back and double-checking I couldn't give you a better number than that.

As you guys look at your prospects going forward, should we expect that to, looking out to that 2011 comment you made about your growth prospects in the Middle East, should we expect that to stay there or could you see it switch over by 2011 where you guys are bidding outside of the U.S.?

I could see it switch over.

As I mentioned in the prepared remarks there are a lot of prospects in the refining industry right now in the US.

So near term growth there is going to be quite good and it's probably our strongest market.

In the short term, I certainly don't expect a big swing.

We expect over time to be a player everywhere there's a major opportunity in the refining business, so the Middle East, Singapore, the US, northern Europe, are all going to be factors and that could swing the balance away from the US at one point or another.

Thanks, guys.

Your next question comes from Barry Bannister with Stifel Nicolaus.

Hi, Barry.

Hi, guys, it's actually Robert Connors, good quarter.

Just on the commodity side, as you see the cycle continuing to progress and projects move out of the design phase and into the field, can costs continue to be kept under control, especially as field service revenue continues to pick up as we saw in this quarter.

If you're thinking from the standpoint of our income statement, yes, I suspect you will see the costs will continue under control or I will have some new executives.

I'm being a little facetious.

The fact is that the field cost part of this business, the sort of cost of goods sold part, is pass through.

And so what you will tend to see is, you may tend to see an escalating revenue line and an escalating cost of goods sold line as that goes through the books.

But the G&A cost of running the business to support that will actually probably moderate against it, right?

In other words it will stay low or relative to those increasing costs than not.

We will have pressure on our labor per staff and that sort of thing just like anybody else will.

We expect that as the business goes on, if there is inflationary pressure on our customers and there is bound to be some, that won't impact our costs of delivering the work at the G&A line.

Just on top of that and you alluded to it earlier, as far as SG&A just being a function of the mix, would you probably expect to see some improvement there to offset that field service or are we at a best case scenario right now as far as SG&A as a percent of revenues?

Well, as we, if with see the fields services revenues growing as a percent of the overall revenues, it does not drive an increase in the dollar amount of G&A like you would see if you were seeing the pro-services because you don't have all the space requirements and such like that to support the fields services.

So if you're talking as a percent of revenue as that mix changes, the percentage will come down.

Absolute dollars we'll still see some continue just because of inflation and such that the absolute dollars will continue to probably increase as the business grows but will be at a rate much less than what we are looking at at least currently, the field labor and some of our field costs and things like that.

And then just could you update us a little bit as far as what you are hearing from your clients on the oil sands market?

A recent E and R article had talked about cost increase in the regions of 40 to 60% over the past two years, and if you're talking on a capital cost basis, projects explode into about $40,000 per barrel of daily production versus only $25,000 two years ago?

Are we seeing more of just push backs and rescoping and not necessarily cancellation at this point or--?

I'm looking at our executives that are responsible.

I'm not aware of any cancellations, are you?

There's no cancellation on the books at this point in time.

Cost pressures are there but it's being watched closely as it moves on.

Investments are still wise.

I think the economics are just overwhelming in terms of $120 to $140 dollar oil and a $60 all in cost.

You have to remember, a couple of years ago that $60 all in cost was 40 or 35 depending on the type of activity.

So what you are talking about the form of cost increase in capital cost is translated into higher break evens but the higher break evens still are significantly below where the market price of oil is.

This concludes the Q&A portion of today's call.

I will now turn it back over to management for closing remarks.

Thank you all for listening and dialing in.

We are pretty happy with the results for the quarter and are looking forward to having a similar call here in about 90 days.

This concludes today's conference.

You may now disconnect.