雅各布工程 (J) 2008 Q4 法說會逐字稿

Good morning, my name is Ashley, and I will be your conference operator today.

At this time, I would like to welcome everyone to Jacobs fourth 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).

I will now like to turn the conference over to Patty Bruner for the opening statements.

Then she will turn it over to management.

Ms.

Bruner, you may begin your conference.

Thank you, Ashley.

Good morning.

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

Although such statements are based on management's current estimates and expectations and currently available competitive financial and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties has the 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 condition and results of operations contained therein.

And the most recent form 10-Q for the period ending June 30, 2008.

For a description 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.

Now I turn the call over to John Prosser, CFO, to discuss the period's results.

Thank you, Patty.

Good morning, everyone.

I will briefly go over the financial highlights for the quarter and the year then I will turn it over the Craig Martin who will give us a business overview.

If you go to slide four, financial highlights, it was a very good year and very good quarter.

The year -- our EPS was $3.38.

That included the $0.04 one time gain that we had reported in the first quarter.

The EPS for the quarter was $0.92.

Again, a strong quarter.

And that actually included some effects of the hurricanes we had in the gulf coast this quarter.

That probably had an effect of between $0.01 and $0.02 on the quarter.

Net earnings for the year was $420.7 million.

Again a strong growth over prior year and good results.

Back log at $16.7 billion is up 22.8% for the prior year.

Balance sheet continues to be strong with net cash of $547.8 million.

We're initiating our fiscal year '09 guidance at a range of $3.55 to $4.05 per share.

Next slide, slide five gives us a history of our growth.

Look at the bars underneath the the chart.

We continue to grow above our historical target rate of the 15%.

If you look at the last five years compounded through the end of '08, we're tracking just a little bit above 30% on an annual compounded growth rate.

The next slide, slide six, again back log for the end of the year is $16.7 billion is up, nicely from last year.

It is down slightly from the prior quarter.

As we reported in the press release, we did have a -- a removal of $2.36 billion as a result of a customer moving future phases of a project in Canada to another contractor.

But even with that reduction we still have a very good backlog and the outlook for the year and for the future remains strong.

With that I will turn the call over to Craig Martin, our CEO, to review the business overview.

Thank you, John, good morning everyone.

I will spend a few minutes this morning talking about our strategies to continue to maintain that long term objective of 15% growth.

I will take you through our key factors.

The things that really drive our business in that regard.

Probably spend a little more time on it than usual here to help you understand where we think the markets are and why we think that is good for Jacobs.

The five key things we continue to do is first and foremost remain committed to our business model.

I will talk about that business model at length, but we think it is the ideal model for the times that we're in today.

We're going to continue to focus on our diversity of markets.

We're going to continue to -- our multi-domestic strategy, we think more than ever localness counts.

I will talk more about that in a minute.

Acquisitions remain an important part of our strategy going forward.

And we believe that driving down costs is critical at any time, but it is especially important in the times we might face coming up.

Let's talk now about our relationship-based business model.

I know many of you have seen this chart before.

I'm on slide eight now.

But I think it is important to contrast the business models and why I think those differences could prove to be significant.

The industry model, on the right, is one that is dominated by what we call transactional projects.

These are the things that are big events, giant jobs in far away places or giant lump sum turn key events around world and most of the industry favors those kinds of projects.

They are the kinds of things that can drive significant profit, and rapid growth.

But they are lumpy and they occur less frequently in turbulent times than they do in really strong times.

Contrasting that to our model where we work on preferred relationships almost exclusively, we're dealing with core key clients.

That is long term business, evenly spread across the markets and it is significantly base loaded.

By base loaded I mean small cap work, alliances, -- the kind of work that tends to go in year and year out without regard to what is going on in the market places.

And for most part, if you get any of our offices around the world, a third or more of their day in and day out business is this base load business.

Another key element of our business is the discrete projects area..

Discrete projects will likely to become competitive competitive as we go forward.

Price will tend to become more of an issue.

And we are well positioned to address this issue if it comes up.

We think our business model, this relationship-based focus will drive a significant advantage for us as we go forward over the next couple of years.

The business is going to be good, but I think we're in a better position to capitalize on it.

Going now to slide nine, revenue by market.

We have a couple slides on this issue today, so I am going to cover some of the markets here then we will turn the page to the next slide and talk about the rest.

Let me start with the chemicals business.

Chemicals is for the most part a GDP driven business, sensitive to recession.

But if you look at our history in this part of the business we have had a very steady percentage of our revenues that came from the chemicals business.

It is one of those places where we're very well positioned on the small cap side, doing mostly small cap and maintenance.

So that business is more or less, recession insensitive on our side as compared to the chemicals market generally.

We're seeing activity in the Middle East.

I will talk about that more, and there is some strength in polysilicon that we're taking advantage of.

But I will tell you the chemicals market is probably going to be okay to maybe a little better than that going forward.

Now to public paper, high tech, food and consumer projects, -- products, I'm sorry.

There are various drivers for these businesses.

Pulp and paper, interestingly, is slightly up.

Still a very small business for us, mostly in North America.

But it is a business that's slightly up and there are fewer players in the business every year.

We're benefiting from an increasing market share in pulp and paper.

Food and consumer products is obviously a recession-dependent business, but we're growing in alliances and small cap work and we're pretty positive about what that means in terms of our ability to sustain that business.

High tech is weak, but our prospects are improving slightly.

Some of our customers may be making investments in the future.

It will be interesting from that point of view.

Overall still a very small part of our business but it is not bad, it is okay.

Turning now to national government.

There are two parts to that business.

Our research and development test engineering, scientific and technical services business.

And that's a good business with continuing growth.

You will have seen in the last quarter awards from NASA and the UK Ministry of Defense.

The Department of Energy is announcing an Award of Hanford -- that is now being protested.

We will see how that turns out.

That business continues to be good.

We see continuing opportunities in the future with the Air Force, NASA, the Army, Special Operations Command.

We believe we will see good growth out of that business going forward, before you think about any sort of pump priming that might occur to stimulate the economy.

On the environmental side, environmental work in the US, the other part of our national government's business, is pretty flat.

But our share is rebounding.

And we're pretty pleased with that.

We see us as increasing our share of that market, maybe getting back to some historic levels or closer to them.

And in the UK, of course, the environmental cleanup market -- particularly on the nuclear side remains very robust.

That $150 billion, most of it still needs spending.

And we continue to be able to participate at all three levels, Tier 1, Tier 2, Tier 3.

In all of that nuclear cleanup opportunity.

The AWE process is also continuing.

We like our position with AWE and we're optimistic about the outcome there.

Moving on now to buildings.

You need to recall that our buildings are technical buildings, so these are government and institutional owners for the most part and in their buildings where what's on the inside is more critical than what -- -- what the building looks like.

It is science facilities and hospitals and schools, it is jails, it is courthouses.

It is that kind of work.

It is a great market.

It is a very large market in which we still are a very small share player so we have lots of opportunity there.

And we have had a lot of awards and strong prospects as we sit here today.

Just looking at bond issues, we're tracking of the many, many, many bond issues that are out there we're track being 14 bond issues in the buildings business right now.

Totaling about $18.5 billion.

All of those, without exception, are polling to pass.

That -- we will see whether that actually turns out to be true.

Sometime tonight.

But the fact that they are all polling to pass and that most only require a majority is really good news from our perspective.

We think there will be a lot of good business there in the markets that we serve.

Moving on now to slide 10.

We will talk about the rest of the markets.

Oil and gas market remains very robust globally and we see lots of spending.

Many of our customers announce they will will continue to spend at the same levels they have been spending in the oil and gas market generally.

But we see the oil sands in Canada as weaker.

The market was probably about a $120 billion market in terms of projects out there.

I think we told you $115 billion last quarter.

It is hard to predict exactly what is going to happen.

But if you took Suncor's decision to cut back by about a third it would still be an $80 billion market.

And $80 billion of work up there is more than there is capacity to do.

So while the sands are clearly weaker, it is still a huge market for us and a great opportunity.

A lot of you are always wondering what happens to the SAGD projects and mining projects at different oil prices.

We took a hard look at SAGD because that is one of the areas where we are a leader up there in Canada.

Even at $60 to $70 oil we see $19 billion worth of SAGD projects that make good IRR returns.

I guess that is a duplicate -- IRR returns, just IRR.

Anyway, it is a huge market.

There is a lot of opportunities.

It actually plays to our strengths.

Again our focus on small cap and alliance will help us baseload our business in Canada.

We're getting a grip in the Middle East.

We told you I think when we made the acquisition of ZATE and started to focus more on the Middle East that it would be a long haul.

It still will be, but things are starting to come our way in ways that we are really pleased about and probably a little faster than maybe we originally thought.

We have about 800 people locally now, between Abu Dhabi and El Khabar.

Our model is at work.

Our localness is one of those things that will continue to drive projects to us, as compared to people who want to export all the work.

So, we see the Jacobs multidomestic models as working well and I will mention that again in a minute.

On the infrastructure side, there clearly are funding issues out there.

The credit crunch is probably impacted infrastructure from the standpoint of the PPPs, the public private partnership, the private finance projects, and -- it is harder to get capital for those jobs.

And there are certainly some states where tax revenues are a problem.

However it is still a huge market and once again I will remind you that our market share is pretty small.

We do have robust prospects and really strong sales in that area and again there are a lot of bond issues out there that would represent major investment.

We're tracking just eight of them specifically right now.

But they represent almost $60 billion.

And all but one of those is polling to pass.

One of the ones not polling to pass is the biggest one of all at about $30 billion but the rest of them are all polling to pass.

Some of them as high as 80% polls in favor.

So, we think the infrastructure business is going to be good.

And we're hopeful after the bond elections today, it will be an even more robust market going forward.

I have talked about the other markets generally, but I wanted to mention pharmaceuticals specifically.

We're seeing a slight pickup in the number of projects.

Not big, big projects but the number of projects.

We're really benefiting from the fact that we're sort of the last man standing in the industry.

Most of our competitors have run off to do other things.

And left us, a market that is not as competitive as it had been historically.

So we're pretty happy about that.

And we think that will drive some nice growth.

The last market I want to talk about was refining.

An awful lot of what we think we will see going forward will be environmentally driven, but not all of it.

We polled our core key clients, six of them, not all of them but six.

And they have a plan of about $32 billion in CapEx for chemicals and refining in '09'.

So that's a very robust market in the refining and chemicals business and the bulk of that is refining.

People like Husky have announced they are moving forward major programs in places like Lima, I think they said $2 billion to $3 billion at Lima.

So there are a lot of things going on that are positives from the overall market place, but I think the environmental side of it is probably the best news.

You know we have the -- the MSAT2 work for the removal of benzene going on now.

That's about a $4 billion to $6 millionmarket.

It is now moving into the EPC phase.

Most of the front end work is done.

We will see a lot of activity over the next couple of years as we get to the implementation of those projects.

We have the news, point source, regulations, the Subpart Ja going to drive another $1billion to $1.5 billion in work in the 2009 to 2014 timeframe.

This is perfect work from our position, because it is small project related.

We're looking at projects on the average that are $10 million to $30 million in size.

And we -- when you get $1.2 billion of those that is good news for Jacobs.

Following that we see Marpole 6 -- our guys think that is about an $80 billion investment, $13 billion of that in US..

They think it -- MARpole 6 will drive about $4 billion of new business opportunities in the '09 - '10 timeframe.

Following that, you have got this whole greenhouse gas thing.

And the numbers are too enormous to contemplate.

Just in hydrocarbons alone we think the next five years has $5 billion to $10 billion worth of GHG work and maybe $120 billion long term.

And that's dwarfed by what will happen in the power sector if the greenhouse gas things continue to go the way they are.

So a lot going on in the market place.

Certainly a turbulent time.

The bubble is -- we have cast it more than once.

I think the bubble has burst but that doesn't mean it is not a great opportunity in the market place for Jacobs.

Turning now to slide 11, acquisitions -- we had great success.

I mentioned in particular how our acquisition in Saudi Arabia has benefited us recently, but our infrastructure business continues to grow and real positive.

We continue to look for additional opportunity and infrastructure, particularly outside the US.

We're looking for oil and gas acquisitions anywhere we can find them.

And interestingly, aerospace and defense acquisitions have finally become economic and that may be a good opportunity to build our business with the governments around the world on the defense side.

So, we think acquisitions will be really solid for Jacobs going forward.

We think pricing is going to come down.

Partly because of private equities, difficult in accessing capital.

Partly because generally multiplies have been depressed for some time now.

So, we think it will be a great opportunity over the next couple of years to make really clever and profitable acquisitions.

Turning to slide 12 - our growth across the world.

This is our most multi-domestic slide, if you will.

You can see that we have gotten great growth rate outs of all of our businesses around the world.

None of those growth rates are anything to sneeze at, but I will point out again that our localness is what is working well for us.

You know we're -- we're right there with the customer in the country, and that's driving good business growth for us that probably isn't easily accessible on an export basis.

We're finding it it is a lot easier to win work if you do a big part of it in Saudi Arabia than if you take it it all to England or the US, or Holland for that matter.

We're making slight progress in penetrating China.

We have our first real work starting to show up in China.

Sometime in one of these calls we will actually color that country blue.

Maybe not next quarter but not too far in the future.

And now turning to slide 13 - you can see we have had 22 years of keeping our costs where they ought be.

The gray line is just an indexed actuals.

The blue line is indexed and adjusted for the consumer price index.

We think that is a great story, a particularly great story when the markets are turbulent.

When you look at that slide you can see it turns up sharply in '08 like we're controlling our cost.

The fact of the matter is mainly acquisition in '08 in Carter and Burgess.

If you look at each one of those peaks you can attribute it to an acquisition.

CRSS in '94, Serete in '97, Sverdrup in '99, Babtie in 2004 and now Carter & Burgess in 2008.

If you look at the slide, the -- the chart to the right each one of those acquisitions you see what kind of opportunity that represents for us.

I think having a great cost posture is a terrific place to be in a turbulent market.

Turning now the slide 14, this is sort of my commercial.

We think we have got a great business model.

We have had really good success over the last three or four years.

But we frankly think we're in our sweet spot today.

That customer-driven business model, that relationship-based approach, the base load of business, our diversified business, our ability to stay close to our customers locally, and what is actually a pretty good market, but not the kind of market it was a year ago, represents a real positive for us.

We have got a strong balance sheet to help support our acquisitions and we're confident we're going to be able to continue to grow 15% on the average year-in and year-out for evermore.

With that I will turn it over for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Steven Fisher with UBS.

Good morning.

I am not sure how much you can talk about the customer issue in the oil sands but wonder if you can give us any sense for whether this was specific project performance related or was it more contractual in nature.

I don't want to talk about this a lot because I am embarrassed by it.

But the simple fact is that, like a lot of big projects in today's marketplace there were struggles with the project itself.

But that is not usually a problem because usually our relationship approach to the customer allows us to deal with those issues and work our way through them.

And frankly we didn't do a good job of managing the customer relationship and doing the right things with respect to the customer's concern and, that was the end of that.

So -- it is an embarrassment to us.

Not something we like to happen.

It is not like it is a big factor in our P&L.

It's less than 1% of our gross margin for '09.

But the fact of the matter is it is a real embarrassment to us because this doesn't normally happen to Jacobs.

Was this project booked in fiscal '07 or fiscal '08.

In both.

In both, okay.

What kind of capacity does that free up for you.

How would you characterize that and what can you do with that capacity?

Well, it freed up quite a bit of capacity, most of which we have already sold.

Okay.

And then, in terms of outside of the issues, the pace of bookings looked pretty good in the quarter.

I wonder if you can talk about how that progressed between July, August, September, and then what kind of trend you're seeing in October versus September.

Sure.

The bookings were relatively even.

Probably stronger in July and September than in August because of the silly season in Europe.

We always suffer a little bit of seasonality in sales when the Europeans go on vacation.

What is interesting to us, though, is that October was quite strong.

You know, not ridiculously strong compared to any previous month but a good solid month.

And so, while we -- we're -- I guess looking over our shoulders in paranoia about what all is happening in the marketplace and stock prices and all those things, the fact of the matter is it isn't showing up in the sales yet.

Okay.

Then just lastly here.

I mean the outlook you mentioned for baglog, I think John, is pretty strong.

Do you think you can continue booking at pace of $4 billion a quarter for the rest of the year?

Went -- we don't forecast bookings so I'm not going to speak to a specific number but there is no reason in our minds right now that we can't continue to grow the business nicely.

And that the market won't support continuing growth..

Okay.

I will get back in queue, thanks.

Our next question comes from the line Jamie Cook from Credit Suisse.

Good morning and congratulations.

Just walk me through your EPS forecast for 2009.

It is a broad range and I understand the uncertainty in the market out there but how much of that is -- is the $3.55 based on, basically just what we have today and in the Canadian business going away or -- can you just help me walk me through the range in what the different drivers are getting to the lower end and the higher spend.

Well, you know, as we said before we don't have a lot of guidance within our guidance but -- you know I think that -- the lower end reflects theuncertainty in the marketplace, and as Craig says we haven't seen any significant changes, but it is out there.

The Canadian market is weakening but -- you know it is not going away as you characterize it.

I mean even in a weaker market it will be down and we will be -- just won't go to zero, we don't believe.

There is an awful lot of activity that is on going.

I think the -- the lower end represents, a weakening maybe of the conditions out there and the upper end, and continues things with a little bit of upside to them but that's kind how we normally do our ranges and our forecast.

And --

If I can amplfy Jamie, we hear some customers like Suncor come out and say they will spend less than they originally planned.

Others have come out like Husky saying they will spend what they planned to spend.

People like Exxon and Chevron have confirmed their numbers but there is enough sort of noise about cancellations and enough about what we talked about before about people taking projects and stretching them out that there is more uncertainty in the marketplace than there has been.

I meant what I said earlier when I said I think we think the bubble has broken.

It -- we're not in a bubble any more.

The markets will behave a little more like they have historically.

On the other hand, if you do the math, the percentage of spread that we have this year, even though it's wide, is lower than last year.

Okay but just to be clear, when we think about this issue with the one customer and the oil sands, do you think that this is -- do you think this is a sign of something broader to come or is this just one specific, one off project that you know --

Let me be clear about this one last time.

I hope I can clear this up for everybody.

That project went out of our backlog because we didn't do what we know to do.

And has really nothing to do with the market out there.

Okay.

And then can you just talk and then I will get back in queue.

You know historically, Jacobs says were going to grow at least 15% a year or so.

The low end assumes lower than that, but can you talk about your appetite for acquisitions in this market and specifically where you would want to do acquisitions and whether in this type of market you would take advantage to get to your targeted EPS range assuming 6% seems like it is going to happen.

Okay.

That's a complicated question.

Let me try to -- we think that sometime in the relatively near future, three, six, nine months the market will adjust its expectation for what these acquisitions are worth.

And that acquisition at opportunities will get significantly cheaper than they were over the last couple of years.

And that represents, in our mind, really good buying opportunities.

So we're in the business of hording our cash to be in position to make what we think will be really good deals in the spaces I talked about earlier, infrastructure, oil and gas, aerospace and defense over the next year or two.

So, it is a very positive market from the standpoint of what acquisitions might do for us long term.

Remember though, we make an acquisition these days we have to amortize intangibles.

So the [cretiveness] of acquisitions in the first year or two or pretty much the first two years, is not very high.

Once the amortization of intangibles starts to go away, that is when the real pop in earnings starts to occur as a result of the acquisition.

So in terms of our ability to use acquisitions to significantly change our forecast in the current year, those will be deals we have already made, if they help us that way.

Not deals we might make going forward.

Does that answer your question?

Yes.

Jamie on the opening part of your question, you know, the 15% growth.

What we said that is 15% is an average annual growth rate.

We have always said that there may be years we'll be a little below it and other years above it.

So, we have never guaranteed that that is a floor.

I know, John, there are just a few years --

Just want to make sure you're clear on that.

I have been following you awhile.

I will get back in queue.

Our next question is from the line of Michael Dudas with Jefferies.

Good morning everybody.

Good morning, Mike.

I would expect some of your major customers are giving second looks to their near, near to immediate term budgets.

Is that going to be helpful relative to Jacobs because the customers that will probably go forward will be lining up in your preferred relationships, and -- and per your comments, Craig and John, it seems like gaining share and taking advantage of maybe a little slackness in the market, is going to be much more helpful to Jacobs and possibly some of your competition.

Could you comment on that?

Sure.

I -- I think you -- you said what we believe very clearly.

You know, we just finished our annual business meeting here about a week ago, two weeks ago now maybe.

And one of the key things we talked with our own management team about was the fact that in upmarkets.

Strongly upmarket we might even lose a little share because we don't run after big projects in far away places.

We kind of stay home and stick to our knitting.

But in these down markets were ideally positioned to take market share from our competition.

We're closer to customers locally and better positioned for the projects that need to be done whether the markets are strong or weak.

So, we actually expect this market, if it is what we think it is, will be a positive for Jacobs going forward and that we will be able to increase our market share, maybe substantially.

And, second question is, did anybody in the management team or the board have any inkling of potentially using some of that cash to purchase your stock given that your stock prices is where it was back in the low end at 2005?

We have given a a lot of thought, a lot of discussion.

We will discuss it again at our upcoming board meeting because it is something you always have to look at.

But we haven't made any decision that says we can't use that cash most effectively to buy other people's cheap stock rather than our own.

And, my final question is relative to other cycles that Jacobs has been in over the past 20 or 30 years, any characterization of how quickly this turned or is it, you know, kind of like what it was back in maybe the early, mid-70s, given where the market seems to be going right now?

Any thought?

Well, you know -- I guess again I will tell what you I think and we had an economist come in and chat with us a little bit about this cycle.

We had some pretty good data as well.

That has influenced my thinking.

I don't think this will be a particularly deep or stressful recession.

It is definitely going to be a recession.

I think it will be a couple of quarters of negative growth, maybe three.

So it won't be as bad as say, the early '80s.

But it might be a little worse than say, 2000.

So, you know, the basic message we got out of our economist at our conference, was that this, too, will pass.

Thank you for your thoughts.

Our next question comes from the line of Andy Kaplowitz with Barclays Capital.

Good morning, guys.

Good morning, Andy.

If we could talk a little more about refining.

Craig you gave good examples about refining spend for you guys.

The one thing I have a hard time reconciling is you see some of your customers, some customers in general lowering CapEx spending.

And that is what we see, and then you give these examples about environmental spending.

How should we look at it?

Is it that within this lowered CapEx spending, there is still robust environmental spending?

So, you know, potentially you could still grow your backlog in refining in 2009?

Is that the right way to look at it?

I think there is every chance we can grow our back log in refining in 2009.

What we see and what we hear from our customers is obviously the environmental stuff they have to do.

And then you layer on top of that, the things they wanted to, to try to deal with worse -- sourer crudes.

Remember Saudi Arabia crudes are pretty sour and getting worse.

Canadian stuff is obviously not very good from an API point of view.

So we're seeing investments that would let them take cheaper crudes as well.

Also, since the oil prices have started back down the crack spread is open.

And so refining is a little more profitable today than it was, say, a year ago.

And we think that may drive our customers to look at ways to maintain that profitability.

I don't think we're going to see any big capacity expansions like Motiva did, going forward.

But that is really not what we need to grow.

Gotcha, great.

And, Craig, given through the new reality of the market, you know when we look at your margins, obviously they have been sort of trending in about the same area for the last few quarters but you just lost what was a very high pass through contract and you talked about sort of field services ramping up and margins coming down on that so how should we think about things now?

I mean, how sustainable are margins at these levels, you know, given the new reality of world.

But also, you know, the tradeoffs with this low margin project coming out of backlog.

I will let John address that.

Well, I think, you know, as we have been saying for awhile, the margins have been driven by the professional services and are -- evenwith this removal -- you got to remember that project was going to be executed probably over the next three years.

So it wasn't all going to happen in one fiscal year so -- it does have -- you know takes some backlog out but we still have significant backlog in the field service and we expect the field services to continue to grow.

Probably maybe not quite as fast a rate as we would have thought but still at a very, very strong rate.

Still a very big focus of our business.

To -- to move forward on the professional services.

On the -- you know, we haven't seen any -- excuse me any impact on selling rates and such.

With the economy at this point.

That is one of the reasons we continue to focus on our cost posture is that we believe as long as we keep our costs under control that we continue to be profitable at even a little bit lower selling rates.

Much better than maybe the average in the industry.

So that has always been a strong focus and will continue to be a strong focus for us, on managing our costs and keeping that under control.

Great.

One more quick one if I could just following up on Jamie's question around acquisitions.

If it is true that a lot of these targets are going to become cheaper over the next several months and already have in fact, what about larger consolidation?

Is it just not something that you guys want to do?

Should we be thinking more about that?

I mean -- just your thoughts.

I think we would certainly be open to larger deals.

But I don't think we have a lot of interest in a merger of peers or anything close to that.

We're going to continue to look for deals that are 10% to 20% our size and in that range or less.

And we're going to continue to focus on subsidiaries of public companies and private companies.

We still don't like the dynamics of a public company to public company deal.

Gotcha, thank you.

Our next question comes from the line of Andrew Obin with Merrill Ledch.

Yes, hi.

It is still Merrill Lynch.

How are you doing, Andrew.

We wondered.

Just two questions.

Just to clarify.

You said $32 billion of CapEx in '09 for your downstream customers.

How does that compare to '08?

It -- it is only six of our downstream customers.

Yeah.

And it is essentially about flat from '08.

Great.

Just a broader question.

You sort of said that the bubble has burst and we're going back to a more normal environment.

In a more normal environment, your business model of customer driven sort of cost plus contracts was an exception, not the rule.

And you have benefited over the past several years from the fact that your -- you know your competitors have been embracing your model because of inflation, because of tight capacity.

How do you see this dynamic playing out over the next 12 to 24 months?

Let me ask Noel to comment.

Noel?

Well, when the market softens a little bit the competitors are driven more and more going back into the lump sum mode taking more risks.

You seen that in some of our competitors over the last couple of weeks.

Particularly from the owner's side getting more price protections.

But since we have lived in this atmosphere all our lives, we understand how to deal with it.

And the core clients we deal with on a routine basis will probably continue to contract with us in the same way they always have.

So the dynamics of the market will be in softer markets.

The clients do demand and do ask for more transactional type projects.

So -- but we have been able, with our model to avoid that and to continue to work on a more rational basis, and to do that you have got to deliver better value.

As long as we continue to deliver better value we will continue to be very successful and continue (inaudible).

Is it fair to say that capacity constraints in the industry, that we have seen over the past couple of years have been alleviated somewhat and there is a bit more spare capacity?

I would tell you that certainly it is not as competitive, in terms of resources and availability of people, or at least I don't believe it is going to be as it was.

I am not yet of an opinion that it is going to be uncompetitive or that there will be excess resources in any way.

So, you know, what I kind of look at -- what we think is happening to our business -- we think it is going to be a little easier to get people but we think we're going to still need to get them and we think there will still be a fair level of competition for talent out there in the work place.

It just won't be quite as intense as it has been.

And we probably won't see quite the salary escalation that we have been seeing.

Thank you very much.

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

Hi.

You know I question the statement as to whether this was really a bubble.

I mean if I go back and look, John, you joined the company in 1974, and Craig, you joined it in 1994.

If I split the difference and start with the 1991 recession, though your revenues is at 15% per year since then, would be doing revenues in '08 of $11.15 billion you reported $11.25 billion.

So, you are compounding at your long term growth rate goal of 15%.

It is only in the last three years that you caught up with the very slow period, 2002 to 2004.

Yeah.

I mean -- you know.

I think if you look at the bottom line numbers you will see a little faster growth rate.

But, you know, what I guess I would tell you is that the market over the last two or three years has been more robust, certainly than in my memory in this industry.

And, therefore, we have been a beneficiary of that.

And you can argue that it helped us catch up to our long term growth curve which -- I mean, that's cool with me.

I like that.

But I -- you know, I would argue that what has been going on in the marketplace in the last couple of three years, is unusual.

Driven in part by a $150 barrel oil price and a lot of other fairly aggressive assumptions in the marketplace and spending assumptions by our customers and that that is going to moderate pretty significantly if 2009.

So -- I -- I don't -- if you don't want to call it a bubble, that's fine with me.

But I do think the market has been more robust and it is going to be less robust.

Well, it can certainly be the case now.

As far as your ability to pounce on opportunities when that occurs, I would think that you would want to step pretty quickly because the public market has taken these stocks up since late October by about 30% to 35%.

And so my guess is your best opportunities would be private companies that are smaller and of high quality.

Where they are more affected by the credit crunch and not by -- affected by or getting the affect of price markups.

Is that the right read?

You certainly could have been listening in to some of our conversations because we have had exactly that dialogue.

Okay.

I will get back in queue.

Our next question is from the line of John Rogers with D.A.

Davidson.

Morning.

Hi, John.

John, I think you mentioned that you hadn't seen any real change in the pricing.

But I am curious, Craig, you went through the various end markets and talked about which are strong, which are less strong.

Is there a big difference in margins between those segments?

In other words, has it given the mix that we're looking at.

Do we naturally see changes in margins over the next year?

There isn't a lot of difference between the markets because -- at the operating margin level, you know, there is some minor differences particularly in those that have -- or are particularly peer pro services versus those that are more of a mix of construction as those margins have moved apart a little bit.

You know, I think that different pricing models and different activities in the public market, those margins are pretty consistent up and down because basically they are driven by Federal regulations and you get your overheads plus a fee.

The other margins we haven't -- they have been driven up because of increasing salaries as we have talked about before and as those salaries moderate and they will grow as fast, there might be a -- certainly the growth rate of those margins will stop.

But from a selling price, in margins I don't think we have seen any -- any slowdown in -- or change in margins.

As we said, as our margins are -- our report margins are going up we weren't seeing a huge increase in the selling price.

We were seeing a more driven by the salaries and, you know, other factors like overtime and such like that.

More than the other multiplier affect rather than the selling rate.

We were getting a little of that but very little was driven by peer selling rate.

With our relationship model, the selling rates don't change that much through the ups or down.

In terms of the preferred relationships, do you have more of what you classify as preferred relationships now than you had a year ago.

Can you give us a sense of -- Not so much the budgets there but whether there is more or less of them or -- what rate that is growing at?

If you look at the growth of the company you know we're maintaining the ratio of preferred relationships on a margin basis or revenue basis, to the business pretty consistently.

But, Craig, it is not getting more concentrated with any select group of customers, I guess is what I am wondering?

Well, it is more concentrated in one sense in that one select group of customers may be spending more money than another group of customers.

But in terms of long term concentration, no, it is actually -- we add a few core clients every year to our list and we add a few preferred relationships, every year, to our list to sort of maintain that 75% to 80% balance.

We need those discrete projects because that's where we find the new relationships.

Frankly, that is where I think there might be a little more price competition going forward than there has been in the past for us.

Because I think winning discrete projects will have a little more of a price factor in them.

But I think the toughest part will be the transactional projects if the market goes where I think they could get very competitive over the next couple of years.

Not right away but over the next couple years.

All right.

Well, thank you very much.

Congratulations on another good year.

Thank you.

Thanks.

Our next question comes from the line of Alex Rygiel with Friedman, Billings, Ramsey.

Good morning, gentlemen.

Good morning Alex.

Couple quick questions.

First, I don't remember you mentioning anything about a share repurchase program.

If you could conceptually comment on where you stand on that and your philosophy on that.

Well, we don't have a share repurchase program.

We don't have plans for one.

We have talked about it a number of times.

Both at management level and board level.

As Craig said earlier, the focus of our cash, we believe, is better used to acquire others and grow the business that way rather than the buyback stock and -- so I think we're being protective of our cash, and -- and looking at it as a resource for growing the business, by acquisition rather than getting a little bit of benefit on the EPS by buying our stock back.

I think Craig's comment is we would rather by other stock than buy our own.

Other cheap stock --

Yes.

Sure understandable.

And then when did your oil sands customer notify you of the decision to discontinue the relationship?

That's one of those things that doesn't happen on an instant.

But I would say probably late September, was when we really were at that point, is that fair?

I am getting nods around the table.

Late September is probably about right if we're having to draw a line in the sand.

Craig, in your remarks you discussed market share in the governmental environmental work segment picking up.

Approximately what do you think your market share is in that segment?

It is insignificant.

I mean, single digits.

Great, thank you very much.

Our next question comes from the line of Avi Fisher with BMO Capital Markets.

Good morning.

Thank you for taking my questions.

You mentioned when you were talking about environmental services, you talked about greenhouse gases, and the potential size of it and durability in the power sector.

Does that imply an interest in getting into the power sector or the environmental services portion of that.

I was trying to get a sense of that.

I think we continue to watch the power sector with some care.

In fact, we have just finished a study of the power sector that I am going to get a report out on this afternoon.

And what we're trying to do is understand where that market is going, how big it is going to be, how transactional it is going to be.

Because as you know we have resisted being in it for transactional reasons mostly up to now.

If the -- if the greenhouse gas thing comes to fruition, and it is -- and it turns out to be real, the size of that market will be enormous.

But again, we will make a decision whether we go participate in that market, or fill in behind others who go over there, with our existing customers.

But -- I'm sorry?

So just to kind of get to the answer.

We made no decision nor are we hinting that we're going into the power market, but we're not hinting that we're not either.

Is that really like a middle of the road no answer?

It is more thanked adamently opposed to it which I think you have been in the past.

Yes, we are no longer adamently opposed to it.

That is a fair characterization.

When you talk about it from the GHG side are we talking nuclear power or something else.

When we're talking about GHG you're talking first to look at the existing installed base, right?

And what has to be done there to sequester carbon that sort of thing.

You're looking at investment in nuclear in a different pile all together.

Okay.

But we're talking about hundreds of billions of dollars of potential work in the power sector if the greenhouse gas thing goes the way it looks like it will.

Do you think that would be an area that you would acquire into or could build organically or a little of both.

A little of both.

We probably want to make an acquisition.

Gotcha.

Moving on, your CapEx number this quarter was fairly low relative to last quarter.

Fairly low to my forecast.

Was that a function of the cancellation, was it a new rate, does it imply something -- I mean -- I am just trying to get some color on that --

I don't think you should read anything into that.

You know the CapEx goes in up and down cycles for us.

We looked at it again before we went through the CapEx with our team at the annual business meeting.

You know, our long term plan is to spend right about the depreciation levels for CapEx.

If we go through a period of sustained growth like we just did, we tend to hit a peak, and then it stabilizes for awhile as we get the utilization up of the newly acquired assets.

Then we will have another burst of CapEx.

Gotcha.

Okay.

Then on the infrastructure side and again I realize it is about 8% of your business.

I have two questions.

One is you had a decline in infrastructure in the quarter -- in the business in the quarter, and this was even in spite of the Carter & Burgess deal not having anniversaried yesterday.

I wonder if you could talk a little about that.

And I'm also curious, what are your biggest states are for infrastructure, i.e.

which bond issues we should be looking at most intensely.

I am struggling a little bit with the data.

My data shows we're up 2%, quarter over quarter, 2.1%.

Quarter over quarter.

Correct.

But I -- maybe I am doing the data wrong.

I thought --

We're up 37% year-over-year.

Okay then I may have something going on here, so I apologize with that.

Either you do or I do.

One of us has some bad data.

If you can talk about the states -- which states are biggest states for you guys?

Well, we're big all along the east coast.

And along -- all along the South and East and Southwest.

Plus we have a nice little business in the Rockies.

And a nice little business up in the Pacific Northwest.

So, you know we're -- we're across a lot of the marketplace.

And -- in if you look at where things are good and bad, setting aside what happens with these bond issues and the fact there are a lot of other previous bond issues out there still spending money, some of the states that are having a little trouble from a tax perspective.

California is certainly having trouble.

Florida appears to have gone through a phase of reconsidering and now they are back to spending.

Texas was a concern for awhile but it is -- it also is not so bad as we had thought it might be.

But, you know, the -- pretty much every state we're in has some kind of a tax concern going forward.

And that -- that is affecting our business but is just affecting the business in the sense you have to be more competitive to continue to grow.

Okay.

I appreciate the color.

And just -- just to clarify on the slide you're infrastructure for the last 12 months is 8% of total revenues, correct?

Let me get the exact number.

8.3%.

Then I am just probably backing out a bad number somewhere.

Thank you for the color and good quarter.

Thanks.

Our next question is from the line of Chris Hussey with Goldman Sachs.

Hi, guys.

Hey, Chris.

Question -- because now I know Noel's in the room -- we harken back to 1983, maybe you can help us just understand how you guys did it a little different.

Back then you guys lost money two years in a row and your margins fell off a cliff in '82.

The stock is trading -- you know at 10 times earnings, if you hit your earnings.

Maybe a little better now.

Why is this time different.

Well, it starts like this, Chris.

I made an about statement these guys have already heard.

If I ever saw 1983 coming again, I would be long gone.

So you can take that -- the difference today, probably, is more in terms of there was an enthusiasm for alternative energy and that type of thing, going back in the late 70s early 80s, whether it was oil shale or the tar sands or methane gas out of feed lots.

I mean it was a time that was just irrational in character, driven a lot by our government, I might add.

And today, all the work we have got is not government driven.

It is all driven by the big private enterprise.

And the government hasn't mobilized even today like they did in the late '70s.

I think I am totally with Craig in that the bubble is gone, but what we're looking at, you know, is really a strong business going forward but the -- in fact when you go to talk about resources or stuff like that.

The work that was all out there about a year ago couldn't get done anyway, so I don't see anything like a repeat of that timeframe that -- the early '80s.

It is just not in the cards.

A different time, different involvement.

We do have probably a mild recession going on.

But we have been through lots of mild recessions through the 1983 to '84 timeframe without real negative effects.

So, it is just a totally different scenario.

I will add a little color.

One of the things we did at the annual business meeting is we had a little thing called a cautionary tale.

And we took all of our current leadership through what happened in the '78 to '85 timeframe.

We reminded them of all the lessons we learned of what to do and what not to do, and kind of concluded that if we do what we do best, the things that Jacobs business model drivers us to do, we're in great shape going forward.

Let me segue that back into a question about the project in the Canadian oil sands where you didn't do what you did best.

Was this a project that was a problem with labor where you weren't able to keep the pace of construction up for your customer or was it cost, did your customer feel you were billing them too much, you weren't doing it efficiently, how can we characterize it.

You're getting into details I'm not prepared to share.

Obviously the job wasn't in construction or the back log difference changes wouldn't have been so large.

So this was in the early stages of engineering.

And like a lot of projects, scope and things like that are challenges, getting it right, getting the price right.

Getting the work done on schedule.

A lot of things moving around.

And that's not unusual for projects.

What is unusual is how we manage the relationship with the customer in that case and that is the embarrassment.

And I really don't want to talk about it any more.

Well, last question then on the Middle East.

That's a market that traditionally has been fixed price and probably one of the reasons why you stayed out of it so long.

You know, with the bubble burst, can you be effective there?

We believe we can.

And -- we -- we think so for a couple reasons.

First, we will position on major projects and programs up in the PMC feed arena, which is traditionally not lump sum, rather than in the EPC project execution arena which is traditionally lump sum turnkey and, in fact, there is still a lot of that lump sum turnkey work out there in the individual project execution.

We will also position, though, to start taking on small cap maintenance and alliance work because to build that local base, and that work really doesn't lend itself to lump sum or if they are -- if the work is lump sum it is tiny lump sums where the risks are very low.

I mean tiny like $200,000.

And so it -- we think our business model is ideally positioned for us to (inaudible) in the Middle East and what makes us salivate is there is this huge installed base of facilities, that really aren't being addressed by a globally competent contractor like Jacobs.

A lot of locals doing little bits of this and that, you know, we know of one customer has 14 different little contractors working for him.

Or maybe it is 17, something -- some silly number like that.

Over time we will consolidate a lot of that business with Jacobs.

So what we will end up with is a bunch of people in the Middle East, in Saudi Arabia, for example, doing that day in and day out work that we love so much.

We will have the relationships with the customers, that lets them come to us for PMC feed kind of things when they have big projects, but the EPC stuff probably will always go to some extent lump sum turnkey.

And there are plenty of people out there willing to do that so, we don't need to have that work, too.

Okay.

Hey, thanks guys.

Our next question comes from the line of Tahira Afzal with KeyBanc Capital.

Good morning or rather good afternoon, gentlemen.

Good afternoon.

I guess I don't want to dwell on history too much but correct me if I'm wrong.

If I go back the 1982 to '83, wasn't that just right before George Jacobs turned over the company to a transaction model, you moved to fixed price, after you saw a big hedge you moved back your model to cost-plus and ever since it has been the same model?

I will let Noel respond to that.

No, that's not right.

The company under Joe Jacobs never moved in its fundament relationship model, even though we didn't define the relationship model until the 90s.

It operated all through the '60s, '70s and '80s, as a pseudo relationship company although nowhere near as pure as we are today.

But there was no move in that timeframe to become a fixed price contractor.

We did take on some fixed price jobs, but that is because we occasionally did that.

But there wasn't a huge model shift in those days.

If we go back to 1983, you had got your cost plus content went down to 46%, would you say that is the lowest it has ever been?

Oh yes.

Yes, so I mean since 1983, you haven't really gone back to doing fixed price to the same extent.

Well, I think the other thing we had in 1983, you got to go look at the total numbers.

We didn't have a lot of work in 1983.

I mean, if you go look at the total revenue in '83 -- while I don't remember them exactly, I know in '84 was about $190 million.

So, we went from $400 million to $190 million in '84 from '81.

I mean structurally speaking it wouldn't be correct -- it wouldn't be fair to compare Jacobs as it is today to back in 1983.

No, not at all.

Okay.

The other question I just wanted to ask you and Craig, I know you don't want to talk about you know the oil sands or the particular project in particular, but if I read through what Suncor has been saying in its CapEx outlook and what Shell have been saying they have been talking about contractor pricing, lagging, -- lagging oil prices and in essence also subsiding over the next year or so.

If you look at the pricing, you've implied in the guidance, would you say you have put a bit of a cushion in that?

I am not sure I understand the question.

Could you expand a little bit.

Sure, if you look at the pricing in your sector in generals where if you look at your multiplier and how that has moved, would you say that you have built a fair bit of a cushion in that?

Well, I don't ever think of multipliers -- as having cushion in them.

I think that what we're seeing is that multipliers are remaining pretty steady in the oil sands right now.

We're not seeing a lot of downward pressure We don't think there is a lot of upward opportunity.

And, you know, the margins are good.

They are not poor margins by any means.

So, we think the multipliers are -- are -- at this moment, steady.

We are anticipating that there may be, for some of the one-off projects up there in particular, some price competition.

We think most of the big customers will continue to do business with the companies they trust.

Right, okay.

So if you look back maybe to the last cycle, let's say, would you say that the physically whatever you were bidding at for the underlying inherent pricing, did that by any chance get, did that sort of move down in any sense, and given your historical experience whatever you've seen in terms of depth -- would you have sort of reflected that in the guidance you have provided?

Well, take that in two parts, I guess.

First off, in -- while we see the transactional pricing softening or dipping, we don't see that same kind of strong dips in our relationships because we do have these long term relationship models.

Just like we don't see and haven't seen strong multiple upswings, you know, during this -- this growth.

Now, we do see in soft markets the multiples go down a little bit.

But not in line with what you might see on the transactional side.

In good markets they do go up a little bit but not in line with what you see in the transactional side of the business, which tends to be much more reflective of the -- I guess marginal sales effort as opposed to these core sales relationships that we have.

Now your last question was have we factored this into our guidance.

Just like, yes, we factored it into our plans so yes, it gets factored into our guidance.

Great, so I mean are you assumed a cushion even if you think the recession is let's say, two or three quarters long, I would assume you have built enough of a cushion in terms of pricing and within your guidance --

I am not sure what you mean by "cushion".

"What we're seeing is the projects we have, we're expecting to continue at the levels we have sold them at and we don't see any significant changes happening in the short term.

You know --

I got just to amplify, I think our guidance reflects what we think the market is going to do.

So both the pieces of optimism and the pieces of pessimism you have heard from us today are factored into our guidance.

Okay.

And we feel pretty good about that.

Okay.

And I -- last question, it is just to do with back to the refinery question, and you had highlighted again that $32 billion, and that you -- if you will be back this year, essentially, it was flat -- would that kind of suggest as you look forward and you seem pretty confident that you can throw your refinery back log, that you are expecting market share gains?

Yes, absolutely.

And -- would those be coming from smaller fragmented players by any chance?

I think the small players will suffer enormously as the market tightens up, particularly the ones that aren't big enough to have back office operations in places like India.

So that will be a very difficult time for them.

But I also think we will be able to take a little share for most of our big time competitors, simply because they don't come down to the little projects very well.

When you're really good at really big projects in far away places, it is hard to be really good at little really little projects in your backyard.

One last question.

You said that you gained -- you know you have done better in the Middle East than you expected.

You know, would this be along the lines of what you just pointed out, some market share gains, against some of your smaller competitors, would it be more base load, operation maintenance work rather than large high profile projects?

What I would like to say is that we have reached the position in the Middle East where we're taking share from our competitors.

We certainly gaining share because we had none, when we started now we have some.

But -- but I think actually what is happening here is the market has been so good, that we -- that it has allowed us to penetrate, right?

The growth in the market has allowed us to get a foothold in the Middle East that we didn't have before.

And that now we're in a position to leverage that, as the -- as the market goes forward.

We don't see anything about Middle East investment that suggests it is going to go down.

Unlike the tar sands we think that business will continue to be very robust for us and all of our competitors but we do think our business model and the fact that we have been able to get in and get in the door helps us increase our share and obviously it will be at the expense of someone.

Some will be at the expense of the little guys in country and in the area and hopefully some of it will be at the expense of our big competitors.

Thank you very much, gentlemen.

Our next question comes from the line of David Yuschak with SMH apital.

One simple question.

When you guys go back to the end of the decade, the energy was about 8%, 10% of your revenue, now it is 43%.

As you look at your other verticals in this kind of market for the next two to three years, do you see anything in the way of shifts because I think that is one of the things that 's kind of helped you here in the last few years, is just seeing that percentage moving up there.

Is there anything in your other verticals that can maybe help mitigate?

Should we see some softness in that percent that goes to energy or do you think energy could even drive further here, as -- from the 43% you have produced in this current year.

That's all I have got, thanks.

um -- David I would say I don't think we're going to get energy taking up a significantly larger share of the pie.

Except to the extent of construction dollars.

And one of the things that I always want to caution you all about is that there are some businesses here that are pure technical professional services businesses or almost pure.

Like infrastructure.

And other businesses like refining, oil and gas, chemicals to some extent that I have a very high volume of construction.

So the percentages are a little misleading in terms of if you were going to try to compare that to the profit contribution of those businesses.

Because you recall the pass through cost.

While we ought to be able to get good margin on them we don't always do that.

And so the net effect of some of those construction dollars to our system is not as much profit as pure technical professional services businesses have.

For a long time we said they were about equal but there is an advantage on the TPS side.

Could it grow in terms of percentage?

Yes.

As a result of construction dollars it could grow a little.

Will it grow a lot?

I don't think so.

Will other businesses grow to kind of balance out or offset any lack of growth in that area?

I feel pretty good about some of our businesses in the other parts of the pie there, in terms of their ability to contribute profitability on a growing basis.

I know that's a long winded answer but I think that gets to your question.

Any particular ones that stand out?

Well, I think we like the national government's building.

We like business.

We like buildings and infrastructure a lot, huge markets globally.

We think [pharma] maybe a little stronger for us going forward.

That side of the pie chart would be where I would expect to see real positives from a PNL point of view.

Thank you, appreciate it.

And there are no further questions at this time.

I will now turn the conference back over to Craig Martin.

Thank you all very much for your time.

I feel like we have a good story for last year and frankly, I think we have a pretty good story going forward.

We're excited about it.

If we can execute well and do what we know how to do on a consistent basis, I think we will turn in a good result.

Thank you all very much.

.

Thank you for participating in today's Jacobs fourth quarter earnings conference call.

This call will be available for replay beginning at 2:15 p.m.

Eastern Standard Time today, through 11:59 p.m.

Eastern Standard Time on Tuesday, November 11th, 2008.

The conference ID number for the replay is 70369619.

Again, the conference ID number for the replay is 70369619.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

This concludes today's conference call.

You may now disconnect.