雅各布工程 (J) 2009 Q1 法說會逐字稿

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

At this time, I would like to welcome everyone to the Jacobs' first 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.

I will now turn today's conference over to Ms.

Patty Bruner.

Ma'am, you may begin your call.

Good morning.

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

Although such statements are based on management's current estimates and expectations and currently available competitive, financial and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause 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 period ending September 30, 2008 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.

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'll turn it over to John Prosser, CFO of Jacobs.

Thank you Patty, and good morning.

I will briefly go through the financial highlights and then I'll turn it over to Craig Martin, our President and CEO to review the business operations for the quarter and comment on the business outlooks.

If you go to slide 4, our financial highlights, we had a very good quarter.

Record diluted earnings per share of $0.94, up nicely from a year ago, about 19% up from a year ago and up slightly from the last quarter.

Our net earnings at $116.4 million for the first quarter was also up nicely from a year ago and last quarter.

Backlog reported at the end of the quarter was $16 billion.

Again, up nicely from last year, down slightly from last quarter, but I will go into that in a little bit more detail on a later slide.

Balance sheet continues to be strong, and our net cash position increased to $746 million, which is up almost $200 million from the end of last quarter.

We did revise our guidance.

We've adjusted the upper end of the guidance to down to $3.90, so the range is now $3.55 to $3.90.

Moving onto slide 5, this just shows the track of our earnings over the last ten years and it continues to be a nice growth rate.

If you look at the bars that are represented underneath the graph, that represents the trailing average five year compounded growth rate.

And through the first quarter of '09, you see that that has been tracking at approximately 30%, well above the 15% annual compounded growth rate goal that we have out there as our long-term growth targets.

You move to slide 6, this is our backlog.

If you look at it year-over-year, we're up over about $1 billion dollars, from $15 billion to $16 billion, but down slightly, down $700 million from last quarter.

During the quarter, we did remove $840 million of backlog for various contracts that were canceled, and of that $840 million, about $450 million came out of the professional services.

So if you look at that, if you adjust the backlog for those cancellations, it would have been up from last quarter.

So the sales -- implied sales rate for the quarter was slightly above what we worked off.

And now I'd like to turn it over to Craig Martin to discuss the business overview.

Thank you, John, good morning, everyone.

We're going to take a little time, as we usually do, to talk about how we're going to try to maintain that 15% average compound growth goal over time, and it's going to be the same story you've heard many times.

I apologize for that, but it is who with are and how we approach things, so I'm going to go through those same five bullets that we cover every one of these calls.

I'm going to talk some depth about our business model, so I won't say much here.

The same with our markets and what's going on there.

I'm not going to give an additional slide on these last three bullets, though, so I want to comment on those here.

We continue to see good opportunity for growth through our multi-domestic strategy.

We believe being local to our customers is a huge value to us, and we're seeing a lot of leverage for us and our business model in doing so.

Our work in the Middle East is going well.

We continue to grow locally, and we're leveraging that into some significant awards of additional work that's executed outside of the Middle East.

We think that will continue to be a positive for us.

We're starting to evaluate China as an opportunity as well.

We think being domestic for our customers as we go forward will leverage us and help us deal with the market conditions in a more positive way.

Acquisitions continue to be a part of what we're trying to achieve as well.

As you recall, we think about a third of our growth has to come from acquisitions over the long-term.

You have seen our announcement about the winning the competition for the atomic weapons establishment contract.

That's pending now.

The European union commission approval, which we expect to get in reasonable time, and that will be a nice addition to our business from several aspects as we go forward.

In general, acquisitions are looking more attractive, we believe pricing is starting to move down.

Some of the firms that might have been willing to hold out for premium pricing are under a little more stress, and that creates real opportunities for us.

We continue to be interested in the upstream oil and gas business, in the infrastructure business and in the aerospace and defense business in terms of targets for acquisition.

And then, we've always said we're committed to drive down costs on a continuous basis.

The benefits of that I think are very obvious this quarter.

It positions us to be more competitive, and it really helps us in the tighter times when there's pressure on margins to continue to maintain profitability.

We also see what we think is a movement to a value-based selection process in the buildings and infrastructure world as opposed to one that is simply qualifications based, and obviously, with our cost posture, that will help us as we go forward, particularly as that might effect the stimulus kinds of infrastructure spending and building spending, for that matter.

Let me go on now to talk a little more in depth about our relationship-based business model.

I'm on side 8 now.

First, I'll talk about the industry model, which we've always characterized as being sort of our way of looking at the industry, not any specific competitor or group of competitors.

But for the most part, this is the way our industry sees the world.

They see the world as competitive, transactional projects, big events, lump sum turnkey projects, that sort of thing, and that drives the business.

And the other work that might get done, small projects work, alliances, relationship-based work, tends to be sort of second place in our competitors' thinking.

We believe this model is going to under increasing pressure as we go forward as a a lot of the customers seek transactional behavior out of the industry, and we're pretty sure they're going to get it.

We're going to continue to take the other track.

We're going to focus on our preferred relationships and our long-term business.

As you know, we've had a relationship-based business model for a couple of decades now, and it has worked very well.

It's an ideal model for the market climate that we're in.

For example, this last quarter, repeat business constituted about 92% of our new work.

So we were very successful in getting our preferred relationships and our customers to continue to work with us going forward.

There's a lot of this work that represents small ongoing jobs.

Alliances, small cap work.

More than a third our business is based on that steady work.

It can be downsized.

Not to say that the volume of that work wouldn't vary from time to time, but for the most part, that work is more steady, more predictable than the big event kinds of projects that are out there.

So we're feeling like the position we have, the relationship-based model is one that us going to help us continue to grow as we go forward in FY '09 and beyond.

Turning now to slide 9, I'll spend a little type talking about the markets.

And let me start as usual with the downstream refining market.

It's a big market for us, obviously.

It's a big share of our business, it's been a very active business.

There have been a few cancellations, a few delays in that business, but overall, our clients are still expected to spend.

They're usually the JE specific clients, the Jacobs specific clients.

Something north of $30 billion downstream in '09.

So we think it's a pretty good market.

There are a number of drivers that are helping that.

This are things like environmental cleanup.

The MSAT2 regulations for the remove of benzene.

That's $4 billion to $6 billion worth of work just moving into the execution phase.

The national point source admission regulation subpart JA, looks like that's going to drive another $1 billion or $2 billion this year -- sorry, $1.2 billion this year.

And that's a real strength of ours, because these will tend to be small projects, in the $10 million to $30 million range and will fit nicely in our local relationship business with our customers.

And then you have the huge impacts of the Marpole-6.

Our guys estimate that at $80 billion over the next few years, $4 billion in that in the '09/'10 time frame.

So there's some pretty steady work there.

On top of that, we continue to see crude slate expansions -- crude slate changes that are driving additional work in a number of locations, and then we're seeing a little bit of creep expansion.

Not anything like new refineries or major expansions, but a little bit of creep expansion, particularly because the crack spread has gone back up to pretty high levels from a profitability point of view.

We had a really weak quarter last quarter, but now crack spreads are back up to where they were in the previous quarter's time frame, and we think that's a positive for the industry.

So we think that and perhaps what might be unsteady oil prices in the mid-40s will help us on the refining side.

We're pretty upbeat about where we are relative to where we could be in that marketplace.

On the oil & gas side, on the upstream side.

Again our clients, the ones we spend the most time with have an $80 billion plus spending plan.

We won't access all of that, because our strengths are really in the oil, sands and in major gas projects.

But we still see a lot of opportunity in those areas.

The steam assisted gravity drainage type projects in the tar sands, SAGD, as they call it, is one our great strengths, and those are still the most financially feasible projects.

We expect the tar sands to return to a reasonable capital spending plan like they did in 2005, 2006, based on an oil price in the mid-40s, and there's a number of projects that will make sense and get funded and go forward, and we expect to be a beneficiary of a number of those projects.

In addition, the gas projects around the world are heating up considerably, particularly for us in the Middle East and Canada.

It's another area where we have real strength in terms of gas treatments, sour gas handling, that sort of thing.

We expect to see a fair amount of leverage in that area as well.

So while there's a lot of turmoil in the oil and gas industry right now, I think we're positioned to benefit well from a couple of trends that are still positive.

On the chemical side, it's still slow outside of the Middle East.

We think the Middle East is still a major growth opportunity for Jacobs.

We intend to continue to use our model of slow and steady penetration of the local client, get a substantial presence on the ground and leverage that to do the small cap and (inaudible) work for our chemical customers there as well.

But our local presence will also spin off work outside of the Middle East for our operations in the US and in Europe, and we think that's a plus.

So overall, our business is going to be a few major projects and that steady work that we've done for years and years.

As you recall, chemicals business hasn't grown as an industry in a long time, but we've managed to continue to grover and have a steady presence in that industry because of where we're positioned.

One other small spot that may be interesting and continues to be interesting in spite of pricing changes is the poly silicone market.

We think there's potential still for additional work in that area as well.

Moving on to our other category, that's pulp and paper, high tech, food and consumer products.

Pretty much a flat industry.

It's been flat for a long time.

We are seeing some activity in the pulp and paper industry and some activity for us, in particular in the high tech world.

Pretty much because we're the only ones around in a couple of these areas right now, that benefits us from a position point of view.

We're also seeing a fair amount of activity in food and consumer products in the form of alliance and small cap work that we're anxious to see continue.

Not a great big business, probably never will be be a great big business for us but it's a good business, and I think we can continue to maintain a good position and get some growth in those offices that do that kind of work.

Moving on to pharma bio.

As you know, this is driven predominantly by drug discovery.

There's a fair amount of activity in vaccines and biotech, but I wouldn't tell it it's as robust as it has been in the past.

We do have the advantage though of really being the last man standing in the sense that the major players in the biotech, vaccines, pharmaceuticals industries have sort of retreated, leaving Jacobs as the industry leader.

We think we'll continue to benefit from that business.

Now going around to our government business.

We've got three businesses here, national governments, buildings and infrastructure.

We expect all of those things to benefit from the stimulus bill, and we'll come back to some of those issues on a case-by-case basis, but for the most part, these businesses are pretty robust right now.

Let's start with our national government's business and the part of that is the research and development test engineering, scientific and technical consulting business.

That business is growing for us.

We see a lot of activity from our customers.

There are a number of opportunities on the prospect list, both in the United States and in Europe.

The win of AWE will also solidify our credentials in the labs arena, and so we expect to see a fairly good flow of opportunities and expect actually to see some pretty good wins as we go forward in that scene.

That business, we think, will will benefit from spending on one hand and perhaps not benefit from the piece dividend on the other the hand, but overall, we see the business as steady to slightly up as we go forward.

On the other side of our national governments business is predominantly our environmental cleanup work.

We're starting to gain some share back in the US, although we don't think the US has been a growth market.

It's entirely possible with the leadership in Washington today we'll see additional emphasis on environmental cleanup.

That may stimulate that market and increase the opportunities as well as allowing us to increase our share.

In the UK, the nuclear decommissioning authority has yet to let a number of opportunities, we see some huge project opportunities as well as some major cleanup leadership roles.

Remember, the spending plan there was something like $150 billion.

We expect that that money will get spent ,and the fact that it's being spent a little slower just means there's more opportunity for the individual project level participation for us.

Again, stimulus bill both in the UK and the US may well help the environmental business as we go forward.

Don't think that's an '09 impact, but it might well be a '10 and beyond.

Moving onto our buildings business.

Remember, this is technical buildings.

Hospital, schools, jails, that sort of thing.

It's an active market for us, particularly the healthcare market, both here and in Europe is very strong, and we're very well positioned.

This is a market where the bond issues, for example, for schools that we told you in our last conference call were looking to pass all did.

In fact, every bond issue we were tracking when we had the first year end conference call in November passed, and that's a huge amount of potential work for all of us in both buildings and infrastructure.

So we see the buildings business, particularly on the government buildings, technical buildings side as being promising.

We also see some good opportunities in the logistics and distribution side of that business for some major retailers, both here and in Europe, so that's a positive as well.

Moving onto infrastructure, the market is very strong.

Our prospects are robust.

We're finding more prospects out there, actually, than we had anticipated 90 days ago, and that's surprising in the face a pending stimulus bill.

But in fact, people are getting out there and spending money and that business, again, driven predominantly by bond issues, looks pretty positive for us in the US.

In the UK, the Chancellery checker has said they're going to spend their way out of the any recession, and that means infrastructure and buildings stimulus in the UK as well.

It's important to note that even though it appears to be only about 35% of our business on this chart, our home office headcount in these three units, national governments, buildings and infrastructure is about half our headcount overall.

So the impacts of growth in this business are probably easy to underestimate if you look at business just on a revenue basis.

Moving onto slide 10, this is kind of the commercial and then we'll throw this open to questions.

I think we have a lot of reasons to continue on to be attractive as we sit here today.

We've got a strong customer driven business model.

We're very diverse as a company.

Our cost focus puts us in a really strong position in difficult markets.

We have an excellent balance sheet with a nice cash position, and that's our money, not somebody else's.

And our target of 15% average annual GPS growth looks to me to be one we will be able to continue to maintain as we go forward.

So with that, Christie, I'll turn it over to questions.

(Operator Instructions) Your first question comes from the line of Andy Kaplowitz of Barclays Capital.

Can you hear me okay?

Yes, we can hear you fine, Andy.

So the $840 million that you took out of backlog, can you give us a little more color on that, if possible?

And just a follow-up to that is, can you tell us as it stands now, how much approximately oil sands exposure you have at Jacobs?

Well, if you look at $840 million, about half of that came out of the upstream oil and gas, and then about another 25% came out of refining.

So the other the 25 was spread across the other businesses.

So clearly, the upstream was the bigger part of that.

And while we don't break down our backlog by industry group per se, if you look at it, it probably breaks down pretty close to the revenue, trailing revenues.

I think it's still holds true to that.

So we're trailing revenues on the -- upstream is about 14% or 11%?

10.

10%, sorry.

And that probably is about where our backlog is as well.

John, could you tell us if you took some core out of backlog?

We don't typically talk customer by customer, and backlog -- what we put the in will be based on how projects are released and such like that, and our policy on backlog is that we don't take out backlog if it is only delayed or postponed.

We take it out when it's canceled, and within that, we really don't want to comment, I don't think, project by project.

Okay.

John or Craig, you mention in the press release that you saw -- there was a comment that some existing programs were slowing down a bit, and that's one of of the reasons why it seems like you took down guidance at the top end of the range.

Could you give us a little more color on that?

We notice things like if you look at Motiva, there's been some recent press about maybe some layoffs there.

Not too many, but a few.

Could you talk a little bit more about that comment?

Let me try to address that, Andy.

A number of our customers are looking at their programs and making decisions that say, well, we were originally just going to go at this tooth and claw, so to speak, but in looking at it, we can only afford to spend $2 billion this year.

And so they've asked us to organize the project in such a way that we only spend $2 billion this year.

I'm just picking numbers.

I'm not being client specific.

And that's not uncommon across a lot of the system.

So what we're trying to say is the rate at which we may eat some of what is in backlog is going to be slower than we might have thought it might be a quarter ago.

But the fact of the matter is, these customers aren't -- for the most part, at least, aren't abandoning these projects.

They're just being cash flow careful.

Does that make sense?

Yes, definitely.

Craig, is there any way to breakdown that refining exposure into how much really is clean fuel's work in terms of backlog.

How much is heavy crude and maybe how much is expansion?

Just so we get an idea of how much of your business really is that clean fuel's work which can be viewed as maybe less recession or more recession resistant.

We don't have that breakdown, and I think that's probably more detail than our customers like us to get into.

Got you.

Okay, that's fair.

I'll get back in queue.

Thank you.

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

Thanks for taking my question.

Andy asked, you said you don't take the late projects out of backlog, could you quantify how much in your backlog could be quantified as delayed?

I would have -- first of all, I'd say that number is not very big, and that's probably as quantified as I can get.

What we look at is, we look at backlog, and maybe a better prospective on that is we've told you that as we look at any prospective 12 months in front of us, we expect that 60% to 65% of work that we're going to execute that next 12 months should be in backlog, and we continue to be in that position.

Okay, do you think you've seen -- have you seen the worst of the cancellations, do you think?

Oh my goodness.

Avi, how would you know the answer to that question?

I certainly would like to think that, but I just have no way to say that's true or not true.

Right.

If there's more slack in the system, what is the impact?

Are you seeing any impact of labor multiple for your engineering work?

Labor multiples have not had much impact yet.

We expect as the market softens and the competition levels go up that our customers will press us and our competitors to take the margins down.

And as we see that, we'll have to address it.

But at least at this point and time, there's still enough industry backlog that that hasn't been a big issue.

Got you -- yet.

But it's coming.

There's no question that it's coming.

In terms of the infrastructure in the buildings in the US, could you clarify or let us know what your biggest states are for those markets?

I guess more for infrastructure.

Biggest -- we're pretty diverse in terms of of our position in infrastructure.

Places like Texas, Florida, California, New York, New Jersey are all pretty big for us.

Washington state's also quite big for us.

Right.

So it's spread across the country pretty widely.

In terms of -- I think you were referring to this in infrastructure, I'm not sure.

It seems like every quarter I mishear something you say, but you said you're looking at value based collections.

Value-based selections.

Oh, selection.

Selection.

Okay, I wasn't sure what that meant, And finally, it looked like you bought some shares back this quarter, or at least the share count went down sequentially,.

Is that a buy back?

No, that's a dilution effect.

When the stock price goes down, the dilution effects go down.

Okay.

Thanks for your questions.

Thanks for letting me ask questions.

Not a problem.

I'll turn it over.

Your next question comes from the line of Steven Fisher of UBS.

Hi, good morning,.

Good morning, Steven.

On the SG&A, can you give us a sense of how much the lower dollar level is a function of mix, or have you actually done some of that M&A related cost cutting that you mentioned recently?

It's a combination of three things in terms of the reduction we saw in the first quarter.

Part of it is currency, because we do have a number of operations in Europe and they are good profitable associations, but they've got G&As associated with them.

Part of it is just really aggressive cost management on our part to get our costs down in the face of what we thought would be a softer market.

And part of it is the benefit of the holidays, during the Christmas holiday in particular, when we had reduced G&As because people took a lot of vacation.

Got it.

And would bidding activity levels have any effect on any material way on SG&A typically?

Not typically.

We run a very, very tight shop from a bidding standpoint, from a marketing SG&A, sales SG&A.

And so the influence there not very significant in the scheme of things.

Okay, and since we mentioned currency, did effect have any impact on your reported backlog?

I would say not much, no.

Okay.

And then, can you just talk about headcount trends?

What actions you took during the first quarter and how you're thinking about staffing level for the next few quarters?

Well, as you can see from our earnings release, headcount's down a bit.

Part of that is in the field, construction related headcount, and part of that is home office.

And it's just a matter of, as always, we keep our overheads proportionate to our revenue -- not revenue so much as our margin flow from projects.

So, we did some selective trimming back, and we'll continue to do that as we see the need.

Would the field cuts for that primarily be in the oil sands?

Yes, some in oil sands, some in refining construction.

Okay.

And then lastly, I mean the cash balance was up nicely at the end the quarter.

Could you give me a sense of how has that balance changed since the end the quarter?

Any meaningful difference?

Since the end of December?

Yes.

No, it it hasn't changed significantly.

It continues to grow.

Our business is a cash flow business and it generates -- in the normal flow of things, it's it generates cash.

You haven't close the the AWE deal yet, it sounded like.

Right?

There that's right.

We'll close once we get EU commission approval.

Any sense of the timing on that?

Well, there's two phases.

It's a really complicated process.

Something in the 60 to 120 days.

Looking at our lawyer here, and he's shaking his head yes, so that's probably about right.

From when it was announced or from today?

From today.

Okay.

Great, thanks a lot.

Your next question comes from the line of John Rogers of DA Davidson.

Good morning.

Good morning, John.

We looked at the chart on slide 8 of your model.

I was just curious, in terms of the preferred relationships and the discreet projects, is that a fair representation of backlog as well?

Or discreet projects count for a larger portion of backlog?

No, if anything, discrete projects would be a smaller portion of backlog, because they tend to happen on an event basis, so there's not that sort of ongoing certainty of project work.

Okay.

Probably a little less.

Okay, but even with preferred relationships, given that you have that long standing relationship.

You aren't regularly adding to that backlog on a continuous basis?

Yes, we regularly add to backlog in all of these categories on a continuous basis, but if you looked at backlog at any instant in time, it probably is a little overweighted in the preferred relationship area.

Okay.

Okay, great and then secondly, in terms of the acquisitions, you talked a little bit about that, Craig, but in terms of the areas that you're looking at, you mentioned upstream as well as infrastructure, and then I think the third area was aerospace?

Right.

The upstream, is it your intention to continue to expand that globally?

You move more into the Middle East there, but -- or do you look at the downturn in oil sands work as an opportunity?

It's our intention to continue to expand that business globally, when you're talking about upstream oil and gas.

We think it's -- I think as I've mentioned several times, a huge market.

Something on the order of $300 billion in annual spend, of which we have an insignificant share.

So we think there's lots of opportunity to expand.

That would include opportunities in the tar sands, but I think as much it includes opportunities in other locations around the globe where we think there's good long term business that matches our business model.

We probably aren't going to be doing great big jobs in far away places as a part that under any scenario, but there's plenty of the ongoing and steady business kind of oil and gas work that we would like to do.

Okay, but -- and left so in the downstream side?

We're pretty much where we need to be in the downstream side, if you look at it.

We have a strong presence on the Gulf Coast and West Coast of the US.

We have a strong presence in northern Europe, we have a strong presence in Singapore.

We have a developing presence in the Middle East.

We have a strong presence in India.

That's where the refining gets done.

So I think there, it's a penetration and market share gain.

Okay, with your existing asset.

There maybe niche acquisitions that would help us, but for the most part, it it's just hard work.

Okay, and on the aerospace side?

Yes, the key there -- we really like this research and development test engineering, scientific and technical consultants business that we have, and for a long time, the multiples in that industry were just outrageous, and we couldn't figure out how to pay a market multiple and not have it be diluted in some way.

Lately, we've seen a considerable drop in market multiples in that industry, partly because of the difficulty private equity seems to be having getting their money together.

Partly because the industry is not as fashionable as it was, and we think there are going to be some opportunities for small and mid-size acquisitions that would be very additive to our capability and would expand our business.

So we're on the lookout for those kinds of deals.

Great, thank you.

Your next question comes forth line of Michael Dudas of Jefferies.

Good morning, gentlemen.

Good morning.

Craig or John, could you talk a little bit about some of the bonding opportunities we heard about from last quarter, and where they stand in relation to some of the work flow opportunities that you have today, and what could accelerate as may be the credit markets start the to get a little bit better so we can get some of those bonds out for market?

Yes, let me comment on that, Mike.

As you recall, we were tracking $47 billion -- round numbers, of bond issues, probably 20 of that -- roughly 20 of that in the buildings arena and 30 of that or a little less in the infrastructure arena.

All of those passed.

And so now it's a matter of taking advantage of those, and what we're finding in terms of who is doing what is it is a little bit of a mixed bag.

Some of the customers are going to the bond market now.

They are getting financing, and they're moving ahead with their projects.

For example, one of the big bond issues with what LA did for their so-called measure R.

That, by the way, wasn't in my $47 billion.

And they are moving ahead with projects and awards as we speak.

Some of the others are of a view that the stimulus package is going to change the tax implications of munis and tax free bonds, and therefore, they're holding back in terms of going to the market until they get that.

But what we aren't hearing from anybody is there's no money out there.

Now I say that from anybody, I can't tell you that of the 18 or 19 bond issues I'm looking at on my sheet of paper in front of me, that we talked to all 18 or 19 of those .

But it seems to be either temporizing until the stimulus shows up or either moving straight ahead.

Does that answer

That's a fair assessment, thank you, Craig.

Relative to positioning the company going forward for the next five years, and given what we're witnessing in the global economy and some of your important end markets, does the board or management feel like they want to be more geared towards public sector funding versus private sector?

Is that also looking at where you want to be allocating resources and bodies going forward in the next few years?

So maybe there's a bit more of a balance, not knowing the severity or length of the spending, declines we may see on the private side?

I think we're pretty happy with the balance we have now.

But I would expect it will tilt slightly towards the public sector over the new couple of years or however long.

We're going to -- without abandoning any of our core clients, because we think that's a critical mistake.

We're going to stick with our clients across all of our markets, but without abandoning any of our core clients, there clearly is going to be more opportunity in the near term -- that's an exaggeration.

Let me re-say that.

There be perhaps more opportunities on the buildings and infrastructure side of the business, the public sector side of the business, then there may be on the private sector side.

But I don't want you to get the idea that that is a huge imbalance, because we really don't see that right now.

Sure.

Get a total collapse of industry, that's a different conversation, but we want to keep that balance because we think in the long run, that's what keeps the growth going steady.

I appreciate -- hello?

Yes.

No, that's fine.

I appreciate those comments, thank you, Craig, thanks, gentlemen.

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

Hi, good morning,.

Good morning, Jamie.

My first question, can you guys speak -- we've heard a lot about cancellations within the oil sands, but can you speak more specifically to what you're seeing in the Middle East and whether you're seeing a fair amount of push outs in that region as well?

And then my second question is a follow up.

Can you talk about -- I was also hearing a big reason for the delays was people are trying to renegotiate for lower material costs or labor costs.

What you're seeing on that front and whether in this quarter there was any backlog repricing just as cost inflation went down?

Well, Jamie, this is Noel.

Hi, Noel.

Talk about the Middle East for a moment.

Like any smart buyer, the Middle East is taking a hard look at the projects, and let's talk specifically about Saudi for a minute, where we have got a fairly sizeable presence.

So the big companies in Saudi are looking at the projects they have in hand.

They're obviously going to get some of these rebid in terms of current commodity pricing and that type of thing.

But -- and of course, because the oil prices dropped some of the upstream things have slowed down, but the downstream projects, refineries, the chemical plants, that type of thing all appear to be live and well right now, and there seems to be a lot of emphasis on it, but there isn't any doubt they're relooking at the price structure, because there's a fair amount of lump sum turnkey work there, so they're getting them rebid generally.

And so that would settle Middle East.

That would settle Saudi in particular.

We've also got a fairly sizeable presence in Abu Dhabi, but we're doing building and infrastructure there, and most of that work continues to move ahead.

And so we don't see a lot of real delay and and repricing backlog.

We certainly -- there won't be enough change in any of our backlog that would be worth repricing, I think that's a fair statement, right, Craig?

That's right.

Jamie, the way we look at backlog is that we revalue it every quarter, so we look at every project and determine what we think the spend is going to be going forward that's in our scope so to speak.

And so that was repricing events, to the extend that the estimate of the cost to complete goes down, that just automatically folds into the backlog, but it's not something we isolate.

Okay and just a follow-up.

You alluded a little bit I think to what might have been Avi's question, just about a little bit more of a competitive environment.

While you won't necessarily participate in this, do you see the energy market moving more towards fixed price over time versus cost plus?

And how will you -- I'm assuming you won't change your strategy, but if you could just talk generally about what you expect to see?

Sure.

We do expect that the customers who have been unable to get lump sum pricing and therefore have pretty much been doing everything on a cost reimbursable basis will go back to trying to get some part of that done on a lump sum going forward.

So we expect that there will be projects and parts of projects that will be done lump sum that were done on a cost reimbursable basis two years ago.

I can't tell you what I think how big that trend will be.

It will depend a little bit on how long and how deep any pullback in the industry is.

But it's not going to effect -- in our opinion, it's not going to affect our position as we go forward.

We're going to stick on our guns and do what we continue to do, because we know that's what creates best value for the customer.

But unfortunately, some well behaved competitors won't behave well, I'm afraid, as we go forward.

Okay, and then just my last question.

If we look at your core customer list now versus maybe where it was two or three years ago, have you added -- and you don't have to tell us who, but you have added any new material customers or increased share within a particular customer which could potentially help you whether the downturn better versus historic cycles, just because either your client base has increased or your market share within that client base has increased?

Let me answer the questions and comment on what the answer means.

We have added about one core client every year for almost as long as I can remember, and we continue to identify clients that we think are potential core clients as we go forward.

And we very definitely increased our market share of the core clients we have.

I think one of the things that I'm happiest about in terms of our organization's ability is its ability to grow the share of wallet with individual customers.

So both those are positive.

I think it would be bragging though to say that will make going through this next couple of years easy.

Those customers will change their CapEx if their CapEx goes down, even if we've done a nice job of growing our share, our share of their CapEx will go down and that will make for a smaller number.

I don't think you can impute from that that we've become sort of immune to a cyclical downturn.

I think perhaps you could say that again, because of our business model, not anything in particular we've done in the past couple of years, that we're less effected by a cyclic downturn than maybe some or our competitors would be.

Thanks, I will get back in queue.

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

Morning.

Good morning.

I wonder if you could talk a little bit about what exactly happens with a cancellation.

Is there a breakup fee?

I guess we can obviously extrapolate what the revenue impact is, but do you suddenly have a big work force of under utilized people and their utilization go down and could that potentially be a margin hit as well?

All of those things happen.

I like the idea of a breakup fee.

I need you to help us negotiate our contracts going forward.

Generally, what we get when a project is canceled is we get some reasonable, but modest allowances to demobilize.

And so we'll be given a couple of weeks to get people off of the job and wind up the documents, put everything away.

But it's very short, and it certainly does not cover any of of the G&A impacts that results from having a whole bunch of people with nothing to do.

And so what we have to do is react very quickly and as quickly as we can to get those folks redeployed or get them off of the payroll if we can't redeploy them, and there's always some G&A hit associated with that.

But I will tell you that we're pretty good at managing those costs.

Okay and then with delays, is it generally the same thing, just not obviously as extreme?

Well, delays tend to be more in the future.

The delays tend not to have as much as an immediate impact as they do timing of additional growth.

So you're working on a front end for a project.

The customer says we're going to push the job out and go slower.

What that means is your staff upcurve just got flatter as opposed to not.

If you're fully staffed, and so your absolute peak of the job, they say they're going to drag it out.

You unwind those people more slowly than you do in a cancellation and so it's a little more manageable.

And getting back to your comments the acquisition market, you said sellers' expectations have come in a bit.

Can you quantify that in terms of what multiples were maybe six or nine months ago versus what they were now?

What they are now, I guess, is the proof of the pudding is in the tasting, and we haven't closed any deals to confirm our opinions, but we think that the markets will move down a more traditional 5 to 8 times EBITDA from maybe a 7 to 10 not too long ago.

So it's material.

And then one final question on the stimulus package.

It seems there is a lot of news surrounding this, but how are you guys viewing how the ultimate market impact is?

Do you see this as double digit incremental growth, or is some of this just going to be replacement for things that have slowed down and it might just help mitigate any significant slowdown in the market?

Well I think that it's a little bit of the latter, in fact a lot of the latter and a little bit of the former.

We think that the stimulus package will add to what otherwise would have been a weak market and make it even a good market.

Double digit growth, I'm not sure I would go that far, but I think the stimulus bill will be more than just a fill the hole back to level kind of impact.

Now we think that's a 2010 and beyond discussion.

We don't expect the stimulus package to have much impact at all on '09.

Okay, thanks, I'll get back in queue.

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

Hi, guys, nice quarter.

Thanks, Barry.

If I look at the company, it's been able to string together about four quarters of very good margins despite field services rising as a percentage of revenues.

Is that more because the technical professional services within backlog is just so good that it offsets the rising field service?

Because field service itself is better than it was in the past.

Well, I think we've seen a shift as we've been talking about.

We've also seen continued growth in the professional services side, so I think the fact that the professional services is growing and the total revenues and margins are growing has been part of the strength.

We've also been able to control and keep our G&A control in fairly tight, so that's helped in offsetting a little bit of maybe softness at the gross margin level.

So I think it's probably a little bit of both.

I wouldn't attribute it at all to one and all to others.

I think we're going to continue to see pressure on those operating margin percentages over the next 24 months at least, and some of that will also come from some of this pricing pressure that we aren't seeing a great deal at this point, but we do expect it it see more of in the marketplace over the next year or so.

And on the last call, Craig used the word bubble a few times, and I guess that shook up a lot of analysts.

But in this call, you seem to be be fairly positive on the 15% long term growth goal for EBIT.

Has there been a change in tone or just a change in mood?

How do we read that?

Well, I still think that we've just gone through a bubble.

I don't think you could characterize what happened to oil prices, for example, any other way.

So I think we're coming out of a relatively hot market, and I don't think we're going to see that again for a while.

So I would stand by my bubble characterization.

On the other hand, we're not forecasting gloom and doom.

We could turn out to be wrong about that, because clearly, there's a lot of uncertainty in the marketplace out there.

But for the most part, we have large, stable customers who are not doing sort of one off things in far away places or dependent on finance to get their work done, and as a result, the bubble was truly a bubble and not sort of a tidal wave that crashed over us and crushed us all.

That's a terrible -- I'm sorry about that.

(laughter) Anyway, that's the best I could do at the time.

So I don't think the level of optimism is higher today than was a quarter ago, but I don't think it's lower either.

And Craig, you made a point of saying that half your headcount is national government buildings and infrastructure.

Were you implying that since those look like they're picking up, that you have operating leverage inherent in that, and that's supportive of your 15% long term earnings growth goal?

I think I was -- maybe my objectives were a little more fundmental than that.

I think that because of the revenue imbalance in our home office business relative to -- because the revenue imbalance in our construction business being heavily process oriented, I think that the market under recognizes or undervalues our public sector business in terms of its capability and ability to contribute.

And so I think the answer to your question is yes, I do expect to get some benefit from our infrastructure business that -- because I think we're a bigger player, frankly, than people give us credit for, and that was my point.

By the way, the 50/50 discussion, about half of our home office headcount.

About all of our construction forces are deployed.

That other part of the headcount are deployed out on the construction sites in the process industry.

Great, thanks a lot.

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

Good morning, gentlemen.

Good morning, Tahira.

Just a couple of questions.

Number one, if you were to look at your backlogs in terms on sort of divide it up roughly into two projects that represent expansion type of projects versus those that are more maintenance and regulatory oriented, would that be possible?

I suppose we could do it, but we won't.

(laughter)

Oh no, okay.

Okay.

I'm just wondering as you stand right now and obviously, things are changing very rapidly in this environment, can you recall the last time you had something like a $3 billion backlog reversal?

Or something that is like 16%, 17% of your backlog in the past, and what impact that had?

I'm looking at our Chairman for the moment to see if he can recall anything of that nature.

Well the problem is, the company's so much bigger today, but there isn't any doubt there's probably been times when we've had backlog reversals, although generally speaking, and I think I said this at the shareholder meeting last week, major cancellations out of backlog are not commonplace.

Most of the time these projects have a life of their own.

We're late putting them into backlog and they keep going.

And I think as Craig told you last quarter, the removal from backlog last quarter was self imposed, and -- but it didn't affect the business at the time a lot.

So, on a percentage basis, I'm sure we've had this, but I couldn't go find it for you for love nor money.

But we would not expect to see a lot of major reversals.

If you're looking at your oil sands backlog as what you have right now and compare it to to what you had, let's say a couple quarters ago, is it more sort of maintenance oriented at the moment, or do you still have some large discretionary projects in there?

We continue do a fair amount of project work in the tar sands, and I think I mentioned in my prepared remarks that the steam assisted gravity drainage part of this business still has financially attractive returns.

And as a result, there a number of those projects that have are -- have been awarded, for example, in the last 90 days.

So to suggest that it's all maintenance backlog, no, that's not the case at all.

There's still a substantial amount of project work in what we're doing up in the tar sands as there is in the rest of the company going forward.

As I'm looking at the people that have essentially become available with the cancellations that you've seen over the last couple of quarters, can you give us an update on what your strategy is in terms of those people?

Well again, I think in terms of people who have become available in the company, if we can redeploy them on billable work, that's what we do.

If he we can't redeploy them, them we have to reduce the work force in that area or that office.

We have that problem year in and year out.

Even in the best of times, we'll find offices where we just can't we deploy the people and we have to have a layoff.

Got it, and just one last question.

Your guidance revision downward by $0.15.

How much -- if you were to divide it roughly, how much is related to the cancellations we just saw, the $840 million, and how much is just taking a more conservative stance given your end markets aren't certain right now?

I would not attribute any of it to the cancellations.

We really don't look at it that way.

What we look at is what the backlog is prospectively, and we don't think it's realistic for us to hit a 405 number, so we felt like we had to take it off of the street.

Got it, and then, if you are looking at the acquisitions, I assume they are going to be a larger piece of your 15% growth rate over the next couple of years?

Well, acquisitions will contribute to the 15% in the range.

About a third or thereabouts as we go forward, but remember that acquisitions are only very slightly accretive in the first year or two because of the amortization of tangibles.

Right.

So it takes two or three years before an acquisition really starts to contribute to the EPS.

Got it, and would your Carter & Burgess acquisition be reaching that point?

Like I said, it takes two or three years, and Carter & Burgess is about 15 months old.

Got it, okay, thank you very much.

Your next question comes from the line of David Yuschak of SMH Capital.

Good morning, gentlemen.

Good morning, David.

As far as your revenue in the fourth quarter and the first quarter in the both the oil and gas and refining were pretty strong compared to your results earlier in the last fiscal year.

Are you seeing a lot of wind down in energy projects right now?

As this climate for energy softened.

Can you give us some sense as to how that may be shaping up as far as the wind down because it's it been so strong?

I'm not sure wind down would be the word that I would use.

We are seeing in terms of the field service revenues.

That's the part that's getting pushed out as customers try to slow down their CapEx, and so certainly that's going to impact the revenues from that end of the business as we go forward.

But again, we're seeing new projects authorized, and we're seeing projects that are environmentally driven or otherwise have driven that have drivers other than the market conditions that will continue to drive construction work.

I don't think we're seeing a wind down of the business on the construction side at all.

That would be the wrong word on outstanding.

More I think about it, wind down of existing projects.

Are you seeing a lot of that occurring right now in the mix?

Not really.

I would say that for the most part, the projects we have ongoing are either projects that are are just going forward as they have, or they are ones where CapEx has been reduced, so it's not really a wind down, it's a push out.

Okay.

As far as you mentioned earlier about backlog being comparable to your revenue on a trailing 12 month basis, is that fair to say right now?

It's on a forward 12.

Okay.

So oil and gas and refineries still be in that 40% plus on backlog right now?

Upstream and downstream would be in that general facility.

They are a percent, but the comment was based on our revenue mix, our backlog as kind of attracts that revenue mix.

Okay.

And then as far as -- you mentioned earlier that you generally burned about 60% to 65% on a longer term basis.

Is there any reason because of some cancellations of pushouts that may accelerate a bit from the traditional 65%?

We don't think so, at least at this moment.

We just ran through a complete check of all of that, and our forecast going forward was in that range again, so we feel pretty comfortable that in the next 12 months, we'll eat about 60% to 65% of what's in backlog today.

Then one last question.

As far as the mix then is concerned, would you expect over the next, say 12 months, that that will be technical service than food services and if so, what may be some of the driving forces to maybe expectations getting better bookings out of the technical services?

I think we'll continue to see a mix of bookings, both moving on into the later phases of things that are now being designed that are in technical professional services, plus we're going to see continued bookings on the professional services side.

If has been speculated, there's a little bit more activity coming out of the of the public sector side because of the stimulus bill and bond issues and such, that would tend to be more professional services for us as opposed to construction.

So you would see that side may be getting little bit more, but on the refining and chemicals and upstream in pharmaceuticals, we have projects in all phases of activity and we just kind of go -- they will continue to go through those phases and we book things as we go through the phases.

It's very seldom we'll book a complete project the day we get told we're going to go forward with the front end design or front end feasibility.

So these get booked in phases, so I think we'll continue to see things booked in the phases as we go through the project cycles.

So this next cycle probably will be more focused on a technical professional side than field services given the kind of softness in the economy right now.

Is that a fair statement?

We still have a lot of projects that are in process that we're doing the engineering and professional services on that will work their way into the field over the next 12 to 24 months.

That's kind of what we've been talking about for the last 12 months.

You're seeing it now in that the last couple of quarters, the field services side of our business has grown revenue.

The field service revenue has grown faster than the professional services.

So where mix has gone from 55/45 on the technical services to this last quarter was closer to 55% on the field services.

Let me ask one final question.

As far as field service revenue is concerned going down as you're doing the technical professional service.

How much will that depend on current credit conditions and to get that out into the field from the early work you have done on the projects?

I would say that the credit conditions have very little impact on whether or not we go to the field.

Again, we don't, for the most part, have customers who are is dependent on availability of credit to get their work done.

Okay.

And so it's more of a cash flow question.

Now if cash flow becomes a problem for our customers, that would have a different story, but I don't think the credit markets are particularly a big issue right now.

Certainly, of the customers that I've talked to, I have not heard that.

Appreciate it, thank you, guys

Your next question comes from the line of Mark Thomas of Simmons and Company.

Good morning, guys.

Good morning.

Thanks for taking my questions.

Just real quick, Craig, you mentioned evaluating China as a growth opportunity.

Are there certain end markets that have caught your attention in that region?

Yes.

Actually, as we've, I think, told everybody for many years now, we follow our core clients into new geographies because we're there to support them, and quite frankly, the pharma market in particular is seeing China as a growth opportunity.

We're seeing a fair amount of interest in the pharma customer being supported by Jacobs, so my expectation is we will go into China on the back of the pharmaceutical relationships that we have and then build from there.

What kind of time frame would that be?

We're very patient about this stuff, so it will start very modestly over the next year or two and grow modestly from there.

Okay, and secondly, you mentioned you expect to see good wins in the national government segment.

Could you quantify those expectations?

No, I couldn't.

(laughter)

All right,.

Thank you very much, the rest of my questions have been answered, guys.

Thanks, Mark.

Your next question comes from the line of Joe Richie of Goldman Sachs.

Good morning, everyone.

Thanks for taking my questions.

Not a problem.

Just one question for you, really.

You've mentioned a little bit about your burn rate potentially slowing going forward because of some of the project delays that you've announced.

You talked a little bit about potential margin compression as the pricing environment gets tougher over the next 24 months.

Guess I'm trying to get comfortable with the guidance range that you've given today and what your expectations are for the rest the year, particularly on the backlog side.

Are you expecting backlog to grow from here?

Are you expecting it to be flat, are you expecting it to decline?

I would love to get your thoughts upper and lower end of your range.

We would like to believe we're able to grow our backlog going forward.

We certainly are pretty happy with our sales results so far, and I think in the face of the market that most people think we're in, it demonstrates a pretty good ability to both win work and take market share.

So certainly, we would like to see the backlog continue to grow.

We don't think that's an impossibility We don't they can we're staring a market in the face that we couldn't possibly grow in.

That's where we sit on the backlog question.

As far as -- in terms of what prospectively this means for guidance, we're really not prepared to give guidance within guidance.

That's fair.

I guess one question on -- one follow up question on your burn rate.

Would your burn rate then to slow sequentially quarter-over-quarter?

Or remain similar to what it was this quarter?

Or potentially grow into next quarter, given that you did just announce some delays his past quarter?

We don't typically give guidance on revenues, and I think we tend to give guidance strictly on the bottom line, and there's a lot of factors that go into that.

We aren't really giving guidance on all of those factors and each individual piece of those factors.

So I think that we'll have to kind of leave it with what we expect to do over this next fiscal year on the bottom line.

Because we've had nice growth rate on the bottom line at times when we've had very slow growth on the revenues, and we've had vice-versa, so the two don't necessarily track in the short term quarter-to-quarter.

What John is mentioning is we really don't forecast revenues much, because it isn't a viable indicator of future performance.

Okay.

All right, well thanks for answering my questions.

I'm sorry if it wasn't the answer you were hoping to get.

I know, that's okay I appreciate your candidness.

You had to try.

Your next question a follow up from the line of Andy Kaplowitz of Barclays Capital.

Hey guys, again.

Craig, I just want to follow up on a comment you made on infrastructure.

The one thing that I guess I see out there is even in your home state of California, there's -- that's probably the most severe case.

There's some issues there.

They took $3.8 billion and basically of infrastructure projects and froze them for short term funding needs, and again, I know California's probably more severe than the rest of the US, but is it possible that we'll see some sort of hole in your infrastructure business as we go over the next six to 12 months while we wait for stimulus, or are you just not seeing the short term funding impasse because your projects are longer term in nature?

Well, you can never say it's not possible that there will be a hole as a result of something happening somewhere, but we certainly don't feel that way right now.

California is an important part of our infrastructure business, but it's just a part.

And the areas where we have a lot of focus tend to be areas where regional or local bond issues are driving funding.

I've talked about this a lot, but I'll go through it again.

If you look at five counties that make up the Southern California part of our infrastructure business, most of the work is not driven by state funding or tax revenues.

It's driven by bond issues that are funded through either sales taxes or some other vehicle, and those numbers are huge.

Discounting the $30 billion in Los Angeles that was just approved and that's all a sales tax based issue to be fund those.

There's probably something north of $2.5 billion of other bond issues that are driving infrastructure investment.

So it isn't as dependent on the state as it appears.

Now, the issuance of bonds for the $30 billion, certainly there will be people evaluating what sales tax revenue is likely to be, but it's a very long term prospective, and so I don't think that affects the bond issue very much.

Got you, thank you.

There are no further questions at this time.

Do you have any closing remarks?

Let me thank you all for calling in.

I think we did have a pretty good outcome for the first quarter.

We remain as concerned as anybody about what future might hold because there's a lot of uncertainty out there, but as we sit here today, we think the future for our company is still pretty good.

Thank you all very much.

This concludes today's conference call.

In you may now disconnect.