雅各布工程 (J) 2009 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Jacobs' second quarter earning 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.

Mrs.

Bruner, you may begin your conference.

Thank you.

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 it's most recent annual report on Form 10-K for the period ending September 30th, 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, and the most recent Form 10-Q for the period ending December 31st, 2008 for a description of our business, legal proceedings and other information that describes the factors that could cause actual results to differ from such forward-looking statements.

The Company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements, whether as a result of new information, future events or otherwise.

Now, John Prosser, CFO of Jacobs, will discuss the quarter's results.

Thank you, Patty, good morning, everyone.

I'll go over the financial highlights and then I'll turn it over to Craig Martin, our CEO, to review the business overview for the quarter and kind of look forward.

If you turn to Slide 4 on our financial highlights, we did have -- report diluted earnings per share of $0.88 for the quarter that was on net earnings of $109.3 million.

For the six months our earnings per share were $1.82 and net earnings of $225.6 million.

Backlog was reported at $16.6 billion, which is up about $6 billion from the prior quarter-- $600 million, sorry.

Thank you.

$6 billion would be nice.

$600 million from the prior quarter.

I misspoke.

And we continue to have a strong balance sheet.

Net cash position at $746 million was about the same as the first quarter, but up substantially from last year end.

Really the difference there was we had some changes in certain payments and receipts.

So while the outlook for the year still remains strong, the cash for the quarter was about flat.

And then we did lower our guidance as reported in the press release.

The current guidance of $3.10 to $3.50, which is a reduction from our previous issued guidance of $3.55 to $3.90.

Turning to Slide 5, this is the history of our earnings growth, it shows that -- well, we still have a good track record for the last trailing 12 -- or trailing five years and also for the last trailing 12, the reported earnings continue to be good, although the outlook is a little bit more complex and difficult.

Going to Slide 6, history of consistent backlog growth.

Again, backlog was up over not only last quarter, but over year over year.

In the backlog, in this quarter, there were a few cancellations, but nothing that was significant.

In fact, the total cancellations were under $100 million for the quarter, which is kind of in line with the kinds of cancellations we could see in any-- even in a normal market.

We do have some work in the backlog that continues to be delayed or stretched out, but -- which is affecting some of the work off, but overall, the backlog numbers were good.

The professional services continued to grow slightly, it was up a couple hundred million over the last quarter and up nicely from the prior year.

With that, I'll turn it over to Craig to review the outcome of the quarter.

Thank you, John.

Good morning, everyone.

I'm now on Slide 7.

I'm going to speak about five topics this morning, pretty much the same five topics we always speak about.

The first two I'm going to go into in some detail in subsequent slides, so I'll skip over those for now.

And I'd like to talk about the bottom three individually here.

Let me talk first about our multi-domestic strategy.

We've talked a lot about that over the years.

It's our idea that we want to be local to our customers and then bring those local customers global capability, not only in terms of know how globally, but in terms of being able to deliver things like high value engineering from some of our centers in places like India.

We think this benefits us in a number of ways, particularly because of our positioning in the market, one of our challenges is always to be more competitive with the local and regional competitors and that combination of multi-domestic strategy and high-value engineering lets us do that.

So it's an important part of our strategy and an important part of why we've been able to maintain 15% growth over the long term.

The next bullet is about acquisitions.

This is an interesting part of the business for us.

As you know, we get about a third of our growth, plus or minus, from acquisitions year in and year out.

It's a good business right now from our perspective, good position right now.

Activity is up and growing and the multiples are dropping very fast.

So we're seeing a real improvement in the buyability of target companies.

You couple that with our strong cash position and we think we're in a great position to take advantage of acquisitions over the next 12 to 18 months.

Now we continue to be interested in upstream acquisitions, oil and gas, almost anywhere; in infrastructure, particularly transportation and water and waste water related infrastructure.

And we finally see aerospace and defense multiples dropping to a point where an acquisition in that arena might also make sense.

So we're pretty excited about the potentials of acquisition in terms of adding to our long-term growth.

And then of course we've always told you that we think driving down costs is an important capability in the Company and I think it's never been more obvious how important that is than as we look at the current quarter.

Gross margins were down, but we controlled our G&As extremely well.

As a result, net margins were flat as a percentage of revenue.

I think our team has a lot to be proud of in terms of their ability to control costs going forward.

I'm now switching to Slide 8.

This is our relationship based business model and I'm going to start by trying to kind of define the categories for you.

We think of transactional projects in these categories as those big event projects that tend to be in far away places or for customers you don't know.

An awful lot of this work is now lump sum turn key.

There are fewer of these big transactional projects out there.

As a result, there is increasing pressure in the markets.

So we think there's a significant difference in the industry model, the one you see there on the right and our model on the left.

Most of our competitors base their business around the big event projects, about which there is a lot of risk right now, there's a lot of movement back to lump sum and increasing pressure on margins.

So we think that balance is going to be challenging.

Everybody does some discreet projects, those are the projects you do for customers you know, but with whom you don't have long-term relationships.

And then everybody has some preferred relationships.

Those are those long-term relationships with a client where you can work for that customer day in and day out with some confidence.

When we look at what's going on in the marketplace, we think our model is one of the best models for these kinds of times.

We still get more than 80%, 70% to 80% of our business from preferred relationships.

We have a substantial amount of repeat business, about 90%.

Our core clients, which are the clients we do a lot of work for year in and year out still respect about a half of that overall capability.

And a base load business, which is the small project work we do, continues to be a high percentage, more than a third of our work overall.

So we think we've positioned ourselves to be in the long-term relationship business as the ideal time and that we'll be able to continue to mine those relationships for growth and for continuity of our business.

We're going to continue to chase some discreet projects as well.

It's the way we add to our preferred relationships.

It's a good business, although price competition is a big factor in discreet projects and we'll do the occasional transactional project as we go along, probably fewer in this market than ever.

But overall, we think that model that depends on clients you know and work with on a continuous basis serves you much better in an uncertain marketplace than the industry model in the similar circumstance.

Moving on now to Slide 9, let me go through the markets.

Now, I'll start with the refining and downstream market.

John's already told you that cancellations are way down compared to prior quarters.

Delays have moderated as well, so the refining business is better than it has been in terms of prospectively.

Our clients still have lots of money to spend.

Our current forecast shows about $30 billion worth of expected spending from Jacobs clients in the refining marketplace and it's driven around things like environmental work, MSAT and NSPS part JA, that's probably $5 billion to $7 billion; MRPL, the sulfur removal from crude in the ocean, transport business, something like $4 billion the next couple of years, a lot of work on crude slate changes, that sort of thing.

So the refining business continues to be a good business.

It's not as robust as it was two years ago, but it is -- it's a good, solid market and we're positioned for the part of that market that we think has a lot of long-term potential.

There's still a number of prospects we're tracking in that industry and there's probably 30 or so -- more than 30, at least, projects that we see that are over $100 million that are possible wins in the next four quarters.

So we think there's plenty of business to be had in the refining market as we go forward.

Going to upstream oil and gas.

For us that business is basically oil sands work and gas plant, gas storage work.

Our clients still have very large spending expectations in that marketplace, north of $80 billion.

In particular, we see a lot of potential for the SAGD business.

At today's oil price, call it $50, there are a number of SAGD projects that make a lot of sense.

I think if oil continues to hold in that price range or even moves up marginally, we'll see a resurgence of SAGD projects across the system and we as a leader in SAGD up in Canada will do very well.

We're seeing a lot of gas plant work both in the Middle East and in the US.

It happens to be the strength of our Company and the investments are fairly significant, so we think that'll continue to be important.

And then there's a lot of gas storage work that we're seeing where we have a lot of strength in the UK and Europe.

We think those projects will also benefit our Company.

So while the oil and gas business upstream has been a tough one for us because of our dependence on the oil sands, we do see a lot of opportunity for future growth in that business.

Moving on around to chemicals.

The chemicals business for us is dominated today by alliance relationships and small project work.

The big project work or bigger project work is slow outside the Middle East.

There is a lot of work in the Middle East and we continue to benefit from that as we grow in the Middle East.

And there's a lot of activity still in the polysilicon arena, where we think we'll do reasonably well.

So if you look at this whole spectrum of heavy-process work, chemicals, oil and gas upstream and refining, it remains a troubled market, pretty complicated, but we see some opportunity in it as we go forward.

We think there's some good chance that we'll be able to build a good book of business for the out years.

Moving on around to pulp and paper, high tech, food and consumer projects, this is also an alliance and small cap business for us.

The businesses themselves look pretty flat, but our prospects are pretty good in the sense that we seem to be increasing our reputation as the alliance contractor of preference and so we think we'll be able to continue to expand our business in this area, although modestly compared to the overall size of the Company.

Moving on around to the pharma-bio.

Pharma-bio's been a little tough over the last couple of quarters, it is I think improving a little, but not a lot yet.

However, I think what's happening right now with the swine flu issue is going to drive the vaccines business very aggressively, so I think we'll see some increased activity in that area.

We have the good fortune, I think, to be the big dog in that business.

We dominate the pharma-bio business today.

It's one of the few businesses that I can actually point to a Company, us, having meaningful market share.

So we think we -- our pharma-bio business will be good for Jacobs, even though the industry pharma-bio business may not be great.

Moving on to the national government's business.

You'll remember this is comprised of two kind of different segments.

One segment is the environmental side of the business, the other segment is the research and development test engineering, scientific and technical consulting services business.

Let me take the environmental business first.

Continues to be a really good business and is expected to get a big boost as a result of stimulus.

One of the industry pundits put on a presentation not too long ago I happened to see, they said they expected 8% or 9% growth in the available funding in that business and that it would be a significant stimulus going forward.

That was the US side of the business.

And, of course, as you know from previous calls, we continue to be very excited about the prospects of the environmental cleanup in the UK, particularly related to the nuclear UK business.

That business has been slow to award, but there's still a very significant backlog of projects and opportunities there and the end days proposed spend of GBP150 billion, most of that is yet to come.

So when we look at the environmental side of this business, we're actually more upbeat than we've been in a long time in terms of our ability to see real growth and continue to expand our business.

On the research and development test engineering side of the business, that business is driven by government spending in places like NASA and Department of Defense.

There is a lot of clarity about what's going to happen on the Department of Defense side, but in the last two or three swings in DOD, we've been a beneficiary, and frankly I don't know of any reason why we wouldn't be a beneficiary again this time.

So that part of the business is good.

We continue to expand that business.

There are a number of prospects in competition that would represent big wins for Jacobs if we were successful and we should know here in the next quarter how all that turns out.

Moving on around to the buildings business, another area where we think there's a lot of positive activity, the same presentation I referred to earlier described the stimulus effect on buildings, public buildings specifically, has a huge increase and, frankly, we're starting to see that.

As we look at the buildings business going forward, we see a tremendous potential to benefit from stimulus and also some fairly positive effects from bond issues.

So that business looks good to us.

It also has a strong healthcare component and, again, just looking at the demographics of aging in the developed world, we think healthcare is one of those businesses that is a good business to be in long term.

Moving on finally to infrastructure.

Transportation and transit were big winners in the stimulus area.

There's also a lot of bond activity there as well.

The infrastructure spending, though, in terms of how it will affect us is mostly moving out into 2010.

We don't think it will have a very significant impact in the near quarters.

When we look at what's out there in the way of bond and stimulus revenue for the buildings business and infrastructure business combined, just to give you a sense, we see between two and four times as much activity driven by bond and stimulus money in the second half of 2009 than we saw in the first half.

So we're pretty upbeat about what that's going to mean in the longer term and its impacts on the out quarters.

So with that, I'll go to Slide 10 and try to summarize.

We think there's a lot of reasons why Jacobs is still the investment of choice in this industry.

We have a very strong customer-driven business model, one that has -- couples lower risk with greater longevity with the customers.

We're diversified in terms of markets, geographies, services.

That cost focus is critically important in tough markets as margins come down, we have a greater ability to respond to those changes in the margins than we believe many of our competitors do, We obviously have a strong balance sheet and we haven't given up on our 15% average annual EPS growth.

We believe we'll continue to deliver that in the long run.

So with that, I think we'll turn it back and we'll start the questions.

(Operator Instructions) Your first question is from Michael Dudas with Jefferies.

Good morning, gentlemen, Patty.

Good morning, Michael.

Craig, you mentioned in your press release or maybe in your prepared remarks, the complicated nature of the heavy process market.

I wondered if you can get a little bit more color into that.

I think we're all understanding of the marketplace and the pressures put on, maybe is it more client specific what Jacobs provides to the clients, is it overall just general malaise and concern?

Could you maybe expand a little bit about how that is impacting your near-term visibility and results?

Absolutely.

And the simplest way I can characterize it, Mike, is like this.

I, I-- as you know, we get out and see customers very aggressively.

I've seen a number of CEOs or COOs of our customers over the last, say -- well, over the last quarter and as I talk with each of these, it's almost like I can tell them what they're going to say because the speech goes something like this.

It says, things aren't so bad.

Our company is doing better than the overall market would suggest that we ought to be and so we feel pretty good about our business and that sounds really good.

And then comes the but, and the but is, but we're not sure what's going to happen and we see a lot of uncertainty in others, so we're not -- we're not making commitments quite like we did.

We're going to think about these investments a little differently and it's going to change the way we think.

And generally the change in the way they think involves different approaches to projects, different hurdle rates, more investigative or development kind of work around their projects and that makes not so much the projects themselves, but the timing of them more uncertain, and it's amazing how uniform that response is.

And that's why I say it's a highly uncertain marketplace because it's almost down to how does the customer feel instinctually about the market.

And to follow up on that a little bit when-- you did an excellent job in your overhead reduction in the first and second fiscal quarters of this year.

Is that more reflective of what you think is more of a run rate business level from a gross margin absolute basis over the next four quarters or is it being a bit more proactive and taking this as an opportunity for you to kind of improve utilizations or move people from the office to the field or vice versa?

Well, it's both, Mike.

We -- as the run rate goes down, we get some natural reduction in our G&A just as a consequence.

We run the Company with a very high level of billability and we maintain that sort of regardless of what the market situation is.

So some part of it is, in fact, just a benefit that comes with a reduced market, we get a reduced G&A.

But back in about September, we thought we could see some challenges in the marketplace and that being aggressive about controlling costs or even driving -- about driving costs down would be a really good idea.

So we put a very strong push on getting our costs sort of minimized and focusing on just doing only the things that absolutely have to be done to run the business.

And I think the combination of those two is what's let us perform as well as we have on the G&A side.

And you anticipate that through the rest of the fiscal year?

We're going to continue to be very aggressive about controlling our costs.

Thank you, Craig.

Your next question is from Steven Fisher with UBS.

Good morning.

Good morning, Steve.

John, you gave us the cancellations, but can you confirm what the gross bookings were in the quarter?

Well, I think the net -- we don't look at gross and net.

We-- I mean-- you can just kind of walk your way through it.

It's about-- the sales for the quarter were about 3.5.

Okay.

That's about what I had in --

So if you take out somewhere around a little bit under $100 million that was the cancellations, then I guess the gross would be $3.6.

Yes.

That's what I had.

In round numbers.

I just wanted to confirm that.

So can you -- Craig, you went around the wheel of the end markets, but can you just comment on what the real drivers were for the new bookings in the quarter because that's a pretty good number and included in there were there any big projects booked in the quarter?

And I guess I'd define big as say $300 million or above.

Yeah, the answer to that is there were some big bookings in a couple of markets.

I was hoping that we'd have had a chance to press release them before this call, we have not, so I can't say more than that, but there where some-- there was a big booking related to crude slate work and a couple of big bookings in the infrastructure and buildings business.

Okay.

And then so given the, the nice solid bookings, I'm just trying to get an understanding of the guidance reduction.

I mean how much of it is margins and -- or how much of it is maybe since you mentioned in the conversations with your customers there's timing uncertainties, can you just give a little color about what the thought process is behind the guidance reduction?

Sure.

We -- part of it is that we believe that there's a significant chance that bookings and activities will go slower than they have historically and so we -- we're trying to be conservative in terms of what that means to billable hours and revenue and profits in the next couple of quarters.

Part of it is that the legacy of cancellations and delays is also impacting the numbers a little more -- frankly, a little more than I thought it would and so that's also impacting our outlook for the next couple of quarters.

So we view the outlook on the next couple of quarters to have been impacted by those things and we also think there'll be a continuing pressure on margins.

You can already see, in fact, we already are seeing cases where the bidding for projects in that discreet projects arena is getting increasingly competitive.

We went through a cycle where we told you we were getting modest improvements in our alliance relationships multiples, now we're getting requests for modest reductions.

But when you have a lot of modest reductions, they start to add up to real money.

So it's a combination of those things.

And are you seeing the same type of competitive pressures on the infrastructure side of the -- on the government side of the business as well or is that mainly just in the energy and other areas?

Yeah.

It -- we see some competitive pressures margin wise in the national governments business where there's a lot of value based procurement and price is a factor.

We don't see any to speak of in the buildings or infrastructure business.

Those businesses are relatively speaking very genteel.

So the stimulus work that comes in should be pretty solid on the margins?

Yes, that's what we expect.

Okay.

Great, thanks a lot.

Your next question is from Andrew Kaplowitz with Barclays Capital.

Hey, guys, how are you?

Hi, Andy.

Good, Andy, how are you?

Good.

So, Craig, you said that you're thinking that there could be a booking slowdown, but have you seen one yet is I guess the question?

No.

I don't think there's going to be a bookings slowdown.

I actually feel pretty good about our prospects going forward.

Our sales numbers are tracking pretty well, frankly, with our plan, we're a little under and a little bit ahead of last year.

But overall, I think that's not going to be the challenge.

The challenge is going to be the timing of releases inside those programs and projects.

I think there'll be probably more steady work and more front end work and it'll take longer than it has historically.

I got you.

So can you give us, then, I think you gave it to us last quarter, that historically you burn about 60% to 65% of your backlog.

It seems like that number would change then over the next year.

Is there any way to think about what the new number is?

Well, it -- let me first be sure we're clear on what the -- how the backlog relates to the business.

In a given year, at the beginning of any basic 12-month period, in that 12 months, about 60% to 65% of work off comes from backlog.

That's a little different than the way you just said it.

Got you, got you.

Okay?

Yeah.

So what we think may happen is that we'll be at the low end of that range in terms of what we expect to be able to eat out of backlog going forward.

Got you.

And we also think that will affect, then, the new sales in terms of the rate at which we're able to eat that.

So we think that the business is going to continue to build backlog, we think the prospects longer term are very good, but in the near term, certainly for the next couple of quarters, it's going to be challenging to eat backlog at the rate we'd like.

And then when I look at your revenue in the quarter, it was down a little bit from last quarter, if I look at the guidance, it assumes, I think, revenue coming down some more and roughly $1.50 of EPS for the second half of the year.

Do you guys have a -- like you have pretty good visibility from your backlog, so is it going to sort of level off at the next couple of quarters run rate for the next four to six quarters?

Is that-- is it just kind of push out so we're going to see a level off of current volume or are we going to continue to see declines?

Like how should we think about it as we go forward in 2010?

Certainly your assumptions over the next couple of quarters are the direction we're talking about if they are going to be going down.

At this point we're not giving any guidance or any forecast of the 2010 year.

We typically don't do that until closer to the end of the year or at the end of the year for the next year.

But directionally it really depends on when we see and when we hit a bottom and at this point we're not predicting or forecasting that.

Do you have that crystal ball?

We'd be happy to have it, but I think the shape we would expect to see is it is going to come down in the next couple of quarters and find the bottom and then the recovery will be a little longer term and maybe slower than what we saw the ramp up over the last few years.

I mean John I--

Yeah, I think-- I mean we'd like to believe it's going to level off and then after a few quarters turn back up sharply.

But it is as I said earlier, hard to predict.

Right.

And I think what I'm trying to get at is that it would seem that you maybe have a little bit better visibility in that you do have all of this backlog, even if it's slower burning, and so to me it means that maybe it should just be stretched out more and you could see that a little bit better than sort of the average industrial company.

Is that fair or -- ?

Yeah, I think that's fair.

And then just one other question, if I could.

It sounds like you guys are maybe much more positive on the stimulus in terms of infrastructure and buildings.

Is that a fair assessment?

Is there something you're seeing that's getting you more excited about the business?

I know you've always been positive, but the new statistics that you've brought up, it sounds like from where you guys are, you're more positive.

Well, yeah, I think let me break it into two parts.

With respect to stimulus in the environmental area and in the buildings area, I'm significantly more positive.

It's really clear that the money is going places where we're very well positioned to take advantage of it.

And so when you look at the money that's been added on the stimulus side, we expect we'll be a disproportionate beneficiary compared to our competition because our public buildings business is the strongest part of our buildings business and all of the stimulus money, for example, there went to public buildings.

So those customers are getting a lot of money, they don't have the resources to spend it quickly like they'd like, so they're having us help them.

And so we're pretty upbeat about that side.

On the infrastructure side, we remain pretty cautious about its impact in the near term, but we do think the stimulus, and frankly some of these bond issues got approved in November and still haven't been funded, those two things combined are going to have a very positive impact on infrastructure, but I would caution you, we think that's in the out quarters.

Got you.

That's great.

John, can you tell us how many employees you had at the end of the quarter?

Just -- do you have that number available?

We were down from the year end where in total I think we're right around 53,000, 54,000.

Great.

We've -- we continue to hire some people in some markets and obviously with the reduction in G&As and such, that's reduction of people and as some of the markets slow down, we reduce the head counts.

Thank you very much.

Your next question is from Alex Rygiel with FRB Capital Markets.

Thank you, that's FBR.

Good morning, gentlemen, nice quarter.

Good morning, Alex, we know who you are.

Thanks.

Couple simple questions.

First Craig, you had mentioned 4% of your business comes from -- or 1%-- your revenue is eaten from backlog.

Any sense as to what percent of your profit is eaten through backlog?

It's actually not a lot different.

If you talk about at least at the gross margin level.

Right.

In fact, internally, we don't pay a lot of attention to revenue.

Frankly, we look at gross margin from our projects as our primary top line.

Okay.

So when I talk about that 60% to 65%, it would apply to gross margin and/or to revenue.

It'd be more accurate about gross margin, actually.

Sure.

And secondly, speaking of the UK, there's a number of different opportunities over there, both on the environmental side and the infrastructure side, particularly with the upcoming Olympics in a few years.

Can you talk a little bit about the developments over in the UK over the last few months and whether or not they've changed, improved or weakened?

The UK is struggling from a GDP point of view.

The situation if anything is worse in the UK than it is in the US.

But interestingly enough, the spending is in areas on the infrastructure side at least where we're very well positioned.

So we're getting a lot of benefit from Olympics and related spending in terms of transit, in particular in the London area.

We're seeing a fair amount of activity in the water business as well.

So overall, our infrastructure business in the UK looks a lot like our business in the US.

It's growing at a modest rate and we think it's going to continue to do so.

Great.

If you want to go on to the environmental side, it continues to be a very lethargic pace in getting the environmental projects out there and bid and recompeted.

But we do think there's some major programs that are going to be very positive for the Company as well as a lot of other opportunities.

There's also some interesting acquisitions opportunities out there that we're continuing to evaluate.

And lastly, on the nuclear front, you've talked in the past about possibly being an owners, engineer.

Any new updates on that strategy?

Well, I think we're making good progress.

I think we have, at least for the near term, decided to focus on being on the customer's side of that whole industry, not trying to compete for the EPC work, again, kind of partly because that's just a big event thing whereas the owner's relationships last quite a bit longer.

We're also working to develop a capability in the maintenance of nuclear facilities, another arena where we think there'll be a long-term capability.

And I'm frankly pretty pleased with our progress so far, although I don't have any giant events in terms of a big alliance win to report in this quarter.

Great.

Thank you very much.

Our next question is from Tahira Afzal with KeyBanc.

Good morning, gentlemen.

Good morning, Tahira.

Just had a couple of questions.

Number one, if you look at the bookings you've booked in the fiscal second quarter, from the sounds of it it seems that the margins, underlying margins within that, would you say they're fairly similar to what you've been booking in the prior quarters?

No, I think they're a little thinner.

Got it.

I don't think -- nothing dramatic, but we're not seeing the margins in new bookings that we saw a year ago.

Got it.

Okay.

So when you say that they're a little thinner, am I pushing my luck here by trying to define it within, let's say, the context of your margins over the last couple of years?

Your operating margins have been, and maybe I should look at your gross margins rather, but your operating margins since the last cycle have gone up from 13% to the 15% level or so and then spun back to the 13%.

How much -- how different are the margins here versus what was on the prior cycle in terms of the down cycle?

We think overall our margins are less susceptible on the down side in this cycle compared to prior cycles.

We have more alliance business where we're negotiating the reduction as multiples and getting a little bit better deal.

And so our promise, when we told you our margins wouldn't go up as much as some of our competitors results, but they wouldn't go down as much, I think we're seeing some of that.

And I also think the diversification of the Company across markets and geographies has made a big difference in terms of our ability to sustain margins in the down cycle.

Now, that's not to say that the oil and gas business, or the heavy process business, isn't going to impact our multiple or our margins and our multiples, I believe it will, but I don't think the impact will be as big as in prior cycles.

Got it.

Also, Tahira, on the gross margin level, we are seeing the effect of the mix.

Got it.

Okay.

So you're seeing a bit of a --

If you'll notice, we have moved over and the mix has moved a little bit to the field services side.

So part of that swings from the 15%, that we saw here last year and also the 13% is a mix, it's not all margin reduction, but --

Good comment.

But we're -- we've been able to maintain our operating margins the last couple of quarters as much by the G&A reductions as by the-- what's happening at the gross margin.

We have seen some reductions in the gross margins, but we've been able to offset that with the reductions in our G&A.

Got it.

Thanks.

And could you give us a bit of color on your market share with the GSA in the past in terms of construction and retrofit activity?

It seems that there's been-- is going to be a lot of spending at least where the GSA is concerned, would love to get some idea of where you stand with that?

I don't think we can give you a market share percentage or a number, but we have a very strong relationship with GSA in every region and it's probably one of our very best customers in the buildings arena as we go forward.

Got it.

And then if I was to generally view the potential offset as the energy side of your story comes under some pressure with a potential offset on the infrastructure side in the fiscal year 2010 time frame, just looking at the color you've provided on the infrastructure bidding and pipeline side, how should we view the two in terms of an offset?

That's one of those uncertainties I don't think we can address, quite honestly.

We expect that there will be some offset.

We feel pretty good about it, but I think that's a -- that's one of those questions that gets to what's 2010 going to be and we're not ready to say.

Got it.

Okay.

I'll just hop back in the queue.

Thank you very much.

Thank you.

Your next question is from John Rogers with D.

A.

Davidson.

Or maybe not.

Mr.

Rogers, your line is open.

Please proceed with your question.

Let's move to the next --

One moment for Mr.

Rogers question.

Let's move to the next person in queue, operator.

Your next question is from Joseph Richie with Goldman Sachs.

Good morning, everyone, thanks for taking my questions.

Good morning, Joseph.

First -- my first question is just going back to your margins for a second, you saw margins increase sequentially throughout this quarter, so I guess I'm just trying to understand the implications of your guidance on margins for the remainder of the year.

Just doing some quick back of the envelope math, it looks like the midpoint would suggest margins are going to be down about 50 bips for the back half of the year.

So going back to the question, one of my colleagues just asked, regarding mixed versus pricing pressure on projects, can you give us a sense for how much of this is mix, how much of it is potential pricing pressure that you're seeing today?

Well, certainly it is a combination of the two, but we don't give guidance on margin percentages other than we would expect to see them continue to -- that the pressure will be on there.

We've been saying for a while that we saw the pressure-- that margins would be coming down and I think that's nothing new.

I mean we've gotten the benefit of G&A reductions and as we will try and continue to keep those right sized, the first fruits are always the easiest to get and if things continue to come down, if they do continue to come down dramatically, we will try and stay ahead of that curve, but it gets more difficult as that curve goes down a little bit.

And so the -- I think we will see it, but we're not ready to -- we don't quantify exactly-- it's going to be X number of basis points or whatever, but it will be a mix of the two and we would expect probably to see revenues coming down a little bit over the next few quarters and the margin coming down slightly as well.

Okay.

I guess maybe asking it a little differently, if you think about the -- your revenue for the back half of the year, is your mix going to change much, are you going to be doing much less work on the downstream and upstream side, more work on the public works side, is there some potential margin compression that you're seeing because of a mix change?

No, I think you won't see the mix of -- at least you won't see it appear to change very much over the next couple of quarters.

We've got a substantial amount of construction work out in front of us, so the field services part of our business will continue to affect the margins a little bit as well.

So I think in terms of seeing the mix from where you sit, you probably won't see the mix change dramatically.

On the other hand, if you look at our business from a home office point of view, the home office mix between public sector and private sector is round numbers 50/50 and so in the professional services end of the market, I think you will see a shift in the mix to the public sector markets, but it probably won't become transparent before the FY 2010 kind of time frame.

Okay, okay, great.

And then as I think about the -- you booked a nice award quarter in line EPS, the -- your guidance was lower.

I-- just trying to get a sense for the impact of Motiva on your lower guidance for the rest of the year.

We don't speak to individual customer impacts.

Okay.

Motiva is a good client, we expect that to be a good program, we're going to be there for the long term, but we really can't say more than that.

Okay.

Okay, great.

And I guess one last question for you.

On AWE, is there any update that you can give us on the EU Commission approval that was expected between March and May of this year?

We expect that we'll be able to move forward to closing that, the EU Commission approval process is nearly complete and so we expect that that may -- that deal could get done in the next couple of weeks.

Okay.

Great.

Thanks for your help.

Your next question is from Barry Bannister with Stifel Nicolaus.

Hey, guys.

The -- when I look at your year-to-date, I mean in the first quarter you beat by $0.05 the consensus and the second quarter you beat by $0.03.

Your revenues in the first half exactly equaled the street and there's a fine line between conservatism and setting the bar too low.

When I listen to the commentary, your gross margin is tracking exactly what we calculate to be where it should be on the field service mix and you don't sound like a Company that wants to put a lot of money into SG&A, which has really helped save the year, so the only way I can get to the back half being down as much as your low end of guidance, is if your revenues disappoint because of project stretch outs that you probably know about now but you can't really speak to, or you're going to invest heavily in SG&A or you're going to do an M&A that's going to boost costs in the short term.

I mean is it one of those three?

Well, as I said, Barry, if the revenue expectation, the business level expectation is going to be down and we're going to see some continued margin degeneration on -- I don't think we're going to be seeing a big investment in G&A, but as we -- as the market slows and we're ahead of the curve right now with the SG&A, that the -- it becomes more difficult to stay under that curve just because it gets down into more of the meat and less of the things that are -- the low hanging fruit, so to speak.

And with the big growth we've had over the last few years, as much as we focused on G&As continually, things have crept into the system that were anticipatory of continued growth and those are the first things that we got out as the market slowed.

So that's kind of a long winded answer to the first two or to your three points.

But I think the -- it is going to be -- we see it as a potential for declining activities over the next couple of quarters, more so than what we thought at the beginning of the year or even at the last quarter and the pressure on margins, particularly on the process side is -- has been a little bit more intense than what we would have even anticipated last quarter and it showed up a little bit earlier.

And while the changes are modest, we work on set spin margins anyway, and it's even modest changes have an impact on the bottom line.

I can see the argument being made for the delays on the civil infrastructure side and those that are most sensitive to short-term corporate CapEx within technical professional services, but you've made tremendous progress in the Middle East in oil and gas, particularly at Saudi Aramco, and they indicate that they are going ahead with their spending, albeit stretched a little bit.

But that business even stretched is the best business you could do, it's the highest margin, it shows up that the energy portion of your sales perfectly inversely correlates with margins being good and SG&A being low.

So even a bad day in the Middle East is a better day than a lot of your civil work, I would say, so why are you -- what are you seeing specifically in terms of what areas are being pushed out and stretched out because we just can't get to your back half numbers?

Well, let me comment on that.

We certainly agree with you that our push in the Middle East is a big positive for the Company.

But I will tell you that the customers are -- the customer and their partners in the Middle East are being very cautious about programs and study phases are very extended compared to what we might normally expect.

So while the business is good, it isn't contributing the volume that you would expect it would after this amount of time.

So that's one of our challenges.

Noel is here with me, he may want to comment on the Middle East.

Noel?

Yeah.

What I'd say on that is there's no doubt the profit margins out of the Middle East appear to be solid, but to say they're wildly better than our big infrastructure business or something like that, I think is stretching it, Barry.

We generally look at these businesses and by the time we get to the bottom line and ratio in the sales costs and all that, the profit margins are solid, but are they just a lot better, no.

I don't-- I just don't agree with that statement.

The Middle East is developing, it's developing in a neat pace, the big guys over there are going to continue to spend.

I was there less than six weeks ago at a big conference listening to what their plans are, but Craig is right, it is -- they are being cautious.

They know the market has changed and everybody in the world is being cautious because, frankly, nobody understands what's going to happen to oil prices and in the downstream business some of the margins.

So people are just being more cautious than they have been and certainly than they were 24 months ago.

Right.

Okay.

Thanks a lot.

Your next question is from John Rogers with D.

A.

Davidson.

Hi, can you hear me now?

Yes, we can, John.

Much better.

Thanks.

Sorry about that.

Just going back to, I guess, Craig, some of your comments and John's as well.

I think you've talked about a lot of the work being pushed out, but at one point I thought I heard John say that you're expecting now a much slower recovery than what you've seen in past cycles.

Did I hear that right?

Well I said that I think it's going to be slower than what we saw in the last run up, which was the last three years.

Okay.

Okay.

But you weren't talking about --

I wasn't referring to the past cycle.

Okay.

Okay.

And then secondly, in terms of acquisitions, it sounds like there's more opportunities out there.

Given your size now, are you more inclined to look for larger acquisitions or -- I mean do you look at this market and -- as a lot of transactions here?

I think, John, it's a little bit of both.

I think that we will be -- we're in a position to do a little bit bigger deals and we probably will if we find the right deals at the right price, we'll do some of those.

We're still not -- don't have any appetite for a merger of equals or anything like that.

That's just -- we just think that's too risky in the long term, but I think deals that are Carter Burgess size or twice that size would not be off the page at all.

But there's-- on the other hand, there's still a lot of opportunity for us in what I would characterize as niche and bolt on acquisitions to help us develop markets or skills or services in these markets and that'll continue to be a big piece of what we do because there's a lot of leverage in it for us.

So it -- and in the -- I guess to summarize my answer, yes.

And lastly, in terms of what you're seeing competitively in the market compared to previous downturns, and I guess any of you, Noel or anybody, how is the competition reacting to this?

I mean do you see anything in terms of crazy pricing or risk taking equity positions, that kind of stuff that we've seen in previous downturns?

I don't believe we have yet seen the bottom in terms of the competitive part of the cycle and I will tell you that while margins are coming down we've seen a really tough cycle on the Gulf Coast, if we get to that point and we could, margins will go to where gross margins and projects are zero.

I mean that's how competitive it can get.

So-- and we're not seeing that yet.

So I don't want you to suggest the competitive environment is as bad as it's going to be and we expect it to get better.

I actually expect the competitive environment to get worse as we go forward for at least a few quarters.

Right now, I think a lot of the competition is still working off backlog and not quite at the stage where they're starving for work.

None of us are.

But I think it'll be a difficult time for a while in places like the Gulf Coast when the work dries up and the backlog evaporates.

That's a more negative statement than I actually mean it to be, but I think there will be more pressure on margins in places like the Gulf coast.

All right.

I appreciate it very much.

Thanks.

Your next question is from [Samir Ratodd] with [Macquarie].

Hi, good morning.

Good morning.

Just a quick question, one of my colleagues touched upon it earlier.

I was wondering if you could expand a little bit on Motiva, where it stands in the current cost review process?

We're really not in a position to comment on Motiva.

Motiva gets to comment on Motiva if you know what I mean.

I can say it because I think it's in the general noise, the project is moving forward and we're moving forward with it, but I really can't say anymore than that.

Okay.

Okay.

Thanks.

Your next question is from David Yuschak with SMH Capital.

Actually, your next question will be from Mark Thomas with Simmons & Company.

Good morning.

Good morning, Mark.

I just wanted to touch real quick on your nuclear comment.

You're talking about focusing more on the owner's side and you're pleased with the progress, but you don't have any large alliance contracts to announce this quarter.

Is that something we should expect to see in the near future, sometime this year?

Well, we continue to work to try to build those alliance relationships.

I can't predict when we'll have announcements.

We announced the alliance with British Energy, I think it was last -- quarter before last.

Right.

And so we continue to work with customers in that arena.

They happen when they happen, unfortunately, Mark, so we can't predict.

I'm not even trying to foreshadow that there's some big award coming up.

Okay.

And then just real quick on the pharma-bio segment, you said you had good market share in that segment, could you elaborate on that, what your estimated market share is?

Well, if you base it on E&R data for the companies doing that business, it would be north of 60%.

Okay.

Great.

Thanks.

The rest of my questions have been answered.

Okay.

Good.

Thank you.

Your next question is a follow-up from Tahira Afzal with KeyBanc.

Just wanted to follow up on something that you said during your prepared commentary.

If you look at the out years, you see them improving as of right now.

Is that in regards to bidding activity, revenues or margins?

Well, I really only think about margins when it comes right down to it in terms of profit.

Got it.

Okay.

So you think that second half challenging, out years would mean both fiscal year 2010 or would that include fiscal year 2010?

Actually, we're not prepared to give any guidance for 2010 or beyond, but we'd like to believe that things will flatten out over the next couple of quarters and, remember, I said we'd like to believe that they'll flatten out over the next couple of quarters and we'll start to see recovery after that.

Certainly that matches what the pundants are predicting for the economy.

Right.

Now when that turns to profit is a function of remembering that we are a late cycle Company.

Exactly.

Okay.

So you have to keep that in mind in thinking about what a recovery in the economy means to a recovery in our profit line.

Got it.

And assuming that some of these infrastructure projects you might be seeing getting fairly similar margins in a sense, are these going to be both front end loaded, higher-- sort of a higher burn rate type of profile?

No, I don't think so.

I think the profile for the infrastructure projects that we're going to benefit from will tend to be the same profile we've seen in the past.

Got it.

And, Craig, last question.

As you look at the pipeline of these projects, what type of size ranges are you seeing?

I mean if I look at some of your Aramco kind of work, those projects are sort of $10 million in size, even less than that sometimes, but it seems some of the infrastructure projects are larger.

Are you seeing sort of $300 million, $400 million projects in this mix sort of similar to what you saw with the recently announced London Rails project?

Yeah, what we find, Tahira, is that the project sizes in the infrastructure business are tending to grow.

I was looking at our prospect list the other day and we have just in infrastructure alone, more than 60 prospects bigger than $100 million in construction value.

Right, okay.

Now, remember, that we predominantly provide engineering and construction supervision services in that industry.

Right.

So our share of that $100 million project may be under $10 million.

Got it.

Okay.

But there's a lot of projects out there and they are definitely getting bigger in that industry.

Right.

Last question, Craig, sorry I lied about that one being the last one.

If you look at the three segments you've highlighted as being areas where you can do acquisitions, i.e.

upstream, infrastructure and aerospace, after three, as you look at the opportunities in multiples right now, as you look at acquisitions that could be more than just niche small acquisitions, which one of these sectors could you potentially be seeing or looking at opportunities that are fairly large in size?

Well, we're looking at opportunities that are fairly large in size in all three of those sectors.

Got it, okay.

The sector -- in the infrastructure sector, because of what I still think is a little bit of an overbelief in the value of the stimulus.

Right.

Is probably the one that has the worst pricing.

Got it.

The other two are more interesting from a pricing point of view.

Okay.

Thanks a lot, Craig.

Okay.

Your next question is from Chase Becker with Credit Suisse.

Hi, good morning, it's Chase in for Jamie, how are you?

Good morning, Chase, we're good.

Just had a quick question.

Most of my questions have been answered.

But in terms of you talked about you're seeing some competitive pricing on the discreet projects.

But I was wondering how over the next 12 to 18 months you're balancing your views of some of the infrastructure work?

I mean clearly some of these smaller projects that have been announced from the stimulus, seems like they're running under budget or it seems like people are trying to take any kind of margin to keep their people busy.

I was wondering how you kind of think about that business over the next 12 to 18 months and the list of projects that you have, how should we think about your bidding activity on those?

Okay.

In the segment of the infrastructure business where we operate, there's virtually no price competition.

In other words, the selection process has to do with your qualifications to do the work and not whether you're inexpensive or expensive in terms of your price.

So we don't expect the stimulus will have much impact one way or the other on pricing and we don't expect to see people dive bombing prices in that industry to keep their folks busy.

Frankly, none of us are having trouble keeping our folks busy in that industry as it is.

And the likelihood that somebody would get cheap in that industry would be of no value in the near term.

In the long term, however, I think there's more infrastructure work to do than there is money to do it with and I believe that in time, maybe sooner rather than later, but in time price will be an important factor in who wins the work in that industry.

And we are salivating for that opportunity because we clearly have a cost structure that is well below the competition in the infrastructure industry.

So in some sense from our perspective it's bad news that there's no price competition in infrastructure.

Okay.

I appreciate it.

You've got to remember when we're talking about the infrastructure, we're talking on the design side.

On the construction side, there tends to be a little bit more competitiveness because more of that's done on a lump sum competitively bid basis.

Terrible business.

So our comment there is really focused on the services side, on field administration and design side of the business.

Makes sense.

I appreciate it.

Your next question is from David Yuschak with SMH Capital.

Good morning, guys.

Good morning, Dave.

As far as the energy outlook is concerned, as you talk to some of your customers, is the volatility in the commodity market one of those things that you-- that they can't get their grasp on to know how you evaluate projects at all that's causing some of the stretch outs or pull outs or whatever that is causing some of the discussions you've had with your clients?

I certainly think that's a factor in their thinking.

To the extent that a number of our customers are in commodity markets, their investment decisions are-- swing on two things, cash flow and what their prospective look at the industry is.

So where customers are constrained by cash flow, we're seeing projects stretched out.

Where customers are concerned about futures pricing of that commodity, we're seeing some stretch out.

We're also seeing a tendency in the customer to take whatever the most recent direction of the commodity might be and forecast it as going to get better or worse along those same lines.

It's interesting that if you do studies of -- in the -- just in the oil and gas industry, if you look at what the forecasting trend is, whenever oil is going up, the forecast is up, whenever it's going down, the forecast is down.

So there's a little bit of a -- I don't know, a --

Trend following kind of --

Yeah, trend-- that's a good way to describe it, trend following activity there that swings back and forth depending on just where commodities are any given moment.

Most of pundants I read right now are saying that oil prices will stabilize at 50, 53 now and go to 60 next year.

No one on earth knows if that's true or not, but that's sort of what our customers are starting to hear and think about and that should drive some expansion of investment, particularly up in the oil sands.

The credit side of it, is that as much of a factor, too, in their thought process or is it more just the pricing of the commodity itself?

Most of our customers spend cash flow and don't need the -- don't focus on the credit side of the market.

Okay.

If you get over into the minerals side of the business, there's some credit issues there.

But in terms of the energy side, commodity chemical side, that tends not to be driven by credit markets, but more by GDP, demand and forecasts about cash flow.

Now looking ahead here, just kind of a plan A versus maybe a plan B, if for whatever reason we continue to see the stretch out in energy spending because of whatever factors the customer doesn't want to go ahead, how do you see -- because you're -- on your one slide you showed 45% of your current business basically out of the energy area.

Do you-- would you see any kind of shifts in that mix in the different market verticals you have that could help offset or mitigate any potential weakness that could follow because of the inability to add much to the energy backlog relative to maybe some other places?

Well there's two parts to that question, I think.

With respect to inside the sort of energy spectrum, I think there continues to be opportunity for Jacobs, particularly upstream, to expand it's market share.

Spending is a huge number in upstream at any time, good times or bad, $10 oil or $50 oil relative to our participation and penetration.

Okay.

So I think in terms of where you might see a shift is our ability to get more upstream work --

Versus downstream.

Relative to our downstream book of business.

Okay.

Where we have a little bigger market position.

Okay.

With respect to the balance between energy and other businesses, I think as energy overall is soft relative to the way it's been, we should accept that some of these other businesses diversification that we've put in place would help us and that we'd see business growth in some of those other arenas.

Is there anything that particularly stands out as far as opportunities there that could help?

Well, I think that's sort of part of the pie that's national governments, infrastructure and buildings is where the -- a lot of that should come from.

Okay.

That's all I got.

Thanks.

Okay.

Your next question is a follow-up from Barry Bannister with Stifel Nicolaus.

Guys, I just -- I just pulled it out here of the Middle East Economic Digest and a couple of other sources, and Saudi Aramco's budget, which is revised every year, five-year spending plan, it's actually increased last month from $58 billion last year to $60 billion.

It's up $9 billion over two years ago, it's 144 projects, 53% of them are downstream and one of the contract provisions, and most of it is going to be in-kingdom EPC in the next three years, one of the provisions is it has to create a joint venture for international firms with domestic firms and you have the Zamel 60% share, so you're ahead of your competitors.

So I'm trying to reconcile that with Noel's conservatism regarding Saudi awards where you've made a major push.

You seem to be in a perfect position for that kind of work and they are spending.

Well, Barry, I'm not talking about Aramco when I have this conversation, okay, I'm talking about the Middle East, because we can't get specific on this.

But I still go back to my point, yes, the spending plans are there, actually, I attended the conference that that number was put out at, okay.

And so spending plans are there all through the Middle East, but the bottom line is that they are being more-- and they haven't pulled back on any of them, any of them.

Whether it's ADNOC or Aramco, or any of these guys, or (inaudible) Petroleum, they're all still doing the spending, they have the spending plans and they are moving forward, but the pace has slowed.

And they're looking harder at their projects, and even some of the projects over in the Middle East that were bid, let's say nine months ago, are being rebid now to take advantage of price competition.

And so the -- even the contract negotiations-- we've been involved in an award over there for months in a contract negotiation that's dragged out I guess since October 1 and it looks like we're going to get it finalized here in the next week or two.

Of course, we've heard that week or two -- and this has nothing to do with one of the big oil companies over there, this has to do with a mid-sized company that you would never have heard of, but it's a fairly sizable job.

But we've heard this every two weeks now since October.

The project will go ahead, we are going to win it, but it has dragged out beyond belief in terms of the award and so we are seeing this drag out, this little more thoughtful approach to projects and so that's where our caution comes from.

Are we ideally positioned, yeah, we think we've done it just about exactly right.

We do believe that.

It was a very conscious effort.

We've gone and done it.

We have our (inaudible) position exactly where we want to be.

So that -- that's just what we believe, Barry.

If I look at the bar chart, though, that they provided, the in-kingdom, out-of-kingdom EP-- lump sum turn keys, looks like it's transitioning more to in-kingdom EPC, and so where they're trying extract cost concessions would tend to be in purchased materials which on a pass through basis wouldn't effect the engineers that much.

No, but on-- no they actually-- companies in the Middle East have actually gone back out and rebid the whole thing in their lump sum EPC bids, just to take advantage of better pricing.

On mostly purchased materials?

Well, yeah, but they're trying to work that in to the lump sum EPC.

Okay.

Thanks.

Remember, Barry, just one other thing here.

Our participation in the Middle East is dominated by engineering, feeds and PMC.

We're not now nor do we intend to be a lump sum EPC contractor.

So there's a significant part of the CapEx that you're looking at that is planned release of lump sum EPC contracts where we will not participate.

That's right.

Right, but you'd be involved with the engineering, the feed?

Yes, that would be right.

Okay, all right.

Thanks.

Gentlemen, at this time, there are no further questions.

Would you like to proceed with your remarks?

Sure.

I'll just close out for a second.

As we said in the press release, we're disappointed not to be producing quarter-over-quarter earnings growth.

It's a tough time in the market, but that's-- that's just an excuse.

We'd like to be able to continue to grow regardless of the marketplace.

We do feel pretty good about our performance relative to the prior year and we feel pretty good about the long-term prospects that are out there going forward, it's just a tough market to be in right now and the uncertainties are pretty high.

So we look forward to your support and we'll talk to you again in 90 days or so.

Thank you.

Thank you all for participating in today's conference.

You may now disconnect.