雅各布工程 (J) 2009 Q4 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Jacobs fourth quarter earnings call.

(Operator Instructions).

Thank you.

Ms.

Patty Bruner, you may begin.

Thank you, Rachel.

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 the period ending September 30, 2008, including Item 1A, Risk Factors, Item Three, Legal Proceedings, and Item Seven, Management's Discussion and Analysis of Financial Condition and Results of Operations Contained Therein, and the most recent Form 10-Q for the period ending June 30, 2009 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 financial results.

Thank you, Patty.

I will just briefly go over the financial highlights for the quarter, and then I will turn it over to Craig Martin, our CEO, to go through the business overview.

If you go to slide four on the presentation, the Highlight sheet, the diluted EPS for the year was reported at $3.21.

For the fourth quarter it was $0.63.

The net earnings was $399.9 million for the year.

Our backlog came in at $15.2 billion.

And we continue to have a very strong balance sheet.

We will be filing our 10-K by the end of the week so you'll be able to see the details of that when that is filed.

Cash balance remains at at $1 billion from about the same as last quarter, of that -- up significantly from the beginning of the year.

And we did include in our press release our initial guidance for fiscal year 2010, which is a range of $2.00 to $2.60.

Going to slide five, looking at our ten-year growth history, this is the first year we did have a little bit of a downturn.

But I'll point out the bars underneath the graph.

Those bars represent the compounded annual growth rates for the past ten years.

The last few years -- or last few quarters, we've been showing the five-year growth rate, but this -- we want to take a little bit longer view and to show what we've done over a longer period of time.

And so these are all the ten-year growth rates -- compounded growth rates over the periods ended the years indicated.

Go to slide six, which is backlog.

The year-over-year total backlog was down about $1.5 billion to the $15.2 billion.

But professional services backlog was actually up a little bit.

During the quarter, we announced that there was another cancellation on -- well, there was a -- some -- a few cancellations, but it was primarily one cancellation that totaled $320 million.

Most of that was in field services.

There was about $265 million of the $320 million came from field services backlog with the balance coming from professional services.

If you look at it for the total year, we had about $1.9 billion in cancellations that we've discussed on the various quarters, and of that $1.9 billion just about $200 million was professional services.

So it was heavily weighted by cancellations in the field services arena.

With that, I will now turn it over to Craig to talk about our our business overview.

Thank you, John.

Good morning, everyone.

We're going to take a few more minutes this morning to talk a little bit about our strategies for growth and what we see as going on in our marketplaces going forward.

So I'm going to try to cover these five bullets, and I have a slide for each one.

So I won't spend any more time on slide seven.

Going to slide eight, we always want to talk about our relationship-based business model.

Our business model is driven a little differently than the industry, and I think it's important that we understand that.

First, let me describe the types of business that we've identified here.

We've talked about transactional projects on this slide.

You will see that predominantly over on the industry model.

Those are the big events -- lump sum turnkey projects -- great big jobs in far away places for customers you don't know very well.

That sort of thing.

And there is a lot of transactional work in our industry.

Then we have what are called discrete projects, discrete projects are those where there is a competition at the individual project level, but it is a combination of qualifications and price that drives the selection and a fairly high level of repeat business.

And then there's the third category, which is the preferred relationship -- long-term relationships with clients that, over time, result in increasing share in the customers' wallet and a preferred position going forward, a limited price competition compared to the other choices, still some, and mostly in terms of staying at market.

But a business that has a little different perspective.

Preferred relationships tend to be built on the back of what we characterize as baseload business.

That's the work that goes on day in, day out, year in and year out, and it's based largely on the established asset base of the customer rather than on new, big project events, giant [green field] facilities, that sort of thing.

And so with that understanding of what the categories are, let me just try to differentiate our model from what we think of as the industry model.

And the industry model here doesn't represent any particular competitor.

It is our composite of the industry.

In general, our industry pursues transactional projects, first and foremost.

These are the big events, usually highly competitive across the world.

A number of bidders.

Often very significant price factor and selection.

But it is the thing that you hear many of our competitors talk about most in their conference calls like this one.

They will talk about the $1 billion plus project.

They will talk about the lump sum, turnkey work, or the the work upon which they're bidding at the time.

They will have the eight or ten big elephants that they are chasing and that characterizes the transactional projects environment.

We, on the other hand, focus on the opposite side of that spectrum which is long-term preferred relationships with our customers.

Our business model is 80% plus preferred relationships, either in the form of formal relationships that are contractually documented or informal ones where we've been working with a customer for years and years and years, in some cases as many as 60 years.

It is very heavily based on repeat business with existing customers.

Our base today is about 90% repeat business.

Most of that is with what we call our core clients.

More than half our business comes from our core clients across the globe.

These are clients that are the major players in industry and who have continuing big spends.

Most of that work is also baseload business, which means it is work that goes on year in, year out.

Very steady.

It is the sort of capital money that has to be spent just to keep the customers' facilities operating.

Both of those -- the baseload business and this preferred relationship business are steady businesses, and they are good businesses -- good, steady businesses day in and day out.

I think it's important that we make it clear here that we're sticking to our business model.

Our approach to the market as it is today, and as it is ten years from now, will be to execute well, build and strengthen these relationships, and frankly, avoid taking work that we might regret having taken later.

Moving on now to slide nine, and we'll talk just a little bit about our geographic diversity.

We believe that it's very important to our customer base to both be global and local.

So we try to serve our multinational customers, in particular, with a set of global skills coupled with very strong local delivery.

You can see that we continue to expand our portfolio of local presence across the globe.

Most recently, we've colored in China as a country where we have a real focus.

We like to focus where the asset base is already installed.

So a strong installed base really lends itself to our baseload business and our ability to work on those assets that are already there and on the ground.

But you can see we are pressing forward in the Middle East and Asia to try to grow our business, and I'll comment a little more about that later.

That's going quite well from our perspective.

Turning new to slide ten, revenue by market.

Going to spend a lot of time on this slide and talk about each of these markets in some detail.

But let me give you a little bit of an overall perspective on where we are in our thinking.

I think our position may be a little bit contrarian to what you may have heard from some of our competition.

We are more pessimistic about the market going forward.

We think there are some challenges left to be addressed.

On the other hand, we do think that we are starting to see the bottom of the market overall, and that CapEx will be coming back.

There just are some challenges out there that we don't think have been completely recognized that are going to make 2010 a little bit tough.

And so that's part of why you see our perspective as being a little bit more pessimistic perhaps than what you've heard from some of other folks in our industry.

Let me go through the market by market discussion.

You see a little bit about why we are where we think where we are -- or why we think we are where we are, and we'll go forward from there.

Let me start first at the top of the chart with pulp and paper, high-tech, food and consumer projects.

This is an alliance and small cap business for us for the most part.

It is a pretty good business right now.

We continue to expand our share of the market, particularly in things like packaged foods and consumer products.

We are seeing signs of life, interestingly enough, in the pulp and paper part of the consumer products industry.

Maybe for the first time in a long time, we're seeing some serious investments start to show up there.

It is not going to swing the needle for us corporately, but it is a nice improvement in that small chunk of our business.

Moving around to chemicals.

The chemicals business remains relatively slow outside the Middle East.

The Middle East is still good, and there is still a lot of small project work for us.

As can you see looking at the 11% number, we've managed to hold onto a fairly significant amount of chemical business throughout this last cycle and continue to hold onto that business as well today.

But that's largely dominated by small projects work, and we think it's going to continue to be a good business.

But we don't see a lot of expansion opportunity in the chemicals business in the near-term.

Again, outside of the Middle East.

We've seen a fair amount of polysilicon work come through the system.

Right now that polysilicon business is a little weaker.

There are still some opportunities out there that will help us in the chemicals area, but I don't think it is going to be as strong as it was cracked up to be a couple of years ago.

Moving now to upstream oil and gas.

For us, as you know, that is dominantly two businesses -- the Oil Sands and gas handling, gas processing, gas storage.

Let me talk about each of those individually.

The Oil Sands are clearly a bright spot in our outlook going forward.

Business is stronger.

Projects are starting to get released.

The level of identified investment has gone up substantially.

Two quarters ago there was about $80 billion of projects hanging around out there.

Today there is north of $200 billion.

And we think that that's going to be a strong factor, a strong, positive factor for our business up in Canada.

And there's every reason to think as long as oil prices stay up and stable that that business is going continue to see a good level of investment, and we'll see nice growth.

What we look at as we sit here today is how well have we done with the initial round of projects that have come out, and I'll tell you we've done good.

We are in an excellent position to capitalize on this upturn in the Oil Sands.

On the gas plant, gas storage side, the business is also good.

Activity in gas plants is up, again, particularly in North America and the Middle East.

It's a good spot for us.

The big challenge there is that pricing is very, very aggressive.

And so we're seeing a lot of very, very focused pricing.

That work is going pretty cheap.

And so it's a challenge from a competitive standpoint, even though there's a fair amount of work out there to do.

On the gas storage side, there's a lot of activity.

This is an area where we have particular strength.

And we're seeing a fair amount of money being spent in that area, largely in northern Europe and the UK.

We think that that will continue to be an area of good opportunity for us as a niche where we operate pretty effectively.

With respect to the rest of the upstream oil and gas business, we continue to make a penetration to that market but we have a very, very small market share in terms of things like offshore, topsides kinds of work.

We think we're going to be able to continue to grow that, but that's a longer term play for us in terms of where we're taking it.

Overall, there is still a lot of money being spent in upstream oil and gas, and we do think that is a market where we can continue to grow our business to some extent just by taking market share, as long as the oil prices remain stable and somewhere north of $50, $60.

Moving on to the refining market now.

This market is relatively slow.

Spending is down outside of environmental projects, for the most part.

Especially new spend.

There is still a fair amount of environmental work driving projects, the MSAT work and the [NSPS sub Part JA] work is out there, but it is coming to the end.

We still have the big expenditures for [Marpole Six] to come, but it seems to be coming more slowly than we'd like.

There's also a fair amount of activity winding up now on crude slate changes.

We don't think there will be as much activity on crude slate changes going forward as there has been as the spread between light sweet and heavy sour crudes has narrowed quite a little bit.

We're also seeing some challenges for our refiners in terms of the fact that the crack spread has gotten down to very low levels, and it's a tough time to be in the refining business.

So we don't think there are going to be a lot of new capacity adds.

However all that having been said, there are a couple of things going on that we think are positives for that market longer term.

First off, there's clearly a lot of energy behind new energy legislation that will positively affect us from an environmental and upgrades point of view.

We think that legislation will be good for our business.

We also think there will be continuing work to address existing environmental requirements and opportunities for little bits of creep and performance improvement.

And given our positioning in the sub $200 million project market and in the baseload business, we think that's good for us in the longer term.

So while refining is not the bright spot in the market place we would like it to be, I don't think it's terrible either.

Moving on around now to our infrastructure business.

Remember that in the US that's predominantly transportation and transit-related work.

The stimulus has been a positive for us.

We've collected a number of stimulus projects.

We believe there are many more to come.

The bigger problem though is that it is one of these half-empty [coffees] thing, right?

You have a cup of coffee that is half full and cold, and you pour in stimulus.

It warms it up, but you do not have hot coffee yet.

That is the challenge we have here.

Stimulus has been good, but if we don't continue to invest in transportation and infrastructure -- if we don't get, for example, some serious authorization out of the federal government for a transportation bill, I think we're going to struggle to see the kind of level of expenditures in transportation that would be a big positive for us.

The state DOT's are just not spending.

The bond issues are slow.

A couple of jurisdictions where they've passed major bond issues, they've decided to spend the money as it comes in rather than have a bond issue.

That's not a bad thing except it drags out the level of expenditure over two decades instead of five years.

So there are some challenges in the infrastructure market as we see it in North America.

The UK is better.

We're more diversified in the infrastructure market in the UK, and we have a larger market share.

But there are some growth opportunities.

But again, the markets for infrastructure are not as strong in our view as we'd like them to be.

And it's going to take some action at the national government and state government level to make things really strengthen and go the direction we'd like them to go.

Moving on to the buildings business, about 5% of our business.

It is clearly a bright spot.

Our business is focused on national security, high-tech, healthcare, government buildings kinds of activities.

And that's a very strong positive for us.

There's been strong stimulus.

And we're seeing bigger government, which means more demand.

And so both those things are positives in the buildings business.

The negatives, certainly the retail and commercial side of the business is completely dead.

And we see every reason to think it is going to stay dead for a long time.

That will drive both some competition that wouldn't have historically been there and create some challenges in a modest way for some parts of our building business.

A big concern, frankly, about the building -- or not "big concern," that's an exaggeration.

A concern is what will happen with healthcare reform.

We think the hospital business -- the healthcare business for us is a very positive business with a lot of upside potential.

We don't know that the healthcare reform is going to negatively affect that, but it is a concern as we look forward.

Moving now to national governments, another positive spot in our business overall.

Two things there.

Remember two businesses for Jacobs, the first business is our environmental clean-up business.

We're seeing some positives out of stimulus in the US.

It's made that business okay or a little better.

Certainly not strong, strong, but it has helped to keep that business at least in the good category.

And then we continue to see significant spending out of NDA in the UK.

They seem to be slower to spend.

I think I mentioned this on the last couple of conference calls -- than we would have liked or that we anticipated.

But the money is still flowing, and that looks to us to be a positive.

We also think that the administration in the long run will have a very positive impact on environmental spending, and that will be a plus in that market as well.

On the research and development test engineering and scientific and technical services business, which we do for the Department of Defense and the aerospace industry in general.

That's a good positive for us, another bright spot in our business.

We are adding market share.

The new administration is both a plus and a minus for that business.

On the plus side, there's a very strong focus in the new administration on organizational conflict of interest and not allowing people to sell products and evaluate products to the Department of Defense.

Some of you may have seen the recent sale of Northrop's test and evaluation business as an example of that where -- the conflict was one that Northrop decided they did not want to address.

I think that that sold for something in the $1.6 billion range.

That OCI focus is a positive for us since we don't manufacture any products for the Department of Defense.

And we think that is going to allow us to increase our share.

Offsetting that to some degree, and it's hard to anticipate how much, is the insourcing of what the president calls inherently governmental functions.

And certainly, we're seeing the government insource positions on some of our contracts that have historically been contractor-held positions.

Up to now, that's had no net impact.

So the government takes in 50 positions, but we add 50 other positions and our position -- our Company hasn't really been negatively affected.

That could shift, however, and that's another source of concern as we see what the administration does over the next 12 months.

Finally, moving around to the pharma biomarket, a business that's been a little flat for a while now.

We think it's going to continue to be flat.

A couple of issues that are driving that.

There's the ongoing consolidation of the industry, and the impact that that has on investment.

It's also driven largely by drug discovery, and we're -- that's a challenge, although the vaccines business is still pretty positive.

We also have the same healthcare reform risk in pharmaceuticals that we have in the healthcare business generally.

And we don't know what the impact of healthcare reform might be long-term on CapEx for the pharma bio business.

Offsetting that on the good side is we're still the last man standing in pharma bio.

We have, by far, the best track record and the largest market share in that business and every reason to think we'll continue to do so.

So there's a lot of things going on in our marketplace that are anywhere from mildly positive to mildly negative.

But when we look at it overall, it looks to us like it is going to make 2010 more challenging than perhaps some other folks think.

We believe we're going to be able to do well in this market, but it isn't going to be easy.

Moving on now to slide 11, just a couple of quick comments about this slide.

Remind you all that one of the things we try very hard to do is increase our residence time with our customers, i.e., the amount of time we spend with the customer throughout the capital cycle.

We really like to have what we characterize as zippered relationships where we're locked up with the client all the way in the customer's organization from top to bottom.

And we think being there -- whether you are on the engineering side, the consulting side, the O&M side, the construction side -- is very important.

One of the things we set out to do a couple of years ago was to start to really grow our construction business.

We think there is a lot of leverage to be had in that.

We think it's a local business that's relatively insensitive to a number of other factors that affect our other businesses.

And we -- as you can see from looking at this, we've been making some progress in making our construction business a bigger part of our business overall.

Turning now to slide 12.

One of our key strengths as a Company has always been our ability to drive down costs.

We want to address those issues as quickly as we can.

We want to get costs out of the system.

I think we've done a good job in doing that up to now.

And I think we're in a position to continue to do a good job of that.

I think we have one of the best cost postures in the industry.

And I think we're going to be able to demonstrate a continuing ability to drive costs out of the system.

Moving on to slide 13.

This is really a terrific time in the industry for acquisitions as an opportunity.

You can see on this chart the acquisitions we've made, and the businesses they've helped us grow.

Up there at the top right is the two most recent acquisitions, field construction operation in Canada to help us address the non-building trades work and the acquisition of the atomic weapons establishment work for the UK government in the UK.

Both really good acquisitions and ones that we're very excited about -- what they can help us do over time.

As we look at where we are in the acquisitions world, the good news is pricing is down.

And that there are some quality companies out there that are talking about being acquired.

Remember that the acquisition business is one in our industry at least that needs to be friendly.

And the fact that there is some really good companies out that are willing to talk is a huge positive for our acquisition program.

We've got a sizable war chest.

$1 billion as John pointed out that we can use for acquisitions.

And we think there's going to be some use of that money over the next couple of years to help really grow the business with some good deals.

Areas where we continue to look -- we still like upstream oil and gas for acquisitions.

We're pretty positive about aerospace and defense for the first time almost in my memory.

Aerospace and defense companies in businesses like ours are available at a reasonable multiple, and that looks like an exciting marketing opportunity for us.

And we still like infrastructure both transportation, but additionally water and wastewater.

As we think those things are both good markets for us to be in in the very long-term.

Geographically, we continue to see the Middle East and Asia as good markets for additional acquisitions.

So there's a lot in our plan to try to grow this Company from the acquisition point of view, and remember that acquisition contributes anywhere from one third to one half of our growth in any given period.

Turning now to slide 14, which is our Highlights slide.

I think we have press released a lot of nice wins during the quarter.

That's a positive.

I'm disappointed that we weren't quite up to the numbers on the backlog side that we would have liked, but I still think we did very well in the competition for the assignments that made sense for us.

We are an early winner in stimulus.

An example of that is the work for Amtrak.

There are more than signs of recovery.

I think our signs is probably a little bit on the cautious side.

I think the Oil Sands are recovering nicely, and I think we're going to take advantage of that.

We are well ahead of our original plan in terms of where we are in the Middle East.

Obviously, we'd like to be even more ahead.

Bull we are well ahead of where we thought we would be and very positive about what is happening to us there.

We've demonstrated an ability to get our SG&A down.

We've taken out more than $150 million year-over-year.

And we think we're going to be able to continue to drive our SG&A down as the markets get tough.

And we certainly do think there's going to be some additional margin compression, particularly in the private sector markets.

And then finally, it is a great time for acquisitions, and we've demonstrated that we are very good at doing that.

So we think that is another positive as we go forward.

That brings me to our commercial slide, the investor appeal slide.

We think there's a lot of reasons to like our business model for this market and for the long-term.

Our diversification continues to be positive and represent opportunities for us to grow.

We've got a solid balance sheet, and we don't have any reason to think we can't continue to grow on a 15% compound basis over the long-term.

With that, I'll turn it back to Rachel, and we will go for questions.

(Operator Instructions).

Your first question comes from Steven Fisher with UBS.

Hello.

Good morning.

Good morning, Steve.

Craig, you mentioned there's more opportunities for SG&A reductions.

In the quarter, it was flat with Q3 at $225 million on the lower revenues.

Were there one-time or seasonal expenditures that offset other cost reductions?

The fourth quarter was a challenging quarter from a cost reduction point of view.

There were some things that affected the numbers negatively.

And we try not to get into one of these, well, here is an one-time this, and here is a one-time that, and that excuses performance from one quarter to the next.

So it's not like we're going to give you a list of all the challenges that we had in any given quarter because we have them every quarter.

But it was a little tougher quarter than some in that regard.

It is also historically a tough quarter because it represents the end of the fiscal year.

And so, there's always the challenges of closing out the year and being sure everything is bowed and tied for year-end.

I anticipate though, frankly, we're going to be able to do better in the coming quarters.

And you think we'll start to see that in the fiscal first quarter?

Yes.

Okay.

And then as you think about how 2010 could play out, is it your expectation that you would have more tailwinds exiting the year with stimulus and perhaps some broader business confidence?

Or do you expect maybe some further headwinds as you get closer to completion on some of the big North American downstream projects that have been going on in the last couple of years?

My view, and I'll ask Noel to comment -- but my view is that we should come out of the year with a good tailwind.

Now, I'll put a bracket around that by saying -- absent something bad happening.

For example, another banking meltdown because of the commercial real estate issues, which depending on who you listen to is either very likely to happen on not likely to happen at all.

But absent some additional financial crisis that results in another sharp downturn, I'm expecting to come out of 2010 with a good, strong upbeat.

Noel, do you want to comment?

Yes.

I'll just add to that, Steve, a little bit.

The steep declines in the business climate as I see it from a little different perspective than the people fighting it every day.

Certainly, the panic and the real uncertainty that existed six to nine months ago seems to be gone.

And so, no one would call it a soft landing.

I was thinking about that term this morning.

It is probably not a soft landing.

Bull I think Craig and I see 2010 much the same way in terms of it is the year of consolidation.

It is the year of -- as the markets start to pick up, and then the real question becomes when you get into '11, how fast does '11 really pick up?

And I don't think that any of us are that smart sitting here today.

So we see signs of stabilization all over the place and in the end markets, I might add, also.

Okay.

That's helpful.

And then just for projects that came out of backlog.

Is it fair to assume that some should be coming back in over the next year?

And, if so, what ways would they be different coming back in?

Well, it -- you know, individual projects, for example, the ones that -- cancellations are up in the Oil Sands in some of the previous quarters.

Many of those projects appear to be coming back.

And it's a matter of what's the timetable for when they're going to come back.

But most of those projects that got into backlog, their economics were not terrible by any means.

They just didn't work at $40.

And so we expect a lot of those projects to come back.

And frankly, to come back in largely the same configuration as what we saw in the past.

Particularly with respect to the non-upgrading side of the Oil Sands.

So the extraction side, we think is going to come back just as strong and the projects that got canceled which -- that's mostly where we were -- will also come back.

Upgraders, maybe not so much.

The upgrading business may be a little slower to come back, and some of those projects may never come back.

More broadly, as you look across other cancellations in the system, most of them were canceled for one of two reasons.

Either the economics did not work at lower oil prices and will work at higher oil prices.

Those projects should come back.

Or there was just a limit on how much money the customer was willing to spend.

In the most recent cancellation of any size, which was an upstream project -- not in the Oil Sands.

The issue really was the customer decided that that incremental CapEx was not going to make the cut, and so the overall CapEx budget didn't have room for that project.

To me, that means the numbers pencil, and when the overall CapEx does have room for that project or some of the other projects get done.

That project will come back.

So long-winded answer to -- for the most part, I think the things that got canceled out of backlog, with the possible exception of upgrader work in the Oil Sands, are likely to come back in time.

But are you having to compete now for work that you already had in backlog, and are the pricing and margin terms or risk terms any different than when they were first in there?

It -- that's a yes-and-no answer.

There are projects that we took out of backlog that when they come back, we'll have to compete for them over again.

And that wouldn't be unusual.

Because in many cases the -- what happens in the interim is the mix of business of any individual company changes.

You can find when a project comes back that Jacobs has a huge amount of work in that office or that location already, and so we're not perceived as being as competitive for the work.

Or it might be different.

And a little bit will depend on the extent to which it is a core client involved?

Core clients tend to bring the work back to us when they start the work back up.

And it will tend to be a little bit dependent upon what our workload looks like at the time they come back.

So it's a mixed bag answer.

To poke at the other half of your question which is what about margins?

There continues to be pretty significant margin pressure on bid work.

So if you look at that discrete projects part of our portfolio, certainly there's significantly more margin pressure there today than there was two years ago.

And even in the preferred relationships, one of the things we have to do in preferred relationships is to be somewhere near market pricing.

We don't have to be below market or even at market, because we do get a premium for the work we do.

But we can't be 10% or 15% over-market and hang onto work.

It is just the procurement organizations for these big customers are way too aggressive and capable for us to do that.

So there's -- even in preferred relationships, there's some downward margin pressure.

So some of the gains we made in margins over the last couple of years, we're going to get back over the next couple.

And that's part of why we think that ongoing margin pressure will be a factor for the industry.

So again I think there's going to be a combination of factors that affect margins -- private sector margins.

And I think that this is a specific to private sector discussion, I don't think this is going to be a problem in public sector margins.

Private sector margins are going to continue to have downward pressure all through 2010 and for a combination of the reasons that I just outlined.

That makes sense.

I'll get back in queue.

Thanks a lot.

Thanks, Steven.

Your next question comes from Andy Kaplowitz with Barclays Capital.

Good morning.

Good morning, Andy.

Craig, so if we go back to last call, we talked about this pricing and competition question.

And I thought that the tone was maybe a little bit better than it is today around competition and pricing.

It sounded like you thought last quarter that margins could be a little bit better than maybe you thought in this downturn than in previous downturns.

And it seems like you are being a little bit more cautious today.

Could you comment on that?

Sure.

If I gave you that impression, I didn't mean to.

I do believe that for Jacobs, our margins will hold up better this downturn than they held up in prior downturns.

I think that's a combination of factors.

It's an improved mix of business.

The public sector business that we have is not nearly as margin-sensitive.

Your government pays whatever it costs.

You may or may not like that as a taxpayer, but it is a nice thing if you are a contractor.

I don't want you to suggest that we think we are going to go back to the margins of the early '90s, as an example.

I don't think we will.

But we are still going to see private sector margin pressure, and private sector makes up 60% of our work today from a revenue point of view.

Half of our work from a headcount point of view.

And so that margin pressure can't be ignored.

We are not going to see the same margins today that we saw at the peak of the bubble.

That's fine.

What you're saying is there is no real change in what you see in the marketplace between three months ago and now, is that fair?

No.

In fact, I think what we're seeing is exactly what we expected to see.

Got you.

And so you made commentary about weaker markets in general maybe than some peers are seeing.

And my question for you is how much of the weak markets is because of certain geographic regions versus others?

Maybe you could characterize what you see in emerging markets versus what you see in the US and in Western Europe, excluding the Oil Sands.

Sure.

Let me think about how best to say that.

Well, let me just with the Middle East.

When we look at the Middle East, it continues to represent a very significant opportunity for us in terms of growth of our business.

And it's the kind of growth that we've always said we want to achieve.

So that's the baseload business built around the installed asset base, and then increasing our share of larger projects and PMCs and feeds from an export point of view.

And all of that from our perspective is working well for us and driving growth.

It's, in fact, a hiring challenge for us to keep up with our growth in the Middle East.

But there's a lot of project activity that is just lump sum, turnkey, hard money bidding, and a significant part of the spend right now is in that category.

That's not our game.

Somebody here remarked the other day that every lump sum, turnkey project looks great at 30% completion.

But not so great at 90%.

And we're just -- we're not going to get into that business or put ourselves in that position.

That's part of my comment earlier about that.

So if you take the Middle East, there's a chunk -- a substantial chunk frankly, of project activity that we choose not to go after.

And that may mean that our mix in that part of the world is a little different than some of our competition who tends to go after that work if there's nothing else available.

As you go on around in India, we're doing extremely well in India.

The market is very amenable to our business approach.

We continue to grow share.

We've got a nice acquisition that's half made that we continue to move ahead with, probably close the second half of that this time next year.

So we think in terms of growth driven by India, and share there -- that's a huge positive for us.

But as I think I've said before, it takes a lot of rupees to make a dollar.

And so you've got to have huge share before you have the numbers that make a big difference on the bottom line.

Singapore and the [ASEAN] countries are another area where we see increasing investment.

Again, it tends to be by our big core client customers.

We think we are going to be able to increase our share of that.

There will still be big events and lump sum, turnkey parts of those projects that we won't be able to access.

China is new for us.

As you know, we deliberately came to China late, like we have to most of the markets we serve.

We think there's going to be nice growth in China for us.

But we see China much more as a long view than anything that's in the near-term.

Again, there's -- China is a really complicated area, and we're still learning what that market means.

So I don't think we can hold ourselves out as even a novice, let alone an expert about the China market.

South America and Africa, we really don't have a presence.

And so I can't even comment about what the business might be like there.

We'll see one-off projects and might participate in an item or two, but I don't think those will really have any impact on our business.

It appears just from reading what other people are saying, it is impacting some other people's businesses positively.

Does that answer your question?

Yes.

That's very helpful, Craig.

I mean just a real quick question on acquisitions because you mentioned them again.

I think that you and your competitors have talked about acquisitions, and it just seems like we still haven't seen a lot of activity.

What's holding you back?

Is it just these conversations take a long time because the targets want some valuation that needs to be corrected over time?

Or what's going on there?

Well, I think from our perspective, these deals can take little time or a long time.

If you think about the two deals that we've done -- we did in '09.

One was the deal up in Canada for the non-building trades construction business -- construction and maintenance business.

Small deal, done very quickly.

And just exactly what we needed.

Contrast that against doing AWE which took us five years to get done.

One of the most grindingly painful processes I've been through in the acquisition experience.

So, it's deal by deal.

What I'm excited about as I sit here right now, I'm glad we got those two deals done.

They were good deals, and there's a couple hundred million dollars worth of acquisition there.

But what I'm excited about right now is that there are some companies that are more volunteers.

And by that I mean, many of the deals we've made over the years, it has taken us ten years of coaching and relationship-building before the deal finally shows up.

And what I'm excited about now is we've seen two or three deals that we're looking at and discussing that we would have been glad to spend ten years to get done, but it doesn't look like we'll have to.

And so we see that as a real positive in terms of acquisitions in the marketplace.

And I can't emphasize enough the fact that the multipliers are coming down, and that even private equity is spending less -- is a big plus.

The Northrop Grumman deal in aerospace was about a ten multiple, and those peaked at 30.

So a ten multiple is a lot more [realism].

We can actually make money at a ten multiple, and we certainly couldn't find any way that our shareholders could benefit at 30.

The other side of it is that pricing expectations are not unrealistic right now.

That's very helpful.

Thank you.

Your next question comes from Richard Paget with Morgan Joseph.

Hello.

I wondered if you could maybe extend a little bit on Andy's first question.

And just getting back to your relative pessimism compared to some of your other competitors about 2010.

Would you characterize it more that it has to do with your business model versus maybe your geographic or end market mix.

In that, A, you're not chasing some of those big transactional projects, and, B, maybe your insight into your customers -- just given the preferred relationship model is maybe a little bit different?

Gosh.

Yes.

Just another great yes-and-no question.

I do think that we're pretty close to our customers, and we have a pretty clear understanding about where they are spending money and what they see as issues.

And our conversations with the big money -- the big spenders now.

Particularly, the Fortune 100 big spenders, suggests that we shouldn't be as positive about their CapEx as it appears that other people are.

Now you could argue that that's partly where the perspective from which we look at their CapEx, and there would be maybe some truth to that.

But I don't think I see a lot of enthusiasm in the board rooms of our customers, certainly at the senior management levels, for spending a lot of money.

And I do get to talk to a lot of senior folks, both in our customer group and in our supplier group, and I'm not seeing a lot of enthusiasm in any of those folks.

I do think also that there -- the business mix difference in terms of things like lump sum, turnkey also drives a difference in our perspective about how good the market is.

When there's lots of work out there to bid, right, even though it is lump sum, turnkey and challenging, you can be pretty excited, right?

All of these projects look great right up until about half-done, and then some of them still look great because we have some really good competitors who are good at doing that kind of work.

But the fact of the matter is that when we look at that work, we look at it longer term.

And we don't think it's very good work long-term, and so we don't get very excited about it.

And so, some part of my contrarian positioning here -- or some part of our pessimism, flows from the fact that there is a significant chunk of work out there that while it is out there it is not very attractive from our business perspective.

And, it is a function of what kind of business you want to run.

We just don't really like that lumpy, three good quarters and a bad quarter performance.

Okay.

And then, getting to the guidance for next year.

Clearly, it's probably lower than a lot of people were expecting.

If we look at 2007 where you did around the midpoint of where 2010 guidance is, should -- is this more or less a margin story where back in '06 you had a little less than $10 billion in backlog and that translated to $2.35 in EPS.

This year, you have $15 billion, and if you take the midpoint of your range, that's $2.30.

So is this just a different margin profile?

Or are you just being very conservative about how these projects are going to flow out of backlog?

Well, I think what we're trying to do is to be honest in terms of our perspective on the business and conservative in terms of our forecast.

Because that's -- I think we think that's the way you see us, and we don't want to suddenly behave differently.

You know?

I can tell you personally I found the last couple, three quarters very, very unpleasant.

I don't like revising guidance, particularly in the negative direction.

And we don't like quarter-over-quarter earnings that are going the wrong direction.

So, this hasn't been a pleasant year for us.

And we would characterize it internally as disappointing even though it's the second highest profit in the history of the Company.

And so as we look forward, I want to try to balance this.

We're not anxious to put ourselves in the position where we were last year.

Where we got too optimistic at the beginning of year and chased it down all year long.

All that having been said though, this is -- our guidance is our honest view of where the business is.

So I'm also not trying to tell you don't ignore our guidance because our guidance is our guidance.

Does that make sense?

Yes.

I think I understand what you're saying.

Okay.

Okay, thanks.

I'll get back in queue.

Your next question comes from from Tahira Afzal with KeyBanc.

Good afternoon, gentlemen.

Hi, how are you?

Good.

Just had a couple of questions.

Number one, if we look at the catalyst and -- that you have in front of you in terms of your cash balances, in terms of your relationship models.

How do you think -- how do we think of Jacobs in terms of relative performance going into 2010?

What do you think makes Jacobs relatively a good, well positioned ENC company going into next year if we mix out the fact that some of your peers might be positioned in more favorable markets at the end of the day?

Well, I think you have to look at our business from the standpoint of its reliability, its repeatability.

The fact that we have demonstrated over and over again that we can grind out that 15% plus compound average growth over any ten-year period you want to pick.

And I think that it's always been the case that when these recessions come through the system that we break early, usually earlier than our competitors.

And we usually power out of the downturn early compared to our competitors.

Will there be a competitor who can ride through the downturn and not have been affected?

Well, everybody has been affected.

So we already know that's not the case.

But I think that our model is one that's very positive for the long-term investor in our Company.

And I do think we've demonstrated over and over again, notwithstanding anything else, that we have the ability to take share in these markets and come out of those -- these markets in a much stronger position.

And I have every reason to think we'll be able to do that again.

Got it.

Okay.

And if you look at the argument that I get the most pushback on which is perhaps that you geographically have -- are in places and in -- on the downstream side.

And those are going to see secular headwinds for several years.

Do you feel that as you look beyond 2010, and outside of Oil Sands which, I agree, seems to be picking up.

Do you see your downstream business and your business model really gaining traction and really reversing some of the downstream headwinds, especially on the domestic side which seem like they could go on for a little while longer?

I think that the headwinds you describe, particularly the ones that are related to capacity, are going to be there for some time to come.

Because I think there's excess capacity and will continue to be excess capacity for some time to come.

We're not really basing our business on the need for new capacity.

What it -- the opposite side of that is that the installed asset base in where we are geographically positioned -- so let's set aside our growth in the Middle East or India or China, or any of those things for a moment.

Let's look at where we have big operations today.

Our growth in those locations has lots of opportunity to increase our share of wallet from the capital investment that's necessary -- both for maintenance capital and for environmental capital.

And while I don't think there's going to be a lot of capacity related capital in North America or Europe, I think there's going to be a tremendous amount of maintenance capital and of environmental -- what I'll call environmental or regulatory capital.

And the regulatory capital side of that, just if you start thinking about all of the things that are being said about greenhouse gases and carbon capture -- means that those customers are going to spend enormous amounts of money in those locations and their invested asset base is so large that they are not going to walk away from it.

The net effect for us is, I think if we stay the course as we always have and position to have a commanding share in those markets, we'll get a commanding share of that business.

And that will be a very positive growth factor for Jacobs.

And then we duplicate that model in the Middle East and in India and in China and Singapore and the other places where there are significant installed asset bases, and we become the ideally positioned competitor.

There will still be great business for companies who want to do big events in far away places because there will be big events work done.

The number of places that we characterize as far away will tend to go down over time, as you would expect.

But I really don't think that our geographic positioning long-term is a big growth issue.

It doesn't mean there won't be times in the cycle when the the money is getting spent in far away places, and we are not there.

There will be times like that.

But we are willing to accept those for the longer run.

And, Craig, longer run would be five years plus?

Oh, no, I think shorter than that.

Okay, good.

That's good to hear.

Last question is in regards to acquisitions, and I think Andy mentioned this earlier on.

But, every quarter goes by, it is painful to watch all of that cash probably sitting at -- and incurring very low interest income.

I think I appreciate that you want to be conservative and disciplined.

But how far do you see some of these acquisitions being from pretty -- coming through.

Given the fact multiples are coming down and perhaps some of these companies are becoming a little more desperate?

Well, I can't really say anything specific about when I think acquisitions are going to get done.

They'll get done when they get done.

But I'll reiterate my enthusiasm for the amount of activity that is in the market and the attractiveness of the multiples in terms of the businesses that are out there.

At any given moment, we're evaluating dozens of acquisitions in today's climate.

It really is remarkable the difference today from a year ago.

And so, when could deals start getting done?

I can't say.

I don't think I'm supposed to say, even if I know.

But I'm very optimistic about our ability to get a number of deals done in a relatively short time frame.

Whatever "relatively short" means in that context.

Less than five years like AWE, for sure.

And I know that's not a great answer to the question.

But it is a pretty exciting time.

For your purposes though, remember that with the way that intangibles are amortized and the like, the immediate earnings impact of acquisitions is not that great.

It takes a little bit before the acquisitions really start to add to the bottom line.

Right.

And I guess I was looking at it more from the perspective of market positioning and your diversification as you continue to grow and really taking advantage of some of the opportunities you might have today, given that you have been conservative in terms of the risks you've taken so far.

Okay.

Thank you very much.

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

Davidson.

Hello.

Good morning.

Good morning.

Craig, when you went through the various end markets, my sense of it is the chemicals business, the pharma bio business -- you are operating there essentially at a maintenance level now for your customers.

And it sounds as if the refining business still is running off in expansion mode but going toward that kind of maintenance mode.

And I'm trying to understand if that's 35% of your business, how much of that is maintenance capital work versus expansion?

Well, when I described baseload as being -- .

Yes.

35% or 40%, that's the maintenance capital part.

Okay.

Okay?

That doesn't have the project work in it.

Right.

So as you look at the spectrum, maintenance capital and pharma bio is actually a fairly small percentage.

That's more project-driven.

Okay.

Chemicals is more maintenance capital-driven, but there's project work in all of these.

Oil and gas and refining are a more balanced mix of projects and baseload work.

So it's -- I don't think -- I wouldn't agree with the statement that refining is going to pure baseload.

I do think big event refining programs -- so if you are talking to somebody who really thinks it's important when it is $1 billion -- I don't think we'll see a lot of $1 billion projects.

But I think they'll continue to be a number of projects in the minus $200 million range and lots of maintenance capital which is minus $10 million.

Okay.

That helps.

Okay.

And I think with the government and infrastructure, that's less of a factor.

Yes.

Yes.

Okay.

And then secondly, in terms of just the people that you have and that you've had to cut back during this downturn.

How does that position you for if we get an upturn in the market?

Are you going to be stuck in terms of bringing people back, or how does that work for Jacobs?

Well, I think the answer to that is, no, we don't expect to be stuck in terms of bringing people back.

Okay.

A substantial part of the reduction in staff that we had up to now has been in the agency people who are working under contract.

This is the lifestyle they expect.

And they manage their lives and their finances accordingly.

So, those folks are, for the most part, available when and if we need them to come back to work.

With respect to the permanent staff side of it, which we have had some reductions.

Frankly, it appears to us as if we've had fewer reductions than most of our competition.

Unfortunately, a lot of that stuff is in anecdotal information about somebody runs in and tells me XYZ just laid off X many people in X location.

But we have the sense that we haven't reduced staff as much as our competition has had to reduce staff which would suggest to us that when we need to staff back up, there will be plenty of resources available for us to do it.

I'm not worried about not being able to catch an upswing because of staffing.

Okay.

Then lastly, just in terms of your backlog and your booking activity, given that there's -- appears to be excess capacity in this industry.

Should we be watching backlog as a sign -- or booking activity as a sign that we're in recovery?

Or do you think that they'll improve simultaneously?

Well, I think that, based on quarterly reporting, you may start to see signs at the bottom line as early as you see them at the top line.

Okay.

But I think the top line still does lead a little in our industry.

Okay.

And you expect for -- and there's no reason to think it won't for Jacobs?

Right.

Okay.

Again, the only caveat about that is the degree to which you need to separate field services revenue from technical professional services revenue.

Because field services revenue -- that part of backlog could lag.

I would not look at Jacobs' backlog in one part.

I would always break it into two.

Okay, fair enough.

Thank you.

You are welcome.

Your next question comes from Michael Dudas with Jefferies.

Good morning, everybody.

Craig, to follow up on your last comment -- what you've said in the past is that the technical professional backlog is a key metric to focus on for investors.

What -- given what you've discussed with the environment, what is your expectation of what that number might be a year from now?

And what are the factors that may or may not get you there?

And is that one of the reasons why guidance is as conservative as you put forth?

Well, we don't forecast backlog, Michael, so the -- .

I understand.

It is a great question that I really can't give you a good answer to, except that I expect it to be more.

I will say that much.

Okay.

But I do think that our technical professional services backlog tends to lead the business overall.

And that you'll see some improvements in it as a precursor to significant improvements in the profitability.

Now all that still has to be put into the context of reminding everyone here that there's all kinds of revenues that go through our business that have lots of profit attached to them, and revenues that go through our business that don't have a lot of profits attached to them and projects where we're in joint venture relationships where we get none of the revenue and a full share of the profit.

So you can say all of those nice things about backlog, but unfortunately if we had a ton of backlog that was joint venture arrangements where we were 40% and the partner was 60% -- the only thing in backlog would be profit.

And that would be very difficult for you to see in terms of -- if that part of our backlog were going up rapidly, we'd all be really happy.

Understood.

Does that make sense?

You understand what I'm trying to say?

It is only a very rough indicator of where the business is going.

Understood.

Just one quick follow-up.

The Northrop sale -- is that a business that you would have considered to look at and was the price or the size just too big for Jacobs?

Is that maybe that area with this conflict of interest issues that you want to take advantage of?

We would have like to have looked at it.

Northrop made the decision apparently to go to non-strategic buyers only.

And the size would not have dissuaded you?

We -- no.

The size would have been -- we would have had to take a really deep breath.

Sure.

About a deal that big.

But I think we would have looked at it hard before we made a decision.

I'm not saying we would have done a deal of that size.

But it -- we've done deals relatively speaking relative to our size that big before.

[Serete] was half the size of Jacobs when we did it.

So a $1.65 billion deal would not necessarily scare us off.

That was about revenue as well for Northrop.

And so it's -- being afraid to do it?

No.

Taking a really deep breath?

Absolutely.

Thank you, Craig.

You are welcome.

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

Good morning.

Good morning.

I do not know what is more surprising, the guidance or that you changed your slide deck?

The Oil Sands.

You talked about it in your prepared comments.

Oil Sands, and you compared it to what you were looking at two quarters ago.

My question is, how does it compare to what you were looking at, say, six quarters ago or more toward when we were still in the peak of the bubble?

It has less of the bubble quality to it.

At the peak of the bubble, folks were talking about projects that made -- even at $100 oil made no economic sense.

And they were all getting added to the list.

If there has been something that I'm -- at least at this moment in time positive about in the Oil Sands is that I think the customers have more realistic expectations for what makes sense in their business.

What I think I characterize back in the bubble, or maybe Noel did -- is a cowboy atmosphere.

Doesn't appear to be the case today.

Much more reasoned.

Much more Big Oil like, I'll describe it -- approach to CapEx that I think represents a decreasing likelihood of -- we are going to spend $1 trillion a day here, kind of cowboy.

As I look at what people are talking about today, if you take the $200 billion number that I mentioned.

That's a $20 billion, $25 billion spend annual clip.

That will be as good as the business ever actually got even though there was talk about a lot more.

But we probably won't see all of the fringe players running in with their multi-billion dollar investments.

I think that will drive -- the overall number will appear a little lower, but I actually think that business is as solid as it was 2.5, three years ago.

And I've heard tangentially that some of the Oil Sands projects, the clients are looking more toward lump sum, turnkey up there?

Are you seeing that?

Or more fixed price work?

We haven't seen it.

We're positioned, I think, very well to take advantage of the market.

Engineering side is dominated by cost reimbursable work.

That is our primary positioning.

We do a lot of maintenance work in Canada.

Obviously, that's not a lump sum business.

I think on the construction side, we'll see a mix of lump sum and cost reimbursable.

Obviously, that will mean part of that work somebody else will have to do.

But the good news is that there is a limit on resources, and we have a ton of construction resources in Canada.

We're one of the largest players in the country from a construction point of view -- construction and maintenance point of view.

So we're going to get our share of the construction work just by virtue of the resources.

Appreciate all that.

In terms of your mix, do you ever see your revenue mix between private and public work?

Where can that go?

Could the private work slip below 60%?

Do you aim for more balance in that market?

I think that the private work could slip close to 50% in the long run.

Close to 50%?

In the long run.

In the very long run though, I have to tell you, [Alex].

Okay.

There's two reasons why I think that's a very long run discussion.

One, the nature of the public sector businesses -- for the most part, we don't see a lot of construction revenue.

And therefore those numbers tend to be all pro services.

Right.

Or substantially pro services, not all.

We see a lot of construction revenue in the private sector side.

The business mix will be tilted that way for a long time, as long as we continue to penetrate the construction business at the rate we're being able to do so today.

So that's why I say it's -- I think the mix we'd like to have is on a -- if we went to more of a pro service basis I think the mix we would like to have would be more in the 50%-50% range.

And we're close to that today.

On the PTS side?

Yes.

And with regard to the public work, I know you've talked about it in the past.

Is there any general way that you can talk about the margins between the private and the public side?

Sure.

The margins on the public sector side appear -- this is gross margin now -- appear to be quite a bit higher than those on the private sector side.

And there are two reasons for that.

One is that the private sector tends to pay for an awful lot of its costs as direct costs of the project, as opposed to as a part of overhead.

So that's part of it.

And then the second reason is that the private sector customer tends to be aggressive about how much overhead they are willing to pay, and the public sector customer does not care.

Right.

And so the net effect is that gross margins can appear to be quite a bit higher in the public sector work outside the DOD, DOE stuff.

Then they appear to be in the private sector.

Now of course you have all the costs to serve, which the costs to serve are significantly higher in the public sector business.

So when you get down to the net margin line, the difference is not so significant.

It is still there.

Public sector work is more profitable.

But it is not nearly as significant as it appears to be at the gross margin line.

Got you.

.

And then finally, could you break out a little bit how much of your backlog is

I don't -- I couldn't give you a number.

I think we reported 38 projects in the first round of stimulus.

And the Amtrak one that we press released is by far the biggest of those.

Right.

And when does that start to materially roll through your P&L?

Amtrak will start through this quarter.

Alright.

I appreciate the questions, and we'll see you soon.

Okay.

Looking forward to it.

Your next question comes from Barry Bannister with Stifel.

Hello.

Hello, Barry.

How are you doing?

Good.

For some time I've been concerned about your margins.

And two or three quarters ago, as the earnings on a, LTM basis were hitting $3.50, $3.60 -- you used the word, bubble, yourself.

One of the charts that we do for the last seven years is that there's a very tight relationship between the TPS percent of revenue and the gross margin of Jacobs.

And for the last two quarters as TPS has surged several hundred basis points as a percent of your revenue, you've gotten no lift.

You're about 100 basis points low on gross margin versus where you should be.

So there's something impacting gross margin, that's just not hitting SG&A operating margin.

Can you talk about that gross margin deficiency?

Yes.

I've got a voice over my shoulder saying -- no.

I'd have to sit back and analyze it on that basis a little bit.

I can't tell you with any certainty why you would perceive there's a deficiency there.

We certainly don't think there's a deficiency in the margins we're seeing out of the TPS business other than what we're seeing in terms of overall margin pressure on the private sector side.

So it's a question I'm going to have to defer a more detailed answer to, but I don't think it's a fundamental shift in the business somehow.

And then -- .

But even on the private sector side, as we've focused on our G&As and have brought those down.

Some of that reduces the gross margins on the public sector side because we don't get -- we don't have that there to get reimbursed for.

So it comes out of the gross margin, the G&As.

So it doesn't change your operating margins that much, but it does have an impact on the gross margin line.

And then, you've always talked about a 15% long-term [Kayger], and if I [Kayger] the EBIT since 1998 at 15%, you'd be earning about $2.70, $2.75.

Your guidance obviously came below the consensus in 2010 but brings you probably closer toward the long-term growth rate of EBIT.

Should we assume that you're still sticking to the 15% long-term [Kayger] and what we're really seeing is partly recession and partly mean reversion?

Well, I hope little of what you're seeing is mean reversion.

We don't like the idea of that.

But certainly, we haven't given up at all on the 15% compound [Kayger].

In fact, we continue to believe that that's the -- that or better, is the way we want to run the business, and the way we can and will run the business going forward.

If you converge back on a 15% [Kayger] this next year if guidance is anywhere remotely correct even at the high end.

And that's right.

We'll converge back on it.

If you go back -- I don't have the slide in front of me, but if you look back about five years.

Five years back.

Go back five years, we were at [15.1].

And I think if you look at these 10-year cohorts.

you will see that they go up and down from even a little under 15 some times up into those mid-20s range.

And I think if you go with longer term lifetime numbers depending on what years you pick you can get anywhere from 15 to 21.

Okay.

That helps ground us.

Thanks a lot.

Okay.

Your next question comes from Andrew Obin with Banc of America.

Yes, hello.

It's Banc of America-Merrill Lynch.

Can you hear me?

Yes we can, Andrew.

How are you doing?

Just a simple question.

You have answered a lot of the questions.

If I look at the earnings guidance, it effectively implies a run rate for the quarter, I don't know, between $0.58 to $0.65.

We're at $0.63 in Q4.

So should I be thinking that some time in the middle of 2010 on a sequential basis earnings will actually bottom?

Is that what your guidance implies as I think about quarters?

John?

Well, certainly we feel that we're approaching a bottom, and so that would be a reasonable kind of assumption.

But frankly, our crystal ball isn't clear enough to say whether that's the first quarter, second quarter, third quarter or fourth quarter.

But as Craig commented earlier, I think our -- certainly our view is that we are approaching what -- somewhere in the near-term -- what should be a bottom.

And -- .

I think he made the comment that he expected the -- .

Because there is a difference in business model and your reliance on design, your relationships.

What are you seeing as the lag between you and the rest of the industry in this timing when you are going to hit the

Noel, do you want to comment?

Thanks.

You've seen more of these than I have.

Sometimes, the people that have a portfolio of gigantic projects will lag us going down, and then they always lag us coming out.

Typically, if you go look at the last three or four of these, you can go all the way back to '84 if you like.

We basically beat the industry out.

And I don't know whether we go down a little faster, or whether it's a fact that we position ourselves well during the downturn.

So we also go back to those three or four cycles I'm talking about, and we have always gained market share coming out.

And so, if history repeats itself, we'll be the first one out of the box.

And let me just -- last question, I'll let you go.

This is maybe a naive question, but how easy is it to shift people who work on downstream projects?

How easy is it to shift them over a year or two to long-term project to upstream projects?

And how amenable will your long-term customers be to giving you more work outside of the oil downstream, just to keep the relationship with you going forward?

I'm talking about over the next three to five years.

Well, first off, the shift is relatively easy to make.

There are a few skills that are different, and you need to have a few people with those skills in order to make that shift.

So if the customer thinks your team is credible at the leadership level and your Company's track record is credible -- shifting the bulk of the workforce is not an issue.

And in fact, we have a couple of our major alliance customers who are talking to us about giving us part of their upstream portfolio because they don't have enough downstream work to keep our team busy.

And we see that as a real positive for two reasons.

It's a really cheap and easy way to penetrate the upstream business, and it's a good, solid indication that our relationship with that customer is continuing to flower.

Thank you very much, and see you next week.

Alright.

Looking forward to it.

Your next question comes from David Yuschak with SMH Capital.

Hey, David.

Hey, good morning, gentlemen.

Good morning.

Just a couple questions for you.

As far as your multiplier on your engineering cost, what does that look like now compared to what kind of multiplier you were achieving, say, 18 months ago.

Again, that would be very market-specific.

In some markets, there's been little change.

Most of the public sector markets are unchanged except to the extent we've reduced costs and therefore get a lower multiplier as a consequence.

In the private sector markets, you're seeing some downward shift.

But even there, it depends on the market and the geography.

So you really can't generalize with a number.

It is not unusual to see a 10% plus decline from peak to bottom in multipliers in, say, the refining industry.

In fact, you can see more than that.

For the most part, do you say still relatively holding up though?

That's not what I mean to say.

What I would say is that in some markets, public sector markets for example, it's holding up fine, no change.

In some private sector markets, pharmaceuticals, pulp and paper, it's not changing very much.

But in other private sector markets, particularly heavy hydrocarbons, there's significant downward pressure.

Okay.

Now, could you give us an update on how you see the [Motiva] project working out at this point?

Well, it's going to get done.

They're going to make a lot of gasoline.

I know that sounds like a facetious statement, but the project is going well.

We are meeting the challenges that the customer set for us.

I've got Greg Landry here who is the executive responsible for that project.

Let me just ask him to comment.

Right at the front, Greg, lower button.

There you go.

As we look at the project today, we're still shooting for the number that we set on a revised number that we had when we first started the project and where it went to.

The construction resources are available.

The market has shifted on the construction resources to where we are having better pricing in that area.

So at this point in time, the project is on its way and looking for scheduled completion in another year or so.

Thanks, Greg.

And then one last question.

Just on your own CapEx spending, how do you see the next 12 months for you internally versus --?

We think CapEx will be fairly low the next 12 months.

During the bubble, we bought lots of computers and lots of desks, and we won't have to buy a lot of computers and a lot of desks in the next 12 months.

Alright.

Any sense about how much down that might be?

I think I saw a forecast.

It's probably going to be one half.

Okay.

That's all I need.

Thanks.

Your next question comes from Peter Chang with Credit Suisse.

Hello.

Thanks for taking my question.

No problem, Peter.

You mentioned earlier in your prepared remarks that the [Marpole Six] spending is slowing down?

Is that just a slowdown in CapEx from your customers?

And when do you think that this will start to pick up?

I think on the last call it was characterized as $3 billion to $4 billion in spending in 2010.

If I said it's slowing down, it hasn't yet started is the issue.

And we are still expecting to start to see that expenditure in 2010.

Our people still believe that $4 billion number is a reasonable number.

Remember that the total from [Marpole] is something north of $80 billion.

So it's a big expansion program, longer term.

Or environmental program, as we look at it.

But we expect to see initial feeds and those kinds of things start to drive the business in 2010.

Okay.

Great.

And I guess one more question on acquisitions, not that you guys haven't had enough.

But as far as the acquisitions into China, what kind of markets are you trying to get into?

Is it going to mirror the pie chart I believe was on slide seven?

Yes.

Okay.

And would you do that through joint venture arrangements or just straight-up acquisitions?

Over time, we expect our business to mirror that pie chart, everywhere we do business.

So our objective is to get that geographic diversity and get the market diversity in those geographies.

In China, we're going to be driven as we always are first and foremost by our core clients and their investments and what their asset pool is on the ground.

So I think things like pharma and chemicals will tend to drive our business in China first.

Although we do have a budding infrastructure and buildings business, particularly out of Hong Kong and Shanghai.

Some of that will be based on acquisitions we've already made.

Some of it will be based on just bootstrap organic growth.

Some will be additional acquisitions, and I wouldn't rule out joint ventures, although frankly, joint ventures are not normally our long-term strategy for penetrating the market.

Again, China is a little bit unique.

We're still looking at options that might make sense.

We certainly see some opportunities to take an interest in companies from an acquisition point of view that would be attractive, but there may be other things we need to consider as we go along.

Great.

Thanks a lot.

Your next question comes from Will Gabrielski with broad point.

Thank you.

Couple of questions.

One, did the Suncor CapEx update from last week, did that have any impact on what you have in backlog today?

Or did there commentary have implications going forward for what you were expecting?

Actually, we thought the Suncor update was pretty positive and for the most part was consistent with our expectations.

We had a little side bet going inside the Company about whether the Fort Hills would be on it or not.

Those of us here in Pasadena won the bet.

No, there wasn't anything surprising about it.

Certainly nothing negative from our perspective.

I know you typically don't quantify this per se, but I'm curious.

Can you help us understand how much Oil Sands work is in backlog today as a percentage of your total backlog?

We don't typically break down our backlog by markets and such.

I really won't give -- can't give you the specifics, but it probably -- when you look at our upstream, it probably mirrors a little about what the revenue mix is.

Okay.

In general.

I can't break it down between Canada and other places.

[Fire Bags Three] specifically, I'm curious.

Do you have any exposure to that project?

And does the mid-October retender, and then there's an announcement this week from a Company called Aecon on the mechanical engineering side.

I've read that Bechtel has picked up some work on that project as well.

Does that have any implications for what you may have been doing in that arena for that company?

Our work -- obviously, we don't talk specifically about our work with any customer.

We have a great relationship with SunCor.

We expect to continue to have a significant share of their work.

We would like to make -- .

Fair enough.

We would like not to have Aecon or Bechtel or anybody else involved, but I don't really think that's realistic.

And I guess I just really didn't have a good handle on what your exposure to [Fire Bags Three] may have been in the past and whether or not that may have been one of the projects cancelled from backlog, and I was trying to get my hands around that.

I really can't disclose any more without getting into customer confidentiality issues.

Fair enough.

The question on the DOE side.

I was wondering, there is a few bigger programs that are -- it looks like coming up for bid this year.

Any expectations or any particular projects that you're focusing more on than, say, others?

I would say that what we do in all those cases is we're evaluating projects, opportunity by opportunity.

There's a fairly healthy list of DOE and DOD projects that we're chasing.

We don't say which ones are which until after we've won them.

Okay.

But we do -- I agree with your assessment that there's pretty good opportunities out there, and we're confident we'll win our share and maybe a little more.

In terms of environmental management, stimulus funding, has all that been booked at this point from what's coming out of the stimulus package?

Are there incremental awards that we'll see come out over time?

I believe there will be incremental awards.

There's a significant amount of what I'll characterize kindly as discretionary stimulus money in environmental management, and where it gets spent will be -- is yet to be determined.

Okay.

In the Middle East and I'm curious, one, the relationship with Abu Dhabi on the chemical side and two, just the general headcount trend there?

Where you are today versus a year ago, and what you think that might look like 12 months from now?

Well, our headcount trend is up.

I don't have the numbers right in front of me, but we continue to see growth.

I think we will see -- we should start to push toward 1,500 to 2,000 people in the next couple, three years.

So like I said, we're well ahead of our schedule in terms of what we think we'll see in the Middle East between Saudi Arabia and the Emirates.

The EPS guidance for fiscal 2010, have we now captured basically -- is that the earnings power of the relationship-driven, non-discrete, non-one-off projects?

Is that the earnings power of the core business excluding all those projects -- the mega projects you have booked in the last few years in North American downstream?

I never thought about it that way, but I'd have to say, no.

I think the vast majority of the earnings power of the Company is in that relationship model.

Remember, even discrete projects are repeat business.

That's just a slow grinding process of converting short-term discrete project clients into long-term relationship clients.

But lots of very big project work comes out of the relationship.

Right.

And so -- the difference -- the relationship-based business and the baseload business intersect, but they're not the same things.

Does that make sense?

Yes.

If I asked it another way.

If one assumed that the North American mega project -- refining projects we saw over the past few years did not repeat.

With or without a macro crisis, some would have said the BP [Whiting] project was probably the last big North American refining project we would see for some time.

If I excluded all of those big projects, what would the core earnings of the business have grown at over the past few years?

And maybe now, obviously, not seeing those awards, that goes back to what I think Barry was talking about in terms of mean reversion so that 15% [Kayger].

We were delighted to have some of the big refinery projects, some part of those in our backlog.

BP and Whiting was not a huge number for us.

Motiva was obviously a pretty significant number.

But I think the contribution of those big projects, while it's significant, wouldn't move us back to Barry's mean or wobble the P&L numbers significantly.

Our business doesn't make its big money on big events.

I can draw you a graph if we had video conferencing today that really characterizes how our business works.

But we're built to make money starting on very small projects and to continue to make money all the way up through the spectrum of the work we do.

And we don't need big events to drive our profitability.

And frankly, we're different than most of our competition in that regard.

Most of our competition, it's big events that swing the profit numbers one way or the other.

We're just not that way.

What I'm trying to illustrate is what contribution did those mega projects that you happened to have booked as a result of a North American refining cycle that may not repeat have on the EPS growth rate?

And now, we're just getting back to hey, this is what Jacobs does well, and if there's not a North American refining cycle with mega projects in it this is what the business will look like and now we can grow at a 15% [Kayger] from this level plus maybe a little incremental growth for economic recovery.

I don't think those mega projects had a -- it's not insignificant, but it's not huge difference on the P&L.

If you think about businesses like that, let's -- I don't know how to do this exactly.

Let me try it this way.

Let's say that you had a $3 billion project that went through the Company's books over three years.

That would be a big event for us.

Alright?

Okay.

And let's say that after tax profits on that business were 3%.

So that meant $90 million went through the Company's books over three years or about $30 million a year.

It's just not -- it's a significant number, but that isn't the driver that makes the difference between $400 million and $450 million in bottom line numbers.

Does that make sense?

No, it does.

But if there's a few of those running at the same time, obviously, I would think it would have maybe 10% impact on the growth rate.

I look forward to the day when we have many of those running at the same time in addition to our base.

I look forward to the day when we consider $1 billion dollar business a baseload project.

But I think -- .

That's really helpful.

We've got a few years of those to go.

It really is -- our business is made up of thousands and thousands of projects.

The average project size in the Company is $1 million or thereabouts.

Maybe a little less.

And we make a little money on a lot of projects, and so while those big projects going through the system are nice to have, they're not as lucrative nor do they have a big a swing -- impact on the bottom line for us as they do for companies whose business it is to do those big events.

Okay.

I think we're saying the same thing, just different ways.

I appreciate the color.

Thank you.

I think -- I certainly think your point is well made.

Alright.

Thanks.

(Operator Instructions).

Your next question comes from Min Cho with FBR Capital Markets.

Good afternoon, gentlemen.

Sorry to drag out this conference call even longer.

Just a quick question on your guidance range.

So obviously, it's a pretty large range, $2.00 to $2.60.

Wondering what assumptions you were making in terms of market trend on that lower number versus the higher number?

In other words, do you still need stimulus to pick up, and will you need the environment to improve a little bit to get to that $2.00 number?

Is that a pretty good base case, given your current backlog?

I hate to be a broken record, but we don't give guidance within the guidance.

So taking in our expectations of the market and what the range of activities and possibilities might be, we expect that we will be somewhere between $2.00 and $2.60.

There's a lot of other factors in there as well, as far as G&A costs and such like that.

But we're not going to go into what individual assumptions are and what they have to be in order to get to one level or to another level.

Alright.

Thank you.

Sorry.

At this time, there are no further questions.

Alright.

Well, we'll take that as a good time to break off the call.

Thank you all for your interest in the Company.

We appreciate your listening, and we appreciate your taking the time to consider what obviously is a little bit of a contrarian position about what the markets are.

I will say we continue to be very, very confident about our Company and our positioning in the marketplace and our ability to deliver on our promises of growth in the long run.

I look forward to having the opportunity to demonstrate it to you.

Thanks again, everybody.

Thank you, ladies and gentlemen, for your participation in the Jacobs fourth quarter earnings call.

You may now disconnect.