Jacobs Engineering Group Inc. F4Q09 (Qtr End 02/10/09) Earnings Call Transcript

Nov.17.09 | About: Jacobs Engineering (JEC)

Jacobs Engineering Group Inc. (NYSE:JEC)

F4Q09 Earnings Call

November 17, 2009 11:00 am ET

Executives

John Prosser - Chief Financial Officer

Craig Martin - Chief Executive Officer

Noel Watson - Executive Chairman of the Board

Greg Landry - Executive Vice President - Operations

Patty Bruner - Investor Relations

Analysts

Steven Fisher - UBS

Andrew Kaplowitz - Barclays Capital

Richard Padgett - Morgan Joseph

Tahira Afzal - KeyBanc

John Rogers - D.A. Davidson

Michael Dudas - Jefferies

Avram Fisher - BMO Capital Markets

Barry Bannister - Stifel

Andrew Obin - Banc of America/Merrill Lynch

David Yuschak - SMH Capital

Peter Chang - Credit Suisse

Will Gabrielski - Broadpoint

Minshew - FBR Capital Markets

Operator

Good morning. My name is Rachael and I will be your conference operator today. At this time I would like to welcome everyone to the Jacobs fourth quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions) Thank you.

Ms. Patty Bruner, you may begin.

Patty Bruner

Thank you, Rachael. 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 actually results of the company to differ materially from what maybe 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 3, Legal Proceedings, and Item 7, Management Discussion and Analysis of Financial Condition and Results of Operations contained therein.

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 revision or update 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.

John Prosser

Thank you, Patty. I will just briefly go over the financial highlights for the quarter and then I’ll turn it over to Craig Martin, our CEO for 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 were $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. Our cash balance are remains at $1 billion from about the same as last quarter, 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 to $2.60.

Going to slide five, looking at our 10 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 10 years. The last few quarters we’ve been showing the five year growth rate, but we want to take a little bit longer view and to show, what we’ve done over a longer period of time. So these are all the 10 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 a $1.5 billion to the $15.2, but professional services backlog was actually up a little bit. During the quarter we announced that there were a few cancellations, but it was primarily one cancellation, the total $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 $9 billion in cancellations that we’ve discussed on the various quarters and, of that $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 business overview.

Craig Martin

Thank you, John. Good morning everyone. We’re going to take few more minutes this morning to talk a little bit about our strategies for growth and what we see as going on in our marketplace is going forward. So we’re going to cover these five bullets and I have slide for each one, so I won’t spend anymore time on slide seven.

Moving to slide eight, we also want to talk about our relationship based business model. Our business model was 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 talk about transactional projects on this slide, you’ll see that predominately over on the industry model. Those are the big events, lump-sum turnkey projects, great big jobs and far away places for customers, you don’t know very well that sort of thing. There’s a lot of transactional work in our industry.

Then we have what are called discreet projects, discreet projects are those where there’s 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 overtime result in increasing share 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 base load business. That’s the work that goes on day in and 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 Greenfield facilities, that sort of thing.

So with that sort of understanding of what the categories are, we just kind of 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’s our sort of 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’s the thing you hear many of our competitors talk about most in the conference calls call like this one.

They will talk about the billion dollar project. They’ll talk about the lump-sum turnkey work or the work, which they’re bidding at the time. They’ll have the eight or ten big elephants that they’re chasing and that characterize sort of the transactional projects environment.

We on the other hand focus on sort of 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, in some cases as many as 60 years.

It’s 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 base load business, which means it is work that goes on year in, year out very steady. It’s the sort of capital money that has to be spent just to keep the customers’ facilities operating. Both of those, the base load business and this preferred relationship businesses are steady businesses and they’re 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 heading taken later.

Moving on now to slide nine; I want to talk just a little bit about our geographic diversity. We believe that it’s very important with our customer base to both the 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 base load 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 bit more about that later. That’s going quite well from our perspective.

Turning new to slide 10, 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 contrarians that what you may have heard from some of our competition. We are more pessimistic about the market going forward. We think there’s some challenges left to be addressed.

On the other hand, we to 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 with top of the chart with pulp and paper, high tech, food and consumer projects. This is an alliance since 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 and we’re 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 isn’t going to swing the needle for us corporately, but it’s 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’s still a lot of small project work for us, as can you see even 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 been seeing a fair amount of polysilicon work come through the system and right now that polysilicon business is a little weaker. There’s still some opportunities out there that will help us in the chemicals area, but I don’t think it’s going to be as strong as it was cracked out to be a couple of years ago.

Moving now to upstream oil and gas, for us, as you know that’s predominantly two businesses: the oil sands and gas handling, gas processing and 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’s north of $200 billion.

We think that that’s going to be a strong positive factor for our business up in Canada. There’s every reason to think as long as oil prices stay up and stable 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’re in an excellent position to capitalize on the upturn on 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 is 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 U.K. We again think, 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 thinks 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’s still a lot of money being spent in upstream oil and gas and we do think that’s 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; from the most part especially new spend. There is still a fair amount of environmental work driving projects, the MSAT work and the NSPS sub par JA work it is out there, but it is coming to the end, we still have the big expenditures for Marpole-6 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 crude’s has narrowed quite a little bit. We’re also seeing some challenges for our refiners in terms of 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. How all that having been said there are a couple of things going on we think are positives through that market longer term. First half, 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 a little bits of creep and performance improvement and given our positioning sort of in the sub $200 million project market and in the base load business, we think that’s good for us in the longer term and so, while refining is not the bright spot in the marketplace we’d like it to be, I don’t think it’s terrible either.

Moving on around now to our infrastructure business, remember that in the U.S. 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 it is one of these half empty kind of coffees things, right you got a cup of coffee that is half full and cold and pour in stimulus, it warms it up, but you do not have hot coffee yet.

I think that’s 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 Federal Government for a transportation bill. I think we’re going to struggle to see the kind of levels 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 excepted 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 U.K. is better, we’re more diversified in the infrastructure market in the U.K., 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 talk 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.

The business 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 sort of environmental cleanup business. We’re seeing some positives out of stimulus in the U.S., it’s made that business okay or a little better. Certainly not strong, but it has helped to keep that business at least in the good category.

Then we continue to see significant spending out of NDA in the U.K. 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 businesses, 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 see the recent sale of Northrop test and evaluation business. As an example of that, the conflict was one Northrop decided they didn’t want to address. I think that sold for something in the $1.6 billion range.

So that OCI focus is a positive for us, since we don’t manufacture any products for the Department of Defense and we thing that going to allow us to increase our share, offsetting that to some degree and it’s hard to anticipate how much is the in sourcing of what the president calls inherently governmental functions, and certainly we’re seeing the government in source positions on some of our contracts that have historically been contractor held positions.

Up to now that’s had no net impact and so the government takes in 50 positions, but we add 50 other positions in our position. Our company hasn’t really been negatively affected. That should 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 pharmabio market, 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 has on investment. It’s also driven largely by drug discovery, and 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 that healthcare reform might be long term on CapEx for pharmabio business. Offsetting that on the good side is we’re still sort of the last man standing in pharmabio. We have by far the before the track record of 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 our marketplace that are anywhere from mildly positive to mildly negative, but when we look at it overall it looks to us like it’s 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 residents time with our customers, i.e. the amount of time we spend with the customer throughout the capital cycle. We’d really like to have what we characterize as zippered relationships where we’re locked up with the client in the customers organization from top to bottom and we think being there whether you are on the engineer side, the consulting side, the OEM side, the construction side is very important.

One of the things we set out a couple of years ago was just start to really grow our construction business. We think there’s a lot of leverage to have on that. We think it’s a local business relatively insensitive to a number of other factors that affect our other businesses and 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. 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 has 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 U.K. government in the UK. Both really good acquisitions and ones we’re really 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 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’s some really good companies out that are willing to talk as 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 and businesses like ours are available at a reasonable multiple and that looks like an exciting marketing opportunity for us. 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 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 an acquisition point of view and remember that acquisition contributes anywhere from a third to a half of our growth in any given period.

Turning now to slide 14, which is our highlight slide, I think we 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 we would have like, 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 as the work for Amtrak. There are more than signs of recovery. I think our sign is probably a little bit on the cautious side.

I think that 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, but we are well ahead of where we thought we would be and very positive about what’s 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.

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’re very good at doing that. So we think that’s another positive as we go forward.

So that sort of brings me to our slide, the investor appeal slide. We think there’s a lot of a reason 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’ll go for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Steven Fisher - UBS.

Steven Fisher - UBS

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?

Craig Martin

The fourth quarter was a challenging quarter from a cost reduction point of view that there were some things that affected the numbers negatively. We try not to get into one of these, well, here is a one-time this and 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’s also historically a tough quarter, because it represents the end of the fiscal year, and so there’s always a challenge, as a sort 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.

Steven Fisher - UBS

You think, we’ll start to see that in the fiscal first quarter?

Craig Martin

Yes.

Steven Fisher - UBS

As you think about how 2010 could play out, I mean, 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 big North American downstream projects that have been going on in the last couple of years?

Craig Martin

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, so, 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.

Noel Watson

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 with the guys fighting it everyday, 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’s probably not a soft landing.

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

Steven Fisher - UBS

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?

John Prosser

Well, it, individual projects, for example, the ones that cancellations are up in the oil sands in some of 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 were just did market $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. Up graders maybe not so much, the upgrading business maybe a little slower to come back, and some 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 is 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 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 pencils 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 up grader work in the oil sands are likely to come back in time.

Steven Fisher - UBS

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

Craig Martin

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.

A little bit it depends on the extent to which it is a core client involved, does the core client 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 it on what our workload looks like at the time they come back. So it’s kind of a mixed bag answer. To kind of poke at the other half of your question which is what are about margins, there continues to be pretty significant margin pressure on bid work.

So if you look at that discreet 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 to aggressive and capable for us to do that.

So even in preferred relationships, there’s some downward margin pressure. So some of 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 and 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.

Operator

Your next question comes from Andrew Kaplowitz - Barclays Capital.

Andrew Kaplowitz - Barclays Capital

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’re being a little bit more cautious today. Could you sort of comment on that?

Craig Martin

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 motocross 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’s a nice thing as a contractor.

So I don’t want you to suggest that we think we’re going to go back to the margins of 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’re not going to see the same margins today that we saw at the peak of the bubble.

Andrew Kaplowitz - Barclays Capital

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

Craig Martin

No. In fact, I think what we’re seeing is exactly what we expected to see.

Andrew Kaplowitz - Barclays Capital

So you made commentary about weaker markets in general maybe than some peers are seeing. I guess my question for you guys is, how much of the weak markets is because of certain geographic regions versus others like maybe you can characterize what you see maybe in emerging markets versus what you see in the U.S. and in Western Europe, excluding the oil sands?

Craig Martin

We think about how best to say that. Let me just sort of start 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 always said we want to achieve. So that’s the base load business built around the installed asset base, and then increasing our share of larger projects and PMC’s and feeds from export point of view.

All of that from our perspective is working well for us and driving growth, I mean 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 in 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. 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. So you’ve got to have huge share before you have the sort of numbers that make a big difference on the bottom line.

Singapore and the Asian countries are another area, where we seen an increasing investment. Again it tends to be by our big core client customers. We think, we’re going to be able increase our share of that sales still be bigger than 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 the most of 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, 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 a loan 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 then we may participate in an item or two but I’d only think those will 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?

Andrew Kaplowitz - Barclays Capital

Just a real quick question on acquisitions, because you mentioned them again, I think you and your competitors have talked about acquisitions and it just seems like we still haven’t seen a lot of activity. What’s sort of holding you back is it just these conversations take a long time because the targets want some evaluation that needs to be corrected overtime or what’s going on there?

Craig Martin

I think from our perspective, these deals can take little time or a long time. If you think about the two deals that 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.

What I’m excited about now is, as we’ve seen two, three deals that we’re looking at and discussing that we’d have been glad to spend 10 years to get done, but doesn’t look like we’ll have to. So we see that as a real positive in terms of acquisitions in marketplace. 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 north government deal in aerospace was about a ten multiple and those peaked at 30. So a ten multiple is a lot more really as we could actually make money at a ten multiple and we certainly couldn’t find any way that our shareholders would benefit at 30 and so the other side of it is that pricing expectations were not unrealistic right now.

Operator

Your next question comes from Richard Padgett - Morgan Joseph.

Richard Padgett - Morgan Joseph

I wonder if you could maybe extend a little bit on Andy’s first question and just getting back to you I guess, your relative pessimism compared to some of your other competitors about 2010. I mean 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?

Craig Martin

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 spenders now, particularly, Fortune 100 sort of big spenders, suggests that we shouldn’t be as positive about their CapEx as it appears 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.

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 these projects look great right up until about, half done and then some of them still look great, because we have got 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 sort of 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.

So some part of my contrarians 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, I guess 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 kind of performance.

Richard Padgett - Morgan Joseph

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, I mean 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, $235 in EPS this year you have $15 billion and if you take the midpoint of your range, that’s $230. 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?

John Prosser

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, 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 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?

Operator

Your next question comes from Tahira Afzal - KeyBanc.

Tahira Afzal - KeyBanc

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 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 sort of mix out the fact that, some of your might be positioned in more favorable markets at the end of the day?

Craig Martin

I think you have to look at our business from the standpoint of its reliability, its repeatability, the fact that we demonstrated over and over again that we can grind out that, 15% plus compound average growth over any ten year period that you want to. I think that it’s always been the case when these recessions come through the system that we break early, usually earlier than our competitors and we usually power out of downturn early compared to our competitors.

Will there be a competitor, who can ride through the downturn and not have been affected, everybody has been affected. So we already know that’s not the case. I think that our model is one that’s very positive for the long term investor in our company. 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 these markets in a much stronger position and I have ever reason to think we’ll be able to do that again.

Tahira Afzal - KeyBanc

If you look at the argument that I get the most pushback on which is perhaps that you geographically are in places and 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 seemed like they could go on for a little while longer?

Craig Martin

I think that the headwinds that you describe, particularly the ones that are related to capacity, are going to be there for sometime to come, because I think there’s excess capacity and will continue to be excess capacity for sometime to come. So we’re not really basing our business on the need for new capacity. 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 roll it from the capital investment that’s necessary, both for maintenance capital and for environmental capital and while I doesn’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 what I’ll call environmental or regulatory capital. The regulatory capital side of that, just if you start to think about all of the things that have been installed 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. They are not going to walk away from it.

So 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 sort of 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 overtime. 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 money is getting spent in far away places and we aren’t there, there will be times like that, but we’ll accept those for the longer run.

Tahira Afzal - KeyBanc

Craig, longer run would be five years plus?

Craig Martin

No, I think shorter than that.

Tahira Afzal - KeyBanc

I guess last question is in regards to acquisitions. I think Andy mentioned this earlier on, but every quarter goes by it’s painful to watch all of that cash probably sitting and incurring very low interest income and 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 perhaps becoming a little more desperate?

Craig Martin

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 it’s 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.

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 am very optimistic about our ability to get a number of deals done in a relatively short timeframe, whatever ‘relatively short means in that context, less than five years like AWE, for sure.

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 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 about the bottom line.

Tahira Afzal - KeyBanc

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

Operator

Your next question comes from John Rogers - D.A. Davidson.

John Rogers - D.A. Davidson

Craig, maybe when you went through the various end markets, my sense that is the chemicals business, the pharma bio business, you’re operating there essentially at a maintenance level now for your customers. It sounds as if the still is running off in expansion mode, but going towards that kind of maintenance mode and I’m trying to understand if that’s 35% of your business, how much of that is sort of maintenance capital work versus expansion?

Craig Martin

Well, when I described base load as being 35%, 40%, that’s the maintenance capital part.

That doesn’t have the project work in it. So as you look at the spectrum, maintenance capital and pharma bio is actually a fairly small percentage. That’s more projects driven.

Chemicals are 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 base load work.

So I won’t agree with the statement that refining is going to sort of pure base load. I do think big event refining programs. So if you’re talking to somebody who really thinks it’s important when it’s $1 billions, I don’t think we’ll see a lot of $1 billion projects, but I think they’ll continue to be as a number of projects in the minus 200 range and lots of maintenance capital which is minus $10 million.

John Rogers - D.A. Davidson

I think with the government and infrastructure, I mean that’s less of a factor. I mean…?

Craig Martin

Yes.

John Rogers - D.A. Davidson

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

John Prosser

I think the answer to that is no. We don’t expect to be stuck in terms of bringing people back. A substantial part of reduction in staff that we had up to now has been in the agency people who are working under contract. This is sort of the lifestyle they expect. 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 XY Z just laid off X many people in X location.

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.

John Rogers - D.A. Davidson

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 that or booking activity as a sign that we’re in recovery, or do you think that they’ll improve simultaneously?

John Prosser

Well, I think that, based on quarterly reporting you may start to see signs at the bottom line as early as you same at the top line, but I think the top line still does lead a little in our industry.

John Rogers - D.A. Davidson

There’s no reason to think it won’t for Jacobs?

Craig Martin

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 lambs so, I would not look at Jacobs backlog in one part, I would always break it into two.

Operator

Your next question comes from Michael Dudas - Jefferies.

Michael Dudas - Jefferies

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 and 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 could guidance is conservative as you put forward?

Craig Martin

We don’t forecast backlog, Michael, it is a great question that I really can’t give you a good answer to that I expect it to be more. I will say that much, 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 pre-closure to significant improvements in the profitability.

Now 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 them and revenues go through our business that don’t have a lot of profits that’s term 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 were 60%, the only thing in backlog would be profit and that would be very difficult for you to see in terms if that part of our backlog were going up rapidly, we’d all be really happy. 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.

Michael Dudas - Jefferies

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

Craig Martin

We would have like to have looked at it Northrop made the decision apparently to go to non-strategic buyers only.

Michael Dudas - Jefferies

Those sizes we not have dissuaded you?

Craig Martin

That the size would have been, we would have had to take a really deep breath, 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 side that big the four was half the size of Jacobs when we did it and so a deal of $1.65 billion deal would not necessarily square 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.

Operator

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

Avram Fisher - BMO Capital Markets

The oil sands, you talked about it in the 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 towards, when we were still in the peak of the bubble.

Craig Matin

It has less of the bubble quality to it. So, at the peak of the bubble, folks were talking about projects that made I mean even at $100 oil made no economic stand and the oil get added to the list and if there is been something that I mean at least that there is moment time positive about in the oil sands is that I think the customers have more realistic expectations for what make sense in their business, right, is that what I think I characterize back in the bubble are maybe now that as a cowboy atmosphere. Does in appeared to be the case today.

Right, much more reason, much more big oil like I will described it approach to CapEx that I think represents a decreasing likely sort of we are going to spend $1trillion day hear kind of cowboy. So as I look at what the guys are talking about today, if you take that $200 billion number that I mention.

That’s it $20 billion, $25 billion spent annual clip that will be as good is the business ever actually got right even there was talk about lot more, but we probably won’t see all of the French players running in with their multibillion dollar investments. The overall number will appear little lower, but actually think that business is solid as it 2.5, 3 years ago.

Avram Fisher - BMO Capital Markets

I’ve heard essential event that some of the oil sands projects, the clients are looking more towards lump-sum turnkey up there, are you seeing that or fixed price work?

John Prosser

We haven’t seen it we’re positioned I think very well to take advantage of the markets, engineering side is dominated by cost reimbursable work, that’s of course our primary positioning, we’ll 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.

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 and maintenance point of view. So we’re going to get our share of the construction work just by virtue of the resourcing.

Avram Fisher - BMO Capital Markets

In terms of your mix, your revenue mix between private and public work? Where can that go could the private work slip below 60%? I mean do you aim for more balance in that market?

John Prosser

I think that the private work could slip close to 50% in the very long run, I have to tell you though, Avram and 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 or substantially pro services, not all.

We see a lot of construction revenue in the private sector side and so, 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 think the mix we’d like to have is on a going to more of a pro service business I think the mix we would like to have would be more in the 50/50 range and we’re close to that today.

Avram Fisher - BMO Capital Markets

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 public and the private side?

.

Craig Martin

The margins on the public sector side appear right this is gross margin now appear to be quite a, but 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 public sector customer does not care 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.

Than 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. Its 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.

Avram Fisher - BMO Capital Markets

Then finally, I mean, could you sort of breakout a little bit how much of your backlog is stimulus related work?

Craig Martin

I couldn’t give you a number. I think we reported 38 projects in the first round of stimulus. The Amtrak one that we press released is by far the biggest of those.

Avram Fisher - BMO Capital Markets

When that does start materially kind of to roll through your P&L?

Craig Martin

Amtrak will start through this quarter.

Operator

Your next question comes from Barry Bannister - Stifel.

Barry Bannister - Stifel

For some time I’ve been concerned about your margins and two or three quarters ago the learn earnings on a LTM basis were hitting 350, 360 you used the word bubble yourself. One of the charges that we do for the last seven years is that there’s a very, very tight relationship between the TPS percent of revenue and the gross margin of Jacobs.

For the last two quarters as TPS has a surge several 100 basis points as a percentage of your revenue. You gotten no lift, you’re about a 100 basis points low on margin versus where you should be. So there’s something impacting gross margin, it just not hitting SG&A operating margin. Can you talk about that gross margin deficiency?

Craig Martin

I have to sit back and analyze that on that basis a little bit. I can’t tell you with any certainty, why you would proceed 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 a price sector side. So it’s a question on that I want to have to differ more detail answer to, but I don’t think it’s a fundamental shift in the business somehow.

John Prosser

Even on the private sector side, as we’ve focused on our G&A is goes done. Some of that reduces the gross margins on the public sector side, because we don’t have that there to give reimburse for it. So when it comes out of the gross margin, the G&A it doesn’t change our operating margins that much, but it does have an impact on the gross margin one.

Barry Bannister - Stifel

Then you’ve always talked about a 15% long term CAGR and if I CAGR the EBIT since 1998 at 15% you’d be earning around 270, 275, which your guidance obviously came in below the consensus in 2010, but brings you probably close to towards the long term growth rate of EBIT. So should we assume that you’re still sticking to the 15% long term CAGR and what we’re really seeing is partly recession and partly mean reversion?

Craig Martin

I hope a 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 CAGR. In fact we continue to believe that sort of the better is where we want to run the business and where we can and we’ll run the business going forward.

John Prosser

It goes back on a 15% CAGR this next year, if guidance is anywhere remotely correct even at the high end.

Craig Martin

That’s right, we’ll converge back on it and if you go back at the slide right in front me, but if you look back about five years, we were at 15/1. I think if you look at this five, ten year cohorts, you’ll see that they go up and down from even maybe a little under 15% sometimes up into those mid 20s kind of a range. I think if you go sort of longer term lifetime members bidding on what years you pick, you can get in from 15% to 21%.

Operator

Your next question comes from Andrew Obin - Banc of America/Merrill Lynch.

Andrew Obin - Banc of America/Merrill Lynch

Jeff, there’s a simple question. You answered a lot of the questions. I look at the earnings guidance, it effectively implies the run rate for the quarter, I don’t know between $0.58 to $0.65, so you were $0.63 in Q4, so should are you thinking that sometime in the middle of 2010 on a sequential basis, earnings were actually bottom. Is that for guidance implies, when I think about quarters?

John Prosser

We feel that we’re approaching a bottom and so that would be a reasonable kind of assumption, but frankly our crystal ball is unclear not to say whether that’s the first quarter, second quarter, third quarter, and fourth quarter. So as Craig commented earlier, I think certainly our view is that we are approaching somewhere in the near term or it should be a bottom.

Andrew Obin - Banc of America/Merrill Lynch

Because there’s a difference in business model and you reliance on design, your relationships, what do you think as the lack between here and the rest of the industry in this timing when you guys going to hit the bottom versus the industry?

John Prosser

Noel, do you want to comment?

Noel Watson

Sometimes the guidance that have portfolio of gigantic projects were lag is going down and then the other lag is coming out. Typically, if you go and look at the last three or four of these, second goal is that being form of alliance. 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 the four cycles that I’m talking about and we always gaining market share coming out. So it really repeats itself will be the first one out of the box.

Andrew Obin - Banc of America/Merrill Lynch

Let me state one last question, this is maybe a nice question, but how easy it is to shift guys who will work on downstream projects. How we did this to shift them over a year or two to long term product to upstream project? How admirable you long term customers be to given you more work outside of their downstream, just to keep the relationship with you going forward? I’m talking about over the next three to five years.

Craig Martin

First of all, our shift is relatively easy to make. Our peer scales that are different and you need to have a few people with those scales in order to make that shift. If the customer thinks your team is credible at the sort of leadership level and your company’s track record is credible. Shifting the bulk of the work force is not an issue.

In fact we have a couple of 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 with our relationship with that customer is continuing to flower.

Operator

Your next question comes from David Yuschak - SMH Capital.

David Yuschak - SMH Capital

Just a couple of questions for you, as far as your multipliers on your engineering cost, what does that look like now compete with kind of multiply you achieving 18 months ago?

Craig Martin

Again that would be very market specific. In some markets there’s been a little change. Most of the public sector markets are unchanged, except to the extent we’ve reduced costs and therefore get a little more multiply or consequents. 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 the number. It is not unusual to see 10% plus decline from peek to bottom in multipliers and say the refining industry that you can see more than that.

David Yuschak - SMH Capital

So the most part you say it’s still kind of relatively holding up though…?

Craig Martin

What I’ll say is that in some market, probably second markets for example, we’re holding up by no change. Some private sector markets, pharmaceutical, pulp & paper, it’s not changing very much, but in other private sector markets particularly heavy hydrocarbons, there’s significant downward pressure.

David Yuschak - SMH Capital

Could you just maybe give us an update on how you see the multiple projects working out at this point?

Craig Martin

It’s going to get done. They’re going to make a lot of gasoline. I mean I know that it sounds like a thesis statement, but the project is going well. We’re 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.

Greg Landry

As we look at the project to-date, we’re still shooting for the number that we set on revised number that we had refreshed out of the project and were it went to. The construction resources are available. The marketing shift on 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 a schedule completion in another year or so.

Craig Martin

Thanks Greg.

David Yuschak - SMH Capital

One last question, just on your own CapEx spending, how do you see next 12 months for you guys in terms versus…?

Craig Martin

We think CapEx will be fairly low with the next 12 months. During the bubble, we bought lots of computers and lots of debts and we won’t have to buy a lot of computers and a lot of debts in the next 12 months.

David Yuschak - SMH Capital

Any excellence, but how around them might be?

Craig Martin

I think, I saw a forecast it’s probably going to be half.

Operator

Your next question comes from Peter Chang - Credit Suisse.

Peter Chang - Credit Suisse

You mentioned earlier in your prepared remarks that multiple expanding is slowing down. Is that just a slow in CapEx from your customers and when do you think that this will start to pick? I think on the last call was characterized as $3 billion to $4 billion in spending in 2010?

Craig Martin

If I said it’s slowing down, it has yet started the issue. We are still expecting to start to see that expenditure in 2010. Our guys still believe that $4 billion number is a reasonable number. Remember, that the total from our poll 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.

Peter Chang - Credit Suisse

I guess, one more question on acquisitions no that you guys have had enough, but as far as the acquisitions into China. What kind of markets are you trying to get into it? Is it going to mirror sort of the pie chart I believe is on the slide seven?

Craig Martin

Yes.

Peter Chang - Credit Suisse

Would you do that through joint venture arrangements or just straight up acquisitions?

Craig Martin

Overtime, 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 co-clients and their investments and what their asset tool 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 in buildings business, particularly at Hong Kong and Shanghai. Some of that will be based on acquisitions, we’ve already made. Some of that will be based on just bootstrap organic growth. Some will be additional acquisitions and I would rule out joint ventures. Although, frankly joint ventures are not normally our long term strategy for penetrating 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 the interest in companies from an acquisition point of view, that would be attractive, but there maybe other things we need to consider as we go along.

Operator

Your next question comes from Will Gabrielski - Broadpoint.

Will Gabrielski - Broadpoint

A couple of questions, one the Suncor CapEx update from last week. So that have any impact on what you have in backlog today or did their commentary have implications going forward, what you’re expecting?

John Prosser

Actually, we thought the Suncor update was pretty positive and for the most part, it was consistent with our expectations. We had a little side bit going inside the company about whether the Four Hills work would beyond it or not, those we’re seeing and testing one to bet, but in other words anything surprising about it, certainly nothing negative from our perspective.

Will Gabrielski - Broadpoint

Typically quantify to say, but I’m curious, can you help us understand. How much oil fence work is in backlog today, as a percentage of total backlogs?

John Prosser

We are typically breakdown our backlog markets in touch, but so I really can’t give you the specifics, but probably, when you look at our upstream, it probably causes mere as little bit about what the revenue mix is again break it down between Canada the other places.

Will Gabrielski - Broadpoint

The fire backs three, specifically I’m curious, do you have any exposure of that project and thus the mid October re-tender and then announcement this week from a company called Aecon on the mechanical engineering side and what I’ve read is that takes some work kind of probably this well. Does that have any implications, so you may have been doing in that arena of that company?

Craig Martin

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’d like not to have Aecon to that anybody involved, but I don’t really think that’s realistic.

Will Gabrielski - Broadpoint

I guess, I just really don’t have good hands on what your exposure to fire backs three may have been in the past and whether or not that maybe one of the projects cancelled from backlog. I was trying to get any answer on that?

Craig Martin

I really can’t disclose anymore in the customer components early issues.

Will Gabrielski - Broadpoint

The question from DOE side, I was wondering, there’s a few bigger program that looks like coming up for bid this year. Any expectations or any particular projects that you’re focusing more on then say others?

Craig Martin

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 project that we’re chasing. We don’t say, which ones are which till after we won them, but I agree with your assessments that there’s pretty good opportunities out there and we’re confident where we in our share and maybe a little more.

Will Gabrielski - Broadpoint

In terms of environmental management stimulus funding, has all that been booked at this point, somewhat coming out the stimulus package or their incremental words that will see come out overtime?

Craig Martin

I believe, there’ll incremental awards, there’s a significant amount of while our characterized timely a discretionary stimulus money and environmental management and where it get spend is yet to be determined.

Will Gabrielski - Broadpoint

In the Middle East, I’m curious, one, the relationships with Abu Dhabi and the chemical side and two, just in general headcount trend there, where you are today versus a year ago and what do think that might look like 12 months from now?

Craig Martin

Our headcount trends up, I don’t have he numbers right front me, but we continue to see growth. I think we should start to push forward 1500 to 2000 people in next couple of three years. So we’re well ahead of schedule in terms of what we think we’ll see in the Middle East between Saudi Arabia and the Emirates.

Will Gabrielski - Broadpoint

The EPS guidance for fiscal 2010, we don’t capture basically, is that the earnings power of the relationship driven non-discrete, non one of project. Is that the earnings power of the core business excluding all those projects, the mega projects you put in the last few years in North American downstream?

Craig Martin

I’ve never thought about it that way, but I’ve 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 at the slow grinding process of converting short term discrete project clients in the long term relationship clients. So at last a very big project work comes out of the relationship. So the relationship based business and the base load business intersects, but they’re not the same things.

Will Gabrielski - Broadpoint

I guess, if I asked another way, if one assumes that the North American mega project, refining projects reserves in the past few years, did not repeat with or without macro crisis. Somewhat if said to BP enlightening project is probably the last big North American refining project we would see for sometime.

If I exclude all of those big projects, what would the core earnings of the business have grown at over the past few years, maybe now obviously not seeing those awards, because that’s what I think they are talking about in terms of new version to that 15% CAGR?

Craig Martin

We were delighted to have some of the big refinery projects in some part of those in our backlog. BP enlightening was not a huge number for us, material is obviously a pretty significant number, but I think the contribution of those big projects, while it’s significant wouldn’t move us back to various mean or well build the P&L numbers technically.

Our business doesn’t make its big money on big events. I could draw your graph we had video conferencing today that really characterizes our business works, but we’re built to make money starting on very small projects and it continue to make money all the way after this spectrum of work we do. We don’t need big events to drive our profitability and would different than most of our competition in that regard, most of our competition it’s big events that swing the profit numbers one way the other we just not that way.

Will Gabrielski - Broadpoint

What I’m trying to illustrate is, what contribution that those mega projects that you happen to booked as a result of a North American refining cycle that may not repeat have on the EPS growth rate and now we’re sort of just getting back to, this is what kept us 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 to 15% CAGR from this level plus maybe a little incremental growth for economic recovery.

Craig Martin

Again, I don’t think those mega projects had it’s not in significant, but it’s not huge difference on the P&L. If you think about businesses like that, look I don’t know how to do this exactly, but let me try at this way. Let’s say that you had a $3 billion project that went through the company’s books over three years that will be a big event for us.

Let’s say that, after tax profit on that business were 3%. So, that met $90 million went through the company’s books over three years or about $30 million a year. 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.

Will Gabrielski - Broadpoint

No, it does, but if there is a few of those running at the same time, I think say, I think it would have maybe 10% impact on the growth rate or some in that effect.

Craig Martin

I look forward to the day, when we have many of those running at the same time in addition to our base, forward today we consider $1 billion business a base load project, we got a few years of those to go it and it really is, our business just made up of 1,000s and 1,000s of projects the average project size in the company is a $1 million of where about maybe a little less.

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 as lucrative nor they have a biggest swing of impact on the bottom line for us as they do for commit use business that is do those big events.

Will Gabrielski - Broadpoint

Okay I think we’re saying the same things with different ways, I appreciate the color thank you.

Craig Martin

I certainly you think your point as well made.

Operator

Your final question comes from [Minshew] - FBR Capital Markets.

Minshew - FBR Capital Markets

Just a quick question on you guidance range, so obviously it’s a pretty large range $2 to $2.60, putting word assumption you were making in terms of market trend on at lower number versus the higher number? In other words, do you still need stimulus to pick up and we need the environment to improve a little bit to get to that $2 number is that a pretty good base case given your current backlog?

Craig Martin

It will be book in record, but we don’t give guidance within the guidance, so taking in our expectation in the market and what the range of activities and possibilities might be. We expect that we will be somewhere between $2 and $2.50, there is a lot of other factors in there is due as well, as far as G&A costs and such like that, where we’re not going into what individual assumptions are they and what they have to be in order to get the one level or two another level.

Operator

At this time there are no further questions.

Craig Martin

Alright, we’ll take that as a good time to break up the call. Thank you all for your interest in the company. We appreciate your listening and we appreciate your taken the time to consider what obviously as a little bit of contrarians position about what the markets are. I will say, we continue to be very, very confident about our company, our positioning in the marketplace and our ability to deliver on our promises of growth in the long run and I look forward having the opportunity demonstrated to you. Thanks again everybody.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!