Craig Martin - President and CEO
Noel Watson - Chairman
Nazim Thawerbhoy - SVP and Controller
Jacobs Engineering Group, Inc. (JEC) Analyst Meeting November 20, 2007 8:00 AM ET
Good morning. Welcome. I'd like to start out this morning just by introducing a few of the Jacobs' folks here. We have a number of Jacobs' executives in the room as well as some guests from businesses here in New York. Let me start with executives and I'll start here with Noel Watson, our Chairman. And I am not sure I can spot every -- Tom Hammond, Executive Vice President, International; Nazim Thawerbhoy, Senior VP and Controller; Greg Landry, Executive Vice President, Process US. George Kunberger, where are you? There he is, Executive Vice President as well and John Prosser our EVP and CFO.
And then in addition in the room, we have a number of guests from our businesses here in New York, [San Rosenbloom, Rich Tangle, Binny Mangieri, Mike Kavinor, Mike Rannord]. Did I miss anybody? Okay, good. I think that's everybody who is here with us.
I will go and get started. I am going to spend a few minutes on a presentation and then we will take some time to try to answer your questions. I will remind you again when we get to the questions, but if you have a question please wait for us to bring you the mike, because we are webcasting this morning's presentation.
And with that, we'll start with the forward-looking statements disclaimer. I'm sure you have all seen at least 8,000 of these. This is your opportunity to see one more. Nothing about it has changed, but the rules are still the same.
We are going to talk about five things today. We are going to talk about our business model, our market and service diversity and what's going on in those markets, our multi-domestic strategy and how we progressed in that regard, acquisitions and what we think is very important is our cost discipline as we get into the marketplace. And so, those five things are things that we think are going to continue to be fundamental drivers to our growth as a company as we go forward.
Let me start with our relationship-based business model. Most of you have seen this slide before. I'm now on slide 4. And I will start here on the industry side, which is the right hand side of the chart, with industry's model for our business. And for the most part, the industry sees our business as an advanced driven business, its transactions, its lump sum turnkey, it’s very competitive and so, the focus is for most of our competitors is to find the big events that will raise their business in that transactional project side and then try to maximize the profitability that those projects represent.
It is a fairly adversarial relationship with the customer that works best in that side of the business. And so, our industry kind of grew up that way and that's still the way most of our competition looks at the business. There's some other aspects to our competitors' business that are like ours, but that's transactional focus and this is no particular company, it's just sort of our imaginary competitor, looks a lot like what you see there.
Let me contrast that against our model, as our model is about preferred relationships. We still get about 80% of our business, give or take, 75% to 80%, from customers with whom we have very long-term established relationship, lots of names for those. They could be called partnerships. They could be called alliances. They could be supplier of choice agreements. They could be basic order agreements. Our customers have as many names for these things as you can imagine, and different rules for why they have to use whatever names they want to call it. One of our customers most recently came up with a strategic relationship, whatever in the world that means.
But what it means to us is that we basically have done to that point with that customer where we agreed that we're going to work together over the long term. We've pretty much settled the commercial hash that goes with the business. So, we know what we're going to get paid and on what basis. And it really comes down to we get work when we've got the capacity and the teams to support that customer. And off a lot of that work is small projects. And small projects are very important to us because it's that piece of business that continues up cycle or down. So, we really like to have that base load of business as we run the business, so we can be sure that whether the cycle is on the up swing or the down swing. Our business is base loaded.
The second aspect of our business what we call is, discrete project. Again, I am on the left side of the screen here. Discrete projects are for customers we know. In a given quarter, our repeat business relationships are probably in the 90% to 93% repeat business. That is, we're working this year for customers we worked for last year in terms of new awards. So, it's a repeat business model for us, almost 100% of the [pod]. But here there's more price competition and there may tend to be more general competition, generally on a qualification kind of basis, generally on a -- are you taking or doing the work, do you have the team, do you have the capacity, still a big factor in this. The price could also be a little bit of a consideration in this kind of work, less so may be today and today's markets in normally. And then, you see this little sliver we show of transactional project. Sometimes we have some of those. We generally take those on when it's in our interest to do so. We've got capacity that we can utilize effectively. There's opportunity to make a lot of money on little job. But it isn't an important part of the business at all, and if it were zero, it wouldn't have impacted us in any measurable way, one way or the other.
So, our business is focused here. You can see that from our competition, they do have some preferred relationships. For example, one of our preferred relationships for a big pharmaceutical customer, one of our main competitors, who is very transactionally focused, also has that relationship. And we end up competing for that customer's work based on who has the team and the availability of the time. But it's a different model for us than for them. And here is why we think that works. And I am on slide 5, and I'll start down here with the employee side of the equation, and I'll start by trying to deliver superior performance to our customers. So, we deliver superior performance that builds trust with that customer, and that builds repurchase loyalty between us and that customer, which drives again more long-term relationships and create the cycle around our clients, that's an improving cycle.
That repurchase loyalty allows us to make more money. And we will make more money, we have earnings growth, and when we have earnings growth, we have the ability to reinvest, acquisitions, investments and tools, capabilities, people and those investments then help us to do a better job. They improve our knowledge and our capability and allow us to provide even superior performance.
The net effect of this is what we see is, kind of, a virtuous circle. You can enter this thing at any point and you can kind of see how this cycle is self-perpetuating and the business gets stronger, the longer we're able to execute in this model. And we believe, ultimately it provides superior value for everybody, our employees, our shareholders and our customers.
Moving onto slide 6. I am going to take a little time now and talk about the markets. I am not going to talk about the markets we are in, just the major ones. I'm going to give you, kind of, an indication of couple things. I'm going to show you how we've grown, so that will be the little chart in the lower left. Talk a little bit about the drivers in the business today. And then, finally, I'll just kind of give you a one word view, so to speak, of how we think that market is doing.
Starting here with energy and refining, the downstream business for us, you can see we've had really good growth over last few years, 30% compound. The things who drive that business today or what have been driving it for sometime. We're seeing lots of activity in regulation-based projects, right? Sulfur removal, benzene removal, now we are taking the sulfur out of bunker, just a lot of regulatory driven work. On top of that, global demand growth needs capacity expansion and so there is also a lot of capacity-related work out there.
And then finally, on the downstream side of oil sands, there is a bunch of upgrades that sort of thing to be done and of course the biofuels business, particularly in Europe is also quite strong. There is just a lot going on in this business and the marketplace look to us very robust. So, we are pretty up lead about where that market is going and where we are in it, we see a lot of good growth out there in the next few years.
Switch to national government programs. You will recall this is really two businesses for us. It's a scientific and technical consulting, research and development kind of business. It's sort of supporting the Warfighter or NASA people like that. It's also environmental clean-up work and those businesses both are really solid right now. You can see we had decent growth in those businesses over the last five years. On the high-tech side, enterprise management services, IT management, the work for NASA have been really good growth areas for us and they look to continue to be so.
We have a really good position in this market both because of our technology and our capability and our track record; we have a very strong track record. But also because we have no conflicts of interest in terms of the customer and supply, for example, defense hardware. So, if you are trying to do the consulting work, you have the customer to figure out what to do or the test work can figure out the customer best option. In fact, if you are not making that hardware, make sure you are a better broker in three of those conflicts of interest kinds of problem.
On the environmental side, the US market is flat, but there is still plenty of opportunity to take market share and frankly, UK nuclear market continues to be very interesting, lots of money going to be spent there, our position in the industry has been very good. We are seeing good growth and good opportunities in that business overall.
Again, we wouldn't put this as quite as strong a market. You can see the word we used there was solid, but it's a good solid market for us right now.
Pharmaceutical and biotechnology: Again, as you'll recall, and I think I have told you this before, this is a business that's driven by for the most parts, new product introduction. So, if somebody who got a new drug, then they got to have a new plant to put it in. And that's good news for us, because those plants started 500 million give-or-take, it kind of go up from there. It is a good business but it is dependent very much on the new product development cycle of our customers, that they've got new products, they've good things in the pipeline. That business is stronger than it is [of ours]. There is also a lot of activity in vaccine. Asian flu and those kinds of things there were big concern, a lot of money being spent to increase the capacity to manufacture vaccines in the world. There are some things going on in the industry in terms of trying to find the lean manufacturing techniques and technology. The Asian markets are emerging; all of those things are driving some good business. You can see that the growth rate from '03 to '07 is not such spectacular number, 4%, but if you go back to hump here, its clear that over the last few years that business has grown nicely, so we've recovered sort of from the downturn back here in '05 and the business is growing on a good growth track.
It is a strongest market in the world in some way, so we characterize it is the word [temper]. Part of that is because we are very high market share player, just want to feel markets that anybody in the world has any significant market share and our market share here is very significant, in terms of probably being the leading provider of these services globally.
Moving on to buildings business, again got a 5% growth rate being driven by global healthcare and education, in the UK, there is some Olympics-related activity. There is a lot going on in the world of IT to support the buildings businesses. Transformational in our view are experienced with three dimensional CAD, those kinds of things.
On the private sector side, starting to drive into building business in a more meaningful way, an interesting sort of developing issue, but the real key here is and probably up here towards the top and that is the demographics of industry are going to continue to drive investment. We are a leading provider of healthcare services globally, both on the design side and on the construction side. And frankly, there is just going to be money spent here. Nobody in this room seems to suffer from the fact that they are getting older, but I am and I really want good healthcare. And so the net effect, that as I think is going to be we are going to see a lot of investment in hospitals and related facilities as we go forward. Remember that our business here is about high tech facilities. [It's more of] the inside of the building, the contents are more important than the outside. So we don't do hotels or office buildings or apartment complexes, multifamily residential those kinds of things. We are focused on buildings that have a technical complexity to them that makes our capabilities interesting and hope that eliminates a lot of the traditional competition from consideration. Good business, we characterize it as steady going forward.
Chemicals and Polymers, this is a really good new story and it’s something we’ve been telling you all for a long time, I think Noel stood up here two, three years ago and said, you know this market is coming back and I think it was good evidence that he was right. 22% compound growth rate, pretty good performance a lot of drivers, economic growth globally, cheap feed stocks in the Middle East, you know the demands that are driving Asia and so on. They require more plastic, more polymers are good news, the strong position for Jacobs on the polymer plastic side. So we see that as a good growth area and we think it’s going to continue to be a good growth area, maybe not quite as good as refining or upstream which I will talk about in a minute, but a really good business going forward.
On the Oil & Gas Upstream I’m now on slide 11. The drivers here are pretty obvious. When oil's way up there and it is today, anything over about $50 is pretty seriously positive driver for the industry. There is lot of capability being put in place, whether it’s in the oil sands or it’s Upstream or it’s gas related project, their level of activity is very significant and you could see we have benefited from that. We are up on a 43% compound rate of growth lately. That’s good news for a couple of reasons. You recall four or five years ago, we told you when we are going to get into the upstream business and build a business out of it and I think this is good evidence that we have been able to do that.
I think the opportunities for us to continue to do that are pretty high in the market we're in today. Frankly, EBIT and oil price down around 50, probably doesn’t have a lot of negative impact on most of our customers. So again, we would characterize that as robust, whatever robust means, I guess I would characterize that as real good.
Infrastructure is sort of the last business I am going to talk about as a business. Again, we've had a lot of good growth 24% compound growth rate over the last few years. Lots of money being spent on transit, transportation related spending. Aviation spending, water and waste water again the Olympics in the UK are driving a lot of business for us because of our business position there. And of course, we're starting to see a lot of infrastructure related opportunities in Middle East. We think that may represent some real growth opportunities for us as well.
We’ve characterized again that market as robust and we like this market in particular because it has we think a lot of long-term, very long-term drivers. Fundamentally, what we see in most places, you can't get from here to there. And when you can't get there from here and there, you get frustrated, you authorize a sales tax bill and a bond issue gets passed and a lot of money gets spent.
As we go around and look at community after community somebody is authorizing $500 million here or $1 billion there to grow this infrastructure business. And so again, its one that we're very excited about, we've told you that for a long time. We're seeing the growth that I think confirms why we’re excited and why we think the prospects are good in the future. There was a study published recently, I believe it was by , [Ian White] but the global under -- unfulfilled demand, exclusive of what has to be done year-in-year-out, the unfulfilled demand in transportation infrastructure of $750 billion is a similar number of water and waste water. So, there are big markets out there with a lot unmet needs and we think that’s a real positive for the business going forward. So, all in all the markets are looking good. Remember though that we're trying to be a relationship based company I talked about and so one of the things that's also important to is to be involved with a customer throughout the project life cycle.
So on slide 12 -- 13 here, you can see, we try to start with the customer in the consulting area and help the customer figure out what to do, then help the customer figure out how to do it, then get it done, and then, operate it and maintain it from their own [house]. So we go from consulting to project services to construction to operations and maintenance. That's important. It keeps our resident time with the client on a continuous basis. We're always there, we're always with the clients working together to solve their problems and that reinforces that relationship wise model. It reinforces our position with that customer, in terms of, that base loaded business important to us in the long run.
On the market side, this is kind of what it looks like. I'm now on slide 14. You've seen all of you in seeing the slide, I think before in terms of where we are geography wise, but I thought it would be interesting to give you some sense of our growth in those businesses over the last few years. And you can see, we've had about a 14% compound revenue growth in US, 25% in the rest of the Americas, 16% in Europe and 60% in the Middle East and Australia. And of course, at $300 million, that's a much smaller business than this one over here at $5 billion or so.
But I think there's two important messages here. We are demonstrating the ability to grow in developing areas, but we also, we've got a lot of leg room, lot of [land yards] left in developed economies for continued growth for us as a company. And the combination in our mind is a good story. It's important that we be able to continue to growing our home markets, so to speak, the US and the Europe, and continue to grow in the rest of North America and in the Asian countries, Middle East and Asia, a positive story I think in both regards.
Acquisitions continue to be important to us. I think we've said repeatedly that we can get something like two-thirds of our growth from organic growth, but the rest of these to come from acquisition, if we're going to continue to make that 15% plus year-over-year forever more and we think we can do that. We are focused on a systematic review of opportunities, but the real key I think is that we are looking at tuck-in or bolt-on kinds of deals. With that I mean we are looking at a little niche deals that help us with the specific geography or a specific service or something that help us get critical mass in the industry. We are really not interested in big public-to-public company mergers, that kind of things not on our page. And we are willing to wait to get the right company at the right price. So, net effect of that is over the last, I don’t know, 20 years or so, we have done 28 acquisitions in 19 countries.
You can see here in the middle of slide 15, how many markets that's been in. The recent ones are, here's the last four, Linder upstream oil and gas acquisition, Edwards and Kelcey, some of the folks here today are from Edwards and Kelcey originally, infrastructure related, John F. Brown, an airport consultancy and Carter & Burgess, a buildings and infrastructure company.
Good acquisitions, very additive to our business and we are excited about what they'll mean for us in the long run. We've done a good job as a company. We've taken acquisitions and continue to grow the business based on how those acquisitions are positioned.
And then here's our cost slide, chart 2 on the cost slide, one is this grey one. You are not supposed to look at that because that's going up. The story we are trying to tell you is how good we are at controlling costs on our custom CPI adjusted basis and the good news is what you are looking at up here on the grey or down here in the blue at the end of the chart [to fall] right hand, we are doing a good job as a company of controlling our costs and I think that's very important. It's very important in today's market, because today is a risky kind of to add structural costs. Sooner or later, nobody knows when, this will boom will burst and companies that have a lot of structural costs are going to really struggle to continue to perform well in that marketplace. We've kept the real tight focus on making sure our costs stay down so that whenever the burst happens and it will, we'll be ready. And I think it's a real advantage to be in that position.
Let me just take you through just a few examples of the kind of projects we work on. This is the Lake Hodges work. It's San Diego County. It's basically CM and inspection services on pipeline work and water reservoir work. This is the business that we are very active in globally and more specifically very, very active in the US, combined to our overflow work, all of it in the tunnel part of the world. It’s also representative of a customer with San DiegoCounty, [there's] probably 10 to 12 major projects we have done for San Diego County over the years.
There is Motiva. Two projects we are going to talk about here. The first one is the fluid cat cracking job. That's the one that’s actually pictured on the slide, good job, very successful, done in very trying circumstances in the aftermath of Katrina and Rita. This is the big program that got announced in August, our joint venture with Bechtel, which is the first essentially equivalent of gas routes to new refinery in United States in about 30 years. This led I think something like 325,000 barrels a day of capacity at that refinery. So, it's supposed [to have] gas routes refinery in a frontier location that you could find. It’s a big program, as you can see, $7 billion worth.
Another example, this goes right to that buildings discussion I had earlier in terms of hi-tech buildings, building where the inside is more important than the outside being the kind of building we'd like to do. This is what's called the Diamond Light Source in the UK. It's essentially a ring photon or electron accelerator that's used to create X-rays. It creates very high density X-rays which allows to study right at the very basic structure of matter. And what we like about this is it's a highly technical building type. You got to have a real understanding of how these things work in order to do this kind of projects and we were able to get the full responsibility for designing this facility and managing the construction. Very successful job for us and a very attractive facility [plan].
NASA, I mentioned NASA earlier, very important customer for us. We are now working at eight NASA sites. We are probably NASA's number-one service contractor today. We do all of the work today that supports Manned Space Flight and shuttle flight, lots of scientific and engineering work for that customer. We are also helping them decide how to go to Mars and beyond. [Initially] up, what you see there is (inaudible). That’s kind of a concept for space travel that’s pretty much there. And as you see the new vehicles come out, we’ll be going back to the capsule-based systems just because of lot lower cost, to be. So, the space shuttle, the Buck Rogers view of where our space exploration is going, is going to tend to change to something entirely different.
This is for the US Army Aberdeen Test Center, that’s where they do a lot of the testing of their wheel and track vehicles. It's their leading edge test center for that. Obviously, it’s been a beneficiary of a lot of activities related to Iraq. For the most part, vehicles haven’t been tested historically at high speeds. Well, sort of old view of vehicles support the infantry was men walking and vehicles keeping up with them. Today, it’s much more of the 70 kilometers an hour, 100 kilometers an hour down the highway and dust and heat and in situations like IEDs rather than it is in the support of the old infantry. So, we have done a lot to help the Aberdeen facility, build a new state-of-the-art high-speed test course and to do that critical testing work that needs to be required there. Really good business for us, and part of a growing relationship with the Army on the test and evaluation side.
And then finally, Borealis. Borealis is a polypropylene, polyethylene, polymers customer of ours. The European partnership, it’s been with Borealis now and we will help to negotiate the original deal in all six, seven years, I think. It has been very successful. We talk about small projects alliances, its part of the power of this small project alliance is where we started with Borealis the sort of diverse small capital business in four countries, is that we get to layer on bigger projects. And the example here is there's $240 million polypropylene facility that we are just completing for Borealis. We provide these EPCM services to Borealis throughout the European environment, we're almost all of their investment goes and it's been a very successful relationship with Borealis, fairly typical of the kind of work we try to do for our chemical customers.
That bring us to a couple of slides just kind of shows the performance, here is the earnings curve. I think that’s a good news story, you can see how our compound growth rates have averaged over the five years ending in '03 to the five years ending in '07. So, slide 23, kind of gives you a sense of our ability to make that 15% a year compound growth promise work and I think we've got a couple of years there where we are only 14.8 but for the most part, we've been able to deliver on that promise. And we believe we will be able to continue deliver on that promise for a long time.
Here is the backlog curve, a good story on technical professional services, this is slide 24. $1 billion year-over-year but probably the bigger news is that, the field services business in terms of backlog has finally started to really take-off and we’re up just a little less than 3 billion year-over-year on the field services side. So, that is up very nicely year-over-year I think it's about 39% we will see that in a minute.
So, kind of operating highlights for last year, kind of where we are, we managed to increase our home office staff by about 4,700 people. That’s a good story, last year at this time, we said, we would need to hire something like 4,500 people to achieve the growth we wanted to achieve. We were able to do that and what is a fairly difficult market for hiring people, it's not an easy time to find employees and we were able to deliver and get the people we needed to get to grow, we’ll need to do that again this year to continue grow like we think we can.
Backlog growth we talked about that, we had a good combination of major wins on large-scale programs and wins on alliances. So, bad things like the Motiva crude expansion, Petro-Canada oil sands work, both big programs, big projects. But probably equally important is thing like the NASA win at Stennis or the TEAS work down in Fort Walton Beach, which are examples of these long-term relationship contract. Five year contract or we wouldn't be with that customer on a continuing basis for sometime to come. And if that base load works again that's those long-term contract that really support our business model and our ability to having sort of predictable growth over the long-term.
Financial highlights, you probably know most of this. EPS of $2.35 last year, fourth quarter was $0.68, earnings is $287 million, finished with our $13.6 billion backlog. Balance sheet is still real good with a cash balance at that time of about 572. We've since gone out and bought Carter & Burgess, so that number will be smaller the next time you see it. And we're guiding them as, I think, probably everybody knows in the 15% to 30% growth range for FY'08.
And now, I get to come to kind of the commercial part of this whole discussion. We have a unique customer-driven business model, that relationship based model is relatively unique for our industry. We think it's a real advantage for us. We've got those diversified markets, diversified geographies, diversified services that will help us grow, and help us balance the ups and downs of these markets.
We got a great balance sheet. We got a 10-year total return to shareholders of 26%, which I don't think can be a bad thing. And we continue to be very committed with this 15% or better average growth rate is out there for the very long-term. So, we see this as a very positive business environment for us as a company. We're pretty excited about where we are.
Okay. With that, we'll go to questions. I would ask you if you have a question to hold your hand up, someone will bring you a mike, that way I won't have to repeat the question. So, let's start, Matthew, here in the back.
Thank you. Is Jacobs or any of its units working on solar or renewable energy, solar or wind power, and distributed generation?
Yeah. The answer to that is yes. And it's a sort of a segment-by-segment discussion. So, we are very active in the solar part of our past both in manufacturer of polysilicon to support [solar detect] panels and in the actual manufacture of the panels as well. It's a good business for us. It wouldn't rock the numbers in any sense, but we see it as a growing opportunity for the company.
On the other hand, things like wind power have very, very low engineering and construction content. The money on the wind power side has been captured by the GE's in the world and designing the foundation and sticking up the wind power facility and become both non-propeller blade that sort of thing. That's not a very attractive business and so simple mom and pop operation can do and there is not a lot of money. So, we are being selective. We are very interested in participating in the renewables and sort of the green side of energy, but it needs to be in business where the technical content is high enough for us as a company but it makes sense for us to participate.
Yeah. The other question is on the bolt-on and in tuck-in acquisition. What range and so far is how large are these deals?
The deals run up in the headcount point of view that may be a 5,000 people as a headcount number. So, that's going to be compared to our overall headcount and may be 10% and that's a good way to look at it. We are really not looking for very big deals, they are very hard to manage, they are very hard to integrate; the smaller deals make a lot more sense. Another question?
Within the infrastructure section, I didn't see anything with respect to transmission and distribution of electric power, that's something you guys are interested in and if you are not into it, what about it doesn't excite you?
I can tell you that we know a lot about the transmission and distribution business per se, but we are not in it and it's really not something that we are looking at with any high degree of interest right now. There are some pretty well established providers of those services today and it isn't such a large business, as we see it, that doesn't make a big difference for us. In general, the power industry is still a little bit of an industry where we kind of standing back with, a bit of the John [to sight], wait and see what happens there. It has not historically been very amenable to our business model and so it's more of a wait and see attitude today for us than anything else.
It's non-amenable because of the relationship side or the terms of the contract or--?
Not amenable for a lot of those reasons, the difficult contracts, fairly lump sum turnkey, competitive orientation, sort of a logger heads kind of behavior as opposed to the partnership one.
On the infrastructure side, could you talk a bit about the where the funding cycle is right now with -- you just had -- [TA loop] came through and you had a lot of bond issues went through in a year ago with the '06 election but now you have. One, how long is that you see funding but now you have weakness in the real estate market where you worry about tax basis to support spending such as (inaudible), that?
Sure, first of all, in terms of the kind of money that got authorized in the last voting cycle, it takes a fairly long time to spend that money, like any other kind of project in our industry; we've got to go through a conceptual planning kind of phase. You got to go through environmental statement kind of work, then you've got to go through some basic designs and detail design, then the construction dollars flow and then finally you've got a roadway. So the cycle for project is fairly long and budget money that got authorized last year is barely used. It may be committed in the sense that there are -- it's earmarked for projects but it isn't necessarily expense yet. So, there is still a fairly good backlog committed but unspent money as a result of all these bond issues. In other words, for example California's $20 billion bond issue, hardly any of that's been spent yet.
In terms of where we are going, I think we are going to have an interesting sort of conflict, certainly state funds, the US treasury, may not see as much in a way of tax revenues, probably because of housing and those kinds of things but there is an awful lot of frustration driven investment in -- particularly in transportation related infrastructure. And we are seeing in lots of communities, it doesn’t really matter, a quarter point sales tax Increase, which is how most of these things get funded. It’s not as big an issue as is taking two hours to get the work. And as we go around the world place after place after place it takes two hours to get to work. And so I think we are going to see people continue to authorize money for those specific kinds of investments, as opposed to a letting the general fund deal with them which I think is positive for the longer term in the business. And I think it’s just one of those businesses where, I -- just like the old movie network, I’m mad I can’t take it anymore and I think we will see a lot of that kind of behavior in the transportation infrastructure area in particular.
That isn’t to say there won’t be some ups and downs, but I think there will also be some substitution in public private partnerships and private finance initiatives to offset some of the lack of state and government funds to support these projects. And we’ll be able to participate in those as a supplier to those contracts. And for the most part it’s those bonds issues but the revenues to support the bond issues is the sales tax revenues. Another question?
On your non-relationship contracts, can you talk a little bit about fixed price versus cost [price] and on a fixed price side, what’s happening with the margins, are you seeing higher margins being built in those contracts?
Okay. We always do a little bit of fixed price work, but the fixed price work that we do – it’s fixed price services, sorry. And so it tends to be instead of a 100,000 hours or engineering work done on reimbursable basis, it’s a 100,000 hours engineering work for which we have fixed a long-term price. We are very comfortable with that because frankly the overrun risk is low. If it takes us another 10,000 hours to complete that engineering work the impact on us financially is very small. And so that piece of our business probably makes more for these profits. 10%, 15% John, I don’t see John, he may have left already. Yeah he went to Boston. (inaudible).
So 10%, 15% of our business evolves that kind of [lump sum] work. Big lump sum turn key project work is still not a part of our business model and really [isn't] any other asset. As to pricing, there is some opportunity in the market to do a little better from a pricing perspective using our business model. If you are a lump sum turn key contractors, you have a lot of opportunity to do better. With our business model it's not so good, and part of that is, these are long-term customers and if we gauge them today, they will remember in the down cycle. And we don’t want them to have that kind of memory.
So, what we tend to do is we renegotiate these long-term agreements. We get a little upward movement in pricing, they'll help us a little bit. But we focus more on better contract terms and reduction of risk because what we tend to find is in the down cycle, pricing pressures will come back and the customers we back are trying to get us to cut prices back down. So, they tend not come back at us and try to change contract terms. So, we get better billing terms, we get risk reduction out of our negotiation in this up cycle, it will help us in the very long-term with our risk costs. Again upfront here.
You recently did -- the last acquisition was the Carter & Burgess? So, I wonder just going forward if you could describe or you could describe little more what they failed in terms of what you are looking for in an acquisition in terms of your strategy and going forward, what are the areas that you want to beef up?
Okay. First with respect to Carter & Burgess, Carter & Burgess was a good sized company, 3200 people give or take. In infrastructure and building, where they are predominant in market areas, as we characterize them and very strong in the south and southwest US. Jacobs had traditionally had sort of Midwest and northeast capability which when we bought Edwards and Kelcey last April, we added a very strong capability in the northeast. So, if you looked at our business, northeast, Atlantic seaboard even down in the Florida, we're pretty strong. As a company, kind of west of Mississippi we're pretty weak. And so, Carter & Burgess brought us critical mass and infrastructure scale, which is fairly important in that business. It was good geographic diversity into US market. And it got to stand up to the point where we as a company now, US buildings and infrastructure business probably about 7,000 people strong and that puts us in absolutely the first tier of competitor in that industry in North America. And that probably means now for a while we won't do anything else into US in the buildings and infrastructure area.
We need to consolidate that acquisition, complete the integration, make the business grow. So, will be a year or so doing those things as we go forward. That's not to say something will irresistible won't pop-up, it could, but we're not out looking for anything thing in that space in the US right now.
We'll continue to look for upstream oil and gas deals. Anywhere in the world that makes sense. So, in terms of the US Gulf Coast or somewhere in Europe or even Middle East, upstream oil and gas activity will be important to us. Middle East in particular is important. So, we'll be putting some energy into build in a presence in the Middle East, because we want to be a different contractor in the Middle East in our competition. We want to be a local contractor to our customer in Middle East. And again, sort of, drive that relationship model into that business is opposed to the traditional, sort of, very arms length from some turn key competitive bid environment since that represent.
We will be looking at infrastructure acquisitions in the rest of the world. In terms of opportunities that might represent Asia, Europe, Middle East, those are all areas where we see opportunities in the buildings and infrastructure arena. And we still have some opportunity to build some more critical mass. Globally in buildings and infrastructure, we're probably 11,000 or 12,000 people and that's really a big business on a global basis. So, there is a lot of opportunity to improve our market position there. So, those two areas will continue to be the focus and then there will be these little niche things that just makes sense to give us a capability in a market or else better serve our customer set that will fit in there as well. Another question?
One of your competitors has recently talked about a peak in 2008 for orders in the downstream oil and gas area, I wondered if you could comment on that?
Well, I don't comment, [Ben], I don't understand your comment because we really don't see that. Noel you want to comment. You add some thoughts on this.
I think the comment probably goes to some really big projects, probably tied into the US in general. But what we are seeing is a lot of mid-sized projects coming at us, both in the US and across the globe. It almost in some way seems to be gathering a little momentum, as people deal with the regulatory issues that also are dealing with the supply demand issues for the gasoline fuel and things like that. So, we see no sign today that we are peaking in the Oil & Gas business particularly in the downstream area.
In the packet here there is a press release that something you are doing down the Everglades in terms of that project?
Sure. The Everglades program is essentially a reclamation to the Everglades. There were lot of bad engineering projects down the Everglades over the years and it's pretty damaging to the (inaudible) and so what this basically is, that the restoration program, the Everglades is a very long-term program, we've been doing this for now and so we started in '96 or '97 somewhere in there and we expect this program will go on for another decade at least. It really puts the Everglades back to where they should have been from an ecological point of view. So, it's pretty important program from that standpoint. There's been a lot of work done on the Everglades to make the water flow more easily, all right, the convenience of developments and that sort of thing. Well, if that actually serves against the purpose of the (inaudible) further underlies the Everglades, the Everglades themselves. So, we are taking that stuff out, we are reconfiguring the basins, the drainage and that sort of things and so it's kind of a revert the Everglades to its original status, it's not my area of expertise, so I can get you an expert if you want for more detail, so that's really, the essence I understand that what we are trying to do. Another question, Tom?
Craig, I know you guys don't want to disclose a lot, but how much of the revenue for next year is in backlog already?
Well, it's interesting but that number runs pretty constant. As we look at any given year going forward about 60% to 65% of next years revenue, next year's margin and next year's profit are in backlog as we begin the year. In some years it's a little stronger, in some year it's a little weaker, but generally we tell our own folks, if the margin in backlog or if the revenue in backlog is less than 60%, our plan is probably too optimistic. And if it's more than 65%, our plan is probably a little conservative and if it's somewhere in that range, then it's probably a pretty good plan based on our ability historically to add the additional business that we have to deliver to get to a 100% of the plan.
So, following on that, I guess you don't want to talk about projects but are there end markets where there are things that you are tracking that are determative in terms of where you come out, in terms of the outlook for next year?
Again, because of the nature of our business model and the focus on small projects, our plan for '08 or '09 even isn't really dependent on big event. So, a big event like Motiva is a nice thing to have and there is nothing wrong we are having that. It helps us move up in terms of what is the top of the small project business, but there is anything you could point to and say this is make-or-break opportunity. It might be a make-or-break opportunity at the office level, but it’s not anywhere near make-or-break opportunity at the corporate level.
So then, what are the differentiating drivers of the 15% versus the 30%?
I think in today's marketplace it’s several things. And the challenges that we see here today is there is still a lot of uncertainty. And you could see a fairly strong movement on the customer start to [delay] projects, prices get out around a year as per session and people start cutting back and we end up towards the lower part of the range. You could also see the continuing of what has been very robust investments and we’d be more towards the upper part of the range. It’s hard in our business to have much real visibility, beyond a quarter, I would say. And in fact, if you think about this conversation, we just add about how much of the work is in backlog, for the current quarter that’s very high in the 80%, 90% range. For the fourth quarter of next year, it’s very low, in the 10% to 20% range. So, that fourth quarter still got a lot, there’s a lot of work to be done between now and that fourth quarter to have the book-of-business to the fourth quarter we expect to have. We've been historically able to do that, but it’s by no means sitting here one month end of the year, any certainty at all what those numbers are going to be, and that’s why the range is wide, you [hand] in the back.
On the acquisitions you have made recently, I may be wrong on this, but is there a higher content of field services and also just on projects you are on, let’s say, over the next two years would you expect a higher content of the field services amongst your mix between the two is tilted more towards the backend?
Two part question, first part is in terms of the acquisition we made, they have been focused on a higher content of field service, it's actually just the opposite.
Virtually, all the acquisitions we have made in the last three or four years have been very home office, engineering professional services construction management driven as opposed to field service driven.
With respect to what's going to the backlog, as you can see, the numbers in our technical professional services backlog this year have gone up nicely. There has been a much more dramatic growth in our field services backlog. And that should turn into a similar change in the mix in '08 and '09 as that field services backlog turns into actual revenue. So, yes, I think, as you look forward into our numbers you are going to see a shift back towards more field services and less pro services in the total revenue numbers. Nazim do you want to comment?
No. I think what you said was right, absolute margins would be on the up trend but as a percentage of revenue they go down because we have a lot of passthrough costs going through.
Other question? Over there.
You touched a little bit on this already as far as the Middle East and this question similar to what was just asked. What are your current capabilities in the Middle East, and I understand you are looking for acquisition to build through platform there, but currently what type of services do you offer and do you see offering complete package of both field and technical or do you focus more of the technical aspect as you grow that business?
Okay. Question, in terms of Middle East, first of all, we've got two different businesses in the Middle East. There is the process business, oil and gas upstream and downstream. And then there is buildings and infrastructure business. Today as we sit, we’ve got about a 150 people on the ground in both businesses in Abu Dhabi and in Saudi Arabia. We're very interested in expanding our capability our initial focus on expansion is in the oil and gas side of the business because we want to get a major presence on the ground. One of the things that most of our competition continues to do is they go into Middle East and they extract projects and execute them in some far away place London or Houston or somewhere. We want to be on the ground and executing projects locally. Again because we’re going to focus on getting that base business in the Middle East as oppose to the big event project.
So overtime, what you will see us doing is the small cap, the maintenance capital work for the installed asset base which has that sort of long-term continuous presence quality to it as oppose to focusing on the $10 billion that sort of $2 billion less to that. With respect to that part of that work that we will get and because of, again part of our model is to be doing all this base business. So, when good projects come along to layered in on top, for the most part of our focus there will be on the technical professional services side. So, we'll tend to be feeds, front end design, it will tend to be program management to sign the CMC contract, construction management contract probably doing direct hire construction Middle East is not on the screen for us for a long time to come. So, that part of it still tends to be very transaction. Other questions?
Okay. Let me summarize, we're proud of last years result, I think more significantly, we really see a good year coming up, markets are very strong for us right now. The markets we got a lot of capability in and therefore customer if we know well are core clients are spending and that’s a good news part of that. We got customers, we know well, we can devote that capacity to. So, we’re looking forward to a good fiscal '08.
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