Jacobs Engineering Group Analyst Meeting Transcript

Executives

Craig Martin - President and CEO

Noel Watson - Chairman

Nazim Thawerbhoy - SVP andController

Jacobs Engineering Group, Inc.(JEC) Analyst Meeting November 20, 2007 8:00 AM ET

Craig Martin

Good morning. Welcome. I'd liketo 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 frombusinesses here in New York.Let me start with executives and I'll start here with Noel Watson, ourChairman. And I am not sure I can spot every -- Tom Hammond, Executive VicePresident, International; Nazim Thawerbhoy, Senior VP and Controller; Greg Landry,Executive Vice President, Process US. George Kunberger, where areyou? There he is, Executive Vice President as well and John Prosser our EVP andCFO.

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. Ithink that's everybody who is here with us.

I will go and get started. I amgoing to spend a few minutes on a presentation and then we will take some timeto try to answer your questions. I will remind you again when we get to thequestions, 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 withthe forward-looking statements disclaimer. I'm sure you have all seen at least8,000 of these. This is your opportunity to see one more. Nothing about it haschanged, but the rules are still the same.

We are going to talk about fivethings today. We are going to talk about our business model, our market andservice diversity and what's going on in those markets, our multi-domesticstrategy and how we progressed in that regard, acquisitions and what we thinkis very important is our cost discipline as we get into the marketplace. Andso, those five things are things that we think are going to continue to befundamental drivers to our growth as a company as we go forward.

Let me start with ourrelationship-based business model. Most of you have seen this slide before. I'mnow on slide 4. And I will start here on the industry side, which is the righthand side of the chart, with industry's model for our business. And for themost part, the industry sees our business as an advanced driven business, itstransactions, its lump sum turnkey, it’s very competitive and so, the focus isfor most of our competitors is to find the big events that will raise theirbusiness in that transactional project side and then try to maximize theprofitability that those projects represent.

It is a fairly adversarialrelationship 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 ofour competition looks at the business. There's some other aspects to ourcompetitors' business that are like ours, but that's transactional focus and thisis no particular company, it's just sort of our imaginary competitor, looks alot like what you see there.

Let me contrast that against ourmodel, as our model is about preferred relationships. We still get about 80% ofour business, give or take, 75% to 80%, from customers with whom we have verylong-term established relationship, lots of names for those. They could becalled partnerships. They could be called alliances. They could be supplier ofchoice agreements. They could be basic order agreements. Our customers have asmany names for these things as you can imagine, and different rules for whythey have to use whatever names they want to call it. One of our customers mostrecently came up with a strategic relationship, whatever in the world that means.

But what it means to us is thatwe basically have done to that point with that customer where we agreed thatwe're going to work together over the long term. We've pretty much settled thecommercial hash that goes with the business. So, we know what we're going toget paid and on what basis. And it really comes down to we get work when we'vegot the capacity and the teams to support that customer. And off a lot of thatwork is small projects. And small projects are very important to us because it'sthat piece of business that continues up cycle or down. So, we really like tohave that base load of business as we run the business, so we can be sure thatwhether the cycle is on the up swing or the down swing. Our business is baseloaded.

The second aspect of our businesswhat we call is, discrete project. Again, I am on the left side of the screenhere. Discrete projects are for customers we know. In a given quarter, ourrepeat 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 termsof 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 moregeneral 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 thecapacity, still a big factor in this. The price could also be a little bit of aconsideration in this kind of work, less so may be today and today's markets innormally. And then, you see this little sliver we show of transactionalproject. Sometimes we have some of those. We generally take those on when it'sin 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 animportant part of the business at all, and if it were zero, it wouldn't haveimpacted 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 preferredrelationships. For example, one of our preferred relationships for a bigpharmaceutical customer, one of our main competitors, who is verytransactionally focused, also has that relationship. And we end up competingfor that customer's work based on who has the team and the availability of thetime. But it's a different model for us than for them. And here is why we thinkthat works. And I am on slide 5, and I'll start down here with the employee sideof the equation, and I'll start by trying to deliver superior performance toour customers. So, we deliver superior performance that builds trust with thatcustomer, and that builds repurchase loyalty between us and that customer,which drives again more long-term relationships and create the cycle around ourclients, that's an improving cycle.

That repurchase loyalty allows usto make more money. And we will make more money, we have earnings growth, andwhen we have earnings growth, we have the ability to reinvest, acquisitions,investments and tools, capabilities, people and those investments then help usto do a better job. They improve our knowledge and our capability and allow usto provide even superior performance.

The net effect of this is what wesee is, kind of, a virtuous circle. You can enter this thing at any point andyou can kind of see how this cycle is self-perpetuating and the business getsstronger, the longer we're able to execute in this model. And we believe,ultimately it provides superior value for everybody, our employees, ourshareholders and our customers.

Moving onto slide 6. I am goingto take a little time now and talk about the markets. I am not going to talkabout the markets we are in, just the major ones. I'm going to give you, kindof, an indication of couple things. I'm going to show you how we've grown, sothat will be the little chart in the lower left. Talk a little bit about thedrivers in the business today. And then, finally, I'll just kind of give you aone word view, so to speak, of how we think that market is doing.

Starting here with energy andrefining, the downstream business for us, you can see we've had really goodgrowth over last few years, 30% compound. The things who drive that businesstoday or what have been driving it for sometime. We're seeing lots of activityin regulation-based projects, right? Sulfur removal, benzene removal, now weare taking the sulfur out of bunker, just a lot of regulatory driven work. Ontop of that, global demand growth needs capacity expansion and so there is alsoa lot of capacity-related work out there.

And then finally, on thedownstream side of oil sands, there is a bunch of upgrades that sort of thingto be done and of course the biofuels business, particularly in Europe is also quite strong. There is just a lot going onin this business and the marketplace look to us very robust. So, we are prettyup lead about where that market is going and where we are in it, we see a lotof good growth out there in the next few years.

Switch to national governmentprograms. You will recall this is really two businesses for us. It's ascientific and technical consulting, research and development kind of business.It's sort of supporting the Warfighter or NASA people like that. It's alsoenvironmental clean-up work and those businesses both are really solid rightnow. You can see we had decent growth in those businesses over the last fiveyears. 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 tocontinue to be so.

We have a really good position inthis market both because of our technology and our capability and our trackrecord; we have a very strong track record. But also because we have noconflicts of interest in terms of the customer and supply, for example, defensehardware. So, if you are trying to do the consulting work, you have thecustomer to figure out what to do or the test work can figure out the customerbest option. In fact, if you are not making that hardware, make sure you are abetter 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 ofopportunity to take market share and frankly, UK nuclear market continues to bevery interesting, lots of money going to be spent there, our position in theindustry has been very good. We are seeing good growth and good opportunitiesin that business overall.

Again, we wouldn't put this asquite as strong a market. You can see the word we used there was solid, butit'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 abusiness that's driven by for the most parts, new product introduction. So, ifsomebody 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 milliongive-or-take, it kind of go up from there. It is a good business but it isdependent very much on the new product development cycle of our customers, thatthey've got new products, they've good things in the pipeline. That business isstronger 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 moneybeing 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 thelean manufacturing techniques and technology. The Asian markets are emerging;all of those things are driving some good business. You can see that the growthrate from '03 to '07 is not such spectacular number, 4%, but if you go back tohump here, its clear that over the last few years that business has grownnicely, so we've recovered sort of from the downturn back here in '05 and thebusiness is growing on a good growth track.

It is a strongest market in theworld in some way, so we characterize it is the word [temper]. Part of that isbecause we are very high market share player, just want to feel markets thatanybody in the world has any significant market share and our market share hereis very significant, in terms of probably being the leading provider of theseservices globally.

Moving on to buildings business,again got a 5% growth rate being driven by global healthcare and education, inthe UK,there is some Olympics-related activity. There is a lot going on in the worldof IT to support the buildings businesses. Transformational in our view areexperienced with three dimensional CAD, those kinds of things.

On the private sector side,starting to drive into building business in a more meaningful way, aninteresting sort of developing issue, but the real key here is and probably uphere towards the top and that is the demographics of industry are going tocontinue to drive investment. We are a leading provider of healthcare servicesglobally, 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 sufferfrom the fact that they are getting older, but I am and I really want goodhealthcare. And so the net effect, that as I think is going to be we are goingto see a lot of investment in hospitals and related facilities as we goforward. Remember that our business here is about high tech facilities. [It'smore of] the inside of the building, the contents are more important than theoutside. So we don't do hotels or office buildings or apartment complexes, multifamilyresidential those kinds of things. We are focused on buildings that have atechnical complexity to them that makes our capabilities interesting and hopethat eliminates a lot of the traditional competition from consideration. Goodbusiness, we characterize it as steady going forward.

Chemicals and Polymers, this is areally good new story and it’s something we’ve been telling you all for a longtime, I think Noel stood up here two, three years ago and said, you know thismarket 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 growthglobally, cheap feed stocks in the Middle East, you know the demands that aredriving Asia and so on. They require moreplastic, more polymers are good news, the strong position for Jacobs on thepolymer plastic side. So we see that asa good growth area and we think it’s going to continue to be a good growtharea, maybe not quite as good as refining or upstream which I will talk aboutin a minute, but a really good business going forward.

On the Oil & Gas Upstream I’mnow on slide 11. The drivers here are pretty obvious. When oil's way up thereand it is today, anything over about $50 is pretty seriously positive driverfor the industry. There is lot of capability being put in place, whether it’sin the oil sands or it’s Upstream or it’s gas related project, their level ofactivity is very significant and you could see we have benefited from that. Weare up on a 43% compound rate of growth lately. That’s good news for a coupleof reasons. You recall four or five years ago, we told you when we are going toget into the upstream business and build a business out of it and I think thisis good evidence that we have been able to do that.

I think the opportunities for usto 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 negativeimpact on most of our customers. So again, we would characterize that asrobust, whatever robust means, I guess I would characterize that as real good.

Infrastructure is sort of thelast business I am going to talk about as a business. Again, we've had a lot ofgood growth 24% compound growth rate over the last few years. Lots of moneybeing spent on transit, transportation related spending. Aviation spending,water and waste water again the Olympics in the UK are driving a lot of businessfor us because of our business position there. And of course, we're starting tosee a lot of infrastructure related opportunities in Middle East. We think that may represent some real growth opportunitiesfor us as well.

We’ve characterized again thatmarket as robust and we like this market in particular because it has we thinka lot of long-term, very long-term drivers. Fundamentally, what we see in mostplaces, you can't get from here to there. And when you can't get there fromhere and there, you get frustrated, you authorize a sales tax bill and a bondissue gets passed and a lot of money gets spent.

As we go around and look atcommunity after community somebody is authorizing $500 million here or $1billion there to grow this infrastructure business. And so again, its one thatwe're very excited about, we've told you that for a long time. We're seeing thegrowth that I think confirms why we’re excited and why we think the prospectsare good in the future. There was a study published recently, I believe it wasby , [Ian White] but the global under -- unfulfilled demand, exclusive of whathas to be done year-in-year-out, the unfulfilled demand in transportationinfrastructure 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’sa real positive for the business going forward. So, all in all the markets arelooking good. Remember though that we're trying to be a relationship basedcompany I talked about and so one of the things that's also important to is tobe involved with a customer throughout the project life cycle.

So on slide 12 -- 13 here, youcan see, we try to start with the customer in the consulting area and help thecustomer 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 andmaintenance. That's important. It keeps our resident time with the client on acontinuous basis. We're always there, we're always with the clients workingtogether to solve their problems and that reinforces that relationship wisemodel. It reinforces our position with that customer, in terms of, that baseloaded business important to us in the long run.

On the market side, this is kindof what it looks like. I'm now on slide 14. You've seen all of you in seeing the slide, I think before interms of where we are geography wise, but I thought it would be interesting togive 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% inthe rest of the Americas,16% in Europe and 60% in the Middle East and Australia. And of course, at $300million, that's a much smaller business than this one over here at $5 billionor so.

But I think there's two importantmessages 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 developedeconomies for continued growth for us as a company. And the combination in ourmind is a good story. It's important that we be able to continue to growing ourhome markets, so to speak, the USand the Europe, and continue to grow in the rest of North America and in theAsian countries, Middle East and Asia, apositive story I think in both regards.

Acquisitions continue to beimportant to us. I think we've said repeatedly that we can get something liketwo-thirds of our growth from organic growth, but the rest of these to comefrom acquisition, if we're going to continue to make that 15% plusyear-over-year forever more and we think we can do that. We are focused on asystematic review of opportunities, but the real key I think is that we arelooking at tuck-in or bolt-on kinds of deals. With that I mean we are lookingat a little niche deals that help us with the specific geography or a specificservice or something that help us get critical mass in the industry. We arereally not interested in big public-to-public company mergers, that kind ofthings not on our page. And we are willing to wait to get the right company atthe right price. So, net effect of that is over the last, I don’t know, 20years or so, we have done 28 acquisitions in 19 countries.

You can see here in the middle ofslide 15, how many markets that's been in. The recent ones are, here's the lastfour, Linder upstream oil and gas acquisition, Edwards and Kelcey, some of thefolks here today are from Edwards and Kelcey originally, infrastructurerelated, John F. Brown, an airport consultancy and Carter & Burgess, a buildings and infrastructure company.

Good acquisitions, very additiveto our business and we are excited about what they'll mean for us in the longrun. We've done a good job as a company. We've taken acquisitions and continueto 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 lookat that because that's going up. The story we are trying to tell you is howgood we are at controlling costs on our custom CPI adjusted basis and the goodnews is what you are looking at up here on the grey or down here in the blue atthe end of the chart [to fall] right hand, we are doing a good job as a companyof controlling our costs and I think that's very important. It's very importantin 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 companiesthat have a lot of structural costs are going to really struggle to continue toperform well in that marketplace. We've kept the real tight focus on makingsure our costs stay down so that whenever the burst happens and it will, we'llbe ready. And I think it's a real advantage to be in that position.

Let me just take you through justa few examples of the kind of projects we work on. This is the Lake Hodgeswork. It's San Diego County. It's basically CMand inspection services on pipeline work and water reservoir work. This is thebusiness that we are very active in globally and more specifically very, veryactive in the US,combined to our overflow work, all of it in the tunnel part of the world. It’salso representative of a customer with San DiegoCounty, [there's] probably 10 to 12major projects we have done for San Diego Countyover the years.

There is Motiva. Two projects weare 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, verysuccessful, done in very trying circumstances in the aftermath of Katrina andRita. This is the big program that got announced in August, our joint venturewith Bechtel, which is the first essentially equivalent of gas routes to newrefinery in United Statesin about 30 years. This led I think something like 325,000 barrels a day ofcapacity at that refinery. So, it's supposed [to have] gas routes refinery in afrontier location that you could find. It’s a big program, as you can see, $7billion worth.

Another example, this goes rightto 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 ofbuilding we'd like to do. This is what's called the Diamond Light Source in theUK.It's essentially a ring photon or electron accelerator that's used to createX-rays. It creates very high density X-rays which allows to study right at thevery basic structure of matter. And what we like about this is it's a highlytechnical building type. You got to have a real understanding of how thesethings work in order to do this kind of projects and we were able to get thefull 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 areprobably NASA's number-one service contractor today. We do all of the worktoday that supports Manned Space Flight and shuttle flight, lots of scientificand engineering work for that customer. We are also helping them decide how togo 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 yousee the new vehicles come out, we’ll be going back to the capsule-based systemsjust because of lot lower cost, to be. So, the space shuttle, the Buck Rogersview of where our space exploration is going, is going to tend to change tosomething entirely different.

This is for the US Army AberdeenTest Center, that’s where they do a lot of the testing of their wheel and trackvehicles. It's their leading edge test center for that. Obviously, it’s been abeneficiary of a lot of activities related to Iraq. For the most part, vehicleshaven’t been tested historically at high speeds. Well, sort of old view ofvehicles support the infantry was men walking and vehicles keeping up withthem. Today, it’s much more of the 70 kilometers an hour, 100 kilometers anhour down the highway and dust and heat and in situations like IEDs rather thanit is in the support of the old infantry. So, we have done a lot to help the Aberdeen facility, build anew state-of-the-art high-speed test course and to do that critical testingwork that needs to be required there. Really good business for us, and part ofa growing relationship with the Army on the test and evaluation side.

And then finally, Borealis. Borealisis 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 inall six, seven years, I think. It has been very successful. We talk about smallprojects alliances, its part of the power of this small project alliance iswhere we started with Borealis the sort of diverse small capital business infour countries, is that we get to layer on bigger projects. And the examplehere is there's $240 million polypropylene facility that we are just completingfor Borealis. We provide these EPCM services to Borealis throughout theEuropean environment, we're almost all of their investment goes and it's been avery successful relationship with Borealis, fairly typical of the kind of workwe try to do for our chemical customers.

That bring us to a couple ofslides just kind of shows the performance, here is the earnings curve. I thinkthat’s a good news story, you can see how our compound growth rates haveaveraged 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 yearcompound growth promise work and I think we've got a couple of years therewhere we are only 14.8 but for the most part, we've been able to deliver onthat promise. And we believe we will be able to continue deliver on thatpromise for a long time.

Here is the backlog curve, a goodstory on technical professional services, this is slide 24. $1 billionyear-over-year but probably the bigger news is that, the field servicesbusiness in terms of backlog has finally started to really take-off and we’reup 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 seethat in a minute.

So, kind of operating highlightsfor last year, kind of where we are, we managed to increase our home officestaff by about 4,700 people. That’s a good story, last year at this time, wesaid, we would need to hire something like 4,500 people to achieve the growthwe wanted to achieve. We were able to do that and what is a fairly difficultmarket for hiring people, it's not an easy time to find employees and we wereable to deliver and get the people we needed to get to grow, we’ll need to dothat again this year to continue grow like we think we can.

Backlog growth we talked aboutthat, we had a good combination of major wins on large-scale programs and winson alliances. So, bad things like the Motiva crude expansion, Petro-Canada oilsands work, both big programs, big projects. But probably equally important isthing like the NASA win at Stennis or the TEAS work down in Fort Walton Beach, whichare examples of these long-term relationship contract. Five year contract or wewouldn't be with that customer on a continuing basis for sometime to come. Andif that base load works again that's those long-term contract that reallysupport our business model and our ability to having sort of predictable growthover the long-term.

Financial highlights, youprobably 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. Balancesheet is still real good with a cash balance at that time of about 572. We'vesince gone out and bought Carter & Burgess, so that number will be smallerthe next time you see it. And we're guiding them as, I think, probablyeverybody knows in the 15% to 30% growth range for FY'08.

And now, I get to come to kind ofthe commercial part of this whole discussion. We have a unique customer-drivenbusiness model, that relationship based model is relatively unique for ourindustry. We think it's a real advantage for us. We've got those diversifiedmarkets, 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. Wegot a 10-year total return to shareholders of 26%, which I don't think can be abad thing. And we continue to be very committed with this 15% or better averagegrowth rate is out there for the very long-term. So, we see this as a verypositive business environment for us as a company. We're pretty excited aboutwhere we are.

Okay. With that, we'll go toquestions. I would ask you if you have a question to hold your hand up, someonewill bring you a mike, that way I won't have to repeat the question. So, let'sstart, Matthew, here in the back.

Question-and-Answer Session

Unidentified Analyst

Thank you. Is Jacobs or any ofits units working on solar or renewable energy, solar or wind power, anddistributed generation?

Craig Martin

Yeah. The answer to that is yes.And it's a sort of a segment-by-segment discussion. So, we are very active inthe 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'sa good business for us. It wouldn't rock the numbers in any sense, but we seeit as a growing opportunity for the company.

On the other hand, things likewind power have very, very low engineering and construction content. The moneyon the wind power side has been captured by the GE's in the world and designingthe foundation and sticking up the wind power facility and become bothnon-propeller blade that sort of thing. That's not a very attractive businessand 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 therenewables and sort of the green side of energy, but it needs to be in businesswhere the technical content is high enough for us as a company but it makessense for us to participate.

Unidentified Analyst

Yeah. The other question is onthe bolt-on and in tuck-in acquisition. What range and so far is how large arethese deals?

Craig Martin

The deals run up in the headcountpoint of view that may be a 5,000 people as a headcount number. So, that'sgoing to be compared to our overall headcount and may be 10% and that's a goodway to look at it. We are really not looking for very big deals, they are veryhard to manage, they are very hard to integrate; the smaller deals make a lotmore sense. Another question?

Unidentified Analyst

Within the infrastructuresection, I didn't see anything with respect to transmission and distribution ofelectric power, that's something you guys are interested in and if you are notinto it, what about it doesn't excite you?

Craig Martin

I can tell you that we know a lotabout the transmission and distribution business per se, but we are not in itand it's really not something that we are looking at with any high degree ofinterest right now. There are some pretty well established providers of thoseservices today and it isn't such a large business, as we see it, that doesn'tmake a big difference for us. In general, the power industry is still a littlebit of an industry where we kind of standing back with, a bit of the John [tosight], wait and see what happens there. It has not historically been veryamenable to our business model and so it's more of a wait and see attitudetoday for us than anything else.

Unidentified Analyst

It's non-amenable because of therelationship side or the terms of the contract or--?

Craig Martin

Not amenable for a lot of thosereasons, the difficult contracts, fairly lump sum turnkey, competitiveorientation, sort of a logger heads kind of behavior as opposed to thepartnership one.

Unidentified Analyst

On the infrastructure side, couldyou talk a bit about the where the funding cycle is right now with -- you justhad -- [TA loop] came through and you had a lot of bond issues went through ina year ago with the '06 election but now you have. One, how long is that yousee funding but now you have weakness in the real estate market where you worryabout tax basis to support spending such as (inaudible), that?

Craig Martin

Sure, first of all, in terms ofthe kind of money that got authorized in the last voting cycle, it takes afairly long time to spend that money, like any other kind of project in ourindustry; we've got to go through a conceptual planning kind of phase. You gotto go through environmental statement kind of work, then you've got to gothrough some basic designs and detail design, then the construction dollarsflow and then finally you've got a roadway. So the cycle for project is fairlylong and budget money that got authorized last year is barely used. It may becommitted in the sense that there are -- it's earmarked for projects but itisn't necessarily expense yet. So, there is still a fairly good backlogcommitted but unspent money as a result of all these bond issues. In otherwords, for example California's$20 billion bond issue, hardly any of that's been spent yet.

In terms of where we are going, Ithink we are going to have an interesting sort of conflict, certainly statefunds, the US treasury, may not see as much in a way of tax revenues, probablybecause of housing and those kinds of things but there is an awful lot offrustration driven investment in -- particularly in transportation relatedinfrastructure. And we are seeing in lots of communities, it doesn’t reallymatter, a quarter point sales tax Increase, which is how most of these thingsget 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 hoursto get to work. And so I think we are going to see people continue to authorizemoney for those specific kinds of investments, as opposed to a letting thegeneral fund deal with them which I think is positive for the longer term inthe business. And I think it’s just one of those businesses where, I -- justlike the old movie network, I’m mad I can’t take it anymore and I think we willsee a lot of that kind of behavior in the transportation infrastructure area inparticular.

That isn’t to say there won’t besome ups and downs, but I think there will also be some substitution in publicprivate partnerships and private finance initiatives to offset some of the lackof state and government funds to support these projects. And we’ll be able toparticipate in those as a supplier to those contracts. And for the most partit’s those bonds issues but the revenues to support the bond issues is thesales tax revenues. Another question?

Unidentified Analyst

On your non-relationshipcontracts, can you talk a little bit about fixed price versus cost [price] andon a fixed price side, what’s happening with the margins, are you seeing highermargins being built in those contracts?

Craig Martin

Okay. We always do a little bitof fixed price work, but the fixed price work that we do – it’s fixed priceservices, sorry. And so it tends to be instead of a 100,000 hours orengineering work done on reimbursable basis, it’s a 100,000 hours engineeringwork for which we have fixed a long-term price. We are very comfortable withthat because frankly the overrun risk is low. If it takes us another 10,000hours to complete that engineering work the impact on us financially is verysmall. 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 businessevolves that kind of [lump sum] work. Big lump sum turn key project work isstill not a part of our business model and really [isn't] any other asset. Asto pricing, there is some opportunity in the market to do a little better froma pricing perspective using our business model. If you are a lump sum turn keycontractors, you have a lot of opportunity to do better. With our businessmodel it's not so good, and part of that is, these are long-term customers andif we gauge them today, they will remember in the down cycle. And we don’t wantthem to have that kind of memory.

So, what we tend to do is werenegotiate these long-term agreements. We get a little upward movement inpricing, they'll help us a little bit. But we focus more on better contractterms 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 usto cut prices back down. So, they tend not come back at us and try to changecontract terms. So, we get better billing terms, we get risk reduction out ofour negotiation in this up cycle, it will help us in the very long-term withour risk costs. Again upfront here.

Unidentified Analyst

You recently did -- the lastacquisition was the Carter & Burgess? So, I wonder just going forward ifyou could describe or you could describe little more what they failed in termsof what you are looking for in an acquisition in terms of your strategy andgoing forward, what are the areas that you want to beef up?

Craig Martin

Okay. First with respect toCarter & Burgess, Carter & Burgess was a good sized company, 3200people give or take. In infrastructure and building, where they are predominantin market areas, as we characterize them and very strong in the south andsouthwest US. Jacobs had traditionally had sort of Midwestand northeast capability which when we bought Edwards and Kelcey last April, weadded a very strong capability in the northeast. So, if you looked at ourbusiness, northeast, Atlantic seaboard even down in the Florida, we're pretty strong. As a company,kind of west of Mississippiwe're pretty weak. And so, Carter & Burgess brought us critical mass andinfrastructure scale, which is fairly important in that business. It was goodgeographic diversity into USmarket. And it got to stand up to the point where we as a company now, USbuildings and infrastructure business probably about 7,000 people strong andthat puts us in absolutely the first tier of competitor in that industry inNorth America. And that probably means now for a while we won't do anythingelse into US in the buildings and infrastructure area.

We need to consolidate thatacquisition, complete the integration, make the business grow. So, will be ayear or so doing those things as we go forward. That's not to say somethingwill irresistible won't pop-up, it could, but we're not out looking for anythingthing in that space in the USright now.

We'll continue to look forupstream oil and gas deals. Anywhere in the world that makes sense. So, interms 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 beputting some energy into build in a presence in the Middle East, because wewant to be a different contractor in the Middle Eastin our competition. We want to be a local contractor to our customer in Middle East. And again, sort of, drive that relationshipmodel into that business is opposed to the traditional, sort of, very armslength from some turn key competitive bid environment since that represent.

We will be looking atinfrastructure acquisitions in the rest of the world. In terms of opportunitiesthat might represent Asia, Europe, Middle East,those are all areas where we see opportunities in the buildings andinfrastructure arena. And we still have some opportunity to build some morecritical mass. Globally in buildings and infrastructure, we're probably 11,000or 12,000 people and that's really a big business on a global basis. So, thereis a lot of opportunity to improve our market position there. So, those twoareas will continue to be the focus and then there will be these little nichethings that just makes sense to give us a capability in a market or else betterserve our customer set that will fit in there as well. Another question?

Unidentified Analyst

One of your competitors hasrecently talked about a peak in 2008 for orders in the downstream oil and gasarea, I wondered if you could comment on that?

Craig Martin

Well, I don't comment, [Ben], Idon't understand your comment because we really don't see that. Noel you wantto comment. You add some thoughts on this.

Noel Watson

I think the comment probably goesto some really big projects, probably tied into the US in general. But what we areseeing is a lot of mid-sized projects coming at us, both in the US andacross the globe. It almost in some way seems to be gathering a littlemomentum, as people deal with the regulatory issues that also are dealing withthe supply demand issues for the gasoline fuel and things like that. So, we seeno sign today that we are peaking in the Oil & Gas business particularly inthe downstream area.

Craig Martin

Another question?

Unidentified Analyst

In the packet here there is apress release that something you are doing down the Evergladesin terms of that project?

Craig Martin

Sure. The Everglades program isessentially a reclamation to the Everglades.There were lot of bad engineering projects down the Everglades over the yearsand it's pretty damaging to the (inaudible) and so what this basically is, thatthe restoration program, the Everglades is a very long-term program, we've beendoing this for now and so we started in '96 or '97 somewhere in there and weexpect this program will go on for another decade at least. It really puts the Everglades back to where they should have been from anecological point of view. So, it's pretty important program from thatstandpoint. There's been a lot of work done on the Evergladesto make the water flow more easily, all right, the convenience of developmentsand that sort of thing. Well, if that actually serves against the purpose ofthe (inaudible) further underlies the Everglades, the Evergladesthemselves. 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 Evergladesto its original status, it's not my area of expertise, so I can get you anexpert if you want for more detail, so that's really, the essence I understandthat what we are trying to do. Another question, Tom?

Unidentified Analyst

Craig, I know you guys don't wantto disclose a lot, but how much of the revenue for next year is in backlogalready?

Craig Martin

Well, it's interesting but thatnumber runs pretty constant. As we look at any given year going forward about60% to 65% of next years revenue, next year's margin and next year's profit arein backlog as we begin the year. In some years it's a little stronger, in someyear it's a little weaker, but generally we tell our own folks, if the marginin backlog or if the revenue in backlog is less than 60%, our plan is probablytoo optimistic. And if it's more than 65%, our plan is probably a littleconservative and if it's somewhere in that range, then it's probably a prettygood plan based on our ability historically to add the additional business thatwe have to deliver to get to a 100% of the plan.

Unidentified Analyst

So, following on that, I guessyou don't want to talk about projects but are there end markets where there arethings that you are tracking that are determative in terms of where you comeout, in terms of the outlook for next year?

Craig Martin

No.

Unidentified Analyst

Okay.

Craig Martin

Again, because of the nature ofour business model and the focus on small projects, our plan for '08 or '09even isn't really dependent on big event. So, a big event like Motiva is a nicething to have and there is nothing wrong we are having that. It helps us moveup in terms of what is the top of the small project business, but there isanything you could point to and say this is make-or-break opportunity. It mightbe a make-or-break opportunity at the office level, but it’s not anywhere nearmake-or-break opportunity at the corporate level.

Unidentified Analyst

So then, what are thedifferentiating drivers of the 15% versus the 30%?

Craig Martin

I think in today's marketplaceit’s several things. And the challenges that we see here today is there isstill a lot of uncertainty. And you could see a fairly strong movement on thecustomer start to [delay] projects, prices get out around a year as per sessionand people start cutting back and we end up towards the lower part of therange. You could also see the continuing of what has been very robustinvestments and we’d be more towards the upper part of the range. It’s hard inour business to have much real visibility, beyond a quarter, I would say. Andin fact, if you think about this conversation, we just add about how much ofthe 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% to20% range. So, that fourth quarter still got a lot, there’s a lot of work to bedone between now and that fourth quarter to have the book-of-business to thefourth quarter we expect to have. We've been historically able to do that, butit’s by no means sitting here one month end of the year, any certainty at allwhat those numbers are going to be, and that’s why the range is wide, you[hand] in the back.

Unidentified Analyst

On the acquisitions you have maderecently, I may be wrong on this, but is there a higher content of fieldservices and also just on projects you are on, let’s say, over the next twoyears would you expect a higher content of the field services amongst your mixbetween the two is tilted more towards the backend?

Craig Martin

Two part question, first part isin terms of the acquisition we made, they have been focused on a higher contentof field service, it's actually just the opposite.

Unidentified Analyst

Okay.

Craig Martin

Virtually, all the acquisitionswe have made in the last three or four years have been very home office,engineering professional services construction management driven as opposed tofield service driven.

Unidentified Analyst

Okay.

Craig Martin

With respect to what's going tothe backlog, as you can see, the numbers in our technical professional servicesbacklog this year have gone up nicely. There has been a much more dramaticgrowth in our field services backlog. And that should turn into a similarchange in the mix in '08 and '09 as that field services backlog turns intoactual revenue. So, yes, I think, as you look forward into our numbers you aregoing to see a shift back towards more field services and less pro services inthe total revenue numbers. Nazim do you want to comment?

Nazim Thawerbhoy

No. I think what you said wasright, absolute margins would be on the up trend but as a percentage of revenuethey go down because we have a lot of passthrough costs going through.

Craig Martin

Jacobs Engineering Group Analyst Meeting Transcript

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