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Foster Wheeler, Ltd. (NASDAQ:FWLT)

Q3 2008 Earnings Call

November 5, 2008 8:30 am ET

Executives

Scott Lamb - VP of Investor Relation

Ray Milchovich - Chairman and CEO

Franco Baseotto - EVP and CFO

Analysts

Andy Kaplowitz - Barclays Capital

John Rogers - D. A. Davidson

Steven Fisher - UBS

Barry Bannister - Stifel Nicolaus

Nick Capuano - Imperial Capital

Jeff Spittel - Natixis Bleichroeder

Martin Malloy - Johnson Rice

Brian Chin - Citigroup

Will Gabrielski - American Technology

John Emrich - Ironworks Capital

Kent Green - Boston American Asset Management

Operator

Good morning. At this time, I would like to welcome everyone to the Foster Wheeler conference call. (Operator Instructions).

It is now my pleasure to turn the floor over to Scott Lamb, Vice President of Investor Relations. Sir, you may begin your conference.

Scott Lamb

Good everyone and thanks for joining us. Our news release announcing financial results for the quarter was issued this morning and has been posted to our website at fwc.com. The presentation that we will use this morning has also been posted to the website in the Investor Relations section.

Before turning to the discussion, I need to remind you that any comments made today about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ substantially from such forward-looking statements.

A discussion of factors that could cause actual results to vary is contained in Foster Wheeler's Annual and Quarterly Reports filed with the SEC. The company's Form 10-Q will be filed with the SEC later today.

Joining us on the call today are Ray Milchovich, Chairman and CEO; Umberto della Sala, President and Chief Operating Officer; and Franco Baseotto, who is Executive VP, CFO and Treasurer. Also participating, Peter Ganz, Executive VP and General Counsel, Lisa Wood, VP and Controller and Gary Nedelka, who is CEO of our Global Power Group.

After our prepared remarks, we will have time to take your questions. I will turn it over Ray.

Ray Milchovich

Thank you, Scott. Good morning, everyone. Thank you for joining us. I would like to walk everybody on the call through our summary of the quarter and then, as Scott mentioned, we will be happy to take any and all of your question.

First of all, in terms of income for the quarter, we posted $127.9 million of net income, $129.6 million, if we look at the quarter on adjusted basis. Or said in another way, we had a $0.88 on fully diluted share or $0.89 on an adjusted basis, $165.2 million of EBITDA, $167 million on an adjusted basis.

In terms of key drivers for the performance, as we analyzed the performance, we once again delivered strong operating performance in both business groups, E&C and Global Power. Our corporate results were of course aided by a lower effected tax rate during the quarter.

We had favorable booking backlog data in our E&C Group. We had to finish the quarter with an all time record level of man-hours in backlog at the end of Q3, Scope new orders in dollars was up 24% from the average quarter of 2007.

In terms of our $750 million, previously announced share repurchase program that we, of course, announced on September 12th. 1.3 million shares were purchased in Q3 and another 9.2 million shares were purchased in October and we have $412 million remaining on our authorized program.

In terms of details in Q3, Q3 adjusted net income was 34% above the average quarter of 2007. Adjusted EPS of $0.89 per share, once again stock operating performance in both business groups, and the results were aided by favorable effective tax rate; we expect the tax rate to be approximately 20% for the full year.

Moving to the next page and going to the operating groups, if you look at our global E&C group, once again and consistent with prior periods, we had solid execution in Q3, but the results reflected routine timing and contract mix, and we had unfavorable impact of three rather unusual items that I will turn to Franco Baseotto to explain to the group. Franco.

Franco Baseotto

Thank you, Ray. We have reported on the slide $5.5 million on our Italian equity interest and this is due to increased tax rate, both of this $5.5 million is actually an adjustment in our differed tax value ability, so on a run rate basis the increase in the tax rate, which we had to [pay for] is approximately $1 million, we also had an impairment of an equity interest minority entity interest that we report on our balance sheet on cost basis and a special purpose company which is developing a power plant project in the south of Italy under $2.2 million. We also had a reversal of previously exchange gains of $6.1 million.

Ray Milchovich

Thank you, Franco. In terms of EBITDA margin in E&C, we had an EBITDA margin of 19.3% on Scope revenue. On an adjusted basis, for the items above our margin was 21.4%, and it is 24.3% actual year-to-date 2008.

Turning to our Global Power Group; EBITDA in Q3 is 86% above the average quarter of 2007. Our Q3 EBITDA margin on Scope is 15.1% versus 9.8% for the average quarter of 2007. The results are driven by strong operating performance on quality contracts that we will put in backlog in late '06, '07, and early '08. I would just like to say that this group is just having what I consider to be a simply outstanding operating year.

Turning to E&C in terms of the marketplace; in Q3, we finished the quarter with a record level of man hours in backlog at 14.4 million man-hours. Our Q3 new orders in terms of Foster Wheeler Scope are 24% higher than the average quarter of 2007. We had no material cancellations or delays of contracts in backlog due to the turbulence in the financial markets or concern over commodity prices.

In terms of market tone, we did begin to experience some delays and schedule slippage on some prospects due to a variety of factors. However, the prospect list for E&C continues to be very robust with a balanced mix of opportunities. The point I would like to emphasize most is as we look at the prospects in front of this business, we are currently pursuing eight potential, what we would consider to be mega projects, given their size. If booked, these contracts would require us to make material capacity additions just to execute our overall contract load in 2009.

As the anecdotal examples to support the above, in October and November, we have either booked or were in the process of booking a FEED/PMC on a refinery upgrade in South America, the largest ever FEED/PMC in man-hours booked for Foster Wheeler USA in Houston. We booked a FEED/PMC for a new refinery in Libya and a FEED for a gas field development in Algeria.

Turning to GPG; Q3 new orders with regard to Foster Wheeler Scope rebounded from the level that we experienced in Q2 of this year, but we are still down 13% from the average quarter of 2007. Q3 new orders included CFB Boiler projects in Sweden, Argentina, Korea, and Taiwan, and a licensing agreement for PC boilers in Korea.

Consistent with E&C, there were no material cancellations or delays of contracts in backlog due to the turbulence in financial markets or concern over commodity prices. In terms of the tone of the GPG markets, we continue to see ongoing delays and schedule slippage in North American prospects and sporadic schedule slippage in some European prospects. Even so, in October, we received limited notice to proceed with engineering work on a CFB project in North America.

Turning to page nine and looking at new orders in Foster Wheeler Scope. What we see here is two materially different stories for our two business groups and I want to make sure this point does not get lost. We are booking our E&C Group. If you took a look at the data on the left hand side, our average quarterly bookings in 2007 were $538 million and were up to $605 million on average in E&C this year. As I mentioned earlier, we continue to be somewhat bullish about what we see in front of us in Q4 and Q1.

Turning to GPG, it is a different story. As you can see by the data suggested here, we are struggling somewhat to book this business as we did in prior periods. This will be an issue for us as we move into next year's plan. The bottom line of the booking story for us is E&C new orders were up 24% over the average quarter in 2007.

Turning to backlog on page 10, you see the data displayed above. Basically, it suggests the same story that I just conveyed in terms of booking. Our E&C prospects offer very strong potential in our view for backlog growth by year end '08.

Turning to our cash position; cash position is $1.3 billion at the end of Q3. This is up 25% from year-end 2007. With regard to our share repurchase program, $750 million program was announced on September 12th. In Q3, we purchased 1.3 million common shares, in October, we purchased 9.2 million common shares and we have $4.2 million remaining under our authorization.

In terms of my situation with the company, as was announced this morning, just at this week's Board meeting here in Houston with the Foster Wheeler Board; I signed a new three year contract to continue to lead the company as Chairman and CEO.

This was obviously a mutual agreement between me and the Board. It is no more complicated than the fact that as the Board and I observed, the macroeconomic condition in the business changing relatively rapidly from the time that we initialize conceptualized and planned for my departure, we both concluded that this just was not a goodtime for a CEO transition of the company.

We both concluded the right thing for the company was for me to continue and therefore we signed a new agreement. I am very excited about continuing to do, what we have done here for the last number of years.

Turning to page 13; key takeaways from Q3; Third consecutive year of record setting income in 2008 is an expectation we have given the fact that we are through three of the four quarters of the year. We are doing that on record level performance in each of our business groups.

In E&C, key takeaways, our prospect list, including the eight mega contracts that I mentioned earlier continues to be robust despite some schedule slippage in the overall prospect list.

We are cautiously optimistic about ending the year with record-level of man-hours and scope in backlog with prospects involving large FEED contracts that could be the leading indicator of an additional wave of investment in the energy infrastructure̶. Full year EBITDA on scope margins, we expect to be in a range of 25%.

In terms of our Global Power Group, we expect to have an all-time record-level of EBITDA in that group in 2008. We expect EBITDA on scope margins for the full-year of 2008 to be materially above that which we enjoyed in 2007. However current market conditions are likely to challenge EBITDA performance in the power business in 2009. Scoot?

Scott Lamb

Okay. Well, operator, we are ready to go to Q&A at this point.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andy Kaplowitz from Barclays Capital.

Andy Kaplowitz - Barclays Capital

Good morning, guys. How are you doing? Can you hear me okay?

Ray Milchovich

Yes. Good morning, Andy.

Andy Kaplowitz - Barclays Capital

So, Ray, in E&C, I recognized some unusual items there. I guess looking at the scope margins, one thing that you had talked about on previous calls was maybe the potential for more incentive fees and some performance milestone payments at some point over this year. Have those been pushed off? Did we not get some of them? Some color on the E&C margins would be helpful.

Ray Milchovich

I am going to defer to Franco.

Franco Baseotto

Andy, about the investment margin; I think the first remark that I would make is that the margin change in Q3 '08 is actually very similar in terms of volatility compared to the yearly average to what we experienced in Q4 of last year. As we have seen in the 2008 activity, Q4 of 2007 was not the indication of a new trend there. It's a quarter-to-quarter volatility and the same is true for Q3 '08.

Again, portfolio made some contract with respect to incentives. We didn't have any material accrual of incentive either in Q2 as we reported, or in Q3. This does not mean that we have lost an incentive in this period, simply that the timing of those incentives did not allow us to book them in this quarter. As we have said, some of the projects on which we have material incentive schemes did well in the project execution in 2009.

Ray Milchovich

Andy, the only thing I would say to add to Franco's comments is that having gone through a pretty deep dive to close the quarter with the businesses when they were in here a couple of weeks ago and looking at the performance on all of the contracts, the material nature, and the portfolio, I can say, there was only one contract that I would say Umberto and I weren't totally happy with our performance on. However, if you look at the impact of that on the overall margin and EBITDA, the amount just didn't move the needle. It just wasn't a material amount.

So my view is that we have a degree of cyclicality in our earnings, which is the reason why we have suggested that we look at things on an average quarter basis. All-in-all, we are bullish about the way E&C is operating and we are also cautiously bullish about what we think our '09 can look like.

Andy Kaplowitz - Barclays Capital

Okay.

Ray Milchovich

So, there is nothing in here that we are the least bit concerned about.

Andy Kaplowitz - Barclays Capital

That is helpful, Ray. If you think about these mega projects that are out there, what do you think about? I know timing is impossible to sort of pin down. But, are they progressing? What are the customers now telling you, given sort of where oil prices are today and given where the global economy is? Can we still see a couple of these go forward in the near term? What is your thought process on these big projects?

Ray Milchovich

In fairness, if we repeat what the clients say; then okay. We think that there is a very good chance that we will know a whole lot more about these contracts by no later than the end of Q1.

Now, that could change, but if we simply repeat what clients say to us, which is precisely what we are doing, and we do as much do due diligence on what we are told as when we predicted the view, since we spoke to our client, then we should have a much clearer picture, again, say no later than in Q1.

Andy Kaplowitz - Barclays Capital

Great, and one more question, if I could, on GPG, you mentioned your thoughts on '09 and one thing I am just wondering about is, obviously Europe seems like it's gone a little bit weaker based on your commentary. What's going on in Eastern Europe, it's been a strong market for you in the past. How do you view it going forward, how should we think about it?

Ray Milchovich

I will just provide an overview comment, and then I defer to my colleague Gary Nedelka. If we look at the fundamentals, and if we look at these businesses on a macro level, it continues to be bullish over what we think this business can deliver, now that we got the business operating it compares to way we think it should operate and it's operating, if you look at it very consistently, with the way E&C has operated for some time. The fundamentals of supply/demand are strong support to business. We think what we are suffering from right now is just the impact of psychology of the market and people in that business can simply delay decisions, they are doing that. Now, as we mentioned in the text, some projects are moving forward, so we are just not getting the prospect flow in the business that we need to support the business.

If you look at the business' capacity, its throughput and kind of year it's having however, we simply created a business that's got a whole lot more capability than that business ever had in the past. So part of this is, we need to book more to feed the machines that we created, and right now, we've not been able to do that at the level that's required for us to have the kind of '09 that we would like to have.

Now, in terms of additional levels and specificity, let me put it to Garry. Garry?

Gary Nedelka

Thanks, Ray. I would like to emphasize also what you said is that the macro economics of power and solid fuel usage in Eastern Europe have not changed, as we look going forward. In fact, the number of prospects that come into the pipeline also increases in Eastern Europe looking at that particular. Is it some of the vagaries or the mentality that market just has, that has not brought a lot of these to closure as quickly as we would have liked. We still see Eastern Europe as been fundamentally a sound growth market for us to going forward.

Andy Kaplowitz - Barclays Capital

Ray or Della, I know you have been careful with the capacity additions in power. Do you need to make any changes you think over next 6 to 12 months if we still have a relatively weak market in power or are we kind of good to go at least for a while?

Ray Milchovich

If power booking continues as it is, we will make some capacity adjustments to the business, so that we optimize our performance in '09. That is a fourth quarter decision.

Andy Kaplowitz - Barclays Capital

Great. Thank you very much.

Operator

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

John Rogers - D. A. Davidson

Hi. Good morning

Ray Milchovich

Good morning John.

John Rogers - D. A. Davidson

Just going back on the power for a second, are there any issues of a movement away from solid fuels?

Ray Milchovich

Let me give you a near term response, and then, I'll defer to Gary who is close this than I am John. We're into a period that I think that business goes through from time to time which is, let's delay the decision as long as we can, and then, what unfortunately happens is, if the reserved margins are miscalculated, the default choice is natural gas capacity.

I would say, yes it is John, I would say near to median term gas is probably gaining market share over solid fuels. I don't necessarily know that that's the result for the exclusive strategy, it can be from time to time and unintended outcome of delays of solid fuel projects going forward. Gary I defer to you for your perspective and an additional level of detail if you got one?

Gary Nedelka

Sure I would say, Ray is completely correct in the United States, but we've really have not seen any slackening in the demand for solid fuel in parts of Asia, whether it's China, Vietnam, India, and again going back to the parts of Eastern Europe, where we're still seeing some demand for solid fuel. As Ray said, I think it is a cyclical thing in the United States, and we've just going to have to keep our eyes on where or when the cycle is going to change.

John Rogers - D.A. Davidson

Okay. Back on the E&C Group for a second, you mentioned material additions to capacity. If you get some of these big projects, would that be homegrown capacity or would you actually acquire capacity?

Ray Milcovich

To execute?

John Rogers - D.A. Davidson

Yes.

Ray Milcovich

Well, first of all, John, let's be clear. To execute the prospects that I described that are on the verge of potentially booking, that's all organic growth.

John Rogers - D.A. Davidson

Okay.

Ray Milcovich

Because obviously, we're selling capability that we currently have. If we grow through M&A in '09, and I am hopeful that we will, then, that will be separate and apart from the organic growth that is required to be added to execute these prospects.

John Rogers - D.A. Davidson

Okay.

Ray Milcovich

Or said another way, the prospects I mentioned and specifically the eight mega projects, these are in product lines where we've got a proven track record of performing. We've got the technical base, the engineering base; we've got all the capability to do that. As we mentioned earlier, our objective through growth through M&A is to diversify the product mix, if you will, into product lines where we're not as strong as some of the others. So if we're successful in growing the M&A in '09, it will be over and above what would be intended to execute the contract if we book them.

John Rogers - D.A. Davidson

Okay. Then just finally, you talked about some slippage in prospects for a variety of factors, but also, you weren't seeing the impact from lower commodity prices or financial markets. But are those the factors that are causing the slippage in prospects or are there something else? Just to be clear.

Ray Milchovich

In my view, John, it's no one thing. But I would to fear defer to Umberto, who is closer to the ground on this than I am. Umberto?

Umberto Della Sala

Well, I believe that probably one, only one project is possibility of that being delayed or canceled because of turmoil in the market. The others, I believe, is where the most specific reasons support for the gains.

Ray Milchovich

John, what I would say is given the hypersensitivity of the market today, my view is any delay or any cancellation is really emphasized more than normal. I mean we have cancellations and delays in prospects all the time, which is a reason why we maintain a very large prospect list, because it takes a relatively long time for these prospects to materialize into projects.

So I don't want to convey the thought that because of uniqueness of this world market, this is the only time we ever suffer delays or cancellations, because we experienced those always in the normal course of business. We have to plan for that. So, to Umberto's point, we watch that very, very, very closely because we know the consuming public is very concerned about that. We want to be able to answer it in a way that is very, very factually correct.

But I don't necessarily know, having closed the quarter with everybody here that we are startled over the delays or cancellations that we have or that we think it's going to make a material change in what E&C can do in '09. The big change is the number of what we would consider very large prospects that are right on the verge of booking today. Because in recent past, we have not seen this many very large prospects that are potentials.

I would just remind everybody, that we're having what I consider a high degree of success booking the E&C business in '08. We've done that with virtually no mega projects in the book mix through three quarters. These are all on a relatively small to medium sized projects. So as I mentioned in my prepared remarks, we are cautiously optimistic that we are on the verge of positioning another very, very good year in E&C.

John Rogers - D.A. Davidson

Okay, great. Thank you. Glad to have you around another three years.

Ray Milchovich

I'm glad to be here.

Operator

Your next question comes from Steven Fisher with UBS.

Steven Fisher - UBS

Hi, good morning. I was wondering on the E&C eight mega prospects, how concentrated are those across your end markets?

Ray Milchovich

How concentrated?

Steven Fisher - UBS

In terms of are they mostly in refining, mostly in petrochemicals, mostly in LNG?

Ray Milchovich

They are diversified. If you look at where we're strongest, chemicals, LNG midstream, refining, coking. I am looking at Umberto now and he is shaking his head. They are relatively diversified across the product lines, where we are strongest.

Umberto Della Sala

Also geographically.

Ray Milchovich

Also geographically.

Steven Fisher - UBS

Okay, that's helpful. I have a follow-up to John Rogers's question. If they do slip, what reason do you think would be most likely? Is it demand? Is it cost? Is it financing?

Ray Milchovich

At this point, I would say, we would be speculating to answer that question, because we just don't know. Once again, because our clients are giving us no reason to believe that they are not going to be booked. As a matter of fact, what we're doing right now is planning capacity. Because if they book, we have got to move quickly to get the capacity situated so that we can execute to standards that will be expected under the contract.

So our issue right now is capacity planning and making sure that we have got the project means the technical capability to execute the contracts, because that is what we have to do. So, it would be pure speculation for me to sit here today and say why they would delay, if they delay because right now I am getting no reason to believe that they will.

Steven Fisher - UBS

Got it. As you look at the GPG prospects in 2009, outside of Europe, are there any markets that you feel more confident in, in terms of bookings?

Ray Milchovich

I think we are very comfortable with demand in Asia. I think we are very bullish about demand in segments of Latin America. We are booking very well in our Finland subsidiary in certain prospects in northern Europe. Gary, what am I missing?

Gary Nedelka

I think that has got it, Ray.

Ray Milchovich

Now that is the good news. I mean, the bad news is we have got to get some movement in North America. Regarding Gary's earlier point, some of this interest has got to come to fruition in Eastern Europe, because we have got a larger machine than we had before. We need to book the larger machine, if we want to continue to have that business move forward, which is obviously what we want to have happen.

Steven Fisher - UBS

Okay. Regarding North America, you mentioned a CFB that you have limited notice to proceed. How big is that in terms of megawatts?

Ray Milchovich

Gary?

Gary Nedelka

300 megawatts machine.

Steven Fisher - UBS

Okay. Great. Thanks a lot.

Gary Nedelka

Thank you.

Operator

Your next question comes from Barry Bannister with Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

Hi. I just to make sure we are on the same page as far as the numbers. You said your EBITDA margin year-to-date on scope is 23%. If I look at E&C, we were thinking when you said 23% is the '08 goal that was EBIT, not EBITDA margin.

Year-to-date, your EBIT margin is 21.6% on average on a trailing 12 month basis. Could you tell us, whether you are speaking, when you said 23% last call EBITDA or EBIT margin?

Ray Milchovich

Let me defer to Franco, Barry.

Franco Baseotto

I think we had made reference to the year-to-date EBITDA margin on scope of 24.3% as compared to 21.4% on an adjusted basis for the quarter. When we refer to margin there, it's always EBITDA margin on scope, which is the metric that we internally utilized.

Last quarter, we gave the guidance of full-year 2008 margin in the corridor of 25%, 27%. I think, we have confirmed that we are within the corridor with our goal on the lower end of the range, 25% EBITDA margin for the full-year of 2008.

Barry Bannister - Stifel Nicolaus

North-West Shelf IV had a good start up, was there no incentive booked in third quarter? Would that fall into fourth quarter, if it exists at all? Secondly, on those eight mega projects, if you sum up the potential scope embodied by them, how does it compare to your $1.75 billion E&C scope margin?

Franco Baseotto

Barry, in terms of, I didn't get the first question, was it the North-West Shelf V?

Barry Bannister - Stifel Nicolaus

Yeah. I believe so.

Franco Baseotto

Okay. We didn't have any material incentive accrual on Train 5 in Q3. But once again not because we missed the incentive that contract was negotiated under conditions that did not allow us to have material incentive scheme on Train 5. So as you have seen the [format] was very favorable, but the contract terms were not consistent with significant incentive accrual on that project.

Ray Milchovich

Barry, there was an incentive earned on the Train 5 startup, but the incentive was so small it didn't move the needle for the quarter. It's not because we didn't earn it, it wasn't there to be earned based on the terms of the contract.

Barry Bannister - Stifel Nicolaus

In terms of these eight mega projects, how do they compare in sum on a scope basis to the $1.75 billion of E&C current scope backlog?

Ray Milchovich

I don't know I am answering your question, but let me try. If we look at these eight mega projects and we assume that we book the early part and that we get the latter part, because it's likely if we book some, if not most of them, the bookings will come in pieces as they typically do.

If we get all of them, which we think is a very reasonable expectation the total scope is about 75% of what we would liquidate in E&C for a full year. Well, this is almost three fourth of a full year liquidation in just eight prospects. If you look at what our typical mix of large and small is, this is a material change for E&C for as far back as we can see.

What would also occur, assuming these eight are booked, is that we would see a material mix shift in E&C's mix from EPC to FEED because if you have very, very high concentration of FEED, which, as we stated previously, could once again point to another wave of energy infrastructure spending because some of these are very, very large FEED.

Barry Bannister - Stifel Nicolaus

Okay, thank you.

Ray Milchovich

Thank you.

Operator

Your next question comes from Nick Capuano with Imperial Capital.

Nick Capuano - Imperial Capital

Hey, guys. Good morning.

Ray Milchovich

Good morning, Nick.

Nick Capuano - Imperial Capital

Relative to the eight mega projects that you are tracking, what would be the lead time and the challenges of ramping up capacity to address them? Would this be something that you'd wait until you had the final booking, the final announcement, the final go ahead or is this something that you are planning for or, dealing with now beforehand?

Ray Milchovich

Capacity addition would happen relatively instantly, just as we did on Pluto. I mean, we're planning for it now. We've done it before. It's just a matter of getting it done. Let me put it this way. It would be a first-class problem to have. We're up to it. I have listened to Umberto discuss this with the guys who run the operating units, we know exactly how the work would be shared operating unit to operating unit. We know how the operating units would support one another, and we've got plans in place to get prepared for this assuming it happens. Fair, Umberto?

Umberto Della Sala

Yeah, absolutely. But I'd like to underline that when we talk about capacity, we are talking about adding production capacity, not the infrastructure to manage the additional capacity. It's already here.

Ray Milchovich

Yeah, very good.

Umberto Della Sala

By the way, I repeat what I always say; when we bid a project we make sure that we have the team and the capacity to successfully execute the project. So everything would be in place to successfully build and execute this project.

Nick Capuano - Imperial Capital

Yeah, excellent. Relative to the pricing environment you have given the scale for; they are obviously very large scale projects. I am sure that they are being competitively bid. What's your outlook on the pricing? What kind of pricing are you seeing currently in large projects like this? How do the prospective economics of these projects look relative to your base of business?

Ray Milchovich

Umberto is the commercial expert. I am going to defer to him.

Umberto Della Sala

Well, literally, first of all, there are no golden rules when it comes to bidding projects. What I can tell you though, based on what we see today and with specific reference to the train project, we should be able to book those projects at the same level of margin of the [Venus] projects. On other prospects, we have to decide based on the strategic conditions, competition, and client. But overall today, there is no indication that we should lower the margin; we will see as we go.

Nick Capuano - Imperial Capital

Okay, excellent. One last quick one.

Ray Milchovich

The only thing I am say, Nick, is if I think of the size and magnitude of these projects; they are obviously very, very large for us, but if we turn this around, they are very large and very important to the clients. Umberto, I think you would agree with this. My view is a big part of contractor selection by the client is who the client thinks is best positioned to perform because performance is critical. If we're the winner, and we think if they proceed it's highly likely that we will be, we are being chosen because the client has concluded that for a whole suite of reasons we're the person best suited to deliver. I frankly believe that there is more pressure on performance than there might be on one or two turns of margin.

Nick Capuano - Imperial Capital

All right, excellent. Great to keep you around, Ray.

Umberto Della Sala

Thank you.

Ray Milchovich

Nice to be here.

Operator

Your next question comes from Jeff Spittel with Natixis Bleichroeder.

Jeff Spittel - Natixis Bleichroeder

Good morning, guys. If we could look at, I guess, provide a little commentary on what you are seeing on the cost front, specifically in the LNG market and I will assume since commodity prices for liquefaction have held up pretty well, how does that reconcile with the appetite that you are seeing in that market from your customers right now?

Ray Milchovich

What we've seen and what we continue to see as we look into '09 is, in fairness, that's the hottest segment that we've got. It's a very, very, very hot segment right now. Therefore, when we look at these eight, we've got a fair concentration of LNG liquefaction potential inside the eight. I think the client and the market generally would conclude that we performed well on Train 5.

I think the client and the market would conclude that we're performing very well in the early stages of Pluto. They've got a much accelerated schedule. I personally sponsor that project, so I am making my fourth trip to Perth, Friday night. I think the reputation of Foster Wheeler is that we're performing well. So we're hopeful that we can leverage that into additional wins in the '09 period. So far that, frankly, other than maybe delayed coking, which is more of a niche, I would say, LNG liquefaction is the hottest market segment we've got.

Jeff Spittel - Natixis Bleichroeder

Okay, I appreciate that. Switching gears to the M&A front, obviously your balance sheet is in good shape here. I know you're proceeding with the share repurchase program. What are you seeing in terms of bid-ask spreads out there in the marketplace with some of the turmoil going on, and would you say that creates some more opportunity for you guys as a buyer on that front?

Ray Milchovich

We're always evaluating that landscape because, let's face it, it's a reasonably relatively fast changing landscape especially now that we've got three years of leadership continuity, which we needed to have if we were going to be active in what I would call large to medium scale M&A. We will continue to watch. We have a keen interest to grow this business and I am hopeful that we will be active in M&A in '09.

Jeff Spittel - Natixis Bleichroeder

Okay. Thanks very much. I will turn it back.

Ray Milchovich

Thank you.

Operator

Your next question comes from Martin Malloy with Johnson Rice.

Martin Malloy - Johnson Rice

My question has been answered. Thank you.

Operator

Your next question comes from Brian Chin with Citigroup.

Brian Chin - Citigroup

Hi. In order for the E&C outlook in '09 to be flat with '08, what portion of the eight mega projects would need to be one? Can you give us a sense of that?

Ray Milchovich

I could try, Brian, but if I answered the question, I would be misleading because we can't draw a bright line between the eight prospects and the EBITDA levels that will be enjoyed in E&C in '09, because there are many, many, many other small medium sized prospects that are in the mix as well.

So, our '09 will not just be dependent upon the eight mega projects, it will be dependent upon all or some of those as well as a number of smaller to medium sized prospects. I will go back to a point I made earlier.

In my view, you look at our bookings in E&C through three quarters, I find them very impressive because frankly our bookings are up solidly and we haven't booked one mega project through three quarters of '08.

So, I'm afraid if I try to answer the question, the conclusion could be reached would be misleading. Our '09 is going to be dependent upon, in my view, what we book over the next two quarters. We have got a shot at what I considered to be a very, very good '09 in E&C.

Brian Chin - Citigroup

One last question; can you give us a sense of the contract mix that you have been looking at? I know it has been going more and more to the cost reimbursable side. Are you seeing a change in that pricing mix coming up due to just the broader commodity price and macroeconomic environment? Or is that still on path towards cost reimbursables?

Ray Milchovich

I will defer to Umberto, who is much closer.

Umberto Della Sala

Yeah. So, far we haven't seen any major change. We feel like the majority of this project is reimbursable. Some long term service contracts, but nothing different with respect to previous years, not yet.

Ray Milchovich

Brian, we are very, I think, we are appropriately cautious about how and what we book and I think that served us very, very well. So, and I agree with Umberto, there has not been a material mix shift in that regard.

What we could see, as I mentioned earlier, is we could see a material mix shift between EPC and FEED over the next two quarters, which frankly I look at as a distinct positive, because we have got some very big FEED that are in front of us and if booked. I think, it would suggest that we are in the beginning of another investment wave. That's the mix shift that I think could occur here over the next one to two quarters.

Brian Chin - Citigroup

Great. I appreciate that. Thanks.

Ray Milchovich

Thank you.

Operator

Your next question comes from Will Gabrielski with American Technology.

Will Gabrielski - American Technology

Thank you. When I look this quarter at the man-hours you added to backlog and then I look at the implied billing rate, obviously as you drop from last quarter, I just wonder, if you could add some color to that number?

Maybe you can comment on what you are seeing going forward and address some of the concerns in the market about lower labor rates due to a loosening capacity side on the labor side. Thanks.

Ray Milchovich

I will defer to Franco.

Franco Baseotto

I think in part, a small part, we have some unfavorable exchange on our dollar scope backlog due to the strengthening of the US dollar. If we exclude on a normalized exchange base, I will just go back a little bit and it will be more or less flat compared to '03.

In terms of the relationships of dollar backlog to man-hour backlog, we have at least two factors that explain why the man-hour backlog has increased and dollar backlog has not increased or remained flat. One is the portfolio mix. We have larger shares of our portfolio, which is executed out of our Asian operation and its one good indication of how effectively we can serve the market demand.

We have strong operating unit in Asia. Clearly, Asia is a lower cost base geographic area compared to Europe and North America. The other factor that I think explains this is the clear utilization of low cost engineering center, which once again had a lower billing rate, but that does not mean in many, many ways that we are satisfied in our reduction of our man-hour margins.

So, I think those two factors should be taken into account in looking at the relationship between dollar backlog and man-hour backlog.

Will Gabrielski - American Technology

Okay, thanks. Then one follow-up, on the cost side of the equation with commodity prices coming down, and I guess for E&C in power, if you look at the cost side, what's the client reaction to lower costs? How long will that take to stimulate spending just as the ROIs get a little better as the procurement costs go down?

What's the reaction, I guess, in the field? Are people waiting and taking their time and hoping to capture lower prices? Is that being put into contracts with a little bit more flexibility? Just some thoughts there as well.

Umberto Della Sala

I believe that this relate to economic viability of the product. We are now in the process of finalizing the cost estimates of some of the major investments, and these production costs will be taken into account. So we see it as positive.

Ray Milchovich

Gary, what do you see?

Gary Nedelka

I see the same thing, that this is just going to have a positive effect on taking some of the projects that may have been on the cusp of being uneconomical and pushing them into positive territory.

Will Gabrielski - American Technology

Okay. One last one, if you guys would allow me, on the consolidation front, any particular piece of your business that you are more intent on growing through acquisition at this point or is there a market you wish you had more exposure to looking out two, three years?

Ray Milchovich

As we have stated before, number one, we think we have an excellent E&C business. Our interest is to grow that business, to diversify our product offering, and to shore up some areas where either technically or geographically that business could be stronger. That has been the focus of our M&A from the start, it is now, and it will continue to be.

We're open to small to medium to large size. It doesn't matter; we are very pragmatic about this. As I mentioned earlier, I am hopeful that this market may give us some M&A opportunity in '09 that perhaps we haven't seen in '07 and '08.

Will Gabrielski - American Technology

Great, thank you.

Ray Milchovich

Thank you.

Operator

Your next question comes from John Emrich with Ironworks Capital.

John Emrich - Ironworks Capital

Thanks. Two unrelated questions, if I could ask them separately. One was could you tell me what the cash flow from operations and CapEx were in the quarter?

Franco Baseotto

Cash from operations if we exclude the buyback activities and the impact of exchange rate was very strong.

John Emrich - Ironworks Capital

Was how much?

Franco Baseotto

Cash from operations was $163 million.

John Emrich - Ironworks Capital

Okay.

Franco Baseotto

In terms of CapEx, we had $20 million of CapEx in the quarter. On a year-to-date, it's $60 million. This includes approximately $20 million of capital expenditure in one of the winds farms that we are executing in Italy. Excluding VAT, our run rate in terms of capital expenditure is between $40 million and $50 million. In 2008, we're going to have a slightly higher amount of capital expenditure because we have some of these zone improvements including the new building which we are currently hosting this conference in Houston.

But, once again, we've not had any major change in our amount of capital expenditure, which is pretty modest compared to the size of the building. These are improvements and IT-related capital expenditures.

John Emrich - Ironworks Capital

Okay and thank you. The other one was what's the right book tax rate to use in our models and is there much of a difference between our cash and book tax?

Franco Baseotto

In terms of tax rate, I think what we said is that we expect 2008 to be 20%. When we calculate our tax provision every quarter based on our estimated effective tax rate for the year. So, we mostly have variation in that annual effective tax rate on a yearly basis. That can trigger bigger variation on a quarterly basis and for 2009; excluding any of these events we expect low 20s for our effective tax rate. Our cash tax rate is actually very much aligned with our effective tax rate in the low 20s as well.

John Emrich - Ironworks Capital

Thank you.

Operator

Your next question comes from Kent Green with Boston American Asset Management.

Kent Green - Boston American Asset Management

Yes, the question pertains to in the last quarter you discussed some shifting of contracts, divesting contracts if they got delayed in the international market. Is that still continuing?

Ray Milchovich

That was primarily in GPG, and the comment, as I recall, was that we were trying to mitigate some slowing in North America with prospects in the rest of the world. I would defer to Gary for an update on that.

Gary Nedelka

Sure. I think if you look in Ray's prepared remarks when he went through the announced CFB projects that we have, I think they show a lot more geographic diversity than perhaps we've had in the past. Another telling thing is to look in the appendices to the presentation here that was made. You can see where we have successfully shifted a lot of the backlog of Global Power from North America to other areas of the world, in particular towards Latin America. So, those efforts are ongoing and they are beginning to gain some traction.

Kent Green - Boston American Asset Management

I've got a quick comment about the labor markets. If you get these bigger projects you're obviously going to have to increase staffing, technical staffing at Scope. How is that market shaping up? Would you possibly make any smaller acquisitions here?

Ray Milchovich

We would not make acquisitions to support the mega projects. That just wouldn't be necessary. Labor is available. We can get it. Labor will move to a good project that they find intellectually stimulating and these are very, very interesting projects. Getting labor is not an issue. We'll get what we need assuming we book the business. We have in the past and we'll continue to do so.

Kent Green - Boston American Asset Management

Thank you.

Operator

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

Barry Bannister - Stifel Nicolaus

It looks like you've bought back stock at an average price of $32, pretty close to the current stock price. Can you give us an idea of the expected pace of the buyback and the time to completion?

Ray Milchovich

Barry, basically what we did is, Franco and I just monitored the market, monitored our sales. Some of them we did in open market trading, some we did through a 10b5-1. I would say right now, we're very happy with what we did. We're going to monitor things over the next handful of weeks and decide what yet we do. It will come as no surprise that what we do is we watch that and watch the M&A opportunities at the same time. We're very happy with what we bought in terms of what we think the accretion level will be to '09 earnings.

How much more we do and when we do it is something, quite frankly, we haven't decided yet. It's all going to be just our feel of the market over the next handful of weeks. So, we do not have a definitive plan today on purpose. We just don't want to force ourselves to do that. We're trying to feel the market and decide what's best to do. But we're very happy with what we bought and how accretive we believe that will be to '09 earnings.

Barry Bannister - Stifel Nicolaus

I was a bit surprised that the Middle East is only 9% of E&C's Scope given how large your presence is there and how many projects you have been involved with and are tracking. Why is the Middle East only 9% of E&C's scope? If I could glue it on, could you give us an update on the Irish boilers dispute situation?

Ray Milchovich

Okay. Let me defer to Franco and to Umberto for the first part, and then let me deal with the second part.

Umberto Della Sala

Well the Middle East, there are projects reaching completion in the Middle East. Some of the eighth mega projects that Ray mentioned will likely be in the Middle East. So, it's the physiology of the market not more than that.

Certainly, we have been very successful in the Far East. So, we are growing bookings in the Far East and this also explains why our man-hours backlog went up and the dollar backlog didn't go up at the same level, so no more than that.

Ray Milchovich

Yeah. I would say, Barry, I wouldn't read anything into that. I mean, Umberto, would you?

Umberto Della Sala

No.

Ray Milchovich

I wouldn't read anything into that. In my opinion that is not a concern. It's not a plus. It's not a minus. It's a fact at a point in time. In terms of the legacy projects in Ireland, something that I personally, I am reasonably close to.

I think we are happy with the technical development and the things that have been done to resolve the technical issues between ourselves and the client. We are in negotiation with the client currently on a potential settlement that's been taking place for sometime.

I am reasonably optimistic that it maybe possible that something there is reached. If it isn't, quite frankly, I am very comfortable with our position in terms of our contract and what we have done.

Barry Bannister - Stifel Nicolaus

But I don't think you have a reserve for that, do you?

Ray Milchovich

We do. Yes, we do.

Barry Bannister - Stifel Nicolaus

Okay.

Ray Milchovich

We do and we are very happy with the reserve.

Barry Bannister - Stifel Nicolaus

Last question.

Ray Milchovich

I would say more than ever, Barry, in the whole period of time we have dealt with that. As you know, that contract approval, believe it or not, predates me. We are very happy with where that sits both technically, operationally, and legally.

Barry Bannister - Stifel Nicolaus

Ray, just in closing, the nature of Foster Wheeler, a lot of people view this company as an E&C, but it's really a big engineering, small construction outfit and you book man-hours not dollars into backlog.

I think the misunderstanding is that you carry these multiyear backlogs, when in fact your backlog is rarely more than 1.25 years. So, my question is the only way this thing grows is not by pumping up backlog, but by extracting better and better margins and efficiencies as you go forward. Do you feel like the margins will climb in the years to come if you continue to book good business?

Ray Milchovich

Let me just say, I fundamentally agree with what you just said and let me just maybe modify one piece. Yes, we book man-hours because of the business model. When you said, we book man-hours and not dollars.

We book man-hours. But you can bet we know the dollar of the man-hour in backlog. We pay a lot of attention to margins, as I hope is displayed. So yes, we book man-hours but we are very, very mindful of the margins.

As Umberto said earlier, we are very comfortable with the margins that we are currently putting into backlog and the margins, we anticipate putting into backlog on the prospects that we see in front of us over the next one, two, three quarters.

In terms of margin growth from today, we would only be speculating as to how we might enjoy margin growth beyond where we are. Generally, we think we margin optimize and we think, we provide good client value for the margin that we extract. I think, what you will find is that we will continue to margin optimize because that is something that we focus a lot of energy on.

But you are right, we are a five, six quarters in backlog churning business that's the business model, that's what we are and frankly, that doesn't concern us. The question is whether there is enough market out there for the services that we provide. We think there is. We think we provide a differentiated service.

If we look at where we are today versus a year, two years, three years ago, we are just a whole lot stronger now than we were then. We are a whole lot more diversified now than we were back then.

I think the way, we continue to grow is we continue to diversify the product offering both technically and geographically, which is what we have done and we have plans to do, as we go forward in '09.

So, what amazes me is there seems to be such a tone of pessimism surrounding the space. We sit here today and we are cautiously optimistic that E&C is on the verge of a really good '09.

When we look at what is the prevailing psychology, you sure would have a tough time extracting that from what we think you can read about this space every week. So, all we do is just keep our heads down, focus on what's important and keep putting our numbers up.

Barry Bannister - Stifel Nicolaus

Yes. That's our reading. Thanks a lot, Ray.

Ray Milchovich

Thank you.

Operator

Ladies and gentlemen, it appears that there are no further questions at this time. I will now turn the call back over to Scott Lamb.

Scott Lamb

Okay. Thank you, operator. I will turn it to Ray for wrap-up comments.

Ray Milchovich

Okay. So to summarize, where we are quickly, 2006 all-time record earnings. We doubled that in '07 through three quarters. We are operating at 34% earnings beyond that which we enjoyed in '07. The company is operating very, very, very well.

Now, we have got two businesses, Global Power business and the E&C business. I'm very, very happy with the performance of the Global Power Group. They are having a lights out year, putting up the numbers, but let's face facts, we are having a little difficulty booking that business right now and that is going to impact their '09.

The good news for Foster Wheeler is our earnings are made up of 70% to 75% based on E&C. So, we are an E&C dominated company. E&C has performed very, very well as well in '08.

As I mentioned earlier, we could be on the verge of another significant growth here in E&C. But it will be contingent on our booking success in the fourth quarter and first quarter of '09.

So, at this point, we feel very good about where things are and we are cautiously optimistic about '09 and beyond for Foster Wheeler.

Thank you for joining us.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Foster Wheeler, Ltd. Q3 2008 Earnings Call Transcript
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