Foster Wheeler AG Q4 2008 Earnings Call Transcript

Feb.24.09 | About: Amec Foster (AMFW)

Foster Wheeler AG (FWLT) Q4 2008 Earnings Call Transcript February 24, 2009 8:30 AM ET

Executives

Scott Lamb – VP, IR

Ray Milchovich – Chairman and CEO

Umberto della Sala – President and COO

Franco Baseotto – EVP, CFO and Treasurer.

Analysts

Steven Fisher – UBS

Jeff Spittel – Natexis Bleichroeder

Will Gabrielski – Broadpoint AmTech

Andy Kaplowitz – Barclays Capital

Joe Ritchie – Goldman Sachs

John Rogers – D.A. Davidson

Barry Bannister – Stifel Nicolaus

Brian Chin – Citi

John Emerich – Ironworks Capital

John Walthausen – Walthausen & Co.

Mike Sheridan – Cobalt

Operator

Good morning. My name is Ashanta and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Foster Wheeler Fourth Quarter Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. (Operator instructions).

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

Scott Lamb

Good day, 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 has been posted in the Investor Relations section of our website.

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-K is being filed today with the SEC.

On the call today with us 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 for Q&A are 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 the call over to Ray.

Ray Milchovich

Good morning, everyone, and thank you for joining us. I will lead us through our prepared remarks and then as Scott mentioned we will take your questions at that time.

Turning to our slide number three, 2008 highlights, in 2008, Foster Wheeler reported its third consecutive year of record results. In terms of income, we posted 526.6 million of net income on a reported basis, 533.2 million on an adjusted basis. And I want to remind everyone on the call that the adjusted methodology and various bridges are contained in the appendix of the presentation. On a fully diluted EPS basis, we reported $3.68 per share and $3.73 per adjusted share. On and EBITDA basis, we posted 686.1 million of EBITDA and 692.7 million of EBITDA on an adjusted basis.

In terms of what drove this performance, we had record level EBITDA in both of our operating groups, Global Power, as well as a Global E&C Group. We also had net income for the year aided by a lower effective tax rate at 15.6% versus a 25.7% tax rate in 2007. This was partially due to a year-end net change in tax valuation allowances, which I have Franco Baseotto to comment on in a couple of pages of $24.1 million. If we normalize for this tax valuation allowance or effective tax rate excluding this item was 19.4% for 2008. Also during the year, we exercised our share repurchase program. We had 18.1 million shares purchased in 2008, approximately 12% of average shares outstanding prior to the authorization of the program. We have $264.8 million remaining under the existing authorization granted to us by our Board Of Directors as of February 24, 2009.

Turning to slide four, and now turning to the fourth quarter highlights, in the quarter we had income of 99.9 million, 137.2 million on an adjusted basis. We had $0.75 per fully diluted share, $1.03 per diluted share on an adjusted basis. We had 105.1 million of

EBITDA, 142.4 million on an adjusted basis. In the quarter, we took a non-cash charge for our asbestos program of $37.3 million, primarily for a revised 15-year protection of defense costs for the period 2009 through 2023. Key drivers of Q4 performance, once again, we had strong operating performance in both business groups.

We had a tax benefit due to a net change in valuation allowances at year-end, and we had earnings per share aided by an approximate 8% reduction in fully diluted shares versus the year ago quarter. In terms of items affecting EBITDA, we took a 6.7 million settlement reserve on a legacy power project in Ireland in our Global Power Group. We took a $9 million provision for restructuring in our Global Power Group for rightsizing employment levels to support what our anticipated workload would be for 2009.

We also had unfavorable currency movements mainly to the weakness of the British pound from Q3 to Q4. We had 14.7 million in foreign-exchange transaction losses in our E&C Group and 12.5 million unfavorable impact relative to Q3 of 2008 as a result of translation of earnings of non-US operations into US dollars for reporting purposes also in our E&C Group.

Starting with slide five, specific Q4 details. Our Q4 adjusted net income was 41% above the average quarter of 2007. We had adjusted EPS of $1.03 per diluted share. This was driven by strong operating performance in both business groups, results were aided by 24.1 million of net change in tax valuation allowances and Franco would you provide with some details on this please.

Franco Baseotto

Thank you, Ray, and good morning to everyone. As we highlight in our disclosure, our quarterly and annual effective tax rate is impacted by two key factors. Firstly our geographic distribution of taxable earnings jurisdiction, which have different tax rates, and we also had changes in valuation allowance, which has been established again by our deferred tax assets. In terms of process, each quarter we perform a detailed review and analysis of our valuation allowance and this is done in conjunction with our external auditors. This is based on the guidelines set forth in FAS 109 and as well as the relevant evidence which is available to us at the time of such reviews.

As part of the reviews that we performed in the last quarter of 2008, we determined that a change in valuation allowance to allow our non-US subsidiaries was required which resulted in 24.1 million of tax benefit, which was recorded in the quarter. If you exclude this item, our expected tax rate for the quarter would have been equal to 17.8%, and as Ray mentioned, for the full year 2008, we reported a 19.4 effective tax rate, which is in line with the tax guidance that was provided at the end of the prior quarter.

Ray Milchovich

Thank you, Franco. Turning to slide number six, and now turning to the performance of our Global E&C Group, a strong operating performance partially offset by the impact of two items, and I am going to turn to Franco to explain these two items as well. Franco?

Franco Baseotto

The two items that is highlighted on the slide are transaction losses and translation exposure and these are two separate items, which however have a common denominator in the unusual volatility of exchange rates, which we experienced in the last quarter of 2008 with the strong appreciation of the US dollar against the European currencies and particularly the pound. Starting with transactional losses, they originated from two items. We have losses on company transactions, mainly associated with the repatriation of cash from our foreign subsidiaries, and we also have losses from the valuation of cash balances, which were held mainly in British pounds for contracts executed by our UK operating unit outside of UK.

Now the open positions that generated these exposures, represented a relatively minor component of our overall exposure to currency movements which we hedged virtually all of our contract exposure to foreign currencies at the time of contract inception. And as I mentioned, the unusual moment in exchange rates amplify the currency effect in the last quarter of last year. With respect to translational exposure, as I said, the impact on our US GAAP financial restatement of the translation into US dollar on account of the subsidiary which we bought in another currencies, and as you know we have significant operation outside of the United States and particularly in Europe, and therefore moment in the euro and British pound rate versus the US dollar can and do impact our financial statements.

And although the average exchange rate for 2008 was very similar to those experienced in 2007, as I mentioned, there was a significant volatility in the last quarter. The US dollar appreciated against both the euro and the British pound and this resulted in an unfavorable impact in terms of translation relative to the third quarter of 2008 for our Global E&C Group of $12.5 million.

Ray Milchovich

Thank you Franco. Turning to slide number seven, and turning to our Global Power Group’s performance, as the slide shows, we had strong operating results offset in the quarter $15.7 million of items. First item was a $9 million restructuring reserve that we took for rightsizing employment levels to match expected 2009 workloads. This rightsizing has already begun and will take place throughout the first half of the year. Secondly, we took a $6.7 million reserve for settlement on the legacy power project that we had spoken about in the past in Ireland, which was a long-standing issue for us to get resolved in the business. We had currency translation in Global Power was not material to its EBITDA in Q4. And Q4 EBITDA margin on Foster Wheeler scope IN GPG adjusted for the above items was 13.8% versus 12% for the average quarter of 2007.

Turning to slide eight and now turning to our E&C group and new orders and backlog, first of all, new orders and backlog declined sequentially. However, the fundamentals remain strong but what we see in the marketplace is clients taking a more measured approach to project releases. I will speak to that in more detail in two slides. But in terms of the tone of the market, we see very large prospects that we are pursuing that are proceeding but we see increased client tendency to release the jobs in phases, we see some levels of increased competition, and we see some pressure on margins and pricing.

Now, last quarter we made a lot of eight potential mega contracts, mega contracts defined by us as contracts providing us at least a 1,000,000 man-hours of potential liquidation opportunity, and we spoke about these contracts needing to be booked in either Q4 or Q1 to set up our 2009. What I would do at this point is asked Umberto della Sala to give you us a status report on these eight-member projects. Umberto?

Umberto della Sala

Okay, thank you Ray, and very good morning to everybody. I'll start with number one, the new project with Ecopetrol in Colombia, this is a major refinery upgrade. This was press released several weeks ago. Now I would like to mention that we had signed a contract for the full scope but what we have booked in the fourth quarter of 2008 is only the FEED, which is approximately one third of the overall scope. And we expect to book the rest of the project when the final investment decision will be made after completion of the FEED, when we present (inaudible). Project number two is a petrochemical complex in the Middle East. We had signed the complex for the FEED aware that it is typical of his client, we had received a limited notice to proceed, and there would be other notice to proceed as we move forward. So the overall project will be booked – we expect to book it in the first quarter of 2009.

The third project, the refinery project in the Far East, it is EPC type contract. The negotiations are going as we speak, so we expect a final decision of this project to be taken in the first quarter of 2009. Project number four is a refinery project in the Far East. We had signed the contract for this project and again as typical with this client, the project is proceeding through limited releases of work. So we had already booked the first release and we expect to book additional releases through 2007. Project number five is a petrochemical project in the Middle East. We have been verbally notified that the project is awarded to us, as well the project is taking longer than expected to be declared. Project number six is a project in the Far East.

We are actually in the bidding phase, the indication is that the project is proceeding, and we expect a final decision by the client. Project number seven is a refining project in Far East. This project was originally bid as a FEED (inaudible) during the bidding phase, which is taking longer than expected. The client has changed the strategy collaboration and they decided to go and split the project in two to go in a limited award on the FEED and then leaving the option open to bid competitively with EPCN [ph]. So we have lost the first phase but EPCN is still available to us. Project number eight, is the refinery project in the Middle East, this was lost also on contract. Ray, if you allow I can make a comment on the last project also, okay, so what is positive is the number of minerals in terms of FEED work more than doubled in the last quarter of 2008 versus the last quarter of 2007 and this inevitably is a good indication that market is still very active.

Ray Milchovich

Thank you, Umberto. Let me ask everyone to turn to slide number nine. And we will now turn to GPG. Q4 new orders and backlog declined sequentially, but differed from E&C. The tone of this market has slowed considerably. The weakness in the global economy is clearly a factor; however, in addition political and environmental sensitivity regarding solid fuel fired boilers had escalated, the decline in natural gas prices increases the attractiveness of that fuel in relation to coal and other solid fuels, and other concerns such as credit liquidity in the capital markets and plant costs have also been factors. Longer term, we are happy with Foster Wheeler’s position in this market.

We believe the world demand for electrical energy will continue to grow and solid fuel boilers will continue to fill a significant portion of the incremental generating capacity. We have a cost-effective environmentally responsible product, we have fuel flexibility of the CFE boiler that enables it to operate in a carbon neutral mode about when fired by biogas and or to burn a variety of fuels other than coal. Foster Wheeler boilers can be designed to incorporate supercritical technologies, which significantly improves efficiency and reduces emissions. And we are also in the process of developing a flexi burn technology that will enable boilers to operate in a carbon capture environment. So longer term, we continue to be bullish about our position in this market, but without question, near to medium-term, this market has slowed considerably.

Now, turning to slide number 10, and looking at new orders booked in Q4 in terms of Foster Wheeler scope. Let me first ask you to look at the graph for global power. What you see here is clearly a decline in orders both for the year and for the fourth quarter relative to the average quarter of 2007. And as we previously reported, this is reflective of the weakening in this market, which we continue to experience as we begin 2009. Now I would like to turn to E&C because I think the story here is materially different. First I would like you to look at the data and the data will show a weak booking quarter in Q4, which lowers the average for the quarterly bookings in 2008 versus 2007.

However, given the activity in the marketplace which was described by Umberto when he described the award of the client on Ecopetrol, also in his remarks on project number two and project number four, what we're seeing is, we're seeing a significant change in terms of clients’ willingness to provide the full release which we would book in the backlog. And what we getting is very incremental releases of very large projects, which we have every reason to believe, will proceed but of course given our booking policy we only book that which is – that which is released that we have a signed contract for.

Therefore, when we look at the data, we don't think in this case, the data fully reflects the position of the business in terms of the backlog support behind the business as we go into 2009. And specifically, if we just take the incremental amounts that we believe will be awarded us, assuming project number two and project number four proceed as planned, we will almost double the amount of bookings that we enjoyed in Q4. And actually what this would do is take the average quarter of 2008 and have it be above the average quarter of 2007 in terms of bookings in the period. So I think it needs to be understood by looking at the business this way why the way we view the E&C business today and specifically the market is materially different than the way we view the markets supporting our Global Power Group.

Turning to slide number 11. What we see here is the backlog sitting behind both businesses, once again dealing with Global Power first, we think the backlog is a good indicator of the strength of the business behind that business and it is a function of the market that we have already described. However, when one looks at E&C, backlog tells the same story. As I mentioned on bookings in that, if we are to make the same assumptions that I suggested on the previous slide, actually we finished 2008 with about the same level of backlog sitting behind the business as we enjoyed when we closed out 2007 and actually if we look at this on a normalized currency basis and the man hammers, we actually have more man-hours of backlog sitting behind the business, exiting 2008 than we did exiting 2007. So we see E&C positioned in a very different way than we see Global Power positioned as we enter 2009.

Turning to slide number 12, our cash position remains very strong. Our cash position exiting the year was at $798 million. We had a decline from Q3 primarily due to the following. We spent 485 million of cash on share repurchases. We chose to make 63 million of discretionary pension contributions. We had the opportunity and chose to retire 20 million of corporate balance sheet debt and we had an $84 million unfavorable impact of foreign currency translation that impacted the cash balance as well.

Turning to slide 13, our Q4 208 key takeaways are as follows. 2008 was the third consecutive year of record financial performance. We had record performance in both business groups. In Q4 of 2008, we were operationally sound but we were impacted by foreign currency transaction losses and foreign currency translation impacts. Our outlook for 2009 in our Global Power Group as we mentioned, revenues, EBITDA and margins will decline from the very good year that we had in this business in 2008.

Still however, EBITDA is likely to be strong relative to historical levels due to existing jobs and backlog and our programs are right sized employment levels in the business. In our Global E&C Group, we continue to see fundamental demand remaining strong, but clients are taking a more measured approach to project releases. Our 2009 results will be materially impacted by the timing of contract bookings that we have already described. And finally E&C is unlikely to experience the same level of EBITDA in 2008 as it did in 2009 for reasons that we mentioned. At this point, we will deal with your questions.

Scott Lamb

Operator, go ahead and poll for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Steven Fisher with UBS.

Steven Fisher – UBS

Great, good morning. Ray, wondering if you consider the scope bookings in power in Q4 to be a base level going forward. I'm guessing not since you said you are seen continuing weakening. And then I guess what level of bookings does your rightsizing assume?

Ray Milchovich

For power at this point, we have got one project left that we will book over the next 4 to 6 weeks that will impact the EBITDA in 2009. It is the only one that moves a needle in 2009. Now we have got bookings later in the year that are highly impactful on 2010 and beyond, but they really won’t impact the EBITDA performance in 2009. So that one project is the one that we are watching and that will take us either way in 2009, but as I mentioned, that is the only one now. Now, the rightsizing that we reserved for is for what we needed to do given the outlook we had for 2009. However, as we watched market, through the first half of the year, it may be appropriate for us to more get the market space where it is today because the market is just, it is this cold. And we have gone through every opportunity that fits what we do worldwide and frankly we are assuming a very successful hit rate on projects that proceed, but they either will or they won't. And so what we will do is that they proceed and if we are stable at this level then we will go into 2010 restructured as we will be by mid year 2009. If not, then we will take further action to right size the business so that the business operates as efficiently as it can. But the markets are off, without question. This market went cold on us I would say Gary beginning of Q2 of 2008 and it’s stayed that way. Next question?

Operator

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

Scott Lamb

We can't hear the question. Operator?

Operator

Your line is open.

Ray Milchovich

Operator, can you try that again? We cannot hear the question.

Scott Lamb

We cannot hear the question.

Operator

Okay, please hold.

Ray Milchovich

Operator, can we take questions?

Operator

The question has been withdrawn. Your next question comes from Jeff Spittel with Natexis Bleichroeder.

Jeff Spittel – Natexis Bleichroeder

Hi, good morning guys. I guess my question is related to the power group, you talked about being right sized in terms of capacity and headcount for the first half of 2009, does the rate of cost that you strip out of that business kind of coincide with that timing, can you give us some flavor for what the impact on margins could be there?

Ray Milchovich

Well, I mean the margins in backlog are set because they we booked in prior periods. So we have got a pretty good dashboard into the margins for the year. Now the restructuring that we are doing will take place in the first half because we're right sized as demand rolls off and it does that differently in different subsidiaries. Now as I mentioned, we will watch the market as things develop in the first half and if further steps are required, we will plan those in the first-half and execute those in the second half.

Jeff Spittel – Natexis Bleichroeder

Okay. And I guess related to your remarks on the stimulus package, my initial impression was it probably wasn't going to have much of an impact at all over the next couple of years, is that your general sense as you try to evaluate that business longer term, understanding that solid fuels are probably be a part of the solution but I guess, could you give us your first impressions of the possibilities there?

Ray Milchovich

Our first impression is that there is nothing in the stimulus package that is going to make a material impact on the demand for this business. What this business needs is this business needs world GDP growth to turn up, demand for electricity to increase, which will cause some of the factors working against the business right now to be mitigated. But right now, given the mood in the world markets in terms of anticipated GDP growth and therefore electricity demand, there is just no pressure on the system for people to make buying decisions for solid fuel boilers. Until that changes, I would say this market is going to remain weak.

Jeff Spittel – Natexis Bleichroeder

Okay. I guess final and related follow-up, you didn’t talk at in your prepared comments about the L&G market, I understandably really things have probably cooled down a little bit there, could you give as your take on what you are hearing on the ground in that market?

Ray Milchovich

Actually, that market segment is probably the segment that if anything we are more bullish about than any. We see no material decreases in demand. We still see clients very bullish to proceed with projects. We have one project in the group of eight that we are following very closely. There has been some delay in the award there, but the delay is not necessarily a financially driven delay. It is a delay for other factors, which in my view once resolved, there is a strong desire on the part of the client for that project to move forward. The economic regime is very favorable for that project and we think it is going to move. So actually, we remain very bullish about that market segment because obviously clients are taking a long-term view of natural gas demand worldwide and natural gas pricing that supports those installations given the length of time it takes to bring them out of the ground and frankly our demand right now is very strong in that segment.

Jeff Spittel – Natexis Bleichroeder

Great. That is helpful. Thanks guys.

Ray Milchovich

Thank you.

Operator

The next question comes from the line of Joe Ritchie with Goldman Sachs. Mr. Ritchie, your line is open. Okay. There was no response from this line. I will go to the next question from Will Gabrielski with Broadpoint AmTech.

Will Gabrielski – Broadpoint AmTech

Couple of quick ones, on margins and backlog, again with the Feed man-hours doubling year on year, do you guys have any sense on the margin break down and backlog right now, and I am sorry if this has been asked already, but within the E&C Group specifically, any color you can provide there would be very helpful?

Ray Milchovich

Yes, what I would say is margins and backlog are strong as you have seen what we posted in 2008. However, given the competitive environment that we have seen, I would say the last in E&C one to one and a half quarters and what we see today, competition has increased, and there is some pressure on margins in the market, and we assume that will continue to be the case while projects are in this mode of prolonged positives. I mean all of our competitors as well as us have added capacity during this four-year boom. As project releases get pushed out, that capacity is looking for a home and what you see in the marketplace is what we anticipate in terms of competitive activity. And so new business book is going to is coming under and in our anticipation will continue to come under some margin pressure. Umberto, anything you’d add to that?

Umberto della Sala

No, I mean that’s certainly right.

Ray Milchovich

Good, and we see the same thing in the power business. I'm it is just fundamental economics. I mean markets are off and there is going to be margin pressure and we are seeing that.

Will Gabrielski – Broadpoint AmTech

Within the competitive landscape, when you look at some of the smaller competitors and the difficulty in raising capital right now, does the landscape shift at all? If the capital markets remain this tight, are there competitors out there who simply won't be able to bid on bigger projects at some point, don't have the bonding capacity, give a sense of what that looks like right now?

Ray Milchovich

I would say the folks with whom we compete against on the E&C side, there is no change with regard to who is and is not advantaged because of what is taking place in the global economy. So I mean the competitors with whom we compete, it is the same as it has been. There is no impact on one of them, two of them, some of them because of the reasons that you mentioned.

Will Gabrielski – Broadpoint AmTech

Understood. Did you guys give an actual number of man-hours and backlog and if you did, I miss it, I'm sorry?

Ray Milchovich

We disclose that number in the K.

Franco Baseotto

Yes. It is reflected in the K, and it is 12.6 million man-hours at the end of December 2008.

Will Gabrielski – Broadpoint AmTech

Okay, thank you. And then lastly maybe just some comments on the LNG market. I know you have a good relationship with one of the bigger petro clients out there, are you seeing any changes in activity, specifically on any particular projects out there that you guys are focused on, has anything changed over the last four months, three months?

Ray Milchovich

I really don't have anything to add other than what I just commented on to the other individual who asked the question. That market segment we continue to remain bullish about. We have not seen a change in client behavior. Clients still seem extremely determined to move forward with the projects. They are looking through the near term global economic issues because as you know given the amount of time it takes for those projects to go from concept to first gas, it is a number of years. So we have not seen any decline in anticipated demand. We remain bullish in that segment.

Will Gabrielski – Broadpoint AmTech

Okay, I apologize if I did miss that earlier. Lastly, on the balance sheet and uses of cash, obviously market valuations coming down, any particular areas of focus right now or things that we can look forward to in terms of end markets that you can get to look into or at least increase your competency within right now?

Ray Milchovich

In terms of uses of cash?

Will Gabrielski – Broadpoint AmTech

Right. And then on the acquisition front, private market valuations coming down, I would imagine that there is a number of attractive opportunities out there, any change in strategy or any markets that you guys are looking at?

Ray Milchovich

There is no change in strategy. We have certain targets that we are focused on on the M&A side. I believe you will see an announcement very soon from us on one, there are several others that we are pursuing. The focus is the same, the strategic objectives are the same as we have articulated in prior periods. And that is our number one objective for cash.

Will Gabrielski – Broadpoint AmTech

Thank you.

Opera Operator

Our next question comes from the line of Andy Kaplowitz with Barclays Capital.

Andy Kaplowitz – Barclays Capital

Good morning guys. Can you hear me okay?

Ray Milchovich

We do fine. Thank you.

Andy Kaplowitz – Barclays Capital

Okay. Ray, you mentioned around power that clients really hadn't not much pressure to make decisions and so I guess I would ask you that in the E&C segment, do you think that they – I mean I know what you're saying that there is a different thing going on there but as long as the global economy is as weak as it looks, is there really pressure to make decisions quickly for those bided projects?

Ray Milchovich

A good question, let me answer it this way, Andy. My view of the global power market is that given the politics of solid fuel burning, it almost seems to me that as though there need to be pressure on the system to force clients to make the buying decisions, to install base load solid fuel will burning boilers. Without that pressure, it is easy for clients to just concede to the pressures to do nothing, or the pressure to utilize other more, I will call them politically acceptable fuel choices. On the E&C side, I see client behavior very differently. Clients seem to still be very interested in what they consider to be the opportunities of the projects, it is not the pressure of the project, it is the opportunities that the project offers to the clients strategically and economically in the out periods.

I see project delays occurring almost because the current economic environment just causes everyone to take pause and do I really want to proceed with this now or is there a reason to wait. And it is almost like the whole award process has just slowed two or three 3 levels. Projects aren’t – they are not stopping, they are not being cancelled, clients remain optimistic about the opportunities of the project, but the award process seems to us that it is just simply slowed down because I think in fairness, these are huge investments, and clients are simply taking pause and asking themselves the question, do I really want to do this now? And I think this is also the reason why we are seeing the projects awarded in segments.

So it is a different dynamic Andy that I see in the power market with client behavior and the E&C market. And I have spent – Umberto and I have both spent a tremendous amount of time over the last number of weeks with clients in the marketplace because let's face it our near term and our year is a function of what we are booking now. Umberto, anything you would add or anything you would see differently than what I just described?

Umberto della Sala

Well, basically I would like to add another comment, the issue is not in the majority of cases we are dealing with, the issue is not whether to go ahead with the project or not, but when is the right time to buy, because it is a fact that material prices are going down, and clients are trying to decide when is it the right time to buy or to proceed with full-speed investment. And the indications that we are getting is that everybody is trying to target the second half last quarter of 2009 as the best year to start buying. And by the way this also reflects the way the projects are released. Till two months ago, typically together we received, we also had the procurement of long lead licenses with the consumer about delivery time, and so we were also providing fulfillment services together with the FEED activity. Today we have seen more early procurement of long lead items. The clients prefer to proceed with the FEED and wait for the market to go down before making the first step into the (inaudible). But in terms of the strategic decision of whether to go ahead with the investment, I believe so far we didn't see the strategic decision being fulfilled.

Andy Kaplowitz – Barclays Capital

Right. The environment that you have described, do you thin it is still reasonable? I mean I obviously see what you expect but for projects two and four, I think it is reasonable that these clients will make the decisions in the timeframe you suggested even though we have a moving target here with the global economy?

Ray Milchovich

At this point, Andy, we have got no indication from those clients that they're not going to proceed with the project and if they are not going to release us just enough to keep moving. But basically, they are keeping their options open. What they are doing is, it would be very inefficient for them to have us proceed and stop and they know that. So at this point there is every reason to conclude that we will proceed with these projects throughout 09 and beyond but I think what will happen is we will get the award in slivers. It'll be just enough to keep us going through that period of time because what this does is this allows the clients to keep their options open. And so basically the backlog we are going to have behind the business is going to be very adequate to run the business very well, but it is going to be delivered to us on a just-in-time basis, if things continue as they are. And it is a paradigm shift in terms of the way projects get awarded and the relation of backlog to revenue ratios behind the business and we have just got to live through that, and what we have to do is make sure that we explain it well so that folks can understand it. But that's the changes we see, but we have no reason to believe Andy that they are not going to proceed.

Andy Kaplowitz – Barclays Capital

Okay, that's fair. Thank you. But one thing when I look at a quarter, I look at the new awards, it looks like there wasn’t many small and mid-sized projects in there. Could you comment on the size of the projects, sort of what you see with short of the small and mid-sized stuff, which in fairness has been a decent portion of your backlog for a while?

Ray Milchovich

Umberto?

Umberto della Sala

Yes. Our destiny is not only related to the big eight, we have hundreds of projects going through the machine as we speak. So, yes, we have got a number of those smaller awards and medium awards which are the projects, which keep our machine busy. What I can tell you is we have seen a lot of activity in the FEED compared to our basic design FEED type work, not only related to the big eight, which as we said before is a good indication that the market is not there. The client is still looking at investments, and they are buying options to proceed or not. So I do know if this answered your question but we have been very high number of projects which have been booked and are going through the machine and will be booked in addition to the delay..

Andy Kaplowitz – Barclays Capital

I'll take it that does. Just shifting gears to power, the question I have is around, if you look over the next couple of years, and let’s assume that things don't get better for a while, the business is very different than it was just a few years ago obviously, and so what I think what I was struggling with a bit is what it would look like if we have services seeing downturn in power, could you comment at all on what you would expect from the power business over the long term if power markets don't come back for a while, maybe in terms of margins or any sort of color you could give us on what it would look like if it stayed pretty bad for a while?

Ray Milchovich

Frankly, Andy, this is a reinvented business for us. And when I say that, if I look at – I mean this is a business that got the company in trouble in the late 90s. So I mean this business was leaking when we started the restructuring. Now my frustration is the team that runs this business today has done in my opinion an outstanding job of remaking the business and they put the year up in 2008 and they were in that table, I mean they had an outstanding here. Now that very same team that fixed the business is restructuring the business, and what we are doing in addition to restructuring the capacity to right size it for 2009 is we are looking at 2010 and we are saying if this continues, we in addition to restructuring, we need to change the business model, and we need to adopt a much more flexible model that can move in and out of the cycles and move in and out of these cycles efficiently.

Frankly, I'm not confident that I know what that looks like yet, to say what I think I can do because we haven't finished that work yet. So to say what that business looks like in a prolonged downturn, it is not that I don’t want to say, I just don't know, I'm not comfortable in my mind that I know what it looks like yet, because what I am going to, I am going to do that in a traditional way. We are going to challenge the model and see if we can get the business to be much more flexible such that such that it can take the cycles and still perform in a better way. And I can get conked that this team did a heck of a job fixing the business and I think what they are going to do is they are going to do an equally good job restructuring the business and I think we'll probably be able to answer that question, Andy, by the second half of the year, but not now.

Andy Kaplowitz – Barclays Capital

Okay. That is fair, thank you.

Ray Milchovich

Thank You.

Operator

Our next question comes from Joe Ritchie with Goldman Sachs.

Joe Ritchie – Goldman Sachs

Good morning, everyone. Can you hear me?

Ray Milchovich

Can hear you now, Joe.

Joe Ritchie – Goldman Sachs

Fantastic, great. So thanks for taking my questions this morning. The first question is really relating to the eight mega projects, and I'm wanting a little more clarification on the few projects that you have, the one that you have notice to proceed. On these projects, at what portion – when do you believe that you will be – at what point do you get to the point where you are going to be – actually (inaudible) with the question, at what point are you done with anything about man-hours that you are expected to work on those projects and what point will you then be needing to go back to your owners in order to get a new contract for the project?

Ray Milchovich

So in other words given how much is released, when do we run out of released work for the teams, the dates when that occurs, I don’t specifically have that at my fingertips, but I do know if Umberto does or not. Umberto, do you know the answer to that?

Umberto della Sala

Okay. Let me comment. First of all, on both processes, we already have a contract for the full scope. Now both clients, these are difficult areas, they release you in pieces. That is not abnormal, it does not affect an unusual condition in the market, it is normal practice with this client. Now on project number two, we have been relieved to start the first phase of the project, which is basically mobilization of the project field, and this is standard procedure. And we are going to be the lead for the full FEED in the first half of 2009. So I don't expect this project is going to go ahead. It is a FEED, the client is willing to proceed, so I don't expect that we will have an issue of running out of man-hours, and we won’t have the need to go back to the client to ask for additional revenues. This project is proceeding as expected, will not have any issue. Project number four, we already started activities on project number four, and again there are still some gauges to be passed which are (inaudible) we know how they need to be managed, they have been projected to reflect our workflow projected for 2009, so I don't expect any real issue on staffing the project or going back to the client for additional revenue. That is where it stands.

Joe Ritchie – Goldman Sachs

Okay, all right. Great. The second question I had, I wanted to walk through your backlog and how your backlog is rolled over from period to period, for instance, when I took a look at the fourth quarter backlog, your beginning backlog was about 7.3 billion, you booked about 1.6 billion in revenues, new works for the period were approximately 580 million, it would lead me to believe that your backlog would have ended at about 6.2 billion instead of the 5.5 billion that you are at today, it looks like you took an adjustment of about 700 million, can you talk to us a little bit about what’s in that adjustment, is it mostly currency translation, or are there any cancellations that are included in that backlog would very helpful, any clarity for that?

Franco Baseotto

You are referring – this is Franco Baseotto – backlog measuring future revenue evidently and you are correct. Most of the adjustments which Q3 to Q4 is actually translation exchange. And as we discussed on EBITDA and I would have to say on backlog it’s probably amplified. Our backlog which is denominated in European currencies, they are always translated at the end of the year rates, and between Q4 and Q3, we had a significant movement in those exchange of 700 million approximately is the translational impact associated with the currency movement on our backlog.

Ray Milchovich

Let me share another word to look at this, would be more in line with the way we look at it, especially as we go into 2009. E&C in 2009 nine is going to be a function of the timing of bookings and the ability to liquidate the capacity that we build up over the last three to four years, okay. So we’ve got to have the backlog, we’ve got to have the man-hours available behind the business to liquidate. It is got a huge impact on the release of corporate profit and also on the ability to cover the overhead structure in the business. We finished 2007 with 13.4 million man-hours in backlog, and in 2008, Franco, we liquidated 18 million man-hours, 18-ish million man-hours we liquidate a year. We finished 2008 with – Franco, did you say 12.7?

Franco Baseotto

12.6.

Ray Milchovich

12.6 million man-hours in backlog. However, as I mentioned in my prepared remarks, if we assume the two projects that Umberto just described proceed and so therefore we assume that the available backlog to us, then the number would be 14.9 million man-hours in backlog. So we would actually have more backlog available to the business for the business to liquidate its capacity in 2009 that we had in 2008 which is the reason why we continue to have a bullish view of the market to support the E&C business. Even though it is taking longer, even though clients are taking some level of pause, even though the mood in the market is different, these projects continue to proceed, and so that is the way we look at what sits behind the business to support 2009 in E&C. Hopefully that’s helpful.

Joe Ritchie – Goldman Sachs

No, that’s helpful. Great, thanks for your color today.

Ray Milchovich

Thank you.

Operator

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

John Rogers – D.A. Davidson

Hi, good morning. Can you hear me?

Ray Milchovich

We can hear you this time, John.

John Rogers – D.A. Davidson

That’s good. Good, thanks. A couple of questions, first of all, Ray you mentioned that you’ve been out visiting with clients and trying to get a sense of market recently. As you look at your skill set and where the market opportunities are over the next two and three years, is there capabilities that you need to add or could you comment on where you’re going to be directing your energies and your efforts?

Ray Milchovich

Well – I mean, it’s still primarily downstream oil and gas to LNG in upstream review, you see opportunities somewhere else. Well – I mean, unfortunately, John, we’re function of who we are so we tend to see clients that are participating in the segments where we’re strong, and the conversation tends to be focused around business that we would be qualified to do because they just work that way. We spend a tremendous amount of time with clients on the downstream, coking, refining petrochemical LNG side because that’s where we’re strong. We spend a much more time there than we do on upstream because we’re not strong enough in upstream. We continue to see opportunities in the segments that we serve. Now, we’re attempting to grow our serve markets and we’ve done quite a bit there over the last three years, but we’re still strong in years I mentioned; and we continue to see opportunities in those areas, specifically. I mentioned earlier that LNG liquefaction is a segment that is growing for us pretty dramatically and we continue to see the long-term view there by clients as very, very bullish. So that’s a segment that we think will continue to grow for us because of the success that we’ve had on Train 5 and that we’re currently having them tuned up [ph]. So, Umberto, would you add anything to what I said to John’s question?

Umberto Della Sala

No. I agree. I don’t believe we’re pointing to deem as defined to different businesses which we don’t understand why.

John Rogers – D.A. Davidson

No, and it’s now – I mean –

Ray Milchovich

What you see John is we’re very close to announcement on an upstream acquisition. It’s relatively small but it’s the beginning of what is intended to be as series of acquisitions that will give us critical mass in that business, which hopefully will, two, three, four years from now have that business segment to be one of our premier segments. But we’re years away from being able to take our current position and roll that into a segment that is as major for us, and so as the others that I mentioned.

John Rogers – D.A. Davidson

Okay. But that’s helpful. But that’s where you’re directing the acquisition, so that’s the idea of opportunities?

Ray Milchovich

Yes. And as more clients want to spend time with us is because it’s where we bring value to them.

John Rogers – D.A. Davidson

Okay. And at this point Ray, I mean, given the evaluation in the market, given everybody’s efforts hang onto cash, I mean, how big enough acquisition will you look at there. How much are you willing to commit to something like that?

Ray Milchovich

It depends on the opportunity, John. I mean, we’re pretty pragmatic. If the opportunity is there for us to, in a very material way, enhance our company’s position over this nine and ten period, which we think is going to be probably a non-growth period. We’re very comfortable in making a move. It might be economics have to clearly be favorable and we’re going to be buying something that we get reasonable transparency inside of. We’re not afraid of something that’s broken. We just want to know the degree in which it’s broken so we know what the task at hand is, and so we can price it. So, I mean given my decision to stay, we’ve got a period here where we’ve got – we got our senior team pretty well set and in placed, and then we’re pretty open to whatever we need to do to enhance the company’s position. Our objective is to make nine and ten as absolutely effective as they can be but at the same time position the business for the next run which we think is going to come, because we think there’s another run that’s going to come as soon as we get through this macroeconomic issue that we’re dealing with worldwide. And so, what we want to do is be in position for the run.

John Rogers – D.A. Davidson

Okay, great. Thank you.

Ray Milchovich

I hope that’s helpful. Thanks, John.

Operator

Your next question comes from Barry Bannister with Stifel Nicolaus.

Ray Milchovich

Good morning, Barry.

Barry Bannister – Stifel Nicolaus

Hi. Give the criticality of currency in the quarter, it would have been helpful to have had an appendix with the currency breakdown on a more detailed basis, but would you tell us that E&C scope backlog excluding the FX adjustments in the fourth quarter ’08.

Franco Baseotto

E&C backlog normalized as its rate would have been $140 million and higher on a scope basis at the end Q4. Okay and that looks –

Barry Bannister – Stifel Nicolaus

And so, I noticeably – yes, when I look at the man hours it was up about 2% year-on-year, in terms of the dollars per man hours is slightly below the run rate of recent quarters. When you talk about your profitability pressure from competitors, are you backing off of your 23% E&C scope EBITDA margin and your double-digit global power EBITDA margin?

Ray Milchovich

In ’09 Barry?

Barry Bannister – Stifel Nicolaus

Yes in ’09 –

Ray Milchovich

So in other words, what do we think ’09 margins are likely to be in both businesses? Yes, I think we’re going to have more –

Barry Bannister – Stifel Nicolaus

– around your prior goal of 23% and double-digit throughout, respectively.

Ray Milchovich

First of all, I think we’re going to see margin pressure in both businesses. I don’t remember saying that we’re going to see 23% margins in E&C on ’09. And I think we’re going to see margin pressure in both businesses vary. I think more so in power but I certainly don’t see single-digit margins in power.

Barry Bannister – Stifel Nicolaus

All right, so bigger than a bread box, 23% was the ’08 goal. You did pretty well on that goal. Any idea in ’09, what you think you’re seeing in terms of given the slowdown in Asia, for example, and the increasing competitors from Asia? You did lose one of the FEED Awards. I’m sure a competitive bidding out there is intense. What are we looking at here?

Ray Milchovich

We’re going to see some level decline and I can’t quantify it yet because we’re still open enough with business yet to book that will be liquidated in ’09, that I’m uncomfortable forecasting a number, and I think Umberto is too. Umberto?

Umberto Della Sala

Yes, it’s too early. And by the way, we can have our goals and gruel on which margin would be project, so each project is different. So it’s too early.

Barry Bannister – Stifel Nicolaus

Yes. The tax rate in ’09, it’s moved around so much and now that your Swiss has come to change, we just need a number on what tax rate to expect on a book basis. And then, you did do evaluation allowance. You said it was an overseas asset. Was it the Chilean and Italian projects that are really non-core and were they a really material contributor to the fourth quarter pending the receipt of the 10-K?

Franco Baseotto

Okay, Barry. With respect to our effective tax rate, first question, what would be our guidance for 2009? We appreciate that it’s still very preliminary because it very much depends on geography of earnings but I would say it’s low to mid-20s, that would be – that is my expectation at the moment and these weeks with domestication is not impacting our effective tax rate in 2009. Valuation allowance that we reversed at the end of ’08 was not related to our Chile and Italian asset. It was actually European asset, Finland, for which we had previously disclosed and we had established a valuation allowance.

Barry Bannister – Stifel Nicolaus

And I know will get the case soon, but Chile and Italy, any idea what the profit contribution of those two individual entities was because that has a material impact on the quarterly operating margin of E&C and GP?

Franco Baseotto

On the Italian build, own and operate, we had some items there. You will see in the K and related to tax changes, which have impacted a bit of the profitability of the Italian build, own and operate. But again, this was not operating. This was really tax-related in ’09, which would go back to a more reasonable run rate, and I am expecting a pickup of equity earnings in ’09 compared to ’08.

Barry Bannister – Stifel Nicolaus

All right, and Chile?

Franco Baseotto

I’m sorry.

Barry Bannister – Stifel Nicolaus

Chile? You said Italy and what about Chile?

Franco Baseotto

Chile was not materially affected by movement in either electricity or other items, and we are not expecting material changes going forward in terms of profitability coming from the Chile and build, own and operate equity investments.

Barry Bannister – Stifel Nicolaus

Okay, thank you.

Franco Baseotto

Thank you.

Operator

Your next question comes from Brian Chin with Citi.

Brian Chin – Citi

Hello?

Ray Milchovich

Good morning.

Brian Chin – Citi

Good morning. Can you hear me?

Ray Milchovich

I hear you just fine now, Brian. Thank you.

Brian Chin – Citi

Great, thank you. On the share buyback, it looks like you’ve gone through about two-thirds of the authorized amounts. Are you intending to continue growing through what you have authorized and exhausting what you’ve authorized for share buybacks or are you thinking of using off the pedal? Give us just a little bit of flavor here.

Ray Milchovich

We actually stopped at a level where we wanted to keep our cash balance where it was because as we mentioned, we had an opportunity to buy back some corporate debt that we didn’t have any opportunity based on its terms to buy back when we did the restructuring and we chose to make voluntary pension payments and we want to keep the cash at a certain level. My answer, Brian, would be it’s simply a function of other opportunities. We’ve indicated before that we’re active in M&A. In this market, we want to be very comfortable with the level of cash that we’re keeping, and so we stopped at this time until we get a better picture of just what our cash needs are going to be for M&A. Once we do that, then we’ll consider additional share repurchases; but at this point, we stopped at where we wanted the cash to be given our M&A plans.

Brian Chin – Citi

Great. Thanks a lot.

Operator

Your next question comes from John Emerich with Ironworks Capital.

John Emerich – Ironworks Capital

Thanks. Can you tell me where the $50.7 million charges are in the P&L, the $50.7 million and ditto the valuation allowance reversal?

Franco Baseotto

Valuation allowance is on the tax lines. The $9 million restructuring charge that we drew in Global Power is $6.6 million in cost of operating revenue, $2.1 million in SG&A, and $300,000 in other deductions, and the $36.7 million is cost of operating revenue.

John Emerich – Ironworks Capital

Thank you.

Operator

Your next question comes from John Walthausen with Walthausen & Co.

John Walthausen – Walthausen & Co.

Yes, good morning.

Ray Milchovich

Good morning.

John Walthausen – Walthausen & Co.

With the issue that in the engineering sourcing business, price competition has become more intense. Is that intense competition broadened to other issues like the amount of working capital you would need to commit in those projects and the amount of risks that you will be asked to bear versus client risk?

Ray Milchovich

No. Not in any material way. And what goes to our (inaudible), I wouldn’t say the competition is much more intense. I would say there’s an increased level of competitive activity, but I wouldn’t say we’d gone from what has been an outstanding market to – we’ve done a 180 to intense competition. I wouldn’t say that. Frankly, I’m very happy with what we’re winning, what we’re not, our success rate, our win rate, and the terms of the contract that we’re booking. It’s just that, I mean, we’re going to see some margin pressure there’s an increased level of competition. No more than that, but I don’t want to think that too negative because it’s not.

John Walthausen – Walthausen & Co.

Good. Thanks.

Operator

Your next question comes from Mike Sheridan with Cobalt.

Mike Sheridan – Cobalt

Thanks, gentlemen. My question’s been asked.

Ray Milchovich

Thank you.

Operator

You have a follow-up question from Joel Ritchie with Goldman Sachs.

Joe Ritchie – Goldman Sachs

Hey, guys. Given my inability to articulate a clear sentence earlier, I had to ask one follow-up question that I failed to ask earlier. Are your clients starting renegotiate any of your contract terms from projects that are in your existing backlog given that commodity prices have fallen so much or are you just starting to see owners wanting you to re-bid new projects?

Ray Milchovich

I’m just – Gary Nedelka here with me in Terryville. We’ve seen none of that on the GPG side. I’ll just turn to Umberto for E&C.

Umberto Della Sala

Yes. We have seen a couple of cases in which has declined the drive to negotiate existing contracts. Actually, the issue has been that most of the renegotiating the existing contracts is trying to negotiate the escalation provision of some of the existing contracts, and that’s all.

Ray Milchovich

And really, I would add to what Umberto said, to keep in mind is when you look at our portfolio on the NC side, it’s in large part a reimbursable portfolio. So, where you may hear of clients taking an aggressive approach to renegotiate the terms of a contract, the big opportunity for the client is in the situation where you’ve got huge LSTK lump-sum turnkey contracts where there was huge escalation built in the contracts or huge commodity price escalation assumed in the contracts. I’d say it’s much less so where you’ve got a reimbursable contracts like we have.

Joe Ritchie – Goldman Sachs

Then the portion – I guess, if there’s a portion that’s at risk, the portion that is at risk is the escalation provision because, I guess, it’s a reward. What you’re saying, Ray, on the pasture side, it really doesn’t matter because you’re not earning a significant fee on the procurement of materials; but potentially, on the escalation clause, is that there is some risk.

Ray Milchovich

Yes, exactly. So, it’s much, much, much less so for us because of the product that we sell and the type of contracts that we typically have in backlog, so it’s very different for us to the point that Umberto made. Now, what we are seeing on reimbursable contracts is clients’ interest to see that we’re capturing for them the commodity price decline in purchase materials and we’re, obviously as a responsible contract, that we’re attempting to do that for them and pass that savings on to them, and they’re taking a keen interest on that as you would expect. But where we see the big movements on the part of clients would be more typically clients with big lump-sum turnkey contracts that were priced and bid at just a very different economic time.

Joe Ritchie – Goldman Sachs

And do you see that the contract terms changing dramatically where you’re being asked to potentially bid projects more on a fixed-price basis or lump-sum turnkey basis than costless with you, which all industries have really benefited from over the last two years?

Ray Milchovich

I’d say there’s some of that. I mean, I wouldn’t say there’s a huge shift of that, but I’d say there’s some of that and we got very well-established parameters in terms of what we will and won’t do because it’s what we did to get the contracting discipline that we needed to fix the company. So, where it makes sense for us, we’ll do it and where it doesn’t, we won’t; and we’ve been successful bidding the business proceeding that way. So, I’d say some of that, but not a huge change from what we saw 12, 18 months ago.

Joe Ritchie – Goldman Sachs

Okay, great. Thanks, guys.

Operator

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

Ray Milchovich

Thank you, operator. Just to repeat our key messages, we’re very happy with our 2008, a third consecutive record-setting year. Our Global Power Group, we’re bullish about that business long-term, working a lean market period that we’re attempting to optimize as much as we can in ’09 and, obviously, in later periods. We’ll keep you posted as to what occurs there. In E&C, we’re seeing much different situation. We continue to be bullish about the E&C business. We continue to be bullish about the markets that support that business. I think we’ve covered what we see the near- to medium-term to be in that business, but we think that business has the opportunity to stay strong as we go through ’09 and go forward. Thank you very much for joining us and we’ll be in touch with you in the future. Thank you. Bye-bye.

Operator

That concludes today’s conference call. You may now disconnect.

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