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Foster Wheeler AG (NASDAQ:FWLT)

Q4 2012 Earnings Call

March 01, 2013 8:00 am ET

Executives

W. Scott Lamb - Vice President of Investor Relations & Corporate Communications

Jerry Kent Masters - Chief Executive Officer and Director

Franco Baseotto - Chief Financial Officer, Executive Vice President and Treasurer

Umberto della Sala - President, Chief Operating Officer and Director

Gary T. Nedelka - Chief Executive Officer of Global Power Group

Analysts

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Steven Fisher - UBS Investment Bank, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Robert F. Norfleet - BB&T Capital Markets, Research Division

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Brian Konigsberg - Vertical Research Partners, LLC

Tristan Richardson - D.A. Davidson & Co., Research Division

Robert V. Connors - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good morning. My name is Tiffany, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Foster Wheeler Fourth Quarter 2012 Investor Call. [Operator Instructions]

It is now my pleasure to turn the floor over to Scott Lamb, Vice President of Investor Relations.

W. Scott Lamb

Thanks. Good day, everyone, and thanks for joining us. Our news release announcing financial results for the fourth quarter was issued this morning and has been posted to our website at fwc.com. The presentation we'll use has also been posted on our website.

Before turning to our 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 with the SEC today.

We are hosting the call today from our office in Zug. Joining me here are Kent Masters, our Chief Executive Officer; Umberto della Sala, our Chief Operating Officer and CEO of the Global E&C Group; Franco Baseotto, who is our Executive VP, CFO and Treasurer; and Gary Nedelka, CEO of our Global Power Group. After our prepared remarks, we'll have time to take your questions.

Now I'll turn the call over to Kent.

Jerry Kent Masters

Thanks, Scott, and good day, everyone. Thank you for joining us on the call. What we'd like to do today is start with a quick review of the year and then move on to talk about the quarter in more detail. After my introductory comments, I'll ask Franco to summarize the consolidated and business group financial results and the company's cash position. Umberto and Gary will talk about their respective businesses, and then, I will comment on guidance.

So let's start with Slide #2, where you can see the highlights of 2012. There's quite a few comments here, but let me comment on a few key points. Our adjusted earnings per share was $1.54, up 8% from 2011 and in line with the guidance we had previously given. Excluding a noncash impairment charge we took on a non-core asset in the fourth quarter, the resulting earnings per share number for 2012 is $1.65, which is a 16% increase compared to 2011. Contributing to the increase in earnings per share were reduced share count, a 13% year-on-year increase in EBITDA in the Global Power Group and solid operating performance by the E&C Group.

Our Global E&C Group had a very good year, reporting record-level annual performance in 3 key areas: scope new orders, scope backlog and man-hours in backlog. Strategically, we completed the reorganization of the E&C Group to better support our growth strategy, and we completed 2 noteworthy acquisitions, one in November and the other at the end of December. The Three Streams acquisition helped us strengthen our position in the Canadian oil sands market, while the Yonkers acquisition supplements our existing pharmaceutical business by providing us with construction management capability in this market.

In the corporate and finance area, we also had a number of achievements, 3 of which are listed here. We invested about $91 million to repurchase 4.3 million shares. We entered into a new $750 million unsecured credit facility, increasing the size and improving the terms and conditions as compared with the previous facility, and we obtained an investment-grade credit rating from Moody's, which aligned with the investment-grade rating we already had from Standard & Poor's.

Moving on to Slide 3. You see a quick recap of the fourth quarter. Both of our operating groups had solid operating performance during the quarter, as evidenced by the 6% increase in consolidated adjusted EBITDA to 78 1 -- to $78 million as compared with the average quarter of 2011. However, our adjusted net income for the fourth quarter of 2012 was below the average quarter of 2011, due largely to the impairment charge I mentioned earlier and a higher effective tax rate. Franco will provide more color on those items in just a few minutes.

Another factor in the quarter was an asbestos-related provision that was higher than our recent quarterly run rate. This was an adjustment to the asbestos-related liability to reflect our revised estimate of future defense costs. This fourth quarter, asbestos-related provision should certainly not be viewed as any sort of quarterly run rate going forward. And on the corporate and finance front, you will see here the share repurchase activity for the fourth quarter. We invested $40 million to repurchase approximately 1.8 million shares.

Now I'll ask Franco to address fourth quarter financials in more detail.

Franco Baseotto

Thank you, Kent. If you turn to Slide 4, you will see the detailed results for the quarter. Our adjusted net income for the quarter was $28.9 million or $0.27 per diluted share as compared to $43.1 million or $0.36 per share in the average quarter of 2011. Now this decrease was due largely to a noncash impairment charge of $11.5 million or $0.11 per share in connection with a non-core asset. Also contributing to the decline in earnings was a higher effective tax rate that resulted from pretax items that had no tax benefit, including the impairment charge I just mentioned and the increased charge for asbestos. Consolidated scope revenues during the quarter were in line with the average quarter of 2011.

And now before turning to Slide 5, I want to give you some additional context for the quarterly results, specifically in relation to earnings per share numbers. I would ask you to look at Appendix 1 in the slide deck, where we have summarized the way we are looking at the results. At top of the slide, you see our reported numbers for the year and for the quarter. In the middle of this slide, you see our adjusted numbers, which, consistent with our definition, exclude asbestos-related gains and losses, $0.27 for the quarter and $1.54 for the year.

Now in the fourth quarter, we also have the noncash impairment charge that I just described. We think it's certainly reasonable to look at the company's performance for the year and for the quarter,, excluding both the asbestos charge and the noncash impairment charge, and that's what you see in the tables at the bottom of the slide. Earnings per share of $0.38 for the quarter and $1.65 for the year.

Now let's turn back to Slide 5 and proceed with the discussion of operating results for the 2 business groups. On Slide 5, you see the results for the Global Engineering and Construction Group. EBITDA in the fourth quarter of 2012 was $53.4 million, in line with the average quarter of 2011, as favorable timing and mix of work executed was offset by reduced profit enhancement opportunities, higher sales pursuit costs and lower equity earnings on partially owned power assets in Italy. Scope revenues in the fourth quarter of 2012 were $423.9 million, which is above the average quarter of 2011 due to higher volume of work executed. The EBITDA margin on scope revenues in the fourth quarter of 2012 was 12.6%, which is below the average quarter of 2011. The full year margin for the E&C group was 12.1%, which is consistent with the guidance we had previously provided.

Going now to Slide 6. You see that our Global Power Group reported EBITDA of $46.5 million for the fourth quarter of 2012, which is in line with the average quarter of 2011, as profit enhancement opportunity offset the impact of lower revenues and the decrease in equity earnings from a partially owned power plant in Chile. Scope revenues in the Power Group in the fourth quarter of 2012 were below the average quarter of 2011, primarily as a result of a lower volume of boiler work executed. The EBITDA margin on scope revenues for the Power Group was 20.5% for the fourth quarter of 2012, which is well above the average quarter of 2011. For the full year, the margin was 21.1%, which, again, is squarely within the range we have previously provided.

If you turn to Slide 7, you will see that our cash position declined on a sequential quarter basis, due in part to $40 million invested in share repurchases and $70 million related to acquisition activity. Cash flow for the full year reflects an increased use of cash to fund working capital needs, and we expect this trend to reverse in 2013. At the end of the year, we had $420 million remaining under our share repurchase authorization, and as we have said previously, we intend to be opportunistic in our share repurchases from quarter-to-quarter, taking into account a variety of factors, such as cash flow generation, share price and other potential uses of cash.

And I will now turn the presentation over to Umberto to talk about the Engineering and Construction Group.

Umberto della Sala

Okay. Thank you, Franco. Now turning to Slide 8. You see the chart for new orders in E&C, which totaled $866 million in scope revenue value. This is the second sequential quarter of record-setting new orders in the E&C Group, and it was primarily the result of the very large PMC contract we booked for the Kuwait clean fuel project. For the full year of 2012, the scope new orders amounted to $2.4 billion, which is also a record level on a full year basis.

Moving to Slide 9. We have listed some of our more meaningful awards during the fourth quarter. The first one, of course, is the contract I just mentioned. As you know, we announced it in December. The scope revenue value of the award is $500 million, so this is one of the largest scope awards we have ever won in the E&C Group. The clean fuel project involves the upgrade and expansion of 2 refineries to increase their combined throughput and to meet expected market demand for tighter specifications regarding the sulfur content of transportation fuels. Next is a 3-year framework agreement with Statoil for front-end engineering design work on future projects in Norway. We always welcome the opportunity to enter into such agreements as they demonstrate the good working relationship we have with clients and also because such agreements generally indicate that we have a very high probability of winning contracts for upcoming work with a client.

The other contracts on the list were not announced, but let me give you some description of these projects. In the third bullet here, you see an EPCm contract for a grassroots specialty chemicals facility in Asia. This is a client for whom we have previously done work in Europe, and this is our first job for the client in Asia. We had previously done the FEED in 2012, which rolled over into EPCm in the fourth quarter of 2012. Next on the list is a contract for the design and material supply of a delayed coker heater in the Middle East. We had previously sold a licensing package for this client in 2012 -- sorry, in 2011, and the heaters lie at the heart of the delayed coking process, and this is a very good business for us.

Moving down the list, you see a contract for FEED and EPCm for a cogeneration plant of an existing LNG facility in Asia. Now we have done work in and around this LNG facility in the past. And we have a local operation in this country, so the project was a natural fit for us. The final 2 projects on the list are for 2 different international oil companies, both of whom are long-term repeat clients for us. Both projects are focused on expansion of existing facilities in Asia, and we believe our ability to win the work was based on technical capabilities and strong relationships.

Turning now to Slide 10. You see the scope backlog for the E&C Group, which reached the record level of $2.2 billion and 17 million man-hours, reflecting the strong bookings over the past 2 quarters. On Slide 11, we summarize our view of the market. Market conditions have not changed much over the course of the past several months, so the market environment is definitely mixed, giving us reasons to be both optimistic and a little cautious. The optimism comes from the fact that we continue to have a robust prospect list and opportunities are emerging. The nod of caution comes from the fact that the timing of many awards continues to be uncertain and competitive pressure continues.

On that note, I will turn it over to Gary to discuss the Power Group.

Gary T. Nedelka

Thanks, Umberto. Looking at Slide 12. You see that we reported a relatively low level of new orders for the fourth quarter of 2012, reflecting further slippage of award dates for some of our committed key prospects from 2012 into 2013.

On Slide 13, you see the summary of the Q4 bookings. These projects represent attractive opportunities for us, but clearly, the new orders you see listed here are relatively small in terms of dollar value. However, as we look out over the next 12 months or so, we continue to have a number of committed prospects, and as a result of that, we expect material improvement in the pace of new orders over the first half of 2013. I'm pleased to report that we have been awarded 2 medium-sized CFB contracts: one, press released yesterday, was effective in January; and the second has been signed and effective February 28 of 2013.

Turning to Slide 14, you could see our backlog trend line, again reflecting the slippage of award dates for committed key prospects. On Slide 15, I have summarized our view of the market. Power generation markets globally continue to be relatively weak. Unsettled environmental regulations in Europe and a similar situation, coupled with low natural gas prices, in the U.S. have delayed or dampened the retrofit markets. And the markets for renewable power have been depressed in many regions due to overbuilding during the past decade and current government reluctance to continue subsidization.

Asia still offers the largest number of near- and intermediate-term prospects for solid fuel generation. The other bright spot for potential demand, as I've said previously, is the Middle East, which is showing real promise as a potential market for solid fuel power generation, specifically in the opportunity to burn petroleum coke and in some cases, coal. We also see some interesting opportunities developing in that region for gas and heavy fuel oil power generation. Our position as the unquestioned market leader in solid fuel flexibility continues to give us a competitive advantage in parts of the world that value and need this kind of power generation, although we are certainly continuing to face competitive pressure in our markets.

On that note, I will turn it back over to Kent.

Jerry Kent Masters

Thanks, Gary. Now if you turn to slide 16, you'll see our guidance for 2013. Let's start with the macro environment, where we are anticipating a continuation of a mild economic recovery globally. In this environment, we expect to see an increase in our EBITDA in our Global E&C Group. We also expect a decline in EBITDA in our Global Power Group, reflecting the low level of new orders that we had in 2012. In addition, we expect that EBITDA margins on scope revenues in both business groups are likely to be noticeably weaker in the first half of 2013 than in the second half of the year. The net result is that we expect the full year adjusted earnings per share in 2013 will be flat to moderately down as compared to the $1.65 figure of 2012. Again, just to be clear, that $1.65 per share number for 2012 excludes the asbestos provision and the impairment charge.

As for the business groups, we expect full year EBITDA margin on scope revenues for the Global E&C Group to be in the range of 10% to 12%. Also in E&C, we expect scope revenues to be up materially in 2013 as compared to 2012. In our Global Power Group, we expect the full year EBITDA margin on scope revenues to be in the range of 15% to 17%. In power, we expect scope revenues to be flat to modestly down in 2013 as compared to '12.

Now I think it's important to offer an additional comment here. When we take a longer-term view of the company's prospects, we believe Foster Wheeler is positioned for significant earnings growth in the years ahead, aided by the strategic actions we have taken and are taking to strengthen and expand each of our business groups. For example, the 2012 reorganization of our E&C Group, our continued focus on business line diversification and the penetration of our products and services into new geographies.

W. Scott Lamb

Okay. Thanks, Kent. Operator, we're ready to go to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Dudas with Sterne Agee Capital.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

So looking at your guidance range for '13. So if you look at net income, absolute net income in 2011 and '12 was about flat, I guess, and it looks like '13, the absolute net income, adjusting for whatever share repurchase, might -- should be down. Can you characterize maybe the lack of improvement in the earnings flow from either a mix or internal cost issues or was the market that much more competitive on the rapid new bookings that you received in your incoming margins, especially on the E&C side?

Jerry Kent Masters

Okay. Thanks, Mike. So I'll start with that, at least. So I think, I mean, you heard it when we went through the prepared remarks. So we are up in E&C and down a bit in the GPG business, and kind of the offset, we think, puts us about flat. And we've not built in any share buybacks into our guidance for that, and I would say it probably is -- we are up quite a bit in signings for the E&C business, and you saw that in the big bookings that we have, but a lot of that is over a longer cycle. So the Kuwait project, for example, it's a 5-year project, so we don't get a lot of benefit out of that in 2013. And I guess, it's fair to say, it continues to be a competitive market. The opportunities are out there, and some are moving forward, some continue to be delayed, but it is very competitive in the marketplace.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Franco, could you highlight what the $0.11 charge, what non-core asset that is and how many other non-core assets might -- you guys are looking at? I guess, this is part of the organizational restructuring and how you're looking at things. And then, as looking to 2013, is there a line item for asbestos charges or expenses through the P&L that we should consider relative to figure on our model?

Franco Baseotto

Okay. Your first question, Mike, just to be clear, the impairment charge is not related to the organization, we have been doing and we have completed for Engineering and Construction. This is an impairment charge that we have taken on a fully-owned "build, own and operate" facility in North America, and it also includes the potential consideration for the potential sale of the facility. Now the result of this charge is included in the consolidated result of our Global Power Group, is recorded as a depreciation expense, and therefore, you will not find it in EBITDA. But just to be clear, this is a non-core asset, "build, own and operate", fully on Global Power, so it's not to do with the Engineering and Construction Group. Asbestos, just before I give the answer regarding 2013, just to put the charge in context, it is important to mention a few things. First, our balance sheet position at the end of the year reflects our best estimate of next 15 years for indemnity and defense cost, net of expected insurance asset. And as you have seen at the end of December 2012, we had a liability of $275 million, recoveries from insurance of $136 million and therefore, net exposure, over a 15-year horizon, of $140 million. Now the increase we had in the liability in 2012 is primarily related to an increase in defense cost, as Kent has mentioned, and the reason is that we are seeing new claim filings that continue to occur and at a rate which is higher than what we had expected. We believe, however, that this is simply reflecting an increase in plaintiff attorneys really naming as large a number of defendants as possible rather than any change in the underlying quality of the claim. However, such increased filings will impact defense costs going forward, and this is what we have reflected in our liability. Now we are not pleased by the outcome, of course, of the early revaluation, but I think the important fact is that the indemnity is under control. And in this respect, we continue to pursue an aggressive defense strategy, and we continue to leverage our extensive job site records. Now for next year, what we have included in our guidance is the addition of a 15th year to our liability estimate. So we have included a run rate, which would be closer to what we had in prior years, certainly, compared to what we had recorded in Q4.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Excellent. My final question, then I'll get back in queue is, Kent, do you think that looking at 2012 and the amount of shares that you repurchased, was it a factor of -- was it share price, these acquisitions you made in the fourth quarter, working capital needs? Because it appears -- and do you anticipate those reversing to allow maybe more material opportunities in 2013?

Jerry Kent Masters

Okay. So from a working capital standpoint, I mean, we did see that move against us during the year, and we expect that to reverse during next year. And I don't really want to comment too much on buybacks. I mean, as we say, we're opportunistic. We look at the opportunity -- the other opportunities we have for cash, cash generation and share price. So I'd rather -- I don't want to get into commenting on what we will or won't do and try and compare '13 to '12 on share buybacks.

Operator

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

Andy Kaplowitz - Barclays Capital, Research Division

Kent, can I push you on the E&C margin guidance? 10% and 12% is down from what you guided to in '13 -- in '12 of 11% to 13%, and that's with probably revenue up $200 million to $300 million would be my guess. So it begs the question, just what's going on? Do you have incremental costs in '13 versus '12 in E&C, as you sort of realign your sales organization? Or -- I mean, it seems like you're saying that pricing is relatively the same, so do you have a utilization problem still in '13 versus '12? And why would margin guidance be lower on higher revenue?

Jerry Kent Masters

Okay. So I will -- Andy, I'll start on that, and then Franco can maybe give you little more details or to follow up that, I'm sure you'll come back with. So I think, I mean, we have signed a lot of business late in the year, and again, we said that spread out over the cycle of the year. But that also puts us in a position where we are not at the back-end phase of a lot of projects, where we have the opportunity for conversion of contingencies into profits. So if we execute well, that's a good opportunity, and we've got a good track record of doing that. But because we're in the early phase of projects, we don't have that opportunity in '13 or much less. The majority of our revenue and work is going to be in the front end of projects so we have less opportunity around that. So the cost -- so there is a bit of cost from, let's say, the reorganization, and we've said that when we've talked about this earlier in the year, that we had some costs that were going in, and we think we'll be able to take out over time, but there will be a period of time with a bit increased cost before we can take those out, and that does impact us slightly in 2013.

Franco Baseotto

And Andy, I would maybe add to what Kent has said, and certainly, the profit enhancement opportunity will have an impact in 2013, and Kent has said, it is really more timing than anything else. The other factor I would mention, there is a bit of portfolio impact in our revenues. And again, I'm not referring to your estimate of $200 million, $300 million, but certainly, revenues are going to be materially up, as we have guided. A portion of the revenue that we have booked in '12 and will accrue in 2012 are related to third-party costs, which are really not the supply of our -- 2013, sorry, the supply of our engineering services. For instance, materials that we procure for clients on which we earn a profit component. We record the scope, but the profit margin of those revenue streams is significantly lower than the profit margin that we are achieving on our engineering services. So this portfolio impact is another factor that is contributing, together with the reduced profit enhancement, to the guidance that we have given. Manpower utilization, you mentioned, and you are correct. Of course, we are going to have better utilization of capacity in 2013, which is going to impact favorably the margins. However, we are still going to have some areas of underutilization, particularly in the first half of the year. And as Kent has said, we have a modest increase in our sales pursuit and general overhead cost, which stem from the reorganization, as well as from the acquisition that we have recently completed, on a revenue basis. On a margin basis, however, of course, the impact of this cost is lower in '13 than in '12. So really, the reason why the guidance is flat to modestly down is portfolio and lower profit enhancement. The other comment I would make just, which is not really the margin on scope revenue, but it's more the absolute generation of EBITDA and the EBITDA growth, is the fact that a significant quote in '13 will start to come from Asia and other areas of -- with a low cost base, for which in terms of absolute profit on the man-hours that we sell, we have lower absolute profit than in other part of -- in other regions. So again, this is not really to answer the margin, but it's important in terms of the way you should think about the earnings guidance that we have provided. I hope that helps.

Andy Kaplowitz - Barclays Capital, Research Division

That does. Franco, let me follow up on one thing you said. In the past, I think you guys have said that utilization could help by maybe 100 to 200 basis points over time. Are you not getting that benefit in '13 yet? Or you're getting the low-end? I mean, what -- shouldn't utilization help by at least...

Franco Baseotto

No, no. As I said, Andy, utilization is going to help and is going to help both in absolute term as well as on EBITDA margin. However, '13, particularly the first half of the year, is still going to be -- we're still going to have areas of underutilization. So the margin impact of the underutilization is going to be lower in '13 than it was in '12, but we still don't have, if you like, positive contribution for over-absorption in '13.

Gary T. Nedelka

Particularly in the first half.

Andy Kaplowitz - Barclays Capital, Research Division

That's fine. Maybe I can ask this to Umberto. E&C backlog has been very good over the second half of 2012, obviously. As we look forward, you still said you have a robust prospect list. Do we still think -- last year, I think, was characterized by a couple of very visible contracts that got booked. Do we still think we could see book-to-bill close to 1 this year in E&C given the prospect list you have?

Umberto della Sala

Well, I believe so, I believe so.

Operator

Your next question comes from the line of Steven Fisher with UBS.

Steven Fisher - UBS Investment Bank, Research Division

It sounds like the utilization is the main reason that the second half E&C margins will be better than the first half. Is that the right way to understand it or are there other things as well?

Franco Baseotto

I think you will have, if we're talking about the E&C, both utilization as well as we should start to have those events that could result in profit enhancement opportunities because, as Kent has described, we booked very late in the year and so some of the profit enhancements are going to be certainly back-ended and in later years. So it's a combination of the 2.

Steven Fisher - UBS Investment Bank, Research Division

So is there any reason why that second half run rate shouldn't carry on into 2014?

Franco Baseotto

No. I think, again, we are not providing guidance for '14, but certainly, I don't -- I wouldn't see any reason why we shouldn't see that trend continuing into '14, both with respect to utilization and with respect to the profit margin on executed work.

Jerry Kent Masters

And as we go through the year, we would expect to sign business more on the even basis, so we don't really have that pattern. The portfolio would smooth itself out. Right now, we signed quite a bit at the back end of the year, and at least one of those is a very long-term project, so we've kind of got an unusual portfolio mix when it comes to timing at the moment.

Steven Fisher - UBS Investment Bank, Research Division

Okay, great. And then for Gary, how has the number of committed prospects changed over the last few months?

Gary T. Nedelka

Well, the ones actually that we -- that I've described in Q1 here were actually prospects that we had on the list through fall of last year. We thought that they would be in the last year, and they slipped to Q1. That grouping of prospects that I talked about last year has not -- they have not gone away, those prospects, so they still sit there. And as we go through this year, we do have other opportunities, newer opportunities, that would -- that are going into our sales funnel, and as I said, primarily, those are Asia-based.

Steven Fisher - UBS Investment Bank, Research Division

And I guess I'm wondering why hasn't the pickup in China activity helped move along some of these committed prospects. It sounded like some of those customers were waiting to see that improved growth in China and in the region.

Gary T. Nedelka

Well, that's right. But I think China seems to govern how Asia goes. And when China was looking at a slowdown and even considering whether or not they're going to have a hard landing, there are still some momentum that kept other parts of Asia going, Vietnam, parts of Indonesia, Korea. So there was a momentum that kept the orders that we even received going -- after China looked like it was slowing down. So China picking back up again, there may be a little bit of a lag as some of these -- as some of the prospects in the surrounding area start to catch up. But we are seeing an increase in confidence among the Asian clients and prospects starting to break loose and move forward.

Operator

Your next question comes from the line of Jamie Cook with Crédit Suisse.

Jamie L. Cook - Crédit Suisse AG, Research Division

Three questions. One, Franco, can you just give the dollar amount associated with what you guys are spending on Foster strategic initiatives, or whatever you want to call it? The second question is, if you could provide color just on how much variability we should expect between margins in the first half of the year versus the second half on E&C. And then my last question, just if you could elaborate on the competitive environment. In particular, some of your peers are talking about better pricing in the United States. It sounds like it's more in the construction side, which, I guess, you wouldn't see the benefit. But can you talk about your prospects in the U.S., whether it's, in particular, on the petrochem side and whether or not you feel like your lack of construction exposure will be an issue for Foster this cycle?

Franco Baseotto

Okay, Jamie. I think I'm going to disappoint you a bit on the first 2 questions, and I hope Umberto is going to make it up with the third one. So the dollar amount of the E&C reorganization cost, again, we said it's not material, and it's certainly not material. So I don't want to say that this is the reason why of our margin guidance. It's certainly not a tailwind, but it's certainly not a factor that has contributed to the slight decline in guidance. So it's a moderate increase, and it's certainly not a material driver of margin in 2013. Your second question was....

Jamie L. Cook - Crédit Suisse AG, Research Division

Variability on margin.

Franco Baseotto

About the variability of margin. I think beyond what we said, which, again, we expect better margin in the second half of the year compared to the first half. Unfortunately, you will continue to have the quarter-to-quarter volatility there. I don't see any change in terms of having a trend setting in the different quarters. They're still going to be, unfortunately, lumpy. And -- but again, directionally, we are expecting margin to definitely be better in the second half than in the first half. I'll hand to Umberto.

Umberto della Sala

Okay. Jamie, let's see whether I can make you happy. So talking about the gas market and petrochemical in North America. I'm definitely more optimistic than I was a few months ago. The reason being that finally I see prospects and I see prospects that we can beat, which I didn't see, honestly, a few months ago. So it is clear that the market is moving. Too early to tell you about the margins because now we are bidding work, we will bid work, and I'll know about the result on the margins when we finally succeed. But certainly, there is activity, and I would include also Canada as a part of North America. And I think we are well positioned to win some of these key projects. So too early about -- to give you an answer on the margin, but certainly, much more optimistic view of the North American market overall.

Jamie L. Cook - Crédit Suisse AG, Research Division

And do you think the prospects are 2013 for U.S. petrochem for you?

Umberto della Sala

Yes. Some of them are 2013. Last comment on construction capabilities now. Number one, we do have construction management capabilities, but in the last several months, we have added capabilities to our Houston office to be able to manage construction, and we also added direct hire capabilities to the office. So I don't believe that our -- that we will be penalized by our construction execution capabilities. And don't forget that some of these project will be kind of EPCm projects, which what counts is the construction management capability, not only the actual construction execution.

Jamie L. Cook - Crédit Suisse AG, Research Division

Okay. Just one last question, then I'll get back in queue. Do you feel like, when you're thinking about acquisitions though, construction should be a bigger focus for you?

Umberto della Sala

Well, we are looking at it. You have to realize that, except for U.S. where you find a number of companies really doing construction on a direct hire basis, for the rest of the world, this doesn't apply. So we are looking at potential targets. But I wouldn't say that this is -- that the world will collapse if we don't do that because based on the prospect I see, I believe, we can successfully win and execute those projects.

Operator

Your next question comes from the line of Robert Norfleet with BB&T Capital Markets.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Just a quick question. I know you get, obviously, a lot of questions on the E&C margin. I guess, from a structural standpoint, you've obviously done some cost-saving initiatives, then we have this divisional alignment in E&C. But is there any reason to believe that the E&C margins can't get back to the more historic ranges of mid- to high-teens over the course of the cycle?

Franco Baseotto

Listen, I certainly believe this is definitely possible. But of course, we would need to see a combination of the volume really flowing through our -- and really fully absorbing our engineering capability and SR margins improving. As we said, for the time being, we have not seen the generalized improvement in SR margin that could really lead to a sustained improvement in EBITDA margin. But we expect that to happen because we don't believe capacity is going to be at this level in the E&C space for the next several years.

Jerry Kent Masters

So that will be driven by activity in the market, volume working through and prices moving up.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Okay. And given the fact that we've had this under-absorption of utilization for the last 2, 2.5 years, I mean what are some things that you've been trying to do outside of just winning work to improve utilization, whether it's moving headcount from one region to another, laying off? I mean, can you just talk about some of the initiatives that you have in place to deal with this prolonged issue?

Jerry Kent Masters

Yes. So let me -- it is a -- Franco had mentioned where we -- it's sometimes geography. Geography, so it all depends on where we have the capacity and where we have the work. Now a lot of things we've done during the down cycle is to make sure we maintain our capability for the up cycle. So -- and we do -- we are able to move work, move people around, collaborate one office to the other and utilize where the -- utilize resources where it's underutilized. It's also important to maintain those capabilities, which is -- it was more of an issue for us a year ago than it is now. We're starting to -- the work is starting to come through, and it's more about a couple of geographies where we're underutilized, which we think that will change, and we can leverage those resources in other geographies where we have work. So we think we can manage that, but it's a little bit of a drag in the first half before we could manage that.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Okay, great. And last question, can you just talk a little bit about -- clearly, you spent some time going through the divisional alignment of the E&C Group and some of the strategic initiatives. Can you talk a little bit about, albeit it's fairly early in the phase of that, what benefits we've seen from that? And whether or not, when you look at your proposal activity for bidding in 2013, how much of an uptick are we seeing in the potential to bid on oil and gas work, which, obviously, hadn't been maybe as much of a focus as the petchem and refining work?

Jerry Kent Masters

Okay. Sorry, I missed the comment a bit. You said something, gas work?

Robert F. Norfleet - BB&T Capital Markets, Research Division

Yes. Just oil and gas work, more upstream proposals.

Jerry Kent Masters

Yes. So I mean the restructuring that we've done is to kind of run more as a global organization until we can leverage resources, as part of your question earlier. So we can leverage some of the resources, the expertise we have in one area, so we have a center of excellence, they can work globally. Align ourselves to work better with the high-value centers we have in lower-cost geographies to drive down -- drive up our productivity or drive down our cost of executing projects. So I mean, that's really the driver. And then, it's about getting our functions aligned so we can work across geographies, improve our processes so we can take cost out. Those are the costs we talk about that are going to come out over time. But we haven't been able to drive that, and we have put a bit of cost in before that. So it's a timing issue, and we keep describing it that way, but that's true because we have to change processes before those costs come out.

Umberto della Sala

Maybe I'll answer the question about the oil and gas, the proposal activity in the oil and gas business. I'm optimistic because, finally, I start seeing a number of prospects for the oil and gas, are mainly upstream, onshore. And there is a pickup in activity in the Middle East, for instance, and including Iraq, which is an area of an increasing activity. So good portion of our efforts in 2013 will be going after oil and gas projects. And by the way, 2013, we had a substantial increase in bookings in the oil and gas offshore, mainly. Refinery business, there are some good prospects in refinery, so we see refinery business to be -- to continue to be a good part of our business going forward.

Operator

Your next question comes from the line of Will Gabrielski with Lazard.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Kent, can you talk about or just clarify specifically the reorg expense and how much that impacted '12? Or is the majority of that in '13 and most of that roll off in '14?

Jerry Kent Masters

Yes, okay. So what we were -- I guess, we described, and Franco said, we're not going to get specific about what amount that is, but it's the cost that we've restructured. And we've put some costs into our business development and sales processes, which, to be honest, that's going to be there longer term. We believe that's an investment that we're making. It will be there a long time, longer term. But what we will do, take cost out in other areas that will offset that, so you won't see it as a difference. It will, overall, but those -- we expect those cost and those business development expenses to stay in because we believe it helps us win more business and hopefully, get more -- better margins as we go forward. Those costs will stay, but they'll be offset by other costs that we'll take out.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. So let me ask it another way, if you think about what you view as the nonrecurring reorganizational charges and you had $1 and you split it up between '12, '13 and '14, how much of it's been done in '12 going into '13? And does it go off in '14 or does it continue in '14?

Jerry Kent Masters

As a one-off, the reorganizational charge is probably going to be -- I'm not sure we are -- when you look at it that way, because we're going to take cost out in the variance that you'll see at the top level but the cost we put in we expect to stay, the one-off costs would probably work their way through in '13 and early '14.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay, fair enough. I know we've talked about this a few times on the call. But in terms of the margin progression through the year, can you just give some color on what the margin might look like in the back half of the year versus the first half or what the spread will be half-to-half? And I understand it's lumpy, Franco, but I guess you're giving specific guidance that the first half will be down, so you obviously have some visibility in the first half. In order to hit your range, you need to have a number in mind for the second half, so I'm just curious what that is.

Franco Baseotto

Yes. And the number that we have in mind is backed into our full year guidance, and that's the number we are going to be providing. We wanted to make sure in modeling the year that you are mindful of the fact that, again, entering the year, we are going to have a couple of softer quarter, but we are confident on the full year guidance.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. And then, just lastly, in terms of cash generation and your visibility on that in '13 and maybe even beyond that. I mean, besides pricing on some of the contracts, has there been any changes in terms of the cash terms? And is that impacting your cash generation or should we see working capital provide a source of funds in '13?

Franco Baseotto

We have, Will, on a few contract payment terms, which are not as favorable as we had in prior periods. So that's one component of the working capital absorption. Another component has been the low level of booking activities in Global Power, because being a fixed-price portfolio, lower booking means that we don't receive inflows from downpayment, then we are actually burning cash on work that we are executing. And lastly, we had some payment delays from a few of our clients, including NOCs. And as we said, we don't expect this to be a trend that is recurring and actually expect this trend to change in 2013 in terms of cash flow generation.

Operator

Your next question comes from the line of Brian Konigsberg with Vertical Research.

Brian Konigsberg - Vertical Research Partners, LLC

Just trying to understand the key prospects within the E&C business. I'm just curious. You mentioned part of the utilization issue is that some geographies are just not as utilized as others. How do the prospects actually align on a geographic basis? Do you expect that to help the utilization issue? Or is that going to continue to be a source of pressure?

Franco Baseotto

As we said, and maybe Umberto can then provide more color, but we do expect underutilization to still impact us, particularly in the first half of the year, and believe it's, some geographies, it's not spread. But in general, the overall utilization -- or underutilization is improving year-over-year, and we expect this to continue as we enter the second half of the year and as we move in 2014. Umberto?

Umberto della Sala

Yes. And by the way, if you look at some of these prospects, the projects we had booked in -- at the end of 2012, take this Kuwaiti job. The Kuwait job will start to slow and because it will start really moving into high liquidation after the EPC contractors are awarded. So in 2013, the impact of this award is going to be much less than in the following years. So of course, this will give us some -- and we have to keep the people. The people need to be ready to really work on the projects, so this kind of gives some underutilization. Now we are -- how do we manage it? Now I always say that managing the workload is an art, it's not a science. And one of the targets of the reorganization of E&C is to be able to share work much more than in the past, to maximize the use of low-cost centers, what we call high-value engineering centers, namely in India, push the cooperation among operations. So we have several ways to minimize the impact of the liquidation, but you have to expect, as a physiology of the business, that you may have some of the liquidation, specifically when you start executing projects. So I agree with Franco, going forward the underutilization will be minimized because these large projects will start flowing into the P&L, actually.

Brian Konigsberg - Vertical Research Partners, LLC

Got you. And just over to Gary, just on -- so power margins, we haven't hit that. That's coming down quite a bit year-over-year. How much of that is pricing versus utilization and the projects that you expect to come to market in the first half of the year or actually over 2013? How does the pricing of that compare to what's currently in the backlog?

Gary T. Nedelka

Well, the actual book margins are going to depend on the portfolio. Certainly, there are prospects that we have where we've got a very good competitive advantage because of technology and experience in certain projects, and those will carry better margins than those that are more commoditized. So how that actually works out will depend on what our success rate is and the mix of things that we can book over the course of the year. Another thing that will affect our margins is going to be the performance of our "build, own and operate" assets, some of which will be affected by electricity rates and other commodity rates around the U.S. and around the world. But for sure, there have been -- there has been an increase in the competitive landscape, particularly with respect to the products that we sell that are more, what I would consider to be, commoditized, which would be smaller, more standard units.

Franco Baseotto

And maybe Gary, just to add. Similarly, to a certain extent to what happened in E&C, we had very low bookings in Global Power in 2012, and the profit that we'll accrue in 2013 on the increased booking that we expect is not going to generate the same level of profit enhancement opportunity because it's too early in the execution cycle for that to happen. So profit enhancement opportunities is, for Global Power as well, a factor explaining the guidance '13 versus actual margin '12.

Brian Konigsberg - Vertical Research Partners, LLC

That's helpful. Gary, just as far as the prospects that you've been talking about, how does -- how is that mixed between commodity and more engineered products that might command higher margin?

Gary T. Nedelka

Well, I didn't quite catch.

Brian Konigsberg - Vertical Research Partners, LLC

So you talked about commoditized versus higher engineered products that could capture or command higher margin as far as the prospects that you see in the next 12 months. How does that mix look relative to what you currently have in the backlog?

Gary T. Nedelka

Well, I'd be -- at this point, I'd be a little bit reluctant to actually try to time when the awards would be. But if I look to a lot of the prospects that we chase in Asia, specifically prospects that we've been successful with in Korea in the past, places like that, because they're based on using more varied sources of fuel, those have favored us a lot more for not being commoditized projects. Whereas, if we look at some of the natural gas type of boilers, those are more commodity. So if I were to expand the time period, and unfortunately I'm not going to be -- can't discuss to what we'd book this year, but what we would chase this year, we're seeing an increase in the amount of prospects that do -- that would take advantage of our higher-value technology. And we'll see that increase in Asia over the course of the year.

Operator

[Operator Instructions] Your next question comes from the line of Tristan Richardson with D.A. Davidson.

Tristan Richardson - D.A. Davidson & Co., Research Division

In 2012, you gave us just a sort of general list of key prospects for the year. And I'm curious, does that look the same for 2013 as it did a year ago, in terms of size or scope revenue potential or man-hours?

Jerry Kent Masters

Tristan, can you repeat the question again? You're talking about E&C?

Tristan Richardson - D.A. Davidson & Co., Research Division

Yes, sorry. Just on E&C, in 2012, you had given us a list of key prospects for the year.

Jerry Kent Masters

You're talking about the list we put out at the Investor Day?

Tristan Richardson - D.A. Davidson & Co., Research Division

I think so, yes. And I'm curious, and although you haven't said anything about key prospects for 2013, I'm curious just as you look internally at your list, I mean, is it generally the same in terms of size or scope revenue opportunity or man-hours.

Umberto della Sala

Well, I wouldn't go into the detailed list of prospects we have for 2013. What I would say is that based on our plan, we expect 2013 to be a good booking year.

Jerry Kent Masters

And Tristan, the other thing I would say is if indeed you're thinking about the list we put out at Investor Day, when we were talking about prospects for the E&C Group, that was just a sampling of the prospects. That was not the entire prospect list. So our perspective, when we sit here today and comment on the prospect list, we're thinking about a much, much longer list of prospects.

Tristan Richardson - D.A. Davidson & Co., Research Division

Sure, okay. And then, I guess I'm curious if you had to name one geography, which would be just the single strongest in the markets that you serve as far as opportunities go, in 2013 or over the next couple of years, I mean, has that changed much from a year ago. I'm just curious.

Umberto della Sala

Not much. We still see a lot of activity in Asia. And the positive -- as I said, number one is North America, where we see certainly more prospect. And again, I'm talking about prospects, which we are bidding or we will bid throughout 2013. And the other positive is Middle East because we see a number of projects emerging, FEED work to be bid, which we didn't see last year, so this has evolved. As far as Latin America, I don't see a major change with respect to last year.

Operator

Your final question comes from the line of Robert Connors with Stifel, Nicolaus.

Robert V. Connors - Stifel, Nicolaus & Co., Inc., Research Division

Within, I believe, the asset sale of, was it E&C, was that the Martinez, California facility? And if so, how much of E&C's EBITDA did that facility contribute in equity earnings?

Franco Baseotto

Sorry, you are referring to the [indiscernible] the impairment charge in the associated facility. As I said, and I apologize if it was not clear, this is a fully-owned "build, own and operate" facility reported in our Global Power Group. And the impairment charge has also taken into account the potential sale of the facility, and our guidance is consistent with this view. So it's going to be included -- it is included in our guidance, margin guidance for Global Power.

Robert V. Connors - Stifel, Nicolaus & Co., Inc., Research Division

Okay, yes. Because, if I just understand, I mean the "build, own and operate" facilities I believe were in Chile and Italy. And you had said this facility is in North America and the only one I can remember was one in California. Is that the one? Or...

Franco Baseotto

This is a fully-owned "build, own and operate" facility. So we don't report it in our equity earnings, where you find the Chile project and some of the Italian project. So this is reported as a fully-owned facility in the EBITDA of the Global Power Group. And as I said, the impairment charge is fully in the depreciation line, so it's not in the EBITDA line.

Robert V. Connors - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just...

Franco Baseotto

And that's why you don't find it in our disclosure on investment because those are nonconsolidated projects that we own.

Robert V. Connors - Stifel, Nicolaus & Co., Inc., Research Division

Okay, I understand. And then, just with regards to the Kuwait PMC job, just wondered when it came down and guys winning it, the number of bidders that were involved in the final list, was it closer to like, say, 2 to 3 bidders or closer to, say, 6 to 7.

Umberto della Sala

You are asking the bidders on the PMC?

Robert V. Connors - Stifel, Nicolaus & Co., Inc., Research Division

Yes. Just wondering when it came down to the award, just the number of competitors that were involved. Including yourself, was it closer to the total of, say, like 2 to 3 competitors or closer to, say, 6 to 7?

Umberto della Sala

I believe closer to 6 or 7.

Operator

There are no further questions at this time. I turn the conference back over to our presenters.

Jerry Kent Masters

Okay. Thank you. So if I can just wrap up. So Q4 delivered fundamentally sound operating performance after adjusting for the impairment and asbestos charges. And although our 2013 guidance does not indicate near-term earnings growth, we believe the company is positioned for significant earnings growth in the years ahead.

Thank you for joining us, and good day.

Operator

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

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