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Executives

Chris Sammons - VP of IR

Jim Bernhard - President and CEO

Brian Ferraioli - EVP and CFO

Analysts

Andy Kaplowitz - Barclays Capital

Jamie Cook - Credit Suisse

Martin Malloy – Johnson, Rice & Co.

Analyst for Barry Bannister - Stifel Nicolaus

David Yuschak - SMH Capital

Stephen Fisher – UBS

Joe Richie - Goldman Sachs

Brian Chin - Citigroup

Scott Levine – JP Morgan

Barry Bannister - Stifel Nicolaus

The Shaw Group, Inc. (SGR) F2Q09 Earnings Call April 9, 2009 5:00 PM ET

Operator

Welcome to The Shaw Group, Inc. second quarter 2009 earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Chris Sammons. Mr. Sammons, you may begin.

Chris Sammons

Thank you operator. Good afternoon everyone. Thank you for joining us today. We have posted a slide presentation on our website to accompany today’s call. To access the slides our website is www.shawgrp.com and the slides are available on the link that takes you to the Investor Relations page. We will reference the slides by number as we proceed. Leading the call today are, Jim Bernhard, Chairman of the Board, President and Chief Executive Officer of Shaw and Brian Ferraioli, Executive Vice President and Chief Financial Officer.

Before we begin our remarks I would like to remind everyone to refer to slide two with regard to forward-looking statements and Regulation G reconciliations. Please consider this information appropriately with respect to today’s presentation. There will be a question-and-answer period after our remarks and the operator will instruct you on how to proceed with the Q&A.

Now, I'll refer you to slide three and turn the call over to Brian Ferraioli.

Brian Ferraioli

Thank you, Chris. Good afternoon everyone. Our second quarter results were mixed with record earnings in our E&C group and continued strong earnings from our F&M and E&I group. However, increased construction labor costs on a fossil contract negatively impacted our quarterly results.

Turning to new awards and backlog we had record bookings for the quarter even after the removal of the Little Gypsy project from our backlog. It has been widely reported here in the Louisiana press that the client, Entergy, has requested a minimum three-year suspension in the project and accordingly we have removed it from our backlog.

During the quarter we booked the largest contract in our company’s history, the EPC contract for two new nuclear reactors in Florida for Progress Energy as well as part of the nuclear contract in South Carolina for SCANA and Santee Cooper. The reason only part of that contract was booked while the whole contract was booked for Progress relates to differences between the two agreements we have with our clients.

During the quarter we generated $113 million in operating cash flow and that was pretty much on target for what we had anticipated. Turning to slide four, we have a summary of our quarterly results. As in the past the first column you see here is the U.S. GAAP reported numbers and as in other quarters we have had some significant volatility in the foreign exchange reporting of our Yen-denominated debt so we have segregated that out in the Westinghouse segment. I want to focus on the third column, the shaded column, excluding the Westinghouse and I will come back to Westinghouse shortly.

As you can see, the revenues were relatively flat from a year ago but down from the first quarter and the reason they were down slightly from the first quarter has to do in part with our maintenance group which has a seasonal business. Its outage business typically occurs in our first and third fiscal quarters as well as a decline in some of our fossil contracts related to scrubber work. Year-over-year relatively flat.

Turning to the earnings and I will specifically jump down to the EBITDA we had, as I mentioned, record results in our E&C group and fabrication and E&I continue to perform very well. The fossil contract I referred to previously resulted in a charge of $79.3 million pre-tax which is approximately $45 million after tax or $0.53 per diluted share. Also in the quarter results is a maintenance agreement that we settled with a client on a reimbursable contract. Nevertheless we wound up taking a reduction charge on that job of $3.9 million pre-tax.

From a cash flow perspective, as I mentioned before, we were cash positive. $86 million from core operations and record bookings of new awards of $5.9 billion.

Turning to Westinghouse, during the quarter we actually had a gain or reevaluation of the Yen-denominated debt of $30.9 million so you see that is what drove the earnings for the quarter. If you recall, our first quarter the exchange rate went the other way and we had a rather substantial non-cash loss. So again that is one of the reasons we like to segregate out the Westinghouse activity.

During the quarter we also received $29.1 million in dividends and between the two cash flow numbers the total is $113 million of operating cash flow I referred to earlier.

Moving to slide five, looking at the segments as I mentioned fossil revenues were down from a year ago and you see in the gross profit number that is reflective of the $73.9 million charge we referred to earlier. Looking at our E&C group, they had a great quarter with record earnings and this is without the flow-through costs. You see the gross profit up dramatically from a year ago. However, I want to caution you we do not expect this type of record result to continue through the balance of the year although we still expect that group to remain quite profitable.

Also in the quarterly result for them was a gain for them on the curtailment of a foreign pension plan that is $2.7 million pre-tax. There really is not anything else in there or anything unusual other than excellent performance across a number of contracts.

In our maintenance group you see the revenues are down as I mentioned previously. A year ago there were a lot more construction related contracts underway for that group than there are in today’s environment and with the settlement with our client you see the gross profit number is negative for the quarter.

E&I continues to perform very well. You see the volume is up in the revenues from a year ago as well as the earnings are up dramatically from a year ago as well. What is particularly pleasing is to see the gross profit percentage increase. Their work is being driven primarily from some levee work we are executing for the Army Corps of Engineers here in Louisiana as well as the mixed oxide or MOX project at Savannah River in South Carolina for the Department of Energy as well as a host of other environmental remediation consulting services contracts primarily for the Federal Government.

F&M continues to perform well. You see the revenues are up significantly from a year ago. That is because the Mexico facility is online and continues to expand its operations and it was not operating this time a year ago. The gross profit declined slightly from a year ago primarily from the result of the mix in projects. There were some sales of some vending machines a year ago that were not in this particular quarter and that is resulting primarily for the reason of this decline in gross profit year-over-year but that operation continues to perform very well. No significant change for the corporate segment.

Moving on to slide six, as I mentioned earlier on Westinghouse again the volatility from the foreign exchange rate continues to impact our income statement. You look at the first column when we made our investment in 2006 the Yen-denominated debt was equal to approximately $1.80 billion because the exchange rate at that time was 119 Yen to the Dollar. As you recall, we have a Put Option as an asset of about $1.44 billion with the difference between the two as we refer to as our principle exposure about $36 million equivalent. At the end of our first quarter the exchange rate was 95.48. You see that Yen-denominated debt had an increase of $1.351 billion and the Yen Put Option increased to $1.306 billion. As I move forward to the second quarter you see the exchange rate has moved in the opposite direction now with 97.75. The Yen bonds have declined to $1.320 billion and you see the Put Option has declined as well to $1.276 billion.

So a lot of movement. Our exposure has only changed $1 million for the quarter but the $31 million swing in Yen bonds goes through the income statement this quarter as a gain. As I mentioned earlier the first quarter when the exchange rate moved the opposite way we had $160 million loss. Again, tremendous volatility but it is non-cash and it is really just an accounting treatment in marking-to-market those Yen bonds where the Put Option is not mark-to-market under U.S. GAAP.

I mentioned earlier the dividends we received during the quarter of $29.1 million and just to refresh everyone our investment in Westinghouse carries a minimum target dividend distribution during our ownership period of $24 million per year. To the extent during our period of ownership if those dividends are not paid our rights to them continue on into the future.

Turning to slide seven, the cash balance has come up as expected in our second quarter a little over $900 million in cash and virtually no debt. $12 million in debt. We will talk more about our cash flow and our guidance going forward but we expect the third and fourth quarter to be significantly better than it has been year-to-date and that again is according to plan. The trailing 12 months operating cash flow has been a strong $336 million.

With that I will turn it over to Jim and he will go through the operations review.

Jim Bernhard

Thanks Brian. Let’s turn to page nine and first review the markets on power. The economic conditions permeating concern slowing the pace of fossil bookings, those have been delayed certainly but the nuclear projects are starting to come alive. As announced today we have not only got a progress notice to proceed we are proceeding on SCANA as well as Southern we announced today as well.

What is particularly encouraging is the international nuclear markets are continuing to develop at maybe even a faster pace than we had thought originally. The U.S. market continues to develop as expected. We continue to see major opportunity to do scrubber work and over the last part of the calendar year and we should see major awards in that aspect.

Geothermal capacity we thought we might address that. We are seeing quite a bit of activity throughout the world that we are involved in. The company has done about 40% of the world’s installed geothermal capacity. Maintenance continues to be steady. We announced a major Entergy renewal of their nuclear fleet which is a major booking for that part of the business and they will continue to do well in that business because of major upgrades to the nuclear facilities there. They do outage work and that business should continue to do well over the next several years.

Turning to page ten, energy and chemicals, the lower oil price certainly has had some economic conditions slowing. That has had an effect on their new bookings. However, client activity in recent last three to four weeks has accelerated and it is very, very significant at this time. In fact, it is one of the largest amounts of inquiries we have had for some time. The polysilicon business has emerged as a strong growth opportunity for our business and demand for petrochemicals in Asia in particular is starting to pick up.

Let’s spend some time on slide 11, our environment infrastructure business overview. Most of our business there, 93% of the existing backlog is Federal business. We continue to work on two major projects; the MOX project in Savannah River which is in excess of $4 billion as well as the levee project and we have a hurricane protection project which is the largest project on a design/construct basis that the Corps has ever awarded.

We do see in the American Recovery Investment Act several opportunities that we will be able to fit well in and you will be seeing awards in the next few months on that as well as continued work on the levee work in New Orleans. The MOX project received funding for 2009 as well as in the spending bill so this business continues to develop and should accelerate in the fourth quarter and in particular next year. We are very, very encouraged about the opportunity they have in the inquiry stage.

Turning to page 12, the fabrication and manufacturing business continues to be steady at the largest supplier of fabricated systems in the U.S. The strong demand for steel pipe fabrication regardless of the type of power plant or facility used piping has continued to do well year-over-year and quarter-over-quarter with special opportunities we are pursuing in the Middle East. So we would look for this business to continue to do well and to continue to expand into the nuclear module business starting early in fiscal 2010.

Turning to page 13, the backlog is a record $19 billion. Certainly over our largest backlog of approximately $15 billion earlier late last year. That backlog excludes the Southern contract. It excludes the majority of the SANA contract and it also excludes the major maintenance contract that we just received. So based on contracts in hand an estimated sales going forward at the end of the fiscal year our backlog will well exceed $20 billion.

Page 14, a disappointment on the fossil and nuclear business because of the major coal project we continue to have difficulty completing and finance the cost. We are not interested in completing now on this particular project. 40% of the complete packages have been turned over to start up so we are well under way on the particular project. There is still a good deal of work left. We had major productivity losses in the second quarter and in our forecasting of costs to complete we have forecasted the same productivity rates going forward which resulted in a major reduction in profit putting the job in a loss position and a $73 million approximate write down on that particular project.

The project we have experienced both quality issues and late delivery from one of our two major vendors on the project and we also have had a major force [inaudible] event on the project. Both we are actively pursuing reimbursement. We are pleased to announce earlier in the quarter that Fred Buckman assumed the Power Role as CEO which will add further stability in that group and we are happy to have Fred on board. As we mentioned earlier the Little Gypsy repowering project was removed from backlog and we still have a record backlog so that speaks well for this particular business. It has an enormous opportunity going forward.

If you will turn to page 15, backlog continues to grow there particularly EBITDA. This quarter is always a down quarter and should pick up next quarter. Nothing major happening there except that I do believe the next 2-3 years you will find their buying increases significantly because of the work expected on a number of nuclear plants and packages to extend capacity, security modules and numerous activities they have in upgrading these nuclear plants.

Turning to page 16, certainly very pleased with solid execution on the energy and chemical business. $55 million in EBITDA is certainly a record in this condition and as Brian said earlier the higher margin engineering project we continue to perform well with a one-time discussion of the 2.7 pre-tax pension plan gain from the curtailment. The project as a routine continues to outperform the estimated cost to complete. So the numerous projects, 10-15 projects that performed well not just one or two particular ones.

Fabrication business continues to have strong operational performance. On page 17, the current projects contributed to a shift in the product mix was the margins that moved down a little bit and the pipe fabrication continues to do well particularly for multi-national oil and petrochemical plants. The opportunities emerging for pipe fabrication services is certainly diversified and there are some solar opportunities and the manufacture of solar panels will contribute heavily in the fabrication market in the future.

On page 18, if you look at the MOX project in the Inner Harbor Navigation projects which will have a major impact on earnings next year and continue to progress nicely. This has again become a major contributor to overall company earnings and we see a bright future in the quarters to come and particularly next year. We are well positioned on the work that continues to be spent on American Recovery and Reinvestment Act.

Turning to page 19, our guidance will remain unchanged on revenue of $7.1 to $7.3 billion. We are lowering our guidance because of the charge on the coal plant lowering it from $2.50-2.70 to $2.10-2.30 per share this fiscal year. We are increasing our operating cash flow previously $250-300 million to $325-375 million.

In conclusion and summary on page 20 the execution on E&C and E&I and fab contracts drove earnings for the quarter. The disappointment is certainly the charge on the coal power plant which impacted negatively the results. I believe we would have had record earnings in the quarter without that charge. Our record backlog continues to increase and it is a very likely scenario that the backlog will reach again a new record next quarter.

The domestic nuclear market continues to develop and contribute to earnings which will begin in a major way in 2006. We already talked about the revised EPS and operational cash flow. At this time I would like to turn over the line for any questions for myself or Brian.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Andy Kaplowitz - Barclays Capital.

Andy Kaplowitz - Barclays Capital

The coal fire project, the one that is 90% done, I guess the question we have is this the same project that caused you trouble a few quarters ago? I think you are kind of suggesting it is. Then Jim or Brian how comfortable are you now with your overall portfolio of these legacy coal projects? This on in particular obviously. Have we adjusted now for what we really think is going to be the ultimate cost to complete this project and when will this be done?

Jim Bernhard

We are very comfortable with the cost to complete the project. The project is completing several months from now in September or October if I recall correctly. It is the same project that we have had problems with in the past, that particular project. Our newer coal projects we have one that is about 90% complete but the other three coal projects that are different contracting model with openers for labor which this one was not, it was a turnkey project, so I think the two things was different contract terms for the other ones and of course we have done a major review and continue to review the other projects and they continue to progress on schedule. While disappointing to have this at this time, it is one that we certainly learned from and execution part of it in particular on the labor productivity there were some outside influences that accelerated the poor performance of productivity and we are pursuing those avenues for reimbursement at this time.

Brian Ferraioli

I would like to stress though that the charge we are taking is forward-looking. The majority of those costs have not been incurred and will be what it takes to finish the job. So this is a forward-looking increase to our cost.

Andy Kaplowitz - Barclays Capital

Is there any way to quantify how much more conservative you are being? Are you being doubly conservative or is it just what Jim said you are going to the productivity you had in the quarter for the rest of the project?

Brian Ferraioli

We have looked at this project obviously very closely and we have to come up with our best estimate. We cannot come up with an overly conservative number to take a charge now and then write the project off next quarter or possibly even next year. Generally Accepted Accounting Principles require us to come up with our best estimate. So while we do think it is conservative we clearly can’t come up with a number that is so over the top there is no possibility of ever exceeding it and then you write the job off later on. So, we go through our normal process. There are a lot of people involved in this from the operational side, the financial side, from our internal auditors and external auditors and we have got all the best people we can muster to look at this to come up with as I said our best estimate of what it is going to take to complete. We focused on what has been the productivity factors, the actual productivity factors, and not necessarily what the other projects’ productivity factors would be.

Andy Kaplowitz - Barclays Capital

Brian, I think you mentioned if you look at the revenue on nuclear in the quarter it did come off a little bit versus the last few quarters. I think you mentioned less scrubber work in there. As we look over the next year, say, how should we think about the run rate in that business? How fast do the nuclear projects come on? When can we see sort of growth in the revenues or was this sort of an anomaly low number? I’m just trying to think about how to think about that fossil nuclear number that you had.

Brian Ferraioli

Some of the scrubber jobs we have had are running down and that is really the reason why that decline has occurred this quarter. However, as we have said I think in previous quarters we still expect a fair amount of scrubber work and we are anticipating some rather significant bookings. So I don’t think you should just anticipate the fossil work is going to come down until the nuclear work kicks in. I view it more just as a timing and if we are correct on bookings we should see the revenues remain, the fossil contract revenues remain strong regardless of what happens to the nuclear revenues.

Andy Kaplowitz - Barclays Capital

You took Little Gypsy out of backlog is there any way to quantify how much of the guidance change was Little Gypsy in terms of earnings? How to think about taking it out of backlog.

Brian Ferraioli

From an earnings perspective very little impact.

Andy Kaplowitz - Barclays Capital

Was it supposed to ramp up next year? Is that basically the way it would have been?

Brian Ferraioli

Yes. Relatively early on in the process from our perspective and therefore the revenue recognition hasn’t really changed in a significant way for us this year.

Andy Kaplowitz - Barclays Capital

Could you tell us how much backlog you took out?

Brian Ferraioli

We haven’t disclosed the exact number but it has been widely reported in the press here the contract value approximated $700 million and we would not argue with that number.

Operator

The next question comes from Jamie Cook - Credit Suisse.

Jamie Cook - Credit Suisse

My first question Brian has to do with the guidance. You took a charge this quarter north of $0.50 including everything but you are lowering your guidance at the mid point by only $0.40. So I’m just trying to sort of figure out what is going better than what you originally thought. My second question is last quarter you talked about what we should expect in terms of contribution from nuclear with EBITDA and you said $10 million in 2009, $75 million in 2010 and $125 million in 2011. I am just trying to figure out whether those numbers are still the right numbers given we are going to book maybe three big nuclear projects fairly soon. Could it be actually greater than that?

Brian Ferraioli

On the nuclear side there is really no change from last quarter. Those projects remain on track and have been moving at the pace we have anticipated. Literally since I have arrived in the company. So no change on the nuclear side.

Jamie Cook - Credit Suisse

So it is still the 10, 75 and 125 each year just to be clear? $10 million in 2009, $75 million in…

Brian Ferraioli

That is the guidance that we gave and there is no significant change to that. Your first question, I’m sorry, refresh me.

Jamie Cook - Credit Suisse

The first question unless I am reading this wrong the charge in the first quarter was $0.53 or $0.54 and then you are lowering guidance at the mid point by $0.40.

Brian Ferraioli

That is correct. Our E&C group had a very strong quarter with record earnings. E&I is doing exceptionally well so you are correct that like any organization we have some up and some down. That is the net result of the two. Clearly the record earnings of E&C and strong earnings of the other, E&I and F&M groups were overshadowed by the charge but those other groups are performing well.

Jamie Cook - Credit Suisse

My last question and it might be unfair but I will try and ask it anyway. As you sit here and you look at 2010 and the amount of backlog you will have as we are sitting here at year end under what scenario in your mind for 2010 can earnings not be up given what we have in backlog and the fact these projects should be moving forward at a normalized pace?

Jim Bernhard

A nuclear incident somewhere in the world where all nuclear plants shut down construction would be something that would be problematic. I mean, we have a tremendous amount of backlog. We believe earnings will be greater next year but I think we will probably in the third quarter be announcing something. For the fourth quarter we will have our discussion on guidance for 2010.

Jamie Cook - Credit Suisse

Is there anything we should be concerned about in terms of the pace that we can move on this backlog that we couldn’t see earnings up in the double digit range?

Brian Ferraioli

I am really reluctant to get into specific guidance about 2010 because we haven’t really gotten there ourselves yet on what the final numbers will look like. Clearly the volume of work is increasing and we certainly would anticipate the earnings will continue to grow. Beyond that I think it is premature for us to get more specific than that.

Jamie Cook - Credit Suisse

Jim, besides the three nuclear projects that we know about using the AT1000 technology is there any other competitor in your mind that could be booking work using the Westinghouse technology or are you having any capacity issues once you book these three projects that you think that this will have to go to another contractor or that they don’t want to put all their eggs in one basket?

Jim Bernhard

We are actively negotiating other AT1000 out there and I understand competitors have come out there and said we can’t do it all. They used to tell me that on pipe fabrication until we did most of it. We have ample capacity. We have people rolling off coal plants. The big module facility puts us at a huge advantage. We are investing over $100 million to be able to build these things more economical. They are repetitious in nature and we are quite comfortable with our partner, Westinghouse. Things are going well. Several opportunities overseas we are pursuing together. Several opportunities in the U.S. The market has done very, very well. We also have been invited to participate using other technologies by client request to build plants so our activity will not be limited to the AT1000 alone.

Jamie Cook - Credit Suisse

Care to say which vendor you are working with?

Jim Bernhard

Is it fair to say?

Jamie Cook - Credit Suisse

Care to say.

Jim Bernhard

This particular case we have a confidentiality agreement.

Operator

The next question comes from Martin Malloy – Johnson, Rice & Co.

Martin Malloy – Johnson, Rice & Co.

You mentioned a pick up in inquiry levels in the E&C business and I’m just wondering if you could talk a little bit more about that and what types of projects and areas of the world you are seeing that in?

Jim Bernhard

We see a strong demand for petrochemicals and chemicals in Asia. It is a significant amount of inquiries that we haven’t seen in the past six months. I would say that is something that is definitely different from quarter-to-quarter from the last six months. That is encouraging. All of the execution on the projects, that unit is doing very well.

Martin Malloy – Johnson, Rice & Co.

Any update on the U.K. RWE projects?

Jim Bernhard

They are proceeding as expected.

Operator

The next question comes from Barry Bannister - Stifel Nicolaus.

Analyst for Barry Bannister - Stifel Nicolaus

Were the CFB boilers a vendor issue on the problem coal project and also in a period of high unemployment why is Shaw Group having trouble finding qualified labor in the South?

Jim Bernhard

Let me answer this as far as the first question, we are just having difficulty with our major vendors and we will just leave it at that. As far as labor in the South we are talking about Boyce, Louisiana 40 miles outside of or 30 miles outside of Alexandria, Louisiana in an isolated major project here. It is some difficulty. Major refineries have peaked at 5 and 6,000 people so it is a difficult situation we are in but one we are working our way through.

Analyst for Barry Bannister - Stifel Nicolaus

For my second question, if you guys decide to keep the Westinghouse ownership should we expect a $240 million non-cash charge upon refinancing the Yen debt? When must you make the decision to go or forego to Put?

Brian Ferraioli

First of all the Yen debt is mark-to-market at the end of every quarter so there shouldn’t be any P&L impact if it is in mark-to-market throughout its life. The Put Option expires in 2013. It will be the end where we would have the Put Option. Whether we chose to finance it, renegotiate it or pay it off we haven’t reached that point yet and it is not on the immediate time horizon to make that decision.

Operator

The next question comes from David Yuschak - SMH Capital.

David Yuschak - SMH Capital

On the E&C as far as it performing as well as it has, certainly from my expectation and you admitted it too that it has been somewhat of a surprise in boosting your guidance X to charge, is there anything in particular in the way of mix or anything like that that is going on there that can produce these kinds of results given the strength there?

Brian Ferraioli

No, as I mentioned earlier it was a host of contracts that all contributed rather significantly to our earnings for the quarter. There was no one outlier that generated the amount of earnings. A lot of it has been attributable to the commercial conditions having improved over the last 18 months to 2 years and we have been anticipating for some time the margins would increase. On top of that the performance has been better frankly than maybe sort of the original estimates beyond those jobs. So the combination of excellent performance and improving commercial terms. As I also mentioned though in the call we do anticipate the earnings in that business are not going to continue at that pace for the next couple of quarters. As Jim mentioned there has been a slow down in inquiries which obviously leads to a slow down in bookings and that has just recently picked back up. So there may be a bit of a trough where it comes down a bit and then it comes back up.

David Yuschak - SMH Capital

You are saying you have actually been doing some bookings in here, it is not just inquiries?

Jim Bernhard

No, we are saying inquiries and it will take awhile for the bookings to come through.

David Yuschak - SMH Capital

Maybe the second half would look more normalized as far as profitability compared to what you are seeing in the first half then?

Brian Ferraioli

We are not giving specific guidance for each one of the…

David Yuschak - SMH Capital

But the margins and the business conditions are so strong in that period of time when you were putting that work into place you would think you would get some kind of, as you said fade on those first half results?

Brian Ferraioli

I don’t think we are willing to go more specific than what we have given other than we do not anticipate it to be at that pace from the second quarter to continue for Q3 and Q4.

David Yuschak - SMH Capital

The fabrication manufacturing, give us some sense to the difference between troughing in $28-29 million EBITDA rate here as far as from trough levels. Is there anything out there in the next six months that gives you some confidence, certainly the fourth quarter last year were gangbuster for you but is there anything out there that suggests that mix or whatever you are going to see a boost in profitability there too?

Jim Bernhard

We are looking at it in different ways but we have been reluctant to give a profit forecast by operating unit. There again I would caution everybody that we do have a module facility that will fall under fab and manufacturing group and that should pick up in earnings for next year.

Operator

The next question comes from Stephen Fisher – UBS.

Stephen Fisher – UBS

You mentioned the Asian petrochemical as an area that you expect to pick up. Would that be for EPC, feed or technology? What would it be?

Jim Bernhard

It wouldn’t be EPC. It would be engineering procurement, maybe construction management and license technology.

Stephen Fisher – UBS

Is that expected to be competitively bid?

Jim Bernhard

Yes.

Stephen Fisher – UBS

Separately, there is talk of over $3 billion of Army Corps of Engineer awards in Louisiana in 2009. How much of that…

Jim Bernhard

Three different projects, right.

Stephen Fisher – UBS

How much of that work do you think you could capture in 2009?

Jim Bernhard

I can’t comment on that. I mean it is up for bid right now and I would rather not comment.

Stephen Fisher – UBS

That is fair. The margins on that business have trended up over the last few quarters. How much improvement do you think you have in the margins in that segment?

Jim Bernhard

I think we have some. I am hesitant to put a number on it. They are doing very well on the projects we have and a good mix of work. The personnel they have there, their billable hours have been increasing so they are doing a nice job. The last couple of years they have reduced their costs and I believe the G&A is now $44 million in two years so they are doing a good job and they are reaping the benefits of their hard work over the last couple of years.

Brian Ferraioli

I would add I think it also depends on how the client ultimately contracts. There may be more incentives rather than flat fees on top of the reimbursable work so then it depends upon your execution. If it is superior you can earn a superior return. So it also depends on how the government decides to contract.

Stephen Fisher – UBS

You mentioned the SCANA booking. Can you say how big that was?

Brian Ferraioli

No we have not disclosed that specifically. That is another one where we have pretty strict confidentiality requirements so we really can’t get into the amounts for any of the nuclear bookings.

Stephen Fisher – UBS

You mentioned you are putting in less because there is a difference in agreement with the client relative to the other contracts. Can you elaborate on that and what the differences are?

Brian Ferraioli

They are just phases. The way the contracts are structured there are different phases and we have booked accordingly. They passed a major milestone during the quarter which triggered for us bookings the announced that we did and when we get certain milestones on that contract we would book additional amounts.

Operator

The next question comes from Joe Richie - Goldman Sachs.

Joe Richie - Goldman Sachs

You mentioned the SCANA, Southern and Progress projects seem to be going sort of as planned and you do have some capacity to take on more work. How early do you think we could see you potentially be booking another nuclear project beyond the three that you talked about already?

Jim Bernhard

[A couple of months].

Joe Richie - Goldman Sachs

Jim you mentioned during the last call that the scrubber business tends to continue to be robust for you and I think you even put a number of approximately $1 billion over the course of 2009. Is that still a good number?

Jim Bernhard

Yes I think so.

Joe Richie - Goldman Sachs

That is by the end of fiscal year 2009 or is that by the end of the calendar year?

Jim Bernhard

Fiscal, calendar, somewhere in that range. Some of these projects are working on already just when we complete EPC contracts.

Joe Richie - Goldman Sachs

The last question I have for you is when I take a look at your fossil and nuclear business excluding the charge that you took this quarter I saw your recurring margins still went down approximately 80 bps sequentially. Is there anything I need to be reading into that? Is there any reason why it trended down sequentially?

Jim Bernhard

No. There is no specific trend there if that is what you are asking. It might be just a mix of engineering work or equipment, etc.

Operator

The next question comes from Brian Chin – Citigroup.

Brian Chin - Citigroup

Just a follow-up on Joe’s question. For the scrubber worth $1 billion-ish. To clarify is that work to be done or is that work to be awarded over the next year or so?

Jim Bernhard

We were speaking about awards.

Brian Chin - Citigroup

Awards?

Jim Bernhard

Right.

Brian Chin - Citigroup

Okay great. Secondly, when you say the Southern Nuclear award will be booked in backlog is that likely to be done in phases like SCANA or is that going to be done all at once like Progress?

Jim Bernhard

The press release is full notes to proceed.

Brian Chin - Citigroup

Lastly, any update on Combined Cycle Gas urban awards?

Jim Bernhard

Any update? There are a few out there that I think we will be successful on this calendar year.

Brian Chin - Citigroup

Has the outlook improved or declined from last quarter?

Jim Bernhard

There are a few out there. It is not a robust market. There are half a dozen out there that we will take a few of those but there is a few out there.

Brian Ferraioli

I don’t know of anything significant that has changed though last quarter to this quarter.

Operator

The next question comes from Scott Levine – JP Morgan.

Scott Levine – JP Morgan

The $75 million-ish increase in the operating cash flow guidance, have you commented or would you care to comment on what is driving that?

Brian Ferraioli

We went back and looked at the individual projects and had some of the performance in some of the other operating groups and the timing of some of the projects. It is a combination of things. Working capital management and we just felt it was appropriate to raise the guidance.

Scott Levine – JP Morgan

Would it be accurate to say it is a number of small adjustments rather than one large one?

Brian Ferraioli

That would be correct. There is no one specific event driving this to change.

Scott Levine – JP Morgan

On the E&I segment you mentioned levees and hurricane work. Is there any kind of one-off project work driving the step up in revenue there associated maybe with individual hurricanes or projects you didn’t contemplate when you initially guided? Or is it levee work that is kind of ongoing? I guess is there anything kind of storm related that drove the step up in revenue?

Brian Ferraioli

No. The two big drivers as Jim mentioned earlier are the Inner Harbor project and the MOX projects. We did do some hurricane in the first and second quarter related to Gustav and Ike but they were relatively small volume numbers compared to the MOX and Inner Harbor projects.

Scott Levine – JP Morgan

Without getting specific on segment revenue guidance would you say the top line is kind of coming in roughly in line with your initial expectations? Slightly above or well above?

Brian Ferraioli

We haven’t changed the guidance so in line would be the answer.

Scott Levine – JP Morgan

Any update on your thoughts on uses of cash going forward? Are you thinking about acquisitions at all? Are you thinking about any of the uses of cash continuing to maintain a cash balance on the balance sheet?

Brian Ferraioli

We continue to think about our cash very strongly. As we mentioned in the past we intend to continue to invest in our business to grow the business. The new modular facility is an example of that. Beyond that nothing specific. We did make a payment at the close of the quarter to our pension plan in the U.K. So we are taking out debt, all the debt basically we have. So we are looking at things in that regard. As we move forward towards the end of the year we intend to focus a lot more on use of cash and exactly how to maximize the shareholder value. Improving the balance sheet has been a primary goal of ours and we are still striving to become an investment graded company which I think has a significant impact in our ability to not have to put letters of credit or other types of security instruments going forward. But we do anticipate the market in general is going to be tighter for those credit instruments. So it is to our shareholders’ advantage if we can improve the balance sheet and therefore continue to grow the business.

Scott Levine – JP Morgan

Is there an incremental focus on acquisitions at all?

Brian Ferraioli

I think the general answer is we always consider acquisitions but there is nothing specific at this point in time and I don’t think any change in our intentions.

Operator

The next question comes from David Yuschak - SMH Capital.

David Yuschak - SMH Capital

Just thinking you over the last couple of years have really ramped up your ability to bring in some pretty good cash flow from operations. As you have looked forward in the big ramp up in nuclear do you see anything in your ability to produce cash like you have been doing here recently in recent quarters with any changes in cash flow generation and the requirements for cash on these big nuclear plants as they ramp up particularly given the number that you could be having? I am just kind of curious what the financial model may look like there.

Brian Ferraioli

We continue to anticipate we are going to continue to grow our cash. That is the way we should be contracting on all of our projects regardless of whether it is nuclear, coal, scrubber or E&C project, etc. So we believe that the model will continue.

David Yuschak - SMH Capital

So there is nothing different in the way you are approaching the model for the nuclear ramp up than what you have been showing here in the last couple of years with pretty strong cash flow from operations?

Brian Ferraioli

No. That is correct. We are trying to drive what we think is good cash management on all projects regardless of size.

Operator

The next question comes from Analyst for Barry Bannister - Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

On the competitive front have you noticed an increase in price competition especially in Asia for Asian petrochemical plants outside of your licensing proprietary technology?

Jim Bernhard

Ours is mostly focused on our technology. We don’t stray from that too much except on a selective basis. It is probably not best to comment on that.

Barry Bannister - Stifel Nicolaus

I guess conversely with the slow down have you been able to progress nicely towards your hiring goals? I noticed it is on your website, for example, that you have press released in the past for the power generation side?

Jim Bernhard

Yes. We have been able to progress as expected. We haven’t had difficulty. We have been able to attract the engineering and management talent for our nuclear plants that we have booked and the ones we have proposed. We not only hire people and manage people for projects we have. We try to keep especially on the nuclear business keep a full bench because there are plenty of opportunities out there so while we are hiring for and developing people to build the next generation of nuclear plants. I might interject here that in cooperation with the MOX project we have been rotating people across plants and cost controls, safety for a couple of years now on a rotation basis. So we continue to develop internally with the largest new nuclear project in the country of $4 billion. So we are able to develop the talent that we need internally as well.

Barry Bannister - Stifel Nicolaus

You pick out people already working on TVA right?

Jim Bernhard

Yes. We understand we did 17 outages almost simultaneously last year and almost 17,000 people at all these plants. There are a lot of components in planning, scheduling and cost control, all those particular nuclear outage systems, etc. that we are able to expand in building these plants.

Barry Bannister - Stifel Nicolaus

Lastly, Levy County struck me as more not a brown field but in between and brown and a green field but Vogel is already co-located on the existing long-term nuclear site so when you have spoken in the past of $4 billion for the Florida booking should we think of scope in that range for Vogel or does Vogel require less scope?

Jim Bernhard

It is still a competitive business out there whether it is $3.5-5.5. We are just going to keep it in those. Four is good for purposes you all need it for.

Brian Ferraioli

I think in the past we have talked about sort of an average or a ballpark number without being specific to locations.

Jim Bernhard

Thanks guys. I think that we will get this coal project behind us and certainly develop a lot of opportunities and in the Asian market having a lot of opportunities in backlog to generate a substantial amount of profit going forward is a real good feeling. Having a backlog we have on hand [by regulated] facilities and the Federal Government being able to finance the work that we have gives us comfort and having no debt and $1 billion of cash in the bank is something we rely on not only to execute work on but to give our clients a good safety net on these projects that we are well financed and able to do the work. We have worked long and hard to develop this nuclear business that some say we never developed but we are certainly seeing a lot of money going forward on it. I think those were wrong and I believe that the [inaudible] at a robust rate in the United States and activity outside of the United States will surprise a lot of people.

Thanks a lot and have a good weekend.

Brian Ferraioli

Thanks everyone for being on the call today. We appreciate you being on late in the day and if you have any other questions please feel free to give me a call tomorrow. Thank you and good night.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may all disconnect.

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Source: The Shaw Group, Inc. F2Q09 (Qtr End 02/28/09) Earnings Call Transcript
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