Chicago Bridge & Iron Company N.V. Q1 2010 Earnings Call Transcript

| About: Chicago Bridge (CBI)

Chicago Bridge & Iron Company N.V. (NYSE:CBI)

Q1 2010 Earnings Call Transcript

April 27, 2010 5:00 pm ET

Executives

Philip Asherman – President and CEO

Lasse Petterson – COO and EVP

Dan McCarthy – President of Lummus Technology

Ron Ballschmiede – CFO and EVP

Analysts

Scott Levine – JPMorgan

Andrew Kaplowitz – Barclays Capital

Graham Mattison – Lazard Capital Markets

Jamie Cook – Credit Suisse

Martin Molloy – Johnson Rice

Michael Dudas – Jefferies

Avi Fisher – BMO Capital Markets

Barry Bannister – Stifel Nicolaus

John Rogers – D.A. Davidson

Andrew Kaplowitz – Barclays Capital

Operator

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the CB&I 2010 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Before beginning today's call, the Company would like to caution you regarding forward-looking statements.

Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding the Company's future plans and expected performance, are forward-looking statements that are based on assumptions the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized in the company's press release and SEC filings.

While forward-looking statements represent management's best current judgment as to what may occur in the future, the actual outcome or results may differ materially from what is expressed or implied in such statements.

Now, I would like to turn the call over to Mr. Philip Asherman, President and CEO of CB&I.

Philip Asherman

Good afternoon and thank you for joining us today to discuss our results in the first quarter. With me are Lasse Petterson, CB&I's Chief Operating Officer; Dan McCarthy, President of Lummus Technology; and Ron Ballschmiede, CB&I's Chief Financial Officer. Following some brief comments from each of us, we will then open the call for your questions.

We're pleased to announce a solid first quarter with the three sectors all reporting good results. New awards of $560 million in the quarter are well in line with the anticipated run rate that we expected; absent of the very large new projects we still see ahead of us in the rest of the year. Current backlog is nearly $7 billion compared to just under $5 billion this time last year.

Ron will be addressing the specifics of our financial results in a few minutes, but it's worth highlighting the gross profit line of over 14%, with operating income of nearly 8%, as clearly indicative of the type of return we want from our business model, considering the unique mix of work and the commercial characteristics of our operating sectors. Also contributing to this was a tax rate that was more in line with previous norms for the size and mix of our business. And our balance sheet reflects solid liquidity, positive cash flows and cash balances that are significantly improved over the same period last year.

At year-end, we reported that we expected our new awards would be more evenly distributed over 2010. With further scoping and pre-contract planning for a very large oil sands project in Canada, has pushed that curve somewhat to the right, with the timing of that project now expected to be added to our backlog in the second quarter.

The remainder of the year is still anticipated to be well within the new award guidance range we provided for the year of $3.5 billion to $5.5 billion. The new awards for the first three months of this year included a gas processing plant for Pluto's Petrol in Peru; a significant increase in the feedwork for the cash again full field development for Shell, along with our JV partners, Aker Solutions and WorleyParsons.

It also included topside engineering for the Goliad FPSO project for Hyundai, which is providing overall engineering services for ENI and Statoil in Norway for the first oil development in the Norwegian sector of the Barents Sea. And a contract in Lummus Technology for the license and process design of a grassroots petrochemical plant in China, among others that Dan will discuss.

We also announced the successful completion of two major projects in the first quarter, including the engineering, procurement and construction of the multibillion-dollar ethylene cracker in Singapore for Shell, in combination with our JV partner Toyo. This project at peak employed over 12,000 workers with one of the best safety records of any major project in the world.

We also completed the South Hook LNG regasification terminal in Wales for Exxon Mobil and Qatar Petroleum, having offloaded over 64 cargoes of LNG during what was an outstanding startup and commissioning phase of this $1 billion-plus facility.

Geographically, at least outside of the US, the energy world is very much open for business. And we're tracking tens of billions of dollars of identified opportunities in our end markets. But the competition is as strong as we've ever seen, not only from the Koreans, but from European, Indian, and other Asian companies who have significantly grown their capabilities over the past five years, and now compete head-to-head with major US firms on EPC energy projects and large tank installations, particularly, those projects for national oil companies where price is the absolute differentiator.

On major EPC projects for international and large integrated oil companies, we still see very competitive pricing, driven by improved stability in the cost of equipment, commodities and labor. But these owners also consider experience, safety, reliability and resource capability as heavily-weighted factors in their capital project decisions. In these competitions the win ratios are much higher for us and have historically been in the 50% to 60% probability range.

Our win rates for these EPC projects will be influenced by our strong international presence, our ability to compete both on a reimbursable or lump sum basis and our diverse mix of technical and project talent, who are experienced in virtually every aspect of the energy infrastructure business.

In steel blade structures, we're clearly a market leader and very competitive on large multiple tank installations, as well as single storage tanks for everything from water, LNG and various fuels and other refined products around the world. Although, the US is lagging, our global markets are very active for LNG tanks, crude oil terminals and a variety of other storage opportunities.

And of course, Lummus Technology continues to be a leader in providing proprietary technology around the world and continues to return high margins in regions of the world where a variety of owners are still investing in refining petrochemical and gas processing expansions. Lummus Technology focuses on many national companies in areas like China, Russia and the Middle East, who needs our expertise for major refining and petrochemical expansions.

Therefore we remain confident in our 2010 guidance. With the ramping up of a significant number of new projects, combined with our positive outlook for Lummus Technology, we expect that the company will have a solid year and good opportunities to further increase backlog in 2011. We also expect to sustain our margins through consistent project performance and our ability to win new work, particularly in LNG, storage and a broad mix of refining and petrochemical opportunities.

I'll now turn the call over to Lasse Petterson for a discussion of our CB&I Lummus and steel plated structures business sectors. Lasse?

Lasse Petterson

Good afternoon. I'll keep my comments brief, but wanted to provide highlights on some of the major projects in our backlog, which totaled $6.9 billion as of March 31st.

Let me start in South America, where the Quintero LNG project in Chile is on schedule for final completion early in the third quarter. As reported, the plan is to deliver gas to Chile since August of last year. The first of the 155,000 cubic meter permanent storage tanks is now in operation and the second is currently being hydro tested.

Construction of the Peru LNG liquefaction plant is essentially complete and the project is currently moving through commissioning and startup. Cool-down will commence shortly. The project is on schedule to deliver the first cargo LNG later this quarter.

Our major EPC contract for REFICAR's refinery expansion project in Colombia is progressing well. Engineering and procurement are underway, the site preparation is ongoing, and we will begin driving piles for the process units in June. Early works materials started to arrive at site. In the US and Caribbean, we are completing several large refinery modification and upgrade projects, which are all proceeding according to plan. Our steel plate structure sector is seeing increased activity in the elevated tank segment, and the storage terminal projects in the region are all progressing well. In Canada, we continue to work on engineering and assisted procurement on the Kearl oil sands project and hope to soon sign an EPC contract defining an expanded scope on this project.

On the Isle of Grain Phase 3 project in the UK, we recently successfully completed a pneumatic test over the fourth and final tank. All welding is essentially finished and we are currently completing the electrical and instrumentation and installation work. The project is scheduled to be completed late this year. The South Hook project is now demobilized. As Phil mentioned, the facility has received 64 shipped cargoes for LNG since startup and has operated at capacity to the client's full satisfaction. Work on the top size design for the Goliat FPSO project is progressing well. We announced in February that CB&I was selected by Hyundai Heavy Industries to provide engineering services for this project in the Norwegian sector of the Barents Sea.

In the Middle East, we are working on numerous Steel Plate Structures project, which are very diverse in terms of project sites. We've been successful at capturing subcontracts for storage tank projects from some of the Korean companies performing EPC work in the region, all of which will be included in backlog in the second quarter. The GASCO low-temperature storage tank project for Takreer in Abu Dhabi is progressing through engineering and procurement according to plan. Our part of the Pearl Gas to Liquids projects for Shell in Qatar is nearing completion. Commissioning is underway with final completion later this summer. And in China, the second phase of the Fujian LNG project is progressing ahead of schedule. We recently successfully air-raised the roofs of the 260,000 cubic meter LNG tanks, and currently we are in the process of pouring the concrete for the outer roofs.

In Singapore, per our recent announcement, the Shell ECC Cracker project has successfully started up, and we are in the process of demobilizing the site. Our EPC gas plant project for Exxon in Papua New Guinea is ramping up. The project management team has assembled in our Brisbane office, and engineering is well underway in our Singapore offices. Similarly, the Gorgon LNG storage tank project for Chevron in Australia is also in the design phase, and engineering is about 40% complete.

In closing, I would like to mention that we are currently involved in several preliminary engineering and FEED studies, which we anticipate will lead to EPC contracts for both storage terminals and LNG liquefaction projects. And that concludes my remarks. Phil?

Philip Asherman

Thank you, Lasse. Now Dan McCarthy will report on Lummus Technology. Dan?

Dan McCarthy

Okay. Thank you, Phil, and good afternoon to everyone. Lummus Technology's sales momentum continued through the first quarter with new awards coming in at about $100 million. Approximately 40% of these awards came from our heat transfer business and the remainder from our licensing and catalytic sales activities. Our significant project awards in the first quarter include the delayed coking heater for the Reficar refinery expansion project in Colombia.

Crude and vacuum refinery heaters for a project in Saudi; an ethylene project for Honam Petrochemical in South Korean, a natural gas treating plant in Saudi Arabia and a styrene project in Thailand. The heat transfer sales skewed the industry profile for our first quarter awards towards oil refining projects.

However, in these sales, we are providing equipment to contractors for projects that have been underway for awhile. We do not see significant new investment commitments in the refining industry in the first quarter. For us, the new project starts, which are reflected in our process licensing activities, are heavily weighted towards petrochemicals.

As we look out through the rest of the year, we believe that petrochemicals and natural gas processing will generate the best opportunities for us. Our research shows that petrochemical demand is rebounding faster than previously predicted. In fact, this month, we received word from two clients that they are restarting projects that were postponed in 2009.

The refining side will return slowly. Demand for energy is growing but refining margins are pinched by over-capacity. Nevertheless, we believe there will be pockets of activity in the second half of the year, especially in hydro processing, where our Chevron/Lummus joint venture is a market leader. From a regional perspective, we had good success in the first quarter in the Middle East, South America and Asia Pacific, and anticipate that these regions will be important markets for the remainder of the year. In addition, we are focused on China and the former Soviet Union, as these regions have significant investment plans.

While the development of projects in these latter regions have been slower than expected for a variety of reasons we believe that they are now poised for release in 2010.

I'll turn it back to Phil.

Philip Asherman

Thank you, Dan. I will now ask Ron to summarize this quarter's financial results. Ron?

Ron Ballschmiede

Thanks, Phil, and good afternoon, everyone. With that overview of our major activities around the world, let me take you through the financial information, which was included in our earnings release. Revenues for the first quarter was $869 million, down from $1.2 billion in the first quarter of 2009. The revenue decline was consistent with our expectations and with our full-year revenue guidance of $3.9 billion to $4.2 billion.

As we described in our year-end earnings call, the industry new awards slowdown in late 2008 and early 2009, combined with the engineering and ramp up phases of our large, late-2009 new awards and the anticipated completion of our large LNG projects in the first half of 2010, caused a bit of an unusual short-term revenue trend, giving our beginning of the year backlog in excess of $7.2 billion.

On a macro basis, the anticipated 2010 decline in LNG revenues exceed the estimated incremental revenues from the ramp up of our four large awards in the back half of 2009. The balance of the revenue declines reflect lower revenues from the North America refining market demand, which the industry has experienced since early 2008. I'll come back and discuss changes in our revenue by business sector in a moment.

Our consolidated gross profit for the quarter was $122 million, or 14.1%, up from 12.3% and 11.1% in the fourth quarter and first quarters of 2009. The current quarter reflects the strongest consolidated quarterly gross profit percentage since expanding our business outside the traditional tank business in the early 2000's.

The first quarter gross profit rate benefited from solid execution, a favorable mix of projects, and a greater percentage of our revenues coming from our higher margin businesses, the Lummus Technology sector and the steel plate structure sector.

Selling and administrative expenses remain well-controlled, down $8 million or 13% over the comparable period. Consistent with past years, the first quarter had a greater amount of stock-based compensation costs due to the retiree eligible provisions of the accounting rules. This accounting requirement adds approximately $0.05 per share of incremental stock-based compensation cost to our first quarter, compared to each of the remaining 2010 quarters.

First quarter income from operations was $69 million or a strong 7.9% of revenues compared to $80 million in the first quarter of 2009, which was driven by revenues of almost $1.3 billion. Our income tax rate for the quarter was 32%, consistent with the 30% to 33% range discussed in our February call.

The summation of all that results in a first quarter net income of $42 million or $0.42 per diluted share. EBITDA totaled $88 million for the quarter or over 10% of revenues and $381 million or 9.2% of revenues for the trailing four quarters.

Now let me take you through the sector's first quarter results. Phil spoke to our new awards and prospect activity. I'll provide some overall comments around these issues. Our new awards for the first quarter totaled $560 million compared to 611 for 2009. We had two awards in the quarter between 40 and $50 million, with the balance being smaller awards spread nicely between our sectors, project types, and geographically. We continue to track several new award opportunities, which are consistent with our 2009 new award guidance, which is 4.0 to $4.5 billion.

Steel Plate Structure reported first quarter 2010 revenues of 335 million compared to 420 million in 2009. The decrease of 85 million is attributable to lower activity in the oil sands related work in Canada, and the wind-down of LNG tank work in the Asia-Pacific region. This revenue decline was partially offset by a greater volume of tank-related work in Central America. Operating income totaled $32 million or 9.6% of revenues compared to 28 million or 6.8% of revenues in 2009. The increases in operating margins reflect a favorable mix of flat bottom storage tank work around the world in 2010. Additionally, the first quarter of 2009 included restructuring charges to consolidate fabrication facilities in the United States and higher pre-contract activity related to several large SDS project bids in the first half of 2009.

CB&I Lummus revenues totaled 466 million in 2010, down 326 million from 795 in 2009. There are a couple of items driving this net change. The most significant revenue decline is the result of a wind-down in 2010 completion of our large LNG projects and U.S. refinery work. This decline was slightly offset by startup revenues from our major awards in the last half of 2009. Both the REFICAR refinery work and the PNG projects are off to a good start with higher revenue burn expected in late 2010 and into 2011 and beyond.

Income from operations totaled $19 million or 4.1% of revenues in the first quarter of 2010 compared to 34 million or 4.3% in 2009. Our CB&I Lummus sector carries a higher relative percentage of fixed costs than our other two sectors. Accordingly, the 40% plus decline in quarter-over-quarter revenues results in a greater downward pressure on CB&I Lummus operating margins. This metric will improve as the large backlog projects move out of the engineering focus phase.

Finally, our Lummus Technology revenues and operating results reflect some important project mix changes. Dan previously mentioned the current relative strength of the petrochemical industry compared to that of refining. For Lummus Technology, the impact of this market results is a lower joint venture results, which primarily reflect refining activities and higher consolidated licensing revenues and gross margins reflecting the strength of the petrochemical market. Additionally, the lower first quarter 2000 – lower first quarter 2000 heat transfer revenues were partially offset by higher licensing revenues, which carry higher margins. Those factors resulted in a strong operating margin of 25% in 2010, compared to 22% in 2009.

Now a few comments on our balance sheet and cash flow. Our balance sheet and liquidity remains strong with a cash balance of $337 million, no revolver borrowings and cash net of debt of $216 million. The cash net of debt is up from $205 million at the beginning of the year, in an improvement of almost $350 million from March 31, 2009.

Our investment and contract capital, reflecting the combination of the balance of the receivable contracts in process and accounts payable, stands at a negative $648 million at the end of the quarter compared to $682 million at year-end. Free cash flow totaled $50 million for the quarter compared to a negative $37 million in the first quarter of 2009.

In closing, our strong backlog and financial position provide us with the necessary financial flexibility to deliver our projects to our owners, take advantage of the energy market demands for our services and pursue internal and acquisition opportunities to grow our Company. Phil?

Philip Asherman

Thank you, Ron. Before I open the call for questions, just a correction. I misspoke during my comments on the new award in guidance, which is, as Ron correctly stated, $4 billion to $4.5 billion range. So with that, let's open the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Scott Levine with JPMorgan.

Philip Asherman

Hello, Scott.

Scott Levine – JPMorgan

How are you doing? Phil.

Philip Asherman

Good.

Scott Levine – JPMorgan

A question on the competition. Would you characterize the competition in the marketplace in general as intensifying or stable at intense levels? And you mentioned Europeans as a source of competition – is that a relatively new development? Or how would you characterize changing the competitive landscape versus three, six months ago?

Philip Asherman

Yes, I think I'd characterize it as more intense. As I stated, I think we've seen several companies over the last several years benefit from the high demand in the industry, particularly in the refining and petrochemical markets, particularly in the Middle East. Companies and Europeans and I'll just name a couple, but certainly you always have Technip and Saipem, but certainly companies like Petrofac and Technosurianitas [ph], who have gotten very substantial. I think the Koreans we've talked about virtually every quarter for the last year as well as the Japanese competition. And on the tank side, certainly, you see Indian companies such as Punj Lloyd and Larsen and Toubro be very substantial in their competition, particularly in the Middle East. And I don't see that – I don't necessarily see that diminishing any time soon.

Scott Levine – JPMorgan

So, I don't know if you guys mentioned the 10% to 12% gross margins that you've talked about historically. How should we thinking about that going forward in light of –?

Philip Asherman

Well, that's the bandwidth that we think is still a good target, at the 14%; there's no particular anomalies associated with that. It's just good backlog performance. We want to see that kind of return, as I mentioned in my comments, from our business model. And – but certainly, we see pressure from competition all around the world in various end markets. I will say that there is a difference in markets, when you're talking about national companies who see price as the key differentiator versus large international integrated oil companies on their projects, who carry a higher weighted value on some of the qualitative aspects of companies considering their resume and safety and reliability. So we do see that difference. In those projects especially, CB&I as well as other Western contractors are very competitive.

Scott Levine – JP Morgan

One last one then if I may. We've seen a jump in iron ore prices and expect the increases in steel. Can you talk maybe about risk mitigation strategies there or how that may factor into either the thought process for customers moving forward with projects and/or risk mitigation, given the current competitive landscape?

Philip Asherman

Yes, we've seen those increases, about $100 a ton, I think in steel prices. We've seen increases in things like air coolers and exchanges, rotating equipment, various other aspects in commodities in our projects. The key difference now versus a couple of years ago is less volatility. I mean, we have seen increases, but it's more of a gradual increase as opposed to extremely volatile market. So we can anticipate that in our pricing. So we have not seen any negative impact on our current projects. We build that volatility pricing into our bids and we don't carry any exposure for that.

But we have seen the prices increase, particularly in iron ore and coking globally, and increasing steel costs, about $100 per ton, I think. And I think that's probably going to increase, maybe perhaps up to $120 per ton sometime this summer.

Scott Levine – JP Morgan

Very well, thank you

Philip Asherman

Thank you

Operator

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

Andrew Kaplowitz – Barclays Capital

Good evening, guys. Phil, if I could follow-up on that last question. Do you think that the pricing or the margins that you're going to put into backlog from the new awards that you're going to put into backlog this year, is similar to what you're reporting in revenue? In other words, are the markets sort of stable in what you can win? Or is the competition still hurting margins?

Philip Asherman

Well, you have to really break these major projects down into components, Andy. If you're looking at the type of competition we're facing in the Middle East for example, we've lost a couple of big jobs over there. So we've had a chance to do quite a bit of analysis, primarily on that large tank job in Dubai [ph] for example, and the recent events at Yanbu before the Conoco change. But we've had a chance to take a look at that.

And if you look at engineering for example, 12%, 15% of the total cost, I think Western contractors, certainly CB&I, can certainly be competitive in that environment given our ability to affect lower cost engineering alternatives, and I think a greater efficiency in those most instances and lower man-hours. We looked at the supply side of that equation, and if you compare it against the Koreans and even assume that there may be some local pricing within Korea that they can take advantage of it. When you look at the rest of the marketplace, though, they really can't affect their pricing to the point where we see the kind of spreads that we're seeing in these large jobs.

So it really comes down, I think, in many cases, just to the differences in perhaps margins, perhaps overheads, and certainly I think most importantly the risk premiums that we would insist on applying to what we think are very difficult terms in some cases, in the Middle East. So you have to take that all into consideration. But we're not sitting on the sidelines. We're going to address those components and we'll continue to compete in that but, I think that low cost model compared to the increasing cost of commodities and equipment and labor around the world is not a sustainable situation. So we'll see how that will play out over the course of this next year or two.

Andrew Kaplowitz – Lehman Brothers

I understand so – but let me ask you more specifically. The new awards that you put into the backlog this quarter, were they similar in sort of margins as what you are reporting in revenue now?

Philip Asherman

Absolutely, absolutely. That was – I could have given you an easier answer than I gave you, but absolutely. We haven't seen any real pressure on that margin. The issue is – the point is that we're being selective on those projects where you have an opportunity to sustain higher margins and perform against higher margins.

Andrew Kaplowitz – Lehman Brothers

Okay, that's fine. And just my follow-up is, on the sales, I mean, you had telegraphed well that sales would be lower especially in the first half of the year. But I think they're still lower than some of us were thinking. Did the big four, are they ramping up more slowly than you would expect? Or is it just a case of that they really are very heavily weighted to the back half of the year and we should not expect sales will sort of – in order to make your guidance for instance, you need a decent ramp-up in the second half of the year.

Philip Asherman

Yes. I think particularly, the one project that I mentioned in oil sands that has taken longer than we expected due to client preferences for more scoping and pricing so. But we do expect to book that job in the second quarter and we'll get on tracks there. But I think the important thing is that 560 million as we've also discussed, is an important number relative to just what we see as a run rate in addition to the major projects we anticipate for the rest of the year. So we think we're on track. I'm not going to tell you it's going to be a hockey stick yet to the back half of the year, but it's really a function of timing, not delay our cancellations.

Ron Ballschmiede

I would add. Andy, in the year-end call, we talked about delta on these revenue in 2010 versus 2009 of our major LNG awards is almost $1 billion. So it takes a lot of ramp-up to recover that quickly. So we're pretty much on plan on all that.

Andrew Kaplowitz – Lehman Brothers

Okay, guys. I'll get back in queue. Thank you.

Philip Asherman

Thanks, Andy.

Operator

Your next question comes from the line of Graham Mattison with Lazard Capital Markets.

Philip Asherman

Hello, Graham.

Graham Mattison – Lazard Capital Markets

Hi, I was just wondering if you could give a time following up on the oil sands, your outlook for additional workup there beyond the one project that you were talking about in terms – do you see that market really starting to pick up or sort of give your outlook there?

Philip Asherman

Well, I think the project that we're involved in is arguably one of the most viable projects going forward. And I think there has been discussion among the owner group and publicly about multiple phases on that project. So, Lasse, do you want to add to that?

Lasse Petterson

Yes. We see some increased activity in the oil sands. There's also other clients who are starting to invite bids and tender for the early phase engineering. So we see that the oil sands is – we expect the oil sands to come back, going forward.

Graham Mattison – Lazard Capital Markets

Could we start to see that sort of in the second half of 2010? Or is that more an ’11, ’12 type of...?

Lasse Petterson

I would say it's more ’11, ’12. But our activity in that area will certainly on this large project that we're involved in increased this year.

Graham Mattison – Lazard Capital Markets

And then just turning to floating LNG projects. I'm just wondering if you could just give your outlook for that market there and any potential opportunities for you there. I know it's something you talked about in the past.

Philip Asherman

I'll let Dan talk about that.

Dan McCarthy

The floating LNG market is one that's developing. It's sort of like an S curve, I guess, it's in the early stages. There’s a lot of opportunity for that. And so we're working various solutions, various customers to position ourselves. And most of it right now is sort of FEED work. I think that – it's study work and FEED work. And I think that the real projects will come about in a couple of years.

Graham Mattison – Lazard Capital Markets

Okay, great. I'll jump back in queue. Thank you.

Philip Asherman

Thank you.

Operator

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

Philip Asherman

Hello, Jamie.

Jamie Cook – Credit Suisse

Hi, good evening. One, I was – I know everyone's focused on margins over the, I mean over the long-term, but I was impressed with your margins in the quarter, the 14% gross margin; haven't seen in a long time and you’re about an 8% sort of operating margin. I don't think I heard anything that was a one-time positive. I just want to confirm that. And is there any benefit going on? We've heard from some other fixed price contractors there's a benefit of lower material costs right now. So I'm wondering if you're seeing any of that benefit.

Philip Asherman

No, I wouldn't say it's a result of buy-down one-time events. We certainly would have told you that. Again, as you well know, we've been focused on this bottom line performance for awhile. And I think just the basic business model, the construct and the characteristics of our sectors are paying dividends in terms of return on the margin levels. And that's what we had hoped would certainly occur and that's what we want to occur. And so I think we're seeing the benefits of that. And we don't see anything in project performance that would dilute those margins. And certainly, it's our intent to keep them within that bandwidth we've talked about.

Ron Ballschmiede

We didn't see any ups – any big ups or any big downs in the quarter. So it was just like we like it.

Jamie Cook – Credit Suisse

Okay. Well, congratulations on that front. And then just a follow-up question. Another reason – when we thought about your margin performance for 2010 relative to where we were last year, and last year, we had the charges, which we don't have this year, one of the things that you cited was just more cost-plus work that gets burned through. I'm assuming that hasn't changed, but on the projects that you're bidding on today too, are you seeing any material change from fixed price to cost-plus, relative to what you were initially anticipating?

Philip Asherman

Well, our mix is still around 50/50 between some type of reimbursable contract and what we consider as lump sum turnkey, primarily in our steel plate structure. That market has not changed. The steel plate structure market will continue to be a predominantly fixed price environment. And the refining petrochemical LNG, that's pretty much a mixed bag. But I think we are seeing perhaps more of a mix where we may have to fix certain components of the job, but certainly relative to some of the supply and the construction, we've taken a view that we're going to be very, very selective on those type of opportunities than we have been. And I think in many cases, the owners have looked at more of a mix-type contract than we've seen before – especially in the LNG and on the refining petrochemical side. The only exception there, again, I'd say regionally would be the Middle East, where that still continues for the most part to be a fixed price environment.

Jamie Cook – Credit Suisse

Okay. And then just a follow-up question. Phil, any thoughts here on cash or any accelerated interest in sort of smaller M&A activity, relative to where we were sort of six months ago?

Philip Asherman

It's really the same. We've got our eye on several opportunities that we can look at relative to growing our technology business. Certainly, we think there's some interesting opportunities perhaps in the CB&I Lummus arena. But we continue to grow our cash balances and look for those opportunities but nothing to talk about today.

Jamie Cook – Credit Suisse

All right, great. I'll get back in queue. Congrats.

Philip Asherman

Thanks, Jamie.

Operator

Your next question comes from the line of Martin Molloy with Johnson Rice.

Philip Asherman

Hi, Martin.

Martin Molloy – Johnson Rice

I was wondering could you talk a little bit about if you're seeing any opportunities in the gas processing facility market in the US?

Philip Asherman

Sure. Dan, do you want to talk about that?

Dan McCarthy

Yes, I'd be glad to. We definitely are seeing gas processing projects being developed around the shale gas that is under development in the Marcellus region and other places in the United States. These projects – so we've had a particular high level of inquiries. We're doing some feed projects so that there's not a full commitment to go forward, but we anticipate that will be a big part of the rest of the year for us.

Martin Molloy – Johnson Rice

And I'm sorry, if I missed it, did you give the percentage of your backlog that's outside the US?

Philip Asherman

No, I didn't, Marty, but I'll tell you that our current backlog is over 70% of work outside the US. Our new awards last year I think was over 90% of work outside the US.

Martin Molloy – Johnson Rice

Okay. Thank you.

Operator

Your next question comes from the line of Michael Dudas with Jefferies.

Philip Asherman

Hello, Michael.

Michael Dudas – Jefferies

Good evening, everyone. I know you're going to miss talking about South Hook going forward.

Philip Asherman

I am.

Michael Dudas – Jefferies

I'll hold back the tears [ph]. First question, when you talked earlier in your prepared remarks, Phil, about the competition angle, when you're looking at your bid list and what your expectations are, what percent of those projects are the ones where you have the 50% to 60% win ratio? And which ones are you may be less confident because of the added competition? I guess I'm thinking this is more CB&I Lummus as opposed to steel plate structure, but correct me if I'm wrong.

Philip Asherman

No, you're correct. That's the issue. I would say when you look at that 50% to 60%, that's predominantly with the type of clients that I described. When you look at for example, projects in the Middle East or other regions where it's predominantly tendered by national companies, I'd have to handicap that down to around 20% to 30%.

So that's more of a price competition and one in an area that we have to be very cautious. Now we're looking at a variety of ways to approach that and the components that I talked about with Andy's question, but also looking at more joint ventures and collaborations to try to either mitigate risks or reduce costs and be more competitive.

Michael Dudas – Jefferies

My follow-up, Phil, is you indicated about steel price increases that you're seeing and probably expect as we move into the summer. When you think about steel craft labor, fabrication capacity, et cetera, foundry time, would you say that the commodity costs and pricing levels for projects for your clients has bottomed and will only move up going forward? And if that's the case, will that influence some of the decisions your clients are putting through, given the delays they have seen over the last year?

Philip Asherman

No, I think certainly the clients have great visibility into these pricing, the supply pricing and particularly around steel and alloys and other major components. But we haven't seen the price of steel rise to the point where it's starting to threaten the viability or the economics of any projects. A lot of that is changing as a result of some of the big mining companies changing their pricing agreements to quarterly contracts, or you see a lot of volatility in that.

But even with the $100 to $120 a ton increase we expect to see out this summer, we haven't seen them threaten, again, the economics of the projects, at least the ones we're chasing. So, I don't think China is a factor. They're concentrating their steel primarily on the domestic growth, so we don't see that necessarily factor in the marketplace.

Michael Dudas – Jefferies

All right. Thank you, Phil.

Philip Asherman

Thank you, Mike.

Operator

Your next question comes from the line of Avi Fisher with BMO Capital Markets.

Avi Fisher – BMO Capital Markets

Hi, good evening. Thanks for taking my questions. You were talking about the heat transfer equipment in the Lummus Technology, I just wanted to make sure I understood, 40% – did you say that 40% of bookings in Lummus Tech was for heat transfer equipment?

Dan McCarthy

That's correct. These are large fired heaters, primarily.

Avi Fisher – BMO Capital Markets

And how long does it take for that backlog to burn typically?

Dan McCarthy

About 18 months.

Avi Fisher – BMO Capital Markets

Okay. And that's typically, most of that's a pass-through cost, if I recall?

Dan McCarthy

I'm not sure I saw what you mean by pass-through costs.

Avi Fisher – BMO Capital Markets

And I think you alluded to this on the call –

Dan McCarthy

We don't fabricate, that's what you mean, we do not fabricate.

Avi Fisher – BMO Capital Markets

But this is – is this a lower margin product on the licensing? Is that what Phil was talking about (inaudible) –?

Dan McCarthy

Yes. Absolutely. I mean, this supply business is sort of a margin on the supply, a fixed fee on a supply contract. So there's no license technology component to the pricing.

Philip Asherman

We said historically. It looks like DPC business, they are historical business margins.

Avi Fisher – BMO Capital Markets

Right. Thanks for the color.

Dan McCarthy

I would say a little higher than that, but still –

Ron Ballschmiede

Gross margins, sorry.

Philip Asherman

But Avi, I think you raised a good point, because when you look at, we want you to look at the individual components in the sectors and that's probably in Dan's business in Lummus Technology where you've got to be – we've got to draw your attention to any variability in that market. Because that's where it's going to occur. Because we, traditionally, obviously can recover great margins in the technology business, but a large heat transferred job will skew the new awards as well as some dilution on the margins. So it's not necessarily representative of Lummus Technology as a whole. Would you agree, Dan?

Dan McCarthy

No, that's – yes. Absolutely, correct. Okay.

Avi Fisher – BMO Capital Markets

Okay. And you were alluding – I think Phil was – I'm sorry, Ron was alluding to this also in terms of the changes in the equity earnings and the minority interest as a result of this?

Ron Ballschmiede

Well, not the minority interests. The equity earnings come from our two JVs that are predominantly in the refining businesses. So, with the slowness in that side that Dan talked about, if you just looked at our income statement, most of that equity earnings is Lummus Technology related. However, in total, Lummus operating income was up and that's really attributable to the higher licensing revenues this quarter, primarily from petrochemicals and lower heat transfer revenues, which drive the GP down.

Avi Fisher – BMO Capital Markets

Got you. Okay, I appreciate the further details there. Although I did see that CDTECH had won some an award in Russia. Is that something that should buoy some of the equity earnings going forward?

Ron Ballschmiede

Yes. When we look at the equity earnings, there's really two joint ventures. And CDTECH is involved in smaller projects that still seem to be going forward. And so, they're running closer above plan, actually. And CLG, which does all these large hydro processing projects, they're the one that's slipping a little bit because the investments are so high and the margins in these refineries are tight.

Avi Fisher – BMO Capital Markets

Okay. Thanks for the details there. Your CapEx was a bit lower than I had expected and I was wondering if there's any change to your CapEx guidance. I think you previously said?

Ron Ballschmiede

No. The guidance remains as it is. When you think about it, it's really a reflection of what we're talking about. The large LNG jobs aren't demanding any new CapEx; they're coming down. The equipment is coming back into our yards and the big new projects are in the engineering phase. So, this would be the low point of our CapEx cycle.

Avi Fisher – BMO Capital Markets

Okay.

Philip Asherman

And I'd have to say it's also the difference in our mix of projects too was a higher component of reimbursable work.

Ron Ballschmiede

Absolutely.

Avi Fisher – BMO Capital Markets

So should the CapEx ramp as the big projects ramp? Is that going to –?

Ron Ballschmiede

There will be more spending in the back half than the front half as we get some of these projects moving up, but still within the guidance, though.

Avi Fisher – BMO Capital Markets

In line with the increased revenues in the back half then (inaudible)?

Ron Ballschmiede

That's a good way to put it. Yes.

Avi Fisher – BMO Capital Markets

Okay. And is interest expense still mostly an amortization of prior financing costs or I'd be interested in (inaudible) –

Ron Ballschmiede

That, together with $120 million of fixed debt we still have out there from the Lummus transaction.

Avi Fisher – BMO Capital Markets

So what should we think about interest expense going forward? Just a slight decline quarter-over-quarter or?

Ron Ballschmiede

I would look at it. There aren't any changes in that until we make another $40 million payment at the end of the year. And your guess is as good as mine on the banking costs. They're not going down.

Avi Fisher – BMO Capital Markets

Okay. Thanks for the details.

Operator

Your next question comes from the line of Barry Bannister with Stifel Nicolaus.

Philip Asherman

Hi, Barry.

Barry Bannister – Stifel Nicolaus

Hi, compared to the rest of the Company, the Lummus EPC business margin really didn't get any lift. Was there any Golden Pass zero margin revenue in the quarter and if so, how much? Are there any legacy Lummus ENC business revenues, such as Westlake or Viondell [ph] or SR still in there that may be diluting?

Philip Asherman

Nothing to move the needle, Barry. I think if you look at the EPC business, the CB&I and Lummus business and comp it against those in our peers, the margins are right in line with what we would expect from that business. No major component – no major factor which moves the needle there.

Ron Ballschmiede

And the only thing I'd point out is, as I mentioned, that the revenue decline is most severe in that business and they carry the highest costs – so, highest fix related costs. So if you just – if you only – the only fixed cost you had was S&A, even though we've taken S&A down by 15% during the quarters as a percent of revenue, if you just spread that evenly across the sectors, that would be a 1.5, give or take, downward pressure on operating margins there. So the size matters in that business.

Barry Bannister – Stifel Nicolaus

You did about $58 million free cash in just the first quarter alone. What is your goal for 2010 for both free cash and the reduction of the $682 million contract capital deficit?

Ron Ballschmiede

Well, our contract capital deficit will move with our backlog. That's – we've seen that go in. The only change was when we had our challenges with our UK projects that required us to take some accruals. So beyond that, I would look for that to move. So the decline, a little bit of a decline, $37 million dollars in the quarter was pretty much as expected. And if we achieve our revenue and our new award guidance, we would expect to trend, give or take the relationship that we've seen in the past.

Barry Bannister – Stifel Nicolaus

Free cash? Free cash?

Ron Ballschmiede

Free cash – it should be pretty consistent with last year. It's really all about contract capital and the reliability of revenues and new awards. Everything else should trend along.

Barry Bannister – Stifel Nicolaus

And then lastly before I hop off, the ATM offer, have you completed that? Are we looking at share count leveling at about $101 million and should the tax rates stay around 32%?

Ron Ballschmiede

Let's do ATM first. We have been out of the market in the first quarter and we'll only go back in for growth money. As you may recall, we started the program in August of last year with the express purpose of having funds to continue to look at that growth, internal and acquisition related. We raised about $40 million last year. Once it was clear that the market was performing like we thought it was, we shut the program off. And it will stay turned off until we talk more about opportunities or spend some money on transactions. Sorry, second part of your question was what, Barry?

Barry Bannister – Stifel Nicolaus

Percent?

Ron Ballschmiede

Didn't hear it, sorry.

Philip Asherman

Tax rate.

Ron Ballschmiede

Oh, I'm sorry. Yes, the tax rate should remain in the low 30s.

Barry Bannister – Stifel Nicolaus

Was there a special reason why it was 32% and not 33% this quarter?

Philip Asherman

Just the geographic mix of income.

Barry Bannister – Stifel Nicolaus

Okay. Thanks a lot.

Philip Asherman

Thanks, Barry.

Operator

(Operator Instructions) Your next question comes from the line of John Rogers with D.A. Davidson.

Philip Asherman

Hello, John.

John Rogers – D.A. Davidson

Hi, good afternoon. Just following up on the last question, I just want to make sure I got that right, Ron. In terms of the cash, as you sign some of these projects or contracts through the year, you're still expecting to collect upfront cash on these, all of the terms you've seen in the years past?

Ron Ballschmiede

Correct. Particularly, the lump sum business.

John Rogers – D.A. Davidson

Okay. And then any pressure to change that in the current pricing environment?

Ron Ballschmiede

No, I don't think so. I think the focus historically has been on the ultimate price. And beyond that most of our owners realize that we're not interested in working on our own money for these projects. And we have mechanisms, it's either breakeven on much of the cost of reimbursables' business or remain cash positive on the lump sum work.

John Rogers – D.A. Davidson

Okay. And then just in terms of the nuclear containment vessel work, what you have now included for that?

Philip Asherman

Have, in what sense? What we currently have in backlog?

John Rogers – D.A. Davidson

Yes, in backlog and the opportunities out there, I know it's still pretty.

Philip Asherman

Yes, we've talked about that. It's been a bit more – a bit sluggish than we really anticipated when we started looking at that. We've got four orders that we –

Ron Ballschmiede

Right around $300 million in backlog

Philip Asherman

$350 million. There is some potential new work in front of us that we would hope would be awarded second quarter and we'll just wait to see how that plays out. Beyond that, I think it's going to be somewhat sluggish going forward throughout the remainder of this year.

John Rogers – D.A. Davidson

Great. Thank you.

Philip Asherman

Thank you

Operator

At this time, we have reached the allotted time for questions. I would like to turn it back over to management for closing remarks.

Philip Asherman

Stephanie, we had one more gentleman on the queue. Would you like to let him ask his question?

Operator

One moment, sir. Your next question comes from the line of Andrew Kaplowitz with Barclays Capital.

Philip Asherman

Hi, Andy. I think Brian Uhlmer was on there, but I think he hung up. So, one more question.

Andrew Kaplowitz – Barclays Capital

Thanks for taking my follow-up then. Just real quickly, Lasse had mentioned something I thought was interesting. You talked about feed work for LNG liquefaction. And he had also talked about some storage work that you were going to win or had won in 2Q from the Korean guys. So can you talk about – are these decent sized projects for the Korean guys? And then on the LNG liquefaction, what regions of the world are you focused on for LNG liquefaction opportunities?

Philip Asherman

Well, as far as some of the tank work, the LNG tank work, as you know, most of those are re-gas or liquefactions are in the hundreds of millions of dollars as opportunities, even just tanks themselves. We do see opportunities globally for that.

The liquefaction, we've seen some opportunities I'd say in some of the more non-traditional regions where we tend to do very well. And we'll be talking more about that in the second quarter, early second quarter.

Andrew Kaplowitz – Barclays Capital

All right, I won't press you. Thank you.

Philip Asherman

Okay. Thank you.

Well, I think that concludes our questions today and we'd just to like to thank you all for your time. That will conclude our call.

Operator

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

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