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Foster Wheeler Ltd. (NASDAQ:FWLT)

Q1 2010 Earnings Call

May 5, 2010 10:00 a.m. ET

Executives

Scott Lamb - VP, IR

Ray Milchovich - CEO

Umberto Della Sala - President, Chief Operating Officer; & CEO, Global Engineering and Construction Group

Gary Nedelka - President & CEO, Global Power Group

Franko Baseotto - EVP & CFO

Analysts

Michael Dudas - Jefferies

Andrew Kaplowitz - Barclays Capital

Steven Fisher - UBS

Barry Bannister - Stifel Nicolaus

John Rogers - D.A. Davidson

Will Gabrielski - Broadpoint

Roger Reed - Natixis Bleichroeder

Avi Fisher - BMO Capital Markets

Operator

Good morning. My name is Brook, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Foster Wheeler First Quarter 2010 Investor Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.

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

Scott Lamb

Well, good day everyone and thanks for joining us. Our news release announcing financial results for the quarter was issued this morning and has been posted to our website at fwc.com. The presentation that we'll use has been posted in the Investor Relations section of our website.

Before turning to the discussion, I need to remind you that any comments made today about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ substantially from such forward-looking statements. A discussion of factors that could cause actual results to vary is contained in Foster Wheeler's annual and quarterly reports filed with the Securities and Exchange Commission. The Company's Form 10-Q is being filed with the SEC today.

Joining us on the call today from our office here in Zug, Ray Milchovich, Chairman and CEO; Umberto Della Sala, President and Chief Operating Officer; Bob Flexon, who is currently CEO of our Foster Wheeler U.S.A subsidiary and who will assume the role of CEO of Foster Wheeler AG on June 1, Franco Baseotto, who is Executive VP, CFO and Treasurer and Gary Nedelka, CEO of our Global Power Group.

And with that, I will turn the comments over to Ray.

Ray Milchovich

Thank you Scott. Good day everybody. Thank you for joining us. I'll briefly walk us through our prepared remarks and then of course we'll be prepared to handle any questions that anyone has.

Turning to page three of our prepared materials, Q1 2010 highlights, we enjoyed continued solid financial performance during the quarter. We had diluted adjusted EPS of $0.56, adjusted net income of $71.3 million, adjusted consolidated EBITDA of $110.5 million. These results included a one time gain for our pension plan curtailment. The pretax affect of that was $20.1 million, included in consolidated EBITDA and after tax of $14.5 million or $0.11 per diluted share included in net income. We continued commercial and operating excellence in both business groups and during the quarter we saw what we believe are signs of potentially improving markets.

In our GBG business, our Scope new orders booked were at the highest levels since Q1 of 2008. In our E&C group we experienced increased proposal activity, signaling what we believe is potential improvement in market conditions, particularly in Asia Pacific, Central and South America.

Turning to page four, Q1 2010 details. We had Q1 adjusted net income of $71.3 million or $0.56 per diluted share. The Q1 results a one time after tax gain of $14.5 million or $0.11 per diluted share for a pension plan curtailment in our E&C group. Turning to page 5, specifically with in E&C, we had Q1 EBITDA of $100 million. EBITDA reflects a one time pretax $20 million gain on the pension plan curtailment.

This resulted from proactive steps taken by the company to address the employee pension plan in our UK subsidiary. The action included the freezing of a defined benefit pension plan and other associated actions and we expect approximately a $13 million reduction in ongoing pretax annual pension expense as a result of these actions.

Our EBITDA margin during the quarter on Scope revenue was at 24.1%, versus 22% for the average quarter of 2009. It was 19.3% excluding the favorable pension related impact and we had no material impact from currency translation in Q1 on EBITDA. Turning to page 6, continuing with our E&C group performance in terms of new orders and backlog in Q1, we continue to enjoy what we believe is a very good prospect list. However, intense competition continues in some situations.

What I may do is ask Umberto to speak to a couple of specific awards that we enjoyed during the quarter. Umberto?

Umberto Della Sala

Thank you. I'll start with the Sasol wax project. This is a project in South Africa. It's a fairly complex, petrochemical complex project. This is an EPCM contract on a reimbursable basis. The Singapore LNG terminal is an integrated project management team. We work together with the client to manage this first LNG terminal in Singapore. (inaudible) Barrancabermeja, this is a project that was booked last year, but this an additional booking in connection with some early work activities on the project. And then last we have the Far East refinery which was booked a long time ago and which is proceeding well. But according to the client procedure, we received interim awards as the project moves forward during execution.

Ray Milchovich

Thank you, Umberto. And as previously mention mentioned, we saw increased proposal activity in the quarter, suggesting potential improvement in market conditions and as I mentioned earlier, particularly in Asia Pacific and Central and South America.

Turning to page 7, in our E&C Group, in terms of new orders in Foster Wheeler Scope, our Scope bookings in Q1 2010 continued at what we consider to be a very sound level. Turning to page 8, in terms of global E&C Group man hours and backlog, we saw a slight increase from Q4 of '09 to 13.5 million man hours in backlog at the end of Q1 in 2010. Turning to page 9, global E&C Group backlog in Foster Wheeler Scope stayed about the same at $1.455 million in backlog in the quarter, substantially the same as where we finished Q4 of '09.

Turning to our Global Power Group, Q1 performance, they posted EBITDA of $30 million during the quarter. EBITDA was below the average quarter of 2009, primarily due to lower volumes. Their Q1 EBITDA margin on Scope was at 18.3%. This was aided by the capture of an increased level of profit enhancement opportunities through excellent operating performance in the group. This is compared to 13.3% margin in our average quarter of 2009.

Turning to page 11, Global Power Group new orders and backlog in Q1 of 2010, our CFB boilers continue to be the preferred technology for cleaner power generation using a wide variety of solid fuels and have helped us weather the period of continued weak demand globally for solid fuel boilers. We had three significant awards during the quarter and I may ask Gary Nedelka to speak to the significance of these awards. Gary?

Gary Nedelka

Thank you, Ray. During the quarter we booked a 190 megawatt biomass CFB boiler in Poland and this represents the largest 100% biomass unit in the world and includes a significant amount of agro biomass. Also, we booked two 50 megawatt CFB boilers in China and these will burn petroleum, coke, a variety of Chinese coal or a mixture of all three.

In addition, we booked a 30 megawatt thermal CFB unit in Spain, which is being designed to operate both in a standard air fired mode, but also to be used in what's called Oxy-Fired or Flexi-Burn mode where we would produce a more pure stream of carbon dioxide for eventual sequestration. So these are three good, good orders for us to represent the flexibility of the CFB design.

Ray Milchovich

Thank you, Gary. And in addition, we're beginning to see a recovery in demand in some regions, specifically in Asia and Eastern Europe.

Turning to page 12, in terms of global power, new orders in Foster Wheeler Scope, as you can see by the graph shown, we enjoyed in Q1 the strongest quarter since Q1 of '08 in terms of Scope booked for our GPG unit. Turning to page 13, in terms of backlog in Foster Wheeler Scope, given the strong booking quarter that we had, as you can see, we ended the quarter in terms of backlog with our highest level we've seen since Q4 of '08.

Now turning to cash, at the end of the quarter we saw a slight reduction in our cash position. This was primarily influenced by, a, $31 million of unfavorable currency translation relative to rates in effect at the end of Q4 '09 and working capital absorption which was timing related due to protracted billing and collection process with some clients.

In terms of page 15, key takeaways from the quarter, we are encouraged by the signs of potentially improving markets as we've mentioned. The Company continues to enjoy excellent commercial and operating performance during the quarter. In terms of 2010 outlook, our Global Power Group, we expect EBITDA margin on Scope revenues to be in a range of 16% to 18% for the full year and we see improving demand in selected markets, which would suggest to us that GPG will build backlog during 2010 versus where we ended in 2009.

In terms of our global E&C group, assuming an accelerated pace of new orders in the second half of 2010, we expect EBITDA margin on Scope revenue to be in the range of 18% to 20% for the full year and our increased proposal activity suggests potential improvement in market conditions, particularly in Asia and Central and South America.

At this point we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Michael Dudas with Jefferies.

Michael Dudas - Jefferies

Two questions. First, Ray, in your prepared remarks, you talked about competition in some markets. Could you give a little bit more granularity regarding that; and secondly, maybe reflect on some of the opportunities you're seeing in Latin America that give you confidence about a better bidding market?

Ray Milchovich

Well, let me just say this. What I meant to say is not intense competition in some markets. It's really more situation specific than market specific and it has to do with not only the market, but also the client situation, the competitive situation and who the competition happens to be. So I would say its much more situation specific than, than market specific. And Umberto, I might ask you to add to that and expand on that in the event you can. Pretty much that.

Umberto Della Sala

Pretty much that, yes.

Ray Milchovich

Central and South America activity.

Umberto Della Sala

Well, the activity in Central and South America is mainly with national oil companies. This is where we started to focus our attention a couple of years ago and there this activity. We have booked projects in Columbia. We are working in other countries in Venezuela and we have prospered in Chile, in Brazil, in (inaudible). There is activity there.

Ray Milchovich

I would say Asia Pacific and Central and South America the activity level is materially more than we see in other areas.

Michael Dudas - Jefferies

And you believe the activity level in those areas or in areas where you have at least the competitive advantage that gives you a better chance to get a win ratio on these areas.

Ray Milchovich

In some cases I would say we have a competitive advantage. In other cases I would say that we are certainly competitive with anyone else who would be competing with us there. Once again, the degree to which we have competitive advantage is very, very situation specific with the client, with the geography, with the product line we're selling, and with the technology that we're selling. So it's very, very situation specific.

Operator

Your next question comes from Andrew Kaplowitz with Barclays Capital.

Andrew Kaplowitz - Barclays Capital

So obviously in the quarter, sequentially your revenue went down quite a bit. And so I guess what we're wondering is was this in line with your expectations? And I know you at the analyst day put out some guidance around Scope E&C revenue. Could you comment on that for the rest of the year?

Ray Milchovich

We still think E&C revenues will be essentially flat on the year.

Andrew Kaplowitz - Barclays Capital

That's helpful. And so would you say that this quarter was more timing related? Is there something that happened? Is it just a….

Ray Milchovich

I don't think there was anything specific Andy, other than it was just quarter-to-quarter cyclicality that we see from time to time. But, as we look at the quarter in the context of the year, it doesn't change our view of the year at this point.

Andrew Kaplowitz - Barclays Capital

On the power side as well Ray, the revenues were down but the backlog was up big. Are we going to start seeing these new projects start to burn immediately or should we expect revenue to ramp up slowly from where we were?

Ray Milchovich

I think you'll see a slow, systemic ramp up. But I think it will start immediately in Q2. Quite frankly, GPG's performance on the bookings side as well as the execution side was a positive surprise to us in the quarter. We actually booked better than we thought we would book because they simply nailed the capture rate in terms of what was available to them and their execution during the quarter was clearly the best ever quarter they've ever had.

So they nailed it on the execution side as well as on the bookings side and it would appear in the marketplace that there's a reasonable level of activity that would suggest that they will be able to continue that as the year continues. So they were actually, for us I'd say not hugely, but a slight positive surprise even for us internally during the quarter. So we're very encouraged by what we see in that group as of right now.

Andrew Kaplowitz - Barclays Capital

Great. And then we noticed that you just won a PMC role on an upstream project, which is pretty interesting to me. Obviously we've talked about the build up there and you've also talked about trying to get more acquisitions in the fold and get to capacity there. Can you update us on where you are there?

Ray Milchovich

I might let Umberto speak to that.

Umberto Della Sala

I guess you are referring to the [ATCO] project in Abu Dhabi?

Andrew Kaplowitz - Barclays Capital

That's right.

Umberto Della Sala

This was a project that was put on hold for a while. Then it was revitalized. And so in addition to what was ready on our screen when the project was put on, we got some additional work in connection with the new oil field. This is a sizeable PMC contract, by the way. But this is an example of what we are seeing in the market.

We start seeing projects which were put on hold being revitalized and this is not the only example. There are other examples that I cannot advertise now. Hopefully, they will be announced shortly, projects which were put on hold, which now are back on our screen and we should be able to book them.

Ray Milchovich

Generally, in upstream Andy, what I would say is I think we're encouraged by the integration that we see happening under Clive Vaughan's leadership in Houston with the acquisitions that have been made. We see the benefits that the critical mass is going to give us in that market. It's not going to be a huge breakthrough for us during the year but it's going to be what I call a steady, solid improvement in our ability to bid and win business there. And we're on plan for what we intended to do there.

Andrew Kaplowitz - Barclays Capital

You talked about a third acquisition there. Is it still sort of pending?

Ray Milchovich

We're continuing to evaluate that opportunity.

Operator

Your next question comes from Steven Fisher with UBS.

Steven Fisher - UBS

Ray, you mentioned on the revenues a quarter-to-quarter cyclicality. I'm just wondering if you could explain a little bit more of what that means and then what has to happen for the revenues to ramp up and to keep flat with last year.

Ray Milchovich

Well, let's speak to E&C specifically and then we'll go to power, because I think the situation is a little different in both places. We said going into the year, at the end of last quarter that we were expecting if you will, a ramp up in booking activity and activity level in general in E&C in the second half of the year.

The signs we're seeing in the market in the first quarter are consistent with that. And assuming that, which we think is a good planning assumption on our part, we've said that our best estimate is flat revenues for the year. We still believe that. But once again, that's all contingent on a second half ramp up, but we're seeing signs of that in the market that it will support that on the E&C side. So the first quarter revenues at E&C weren't a huge surprise to us and it's not inconsistent with our current view of the year.

In GPG, we knew we went into the year really light on backlog because of the booking experience that we had last year. Last year was just a horrible market to support that business. As I mentioned earlier, if anything, they were a pleasant surprise internally in the quarter because we did a level better on the execution side, as well as the booking side in the business and we see opportunities in Q2 which we think should continue to do that.

They desperately needed those bookings to be able to support the business. And they're now getting busy again, which is going to be good for us, which will be a steady ramp up in level of activity and revenues in that business going forward. Their issue simply was they went into the year with just a very, very low backlog and they needed the booking in Q1 and they did. So the situation of the two businesses is a little different.

Steven Fisher - UBS

That makes sense. How much are the visa rules in India restraining Paradip revenues, if at all?

Umberto Della Sala

We know certainly that there are some new rules being implemented in India in connection with visas, but so far they have not affected the project. The real issue we have today is the progress on procurement because of public procurement rules that we have to follow on the Paradip project. So today that's the major issue we have on the project and we are working together with the client to find ways to expedite the procurement activities because if we cannot procure, we cannot progress with the engineering. Visa has not affected so far the project.

Ray Milchovich

Because remember Steven, there's a high level of Indian content, our Indian offices on the Paradip project which helps the visa constraint situation that you mentioned.

Umberto Della Sala

And, by the way the project is fairly large and is divided in four project teams. One of them is already completely moved to India and all of the others are moving to India because that's the plan, to complete the execution in India with Indian resources.

Steven Fisher - UBS

Great. And then just on the power margin, how do the margins on the recent bookings this quarter compare to what the 2010 guidance range is?

Ray Milchovich

It's consistent with. We track margins booked during the period and I would say it's completely consistent with.

Operator

Your next question comes from Barry Bannister with Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

Just to follow up on the last question, I understood that there was a good bit of contingency capture in GPG. So you're saying that you're actually booking new business in GPG at a comparable margin to the contingency capture enhanced margin of the past business?

Ray Milchovich

No Barry. What I'm saying is we're booking business consistent with the margin guidance that we've given. Now GPG's margin performance in the quarter was aided by a level of operating performance that was just a level better than anything they've ever done before. But what I'm saying is the business they're booking is con consistent with the margin guidance that we provided.

Barry Bannister - Stifel Nicolaus

And sterling is flat and the euro is down slightly year-over-year. Both are down very sharply year-to-date. Could Umberto give us some update on the foreign exchange effect on full-year profits and perhaps the possibility that currency will erase some of the operating leverage associated with rising bookings, keeping this year to a moderate level of earnings?

Ray Milchovich

Umberto could, but Franco wants to.

Franco Baseotto

I'll take that question Barry and you are right because the increase in the U.S. dollar at the end of the quarter was definitely more significant than on the average. On an average basis, as we said, we have not been impacted by translation. In terms of answering your question, I'll take the quarterly EBITDA of $111 million and I normalize it for the one time pension curtailment gain. And assuming that as the run rate for the year, and I'm not saying that's our forecast, but just for purposes of addressing your question, and assuming the same distribution between euro and pound, if the euro remains in the current range of 130, 135 and the pound 150, 155; the yearly impact in terms of currency translation for the total company would be between $10 million and $15 million negative translation on EBITDA.

Barry Bannister - Stifel Nicolaus

Okay, a million dollars. And then lastly, Ray, your clients including national oil companies are increasingly vertically integrated. You've largely been known as a downstream company on the E&C side. Should we take the increased vertical integration of the industry as a sign that to gain true scale, you're going to have to make a large upstream merger, part of the Foster Wheeler future once the transition to Mr. Flexon occurs? And then related to that, you haven't really addressed or moved on capturing all of that Global Power Group after-market service. Is that a sign that the division is non-core and is less pressing, because you haven't made those kind of people investments to capture that business?

Ray Milchovich

Let me start with the E&C question and let me say that I accept your point about the integration of national oil companies. However, as we see specific opportunities, they have had a complete willingness to take the opportunities to who they think the contractor is who is best skilled to execute that work. Umberto, would you agree with that?

Umberto Della Sala

Absolutely.

Ray Milchovich

And so number one, I do not see a press from them to one stop shop. They've had a complete willingness to take the opportunity to the contractor they think is best suited and now what Mr. Flexon's appetite will be for large, upstream acquisitions, he can speak to you next quarter. But what we see in the market would not require us to do that to service national oil companies. Umberto, would you agree?

Umberto Della Sala

Yes.

Ray Milchovich

Now Gary is coming out of his seat. He wants to speak to the GPG services issue. So I'm going to let him speak to that question instead of me. Gary?

Gary Nedelka

Basically what's happened with the services market in the United States is it's predominantly driven by the amount of electricity generation that has seen a dip of anywhere, depending on which North region, 6% to 8% over the last couple of years. So that's driving a contraction in that market to an extent that's certainly stalling the market.

The other thing that we're waiting for is for implementation of new clean air interstate regulations or revised [CARE] Act, which would start to drive some of the investment in services that would be tied to omissions projects.

Barry Bannister - Stifel Nicolaus

So it's fair to say that when you get visibility on [CARE] and we get some recovery in power that you're going to make the people investments necessary to capture the after market where Foster currently gets a fairly woeful share compared to, for example, McDermott?

Gary Nedelka

Yeah. In fact, we're making those moves right now in terms of people and resources. We're not just waiting for the market. But of course, it's going to take a little bit of comeback in the market for those results to bear fruit.

Ray Milchovich

Yes. We would agree with your observation about our prior emphasis and focus on the services market. And as Gary and I deal with his focus on services going forward, I'll remember that word woeful. We may use that word from time to time, Barry. Thank you.

Operator

Your next question comes from John Rogers with DA Davidson.

John Rogers - D.A. Davidson

Ray or Umberto, just as it relates to the E&C business, can you provide a little more color in terms of the accelerated pace of new orders that you're looking for in the second half of the year. Are these just a couple of substantial orders or is it much broader than that, number one. And then secondly, in terms of the strength in proposal activity, could you characterize -- you talked about geographies -- but maybe between downstream versus LNG work or be more specific on what type of end market.

Umberto Della Sala

Okay. So maybe I'll start from the last question, proposal activity. LNG, we see a pickup in proposal activity, mainly conceptual and some basic design FEED work. So, quite a number of prospects on our screen, mainly conceptual which gives an indication that there are projects which have been considered by clients for implementation.

In terms of bookings going forward, our life does not depend only on a few large bookings. To feed our machine, we need a number of bookings, small-medium sized bookings. So I don't believe that you should judge our future based on a couple of important bookings. We book projects from a few hundred thousand dollars so several million dollars.

So what we see in the market is a pickup in proposal activities on all sized projects. So in terms of geography, certainly we see the Far East picking up, Singapore as an example. Singapore is definitely improving. A number of projects are back in the market, some of them being bid now, possibly very shortly. China is another country in which we see a pick up of activities. We mentioned earlier on Latin America national companies in our projects have been becoming larger, additional scope on existing projects, new projects coming on the screen.

So the only issue I see is that it takes more time today for the clients to arrive to the final investment decision. So, a couple of years ago the time from the conceptual development to the final investment decision was shorter. Now it takes longer. There are other examples of large petrochemical projects in which Dubai, Ras Tanura, you've seen what's happening there. We start with a project to be located in Ras Tanura, now where they are talking about relocating the project, changing some of the scope, releasing the economics. So it is taking longer.

Ray Milchovich

The only thing I would add John is, when we closed our quarter and we had discussions with each of the operating units, there was clearly a difference in the tone of what we saw out of Asia Pacific and what we saw with the business units that were servicing Central and South America than there was in the previous quarter, in terms of activity, in terms of project by number. And these were projects that had been dormant for a period and new projects that, to Umberto's point are new on the drawing board.

I was in Australia last week. We're now dealing with potential issues of construction labor shortage in Australia, given the labor rules in Australia. We simply weren't dealing with that a year or two years ago. So there are clear signs of pickup in the market that, frankly, we were forecasting that would occur in the second half of this year and our view is that the activity will in fact lead to bookings that will support that. That was our notion going into the year and we saw the activity level in Q1 to support that.

John Rogers - D.A. Davidson

And I don't know if you want to put this final point on, but you talked about this acceleration. Are we talking about twice the level that we've been running at over the last couple of quarters or…?

Ray Milchovich

No. I wouldn't say, not that orders, no, not twice that. But I'd say it's definitely a material increase over what we've seen before. But I wouldn't say it's twice the activity that we saw a quarter, two quarters ago. No. And once again, it's situation specific. And in this case it's geography specific.

Operator

Your next question comes from Will Gabrielski with Broadpoint.

Will Gabrielski - Broadpoint

A question directly for Umberto. I believe you said earlier there's more projects to be had shortly. I was just wondering if you could follow up on that comment. Are these upstream, downstream and is it more FEED work, feasibility work or are there any [PC] opportunities maybe in the next six months that we should be looking forward to?

Umberto Della Sala

Well, certainly there would be a number of conceptual and FEED work from EPC. But mainly when we talk about EPC, we talk about projects which we are working already, which should move into the EPC phase. I don't see today any major large EPC, with a couple of exceptions, coming out of the sky. The EPC are mainly projects which we have been following for a while which should move into the EPC phase. The rest will be conceptual FEED type work.

Will Gabrielski - Broadpoint

Okay. And then can you talk about three down downstream projects, Barrancabermeja, the refinery in Libya and the refinery in Vietnam? You guys had press release I believe on all FEED work and you had talked about additional scope obviously as those were moving into EPC, including program management. Are there still more expected releases on each one of those projects or are any of those fully booked at this point?

Umberto Della Sala

You mentioned three projects and on some of them we are now in the bidding process and we are confident that we could work on those.

Will Gabrielski - Broadpoint

And then I guess over the past few weeks it's been quite obvious that the western E&P firms are suddenly winning work and I think that's because a lot of the work that's been awarded over the past few months has been more front end conceptual and engineering work. You guys have noted the western firms still have a competitive edge over the Asian firms there and I'm just wondering, we saw Abu Dhabi sort of blink and obviously add the number of upstream oriented projects. Do you think we should expect to see another one or two of these gulf countries blink like that and rush out a few projects similar to, how all these companies tend to fall in line with each other?

Umberto Della Sala

Could you help us understand --?

Will Gabrielski - Broadpoint

I guess what I'm asking is, everyone has always operated under the assumption that these companies are very reactive to one another, these countries, the national oil companies. So Abu Dhabi, you guys or a few other companies have announced work related to Abu Dhabi. We haven't seen anything on the upstream side out of Kuwait or a [Ramco] frankly on the downstream side either and I'm wondering if there's not FEED or conceptual work that we can expect to see coming more out of the Middle East from some other countries, now that one of these countries has started to move forward?

Umberto Della Sala

Generally, yes. Even if I should say that, and maybe some of my colleagues disagree, but honestly, today I've not seen a substantial number of new projects in Middle East coming up with respect to other geographical areas. And when you the mentioned the [ATCO] project, this is not a new project. It's not a new investment. So Middle East, I'm a little bit cautious at this point while other geographical areas we have seen new projects coming on the screen.

Will Gabrielski - Broadpoint

Okay. One last question, the awards trend for the year, since we're so far into Q2, you were sharing with the Q4 call that, that your expectation for Q1 was flat maybe to slightly up I believe for E&P and that's what we got. Care to provide any color on Q2, how this tracks to date?

Ray Milchovich

No. I think our general view of E&C is it's a second half pickup. And I think what we saw in Q1 supports that view. So, I think we hold our own in Q2 and we see a second half pickup. That would be our current best estimate.

Operator

Your next question comes from Roger Reed with Natixis Bleichroeder.

Roger Reed - Natixis Bleichroeder

Real quick, I guess going back and hitting the margin question again, you executed better than you expected in Q1, specifically in Global Power. It sounds like everything is on track for a pretty good performance in Q2 there as you see it. Why not raise the margin expectations? What is it, that's causing you worry or concern, keeping you awake at night, that sort of thing?

Ray Milchovich

Nothing at this point is really keeping me awake at night. Our year is beginning about the way we thought it would. And if anything is different, I would say that Global Power's quarter was better than we thought. Their bookings were better than we thought and it would appear that their markets are coming back stronger than we thought.

Other than that, the quarter was about what we thought it would be and the year is shaping up to be about what we thought it would be. And why would we stay with the margin guidance? Because our view is that's our best estimate of what the margins will be for the year. Now, could we do better than that? Maybe. But we're not prepared to forecast that yet.

Roger Reed - Natixis Bleichroeder

I'm comfortable with that. I'm just trying to understand what the issues are.

Ray Milchovich

I understand.

Roger Reed - Natixis Bleichroeder

Okay. And then coming back to the E&C's revenue trends, when you talked about the flat year-over-year potential, is that both the total revenue and the Scope revenue or would we see any difference between the two?

Ray Milchovich

We don't focus much on overall because we think it's much less meaningful than Scope and so when we forecast the year, we're talking about Scope.

Roger Reed - Natixis Bleichroeder

Okay. And then as that plans pans out, I guess the idea here is that you're getting some of the order, you're certainly seeing the proposal side, Q2 not necessarily the turning quarter, but Q3 much more so?.

Ray Milchovich

I didn't say Q2 wouldn't be the turning quarter. I would say it could be. At this point what I'm saying is our view of the year is we hold our own and get a second half pickup. And what we needed to see in Q1 was movement to support that. We saw that. And at this point that's how we think E&C's year shapes up. And that supports us going into 2011 with a level of momentum in that business, which is what we were hoping for and what so far we believe we see signs of.

Roger Reed - Natixis Bleichroeder

One final question. Obviously comments about, competitive pricing or competitive bidding, you think your margins have generally held in all right. What have you seen other than just the flat out pricing? Has there been any change in terms within these contracts. You mentioned in Australia obviously the labor issue. Are you protected well enough? Do you feel you're protected well enough on contracts you'll sign now that if there is some future labor strike disruption, et cetera, that you'll be able to maintain margins through such an event?

Ray Milchovich

Okay. Well, let me just say this. Our contracting approach hasn't changed since we started this whole process back in '05, '06. Our approach to the business, our approach to risk management, our approach to what we will and won't take hasn't really changed at all and right now it's consistent with what it's been for the last several years.

In terms of contracts we have, we're not exposed to labor disruption, et cetera and we wouldn't expose ourselves to that. Our clients in some situations attempting to trigger risk transfer from them to us? Of course they are. But that hasn't changed either. That's been the case for as long as we've been doing this. And we only will allow that under a certain set of circumstances.

So I'm not at all concerned about getting ourselves in a bad situation because, once again, our contracting approach has been completely consistent and we're very happy with what it's delivered for us. So, is there a pressure by the clients for us to transfer risk out? The answer is yes. There always has been. But we only let that happen under certain sets of circumstances.

Roger Reed - Natixis Bleichroeder

I don't blame your customers for trying to put the risks on you. I'm just always more concerned that some of your competitors are willing to accept risk and that ultimately unbalances the market to some extent.

Ray Milchovich

Well, in some cases that happens. And we wish that didn't happen. But it does. So, if they want it and they're willing to do it, then they must want it worse than we do and we let them have that opportunity and we go to the next one. And where we think its incumbent upon us to be competitive, we think we can be competitive with anybody. But we think we're astute contractors and we think that's an essential part of the way we run the Company. And that's been part of the Company's success. So I'm not concerned about that changing at all.

Operator

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

Avi Fisher - BMO Capital Markets

I came in late. I apologize if some of these questions were answered but where in the P&L is the pension plan benefit? Is it in SG&A?

Franco Baseotto

No. It's in the contract profit line.

Avi Fisher - BMO Capital Markets

Contract. So it's a direct cost?

Franco Baseotto

Yes.

Avi Fisher - BMO Capital Markets

Okay. In the power segment backlog is roughly 80% U.S. and Europe but demand for solid fuel boilers most likely growing I think faster in the developing world. What can you do to penetrate those markets?

Ray Milchovich

Would you repeat the first comment you made about backlog?

Avi Fisher - BMO Capital Markets

Sure. It looks like the power segment backlog is 80% U.S. and Europe and I wondered how you could better penetrate or if you're trying to or if it's not on your radar, developing worlds because that seems like where solid fuel boilers are most likely going.

Ray Milchovich

Let's be specific. We focus on the CFB product line in new boilers. We have a very, very high capture rate of those boilers and we simply go where the opportunities are for those boilers. So our focus isn't necessarily a geographic focus. It's a world focus on a product line in a specific technology. Would you not agree, Gary?

Gary Nedelka

Yes.

Ray Milchovich

We have a very, very high market share of that particular product line and we believe we cover the world pretty well in that product line. So, the mix of our bookings geographically would simply be where those projects become realities as opposed to where our focus is.

Avi Fisher - BMO Capital Markets

Okay. I think I see what you're saying.

Ray Milchovich

Yes. We focus on dominating that space worldwide.

Avi Fisher - BMO Capital Markets

Right. And it sounds like the developing world hasn't really been leaning towards that specific boiler. But if it were, you'd capture it?

Ray Milchovich

We, no. It certainly has in Southeast Asia. We've seen tremendous success in our CFB boilers within Southeast Asia. And commenting to large percentages in Europe, a big portion of that is over in the Eastern European market. Sometimes looking at the backlog numbers, you consider North America, there is still, albeit we spoke earlier that it's down a bit, there still is a large services market in North America which will skew some of these percentages somewhat.

Avi Fisher - BMO Capital Markets

Okay. Going to the E&C side, a lot of people asked about this. Going back to 2006 you've pretty consistently done between 1.9 billion and 2.1 billion in Scope bookings in E&C from '06 to '09. When you talk about a second half strength, does it put you within that band or above it?

Ray Milchovich

I think it probably puts us pretty close to that band.

Avi Fisher - BMO Capital Markets

Okay. I'm not sure if anyone asked this, the Australian tax issue, have you heard anything from your clients there about negative impacts on projects down there?

Ray Milchovich

I have not. I just came back from there last week, and I have not heard that issue at all.

Avi Fisher - BMO Capital Markets

And finally, does guidance, and I apologize again if you answered this, does guidance include the pension benefit? Does your EBITDA margin guidance in E&C include that pension benefit?

Ray Milchovich

Yes. Correct.

Scott Lamb

Thank you. I believe there are no more questions. I'd like to thank you all for joining us.

Operator

Thank you. This concludes the conference. You may now disconnect.

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