Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q4 2013 Earnings Conference Call

February 25, 2014 5:00 pm ET

Executives

Philip K. Asherman - President and Chief Executive Officer

Ronald A. Ballschmiede - Executive Vice President and Chief Financial Officer

Analysts

Andy Kaplowitz - Barclays Capital

Michael Dudas - Sterne Agee

Jamie Cook - Credit Suisse

Jerry Revich - Goldman Sachs

Steven Fisher - UBS

Robert Norfleet - BB&T Capital

Brian Konigsberg - Vertical Research

Will Gabrielski - Stephens

Operator

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 the SEC filing. 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 any such statements.

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

Philip K. Asherman

Good afternoon, and thank you for joining us as we report Chicago Bridge & Iron's results for the fourth quarter and full year 2013. With me today is CB&I's Chief Financial Officer, Ron Ballschmiede, who'll discuss the Company's overall financial performance. In order to allow for additional opportunity to take your questions, we've shorten the duration of our prepared remarks. I'll be summarizing the overall results of the Company and our operating groups, followed by Ron who will report our financial results for the quarter and full year.

2013 was a very good year for CB&I. our backlog of business on projects in shops, labs and engineering offices performed at record levels. We maintained our relentless focus on safety, capitalized on the continued growth in our markets and achieved record financial results with $11.1 billion in revenue, $12.3 billion in new awards, backlog of almost $28 billion, and earnings per share of $4.91 excluding acquisition related costs. We attribute that success to our talented workforce and unique business model that delivers a more complete supply chain solution to our customers.

At CB&I, safety is our highest priority. In 2013, we continued to extend our exceptional safety record with more than 146 million hours completed around the world and with a 0.5 lost time incident rate, which means we just had one lost time incident for every 3.5 million hours work. Projects like Ecopetrol's Reficar project in Cartagena, Colombia had 60 million work hours, Exxon's Papua New Guinea project with almost 20 million work hours and the MOX Savannah River program in South Carolina with over 17.5 million work hours, all without a lost time incident. These projects are representative of our commitment to the belief that zero accidents is achievable.

We continue to focus on the capabilities of our direct hire model with CB&I recruiting, hiring, training, and managing employees in locations around the world. The combination of our safety record, long history of direct hire operations and expertise in personnel management makes CB&I an employer of choice in the industry that will position us well for the increasing demand for resources in North America and elsewhere in the world.

Our new awards during the year are indicative of our global diversity across the markets in the energy infrastructure industry. They range from the large scale LNG liquefaction terminal, petrochemical plants, an export propane terminal in the U.S., Air Quality Control programs for power plants in the U.S., piping and storage for key LNG liquefaction terminals and ethane crackers, a plant services contract for Peru LNG, a paraxylene technology contract with GS Caltex, as well as numerous strategic petrochemical and refining technology licensing awards around the globe.

Now I'll briefly provide some highlights from our four operating groups. During the year, our Engineering, Construction and Maintenance group continued to capitalize on a robust end market in oil and gas with strong bookings for projects in North America in LNG and petrochemical developments, as well as expansion work for our existing projects. As our fourth quarter awards for Freeport LNG and Occidental's ethane cracker demonstrate, the integrated supply chain solution we're able to provide gives customers greater confidence and CB&I a competitive advantage. In the case of both of these projects, we provided conceptual design and feed and will now be providing full EPC services.

Recently we announced our cooperation agreement with Chiyoda, the partner in LNG opportunities in North America. We believe that Chiyoda's global experience in LNG and their outstanding reputation complements CB&I's project management, execution capabilities and expertise in North America.

Our Engineering, Construction and Maintenance power business received Air Quality Control awards, and importantly, we continue to see potential for future expansion on gas power generation in North America, nuclear power in Asia-Pacific, the Middle East and Europe, and solid fuel power generation in South Asia and South America. During the quarter, we announced our strategic agreement with the China Power Investment Corporation, one of the three nuclear power plant owners and operators in China, and we expect these opportunities to start gaining traction during this year.

Our plant maintenance business capabilities added a new value-add to our oil and gas business internationally with the contract for the maintenance of Peru LNG and we continue to capitalize on our ability to leverage our position in power services with awards like the nuclear fleet maintenance contract we announced during the year as well as small capital work for traditional customers.

In Government Solutions, it continues to be a solid contributor despite significant challenges in the government arena, including sequestration and a 16-day government shutdown during the quarter. We're also seeing key opportunities expected for 2013 first half to 2014 with opportunities we continue to actively pursue. Looking forward, Government Solutions is anticipating moderate growth, particularly in environmental remediation, landfill gas and energy projects, [indiscernible] infrastructure replacement and other environmentally oriented opportunities. The group has also implemented internal adjustments in its organisational structure which have resulted in improved efficiencies and cost synergies by consolidating their operations.

In addition, our joint venture, mixed-oxide program at Savannah River, better known as MOX, continues at reduced spending level but is performing very well with productivity and progress at planned levels and with outstanding quality and safety results. We're hopeful that the program will be refunded during 5the next budgeting discussions in Washington and we're really pleased with the proactive leadership of the DoE and various congressional supporters of the program.

Technology had another year of strong sales, record revenues and earnings, and our joint venture with Chevron called CLG exceeded expectations with exceptional technology and catalyst sales. During the year, we commissioned our new manufacturing and research facility in Pasadena Texas, added key strategic technologies to our portfolio through acquisitions such as our acquisition of E-Gas solid gasification technology, and broadened our offering by signing an agreement with Clariant to develop polypropylene catalysts through various commercialization agreements.

End markets for Technology remained strong with U.S. shale attracting new petrochemical investments in North America and incremental activity in global refining markets driven by diesel protection, resident conversion and demand for cleaner fuels. During the quarter, the Technology group experienced all-time highs in refining and catalyst orders and our engineering centers continued to operate at high utilization rates, and we expect these trends to continue through 2014.

Fabrication Services experience healthy demand during 2013. This operating group's U.S. end markets remained robust due to shale gas developments and the viability of petrochemical and liquefied natural gas explore projects. During the quarter, Fabrication Services advanced negotiations to secure long-term agreements for pipe spools and storage tanks. These agreements enhance our ability to market best in class project components to third parties, including plate structures, pipe spools, pipe induction bending and modularization.

Recently we announced a significant long-term agreement with Dow Chemical to supply Fabrication Services for a variety of projects on the Gulf Coast. We continue to make progress on strengthening a quality-driven, safety-conscious work environment at our Lake Charles fabrication shop. In addition, with fabrication modules, pipe spools of structural steel for the [indiscernible] and V.C. Summer nuclear power plants made good progress during the quarter. Today, a total of 220 modules for the first units have been shipped as more of the effort transition to these construction sites.

Our outlook for Fabrication Services is very optimistic. We feel confident of our capability to meet the demand of future growth through our shops, prudent investments in capacity and increases in productivity for not only CB&I projects but the total range of energy CapEx around the world.

Now before I turn the call over to Ron to report the financial details of 2013, I just want to take a moment to thank our employees. We've just passed the one year mark since the financial close of the Shaw acquisition, and as I told you before, our employees work extremely hard to ensure that we became one CB&I last February and made the transition virtually seamless. Their commitment to the integration continued throughout the year as reflected in our strong results and success in building a world-class highly competitive company. Ron?

Ronald A. Ballschmiede

Thanks, Phil, and good afternoon everyone. Let me take you through our financial performance for another strong year and quarter. In order to focus on the ongoing Company's operating performance during the quarter and year, I will discuss our results excluding the acquisition and integration related costs as set forth in more detail in the earnings release.

Revenue for the fourth quarter was $3 billion, up $1.5 billion or essentially double that of the fourth quarter of 2012. The revenue increase reflects significant quarter-over-quarter growth of our legacy business units, up $337 million or 22% driven by increased activity on our large projects in the execution of our higher beginning of year backlog. The balance of the fourth quarter revenue growth of $1.1 billion represents revenue from our acquired operations

Full-year revenue totaled $11.1 billion, an increase of $5.6 billion over 2012. Approximately 30% of the revenue increase was generated by our legacy businesses. We previously announced our 2014 revenue guidance range of $12.6 billion to $13.2 billion, an indicative increase of 60% based on the midpoint of our guidance. This revenue growth reflects the continued high activity and ramp-up of several large projects in our backlog, the increase in our year-over-year opening backlog and a full year of revenue from the February 2013 Shaw acquisition.

The 2014 revenue burn is anticipated to be 35% to 40% of our record 2000 year-end backlog of $27.8 billion. This backlog burn compares to 45% to 50% for legacy CB&I in 2013 and reflects the increasing overall duration of projects in our backlog, specifically our major LNG and nuclear projects.

Gross profit for the quarter totaled $339 million versus $198 million in the comparable 2012 quarter. The increase was driven by the acquisition and higher revenues from our historical CB&I business units. Each of our operating groups continued to benefit from the solid project execution and performed consistent with our expectations.

The decline in our fourth quarter gross margin to 11.3% from 12.9% in the fourth quarter of 2012 reflects the lower gross profit characteristics of the acquired Shaw business units and the changing relative volume mix of our legacy business units. Specifically and as we expected, more than three-fourths of our legacy quarter over quarter consolidated revenue increase came from our oil and gas business unit which accounted for 63% of our historical consolidated revenue base.

The balance of the gross margin change is attributable to the acquisition which generally delivers an overall lower gross profit percentage than our pre-acquisition metrics. On a sequential quarter over quarter basis, our gross margin improved by 70 basis points over the third quarter of 2013. Obviously both those quarters included the acquired operations for the full quarter. I'll come back and discuss the changes in our revenue and operating income by operating group in a moment.

Selling and administrative expenses increased to $99 million from $59 million in the fourth quarter of 2012. The acquisition accounted for the vast majority of the dollar increase. While our integration and consolidation activities are continuing, as I indicated in our previous earnings call, our day one activities and our actions to date have exceeded the high end of our previously communicated annual cost synergy savings range of $30 million to $50 million.

Accordingly, our full-year S&A expense benefited from these savings and our continued operating leverage. Our S&A expense was 3.3% of revenues for the fourth quarter, down 0.6% from 3.9% in the fourth quarter of 2012. Further, we expect our full year 2014 S&A expense to approximate the fourth quarter 2013 rate of 3.3% of revenues.

As an important reminder when thinking of stock-based compensation cost, GAAP requires certain stock-based compensation to retiree eligible participants to be expensed in the quarter in which the awards are made. CB&I's long-term incentive compensation awards are made in the first quarter. Consequently for the aforementioned accounting results, we had approximately 60% of our full-year stock-based compensation expense being recorded in the first quarter, predominantly within S&A.

In terms of EPS, the first quarter of 2014 stock-based compensation expense is expected to incrementally exceed the related expense for each of the second and third and fourth quarters of 2014 by approximately $0.18 per share per quarter. That gives us an important metric to think about as you look at our quarterly flow of income for our business.

Intangible amortization totaled $18.4 million in the fourth quarter and $61 million for the full year. Our full year 2014 intangible amortization is expected to be approximately $70 million. Acquisition and integration related costs for the fourth quarter of 2013 were primarily related to facility consolidation and totaled $19.3 million or $0.11 per share. The acquisition and integration costs together with pre-closing and one-time first quarter financing costs totaled $106.3 million for the year or $0.68 per share.

Finally, fourth quarter adjusted income from operations was $230 million or 7.7% of revenues compared to $145 million or 9.4% of revenues in the fourth quarter of 2012. For the full year of 2013, adjusted income from operations totaled a record $780 million or 7% of revenues, up from $314 million or 67% up over 2012.

During the fourth quarter of 2013, we recognized incremental income tax benefits relating to the recognition of the remaining U.K. NOL, primarily driven from the project losses of 2007 and 2008 and the recognition of additional U.S. foreign tax credits. With regards to the U.K. NOLs, our U.K. earnings from 2009 forward have been very strong and in the fourth quarter of 2013 we utilized the final balance of approximately $75 million NOL recorded in 2008.

Consequently, the fourth quarter and full year tax provision benefited by a total of $77.8 million or $0.72 per share. Our effective tax rate for the fourth quarter and year excluding these items were 27% and 28% respectively. Our effective tax rate benefited from a more favorable mix of geographic income and other higher global tax credits. We expect our full-year 2014 effective tax rate to be approximately 32%.

Our net income attributable to non-controlling interest for the quarter totaled $20 million, an increase of $13 million over 2012. The increase primarily reflects the increasing activity of our Gorgon MEI and Papua New Guinea gas processing project and the impact of the acquisition. The summation of all that resulted in the fourth quarter adjusted net income of $208.9 million or adjusted earnings per share of $1.91. For the full-year, adjusted net income was $527.4 million or adjusted earnings per share of $4.91. Both the quarter and the year reflect the highest earnings in our Company's history. After including the acquisition and integration related costs of $0.11 per share for the fourth quarter and $0.68 for the full year, GAAP earnings were $1.80 and $4.23 per diluted share respectively.

As we previously communicated, our adjusted EPS guidance for 2014 was $4.80 to $5.65. The adjusted EPS guidance excludes the integration related costs anticipated to be $15 million to $25 million or $0.10 to $0.15 per share. Adjusted EBITDA totaled $279 million or 9.3% of revenues for the fourth quarter of 2013 company to $160 million or 10.4% of revenues compared to 2012 quarter – sorry 2013, 2013 of $279 million compared to 2012 of $160 million. Adjusted EBITDA for the full-year totaled $960 million for 8.7% of revenues. All of the above are also high watermarks by a significant margin.

Now let me take you through each operating group's fourth quarter results. Each of our operating group's 2013 results were consistent with or in some cases exceeded our expected annual range of operating results which we have previously discussed. Specifically our annual performance expectations are, operating income in the range of 4% to 7% for EC&M, 8% to 11% for Fabrication Services and 3% to 6% for Government Solutions. Finally Technology's 2013 operating income exceeded our expectations and totaled $157 million.

Our new awards for the fourth quarter totaled $5.3 billion and $12.3 billion for the year, representing a book-to-burn ratio of [176 million] (ph) for the quarter and 110% for 2003. Our major fourth quarter new awards included $2.5 billion for our share of the Freeport LNG project and $1 billion for the Occidental ethylene project. The balance of new awards of approximately $1.8 billion reflects the important underpinning work at normal project growth which is spread nicely between our operating groups and project types around the world.

Our December 31, 2013 backlog totaled $27.8 billion, up from $10.9 billion at the beginning of the year. This increase includes acquired backlog of approximately $16.8 billion. Our non-US dollar-denominated backlog decreased by approximately $800 million in 2013 due to the strengthening of the U.S. dollar primarily against Australia, Colombia and Canadian currencies. While these currency fluctuations can cause variations in our reported backlog, the fluctuations have not resulted in significant variations in our operating results.

EC&M fourth quarter revenue totaled $1.9 billion, an increase of $918 million over the fourth quarter of 2012. Approximately 72% or $663 million of that increase was attributable to the acquisition. The balance of the revenue growth was the organic growth of our oil and gas operations which increased its revenues 26% up to $1.2 billion. The most significant driver of this organic revenue increase was related to increasing activities on our LNG and gas processing work in the Asia-Pacific area.

Finally, with our strong backlog position and significant awards booked in late 2013, we expect our 2014 first-quarter revenues to be generally consistent with 2013 fourth quarter and subsequent quarter revenues increasing sequentially throughout 2014.

Income from operations totaled $110 million or 5.8% of revenues in the fourth quarter of 2013 compared to $60 million or 6.2% in 2012. Factors contributing to the change in the quarter's operating income include the impact of the acquired power revenue and organic revenue growth discussed earlier.

With respect to Fabrication Services, fourth-quarter 2013 revenue was $698 million, an increase of $273 million over 2012. Revenue for the acquired fabrication and manufacturing operations totaled $173 million with operating income of $15 million.

Steel Plate Structures revenue increased $100 million or 24% to $525 million on higher activity for our LNG tank projects in Asia-Pacific region and storage tank work in North America, partially offset by the completion of various projects in the Middle East. Operating income totaled $76 million or 10.8% of revenues compared to $43 million or 10.2% of revenues in 2012. Fabrication and manufacturing operating margin was 8.8% of revenues and Steel Plate Structures margin were 11.5%, reflecting changes in the mix of the projects and processes during the quarter.

Technology reported revenue of $130 million compared to $148 million in the fourth quarter of 2012. The decrease in revenue reflects the lower volume of e-transfer revenue driven by normal timing considerations, offset somewhat by stronger licensing and catalyst revenue. Fourth-quarter operating income totaled $40 million benefiting from the timing of the delivery of licensing and catalyst activities and strong refining related equity earnings.

Finally, Government Solutions reported revenue of $289 million and operating income of $4 million. The quarter and year results were negatively impacted by the sequestration work stoppages and the ongoing uncertainties with respect to government spending and prioritization.

Now a few comments on our balance sheet and cash flow. Our balance sheet and liquidity remained strong. At the end of December, our shareholders' equity exceeded $2.5 billion, our cash balance was $421 million and cash and other revolving borrowings was $306 million, an improvement from $29 million from March 31, 2013, the first quarter subsequent to the Shaw acquisition. We continue to enjoy significant support from the credit markets to support our new awards growth and strategic opportunities.

We finalized our new $1.35 billion revolving credit facility in the fourth quarter. This revolver replaces our previous $1.1 billion facility which was due to expire in mid 2014. The new facility has a five-year term expiring in 2018 and brings our total revolving facility capacity to $2 billion. The facilities will continue to be used primarily for project related letters of credit that support the significant opportunities in front of us.

During the year we invested $90 million in capital expenditures, invested $61 million in acquisition for the continued expansion of Technology's portfolio, serviced $75 million of our long-term debt and paid $21 million of common stock dividends. Last week our Board approved our first quarter cash dividend of $0.07 per share compared to our quarterly $0.05 per share dividend in 2013. In addition, in the fourth quarter we repurchased 124,000 shares of common stock for $10 million.

We expect our 2014 CapEx to be in the $175 million range. The increase over 2013 reflects the completion of our additional facility in the Woodlands enabling us to complete our administrative integration and consolidation activity and investments to the capital related – in project related capital and facilities necessary to execute our increased backlog and prospects for 2014 and beyond.

Our investment and contract capital reflecting the combined balances of receivables, inventory, contracts in process and accounts payable stands at a negative $1.6 billion at the end of the year compared to negative $325 million at the beginning of the year, the increase primarily reflecting the impact of the acquisition.

In closing, our significant backlog and prospects, consistent project execution and strong financial position provides us with the necessary financial flexibility to deliver our projects and other services and take advantage of the global energy infrastructure market. We remain well-positioned for opportunities to grow our Company and continue to provide strong returns to our shareholders. Phil?

Philip K. Asherman

Thanks Ron. Now we'll take your questions. Operator can you open the line for questions please?

Question-and-Answer Session

Operator

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

Andy Kaplowitz - Barclays Capital

Nice quarter, Phil. So at your Analyst Day, you said that you expected backlog to grow in 2014, so as we sit here after the first two months of 2014, can you talk about your conviction in backlog growth this year and then can you talk about whether there was some project [indiscernible] in 4Q because I remember you saying you could have made the bottom of your [indiscernible] in 2013 without Freeport and you made it at 12.3, I know you mentioned government flipping a little bit but are the [indiscernible] of contract LNG and gas processing jobs that you still expect here in the first half of the year?

Philip K. Asherman

That's correct, Andy. We did have some slippage into 2014. When we look out in front of us, and that happens many years, we look at a fairly smooth and stable prospect growth, but as we all know, as we get closer to these new jobs they tend to move to right. But we thought the result for 2013 was very strong. When you look at going into next year, we certainly have some large projects. We expect to – we survey our screen for the first half of the year and we'll be anticipating those in the first and second quarter. But most of that is concentrated in North America new awards but we are seeing some interesting activity in other parts of the world. There is some activity continuing in LNG in Australia as well as some interesting work that is being developed in the Middle East. So we think it's going to be a very active year as we see more CapEx being released particularly in the energy sectors around the world. So we're quite optimistic.

Andy Kaplowitz - Barclays Capital

Do you still feel pretty good about backlog growth if I had to pin you down?

Philip K. Asherman

Yes, you can pin me down. Let's say that in our funnel that we've talked about before, we looked at a nice $70 billion to $100 billion worth of work out there that's identified prospects that could under certain circumstances be awarded this year. If you assume that our win rate and our hit rate has been running anywhere from 45% to sometimes in some markets 50% and then you factor that against the competition, you can get down to – our range last year was certainly [indiscernible], combined with that we think that probably our burn rate for this year will probably be in the 35% to 40%. So I think you can do the math pretty quickly to see that that should lead us to certainly incremental backlog growth.

Andy Kaplowitz - Barclays Capital

Okay, that's great. So let me try and pin down Dan as I usually do also on…

Philip K. Asherman

Dan's not here, I'm sorry to disappoint you. You'll just have to put up with Ron and I.

Andy Kaplowitz - Barclays Capital

So let me pin down Ron and Phil then, so Technology has been a double-digit grower essentially since the recession and you have continued to grow the business both by buying more technology and just growing the business organically. So as we look forward into 2014 and beyond, why can't the business continue to grow double-digit or at least have some pretty good growth to it here in 2014 and beyond?

Philip K. Asherman

I think just from steady-state, if you look at just the demand for the technologies and the energy markets around the world, Technology has got a tremendous opportunity to continue to grow in their existing businesses by double digits each year. But we think there is probably more opportunity to look at continuing investment to link other technologies to improve our catalyst position which we think could be somewhat aggressive and think that that could exceed what our normal expectation would be for the Technology business.

So when we look for the best return on our capital, for the shareholders capital to future years, we certainly think that Technology is the leading candidate for that, as well as Fabrication Services because we can expand our capacity significantly and get better leverage out of that capital on new storage around the world. So those would be the two areas outside of repurchase of stock and dividend that we would look at for our capital allocation.

Andy Kaplowitz - Barclays Capital

Ron, can I just ask you to clarify something quickly, like around free cash flow in 2014, should you start to see the benefit from the nuclear projects starting bleeding cash I guess if you may and start to actually hit milestone there so you should see better free cash flow in 2014, if there's any color there it would be great?

Ronald A. Ballschmiede

Sure, we certainly expect some improvement in 2014, but just from a macro standpoint on the nuclear projects and this is not bad. We still have give or take $1 billion of net advances on those projects and of course like all advances they get worked off over time and if you just did the simple math, we have four plus years of having growing those. So you could probably do that math and say, okay we're going to unwind those advances on that kind of rate in the next many years.

However, the positive element that is occurring is these large projects in the United States, of course it's been a part of those projects and a part of the world, but we are more willing to take a bigger portion of those projects on a classic lump-sum basis, and any time you do that you start getting advances and down-payments and milestone billings, et cetera. So I think we can start seeing that in 2014 from the awards we have already talked about and some of the awards that are still to come. So I think the balance of those will be substantially increased, but just mathematically the other ones will come down a little bit.

Andy Kaplowitz - Barclays Capital

Okay, that's helpful. Thank you.

Operator

Our next question comes from the line of Michael Dudas with Sterne Agee.

Michael Dudas - Sterne Agee

Ron, just further the comments on capital spending, how debt repayment and other acquisition potential in 2014, how that may flow through the business?

Ronald A. Ballschmiede

Sure. I think the side of opportunities is just that we will keep our eyes out for opportunities to do some things that Phil just talked about, whether they are narrow focused extension of plant facilities to take advantage of fabrication opportunities or if there are some opportunities come up to extend our Technology portfolio. That's sort of the number one thing. We don't really have a number on that other than our first goal is to remain flexible and with plenty of dry powder to take advantage of these opportunities when they arise.

We have about $125 million of normally scheduled debt for 2014 which of course have some opportunities to go beyond that, but we continue to look at shares repurchases as we go through the year and keep an eye on how our cash flow occurs, how our orders are coming in and of course the opportunities to grow our business on the organic side. So I think we'll continue that three-legged stool that we've been talking about for really for several years; first, opportunity growth in the business; second, our capital structure combination of paying down our long-term debt. I'll put an insert in there. We have very nicely priced long-term debt. So I wouldn't – while we'll make some incremental progress beyond perhaps the scheduled thing, I wouldn't look for a lot of it, it's just a cross-capital issue that is pretty hard to resist keeping it for as long as we can.

Michael Dudas - Sterne Agee

Understood, Ron. Phil, intrigued about some of your comments about international opportunities, I mean we really see a real big focus on North American and rightly so but where do you see from the tank side and from the ECM side where we could see some good hits, is it more just a run rate type projects or is it couple of decent opportunities out there that might hit the books in 2014?

Philip K. Asherman

I think there are some decent opportunities. When you look at just the overlay in our Fabrication Services, and when we take what we acquired from Shaw and include it with our global models, there's been some tremendous opportunities and that's on all capital expenditures that we are seeing in Asia-Pacific. So that's going to be in general just a great opportunity from Fabrication Services and also in the Middle East.

I think there's an interesting job that we just announced with KNPC job going national in the Middle East. I mean those are interesting jobs that a couple of years ago we had discussed having little opportunity because of the Korean influence but we're seeing that the Koreans aren't necessarily as aggressive in their pricing in some of the new work. I think we talked about it a few years ago that – or I guess continuously about is that sustainable in terms of pricing there and I think we're starting to see that perhaps there is some reversal in that trend where the jobs are becoming more competitive for western contractors. So I think that's an area to watch.

We continue to hope that the Chinese will be aggressive, not only on their nuclear power plants because they talked about six more reactors using AP1000 type technology and also on regasification terminals that we started many years ago. So I think it's those kinds of opportunities that we look at. And we see some continuing offshore work in our London office and certainly in our Singapore office. So all the offices are very full with those kind of businesses as well. So very diversified outlook for the year.

What you see though on your screen though is that U.S. dominates, North America dominates simply because of the petrochemical facilities, gasoline facilities, the export facilities which we are going to see this year. So that's probably going to grab almost everyone's attention but we are very pleased with what we see happening in the rest of the world as well.

Michael Dudas - Sterne Agee

Excellent, Phil. Thank you very much.

Operator

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

Jamie Cook - Credit Suisse

So couple of questions. One, your margin performance in the quarter was fairly impressive and some of your peers were talking about that inflection point where they really expect margins to start to improve in the back half of the year, so can you talk about any components in your business where you are feeling a little better about the margin side, particularly given the strength that you saw in EC&M and on the Fabrication Services side? The second question I have I guess relates to capacity, Phil, with some of the success you've had in winning awards so far, I mean I think there's a view that you guys probably get Cameron as well, you just got Freeport, so how you are thinking about capacity? And then last, Ron, just on the free cash flow, I know Andy asked the question and there were puts and takes but in general this year you expect free cash flow to be more comparable to your net income number, if you could just, because I felt like I don't know that we've really got a financer?

Philip K. Asherman

Okay, I'll tell you first what we think about free cash flow, Ron.

Ronald A. Ballschmiede

We think about it every day.

Philip K. Asherman

[indiscernible] margins at the inflation point, it's a matter obviously of mix. We might have a probably stronger mix and even as we look at this year with potentially some new awards in those markets that you mentioned. Yes, in fact the margins could improve. We always have that opportunity for premiums and additional margins relative to fixed price work. We are also seeing, you got to remember, that outside of our, just our engineering and construction work, the kind of margins that we're seeing improving all along the Fabrication Services line, and again that touches every capital project throughout North America and elsewhere in the world and we're very pleased with seeing the margin improvements on that business. So we will be more in tune now that business is performing as the year progresses but we are quite encouraged by what we see there.

So I think between the two as well as our traditional work and our legacy work in Steel Plate Structures, I think you could see some. I don't think inherently though the market will drive higher margins. I don't think reimbursement work necessarily will pay more than what you've traditionally seen on the operating income line, but I think it depends on the company's mix of projects and geography that's going to drive that, but I don't think inherently the additional work is going to drive margins much higher than what you've seen in the past. It just performs against your mix of projects.

Capacity, again I think clearly with our joint venture partners, with [indiscernible] and Freeport, we feel very comfortable about the capacity to handle that work. We have also included Chiyoda who are doing some subcontracting engineering work for us out of the Philippines. So we have got a good mix of work for our good capacity. For the Freeport work, we are hopeful about Sempra and if that were to take place, we are going to do a lot of that operations out of our [indiscernible] office, again with a joint venture with Chiyoda.

So from an engineering standpoint, we have the capability to move engineering virtually anywhere around the world. Engineering specifically for LNG is best executed either in Houston, Oklahoma or London. So we have an opportunity to certainly use our global capacity between our engineering and joint venture partner.

When you look at construction, we've been working hard on developing training programs and partnerships with various states, particularly along the Gulf Coast. We have all of the capital work regardless of who has the prime contract. We see a delta of about 50,000 craft employees that are going to be needed to be added to additional craft population along the Gulf Coast. So that's a challenge for all companies and one that I think most companies are taking head on certainly through training and plans to do more direct hire for these projects which is certainly our plan as well.

So capacity I think from an engineering standpoint and shop standpoint I think we certainly have the capacity for the work that we see in front of us. We are working hard on making sure we also have the craft workers and have certainly built that into our planning for this year. Ron, about the cash flow?

Ronald A. Ballschmiede

Sure. I think over a cycle, we would continue to tell you that operating income is pretty good surrogate for what we would expect our cash flow to be. It's probably too little – there are some unique pieces of that certainly in 2014 and the future. I mentioned the nuclear advances, so you do that easy math, it's $200 million to $300 million of the nuclear side being essentially worked off per year for the next four or five as we finish those projects. Like I said while that might be due to the negative, we have the money essentially on our balance sheet somewhere at this point in time.

I think the other element of it is, we won't give guidance on it, it is the most difficult to predict and it has to do with the timing of our client paying us in some cases, it's not unusual, the $800 million check three days earlier or three days late and that drives our numbers quite a bit. So our guidance, my suggestion would be look at operating income adjusted for the nuclear side, we have a more CapEx spent this year than last, about $70 million to $85 million is our plan incremental, but beyond that I would expect the cash flows to settle to operating income, come off those two or three things and that would probably be a best number to model at this point in time.

Operator

The next question comes from the line of Jerry Revich with Goldman Sachs.

Jerry Revich - Goldman Sachs

Can you gentlemen update us on chemical pipeline, when do you expect final investment decisions on – I believe you're bidding on one ethylene project and can you just update us, are there any propylene projects that you are evaluating as well?

Philip K. Asherman

All of those are in the mix. When you look at our prospects going into next year for end markets for example, I think about 44% of our prospects are probably in the LNG, maybe 16% combined between LNG, export and related projects and 19% or so of petrochemical projects. So certainly without getting into discrete numbers of how many, we think there's certainly several that, or at least two or three that will be awarded this next year, but we are very encouraged by the diversity of the work and the strength of these North American market and we think that's going to continue to get traction.

Jerry Revich - Goldman Sachs

And in Australia you've been very successful with MEI work. On the last call you spoke about $2 billion of essential opportunities, I think a part of that was awarded on [indiscernible], can you just give us an update on how much work you're looking forward in Australia LNG in your prospects?

Philip K. Asherman

We are going to be there for a long time working on MEI. We're still on new side of the progress on Gorgon, got a lot of growth left to work off of that job. There's a couple of other prospective jobs out there which we are hopeful that we'll have similar type, maybe not the scale, but certainly type of awards, reimbursable type projects. So we've been very successful on demonstrating our capabilities with one of the primary mechanical electrical contractors in Australia, which is kind of unique in our business. We don't tend to do that elsewhere but certainly Australia we've had great success and we think it's going to add to our new awards probably in the first half of the year.

Jerry Revich - Goldman Sachs

And in China, really interesting opportunity you have there in nuclear, can you just give us an update on when that could potentially turn into business for you, what are the discussions like with customers there?

Philip K. Asherman

I'll start the discussion by just saying, remember it's China. So we think there's tranches there, or actually three. Our Technology business tends to be extremely strong in China. We're seeing a lot of interest in petrochemicals and hydro-processing, we're finding work on petrochemicals across-the-board. So that's a very strong market. As far as the boost on the ground type work, our Steel Plate Structures is busy developing other regasification projects, primarily on the tank side working with CNOOC and others. When we started on that program a number of years ago, the Chinese were predicting 14 at least regasification projects build up and down the coast, I think there's probably been a third of those build so far. So we've got still some headroom on that.

The nuclear work is particularly very kind of interesting. They purchased a tremendous amount of technology transfer from Westinghouse to develop their own nuclear fleet in China. We have been very successful in continuing our relationship with the utilities in China, CPI being one of them but the other utilities in China as well for the development of that, and they are probably on a pace to be more aggressive with the development of their program than elsewhere in the world. So they've been talking six new reactors throughout China. So we think that program will get started again. Even in the best of development cycles around the world, those projects are anywhere from 6 to 11 years in cycle time. So it's a long-term program but one that we feel on the horizon it looks very interesting to us.

Operator

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

Steven Fisher - UBS

On the nuclear projects in the U.S., to what extent are you starting to pick up some speed and be efficiencies as you go along there, and if you are how might that affect the way the earlier cost disputes are going to be resolved, and then on that point, can you give us an update on kind of when you expect to have some settlement there?

Philip K. Asherman

There are actually two different issues there. One is related to – the dispute actually is based on past issues in terms of additional scope and additional engineering required for the safety and reliability of the plants driven by various regulatory requirements, so that's one issue. But that doesn't stop us or has anything to do with progress on the existing work. We're pretty pleased and probably once we get comments from licensees to confirm this, but we've picked up the pace significantly in our Lake Charles and other plants, we've sub-contracted some of the fabrication or modularization work outside of Lake Charles and that program is proceeding very well. We're busy erecting the work over on the sides and more and more of this work is moving to the side. So I think all concerned including the licensees on both projects as well as Westinghouse and our Company are very encouraged by the progress being made.

And again let me just say that everything that's being done additionally to that project points to the safety and reliability of these projects and we are all on the same page wanting the same thing about having the safest and most reliable nuclear projects anywhere in the world. So we're all working towards an end in a very, very stringent regulatory environment. So we're pretty encouraged by the way it's going.

Steven Fisher - UBS

And in terms of timing of any settlement on the initial cost over issues?

Philip K. Asherman

It's a little more complicated. The best thing I can say about that is that the discussions are on the table. Westinghouse is the major player in that, so probably it will be more appropriate for them to comment on the actual status of the discussions, but the discussion today is between the parties and not before a judge. So that's very good and I think the discussions will continue. The timing, I really don't have an answer for you on that.

Steven Fisher - UBS

Okay, and if I could just ask you about the Government segment, how quickly can that business recover from the shutdown earlier in the quarter from both revenue and new award perspective and can you get rate back up to the level you had in Q2 and Q3 of 2013?

Philip K. Asherman

I think we're going to see it fairly flat going into the next year and we'll just have to see how the activity goes. It was a big impact. It did disrupt the pipeline of new work. Some of this would be decrease in funding level of MOX, was certainly a contributor to that. Still we were able to acquire $1 billion worth of new work this past year. The margins are reasonable when you look at that most of its engineering construction work and fairly derisked in terms of the contract, but we don't see any tremendous growth in that business at least for 2014. We'll just have to see what the government's response to that funding levels are for 2015 and beyond.

Steven Fisher - UBS

Is that flat with the 2013 overall level?

Philip K. Asherman

Pretty much. I would probably look at that business as fairly flat going into 2014.

Operator

The next question is from the line of Rob Norfleet with BB&T Capital.

Robert Norfleet - BB&T Capital

Congratulations on a great year. Most of my questions have been answered, I have one or two. Ron, I want to ask you on the non-controlling interest. Clearly we have a number of projects that are currently ramping there on the JV structure and we have a number of projects that we have recently won and are bidding there on the JV structure, so how should we look at modeling that number throughout the course of 2014 as obviously it increased sequentially each quarter in 2013?

Ronald A. Ballschmiede

Sure. I think the good news is that the projects in the United States are generally 50-50 projects, in other words 50% us and 50% our partner, and structured in a way that will allow us to do we call it proportionate consolidation. So by example in the case of Freeport, about $2.5 billion is our backlog, our new award in our backlog, we will report that as regular revenue and regular gross profit for our proportionate 50% share of the $5 billion.

Others in United States are similarly structured. So right now we don't have any big inputs to the type of contracts or the percentage of ownership contracts that you'll see that already exist and are generating the non-controlling interest that we saw in 2013. Having said that, our largest – we'll be wrapping up on the Papua New Guinea job here shortly, a great project for us both safety and performance-wise, but we will be continuing to ramp up the Gorgon MEI work. So I would expect some growth out of that again end of the year right at it's under $650 million and I guess I would expect 10% to 15% growth on that.

Robert Norfleet - BB&T Capital

CLG?

Ronald A. Ballschmiede

On the CLG on the equity side, and they just continued the equity earning side, the third choice of all these contracting methods of ownership that we do, and right now they continue to have just a fabulous work in the refining world and we would continue to look at that being an increased some growth over 2013 which by itself was remarkable over 2012.

Robert Norfleet - BB&T Capital

Okay, great, that was helpful. And then lastly you all mentioned at your Analyst Day in the Fab Services business that you typically have capacity around 65% that enables you to kind of flex up during periods of high volume. Currently we are seeing the volume pick up. So I guess my question is, as we see that capacity ramping, do you get operating leverage in that business, meaning should we see some additional incremental margin expansion in Fab Services as capacity gets higher?

Philip K. Asherman

Yes, absolutely Rob, that would be our plan. We get tremendous leverage out of our capital in those projects and certainly had a capacity and leverage from that. We have the ability to transfer those orders in a variety of geographic places that makes sense and some low cost solutions around some of our Fabrication Services, particularly in our Mexico shop. So we're seeing great leverage in that and as we look to expand capacity, we now have capital required to expand capacity or even double capacity is fairly nominal compared to other ways that's been in our mind considering the kind of return we can get on that. So we're looking at that as a real opportunity that would improve our margins going into next year.

Ronald A. Ballschmiede

That certainly is one of the items that causes our CapEx to go up there, relatively modest per facility but there's lots of places around the world that we can easily increase capacity as we look forward to orders that are still or opportunities that are still in front of us. So we are going to be ready and have the capacity ready to take advantage of fairly good sized opportunity list.

Operator

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

Brian Konigsberg - Vertical Research

Nice quarter. Just a couple of quick questions, just more clarity just on the backlog balance, so just trying to do the basic math and I think you kind of pointed to this but it wasn't exactly clear, if you just take the Q3 ending backlog, you add the orders, subtract out the revenue, you get about $1 billion less in backlog balance than you reported, was that all – I mean you said FX was a headwind but were there other change orders or other things that would explain that differential?

Ronald A. Ballschmiede

It was primarily currency. So it is $800 million for the full-year. I don't have the fourth-quarter number right in front of me but there were significant movements in the fourth quarter currency and moving it by high hundreds of millions would not be a surprise. We didn't had any cancellations out of backlog of any magnitude at all.

Brian Konigsberg - Vertical Research

I see. And just kind of on the savings, you outperformed your initial estimate with the integration savings between you and Shaw, I think at the Analyst Day you were talking about $50 million of saves in 2014 as well, maybe you could just reiterate whether that's your view and maybe you could just give a little more flavor where you see that coming from?

Philip K. Asherman

I think certainly we considered that in our guidance and we expect that we can achieve that at least for 2014. When we look at the whole capital savings program over, we look at a three year horizon. So we expect over the three years to certainly be well in excess of $100 million we'll get out of cost synergies from the acquisition.

Ronald A. Ballschmiede

When you think about it, the year one was sort of the year of corporate consolidation, years two and beyond are continuing to look at our footprints on each of our operating groups and be more efficient in the way we do things.

Brian Konigsberg - Vertical Research

And just last one to Phil, I know you kind of discussed this and there is only so much you could say, just on the discussions with southern [indiscernible] in the previous I guess disagreements on cost, I mean I think the narrative before was you feel very confident about your contracting structure that gives you protection that were clearly written [indiscernible], I mean is it turning out not to be that I guess straightforward or simple economy?

Philip K. Asherman

My hesitancy has nothing to do with the change in our position on that particular aspect. Actually part of that original dispute has been sales and we've already incorporated in our numbers as far as the CB&I specific portion work. There is a large chunk in there that's related to Westinghouse, them getting paid then we getting paid, and we're confident that that will fall within the range where we will certainly satisfy all of our obligations. But the lead of those discussions are not with CB&I. So I'm kind of hesitant to talk about the qualitative aspects of that negotiation. But we are very encouraged that the dialog is very good and very open between all the parties and the fact that it's going to be handled I believe at the table rather than a court of law is good for everyone concerned. So that's the optimism I speak of but it's probably inappropriate for me to get too discrete on the qualitative aspects of the timing of that considering that we're not in the lead of those discussions.

Brian Konigsberg - Vertical Research

Okay, fair enough. Thank you, guys.

Operator

We have time for one last question. Your last question comes from the line of Will Gabrielski with Stephens.

Will Gabrielski - Stephens

Nice quarter and nice finish to the year. Can you walk through the puts and takes that you see on margin in the quarter just because you don't have the K yet and I'm wondering if anything was significant that you want to call out in either direction?

Philip K. Asherman

Of the margin specifically?

Will Gabrielski - Stephens

Yes, the ECM 5.8% margin.

Philip K. Asherman

I think power would be pretty consistent with what it's been, up a little bit for the quarter but the oil and gas side saw some uptick. Some of that is simply because we're coming to the end on the cost reimbursable, at least a couple of them or certainly Papua New Guinea work, and that work is being replaced by other work around the globe some of which is lump-sum that has higher profit characteristics with of course higher risk profile. So I think you're just starting to see a little bit of that. And then don't get linear on me. I think it also has a lot to do with particular jobs that it worked on in the year and [were removed] (ph).

So we're happy with the movement, we don't continue to see them be moved towards the upper end, frankly the upper 50% of that range I talked about, a 4 to 7, and if we see that moving any faster or slower as we book these new awards and start burning them in 2014 and beyond, we'll move those rates but it, but for now that board is 7, actually all of the percent we've historically talked about are still valid albeit they were hitting us during the top end of a couple of the operating groups by net performance.

Will Gabrielski - Stephens

Okay. And then what was the nuclear revenue in the quarter and how you're expecting that to ramp in 2014 versus what you said previously [indiscernible] updates to CapEx comparisons from your customers?

Philip K. Asherman

We continue to see about the same spend as second, third and fourth quarters. So, for the full year, just under $1 billion of revenue and about between $9 billion and $10 billion to spend till we're done in late 2019, 2020.

Will Gabrielski - Stephens

Okay, and then lastly, you guys are winning a lot of work in U.S. North America and that's not the case for everybody else out there, so the question is, as you think about these markets tightening up in the lump sum risk of that you have taken on here, you are a lump sum contractor, I think that's your course so that should be an advantage, but how do you think about mitigating risks early and are there – the ramp right now around getting permitting on these jobs and getting these jobs into the construction phase and especially in the U.S. specifically, when will we start to see that accelerate and what impact does that have on your confidence on getting labor and making sure you make money on this work?

Philip K. Asherman

First on the risk of the projects, you're right fixed-price large projects, they are certainly one of our competencies, but I just have to remind you that most of these major projects have been on some kind of hybrid negotiated basis, once that you go through the feed and you qualify and again the discussions with the owners, they usually narrow that list down, it's not to one company, probably two we've seen that. So by the time we get to the point with the contract to sign, there is a pretty high confidence level that we're going to be able to mitigate and there's no materials unfunded viability on these projects.

Also the joint ventured that we have developed I think is a huge mitigation factor. We've got quality, experienced joint venture partners on virtually everything we're doing. So we think that's going to be a tremendous help in terms of making sure that we stay on schedule and budget. We've got a philosophy of self performed direct hire to control more aspects of our work, and by the business that we have acquired in terms of pipe fabrication and certainly vessels and Steel Plate Structures that we already had, we certainly expand that ability to provide for I termed earlier as just a bundling all of our services together, a real supply-chain type of approach to these projects. So I think all that plays into our confidence level in terms of mitigating our risk.

As part of the permitting goes, for example we are very pleased that it was announced that Sempra received its DoE permitting. I think there's been a very – I'm also relaxed and there's certainly a better pace on the permitting for all the projects that we've seen in front of us. We don't necessarily see permitting as an extraordinary impact on the projects, although we probably see that jobs like Freeport probably won't start getting some real traction under midyear. So you won't see that develop much in terms of revenues until the midyear, and Sempra is picking up some traction in terms of its permitting and start. So if we're successful in being awarded that contract, we would see that as ramping up pretty quickly.

So those are the two that I think we have been watching very carefully as far as any potential delays. The other LNG exports that are in the queue I think gives us probably a handful of those that would probably start seeing perhaps this year getting some approvals and of course you have got some international work like Mozambique and others which aren't subject to those approvals, but certainly are very large projects and it will take some time to get through development cycle.

Will Gabrielski - Stephens

Okay, I really appreciate it, and nice quarter.

Operator

We have reached the allotted time for questions. I would like to turn the call over to Mr. Asherman for closing remarks.

Philip K. Asherman

Thank you. So in closing, I'd just remind everybody that 2013 marks 125 years since the creation of our Company. Generations of CB&I employees have achieved many milestones. We witnessed periods of exceptional success and faced great challenges, and experiences that are part of our Company legacy, and that certainly gives us the confidence to be optimistic about our future growth and the ability to maintain our focus on always delivering long-term returns to our shareholders. I want to thank all of you for your attention this afternoon, and with that, that will conclude our call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Chicago Bridge & Iron's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts