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The Shaw Group Inc. (NYSE:SHAW)

F3Q10 (Qtr End 05/31/10) Earnings Call Transcript

July 12, 2010 9:00 am ET

Executives

Chris Sammons – VP, IR

Jim Bernhard – Chairman, President and CEO

Brian Ferraioli – EVP and CFO

Analysts

Steven Fisher – UBS

Robert Conners – Stifel Nicolaus

Scott Levine – JPMorgan

Peter Chang – Credit Suisse

Andrew Kaplowitz – Barclays Capital

Brian Uhlmer – Pritchard Capital

Andrea Wirth – Robert W. Baird

John Rogers – D.A. Davidson

Joe Ritchie – Goldman Sachs

Mark Levin – Davenport

Operator

Welcome to the third quarter 2010 earnings conference call. My name is John and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Chris Sammons. Mr. Sammons, you may begin.

Chris Sammons

Good morning, everyone. This is Chris Sammons with The Shaw Group. Thank you for joining us on the call today. We have a presentation on our website as usual with the slides, shawgrt.com. It's on our homepage, as well as the Investor Relations page. We will reference the slides as we move along today by numbers.

On the call today, Jim Bernhard will lead the call, Chairman of the Board, President and Chief Executive Officer of Shaw. Also, Brian Ferraioli, Executive Vice President and Chief Financial Officer, will review the financial information.

Now I’d like to refer everybody to slide number two which addresses the use of forward-looking statements and also the Regulation G reconciliations for the non-GAAP items. Please consider this cautionary information with respect to today’s presentation and the press release. We’ll have a question and answer as usual and the operator will give us the instructions for the Q&A session.

Now, I will refer you to slide number three and I'll turn the call over to Jim Bernhard, Chairman and CEO.

Jim Bernhard

Thanks, Chris. Turning your attention to slide three, as we are still operating under typical operating segments as you see on that particular slide and let's turn to slide four for our executive summary.

We had a strong operating performance certainly for the quarter in environmental and infrastructure, fossil, renewables, nuclear, and our maintenance group. Our GAAP earnings, again, were volatile. Volatility continues to be reflected in the Westinghouse segment with $34.1 million of pretax translation on the Westinghouse bonds.

The cash balance remains very strong with $1.6 billion and continue to generate positive cash flow of $34.1 million. The quarterly bookings are in line with expectations as awards within our petrochemical and fossil markets remain slow. The major projects, including new nuclear projects, are continuing as planned, as well as the nuclear market as we have projected in the past.

Let me turn it over for the financial review with Brian and then we'll go over the operations review in a little bit more detail. Brian?

Brian Ferraioli

Thank you, Jim. Good morning, everyone. Turning to slide six, looking at our backlog, backlog remains very strong at in excess of $20 billion, led primarily by our fossil and nuclear group.

During the quarter, we booked a fairly large nuclear uprate for Entergy and that's included in the fossil and nuclear group at about – just under $200 million type booking. New awards were relatively slow as expected, nothing unusual in the quarter or really not much from what we had hopefully been signaling for some time.

Turning over to slide seven, looking at the financial results, as typical, we show the as-reported, the U.S. generally accepted accounting principles number. But then the shaded box in the middle, we show the results excluding the Westinghouse activity. As Jim mentioned, we continue to have volatility in that segment for the translation gains and losses associated with the Westinghouse yen-denominated bonds. I'll talk more about the accounting on Westinghouse later.

But if you look at the revenues, relatively flat from a year ago; down a little bit, again, as expected and as we've been signaling for some time. But we don't think there is any significant trend there. Gross profit, again, slightly down a little bit, but if you look at the EBITDA, we are relatively flat. So we picked up some of the benefits of some of the activities we've been doing to reduce our overheads. And you look at the net income, again, flat. And the earnings per share at $0.57, equal to last year's.

As Jim mentioned, the earnings for the quarter were driven primarily by very good execution really across all of the segments. And I wanted to point out that the nuclear power projects here in the U.S. are still less than 5%, but they are starting to contribute to the earnings for the quarter.

Turning to slide eight, looking at the segment results, if you look at revenues in total, in this case, revenues excluding the flow-through costs on E&C – flow-through costs, to remind everyone, are revenues which we do not earn any profit or loss on. They were relatively flat from a year ago and I would say, turned out pretty much again as expected.

Fossil and renewable and nuclear were down from a year ago. That's primarily due to lower activity in the air quality control business. As you might recall, we were very active in the scrubber market a year ago and with the uncertainty around air emissions, that business has slowed throughout the second half of 2009 and so far in 2010.

E&C also was down from a year ago from a revenue perspective. Again, nothing new there; just that the refinery and petrochemical business has remained relatively flat. Maintenance, though, you see is up pretty significantly from a year ago. They had a number of nuclear power plant outages during the quarter and performed extremely well.

And the real star of the quarter was the environmental and infrastructure or E&I group, who remained very busy with U.S. government spending. You see their revenue is up in excess of $100 million or 26% from a year ago. F&M follows the E&C. Their revenues were down. Again, that's in relation to the lack of process related business, refineries, chemical, petrochemical, et cetera. And again, nothing new from what we've been talking about for a number of quarters.

But moving on to the earnings, if you look at the gross profit for fossil, they were up from a year ago and that is reflective of the operations and the nuclear work just starting, as I mentioned earlier. E&C is down again, just from the sheer volume of business; no operational issues there, it's just a volume driven result. And maintenance, up significantly from a year ago, as well as E&I up significantly from a year ago. And F&M, again, good execution, but just lower volume from a year ago.

With that, moving on to slide nine, talking quickly about Westinghouse. If you go all the way to the right, you see we had a gain this quarter of $34 million pretax and you see the volatility of the results where we had a loss in the first quarter, a gain in the second quarter, a gain in the third quarter, and you see how the numbers bounce around as the U.S. dollar-yen exchange rate moves.

At the end of the third quarter, we had a 91 yen to the dollar compared to 89 at the end of the second quarter. And I want to remind everyone that the results here do not show any change in the accounting for the put option, which is also denominated in yen and which is an economic hedge to the yen bonds that are outstanding.

Moving on to cash, cash remains very strong in excess of $1.6 billion or almost $19 per share. We – as Jim mentioned, we had a strong cash flow in the quarter again and we would continue – we would expect that to continue into the fourth quarter as well.

With that, I'll turn it back over to Jim and he will go through the operations and the market view. Thanks.

Jim Bernhard

Okay. Thanks, Brian. Turning to slide 12, we see pictures of Vogtle, V.C. Summer project that we are working on the nuclear power plant in South Carolina, as well as the Dominion project we are work – project we are working on – coal plant we are working on in outside of Virginia City.

The – nuclear continues to do very well not only in terms of uprates, we are still very encouraged by prospects outside the country, as well as inside the country on nuclear new-builds. Our press release today is an exciting event for us with Toshiba and Exelon to pursue the activities that was announced by the Kingdom of Saudi Arabia over the last six months. We are attacking that on a twofold basis with both Toshiba's technology, as well as Westinghouse's technology, working with the client on that basis. So we are very encouraged there.

On the domestic – domestic nuclear uprate market continues to remain strong. We will go in that to a little bit more detail in a minute, as well as the air quality control with the new standards were released last week, certainly is going to be a transition back into the air quality control market which we were the leading participant in the past and we will go in that to a little bit more detail as well. And certainly there is a numerous amount of gas plants out there to build.

Looking toward the nuclear part of our business, let's go into some detail here today. You can see SCANA on the left, which we are currently working – over 700 people in the project and Southern Vogtle, we have over 1,100 working there. They are both doing site preparation. At peak construction, we will have over 3,000 people. These projects remain on time and on schedule and running on budget and very major projects going forward in our nuclear part of the business. We are still encouraged about overseas nuclear plants and – as well as domestically and we believe that we will book another couple of reactors in the next 12 months.

Turning to page 14, I think it gives you an indication of how massive these plants truly are on the progress that we are achieving at Haiyang and Sanmen units 1 in China. We can see the progress that we've made over the last couple of years in these slides is truly amazing and we continue to run slightly ahead of schedule on both of those projects.

Turning to page 15, our nuclear prospects and strategy continues to work well. In China, there is a – there will be some incremental AP1000 nuclear reactors built in China, particularly on the inland away from the coast and Shaw will participate and we will be announcing in the next six months to what extent. It won't be as much as we have in the past, but it certainly would be significant projects going forward.

On the international prospects, they continue to develop nicely in terms of Brazil, Saudi Arabia, U.K., and as well as the rest of the Europe. On the nuclear uprate projects, we think we are going to have great success there, beginning with the Entergy and Grand Gulf. Shaw has certainly the platform to participate in many of these uprates with almost half the current reactors we do maintenance or outage work.

So this is a very big market for us, one that's just beginning to unfold and one we hope to participate in a significant manner. The awards would be similar to the Entergy-Grand Gulf nuclear uprate that we were just awarded, the first station of their portfolio on page 16. It's a couple-of-hundred-million-dollar contract where the engineering, procurement, and construction of these uprates increasing about additional megawatts to that particular unit in Grand Gulf, and I believe Entergy is well underway to do their fleet as are others.

Let's talk a little bit about – on page 17. We are very, very, very encouraged about the new rules that were issued by the EPA. Now, we have more certainty on what the coal plants in the United States have – moving those forward. That's both on new-builds, as well as ones that currently exist. And according to the Wall Street Journal, there are now 180 new plants that need to have some type of retrofit, some type of air quality control, SOx and NOx as we call it, flue gas desulfurization added to these plants.

In the first – recent past, over the last three to five years on the AQCS projects, Shaw has participated in about 40% of that market. So we've been a – the leading participant in that market and there is no reason we shouldn't continue to do that in the future, which has been a significant market for us. And so over the next five to six years, this certainly is a market, the one that we will pursue. There are going to be many gas turbines built, because of – probably continuing low price of natural gas. We think that over the next five years that market is probably $20 billion to $30 billion and we will participate that – in that market as well.

So – and looking at the power market, we have gas turbine business we are going to participate in, the AQCS projects that we were the leading participant in is again going to become very, very active with the new EPA rules with over 180 plants that need to have some type of air quality control systems in place over the next five to 10 years, and as well as the other power part of our component, the nuclear uprates, as well as the new-build puts us certainly in a position to participate in the national and international market for the power. So we are very, very encouraged all these three or four segments coming together at one time, as well as maintenance of these particular plants.

Let's move to page 18 on engineering, energy, and chemicals group. That market has been very flat for the last 18 months. We look at that being – continue flat for the next six months. But all indication that again starting in beginning of '11 and moving forward of another major chemical, in particular ethylene projects going forward, which we have initial indications of a very major build-out throughout Asia, as well as the Middle East. So we are very encouraged in that market going forward into '11.

Our fabrication market will rebound next year as we begin to grow the petrochemical, nuclear, and power markets, which they participate in a very meaningful way. Domestically, our new facility, joint venture in the Middle East will be in production next year, which will certainly benefit them in a major way on projects they have booked in the particular plant will – it's interesting they'll begin at 100% capacity the first day they are open. So we are – our international expansion with the fabrication and looking at – continuing to look at other markets in Kazakhstan and Saudi Arabia could be a very significant one over the next few years.

On E&I market, continues to do well with government spending. Our two major projects there, the MOX as we see on the top slide on page 20, it's our nuclear project down the Savannah River, continues to move on schedule and it's under budget, as well as the Inner Harbor Navigation Canal as you see on the bottom of slide 20, certainly a massive project, the largest project design-build ever awarded by the Corps of Engineers.

We continue to be very, very active in proposals and bidding for design and construction of environmental remediation projects and the potential for significant new government awards is imminent and that business should continue to do well for the foreseeable future.

On page 21, I'm sure everyone is aware of the projects – some of the projects that we are working on for BP in the State of Louisiana and other entities as a response to the major oil spill off the coast of Louisiana.

Okay. We wish – everybody wishes that it didn't happen, but we are – we participate in emergency response projects, some 400 a year, and it seems all too often they seem to be close to our home headquarters. Currently, we have over $300 million project that we've been employed by the State of Louisiana to oversee the Sand Berms as you look on the slide on page 21. And we are actually moving sand from the bottom of the – underneath the water level in particular areas and building them up. You can see in the slide right there, near the Chandeleur Islands where we are increasingly extending the range of these islands, all these breaches in order to project the coast from incoming oil.

We are doing that, certainly the most major project that we have underway in response to the BP oil spill, but we are certainly working with BP on staff augmentation and environmental services, procuring equipment, we have sent 40 biologists down to work with the BP to protect the – help protect the ecological habitats, we are doing decontamination operations.

While a lot of these are moderate in nature, we continue to believe that over a long period of time, if we are – if we are to return the gulf to better than it was before, it certainly will mean a tremendous amount of effort in the marshes of Louisiana in wetlands restoration. Shaw is the leading company in the United States of doing wetlands restorations from the Great Lakes and Chesapeake Bays to the Everglades, to the marshes in Louisiana. We have a very significant amount of work that we have accomplished in the past. So more to come on that later.

We are continuing our guidance with $7 billion at the beginning of the year and EPS, $2.10 to $2.20 at the beginning of the year. Certainly we are going to be at the top side of that – those guidance for the fourth quarter. Cash flow remains basically the same at $345 million.

In conclusion, we had great – we had results, solid results, a great strong execution and certain business volumes were lower in the E&C in the part. But the markets look – the way I would sum up the market, the fab business is going to recover and recover nicely next year. The E&C business will continue to be flat with awards happening in the second part of the year. The power business will start to do extremely well with the nuclear business starting to be more of a factor in the business not only in terms of income but also in terms of award – awards during the year, which should be a major year in awards, as well as the maintenance business continues to do very well. Our E&I business will again do very well next year, as well as – not only in terms of income, but in terms of new orders.

So we are very encouraged about the markets we are in and our execution in the last few quarters has been right on. So we are very encouraged for next quarter and the coming few years.

Okay. At this time, we will open it up for any questions that you may have.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Steven Fisher from UBS. Please go ahead.

Steven Fisher – UBS

Hi, good morning.

Jim Bernhard

Good morning.

Steven Fisher – UBS

The E&I margins were the highest that I've seen in some time. And so I'm just wondering, was there any unusual mix in there or non-recurring items and you mentioned it sounds like there were some big projects that could be imminent there. Wondering would the margin profile is going to be similar to what we've seen in this quarter.

Brian Ferraioli

Steve, this is Brian. I'll take the margin one. In general, there was nothing out of the ordinary. They do get incentive fees from time to time and we did pick up some incentive fees on some of the government contracts, so you get a little bit of a spike as a result of that, but I mean that's just normal course. So nothing really unusual.

Steven Fisher – UBS

Okay. And the imminent booking?

Jim Bernhard

Well, let me not use the word imminent and kind of retract there. There is very, very significant amount of activity and it continues to be a big part of our business, the inquiry level has never been higher in that part of the business. So we are encouraged.

Steven Fisher – UBS

Okay, fair enough. On the E&C side, how much was the SHARQ project still a driver of revenues and margins in the quarter? And was it more of a factor on the revenues or the margins?

Jim Bernhard

SHARQ was basically finished. That project has been successfully completed and really was not a major factor in either revenues or earnings. Unfortunately – it was a good project. What is more prevalent for E&C is the ExxonMobil project in Asia, which has entered into the construction phase and that has more of an impact on both earnings and revenues. But obviously, the margins will be lower than at a phase when E&C is doing all high-value engineering work. Once you get into the field and the construction, the margins will be a little tighter due to the subcontract nature of the construction that they do.

Steven Fisher – UBS

Okay. And lastly, can you just comment on how the competition looks for the gas-fired plants you are expecting, how many bidders are you seeing and do you expect contracts to be pretty universally lump sum or could it be a variety of contracting terms?

Jim Bernhard

There will be a variety of contracting terms of those particular projects and depending on the client, the competition slighter bidders could be – typically is the largest in the power business with other parts of the more sophisticated work with more negotiated type of contract rather than gas power plants. A lot of those will be fixed-price, but some of them would be other – different, varying terms.

Steven Fisher – UBS

Okay. Thanks a lot.

Brian Ferraioli

Thanks, Steve.

Operator

Our next question comes from Barry Bannister from Stifel Nicolaus. Please go ahead.

Robert Conners – Stifel Nicolaus

Good morning, guys. This is actually Robert Connors in for Barry. How are you?

Jim Bernhard

Good.

Robert Conners – Stifel Nicolaus

Good morning, guys. This is actually Robert Connors in for Barry. Just firstly, of the $4 billion of scope revenue per US nuclear site, what percentage do you believe can be completed before the COLs and are the COLs still a year-end 2011 expectation?

Jim Bernhard

Yes, still a year-end 2011 for the – calendar year 2011 for the COL – of the COL. And I don't think we released that information, it's different for different sites depending on if they have an early work permit or not on the site of how much would be complete or billed or – to the clients. I don't think we've given that information, but we can look into that.

Brian Ferraioli

But I think we have said in the past, Jim, that it's in excess of – would be measured in excess of $1 billion.

Jim Bernhard

Yes. I mean –

Robert Conners – Stifel Nicolaus

Pre-COL?

Jim Bernhard

Yes.

Robert Conners – Stifel Nicolaus

Okay, okay. And then just secondly, previously I believe it was stated that the nuclear modularization work that will be running through the F&M segment would be a little more labor-intensive than the traditional pipe fab work.

Jim Bernhard

Yes.

Robert Conners – Stifel Nicolaus

Does that prevent the segment in any way of re-achieving, say, a mid-20s gross profit margin, about where we were at about a year and a half ago?

Brian Ferraioli

Well, we haven’t really given any forward guidance on margins for any of our segments. So I can't answer the question directly, but I think we have indicated throughout that we thought that that business would be at least equal to the historic margins.

Robert Conners – Stifel Nicolaus

Okay. Thanks for the clarity.

Jim Bernhard

No problems, Robert. Next question, please?

Operator

Next question comes from Scott Levine from JPMorgan. Please go ahead.

Scott Levine – JPMorgan

Good morning, guys.

Jim Bernhard

Good morning.

Scott Levine – JPMorgan

A question regarding utility spending patterns in general. Could you comment regarding their behavior today versus maybe at the time you provided guidance? And how much uncertainty do you sense with regard to the regulatory factors like the emissions control regs or potentially an energy bill? Are they more willing to spend, if they are considerably more willing to spend today than they were six to nine months ago?

Jim Bernhard

Thanks. Certainly, all the emissions regs places more certainly because we had some projects that were slowing down as far as the inquiry level, et cetera, which are now with more certainty and I'm sure they will go forward. So I would say it's certainly – and with the financial community and the banks recovering, I think it's certainly a better environment in the power than it was nine months ago to a year.

Scott Levine – JPMorgan

And on the new-build side with gas plants and other areas, similar story?

Jim Bernhard

Well, we still see gas plants and there is some limited coal activity and the nuclear plants out there are still on a slow march to the sea, not only in the United States, but – and maybe even on a quickened pace outside the country, which we hope to participate in a meaningful way.

Scott Levine – JPMorgan

Okay. And talking about the E&I segment, moving beyond the BP spill and the implications for work for you guys, do you see greater opportunities in the area of coastal restoration or protection over, call it an intermediate-term horizon, due to a greater focus on that area?

Jim Bernhard

Yes, we think that there is going to be a significant amount of hurricane protection/environmental remediation. We are hopeful that the money that was coming as far as percentage of all revenue offshore in five or six years will start in a more immediate fashion now and I think that that might be into works in Congress currently. So we are – and we are participating in the overall planning process of that now. So we believe that that is going to be an intermediate and significant amount of money spent, as well as over a very long period of time.

Scott Levine – JPMorgan

Got it. One other quick one, if I may, really. I don't know if you addressed this before, but the adjustment to the operating cash flow outlook for 2010, could you comment about what drove that?

Brian Ferraioli

That's just really timing of some receipts, nothing significant, unchanged from a business outlook perspective. We also should caution you Scott, we also have some pretty significant collections in the month of August – forecast for the month of August that depending on when they come in, if they come in on-time or a week later could fall from fourth quarter into 2011.

Scott Levine – JPMorgan

Okay, that will be a timing issue then. Great. Thank you.

Chris Sammons

Next question?

Operator

Well, our next question comes from Peter Chang from Credit Suisse. Please go ahead.

Peter Chang – Credit Suisse

Good morning, guys. How is it going?

Jim Bernhard

Good.

Brian Ferraioli

Good.

Peter Chang – Credit Suisse

Great. My first question is on F&M margins. They were actually pretty solid in the quarter. And I was trying to find out if this is sort of the level that we should expect or with the additional uprate work, possible gas opportunities and air quality control work, if that could even move higher.

Brian Ferraioli

Again, we don't give specific guidance on margins and particularly for individual segments. What we have said in the past is that the nuclear work with fewer competitors in that market as compared to, say, gas plants which have more competitors and the nuclear margin should be higher, the gas ones would – you would to be lower just – given the competition. And the air control quality market is a market, as Jim mentioned earlier, we've been very active and we are one of the larger players in. So we would anticipate that to be on the stronger end for the margin spectrum. So beyond that though, we can't really get too specific.

Peter Chang – Credit Suisse

Got you. On that air quality control opportunity, with new Mercury Rules expected next year from the EPA, when do you expect to see utilities actually start to spend here? Would it be late 2011 and maybe even into 2012?

Jim Bernhard

I think you will see them start to spend over the next six months.

Peter Chang – Credit Suisse

Okay, so pretty soon then. And then –

Jim Bernhard

Yes. A lot of these plants were in the works and they took a step back to have more certainty for these EPA rules to come out. So a lot of them were way along in the process and we are kind of put on hold or so more exacting data could – more certainty out there and I think they have that now.

Brian Ferraioli

And I think also when you think about the new transport rules that were just proposed last week, the target is for them to be in place with the emissions reductions by 2014. So there is not a lot of time for some of these projects to get moving.

Peter Chang – Credit Suisse

Got you. Well, I'll let somebody ask – else ask another question. I'll get back in queue. Thanks.

Brian Ferraioli

Thank you.

Operator

And our next question comes from Andrew Kaplowitz from Barclays Capital. Please go ahead.

Andrew Kaplowitz – Barclays Capital

Good morning, guys.

Jim Bernhard

Good morning.

Brian Ferraioli

Hi, Andy.

Andrew Kaplowitz – Barclays Capital

So Jim or Brian, you guys mentioned in your Analyst Day a couple months ago about a couple of large prospects in the E&C space. And I know, Jim, you talked about sort of flattish over the next six months in terms of new awards. I mean, I think you had even mentioned that you were in negotiations for a major refinery expansion. So have these things just continued to get pushed a little bit, are they still out there? Where are we with these things?

Jim Bernhard

I think they've just gotten pushed a little bit. But I think we are going to be okay after the first of the year. It looks like there is – well, there is a lot of activity moving forward, particularly on the ethylene front. And so 2011 should be a major award year in that particular business.

Andrew Kaplowitz – Barclays Capital

Okay, Jim. That's helpful. And then if you look at your fab and manufacturing new awards in the quarter, you just back into them, they look strangely low and I'm just wondering if there was a scope change in that segment, cancellation, we moved something. Just any information you could give us on fab and manufacturing in the quarter?

Brian Ferraioli

That's good. You are pretty sharp there, Andy. There was a transfer of some of the scope work back into the nuclear segment relating to the modular facility. As the design and drawings get finalized and the estimates get updated, some activity moved back and forth. I'm just looking quickly to see if I can find the transfer. Yes, it's in excess of $150 million got transferred back.

Andrew Kaplowitz – Barclays Capital

Okay. Got you. Okay. That's helpful, Brian. And then one more quick one. Jim, just curious like – so you mentioned the nuclear projects are sort of a slow march to the sea. But each march does seem different. And so I would have – I would – you guys would probably agree with me that the U.K. prospects looked pretty good, and then we had the election and may be they slowed down a little bit. But can you maybe rank the regions of the world and where you think the prospects will come from over the next 12 to 24 months?

Jim Bernhard

12 to 24 months? I think that we will continue to be active in Asia, I think we will begin to be active in Europe and I think we will begin to be active in the Middle East, and certainly we will continue to be very active in the U.S.

Andrew Kaplowitz – Barclays Capital

Do you think that those international opportunities are maybe ahead of the U.S. opportunities in general?

Jim Bernhard

Well, China certainly is committed to – for these next 10 units. So that's almost without question. But I would say that they are all – we are not looking at building 20 units in the U.K., there will be a couple awarded next year and there will be maybe three or four awarded in the U.K. next year and there will be a few more in the United States and it's throughout the world. So what the good news about this is certainly that we have been very competitive in the U.S. and China. So we are going to be able to take our technologies and our knowledge and we are going to be able to market these nuclear plants on a worldwide basis rather than on a domestic basis. So I think –

Andrew Kaplowitz – Barclays Capital

Great. Thanks, guys.

Jim Bernhard

Thank you.

Operator

Our next question comes from Brian Uhlmer from Pritchard Capital. Please go ahead.

Brian Uhlmer – Pritchard Capital

Hi, good morning, gentlemen.

Brian Ferraioli

Hi, Brian.

Brian Uhlmer – Pritchard Capital

I have a question on the transport rule. As a look at the SOx requirements, I guess the regs is tougher than anticipated in that you would foresee a lot of incremental spending on some of these plants. Do you guys view this as spending that's going to happen immediately on these plants or does the payback (inaudible) switch to shutting plants down and maybe generating more on the new-build order front in 2011? I just kind of wanted to get your feel on – it looks like you have a lot more dollars spent on new-builds than you do on the AQC work, so I wanted kind of your feel on that.

Jim Bernhard

That's going to – I think you are going to – there is not going to be one-size-fits-all, it could be a combination of both. But I suspect with the difficulty in permitting new coal plants that these things have become more variable even with the incremental spend increasing on the air quality work. So my feel is that more of the air quality work will be done rather than new-builds, although some of these in particular places will be converted to natural gas.

Brian Uhlmer – Pritchard Capital

Okay. And your read-through was on 2014, because I thought that there was some of the implementation was 2012 to kind of time the spend, to make sure that that was – it was spent during the current administration.

Jim Bernhard

Even 2014 for 180 plants in four years, they usually take 36 months to build. I mean, this is a major, major activity to try to do 180 plants in three or four years or five or 10 years. That is an enormous activity, a lot greater than it was in the past.

Brian Uhlmer – Pritchard Capital

Right.

Brian Ferraioli

Brian, I think you are right. There are interim steps, but the 2014 I was referring to is what I thought was supposed to be all in place.

Brian Uhlmer – Pritchard Capital

Okay, yes. That – yes, we are on the same page there. Thanks. No, I think the magnitude is – this $10 billion number speaks volumes. Switching over to my second question, I want to follow up on kind of the remediation and what's going on in Louisiana right now. You said you had 40 biologists down there and you placed some people. Is this kind of a contract hire where you are pass-through or are these actual full-time Shaw employees?

Jim Bernhard

Most of them are full-time Shaw employees. We have seven or more contract employees, but we have a lot of biologists that work for us on our E&I group on environmental remediation, wetlands activities.

Brian Uhlmer – Pritchard Capital

Okay, and now they are billable. Okay – well, they are actually on specific projects being billed. All right, I'll follow up a little more with that later. Well, I'll turn it back over.

Jim Bernhard

Thank you.

Brian Ferraioli

Thanks, Brian.

Operator

Our next question comes from Andrea Wirth from Robert W. Baird. Please go ahead.

Andrea Wirth – Robert W. Baird

Good morning, gentlemen.

Jim Bernhard

Good morning.

Brian Ferraioli

Good morning, Andrea.

Andrea Wirth – Robert W. Baird

I wondered if you could talk a little bit more about the Middle East. It does sound like the opportunity is pretty substantial. You had mentioned the Middle East was kind of the number three in terms of where you could see a lot more nuclear opportunity. Was that primarily on the Fabrication side? Is that probably where we should normally – primarily think about that?

Jim Bernhard

No, I would think you look at that in terms of nuclear and new-builds. You've noted UAE has a program they have begun, Kuwait, Egypt and now, Saudi Arabia has announced a huge program in which we announced today that we are going to participate in a consortium with Toshiba, Westinghouse, as well as Exelon. So I think that you would – we would look forward to participate in new-build and nuclear power plants in that part of the world.

Andrea Wirth – Robert W. Baird

Got it. And then maybe could you just give us a little more clarity and understanding in terms of – with that agreement you just formed in terms of how do we think about that versus the Section 123 atomic agreements? Since we don't have – the U.S. doesn't have an agreement with Saudi Arabia, so how do we kind of think about the opportunity given that that's not in place?

Jim Bernhard

Well, the UAE, a neighboring country to Saudi, had a little difficulty through Congress in getting 123 agreement, what we call it, confirmed. And I think that the other countries in the area, Saudi Arabia in particular, should be afforded the same type of level of consideration as UAE. These plants do take some time to develop and our participation is limited to having that pass through Congress.

So we have that to go forward, which will – hopefully, it will work as well as the UAE and certainly with Toshiba and Westinghouse, two of the leading technologies in the world and the largest operator of nuclear plants in the world, Exelon, certainly makes for a formidable and competitive team.

Andrea Wirth – Robert W. Baird

Well, that's very helpful. Thanks. And then in terms of the U.S., you had previously given out some rough framework in terms of how we think earnings should look from the U.S. nuclear side back in 2009. Do we think that that same rough level of guidance should still hold for 2011? Obviously, adjusted for the Progress delay, just given that things are remaining on track or do we assume it looks a little bit better in 2011 than we initially had thought?

Brian Ferraioli

Without being too specific, Andrea, we – I think it's safe to say though we think it will be a little bit better.

Andrea Wirth – Robert W. Baird

Got it, got it. And then just one last question. The last several quarters you had talked about the hope that backlog would actually be up year-over-year in 2010 just kind of given that things have been a little bit tougher thus far this year. Is that still something we should be looking to happen or should we assume that that maybe a little bit more challenging to come through this year?

Jim Bernhard

It maybe a little bit more challenging, but I think that it is still a chance that certainly will happen.

Andrea Wirth – Robert W. Baird

Got it. Thank you.

Brian Ferraioli

Thanks, Andrea.

Operator

Our next question comes from John Rogers from D.A. Davidson. Please go ahead.

John Rogers – D.A. Davidson

Hi, good morning.

Jim Bernhard

Good morning, John.

John Rogers – D.A. Davidson

Just a couple of quick follow-up. I think, Jim, in your comments when you were talking about new reactor contracts, you mentioned internationally, but you also said domestically you expect some new contracts within the next six months. Did I hear that right?

Jim Bernhard

I said that we would have a couple of reactors in the next six to 12 months. I didn't say they were national, international, or in the U.S. I feel very comfortable about that and maybe more, we'll see. But there is a lot of activity – there is still a lot of activity in the U.S. and China and U.K. I mean, it's – yes, when we say a lot of activities, 10 nuclear plants is a lot of activity.

John Rogers – D.A. Davidson

Okay.

Jim Bernhard

You know, 10 – you get three or four of them, is a huge amount.

John Rogers – D.A. Davidson

Yes.

Jim Bernhard

If you look at – one nuclear plant encompasses all the fossil work we have.

John Rogers – D.A. Davidson

Okay.

Jim Bernhard

Let me repeat that, one nuclear plant is equivalent to all the fossil work we have.

John Rogers – D.A. Davidson

Right.

Jim Bernhard

So these things are very, very large.

John Rogers – D.A. Davidson

Okay. In – Brian, in terms of CapEx this year and looking out into 2011, given the – I mean, minor adjustments to cash flow, any changes there on what your total spend looks like?

Brian Ferraioli

For the balance of the year, no. Our guidance is going to remain the same. But we should be lower next year than this year when you think about completing the modular facility and some pretty significant investments in cranes, some of these mega-cranes that we use at these nuclear power plants, we would think CapEx should go down next year compared to where it is this year. We haven’t done our budgets for next year yet, they are all in process. So I don't have a specific number, but I would expect the number to be down rather than flat or up.

John Rogers – D.A. Davidson

Okay. And there is no significant investment required with just the JV that – or agreement that you announced this morning?

Brian Ferraioli

No, no. With the Saudi Arabia?

John Rogers – D.A. Davidson

Yes.

Brian Ferraioli

No. No, no.

John Rogers – D.A. Davidson

No upfront investment of any – okay

Brian Ferraioli

Yes.

John Rogers – D.A. Davidson

Great. Thank you.

Jim Bernhard

Thank you.

Brian Ferraioli

Thanks, John.

Operator

Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Joe Ritchie – Goldman Sachs

Thank you. Good morning, everyone.

Jim Bernhard

Good morning, Joe.

Joe Ritchie – Goldman Sachs

I just have – just one quick question really on the margins. I know that you guys don't like to talk about margin guidance going forward. But if we can talk a little bit about the quarter, you saw a nice uptick in your fossil and nuclear operating margins this quarter. I was wondering whether there were any one-time fees associated with project closeouts in that number, Cleco and Comanche, specifically.

Brian Ferraioli

No. Cleco and Comanche, no significant amounts in there. In terms of – no closeouts really. I'm trying to think off top of my head. Any significant closeouts, no. No, it just – we are trying to take advantage of some softer markets from equipment supply. And just, as Jim mentioned, pretty solid execution.

Joe Ritchie – Goldman Sachs

Okay. Okay, great. And was there anything – any amount driven by the ramp that you are starting to see in your two nuclear new-builds?

Brian Ferraioli

Yes, they are starting to contribute. They are less than 5% and we would expect that to continue to ramp up. So yes, we've been signaling for some time we would expect the margins, everything else being equal, to increase, given the nuclear work coming online.

Joe Ritchie – Goldman Sachs

Okay. Okay, great. And I guess in – sticking with the margins on the fabrication and manufacturing side, we saw a pretty significant decline this quarter relative to what you had been tracking over the last few quarters. I have margins down about 590 basis points. Can you help me understand what happened in that segment this quarter?

Brian Ferraioli

Lot of that is just project mix. If you look from a year ago, they had some high-margin type projects going through, which they did not have in this quarter. And again, they are – I would anticipate that – when the nuclear work comes on that there will be a change in their margins to the upside.

As we mentioned earlier, they are experiencing a little bit of pricing pressure from the lack of the refinery or the petrochemical/chemical work that they had enjoyed in the prior years. But once the nuclear work ramps up, that will fill the void – more than fill the void and we think that this is going to continue to be a very, very good business for us.

Joe Ritchie – Goldman Sachs

Okay. And I guess the timing of the nuclear ramp-up in this particular segment?

Brian Ferraioli

It's starting. But again, it will ramp up much more in fiscal 2011 and into '12 than certainly anything in 2010

Joe Ritchie – Goldman Sachs

Okay, great. Thanks for your time.

Brian Ferraioli

Thank you.

Jim Bernhard

Thank you.

Operator

(Operator Instructions). And our next question comes from Mark Levin from Davenport. Please go ahead.

Mark Levin – Davenport

Hi, a couple of quick questions. Most have been asked and answered. The requisite quarterly question about uses of excess cash flow, still sitting with a lot of cash on the balance sheet. How do you think about the opportunities, meaning share repurchases versus special dividend versus the returns you are able to generate by deploying that capital into other opportunities?

Brian Ferraioli

Well, really no change from where we've been. We continue to look at opportunities there. Our number one priority would be to reinvest in the business. We think that that will give the greatest shareholder return. We haven’t found that opportunity yet. So we continue to evaluate it. So really no change from where we've been, although it is an area that we spend a lot of time and energy.

Mark Levin – Davenport

In terms of the share repurchase, I mean, when you view the share repurchase against the backdrop of those opportunities – I think you mentioned you are still looking. Is there – what would be the reticence to doing something like what one of your peers recently announced, to go out and buy back stock aggressively?

Brian Ferraioli

Well, if we can find an opportunity to invest in the business and given the markets that we've been talking about this morning, we think that that gives the greatest shareholder return rather than just giving money back to investors. But if we can't find a way to do that in a way that maximizes shareholder value, then we will find ways to return it to shareholders.

Mark Levin – Davenport

Okay.

Brian Ferraioli

But again, if you believe in the markets that we've been talking about, we do think there are opportunities to invest in that business and provide the greatest return.

Mark Levin – Davenport

Okay. Fair enough. And then the last question has to do with the Progress plant in the context of it being still included in backlog. I mean, can you provide maybe some commentary as to sort of what the threshold or the standard is, and in particular with regard to that project and its inclusion in backlog?

Brian Ferraioli

Okay. The standard for putting anything in the backlog is we need to have a legally binding commitment and it has to be management's assessment that the project is likely to proceed. So looking specifically at Progress, there really is not any significant change from where we've been in the past. We do have a valid contract, we have a client who has repeatedly said that the project is going to proceed, and he said it both to us and privately and publicly to their investors. We see activity in terms of long lead items that they are doing and activities that with the NRC that give us confidence that the project will proceed.

So that's the basis of leaving it into backlog. I also would like to point out though, you contrast that with the V.C. Summer project for SCANA, only a limited amount of that project is in backlog because of the way that contract is structured. However, that contract is going full speed ahead and we are – remain very optimistic that both V.C. Summer and Vogtle are going to continue to proceed in parallel and will be coming online in 2016. So V.C. Summer, very little in backlog where Progress is in backlog. So no change from prior quarters.

Mark Levin – Davenport

Okay, great. Thank you very much.

Brian Ferraioli

Thank you.

Jim Bernhard

Okay. That concludes our conference call for the third quarter. We appreciate your participation and we looking forward to meeting with you guys again on the fourth quarter. Thanks a lot and have a good day.

Chris Sammons

Thank you, everyone.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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Source: The Shaw Group Inc. F3Q10 (Qtr End 05/31/10) Earnings Call Transcript
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