Foster Wheeler AG Q2 2010 Earnings Call Transcript

Aug. 6.10 | About: Amec Foster (AMFW)

Foster Wheeler AG (FWLT) Q2 2010 Earnings Conference Call August 5, 2010 10:00 AM ET

Executives

Scott Lamb – VP, IR

Bob Flexon – CEO

Umberto Della Sala – President, CEO; and CEO – Global Engineering and Construction Group

Gary Nedelka – President and CEO – Global Power Group (GPG)

Franco Baseotto – EVP, CFO and Treasurer

Analysts

Andrew Kaplowitz – Barclays Capital

Michael Dudas – Jefferies & Co

Joe Ritchie – Goldman Sachs

Steven Fisher – UBS

Will Gabrielski – Gleacher & Company

Barry Bannister – Stifel Nicolaus

Avi Fisher – BMO Capital Markets

John Rogers – D.A. Davidson & Co

Roger Ried – Natixis Bleichroeder

Peter Chang – Credit Suisse

Operator

Good morning. My name is Lynn, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Foster Wheeler Second Quarter 2010 Investor Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. Thank you. It is now my pleasure to turn the floor over to Scott Lamb, Vice President of Investor Relations.

Scott Lamb

Good day everyone and thanks for joining us. Our news release announcing financial results for the second quarter was issued this morning and has been posted on our website at fwc.com. The presentation we’ll use today has also been posted on the website.

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

Joining us on the call today from our office here in Zug, Bob Flexon, CEO, Umberto Della Sala, President and Chief Operating Officer; Franco Baseotto, who is Executive VP, CFO and Treasurer, Gary Nedelka, CEO of our Global Power Group, and Michael Liebelson, Executive VP and Chief Development Officer.

After our prepared remarks, we will have time to take your questions. I will turn the call over to Bob.

Bob Flexon

Thanks Scott, and good day everybody. Thank you for joining us on the call today, my first as CEO of Foster Wheeler.

Beginning on Page 3 of our slide, you can see that our adjusted net income for the second quarter of 2010 were $61 million, or $0.48 per share, that’s below the average quarter of

2009, due largely to market-related declines in both the volume of work executed and the EBITDA margins for each of our operating groups. It’s important to note that even with the decline in net income, each of our business groups continued to demonstrate outstanding performance in executing contracts, and maintained commercial excellence in a market that remained highly competitive.

Turning to Slide 4, you can see that our Global E&C Group reported $85 million of EBITDA for the second quarter. This is below the average quarter of 2009 due to what I just mentioned; lower volumes of work executed and lower EBITDA margins. For second quarter of 2010, the margin was approximately 19% compared to 22% for the average quarter of 2009.

I’ll ask Umberto to speak to the market environment on Slide 5. Umberto?

Umberto Della Sala

Okay thank you Bob. Okay, let’s go to Page 5. We did in fact see good levels of bidding and booking activity in the second quarter. And I use the term good in a relative way in consideration of our current market condition. In this environment, we were able to book a number of very nice awards in our E&C Group in the second quarter. And you see it on the slide several examples.

I will start with the EPCm contract for the clinical facility in Singapore. This is a sizable award in terms of (inaudible) just below, little bit below the threshold that we set to define a project as a mega project. We have a very strong track record in Singapore which contributed to winning this first large job with a new client. So, this is a very nice award.

Secondly the lead piece, the contract for the EPCm for a pharmaceutical project in China. We really like this one because it is a large (BUS) processing plant, very similar to a chemical plant, and this is an area in which we excel.

Next in the list is the feasibility study and the FEED for the new grassroot specimen Nassiriya refinery in Iraq. Now, this project has been on our screen for a while. We are happy that we are finally able to book the project. And this is a key win for us, which plays directly to our strength in clicking on large complex assignments.

Next project on the list is the EPCm contract for an upgrade of the Limbe refinery in Cameroon. Now we did the FEED for this project and we were able then to win the subsequent EPCm phase. This is a good size job in a geography where we have not been active in recent years, as our Paris office worked very hard to develop this relationship.

Next one on the list is also in Cameroon. This is a pre-FEED concept for an LNG (inaudible) facility. Again, this a job that goes right to a lot of competitive advantage in the market.

Next we have the EPCm job for cogen plant in Germany for Dow which could sound as a surprise to you, but I’ll take this opportunity to remind you that our Global E&C Group does in fact have expertise in these kinds of power industry work. And we were very happy to win this award with the clients of Dow, with whom we are building good relationships across a number of areas of their business.

Next are the two PMC contracts in Abu Dhabi which represent the kind of upstream oil and gas work that we have long been known for. Clearly we have been very vocal about our desire to grow in the upstream oil and gas, but it is probably worth yet another reminder that we do in fact already have a very solid foundation in this business and as we grow this business, our objective is to increase our capacity and broaden the very good skill set that we already have here.

The final bullet is a contract for detailed engineering and procurement services for a delayed coker in South America. Everybody knows our leading position in delayed coking market. What is important to this award is that it represents winning accounts where we have not been having much presence.

Now clearly, we are pleased with these contract awards. And when I look at the prospect list, I see that we continue to have a good activity level. Also it is clear, too, that clients are taking the extended time to arrive at their final investment decision. Now, this confirm the numerous signs that the global economy actually continues to improve especially in the emerging economies. And these will shift view of our clients in taking their decision. With that I will pass it over to you, Bob.

Bob Flexon

Thanks Umberto, and turning to Slide 6.You see here the result of the booking activity in the second quarter of 2010 expressed in terms of scope revenues. At $488 million, we were essentially flat as compared to the average quarter of 2009, although it was certainly encouraging to see the third consecutive quarterly increase in scope new orders. And it’s also worth noting that we achieved this level of new orders despite the absence of any single major sized contract during the quarter.

Turn the page to Slide 7 and you will see the net result of the new orders which was a scope backlog level of $1.4 billion in the second quarter of 2010. Our scope backlog numbers have been relatively stable in E&C for several quarters. And if you adjust for currency impacts, the scope backlog at the end of the second quarter of 2010 was approximately 8% above the fourth quarter of 2008 and about 4% above the fourth quarter of 2009.

On Slide 8, you see that our E&C Group reported a nice sequential quarter uptick in the number of man-hours in backlog in the second quarter of 2010.

If we turn now to our Global Power Group, starting on Slide 9, you see that EBITDA was below the average quarter of 2009. Again the drivers here are lower volume of work executed and a lower EBITDA margin. Also contributing to the decline was a reduction of about $4 million in equity income from a Chilean power plant that was disabled by an earthquake back in February 2010. We have business interruption insurance coverage and we fully expect to recognize the lost profits once our claim is finalized. Given the improvement in the boiler orders in recent quarters, we actually expect to see significantly higher EBITDA for GPG in the second half of 2010 than in the first half.

I’ll ask Gary to speak to tone of the market on Slide 10.

Gary Nedelka

Thanks Bob. We’ve seen a pickup in demand outside the US for solid boilers this year as compared to 2009 especially in relation to our market leading CFB technology, where we continue to capture a high percentage of available opportunities.

You can see evidence of this in the fact that your year-to-date bookings through June 30th in the Power Group, have already exceeded our bookings for all of fiscal 2009. You see some of the key awards for Q2 listed here.

The contract in China is for Sinopec where we have done a total of 26 CFB projects over the years. So, clearly this is a client who is very happy with our CFB technology. The units under this contract will burn a mixture of coal and petroleum coke.

The order in Poland is for one of our smaller CFB units. But it is for a power plant client that already has four other Foster Wheeler CFBs in operation. Again, a testament to the quality, reliability, efficiency, and environmental performances of CFB.

Also on the list is a partial booking for a 100-megawatt CFB boiler in the Czech Republic where we’d received a limited notice to proceed.

The other booking here is for technology development package for a planned 300-megawatt carbon capture CFB boiler in Spain. This is a very exciting project for us that will involve our Flexi-Burn technology. Flexi-Burn enables the CFB to operate in carbon capture mode or conventional air-fired mode. In addition to this technology development package, we are already at work on the precursor to this project, a 30-megawatt thermal carbon capture CFB that will operate at the demonstration plant to validate the technology in advance of the full 300-megawatt unit.

These Q2 bookings are concentrated in two of the key geographies where we see additional prospects for the balance of the year; Asia and Eastern Europe. There is no coincidence then if you see Asian countries represented in two of the three awards at the bottom of the slide. We have not yet press released these awards, but these and potentially others will be included in our Power Group booking during Q3. Bob?

Bob Flexon

Thanks Gary. On Slide 11, you’ll see there are still bookings in Global Power for the second quarter of 2010 were $162 million. The sequential quarter decline is very typical of the lumpy nature of the bookings in this business, but clearly at $622 million, as Gary said, our new orders in the first half of 2010 have already exceeded the total level of scope new orders for all of 2009.

And if you turn the page to Slide 12, you see that our Q2 backlog in Power is in good shape. And actually it’ll be more than $100 million higher than the $795 million figure you see here, if one would apply the currency exchange rates in effect at the end of 2009.

As we have said previously, we expect to build backlog in the Power Group this year, and we’ll exit 2010 with a scope backlog as well above the levels we reported in the first two quarters in this year.

I will turn to Franco to discuss our cash position and our recently completed refinancing.

Franco Baseotto

Thank you Bob. As you can see from the chart on Slide 13, at the end of the second quarter, our total cash position continue to be very strong at more than $1b. And on a related note, you’ll shortly see when we file our 10-Q that we have a mandate on our US senior credit agreement and the new $450 million facility, actually the same size of the preview facility with a four-year maturity that provides us with better term for the issuance of our Letter of Credit and added flexibility to pursue our business strategy including share repurchases. Bob?

Bob Flexon

Thanks Franco. And on Slide 14, you see the key takeaways. And I again I want to emphasize that in the second quarter of 2010 both business groups demonstrated excellent performance in executing our contracts.

Our outlook for the Global Power Group is unchanged. With the expectation of an EBITDA, the scope revenue margin of 16-18% for the full year, with the second half of 2010 EBITDA being significantly higher than the first half of 2010. As I mentioned, we expect to build the scope backlog in the Power Group this year exiting 2010 with a level that’s well above where we’ve been in the first two quarters of this year.

In our E&C Group, we are partially revising our outlook as you see here. We now expect the pace of orders in second half of this year to be steady, rather than accelerated. This is due largely to what Umberto mentioned earlier, basically clients deferring contract award decisions. On a number of our key prospects, decisions appear to be deferred to 2011. This pattern of deferral along with lower currency exchange rates as compared to 2009 has prompted us to revise our outlook for scope revenues in E&C for the full year. Whereas we previously expected E&C scope revenues in 2010 to be comparable to 2009, we now expect E&C scope revenues will decline moderately year-over-year.

Despite the deferrals, I am pleased to say that our expectation for EBITDA margin on scope revenue for full-year 2010 is reaffirmed at 18-20%, bolstered in part by profit enhancement opportunities. And taking a broader view of market conditions in E&C, I am encouraged by the trend of continuing improvement, especially in the emerging market economies.

One final comment prior to opening up the lines for questions. As you may recall, simultaneous to my appointment as CEO, we initiated a strategic renewal effort for our E&C business segment to drive the Foster Wheeler growth plan. We remain on track for the fourth quarter completion and communication of our forward plans.

At this point, I would like to open up the lines for question, thank you.

Question-and-Answer Session

Operator

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

Andrew Kaplowitz – Barclays Capital

Good everyone.

Bob Flexon

Good morning Andy.

Andrew Kaplowitz – Barclays Capital

So Bob or Umberto, you partially changed the guidance for E&C. The question I have is, how much conviction do you have in this steady piece of new awards now? And, you know, maybe when you talk about what changed, but how much did some of these very large projects that, you know, we know about, like Pluto and maybe the Santos decision, how much of that affect the guidance?

Bob Flexon

Well I will go first and then I will let Umberto to fill in behind me. When I look at the guidance going forward, what we have put forward today is a number that we’ve got a very high level of confidence in. When we take a look at what’s coming out of backlog and the work that’s executing, we pretty much have a clear view from here through the end of the year. So, we feel very confident that the number that we’ve got out there is a solid number. And if anything were to change in the marketplace where our orders actually did pick up, you would see some uptick from where we are, but I think what we’ve put out there is something that we’ve got a high level of confidence.

Regarding Pluto, really in terms to the timing of the awards on Pluto 2 or Pluto 3, that really was not a big factor for us this year as we didn’t really build into our plan any expectation that any awards will be coming through the P&L at this early stage at this point. Umberto, anything?

Umberto Della Sala

No comment, I think.

Andrew Kaplowitz – Barclays Capital

And so Bob, you have been starting to take a fresh look at the business, obviously. And so one of the questions that maybe you can answer better in the quarter is, does any of this sort of, you know, a slight change in guidance, any of it because of the E&C positioning itself? You know, is any of it because maybe a little bit more in downstream and maybe customers are taking a little bit more time on the downstream projects? Can you give us any opinion of that yet?

Bob Flexon

Well I think when I generally look at the market, the market is a – somewhat of a very cautious market. Although I think when you take a look at what happened over the last three quarters of bookings and you’ll see steady but slight increases quarter-over-quarter. So you see a business that’s coming back to life. We’ve been saying for a couple of quarters now that we see good activity in the bid and the proposal groups of the company. We are seeing with the awards that we recently or Umberto went through in the Far East. You see the emerging economies coming to light and you see the prospects coming through. So, we’re seeing a steady state of improvement over the last several quarters.

What was really the variable is the speed at which things recover and it’s just been in a more measured pace than maybe what we’ve thought on going back a quarter or two. But the clearly the momentum obviously is in the right direction, just remains a cautious steadily improving environment.

Andrew Kaplowitz – Barclays Capital

That’s helpful. Just real quickly, you mentioned EBITDA for power could be up in the second half of the year. Any reason why power revenue was flat in 2Q given that you have had a decent amount of bookings? Is that just sort of timing and that it will ramp up now?

Bob Flexon

Well I think part of it is exactly that, it’s the timing. Certainly the Power Group has very good bookings in the first quarter and then that will start flowing through. And we will see in the second half of the year, we’ll see the revenues going up. We are going to see the EBITDA going up significantly from what the first half results were. So, I think the Power Group has had a very good I guess positioning of the business to getting the CFB opportunities and PC opportunities that are out there. They are doing very good in winning the opportunities that are there and the backlog is showing it. And now that will start flowing through the P&L. Gary, do you have any additional color you want to put on that?

Gary Nedelka

No, I think that pretty much covers it. We, really for the first half of this year, are just executing the lower level of bookings that we had last year.

Andrew Kaplowitz – Barclays Capital

Thanks guys.

Bob Flexon

Thanks Andy.

Operator

Your next question comes from Michael Dudas of Jefferies.

Michael Dudas – Jefferies & Co

Good, I guess, afternoon for everybody, gentlemen.

Bob Flexon

Yeah thanks, Michael.

Michael Dudas – Jefferies & Co

First question for Bob or Umberto. As you characterize your second half discussion about the pace of new awards, could you maybe add a little bit of discussion relative to – is it more political, more economic, still is there a level of uncertainty at your major clients that’s causing these delays? And are we closer to a point where – the tipping point where everybody starts to get in line to make these decisions, which could lead to possibly a pretty good 2011 recovery?

Bob Flexon

Well I think it’s probably all of the reasons you just stated. So, depending on which client you talk about. We have some clients where their final capital decisions have been delayed a quarter. We’ve got others with just working through some permitting issues, others that’s just making sure they have got the right access to capital. So, I think a reasonable scenario is like you just said at the end, as each of these companies start working through the issues, and the economy continue to fall, I think you are going to see ramp up where things change quickly. I think one of the things Umberto always told me in his business is that things change very quickly. And they tend to go in the same cycle. So, I would expect that as things, as time goes on through the rest of this year and into next year, as these things work through, and as the global economy continues to fall, I just see an acceleration from multiple clients. Umberto?

Umberto Della Sala

I agree. We have learned that if things change, they change very quickly.

Michael Dudas – Jefferies & Co

My second question for Franco. Could you maybe highlight first half currency impact to results? What we could look for second half, and just remind us year-over-year averages, and how possibly we could see changes going into 2011, given where, maybe the current pound and Euro is, but certainly we’ve had pretty good strength in both of those currencies of late?

Franco Baseotto

Okay, we will be referring to consolidated EBITDA and just to make – to be sure likewise to what we did when we provided previous guidance, we are using year-to-date run rate as a proxy for the balance of the year. So we will really not have a forecast at the proxy level, but we get a sense and if we take as I referenced, the current rate and the rate also of the last reporting month, June, because rates have fairly improved during the month of July. Year-to-date currency impact on consolidated EBITDA is $7 million and this is largely the Engineering and Construction Group. On a full-year basis, including therefore year-to-date numbers, based on current rates, the unfavorable transformation would be in the range of $15 million. If we were to look at less favorable rates, i.e. the June rates, that unfavorable translation would be in the range of $25 million and clearly if rates continue to stay at these levels, and/or improve from these levels, 2011 will probably be flat and/or slightly favorable in terms of translation.

Michael Dudas – Jefferies & Co

One final question maybe for Gary. Can you characterize – you know, relative to your expectations six months ago, how the market for your products has evolved? And do you think there’s some sustainability in the recovery for CFB technology opportunities in your major markets into 2011 and beyond? Thank you.

Gary Nedelka

Sure. I think actually the bookings that we have thus far year are in the geographic markets that we’ve spoken of over the last year or so; that being Eastern Europe and Asia. And we see both Eastern Europe and Asia as sustainable growth markets particularly for the CFB. It’s been a good biomass movement in Eastern Europe that we have been able to take advantage of. At some of the more difficult to burn fuels in Vietnam and other countries, have played very well into the CFB. So, we see those as being sustainable.

When I look at the overall bookings landscape, Western Europe and the US continue to not only lag, but they are pretty much invisible to us in terms of solid fuel boilers. So right now we don’t see that changing in the near future either.

Michael Dudas – Jefferies & Co

Thank you guys.

Gary Nedelka

Thank you Mike.

Operator

Your next question comes from Joe Ritchie with Goldman Sachs.

Joe Ritchie – Goldman Sachs

Hi everyone.

Bob Flexon

Good morning.

Joe Ritchie – Goldman Sachs

Couple of quick questions for you. On your E&C margins, I guess, if I think about your guidance for the rest of the year, it looks like, you know, if we maintain margins through the second half of the year flat, which were actually stronger than we anticipated this quarter, you know, we hit the high end of your range of guidance for E&C EBITDA margins. I guess, as we kind of progress through the year, how should we be thinking about that? Do you think that you can hold margins steady at the 18% plus that you did this quarter? Or is there anything that’s going to potentially pressure those margins in the second half of the year?

Bob Flexon

Well I think when we forecast through or look at the range, I think we are probably slightly down from that level. But we will see where the bookings come in the second half of the year in terms of how it ends up rolling through. But overall when you look at the full year, we expect to be within that range that we provided, but probably slightly lower than what we were for the first half versus the second half.

Joe Ritchie – Goldman Sachs

Okay, great. Yes, secondly I guess switching over to the Power Group, I saw that you’ve booked – did initial work on this two 300-megawatt PC boilers. I was wondering how do you expect the timing of additional scope work on those boilers to evolve from here?

Gary Nedelka

Of additional scope? I am not quite sure I grabbed the question.

Joe Ritchie – Goldman Sachs

Oh I am sorry, you’ve got a limited release on those.

Gary Nedelka

Yes, we would expect those to be fully released within the third quarter.

Joe Ritchie – Goldman Sachs

Okay great. I guess lastly on capital allocation, Franco, I think you made some mention of share repurchase program, you know, by calculations you have about 11 million to 12 million shares that you could repurchase. I know that you didn’t make any decisions to repurchase shares in the first half of the year. Can you give us a little clarification on how you are thinking about that program for the second half of the year? And then a follow-on to that would be, I guess M&A, and where M&A is on the priority list for the cash on hand. Thank you.

Bob Flexon

And Joe I’ll take that question and just philosophically say, when I think about capital allocation I generally like to think about it in terms of a balanced approach. And really the three legs of the stool are making sure we’ve got the right liquidity to support and run the business and make sure that we’ve got ample room there to protect yourself. And secondly, reinvest in the business and pursuing the growth opportunities.

And third of all, to the extent you’ve got some excess capital on your balance sheet to return the shareholders, when I look at where Foster Wheeler is today, trading the day when I look at the outlook that we see, I see a company that has overly compressed margins, has suffered maybe overly to the downside in terms of being cyclical to the downside with the volatility. So, I see capital allocation – a portion to be dedicated to share repurchases. I am very supportive of that return mechanism, and today is the environment of where things are trading, it’s a right time to be thinking in those lines. So, I would expect that we will be using some of that available capacity in the very near future.

Joe Ritchie – Goldman Sachs

Okay great. Thanks of the color, Bob.

Operator

Your next question comes from Steven Fisher with UBS.

Steven Fisher – UBS

Hi, good afternoon. I just wanted to clarify the previous question. For the margins in the second half of the year in E&C, what does the full year assume that the first quarter was? Was it the 24% actual, or was it the margin excluding the pension?

Umberto Della Sala

Our full-year guidance includes bigger payment gain that we recorded in Q1.

Steven Fisher – UBS

Okay, so that will be a 24% roughly in the first quarter?

Umberto Della Sala

Yes.

Steven Fisher – UBS

Okay. And then the profit enhancement opportunities that you mentioned, is that assumed for the second half of the year?

Umberto Della Sala

Yes, as you know, we review our contract position every quarter, and this is of course as per the requirement to file our Q. And as part of that review we look at the contract position of our portfolio and we take a view of where the contracts are, what are the risks that we are still facing, and what the likelihood of some of these risks may be managed in a way that will enable us to convert some of the contingency into profit and/or to gain some of the incentive and again, that’s part of our quarterly process, and our revised guidance is exactly reflecting what we did at the end of Q2.

Steven Fisher – UBS

Okay. So just for the back half of the year, if we assume 24% in the first quarter, 18-19% this quarter, and basically it sounds like the second half is going to be lower than the 18-20% range, and then that does also include proper enhancement opportunities. And so, I guess the question is, is there going to be opportunities in 2011 to see improvement in the margins from second half of 2010?

Bob Flexon

Oh I think the way you are thinking about this year is correct, but in terms of 2011 as the year plays out, we’ll come back next quarter and give more indication around 2011. At this point, I think it’s little bit too early to make that forecast because there’s still a series of plays – releases that we expect from some of our even existing contracts in the second quarter of the year that will have an impact on 2011. So, we’ll update that at our next call.

Steven Fisher – UBS

Okay. And then last quarter, it was mentioned that the margins on Power that were going into backlog were still consistent with the 2010 range. Is that still the case for all this work that’s going into backlog now?

Bob Flexon

Yes, overall it’s consistent.

Steven Fisher – UBS

Okay, that’s good. It seems like the Power is now poised to be a real nice growth driver and so – and I think the hundred day review was going to be focused on E&C. I mean, is there any thought to changing the priority of the Power business and kind of accelerating the focus there?

Bob Flexon

Oh I think that where we see it right now, we are very focused on E&C and the Power Group has done a very nice job of positioning themselves as we go forward. Coming off a tough year, and 2010 has really been a strong start. Once we complete our work with E&C and get focused and get the implementation underway, we expect to do a similar review with the Power Group. But overall, the Power Group I feel very good about the way Gary is running that business and the outlook for that business.

Steven Fisher – UBS

Okay. Thanks a lot.

Operator

Your next question comes from Barry Bannister with Stifel Nicolaus.

Bob Flexon

Barry?

Operator

Mr. Bannister, your line is open.

Operator

Your next question comes from Will Gabrielski with Gleacher.

Bob Flexon

Well, there might be a problem with the line. We don’t hear anything from Will either.

Operator

One moment please.

Will Gabrielski – Gleacher & Company

Hello.

Bob Flexon

Is it Will?

Will Gabrielski – Gleacher & Company

Yes. Can you hear me?

Bob Flexon

Yes.

Will Gabrielski – Gleacher & Company

Okay, it’s all right. Just Barry got cut off.

Umberto Della Sala

(Inaudible)

Will Gabrielski – Gleacher & Company

No I understood. Can you just, I apologize for Barry, can you just remind me what your FX assumptions were based on for this year, at the beginning of the year?

Umberto Della Sala

The EBITDA in fact at the beginning of the year, I think we entered – as usual, we entered the year without making any real assumption in terms of FX impact. When we gave the first guidance which was at the end of Q1, rates were clearly more unfavorable than currently. So our previous guidance was an unfavorable impact in the range of $30 million to $35 million EBITDA which as I said, for full-year 2010 had current rate. That number would be now lower at the $15 million mark on consolidated EBITDA.

Will Gabrielski – Gleacher & Company

Okay. I just wanted to touch on the CFB market again. The current – I guess the high end capacity – what’s the current high end capacity of your boilers? And then in development where do you think you’re going to get that to? And is the market growing towards bigger capacity CFB boilers, going forward?

Gary Nedelka

Let me start with the first question. The largest capacity we have in service right now for CFB is 460 megawatts, which is far and away the largest CFB by any manufacturer in the world. It’s a super-critical CFB and it’s also the only super-critical CFB in operation today. The CFB is actually a nice product for scaling. And we’ve got opportunities right now in the pipeline that we are looking at, that go up to 800 megawatts. Now as far as whether or not the CFB is going to be a consistent player in the 800 megawatt size is going to depend a lot upon what the fuel choice is for a unit of that size. And I guess the fuel is widely varied from coal to biomass to typical anthracites, CFB would be a great choice at any size. But we look right now, we’ve got designs from the board and chasing opportunities up to 800 megawatts in super-critical pressures and temperatures.

Will Gabrielski – Gleacher & Company

Okay great. Back to the E&C, really quickly, what’s the makeup of these projects that are being pushed to the right? Is there a constant theme, are these FEEDs? Are there some bigger EPC projects in there?

Umberto Della Sala

Yes, the majority to that are EPCs.

Will Gabrielski – Gleacher & Company

Okay. And so, I guess, when you look at that list of opportunities that are pushing to the right, and you know, you guys had a decent quarter of man-hours booked in E&C. They are kind of on the average of your $2 billion per year you’ve done for the last four years. Did you think we might have a (Paradip) sized project in 2010 to help you get to that ‘09 number you had in scoping and (inaudible)?

Umberto Della Sala

Well, probably not the (Paradip) size, but certainly a couple of large projects are on the radar screen yet. Those are huge projects.

Will Gabrielski – Gleacher & Company

And these are still opportunities for 2011, right? You haven’t seen any firm cancellations yet?

Bob Flexon

No, we have not seen any cancellation of any large projects. So, it’s really a question of if it’s going to be late 2010 or really pushed to 2011.

Umberto Della Sala

Exactly.

Will Gabrielski – Gleacher & Company

So I know you listed a lot of reasons that could be driving these delays, but I guess, you know, oil at $80 and then it just picked up, you know, is there any overriding theme? Is it that people are generally concerned about macro, not confident that this recovery carries into 2011, is that an issue?

Bob Flexon

No, I think what’s happening in the marketplace still, part of it is refining margins have also an impact on the business, and now the refining margins are becoming much more healthier as well. So, it’s a combination of a number of factors, and our business also has shifted more towards the national oil companies, say versus an integrated. So, there’s a lot of local factors that go and as to whether or not a project goes forward, and there’s a lot of local national rules around clean fuels, issues around wanting to process local crude. So, it’s really more a function of just this thing continue to through the system and to be awarded. We don’t really see much of any cancelation. It’s really just the timing and just the factor of making sure capital availability is there and the demand is coming back at a reasonable rate. So, I think it’s just a – it’s clearly just a matter of time.

Will Gabrielski – Gleacher & Company

Okay, thank you.

Operator

Your next question comes from Barry Bannister with Stifel Nicolaus.

Barry Bannister – Stifel Nicolaus

Hi guys, can you hear me this time?

Bob Flexon

Yes, Barry.

Barry Bannister – Stifel Nicolaus

Okay. We’ve seen an extremely price competitive Middle East, to say the least, and saturated US and European downstream. So, if global GDP continues to grow, I guess a policy of skating to the hockey puck would imply going for the peripheral emerging markets. So, is Foster pursuing all this work in Uganda, Cameroon, Iraq, Columbia, and Vietnam because that’s what’s available at a reasonable return, albeit at a higher business risk?

Bob Flexon

We are following where capital is being spent. The markets are clearly moving and the company, as we mentioned, like the Vietnam or other economies in the Far East or Middle East Africa, I mean as economy develops, and the capital moves, we need to move our business with it.

Barry Bannister – Stifel Nicolaus

No. I agree. But you can also say capital is being spent in the Middle East, but you’re not getting the awards nor any of the western domiciled E&Cs. I mean, the only people who are winning there are Korean engineers, Chinese engineers, and discounters like Petrofac. So are you pursuing the peripheral countries because that’s where you’re getting the business? And are you going to be managing your receivables and contracts and process risk more closely since you are dealing with these more peripheral countries?

Bob Flexon

Well, the latter point first Barry that we’ll always monitor our risk and receivables and credit risk and the like and we’ll continue to do so. We have a very strong and robust risk management program. We will compete in most markets. Now, if it’s lump sum turnkey and Middle East competing against Korean or Chinese or the likes that is not our business, but to the extent that you’ve got opportunities in some of the markets that you mentioned, we will pursue those. They fit our business, they fit our level of expertise, and they are good opportunities for us.

Barry Bannister – Stifel Nicolaus

Okay. And then I understand about being methodical, but at a point, it can be a handicap. And I doubt if you’ll ever find M&A that yields more than 14% EBITDA on a forward-basis like your own stock. You have $1 billion of cash, probably $500 million you’ll spend on M&A, $250 million is a comfort level for cash, so what is keeping us from completing now at $23 a share, the $264 million remaining buyback? Your competitor just announced a 10% buyback and the stock went up dramatically, and they are executing on the buyback. Is it the tax issues related to Switzerland? Or is it lethargy? Or is it the methodical program you’re doing? What is keeping you from doing that?

Bob Flexon

Now Barry I mentioned earlier – in an earlier question just my kind of philosophy – philosophy returning capital to shareholders. You know, I’ve got a long track record of doing that. Our stock, at this price, is a compelling buy. We will be using our capacity, as I mentioned earlier. But I also believe in a balance capital allocation program. And when I think about the cash flows of this business and trying to soften some of the volatility that we have, a portion of our capital will be allocated to growing the business in the right markets, in the right business lines to give us a little bit more diversity, a little bit more stability of cash flow. So, again, I feel it’s is a three-legged stool in how we deal with capital allocation here. We’d again, protect the balance sheet in the business, grow the business, have some diversification and return capital to shareholders, particularly in this environment for the very reasons you just said.

Barry Bannister – Stifel Nicolaus

Yes, I think I believe that we would just rather see you do it at $23 a share than at $28 in six months or something like that. And lastly, when do you expect, Franco, to collect the insurance money that you are due?

Franco Baseotto

We’ve submitted a claim. I think you are referring to the Chilean project that has been impaired by the earthquake, and we have submitted a claim to the insurer. It’s still under examination by the insurers. Our expectation is that by end of the year, we will have clear the claim with insurer and there we will be able to record the equity gain, the equity income which we have not been able to record in Q2 and hopefully also to collect the cash on our business interruption.

Barry Bannister – Stifel Nicolaus

You are assuming that in your guidance for GPG?

Franco Baseotto

That’s built-in in our guidance for GPG.

Barry Bannister – Stifel Nicolaus

Okay thanks. Bye-bye.

Franco Baseotto

Thank Barry.

Operator

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

Avi Fisher – BMO Capital Markets

Hi, thank you for taking my questions. You ended 1Q10 with strong backlog in the Global Power business. I guess this question is for Gary. You ended 1Q10, strong backlog, Global Power. The burn rate this quarter was slightly lower than I expected. When do you expect the projects that you booked in 1Q to really start to ramp and contribute to revenues?

Gary Nedelka

Each project has got a little bit of different cycles to it. Projects in Europe generally are in the 36-42 months for a total life of the project, whereas the ones in Asia seem to move a little bit quicker, more in the 28-36 months. So, we start to see, thought that was in Q1, to start to have heavier revenue recognition towards the end of this year, and then of course moving into 2011.

The other part when you start looking at burn and where we are with the revenue, is there’s been a depressed services market or aftermarket across the whole globe in the Power history. So, you normally see a strong component in our business of book and burn aftermarket work, that’s just hasn’t been there to the extent it’s been in previous years. So, that will offer some of the mix of what you are seeing on burning off backlog.

Avi Fisher – BMO Capital Markets

And the services business doesn’t really go into backlog, does it?

Gary Nedelka

It will. Some of the larger projects certainly will, but there is a pretty good element of book and burns that it doesn’t spend much time in backlog. That’s for sure.

Avi Fisher – BMO Capital Markets

Okay. On the E&C side, there has been a decline in the ratio of scope revenues to gross revenues. Is this indicative of mix towards more engineering versus construction management type work?

Franco Baseotto

It’s really, you are referring of dynamic of our flow-through cost, which is really more a composition of the portfolio mix. I wouldn’t use that ratio really, and certainly we don’t use it internally, as an indicator of underlying dynamics in our business growth, because we had flow-through revenues can have very high liability quarter-on-quarter and very much impacted by other different contract progress and composition of the portfolio.

Avi Fisher – BMO Capital Markets

But does it at all reflect, say, the amount of work you are subbing out versus not subbing out or is it just a function of phases of construction or totally, I mean, what does that represent?

Franco Baseotto

It’s just a factor, again flow-through, as we had I hope we explained in the past is just a component of our EPC jobs that we contract on a cost reimbursable basis. So, it really pass through in terms of risk and revenues to our clients, and therefore that component can be very significant in terms of ratio compared to our engineering service which are included in our scope. But once again that component is going to flow into our revenue and in our cost depending on the progress of those large EPC. And once again, I wouldn’t use that metric personally as an indicator of underlying trends in our engineering business.

Bob Flexon

It’s partly going to be a timing issue. It’s going to be variable based upon individual contracts, where we have got the procurement responsibilities.

Avi Fisher – BMO Capital Markets

Could we ultimately, I’ve been asking that question because I am trying to ultimately get to the same issue of what’s happening in the pricing market. And when I look at your backlog mix, the fixed price backups are roughly 25%, where it was in ‘08. I would think that ratio comes down, and should that improve pricing next year and margins next year, the mix towards fixed price?

Franco Baseotto

So, you are referring to ratio of…

Avi Fisher – BMO Capital Markets

I was asking the question about the ratio of gross to scope revenues ultimately, because I thought it might be indicative of what’s happening in the pricing environment. And asking it another way, and you referred to it more as a reflection of the mix between fixed price and cost reimbursable work. If I look at your mix in your backlog, your fixed price is now about 25% of total back to where it was in ‘08. And I wonder is that a reflection of a decline in pass-through costs. The pass-through costs should come down relative to gross, and shouldn’t that improve margins next year?

Franco Baseotto

Okay I understand the question. Your question is our components of fixed price in the pie chart of our scope backlog in E&C has increased quarter-on-quarter. That’s really not related to material construction rates that we have taken on board in E&C. That’s really driven by a larger percent in mainly of lump sum engineering services that were bought in the quarter. So, that may have an impact on margin, because clearly the trade off is of course, higher risk means higher margin. But again, that has not to do with material construction which instead makeup the flow-through component of our gross revenue.

Avi Fisher – BMO Capital Markets

Sure. But does the mix to lump sum, implies, like you just said, higher risk, higher margin? Does that mean we could get back, since the mix is back to where it was in ‘08, can we get back to the margins that you had in ‘08?

Franco Baseotto

As I think Bob had mentioned before, we are not in a position yet to provide a firm guidance of what our margin are going to be in 2011. I think we need a bit more of booking activity behind us in 2010 to firm up that view and as soon as that view is firmed up, we will update our guidance for ‘11. So, of course, margin can go up, but

Again, that’s too early for us to provide a guidance on E&C margin.

Avi Fisher – BMO Capital Markets

Would it be safe to say that the pricing environment now is not like what it was in ‘08, then?

Bob Flexon

Yes.

Avi Fisher – BMO Capital Markets

Okay. Thank you.

Operator

Your next question comes from John Rogers with D.A. Davidson & Co.

John Rogers – D.A. Davidson & Co

Good morning.

Bob Flexon

Good afternoon John.

John Rogers – D.A. Davidson & Co

I just, I guess follow up on a couple of things. In terms of the market prospects, and you referred to the possibility of a fairly quick upturn when the market comes together, do you expect your E&C business to be in the same markets that drove your growth over the last three or four years, mainly the LNG, the Middle East downstream business, or you are looking at other market opportunities, and what would those be?

Umberto Della Sala

Yes, certainly we continue to play the markets which we played in 2008. But certainly we expect to be present in other emerging markets. And there are examples in the recent bookings where are looking. Now there are countries in which we were not present, in which we started booking nice job. So, yes, the intent is to expand it geographically our presence and our business.

John Rogers – D.A. Davidson & Co

And Umberto, is that also the types of projects? I mean, you’ve got the chemical and a pharmaceutical project again, which I don’t think you had for a while and is it a broader market?

Umberto Della Sala

We expect to expand not only geographically but also in certain business line, yes. And you mentioned the pharmaceutical. Yes, it’s an area which we are going to look very closely.

John Rogers – D.A. Davidson & Co

Okay. Thank you.

Umberto Della Sala

Thank you John.

Operator

Your next question comes from Roger Ried with Natixis Bleichroeder.

Roger Ried – Natixis Bleichroeder

Good afternoon.

Bob Flexon

Hey Roger.

Roger Ried – Natixis Bleichroeder

I guess my question, maybe is trying to get at pricing and understand other ways things can change and maybe it’s all just noise. But if we look at the man-hours and the scope backlog in the E&C segment, it would indicate that pricing is lower than it was in the prior quarters. I’m just wondering if you can give us a little color on that.

Bob Flexon

I think if you adjust it for the foreign currency, the difference is pretty minimal. So, if you normalize it for that, you won’t see much of a difference.

Franco Baseotto

If we normalize for currency and if we take the average ratio that you just mentioned, so the average billing rate in backlog in 2010 compared to 2009, we would see a decline of approximately 2%. We should be mindful that once again that that billing ratio is not solely a function of margin, but it’s also function of our portfolio, and with more business moving into Asia and other low cost center, you would expect that that billing rate to go down, which is not necessarily an indication of margin profitability decline. But again, on a currency normalized basis, if we compare the ‘09 average billing ratio to ‘10 and you would have approximately 2% decline in that ratio.

Roger Ried – Natixis Bleichroeder

Okay thanks, that’s helpful. And then, as you talk about a slower but certainly steady award pace, and we’ve got some questions earlier about some of the large projects. As you look at your bidding list, expectations for awards late this year, early next, has there been any material change in the number of large projects? Clearly none came through in the first half or the second quarter, but are those the type of projects that are sliding out? Is it projects of all sizes? Maybe just a little help there on you know maybe how customers really are looking at it and what they are re-evaluating on a continual basis?

Bob Flexon

Well I think it’s – generally speaking, it’s all sizes. But you certainly do see the larger ones that have the impact on the awards and on our backlog. So, I would skew it more towards the large ones.

Roger Ried – Natixis Bleichroeder

Okay, thank you.

Bob Flexon

Thanks Roger.

Operator

Your next question comes from Peter Chang with Credit Suisse.

Peter Chang – Credit Suisse

Hi good afternoon. Thanks for taking my question. Just one quick question. Going back to your comments earlier on how the market can change to positive in E&C fairly quickly, how are you guys managing your E&C headcount? And are you managing it with anticipation of a speedy turnaround in late 2010 or early 2011?

Bob Flexon

Well, we’ve been managing our headcount very consistently to the works that we have been matching it with existing liquidations to the extent things get softer, we’ve had some reduction in staffing in certain parts of the globe. But we are pretty much very easily can ramp back up to deal with any increased business levels. So, we’ve had some adjustment, not much significant.

Peter Chang – Credit Suisse

Okay, so you’re not anticipating any kind of capacity shortages if work comes back pretty fast?

Bob Flexon

No.

Umberto Della Sala

We are ready to start full speed.

Peter Chang – Credit Suisse

All right thank you. That’s all I had.

Bob Flexon

Hey Peter.

Operator

Today’s final question is a follow-up question from Barry Bannister with Stifel Nicolaus.

Barry Bannister – Stifel Nicolaus

Hi, just in response to an earlier question from Avi, the increase in LSGK, isn’t that simply the surge in GPG backlog, and thus has no real implications for E&C?

Franco Baseotto

I thought he was referring to the E&C pie chart. That’s what we were commenting in terms of the increase on a quarter-to-quarter basis.

Barry Bannister – Stifel Nicolaus

Okay. And then, the crude (inaudible) down sharply from ‘07 but up from the bottom, and I know we talked about the scope man-hours and backlog, they are down about 20-25% from the peak a few years ago. But if we normalize for currency, maybe less. The thing that I am interested in is that refining revenue is down also about 20-25% from the peak. So is Sydec simply losing market share in the coker market, or are cokers just slowing down, or is the competition choosing something else, particularly in Middle East new builds, that’s caused the refining part, which is so critical to your profits, to be under pressure and to actually cause you to start looking at more upstream as a way to grow?

Bob Flexon

Well, when we looked at our coking business, we look back on the bookings over the last few years and we look forward, we don’t see much change in the business other than where it’s actually happening. So the opportunities are still there. It’s still a core part of the business.

Barry Bannister – Stifel Nicolaus

You’re not losing market share in recent new build awards for cokers?

Bob Flexon

We are not.

Barry Bannister – Stifel Nicolaus

Okay thanks.

Bob Flexon

Thanks Barry.

Okay then thank you very everyone for joining the call. At this point, we’ll end the call. Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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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.

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