Shaw Group CEO Discusses F4Q2010 Results - Earnings Call Transcript

| About: Shaw Group (SHAW)

Shaw Group (NYSE:SHAW)

Q4 2010 Earnings Call

October 28, 2010 9:00 am ET

Executives

Chris Sammons - Vice President of Investor Relations & Corporate Communications

Brian Ferraioli - Chief Financial Officer and Executive Vice President

J. Bernhard - Founder, Chairman of the Board, Chief Executive Officer, President and Member of Executive Committee

Analysts

Scott Levine - JP Morgan Chase & Co

Barry Bannister - Stifel, Nicolaus & Co., Inc.

Richard Roy - Citigroup Inc

John Rogers - D.A. Davidson & Co.

Andy Kaplowitz - Barclays Capital

Sameer Rathod - Macquarie Research

Joseph Ritchie - Goldman Sachs Group Inc.

Jamie Cook - Crédit Suisse AG

Steven Fisher - UBS Investment Bank

Operator

Welcome to the Shaw Group's Fourth Quarter 2010 Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. [Operator Instructions] I will now turn the call over to Chris Sammons, Vice President, Investor Relations. Mr. Sammons, you may begin.

Chris Sammons

Thank you, operator. Good morning, everyone. Thank you for being on the call with us today. As usual, we posted a slide presentation along with our press release this morning. To access those slides, you can go to shawgrp.com, and they're available either on the homepage or on the Investor Relations page. We'll reference the slides by numbers during the call.

Leading the call today are Jim Bernhard, Chairman of the Board, President and Chief Executive of Shaw; and Brian Ferraioli, Executive Vice President and Chief Financial Officer.

Now I'd like to refer you to Slide #2, which addresses the use of forward-looking statements and Regulation G disclosures for our non-GAAP items. Please consider this information appropriately with respect to today's call. We'll have a question-and-answer period after our prepared remarks, and the operator will provide instructions for that.

Now, I'll refer you to Slide #3, and I'll turn the call over to Jim Bernhard, Chairman and CEO.

J. Bernhard

Good morning. Before we get started here, we have to note, we renamed two of our segments, which will better reflect our service offering. First our Fossil, Renewables & Nuclear segment, which we will simply call our Power segment. Our Maintenance segment will be referred to as our Plant Services segment.

Turning to Page 4. Before we get started on the fourth quarter results, I'd like to give you a snapshot of fiscal year 2010 as a whole. As forecast, we saw an increase in earnings in 2010. This was primarily a result of our continued focus on project performance as well as efforts to contain costs through the company.

We're starting to see an improvement in market conditions. The economic environment, however, is still challenging. Shaw has put considerable focus on cost containment, as we see in today's report. We believe that this has been a significant driver of our results for the year, and we intend to maintain this same focus for 2011. Overall, we expect to see continued earnings growth in the fiscal year 2011.

In the fourth quarter of 2010, our earnings were driven by strong operating performance on our Environmental & Infrastructure as well as our Fabrication & Manufacturing segments, as well as the initial work on the domestic nuclear contracts that we have.

Our GAAP earnings continued to reflect volatility in the Westinghouse segment, where we experienced a $102.7 million pretax translation loss on the Westinghouse bonds. However, as most of you know, we used financial results, excluding the Westinghouse segment, to communicate financial performance externally as well as internally for setting budgets, determining forecasts, setting definitive compensations, et cetera. We'll talk more about the Westinghouse impact on our financial review.

Once again, we had a record cash balance, with $1.8 billion, as we continue to generate positive cash flow during the quarter of $218 million, Looking through in the quarter was in line with our expectations. New bookings were led by our E&I and the Infrastructure group and our Plant Services segment.

Turning to Page 5. Let me introduce Brian Ferraioli, who will give us our financial review at this time.

Brian Ferraioli

Thanks, Jim, and good morning, everyone. Turning to Slide 6. Our backlog remains strong with an excess of $20 billion of unfilled orders currently sitting in backlog. We booked $1.5 billion in new awards during the fourth quarter of fiscal '10, and that was led by new awards in our Environmental & Infrastructure group and the Plant Services segment. During the next four months, we expect to work off about $5.3 billion or approximately 27% of the existing backlog. And for the year, we booked approximately $4.4 billion in new awards.

Turning to Slide 7. Again, our typical chart shows as reported debt numbers in addition to the results excluding Westinghouse. As we've talked about in the past, our business volumes were impacted, as expected, by the reduced bookings that we've incurred throughout 2010. We experienced a change in the business mix, and we'll talk a little bit about that more as we get to the segment slides, but that resulted in slightly lower margins in 2010 versus similar period of 2009. Separately, cost reductions will help to offset the margin compression and help to increase our profit.

Turning to Slide 8. As we've previously reported, our earnings were primarily driven by solid operating performance in our E&I group, the Fabrication & Manufacturing and Plant Services segments, as well as from the early phases of our nuclear contracts here in the U.S.

The E&I group continues to generate strong quarterly revenues, and is due primarily from increased U.S. government spending. The Power business on the other hand, its volume of business was down year-over-year, primarily due to its decline in the air emissions projects that we had been executing in 2009. As you know, there's a legislation pending on changes in the air emissions, we expect that business to pick up as we move forward in 2011 and '12.

The E&C results were negatively impacted by the current mix of contract and market conditions. The decrease in gross profit percentage is a result of lower volumes of the higher engineering margin contracts that we had in 2009 and an increase in activity in the construction activities on a major international ethylene project in Asia, which carries lower gross margin.

The reduced cost margin percentage for the quarter was most prevalent during the fourth quarter when the fuel cost increased on that project by approximately $9 million to $10 million net. Remember, the E&C revenues that we're showing here on this chart excludes the pass-through costs, as the pass-through costs do not include any profit or loss on them.

Turning to Slide 9 and the yearly results. Again, decline in revenue was largely attributable to a decrease in the volume in the air quality control business within Power, and the completion of two major projects for PPL's Brunner Island and there was one project for several locations for Mirant.

Our fiscal year 2010 earnings were in the upper end of our guidance, as we have previously given up $2.10 or $2.20. And our earnings reflect the ramp-up, as I mentioned earlier of the initial phases of our nuclear EPC power project, as well as a continued emphasis on controlling our cost.

Turning to Slide 10, the segment results. Now despite a challenging economic environment, we were able to maintain our levels of revenues and profits. We attribute that to the diversity of our businesses beyond the traditional E&C market. Similar segments faced some of impacts of the challenging economy, but we saw sustainable growth in other segments. For example, during the year, revenues and profits were driven as expected by the U.S. government spending, which significantly benefits our E&I group as well as the work on the EPC nuclear power project. E&I had a record year for revenues and gross profits, and it's something we're very proud of. Their execution was very strong during the year, and their sales prospects are also quite strong, if we look forward to 2011.

Looking at some of the largest wins for the year, our E&P segment had a decline in profits from the record year they had last year due to the change in contract mix, as I mentioned before, as well as the reduced bookings that we've been talking about throughout the year.

On the other hand, our Plant Services segment clearly had a very good year. Our profits grew primarily due to the increased number and the length of nuclear refueling outages in fiscal year 2010 as well as reduced costs. Their execution was very, very good, and many of their contracts contained incentive awards, which are based upon our performance.

Moving on to Slide 11. Many of you have talked to us about the Westinghouse's investment and particularly with the strength of the yen to the U.S. dollar. This has been an area of reduced focus, so I'd like to spend a little bit time talking about Westinghouse and exactly where we are in terms of put options and the debt that's outstanding.

If you look at Slide 12, just a little history, we acquired 20% of Westinghouse in 2006. And at that time, the investment was approximately USD $1.1 billion. However, that investment was financed using limited recourse of Japanese yen-denominated bonds. At the same time, we entered into a commercial relationship agreement with Toshiba that gives us certain exclusive opportunities for EPC work on the AP1000 nuclear reactors that we've been talking about. The CRA requires that we maintain at least a 15% equity interest in Westinghouse. So the minimum is 15%, but we currently own 20%.

The transaction also included a yen-denominated option for us to sell our shares back to Toshiba, and that is valid through February of 2013. This option requires Toshiba to buy the Westinghouse shares back from us in Japanese yen. That's equal to an amount of 97% or 100%, depending upon various circumstances of the value of the Japanese-denominated bonds.

Any of the cash proceeds from putting the shares back to Toshiba would go direct to the bondholders. So if we take a step back, we have yen-denominated bonds, and we have a yen-denominated put option. And if we put those shares back, the bonds would be paid off and the currency fluctuation has really no impact on us from an economic perspective, regardless of what the yen-dollar exchange rate is.

However, for U.S. financial reporting purposes, the Japanese yen bonds are revalued at each quarter end to their current exchange rate. So the strong yen translates into a higher U.S. dollar equivalent loan. The other side of that transaction is a non-cash loss that goes to our P&L. As Jim mentioned earlier, we had a rather significant loss for this quarter. However, the yen option is not revalued at each quarter end for financial reporting purposes, and any translation, gain or loss would only be recognized if we exercise the put option.

Moving on to Slide 13. You see the volatility from all of it. This chart shows the losses generated from revaluing the yen-denominated debt at the end of every quarter. And at the end of the fourth quarter, we reported $103 million pretax non-cash loss. So you can see looking back in history, it's been quite volatile. But in general, the yen has significantly strengthened against the dollar, since we made our initial investment.

Another thing I think we'd like to point out that is not always clear to investors. Since we've made the investment, we've paid approximately $114 million in cash interest on the bonds that are outstanding, and we've received about $70 million in distributions from Westinghouse, so leaving us about $44 million out of pocket over a four-year period, so on average, about $11 million per year.

However, there's a target dividend payment to us each year, and to the extent that, that minimum target is not hit, that shortfall rolls over into the future. And that shortfall is equivalent to [ph] $14.5 million. That money would be due to us provided that Westinghouse has earnings in the future. So for roughly $11 million on average per year, we are currently working on 12 reactors, six here in the U.S. and four in China.

Moving onto cash, Slide 14. Jim mentioned we have a record cash balance of $1.8 billion, which is approximately $21 a share. We generated $467 million in operating cash flow during 2010, and we expect 2011 to also be cash positive. However, I caution you that Q1 is likely to be negative.

I think it also makes sense for us to talk a little bit about cash, given the size of the balance that we have on hand. And during 2010, we continued to invest in our core business, and we've evaluated a number of capital allocation opportunities. The investments in our core business have been consistent with our prior discussions. We had approximately $194 million in CapEx during 2010. We completed our investment in the modular facility, which is going to support the Nuclear business, and that was approximately the $50 million of that $194 million. And we continue to purchase significant amounts of construction-related equipment cranes, batch plants [ph] for cement, et cetera. And that's probably another $85 million to $90 million of that $194 million.

We committed to build a new pipe fabrication facility in the United Arab Emirates, and we're looking at other potential international locations for additional pipe fabrication facilities. We had also evaluated a number of other transactions that, for one reason or another, we either concluded did not enhance shareholder value or they haven't gotten to the point, where we've reached the conclusion whether to proceed or not.

Examples would include co-investing in projects with our clients were worked through the EPC, site work on that facility; setting up newer operating entities with strategic partners, which allows us to access international markets as a local company; increasing or expanding our presence in lower-cost engineering centers; increasing the range of technologies that we have in our portfolio that are available to our clients, either by expanding what we currently have, our existing technologies, or by buying the rights to technologies owned by others; we also looked at a number of M&A transactions; and finally, the board continues to look at ways to return cash to shareholders in the event that these other capital allocations are not pursued, and that could take the form of either a dividend or a share buyback.

So in summary, we've invested in our core businesses, and we continue to evaluate a the number of opportunities that we think will create significant shareholder value. We're trying to be good stewards of your cash, and we're taking the time to do what we believe is a professional evaluation of opportunities that are available to us.

So with that, I'll turn the call back over to Jim, and he'll talk about operations and markets.

J. Bernhard

Before we move to the operation and market review, I'd like you to take a look at this. I think it's a cool photo. This was taken from inside the containment vessel at our Sanmen nuclear project in China. This year, we will really begin to see the financial impact of our nuclear work, both domestically and in China, as we work through that project.

Turning to Page 16, our nuclear new projects in the U.S. included Southern's Vogtle, SCANA's V.C. Summer and China's AP1000 project continues as planned and on schedule. The top photo on this slide shows a slight overview of the two reactors under construction at Sanmen project in China. The second image shows the module assembly building currently under construction at plant Vogtle. If you remember our slide from last quarter, you can see that we continue to make steady progress.

We're also continuing progress V.C. Summer project in South Carolina and Haiyang, China as well. The top prospects for new build include Nuclear Europe China, Brazil and the Middle East. We're beginning to work with clients on the second wave of new nuclear reactors in the U.S. We're already working in China and expect the U.K. new build market to be promising as well. Horizon has established parallels in one with Westinghouse Shaw and one with AREVA to prepare our better estimate of the three nuclear plants to be built there called an Early Works Agreement that we're currently -- have contract to support the certification of our technologies.

Domestic nuclear operating market truly remains strong. The domestic market for nuclear operates continues to be in area, which Shaw can win more awards. We've already helped our client more than 30,000 megawatts in the U.S. power grid, and we'll continue to provide the services to fit their needs. We expect to book several operate contracts in the very near future.

The proposed environmental regulations includes the power industry decision-making. The EPA anticipates that the power plant may use several different avenues to achieve compliance. Power plants may operate already installed control equipment more frequently as they use low sulfur coal or install control equipment for low-NOx burners and slow selective catalytic reduction or scrubbers. So this remains a challenging market for Shaw that's developing under the EPA rules, but certainly should have some clarity towards the end of the year.

We're anticipating strong domestic new built gas market moving forward. The gas market is expected to strengthen in '11 with gas prices continuing to be low. We estimate that 10,000 megawatts of gas plants maybe awarded this year rather than approximately $10 billion. Our targeted market is approximately $5 billion, which we should have a significant part of that market going forward. In the fourth quarter of 2010, our Plant Service segment signed a contract extension to provide plant maintenance and capital instruction services to 10 manufacturing sites for our major chemical company which we'll announce shortly.

Considering several strategic alternatives to expand our market, we continue to receive recent industry recognition from POWER Magazine for two Shaw AQC projects and one Shaw coal project, both from Brunner Island and Mirant, somewhere top plant designations in Cleco's Madison received a major award recognizing excellence for power plant construction. I'm very proud of our organization on the completion of those projects.

Turning to Page 17. Last quarter, we told you about the importance of nuclear in China. In August, we signed a contract with China's State Nuclear Power Technology Corporation to provide technical services for additional AP1000 nuclear power plants in China. Contract includes initial service work on two new AP1000 units at the Xianning nuclear power plant project. We anticipate expanding the scope of this work and participate in additional AP1000 nuclear power projects in China as the country continues to expand its nuclear power base.

Our role in China, moving forward, will focus primarily on technical support. However, we anticipate a significant volume of these four contracts, and we're now supporting six AP1000 nuclear power units in China, certainly has been a great success of nuclear power in this country.

Page 18. In July, we announced a teaming agreement with Toshiba and Exelon for nuclear projects in Saudi Arabia. Together, we will pursue contracts for engineering procurement, construction and operations of nuclear power plants using both Toshiba's ABWR [AdvancedBoiling Water Reactor] and Westinghouse's AP1000 technology. This is very significant because it creates opportunities for Shaw with the ABWR technology, which further advances our leadership role in the nuclear industry.

Turning to Page 9 (sic) (Page 19). As you know, Westinghouse has informed the NRC of changes to the AP1000 Design Control Document last year. These changes are part of the model design finalization, and we're making progress. Westinghouse and NRC have resolved a substantial number of the technical issues, and Westinghouse, as are we, are now confident it we'll satisfy the NRC's request for documentation and additional information. We believe, along with Westinghouse, that no changes to the schedule will occur and that we'll achieve design certification to support the granting of the COLS and the first AP1000 online by 2016.

On Page 20. Looking at our Energy & Chemicals Group. This photo here shows a large [indiscernible] at our ExxonMobil project in Singapore, which is a major ethylene plant under construction. Our projected shortfall of ethylene capacity in 2015 will certainly bode well for our company as it will require new construction, primarily in Asia and the Middle East. Significant amounts of ethylene capacity are underdeveloped and very few major EPC awards are forecast for fiscal '11.

As we have said before, this is a cyclical business. We anticipate being relatively flat in the first few quarters of fiscal '11, but we expect to pick up significantly on the latter half of 2011 as we expect to see larger awards in fiscal 2012. While many larger projects remain on hold, we still see significantly more activities on smaller project and front-end work. The pursuit of key and complementary technologies and other strategic initiatives will expand our market presence in this particular segment.

On Page 21, our Fab & Manufacturing segment pipeline markets remain positive while refinery and petrochemical bid activity continues to remain slow. We announced a few weeks ago that we'll begin construction of a new international facility in the UAE, and we'll expand Shaw's presence in the region. This facility is located in the industrial city of Abu Dhabi and has a maximum backlog for first year in production. The facility is expected to be completed in 2011. Additional international markets are being evaluated in Saudi and Columbia, India the Australia, Kazakhstan and Ecuador.

Turning to Page 22, in our Environmental & Infrastructure segment. Certainly, we had a solid execution across the entire business of our largest projects, MOX and Inner Harbor Navigation Surge

Barrier [Inner Harbor Navigation Canal Surge

Barrier]. As you can see the photos on the left, the MOX facility is progressing at its own schedule. The surge barrier front wall construction has been completed since July in addition to the levies which are provided in the 100-year level storm protection, the coal walls achieved. As you can see in the photo, Shaw recently began the final call for of gates at the barrier, which will allow navigational traffic on the Gulf Intracoastal Waterway through the city of New Orleans.

We continue to execute the barrier projects for the state of Louisiana. As you know, we were named prime contractor and overall program manager for the state to construct with sand berm to protect and stop the oil spill in the Gulf of New Mexico. Our E&I segment has been very active proposal and bidding process for design and construction, environmental remediation and other opportunities and bidding on several very, very large projects. We're well positioned in target markets, and we continue to believe that this segment will continue to grow and prosper in the coming years, 2011 and 2012.

Turning to Page 23. Our guidance. Our revenues will be slightly down next year to $6.5 billion. Our earnings will increase excluding Westinghouse, $2.15 billion to $2.25 billion. Our operating cash flow will be approximately $150 million to $200 million.

Turning to backlog. For next year, we believe that we'll have a year-over-year backlog increase fiscal-year-over-fiscal-year, and we look forward to 2012, which we will have a significant increase in EPS earnings.

At this time, I'll turn it over to open the lines up for calls. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Barry Bannister from Stifel, Nicolaus.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

When I think of a typical EPC job, it tends to be about 20% engineering, 40% procurement, maybe 40% construction services. Your scope per reactor beyond the COL approval date is about $3 billion per site at places like V.C. Summer and Vogtle. Is that going to be the typical EPC split, or has the client done the majority of procurement in advance? Can you give some idea over the of the four-and-a-half-year build cycle?

J. Bernhard

I don't believe the client has done any procurement. That falls into our scope and Westinghouse's scope. So I believe that would be typical. I'm not sure if those percentages are exactly correct, I think it maybe a little heavy on the engineering part. But that would be a typical EPC project with equipment and with materials volatile outlooks.

Brian Ferraioli

Plus the engineering, Jim, I think will decline versus the standard plant of AP1000. And it's not going to be reengineered everything every time you build another reactor.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

And then when you look at what you did in Sanmen and Haiyang and of course now you've got and Xianning, are you looking at a Shaw scope per-reactor site about one quarter? What you would expect for U.S. site on a go-forward basis, that's the norm on the margins? Anywhere comparable to what U.S. margins would be?

J. Bernhard

Well, margins of technical services are generally a lot higher than margins on the EPC contract. And as we develop these contracts on a series of significant contracts per unit, we've just become the preliminary technical contract of these units, and we anticipate more contracts to come.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

You had $467 million of operating cash. Your goal is recently as 3Q is only $345 million. We calculate you have at least $9 a share of cash in excess of company needs. When is the next board meeting? And how seriously would you consider a buyback just given that we are looking at a low in '11 before 2012 earnings take off?

J. Bernhard

The last board meeting was yesterday. I think that we'll continue to have some excellent opportunities for us to deploy cash, and that maybe one of them, and we look at that on a consistent basis. And we certainly have a significant amount of cash, I believe, $21 a share, something like that. And we think that we're going to have some great opportunities in the near future. Let me address the cash here. We believe in good stewards of cash. We believe in good purchases of M&A acquisitions. Having a little cash in the bank for a little longer than maybe we would like and our shareholders would like, I think that at the end of the day, I think a little patience will pay great dividends.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

I agree. you've been a great acquirer of assets.

Operator

Next question comes from Andy Kaplowitz from Barclays Capital.

Andy Kaplowitz - Barclays Capital

Can we get a little more color on your margin performance in E&C and Power. Brian, specifically, I think you mentioned that fuel costs have increased on that large project by $9 million, but I guess my question is does that continue? Is that sort of a go-forward expense, when you think about it in E&C or is it just sort of a one-time hit and things were better? And then on power, the margins or all over the place every quarter. I guess maybe if you could update us on their big coal-fired plants, let you now how big -- I think there are three of them that are well along construction. How are they doing?

Brian Ferraioli

Okay. On the E&C, the fourth quarter was a bit lower than what we would expect going forward, but you have two items ongoing within E&C. You have moving to the field, the construction phase of the large EPC contract that they have, which will tend to have lower margins than the engineering and procurement-type of work. And two, the decrease in the volume of their business, as we've been talking about, they did not book a lot during 2010. So we're not as efficient, we're not liquidating overhead cost as efficiently as we could and should. So you have both of those items. And regarding margins going forward, you know we don't really give guidance for that, but we believe that E&C is not at the bottom of the cycle. It's going to be pretty darn close. Regarding Power and the coal projects, you're correct, we got three coal projects. One for dominion in Virginia, one for Duke in North Carolina and one for AEP in Arkansas. Those projects are all proceeding pretty much according to plan. They're going well. Weather has been relatively good, productivity has been relatively good. The issue we have on Power, though, has been more of the drop-off of the air emissions project. As you know, that was a very significant market for us. And until the transport rule becomes effective and people start making investments there, that business has dropped significantly. And that was a business that we were quite good at. So there's also an efficiency issue on that side. The volume of business has come down and we have capacity to do more. So as we're ramping up nuclear and gas projects, they're replacing to a large extent, the coal projects, and the net is the air emissions is resulting in the reduction in volume and earnings within the Power group.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

You mentioned the cost-saving initiatives, and your SG&A was much lower in the quarter versus last quarter. Maybe you could talk about some examples or at least how far along you are in these cost-saving initiatives. Is there plenty of room to go, where we could see SG&A continue to drop in 2011? Is that sort of the expectation?

Brian Ferraioli

All the employees listening to the call are probably cringing when you say that. We try to stay focused on cost here. And you're right, we did have a pretty significant drop in the fourth quarter. I would not expect that to be the run rate as we go forward. We had some favorable trends in employee compensation and benefit like workers' comp and things like that. So I would not expect -- don't take the fourth quarter and multiply it by four, but it is an area, frankly, that we have focused a lot of time and energy on. The economy is slow and the bookings some of our segments have been down and we've taken the corporate actions. So never want to say we're finished, but I don't want to give the impression that there's going to be any significant improvement from the quarterly results. On the contrary, the run rate would be higher going forward.

Andy Kaplowitz - Barclays Capital

On the gas plant comment you made. We thought that there would be a ramp-up in gas plants at some point maybe even in 2010, and it hasn't happened yet. So what's the confidence level as we look at 2011? I know the addressable market seems large for these gas plants to go-forward and, I know gas prices seem sustainable at lower levels, but what are your utility customers telling you about the timeframe for these bookings?

J. Bernhard

If you look at the transport rules, not sure about coal plants, and I'm not sure if the wind and solar's kind of had it's run. And the gas plant is a quick way to produce electricity that allows customers we maintain. Our market's probably going to be half of what the overall market is. I guess we're at a stage in our career that we kind of pick the clients that we go choose go move forward with these all gas prices. So there's an apple out there to bit on, and I'm sure we'll have great success in the quality of the plants that we think we need for our plant

Operator

The our next question comes from Jamie Cook from Credit Suisse.

Jamie Cook - Crédit Suisse AG

Two questions, one for Brian and then Jim. Brian first. And Andy sort of alluded to this, but I'm thinking about you 2011 guidance. Your revenues are down. Maybe we get a little more help from SG&A for the full year relative to where we were in 2010. But you're implying that your margins for the total business are up for 2011, whereas most E&P companies continue to face margins headwinds. So I just want to make sure, is it the mix issues going away? Is it mix by segment? Are the backlog and margins higher? I just want to get comfortable with why we would expect margins to be up. And then Jim, for you, two questions. You talked about earnings being up significantly in 2012 and your backlog growing in 2011. Which areas are you most confident in? And then when you think about M&A, do you feel like it would be appropriate to diversify your portfolio more being less power-focused, just given -- well, Power's a great opportunity longer term. It just seems like in the short term, those opportunities are more limited.

Brian Ferraioli

And in response to your question on margins, I think you are correct, we are expecting those margins to have a bit of an uptick in 2011, and that's driven primarily by the nuclear project. We've tried to save the matter for some time, and as those projects move along, we're hopeful that margins will respond accordingly.

Jamie Cook - Crédit Suisse AG

And what are we seeing in '20? I mean, we're used to get the old nuclear guidance, now we had to cut that given some of the delays. Are we sort of still along that track?

Brian Ferraioli

We haven't given any additional guidance. We don't give guidance on specific types of contracts, but Jamie, what I can tell you is if anything, it's better than what we have previously had indicated. We remain confident that the guidance we gave that we can hit.

Jamie Cook - Crédit Suisse AG

And then Jim?

J. Bernhard

The earnings for next year, we think that we're looking at increases of 25%, 30% going forward year-over-year, particularly able to start a new forecast because of all these nuclear plants in the field. I mean, we pretty much can estimate percentage of completion, et cetera. It's been a long time coming, but as we go on percentage completion, they'll start to accelerate from that year forward. On the M&A, broad M&A activities out there. We try to be good stewards of the money and certainly we will want diversification, but that doesn't mean diversifying more in Power, we diversify in other segments of the business. And yes, we've been opportunistic buyers in the past. But I think we still have some good activity going on right now, we're encouraged. But we have the pacing. We might be sitting saying the same thing next year, but we're not going to rush to do an M&A transaction for the sake of doing one.

Jamie Cook - Crédit Suisse AG

So, Brian, I can assume that your 2012 EPS is about $2.75?

Brian Ferraioli

We haven't given the number but Jim gave you a percentage.

Operator

The next question comes from Steven Fisher from UBS.

Steven Fisher - UBS Investment Bank

The comments that you guys made suggest earnings growth in 2011. But the guidance numbers don't really reflect much of that. So I guess I'm just wondering have you excluded certain incentives on various projects or are you factoring in for certain timing delays of projects? Anything you can give us there?

Brian Ferraioli

Steven, I think we're trying to emphasize the growth in 2012. You're right. There is a slight growth in the guidance '11 versus '10., but I think the numbers Jim was referring to was 2012. We always have incentive opportunities, and we built those into our forecast on a factored basis. You don't assume you get them all, you don't assume you get none. So technically, the answer to your question is yes, there are some excluded, but that's no different than any forecast we've ever done.

Steven Fisher - UBS Investment Bank

I was just looking at the sense in the press release that says expect to see continued earnings growth in fiscal year 2011. And then so maybe I could just dig into the incentive assumptions. You mentioned there's Plant Services contracts and have incentives. So the works that you booked today or in this quarter, anyway, have you baked in incentives for that? And then I guess maybe any kind of assumptions you have on the Inner Harbor Navigation Canal?

Brian Ferraioli

just taking a step back, David, virtually Plant Services and the Environmental & Infrastructure federal government contracts, the majority of those contained various types of incentives. They could be based upon performance, cost, safety. So that's routine that there are incentives in their contracts. And yes, virtually all the contracts that we book in those segments have some component of incentive in it, and we do bake that into our forecast, and we record for accounting purposes those incentives on an ongoing basis based upon historical performance. So if we were the same client, the same site, average for 92%, then we would accrue at 92%. And as those averages move around either up or down, we adjust accordingly.

Steven Fisher - UBS Investment Bank

On the sand berms, can you just talk about what assumptions you have for impact for in fiscal 2011 on those?

J. Bernhard

Not significant.

Steven Fisher - UBS Investment Bank

Okay, but positive assumption?

J. Bernhard

Oh, yes. We're working out there, and that was positive.

Steven Fisher - UBS Investment Bank

And if there were to be any sort of cost overrun on that, how would that play out? Who would bear the responsibility?

J. Bernhard

It's a cost-reimbursable project.

Steven Fisher - UBS Investment Bank

And then lastly on the Fabrication segment, can you just talk about what drove the improvement to the 24% margin there?

Brian Ferraioli

Again, just the mix of projects. There was nothing dramatic, different from prior periods. They have some projects that are higher margin than others, and it really depends on the mix that go in through the shop at that particular quarter.

Steven Fisher - UBS Investment Bank

Okay, so we could still expect some fluctuation in that segment margin, going forward?

Brian Ferraioli

Yes. I think so. And I think what's more of an issue for them is the volume of business. If their volume of business picks up, utilizing shop space, and we'd become more efficient and your margins improve.

Steven Fisher - UBS Investment Bank

But that's what I was really wondering about. Have we achieved in this quarter enough utilization across your various facilities that would drive that margin, or is it just sort of mix? It sounds like it was more of mix this time, but as you go forward incoming quarters, there's still utilization benefit ahead of you?

Brian Ferraioli

It's mixed in the volume in that particular quarter, because you could be busy for a quarter and then not busy. So that's more of the reason why it bounces around. But we had capacity, we sought capacity. What's encouraging is they have a number of significant prospects that if we're successful in achieving, we believe they're going to have a successful year in 2011.

Operator

Your next question comes from Joe Ritchie from Goldman Sachs.

Joseph Ritchie - Goldman Sachs Group Inc.

Just wanted to piggyback on I guess Jamie's question from earlier. You mentioned that the work you're doing on the Nuclear segment is a little bit better than you previously had indicated for next year. Can you give us any more details on that? And does that include any of the work on the progress project or is that still delayed until 2012?

Brian Ferraioli

We're not going to get into more detail in terms of amounts, et cetera or margins on the Nuclear for once. I don't think we have competing interests between shareholders' interest and competitors and et cetera. So we don't want to get into any more details in that regard. Regarding progress, we have assumed issued very little activity in 2011 and probably 2012 as well, relating to progress as it currently stands. There's been some positive movements on that project as of late from what we read in the press and what we hear from the client. But in terms of the assumptions in our forecast, right now, nothing significant at all in 2011 or '12.

Joseph Ritchie - Goldman Sachs Group Inc.

And I guess, Jim earlier you mentioned the Nuclear opportunity remains strong today. Beyond the Exelon, can you give us any color where you're seeing the strong demand, any specific regions? And are you seeing this from the regulated utilities or from the non-regs?

J. Bernhard

Well, Exelon is de-reg, so most naval plants are regulated, so mostly regulated. All of them are looking at ways to an inexpensive way to do these upgrades and produce increased electricity. So it's a great market for us.

Joseph Ritchie - Goldman Sachs Group Inc.

I guess just following up, are there any regions specifically where you're seeing it beyond Exelon?

J. Bernhard

Yes. But I hesitate to give the name and phone number of the plant for other sales people to call on, but basically all of this -- we're in good shape here. We have 35, 38 reactors that we do the outage work on. It's natural to have the upgrades done by the same company. It makes a lot of sense. you're already in the plant, you already have people. My engineering -- more nuclear engineers, I believe everybody combined in the United States today. And so we are a very powerful nuclear organization, and these upgrades are really fit into our [indiscernible].

Joseph Ritchie - Goldman Sachs Group Inc.

One last question on the emissions control work. Is there any expectation that you'll see that work pick up at all in your fiscal year '11 or do you think this is more of a fiscal year '12 event?

J. Bernhard

I think we'll have some in '11. And I think, we'll have some awards in '11, for sure. And I think a lot of the execution would be in '12.

Operator

The next question comes from John Rogers from D.A. Davidson.

John Rogers - D.A. Davidson & Co.

First of all, in terms of the nuclear projects, particularly outside of the U.S. and China, would these be projects that you'd be providing technical services on, or the entire EPC work? How should we think about the opportunity there?

Brian Ferraioli

I think the answer to that, John, is it depends. It depends upon where it is. We pick and choose our role based upon our capabilities and the client needs in a particular country. So the two extremes you point out, the U.S. model where we're quite comfortable doing the full EPC. In China, I don't think we're going to teach the Chinese construction or do the construction better than the Chinese can do themselves, where we will provide more supervisory services and technical services. And then there's a host of countries in between. We've talked about in the past different countries and maybe partnering with a local construction company. The U.K. is probably closer to the U.S. model than the Chinese model. So it really depends upon the country. So far they'd give a specific answer to your question.

John Rogers - D.A. Davidson & Co.

And then secondly, in terms of the E&I opportunities that you referred to, some large projects, can you give us a little more color there on the types of things you're looking at where you're looking for or expect to bid on?

J. Bernhard

Almost exclusively, there are federal projects launched by the federal government. I know we say this quarter-after-quarter, but we truly have more activity in the bidding process than we ever had and it's a very, very good market for that group.

John Rogers - D.A. Davidson & Co.

And Jim, these are all domestic stuff along the Gulf Coast or throughout the country?

J. Bernhard

Throughout the country.

Operator

the next question comes from Scott Levine from JPMorgan.

Scott Levine - JP Morgan Chase & Co

Initially, your expectation was the backlog was going to be up in fiscal 2010, and your expectation here is it was going to be up in fiscal '11. Can you talk maybe anecdotally about some of the areas where '10 came up light and maybe some of those areas where you expect to drive the growth in the backlog this year? Or if you could highlight any major changes, I guess, expectations when it comes to backlog?

J. Bernhard

I think some of it's just a timing issue. I think our backlog went down some this year but not significantly. If you look at our backlog and you take out the nuclear power plant, our backlog's doing fairly well. We've been awarded a new plant for $5 billion, I mean, it's a pretty lumpy deal. And as these nuclear pints work off, I think we're going to be fine. But we're encouraged, we'd say it was going to be at this time last year, whether we would have got one, another $1 billion last quarter or this quarter. So we would look for significant activity in the next couple of quarters.

Brian Ferraioli

I think we've had several projects just moved to the right, and that's across the board, E&I, Power, as well as E&C. I agree with what Jim was saying, but we have some significant -- the encouraging thing is the project hasn't gone away. So it always had some competent time. It's not that major projects that we were pursuing have been dropped.

Scott Levine - JP Morgan Chase & Co

So broad-based, but everything is kind of viable still?

Brian Ferraioli

Yes.

Scott Levine - JP Morgan Chase & Co

Turning to international nuke, in Saudi Arabia, in particular. Can you add maybe a little more color regarding the opportunities you expect to see in Saudi, maybe time frame and maybe the type of involvement you'd expect to have there relative to the work you're doing in China and the U.S, at least broadly speaking?

J. Bernhard

I don't think it's a big secret. I think it's always announced I'd like to build 32-meter power plant. We announced in our consortium, in which we will participate on the EPC basis if we were successful.

Scott Levine - JP Morgan Chase & Co

And I mean in terms of timing, when you'd expect to see builds come out of that or announcements to that effect? Could you hazard a guess there?

J. Bernhard

I think the timing is -- I think certainly we'll see significant progress in the next 12 months.

Scott Levine - JP Morgan Chase & Co

Lastly, Brian, I don't know if this was covered yet. Did you mention the tax rate that's implicit in your 2011 fiscal guidance?

Brian Ferraioli

We have a 37% tax rate assumed for 2011.

Operator

Your next question comes from Barry Bannister from Stifel, Nicolaus.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

I believe there was an earlier confusion on the guidance. Your revenue guidance excludes pass-through. Typically just in E&C alone, you did about $500 million of that. Is that a change from the past, you're guiding to revenue, excluding pass-through?

Brian Ferraioli

Yes, that was my idea there. We have had a lot of pass-through in the E&C business in the past, and we are at a situation right now, where we don't have a lot of it, going forward. As you know, we look at these numbers always excluding the pass-throughs. We think that's more appropriate because that's where we have the opportunity to make money. So what we try to do is put more an apples-to-apples basis when you look at the E&C actual results, we back out the pass-through, and we thought it was more appropriate on the guidance, so also do it the same way. It's really hard to project whether we're going to get a lot of pass-through costs going forward. So rather than try to predict the number that's as hard to do and generates no economic benefit or any economic risk for us, decided just to exclude it.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

So really if I add back the pass-through, your flat year-over-year on revenue guidance essentially, roughly?

Brian Ferraioli

Yes, not a significant change.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

I guess I can take from that as you ramp up nuclear work in '12, there's not a lot of pass-through revenue in that. So the whole $4 billion is scoped revenue and goes through the P&L, right?

Brian Ferraioli

That's correct.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

I can only imagine the complexity of separating the PU239 [ph] into a mixed oxide fuel, so your MOX job is a very big, very complex job. Is that a higher-margin business, because it is a complex job vis-a-vis for instance, Inner Harbor work or other E&I work? And perhaps that is the reason why Environmental is doing a low- to mid-nines margin?

Brian Ferraioli

Low- to mid-nines did you say, Barry?

Barry Bannister - Stifel, Nicolaus & Co., Inc.

Yes.

J. Bernhard

I a lot of the federal government contracting now is incentive-based, and our group has been doing a great job of earning incentives. And based on what we understand that the major projects going with the Department of Energy, the MOX project is a sole project under budget and ahead of schedule, which is great for E&I, but it also encourages, I think, to encourage the shareholders that the same type of construction on building these nuclear plants are the same type of class people in finance scheduling all those markets, and our first plant is only five or six miles away from the site here. So they're doing a great job, and I think this year you're going to see some recognition of the work that they've achieved in terms of new awards in a lot of different areas.

Brian Ferraioli

Just a follow-on, Barry. you should not assume that the MOX margins are any way significantly different than the other government contracts, that we are executing.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

And then back on the nuclear question, the Saudi Arabian opportunity looks particularly interesting given the power needs of Saudi Arabia as evidenced by a lot of reading that we've all done. Could you talk about the approval process for U.S. participation in the construction of Saudi work? And would this be similar to working on a U.S. project, and that it would be largely all-scoped booking and nothing like the Chinese work, where it tends to be more of a project advisory role?

J. Bernhard

Yes, I think it would be closer to the U.S. type of scope of work rather than the Chinese type of scope, certainly.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

And given that they are using most of their associated gas for their petrochemicals and their energy-intensive investments that are coming up in terms of industrial and cities, how quick of a timeline are we looking at on their needing some nuclear reactors built and how many?

J. Bernhard

Well, I think their plan is for 32, the way I understand it, reactors. And I think the interesting thing that you brought up is they don't believe natural gas is going to be cheap very long unless they keep burning it to produce electricity. So they have chosen to go a nuclear route for lot of reasons. I think one of them, I believe that the price of natural gas is better used in other places in the generation of electricity. So we encourage that, and we encourage outside the United States, gas is not as inexpensive as it is here today. I mean, U.K. it's $8, Japan it's $11, $12. So there is a lot of opportunity outside the U.S. particularly on the nuclear front. I think that we'll see significant progress moving forward on the Saudi units in the next 12 months.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

The thing about the Saudi though is that they can afford it, and they can get it done faster. So is that kind of the best of both worlds?

J. Bernhard

Well, it's certainly all indications that they have the money to afford it. So that was good clients I can afford with the deal. We're encouraged by that, and we're encouraged by a lot of activity throughout the world, not just in Saudi Arabia. And so I think that in the short-, medium- and long-term run, nuclear is going to be part of the mix in generating the world energy.

Operator

The next question comes from Richard Roy from Citigroup.

Richard Roy - Citigroup Inc

You spoke earlier about the nuclear between the U.S You also spoke about natural gas power plant opportunities. Do you view these as distinct opportunities, or do you think, given the gas price environment in the U.S., there's potential for cannibalization there?

J. Bernhard

I'm not sure I understand the cannibalization part.

Richard Roy - Citigroup Inc

Meaning that a lot of these nuclear projects will not move forward over time, simply because the economics are more challenging?

J. Bernhard

Yes. I think a lot of natural gas is relatively expensive today. Six years ago, it's relatively expensive than it was at $15. When we go to build a nuclear power plant, our clients are looking for what's the best way to serve the energy needs for their customer base over the next 60 years, not the next 60 months, and most of the major utilities are looking at a mix of fuel to produce electricity for the next 60 years, natural gas being one, wind being one, nuclear being one. So I think that if you look at one aspect that it appears to hurry up and let's go build a natural gas plant, it's less expensive. But if you look at the long-term view, with interest, rates so low, there's not a better time to build nuclear production facilities for a long period of time. One of the major cost is the capital construction of nuclear plant as you well know and one of major cost of that construction is interest rates. With interest rates being so low, one could argue that it is the most opportune time to build a plant that will be in operation seven to eight years from now. And about $7 gas is about the breakeven for nuclear power plants. And we still have our opinion that over the next 60 years, starting eight years out, that the price of natural gas will likely exceed that number.

Operator

The next question comes from Guy Baybor [ph] from Simmons & Company.

Unidentified Analyst

You mentioned comments about looking at other locations for international expansion of your fabrication operation. Over what time horizon could you proceed with those initiatives? And is there any more color or commentary you can provide on what end markets would offer you the most opportunity and kind of are at the top of your list and could be most impactful for you?

J. Bernhard

Well, as our bending has become better accepted throughout the world and as labor has become more and more difficult to train in great quantities to do these major projects, we're getting a lot of so-called asks to come here, to come there to help with other projects. I think Brazil certainly has a huge opportunity there. India, I think that we have some great opportunities there. And certainly, in Kazakhstan and Australia, a little bit less. But the others, really, for the first time in my business career, there really is a rush to move to the fabrication, including bending old sites, so we're very encouraged by the overall market.

Unidentified Analyst

Is there any opportunity for international air quality control work for you guys? And if so, are there any geographies that stick out to you that you could highlight?

J. Bernhard

I think the U.K. looks promising. and then some of the countries, but I think the U.K. looks promising/and we're currently doing a project in Hong Kong, air emissions. So while it's not as great a market I'd experiences in the U.S, there are some opportunities outside of the country.

Operator

The last question comes from Sameer Rathod for Macquarie.

Sameer Rathod - Macquarie Research

I saw this morning that a judge ordered an injunction against Southwestern Plant. How much does affect Shaw Group and what you're doing there?

J. Bernhard

I've been on this conference call, so it's the first time a hear of it. Let me say that the injunction, at one time, the public service commission there was some conflict there, but I believe that AEP went ahead forward, and these numbers don't -- but 20% of it would be in a deregulated market. So I think that maybe the issue there that really had been addressed before which had no effect on the project at all in the completion of the project. I think probably it may be more of who is going to pay for the project rather than is the project going to be built or not. The project is well along in completion. It would be very difficult to see that, that project wouldn't finish.

Okay, thanks, everybody. If you have any additional questions, give us a call on the earnings announcements today, and hang in there. Things are progressing better than expected here, and I think we have some exciting times ahead of us. Thank you.

Chris Sammons

Thank you, everyone. That concludes today's call.

Operator

Thank you for participating in the Shaw Group's Fourth Quarter 2010 Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.

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

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

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