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

Chicago Bridge & Iron Company (NYSE:CBI)

Q2 2014 Earnings Conference Call

July 24, 2014 05:00 p.m. ET

Executives

Philip Asherman – President and Chief Executive Officer

Luciano Reyes – Corporate Treasurer

Analysts

Andrew Kaplowitz – Barclays

Michael Dudas - Sterne Agee

Jamie Cook - Credit Suisse

Will Gabrielski – Stephens Inc.

John Rogers - D.A. Davidson

Chase Jacobson – William Blair

Vishal Shah – Deutsche Bank

Martin W. Malloy - Johnson Rice & Company

Steven Fisher - UBS

Operator

Good afternoon. My name is Holly and I’ll be your conference operator today. At this time we would like to welcome everyone to the CB&I Second Quarter Earnings Call. [Operator instructions] Before beginning today's call, the company would like to caution you regarding forward-looking statements. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding the company's future plans and expected performance, are forward-looking statements that are based on assumptions that company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized in the company's press release and the SEC filing.

While forward-looking statements represent management's best current judgment as to what may occur in the future, the actual outcome or results may differ materially from what is expressed or implied in any such statements.

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

Philip Asherman

Good afternoon, and thank you for joining us as we report Chicago Bridge & Iron’s results for the second quarter of 2014. We’ve got a little change this afternoon, Ron Ballschmiede who I don’t believe has ever missed an earnings call since he has been with the company got ill this morning and we sent him out to get checked, but it’s great opportunity to reintroduce someone that you met at our investor day and during the course of business is our Corporate Treasurer, Luciano Reyes.

Luciano has been with the company since 1998 and has been the Corporate Treasurer since the same week that I got my job and I think certainly well versed in our finances and he is going to provide the financial results for the quarter following a brief summary of the overall performance of the company from me.

Our second quarter produced solid results for CB&I, our backlog of business on projects and shops, labs and engineering offices increased nearly 30% year-over-year. We maintain our relentless focus on safety, capitalized on the continued growth in our market and achieve strong financial results.

In the quarter, new awards totaled $4.2 billion and year-to-date CB&I has booked over $10 billion in awards resulting in a backlog of $31.5 billion as of June 30.

This quarter we generated $3.3 billion in revenue and earnings per share of a $1.36 excluding integration related costs.

In safety, we continued our goal of zero injuries, year-to-date with more than $82 million work hours performed since January 01, we recorded a lost time incident rate of 0.03, which is one of the best safety records in our industry. Projects with outstanding safety performance for hours work without a lost time accident, included Ecopetrol's REFICAR project in Cartagena, Colombia with 78 million work hours. Exxon's Papua, New Guinea, project with 21.5 million work hours and the MOX Savannah River program in South Carolina with more than 19 million work hours all without a lost time accident. These tremendous achievements on these projects are examples of our commitment to believe that zero accidents is achievable.

And as a safety record along with our long history of self-performed direct hire execution, that makes CB&I an employer of choice in the industry and continues to provide us access to the resources needed to hire and retain skilled workers. We are particularly focused on our direct hire model for recruiting, hiring, training and managing craft labor for our LNG export and petrochemical projects along the Gulf Coast, as well as the anticipated demand for shop workers, technicians and engineers.

Year-to-date, we have hired over 1100 engineering and technical personnel primarily in the Gulf Coast region. Our direct labor will significantly ramp up next year through our peak period in 2016 and 2017. We anticipate our direct labor headcount for our construction and maintenance projects will be close to 20,000 direct hire workers.

One of the key mitigation factors in the demand for resources continues to be our flexibility to collaborate with other firms to strengthen our competitive position, such as our joint-venture for projects with Zachry Corporation on Freeport LNG and Chiyoda Corporation for virtually all of the LNG developments in North America and Mozambique. Our joint developments such as our agreement with Clariant for catalyst, our recently announced agreement with Versalis for low-density polyethylene and ethylene vinyl acetate copolymer technologies, our equity investment for technology development such as Chevron Lummus Global, our consortium with Westinghouse for the nuclear projects in the US and our recent announcements on our agreements with China Power Investment Corporation with China National Nuclear Corporation for the development of nuclear power in China.

Now we are confident that our ability to effectively collaborate with expert partners to maximize our competitive positioning in adjacent markets or geographies or better develop new projects and technologies will keep CB&I a pacesetter in the industry. Our new awards during the period are indicative of our global diversity across the markets in the energy infrastructure industry. They range from a combined cycle gas turbine power station in the US, technology license and feed scope for a large scale ethylene cracker in the US, significant maintenance modification and construction awards for the US nuclear power units, long-term maintenance and operations at multiple chemical facilities throughout the US, storage spheres for a grassroots refinery in Saudi Arabia, storage for ammonia plant expansion in the US, delayed coking, hydrocracking, crude and vacuum heaters in Oman and operations and services work for the US EPA, as well as numerous strategic, technology, environmental and fabrication awards around the world.

Now let me review in more detail relevant headlines from our – relevant highlights from our operating groups. Our engineering, construction and maintenance group had a very positive quarter with significant new awards and developments across our end markets. Third-quarter results included $3.2 billion in new awards, revenue of $2.3 billion and a 66% increase in operating income over the comparable period last year.

Starting with power, during the quarter we announced an EPC award for 607 MW gas-fired combined cycle plant for Indianapolis Power & Light. Now this award is a first of a series of gas-fired projects in the United States that we expect to be built supported by the low cost of natural gas feedstock. CB&I has a strong track record in fossil power as evidenced by our soon to be completed 550 MW Ninemile combined cycle plant for Entergy in Louisiana. We are currently preparing the plant for first fire in the coming months.

During the quarter, our US nuclear projects completed key milestones, more specifically at V.C. Summer we set the CA20 module for unit 2 and the first ring of the containment vessel for unit 3. While at Vogtle we set the containment bottom head vessel for unit 4 and started the CA1 module assembly for unit 3.

Outside of the United States, we continue to make progress on positioning CB&I for future nuclear work in China. As recently announced, we finalized strategic agreements with China National Nuclear Corporation for future nuclear power generation projects in China. This combined with our joint venture with China Power Investment means CB&I has co-operative agreements in place with two of the three state owned corporations with the authority to own and operate nuclear power plants in China.

We see strong fundamental drivers supporting developments in China as they aim to reduce their dependency on imports and experience growing demand for reliable and clean energy. Our market leadership in nuclear power is also reflected in the growth of our plant services business. We were awarded an $800 million contract from Exelon for maintenance modification and construction services for their expanded nuclear fleet in the United States, and we continue to enhance the competitiveness of our maintenance business by broadening its addressable market in terms of clients and geographies with locations now including Central and South America, Canada and Asia-Pacific.

Our oil and gas business continues to perform very positively with a number of very tangible opportunities in the foreseeable future. Starting with LNG, our Australian Golden mechanical erection and instrumentation project continues to ramp with more than 2800 people onsite. Preparations for construction activities are underway for Wheatstone LNG and in the US recently awarded LNG projects continue to move forward into final investment decision.

Cameron LNG obtained its final FERC approval clearing the way for a final investment decision in the third quarter. Also Freeport LNG is essentially ready to go to field in the third quarter. Our feed work for Elba Island liquefaction project in Georgia continues to advance and we believe we are well positioned for the EPC on that project. And in East Africa, we continue to progress our feed activities for Mozambique. We are confident that our expertise and ability to address the complex demands of these projects will continue to lead to the EPC awards in 2015.

For petrochemicals, we announced an award for license, technology and feed for a large scale US Gulf Coast ethylene cracker during this quarter, which may convert to EPC before year’s end. At our Ingleside OxyChem ethane project, engineering and procurement are underway. This project reflects the value of our business model as it incorporates technology licensing, feed, environmental services, piping storage, proprietary equipment and EPC. We expect additional opportunities as it relates to the US petrochemical market in the second half of 2014 and into 2015.

Our Cartagena refinery expansion continues to progress well. We currently have more than 15,000 employees on-site and have completed over 78 million work hours without lost time injury as this major project winds down this year. Also, our gas processing project in ExxonMobil in the Highlands in Papua, New Guinea is also in the process of demobilizing.

We are tremendously proud of the success of this project on all fronts. They are particularly performing well on almost 22 million work hours without a lost time incident and outstanding cost and schedule performance in an extremely challenging work environment.

Environmental solutions had a very positive quarter. The operating group is showing positive trends as a result of focus, efficiency and selectivity. Operating income nearly doubled from the same period last year, and new awards of 280 million during this period include contracts to provide operations and research services at a number of facilities for our government agency, site preparation for oil and gas developments, site remediation work in petroleum decontamination and hazardous waste cleanup services. We'll continue to align with the in marks with the most opportunity and where our expertise is greatest, and expect to continue to be within guided ranges for this business.

Our technology group had a record quarter. We booked over $500 million in new awards combined with our unconsolidated equity joint venture with Chevron Lummus Global. Notably, these new awards were a good mix of scope, geographies and addressable markets, including engineered products, refining and gasification and petrochemicals. Awards include two gas projects, include two gas plant equipment and module supply contracts, refinery heater the contracts in Saudi Arabia and Oman. The new grassroots ethylene project in Turkmenistan, a high propylene cab cracker and numerous strategic awards in China.

We continue to enjoy a strong prospect list and expect the second half of the year to be similar to the first with (inaudible) and hydro processing continuing to lead the way in the United States, Russia, Middle East and China. We also expect to put major heater contracts associated with ethylene licences previously awarded.

During the quarter we also continued to expand our portfolio of petrochemical projects and partnered with Chrysalis to licence low density polyethylene technology used to manufacture a variety of projects, such as rubber and your running shoes.

Fabrication services had a solid quarter in both our pipe fabrication and steel plate structured business. New awards for the quarter represent a good mix of geography, in markets and under penny work. As indicated by the significant rebound in operating margin at the top end of our guided rage, we’ve address the impact of delays and client furnished materials and owner engineering reported last quarter by aggressively reducing headcount and improving the contract mix in our shops and we expect further improvement.

Demand for our piping products remains strong with significant traction in the Unites States, Canada, the Middle East and Australia. We deliver our large first diameter pipe spools for the week’s stone L&G projects in Australia shipped from our Abu Dhabi shop. We continue to make good progress on the module delivery for U.S. nuclear projects. During the quarter we shipped 44 nuclear modules and pipe spools on ahead of our schedules and made progress well in nuclear modules into large sub assemblies of boggle and summer.

Our storage and tank business reached a number of highs during the period as we air raised 27 large tank roofs, a company record including large L&G and LPG roofs in China, Australia, Saudi Arabia and the U.S. We currently have 59 pressure spheres underway in the U.S., Middle East and South America and we continue to see high levels of prospect activity in our low temperatures and pressurised storage in the Unites States. As well as a good mix of work from central and south America, the Middle East and Canada from a variety of end markets.

So, in summary our four operating groups have strong performance during the quarter and we are firm our guidance for the year.

Now, I’ll turn the call over to Luciano to report the financial details of our first quarter. Luciano?

Luciano Reyes

Thanks Phil. Good afternoon everyone. Let me take you through our solid financial performance for the quarter. Revenue for the second quarter was $3.3 billion up $444 million or 16% in the second quarter 2013. The increase for the quarter was primarily due to net increases on our large cost reimbursable projects in the Asia Pacific region in Columbia and progress on our large nuclear project all of which are included in our engineering construction and maintenance operating group or EC&M. This level of activity is expected to continue in the back half of the year consistent with our previously announced full year revenue guidance of $12.6 billion to $13.2 billion.

Gross profit for the quarter totaled $381 million or 11.6% of revenue compared to $297 million or 10.4% of revenue in the comparable 2013 quarter. The dollar increase and percentage improvement in our gross profit for the quarter was driven by the higher revenue volume, improved mixed of work, cost reduction actions and greater operating leverage.

Selling and admin expense increased $5 million to $98 million in the second quarter of 2014. Importantly, we continue to benefit from our operating leverage. S&A’s percentage of revenue improved 30 basis points to 3.0% in the second quarter of 2014 from the comparable 2013 period. We expect our full year 2014 S&A as a percentage of revenue to be approximately 3.3%.

Integration related cost of $9.5 million or $0.05 per share for the second quarter of 2014 really primarily to facility consolidations, personal relocation, and system integration costs. We expect our full year integration related cost of approximately $30 million for the year.

In order to focus on the ongoing company's operating performance during the second quarter, we will discuss the results excluding the integration and acquisition related costs for both 2014 and 2013 as set forth in more detail in the earnings release.

Second quarter income from operations excluding integration cost or adjusted income from operations was $270 million or 8.2% of revenue compared to $195 million or 6.9% of revenue from the second quarter in 2013.

Net interest expense for the quarter was $20.2 million compared to $18.8 million in the second quarter of 2013 reflecting increased borrowings in 2014. Our income tax rate for the second quarter of 2014 was 30.4%, up from 28.2% for the comparable quarter of 2013. The lower prior tax year rate was primarily the result of previously unrecognized tax benefits. We expect our full year tax rates to approximately 31% reflecting the changing geographic mix to our taxable income to higher tax rate jurisdictions in 2014.

Our net income attributable to non-controlling interest for the quarter totaled $24.7 million an increase of $11 million over the 2013 period. The increase primarily reflects the increasing activity of our Gorgon MEI project. The summation of all that results in second quarter adjusted net income of $148 million or $1.36 per diluted share or $1.31 per diluted share on an as reported GAAP basis.

Our full year adjusted EPS guidance remains unchanged at $4.80 to $5.65 per diluted share. Our new orders for those second quarter totaled $4.3 billion for book-to-burn ratio of 128% compared to $2.5 billion of new orders for 2013 comparable period. Our June 30, 2014 backlog totaled $31.6 billion up from $27.8 billion at the beginning of 2014 and up over $6 billion from the 2013 first quarter end subsequent to the Shaw-acquisition.

Now few comments on our balance sheet and cash flow: Our balance sheet and liquidity remains strong with total shareholders’ equity of $2.8 billion, and revolver and other short term borrowings net of cash of $235 million. We continue to enjoy significant support from the credit markets, with $2.7 billion of available credit at June 30, 2014 of which over $700 million maybe utilized for incremental borrowings.

During the first half of the year, we invested $58 million in CapEx, paid $15 million of common stock dividends, repurchased $67 million of our common stock and repaid $50 million on our term loan. We expect positive operating cash flows for the back half of the year.

With that I will turn it back over to Phil.

Philip Asherman

Thanks Luciano. Now let's open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question will come from the line of Andrew Kaplowitz with Barclays.

Andrew Kaplowitz – Barclays

Good afternoon guys.

Philip Asherman

Good afternoon Andy. How are you?

Andrew Kaplowitz – Barclays

Good, how are you? Phil, you really didn’t announce anything huge in the quarter. You had a very strong bookings quarter. You talked I think in previous call about something like $3 billion a quarter for the next few quarters of work. So, one of the quarter was higher than your expectations and do you think you can continue to see this kind of momentum for the rest of the year?

Philip Asherman

I think, we talked about some potential targets within the year Andy, even though we are not guiding that we talked about the amount of prospects, we still see in progress. We thought it could be achievable to getting that $50 billion range and I still stand behind that. One of the reasons my comment was so much longer is because the broad diversity and types of orders we had that were very, very significant. And that's a great mix. I mean that’s great underpinning long term work and there is still some larger projects still out in front of us if we can get the timing right.

So, I am very encouraged by what we see particularly in the U.S. markets. The international markets right now are primarily fabrication and technology type markets, but certainly within the U.S., we see a tremendous amount of opportunities including more petrochemical, ethane projects in U.S. and so we are very encouraged by being able to achieve that target for this year.

Andrew Kaplowitz – Barclays

Okay, and then, Phil and Luciano, earnings were obviously good in the quarter, but cash was another sizable burn. You said in the past that you expect this divergent to significantly improve towards the end of the year and Luciano I know as you said cash from op should be positive for the second half of the year. I think the key question is, do you still expect free cash flow to equal net income later this year and then going forward from there and obviously there is the clashing around dense payment from the new projects, how that factors into that. But how close can we get to net income with free cash flow and when do we expect those to sort of equal each other going forward?

Luciano Reyes

I think, when you look at free cash flow it's probably going to be a push towards the end of the year. We expect to hit some milestone circling on our new projects which have been a contributing factor to that. We certainly see some possibilities plus major down payments at some of the major EPC awards move forward. So that's certainly going to be contributing factor and just overall projects. We expect to see a lot of that get cleaned up before the end of the year and cash flow continuing to drive itself.

Andrew Kaplowitz – Barclays

Okay. So and then just maybe a bit of follow-up, can you give us a little more color on your power and government markets, really this Shaw former business you did announce to combine cycle job on a quarter which is great, some significant nuclear maintenance awards. Do you see those markets picking up or would you still characterize them in lethargic and obviously I think investors have been worried that you might have to take impairment on the former Shaw business maybe you can talk about that?

Luciano Reyes

No, I don't know that I have ever used that word lethargic. I think the plant services for example, has just done a tremendous job of leverage and expertise and expanding this relationships and services to companies like (inaudible) and others. We have also assisted that by making them part of our global footprint as a result they have been able to address large maintenance jobs in four-five different locations internationally, we think that's expanding.

So, these guys are very good at this. Now that's not our highest margin work, but it's really good in terms of keeping this in from the clients relationships and significant volume associated with that. So, I think that's better than, significantly better obviously then when we bought it. The fabrication services you know the first we had a hick up of the first quarter some of that had to do with just kind of understanding of the utilization factors and association with these large projects, getting a better mix of projects and size projects that have different booking burn characteristics. And perhaps an over reliance on some of the larger jobs that we had booked but had some delays as I mentioned in client furnished material and engineering. We fixed that, we are at the top of the range. I think it’s 11%, we had reported in operating margin this year and I think we can do even better.

So as we expand that it’s not only an own backlog but the external work there’re very little CapEx that’s been announced, certainly in the Americas and elsewhere that we don[‘t have an opportunity to get a piece of it then. So those are the shop businesses and so nuclear continues to make great progress. The combined cycle was extremely important because to get that first one especially because the reference plants and just the experience associated with doing those plans is going to be extremely beneficial in getting the following plans, so we are very excited about that. So, I’m not lethargic at all about the buisenss, I don’t think impairment is an issue. I think its just going to continue to grow and we see more and more opportunities.

Andrew Kaplowitz – Barclays

Alright, thanks guys, appreciate it.

Philip Asherman

Thanks, [Andy].

Operator

And your next question will come from the line of Michael Dudas with Sterne Agee

Michael Dudas - Sterne Agee

Good afternoon, gentlemen.

Philip Asherman

Hey Michael.

Michael Dudas - Sterne Agee

And hope Ron feels better soon.

Philip Asherman

I’m sure he will. He’ll be fine.

Michael Dudas - Sterne Agee

That’s great news. Thank you. First question, the engineering, construction business had very strong margin performance, good revenue growth, can you expand a little bit about how that’s been working and you know the improvement we have seen and you know how mix and some of the new business targets ahead of us could maintain or even accelerate some of those productivity margin gains in that business?

Philip Asherman

Well you know we are seeing more and more movement of these jobs that we have been working in FEED in the very front end of preliminary engineering finally start getting some tractions from pace. As I mentioned in my comments we think looking forward we can go to the field virtually any time with some additional approvals there, but we are pretty much ready to go. I mean we can go to the fields, so you are going to see that. You know I think just overall generally we’ve taken a little bit of cost, we have consolidated, we have done a lot of things to make sure that we are fishing on all fronts. And I think that’s what you are seeing. So just a performance is much better. And it’s a nice mix of work, certainly in North America. And I think when you look in front of us we probably got four ethylene projects it is still possible to book this year and there is about nine worldwide and those were of the size that we should be very competitive and very much involved in, if its not just from a technology but certainly U.S on EPC side.

So we’re seeing all of that. So we are very pleased to see the margins at the top of that range and we hope its perhaps demand increases we might see some incremental improvement on that.

Michael Dudas - Sterne Agee

Appreciate that feedback. And just my second question. Just maybe a bigger picture international, it seems like each quarter we have more geopolitical and tensions in some of the areas of the world that you might be working in. Any observations or anything that you are seeing that would cause a bit of concern or slow down a little bit in orders or business there or could that be an advantage for some of the North American opportunities to kind of leap frog as we look longer term?

Philip Asherman

Well specifically Russia for example and the sanctions, we’ve had a couple of questions about that and any exposure we have that. I mean they are very narrow and the sanctions are very narrow, we haven’t seen any impact, we really don’t anticipate and that effects mainly our technology licensing business and in Russia should those sanctions expand I think our exposure is fairly minimal in terms of it but certainly our outlook this year and when you spread it over multiple years I don’t think that will be certainly much of an impact. Other than we’ve always enjoyed a fairly robust business there from a technology standpoint. In the Middle East, certainly our main – primary business there these days has been in technology and fabrication services. We haven’t seen really an impact on that business, but that – you political in terms of our market opportunities than just competitive issues. So on that front we’ve not seen the positive side is the work that is driving the CapEx we see throughout the Americas. We continue to see new opportunities and new discussions around a wide range of investments and CapEx particularly in our energy markets and its particularly in the ones that we are well positioned for.

So that has been a very positive impact on projects that quite honestly like the one up in Eastern Canada, probably wasn’t even on – a year ago, so there is a lot of discussion and aggressive development on CapEx and energy in U.S. And I think we can be a part of much of it.

Michael Dudas - Sterne Agee

It doesn’t happen now and I’m not sure when, but still thanks for your time. Appreciate it.

Philip Asherman

Well I agree, Michael.

Operator

And your next question will come from the line of Jamie Cook, Credit Suisse

Jamie Cook - Credit Suisse

Hi, good evening and congrats on a nice quarter.

Philip Asherman

Hi Jamie.

Jamie Cook - Credit Suisse

I guess a couple of questions. One, I think last quarter you guys talked like on the tech business and that profit dollar should grow in the double digit range. Is that still the expectation on the back half of the year and you actually had like I think 23% which was above sort of my targets? So can we continue to deliver that type of growth? The second question relates to capacity, Phil just given the success that guys have had so far, if there are any concerns from customers about your ability to take on you know some larger LNG projects just because of the success you have today. And then my last question relates to how you are thinking about share repurchase just given you know the performance of your stock more recently, would you be more aggressive on a share repurchase just if you were to show your sort of longer term confidence in the earnings power of the company? Thanks.

Philip Asherman

Thank you. Okay, let me address technology I actually think that you can expect to see the same kind of performance in the second half of the year that we were experiencing in the first half of the year. You know these new work Jamie would [indiscernible] guys did a tremendous job of just not depending on the technologies that we’ve had over the years to continue to sell more of those license more of that. What they have done is look at their business very creatively and put together technologies, collaborations and other opportunities in a very interesting way to our market place and expand our opportunities tremendously and new licensing opportunities as well as a follow on catalysts. And that’s going to continue and so we see that technology is going to have a very good year, this year.

In terms of capacity you know I mentioned that we hired 1,100 engineers just today. I think we have maybe a couple of hundred on open [rigs] but we don’t see any constraints around rig engineering, now that’s something we constantly communicate with current customers as well as new ones. We’d assumed we don’t see any constraint. The direct hire issue, when you look at the current job there, we currently have about 8000 direct hire employees in the effective regions where all this CapEx is going to occur. And you know when you look at Golf Coast from a labor standpoint that really extends from the Carolinas that down to Texas simply because that’s the market that we can recruit direct labor from

So we got 8000 on end. We’ve got inactive employees when you put the legacy [Shell] employees in our database together there’s over 116,000 of direct hire employees that are in our database that are inactive that we can certainly draw from a good number of those.

And then during our current recruitment, we have a current database of probably close to 45,000 registered craft workers that can contribute to that overall peak that we are seeing around 20,000 craftsmen from 2016 to 2017, which means that if all our numbers are correct and our assumptions were correct we’ll probably only have to train and hire about 10% of that workforce. That’s not an overwhelming number. We are building training centers in Louisiana and Texas. We work in all the states, you know we are going to direct hire most of these people, so we’ve got very aggressive plans for all of that. So that’s the kind of message that we give to our customers and prospective customers, show him the data understand, you know, when you look at escalation of labor wages and you look at probably 2006 to now mechanical rate has probably only increased by $0.36. Now you can anticipate escalation certainly but it's not going to be, again I don't think it's going to be certainly achievable. So that's the kind of things we are thinking about. So it's a challenge certainly but that's the business we are in and we are pretty confident that we are going to be able to meet that.

Jamie Cook - Credit Suisse

And last on the share repurchase?

Philip Asherman

And the share repurchase, you know, we talked to you about our capital allocation plan and how we are going to deploy our capital. Certainly share repurchase is along the lines of what we have experienced today. I don't think you are going to see us with any extraordinary type of plan to repurchase this year. We are looking at some additional perhaps adds to our technology business, some additional capital we may deploy to our fabrication. We think that's a good return for our shareholder’s capital. So I think as we described our share repurchase and all the other components for our capital allocation plan, that's what we are going to continue to do through this year.

Jamie Cook - Credit Suisse

Okay, great. Thanks. I will get back in queue.

Philip Asherman

Thanks Jamie.

Operator

And your next question will come from the line of Robert Norfleet with Alembic Global Advisors

Philip Asherman

Hi Robert.

Unidentified Analyst

Hi. This is actually [Indiscernible] for Rob Norfleet. First of all congratulations on a great quarter.

Philip Asherman

Thank you, Rob. Nick, I am sorry, Nick.

Unidentified Analyst

No problem. We were curious at this point are you actively looking to divest any assets from your portfolio and if so what would be the proceeds be used for?

Philip Asherman

Well, you know, one of the advantage we have – we have in this diversity and the scale now within our combined companies is there are assets which may not be as core as they were seen before we made the combination, and so we are looking at those things and there are several things we are considering. Obviously I can't get too descriptive right now. All those – any kind of conversation is we have non-disclosure agreements and so forth. We are actively looking at specific assets that are non-core. We like to depending on the value and where we are, certainly share repurchase in that instance would be certainly an alternative to deploy these assets depending on how much we got for the assets and there are other factors but in the absence of those divestitures certainly the capital allocation plan that I mentioned to Jamie was – it's certainly what we have in front of us. But yes we are looking at certain assets that we may divest.

Unidentified Analyst

That's great. Thank you.

Philip Asherman

Okay.

Operator

And your next question will come from the line of Will Gabrielski with Stephens.

Philip Asherman

Hello Will.

Will Gabrielski – Stephens Inc.

Good evening. Can you talk about the P&G in Cartagena ramping down and then what you have ramping up how – can you keep the sequential growth going across revenues through this year and into next year still.

Philip Asherman

Yes. Well yes P&G has just done a great job. I mean it's not just a great job for us but I think I know on Exxon Mobil’s earnings call I think they are probably going to talk about this. When you look at not only gas conditioning portion of that but also liquefaction trends at [Indiscernible], you know, our good partner in many other projects have built I think Exxon Mobil would tell you that this is probably one of the best economical projects in terms of cost and schedule and all factors that we have seen certainly in LNG.

So they are going to be very, very proud of that. We are very proud of that and we will demobilize that – certainly demobilize of that project within the next couple of months or so. So that's a project with a great result. When you look at Cartagena, we have still got lot of people on there, we are going through commissioning. We are turning over system. So that’s a little slower ramp down. Like I said we still have 15,000 people working on that job. So that will take a little longer but in the whole scale of the job, that's certainly on the back end of that and I think again the start up is going very well. It's a big challenge. It's a huge job and one that’s going to take lot of effort from the owner to get the systems run, but again I think that job has been extremely successful.

Where that plays out in overall curves I mean we started looking at that a long time ago, what is going to take the place of that. I think when you look at the curves, certainly our LNG export facilities in the US and the large petrochemical projects in the US most of it is in US in terms of the value and the size of the projects that will take the place of those in our backlog. And I am sorry they are assumed in our forecast and our guidance as far as those jobs coming down and new ones coming up.

Will Gabrielski – Stephens Inc.

Okay. Can I push you a little harder following up on Andy’s question on cash flow?

Philip Asherman

You can try.

Will Gabrielski – Stephens Inc.

Yeah, no, I don't want to call it like, it was certainly like a non-committal oil cash I am absolutely positive but when you are printing $140 million, $150 million in GAAP net income and $50 million in D&A, like it ought to be, so I am just wondering what do you see as the headwinds or tailwinds to getting to cash from ops converting out of better than net income by at least the D&A amount.

Philip Asherman

Well what I said was what we see. Of course if that didn’t happen and that would be a headwind and that would be if we failed to make the kind of progress in the milestones associated with our nuclear modules. I mean that is going to be very important to hit those goals. Again what we anticipate in our cash flow in terms of the down payments for large LNG job. That's certainly going to be helpful and the overall operations of the company contributing to the cash flow. So if those six or seven drivers didn’t occur, that would certainly – certainly causes some concern. There is no reason at this point to think that it's not. So we anticipate that's why I made the statement that cash flow is going to be positive by the end of the year.

Will Gabrielski – Stephens Inc.

Okay. I know –

Philip Asherman

And certainly better after that.

Will Gabrielski – Stephens Inc.

I appreciate that. Thank you. I know the Qs are now out, but I am sure it will have some color in there that will enable us to at least analyze what the non-cash earnings impact was from the Shaw acquisition which will get a lot of airplay once for all disconnected from this call, so if there is any color you want to add around that for the quarter for the rest of the year?

Philip Asherman

State your question again.

Will Gabrielski – Stephens

The non-cash earnings impact that resulted from the fair market value adjustments that you made through the purchase price allocation process for the Shaw deal, I was just wondering if there was any – I mean this was like an opportunity for you guys to address that publicly so I just wanted to know.

Philip Asherman

Well, thank you Will and what I will say publicly is we always standby by certainly the higher prices and our judgment is made on that and the validity of our financial statements and our earlier statement that we made when that report which we deemed was misleading and inaccurate came out we feel we have been very responsive to all the inquires we have had and certainly there has been some comprehensive reports published by analysts such as you and others that we feel have been very thorough and again comprehensive and I think that’s been good.

I think we can move on. But certainly and I think if you look in the 10-Q that we provided even greater detail on the acquisition accounting. So look at that if you have any detailed questions after reading that and the other reports that you would like to source, we will be more than happy to go through that with you again.

Will Gabrielski – Stephens Inc.

Fair enough. Thank you very much.

Philip Asherman

Okay, Will.

Operator

And your next question will come from the line of John Rogers with D.A. Davidson.

John Rogers - D.A. Davidson

Hi, good afternoon.

Philip Asherman

John, how are you?

John Rogers - D.A. Davidson

Good. Good. Hey just a couple of follow-ups on that cash flow for a second. The positive cash flow that you are seeing in the second half are you assuming any recoveries on – related to the nuclear project in there. You mentioned milestones but –

Philip Asherman

We haven’t – no I mean that will certainly be great but we haven’t assumed that. We haven’t assumed that. It is just, it's taking time and we just haven’t assumed that. So we are not counting on that. So it's the normal operations, the job, the cash flows from our project’s progress I mean getting it the old fashioned way. So that’s the basis of our assumption.

John Rogers - D.A. Davidson

And where are you in terms of those recoveries timeline and process?

Philip Asherman

Yeah, well, the recoveries you know it's not in litigation. It's in negotiation. The negotiation by the nature of the claim is led by Westinghouse because it's on the basis of the value of the changes required by the regulatory – requirements. It's I – you know, I don't think anybody would tell you it's a matter of entitlement. It's just a negotiations on what that entitlements were. So cost that we have wrapped up in that certainly would be released if we can get a settlement on that. So we are, you know, I think all parties involved would like to get this thing resolved as soon as possible, and working towards that end.

John Rogers - D.A. Davidson

And in terms of your guidance for the year you are still, it's got a pretty big range here in terms of earning in the second half, can you give us a little bit of color on how we should think about the possibility –

Philip Asherman

I guess I have given to you last November so I guess [Indiscernible].

John Rogers - D.A. Davidson

Yeah, no, I know.

Philip Asherman

But I, you know, I am really encouraged by what we are seeing in this. I mean I am more optimistic than I am anything else in terms of whether we are going to fall within that range and I think when we look at the estimates by the analysts out there I think, you know, hopefully – we are hopeful we are going to be in the middle range like the middle of the fairway like everyone else. So we are very encouraged by what we see.

John Rogers - D.A. Davidson

Thank you. I appreciate the help.

Philip Asherman

All right John.

Operator

And your next question will come from the line of Chase Jacobson with William Blair.

Philip Asherman

Hello Chase.

Chase Jacobson – William Blair

Hi, good afternoon. Can you guys address the competitive environment? One of your European competitors this morning seemed to be a little bit more cautious on that and then what we have heard recently I think they compared it to 2009 and 2010 in the Middle East so just what you are seeing there?

Philip Asherman

Yeah. I think I know what you are talking about there but I think from our perspective we are very fortunate to be positioned so well in the North American marketplace. I think tremendous amount of Capex around the world, I think if you look at the concentration in energy infrastructure primarily in North America, if you are not positioned there, then I think it's going to be difficult. I mean, we are seeing a lot of technology activity in the Middle East, but I think it's still fairly well marginalized by the involvement of the Koreans and some very stiff competition out there.

Offshore floating LNG, those are very good opportunities but again they are very opportunistic. So if you are not engaged in Australia and you are not engaged or well positioned in North America, it could be a little tougher. So we are very fortunate to be positioned in both of those areas. And that's how we see it. But I also think, you know, our business model is not overly dependent on EPC work even as that cycles throughout the world, offsetting cycles you know there is there are so many ways that we can participate anywhere in the world in a variety of ways at fairly high margin businesses, we think we have got an advantage there as well.

Chase Jacobson – William Blair

Okay. And then on the fabrication services, sorry if I missed it but can you address why the revenue was weaker there and even with the weaker revenue you guys did a good job on the operating margins. So is that because of mix or is that because of things that CB&I is doing to help improve the margin in that business?

Philip Asherman

Yeah. Well we had to respond. We haven’t seen all the improvement that we would like to see out of the – what happened in this first quarter where we had underutilization combined with delayed plant furnish materials and engineering drawings from other projects and other clients. That hasn’t completed righted itself yet. Well what we did do is take a very aggressive view on our cost structure [Indiscernible] our flow and our capacities on our project and made some tremendous changes to get those margins back where they needed to be.

So I think as soon as we get that equilibrium between, you know, what's supposed to come in the door and what we are going to be producing I am pretty encouraged that we might see those margins continue to improve because we did the hard part this quarter. So I think as the flow gets more stabilized I think there is every opportunity to increase margins.

Chase Jacobson – William Blair

Okay. Thank you.

Operator

And your next question will come from the line of Vishal Shah with Deutsche Bank.

Philip Asherman

Hello Vishal.

Vishal Shah – Deutsche Bank

Hi. This is actually [Indiscernible] on the line for Vishal, thanks for taking my question. So with most of the ethylene crackers likely haven’t or have been awarded by the end of 2014, which leads me to kind of look towards the derivative opportunities. So I just want to get a sense of, you know, what you are seeing in the market, you know, order, are you seeing great increase for feeds, what's the timing, any color would be very helpful?

Philip Asherman

Yeah. Well, I am not sure I think all the crackers is going to be awarded by 2014. I think we kind of saw this is kind of a successive waves of opportunities over 2014, 2015 perhaps in the 2016. So we are seeing some kind of non-traditional investment exploring around the US, but perhaps this isn’t on everyone's screen. So I think it's going to be quite a bit of ethylene investment over the next three years. We think, you know, I mentioned that we think there is perhaps four this year, there is probably nine outside the – nine in the rest of the world or total in the rest of the world. And, of course, our EPC and our conversion opportunities is probably strongest in the US and elsewhere. So that is a market we are going to continue to work. I think as this – as gas, cheaper gas gets closer, you got to think that cheaper feedstock is going to drive more downstream and more derivative more downs stream and more derivative investment and more projects, downstream projects. We haven’t seen a lot of that yet, but certainly you can only assume that successful waves are going to drive that CapEx particularly in the United States and I think the other thing is we are seeing some very interesting perspective investors from all over the world and in Asia coming to United States to look at how they can get positioned for this stuff too. So, I think it's going to be very interesting market for all petrochemical downstream derivatives over the next few years.

Vishal Shah – Deutsche Bank

That's helpful and then just switching over to fabrication service business, it seems like world has slowed down a little bit. So, could you talk about what do you see in your pipeline, how do you see growth trending over the next year or so?

Philip Asherman

Well, again we are for example probably largest union pipe fabrication, pipe fabricator in United States. We are probably one of the largest pipe fabricator period globally and that's what these jobs are going to take. They are going to take a lot of capacity. So, we have not only our U.S. jobs to draw on but certainly international jobs drawn. So, as you see the CapEx starting to ramp up and get closer to construction, I think you are going to see certainly the work and the demand for those services increase even more.

So, they are very few constraints to that. It doesn’t take a lot of capital for us to expand our fabrication and capacities. We have a number of alternatives in our plans now and certainly it's not an overwhelming CapEx requirement to expand by adding lay down, by adding machines, by doing that sort of thing. So, we are pretty confident, we are positioned well. I think the real growth longer term is going to come internationally. Shaw in this business model had some very well placed plans and good, good operations there. I think we are going to take that model and look elsewhere in the world and see how we might position ourselves for other opportunities. But I think the real opportunity for us in terms of growth is going to be again this North American energy CapEx.

Vishal Shah – Deutsche Bank

Great. Thank you.

Philip Asherman

Okay.

Operator

And your next question will come from the line of Martin W. Malloy with Johnson Rice.

Philip Asherman

Hi Marty.

Martin W. Malloy - Johnson Rice & Company

Good afternoon. On the pipe fabrication segment what meaning would you say we are in terms of the awards of the piping work for the build out along the gulf coast and in conjunction with that there was a higher margin business for Shaw, 20% plus gross profit margins, and you are already doing over 11% how should we think about your margins going forward as we look out in the 2015 and 2016, is there a new range that would be appropriate?

Philip Asherman

Remember our fabrication service is a combination of steel plate structures and our fabrication service, upright fabrication, right? So, it’s a consolidated numbers between those two businesses. But both doesn’t mean to say that we can’t continue to increase our margins. I mean we are seeing tremendous opportunities in our steel plate business structure as well. We are probably making a record number of spears which are higher margin vessels, are higher margin tanks themselves. I think 59 of them right now, throughout the Unites States. It’s just tremendous market. So between now and the growth of fabric and the pipe fabrication, there is no reason to think that margins can remain pretty high in that business. What any know Ian, I don’t know, if you are talking any of quarters but, but I think we are very early in the game, very early in the game.

I think as this thing gets traction and we are doing a great job of covering the market, even beyond our backlog. I think we are very intent for making sure that we increase our position and get more and more done all of the CapEx that’s being invested in the United States. We are not going to let this opportunity pass.

Martin W. Malloy - Johnson Rice & Company

Okay and then just on the L&G side, did I hear correctly in the prepared comments, did you say L Builin was a potentially key word second half this year?

Philip Asherman

Yes, yes. We’ve been doing the preliminary work in the fieldwork with Shale. The jobs are little bit smaller in terms of capacities that we’ve seen, but it’s a great job and we did the original re-gas. So we are hopeful that we are going to be able to convert that this year.

Martin W. Malloy - Johnson Rice & Company

Okay, thank you very much.

Philip Asherman

Alright Marty, take care.

Operator

The next question will come from the line of Jerry Redich with Goldman Sachs.

Philip Asherman

Hi, Jerry.

Jerry Redich - Goldman Sachs

Hi, good evening, Phil. Good evening everyone. Can you talk about how we should think about project timing on Golden Pass, L&G and also can you touch on how the Mozambique L&G work is going? I guess, there is some chatter about potentially that turning into a floating L&G Project and we’d love to get your thoughts around that as well?

Philip Asherman

God, that would be a terrible thing to happen, but going to Golden Pass, I think it’s moving forward. We’ve seen signs, very aggressive signs moving forward. Should we be fortunate to be awarded that that would be a joint venture with our partners in Chiyoda. So when you go back to Jamie’s question about capacity, having these partnerships with people like Chiyoda and the engineering that gives us a lot of comfort level that is like our own comfort level but they can source a lot of textbook talent for these jobs and I think that’s it. So, I think that certainly you might hear something on it this year in terms of where that stands at Golden Pass.

As far as Mozambique, the contractor list is continually being rationalized and looked at. We feel pretty good about our overall positioning on that job, we established a shed in Mozambique. We are taking that job very, very seriously with our joint venture group of Chiyoda and Saipem, I think it's good strong team. I have not heard I think in all these just as we saw on browse, if you remember that one for job done in Australia, we have heard some discussions around that but we have not done anything differently in our plan or modeling for the job and nor have anybody told us that they are changing their plans with some other approach. So, we are approaching this thing as previously described and again I think towards the end of the year and 2015 you are going to see some real traction on that job.

Jerry Redich - Goldman Sachs

And Phil, just to clarify that last point, do you think you see a final investment decision or further reduction in the number of contractors?

Philip Asherman

I think that it closes up to who they want to the team, the selected team and I think once they have that and they will finalize the feed and tactical decisions around that job and then they will go towards final investment decision.

Jerry Redich - Goldman Sachs

Okay and then in EC&M you had a nice pick up and that revenue burn in the quarter. I am wondering if you just talk about the project drivers how much of that was nuclear projects so what were other major drivers of the sequential increase?

Philip Asherman

Yes, part of that was nuclear, it certainly had some major milestone we did make. We are trying to pick up pace on the one still on premise so that was part of that. We certainly have seen some acceleration on some of the Australian jobs, we’re good performers and just overall progress on our projects, I mean it's a big backlog, I think of the $32 billion probably $20 billion or so resides in engineering construction maintenance. So across the board, they have been making the targets and progress has been good. So it's not a matter of home runs on the revenue, it's the matter of just good performance with a lot of doubles and triples.

Jerry Redich - Goldman Sachs

Thank you very much.

Philip Asherman

Alright. Thank you.

Operator

And we have reached the end of the allotted time for questions and answers. Your final question today will come from the line of Steven Fisher with UBS.

Philip Asherman

The final question, Steven.

Steven Fisher - UBS

Excellent. Thank you for fitting me.

Philip Asherman

My pleasure.

Steven Fisher – UBS

It will be good one, don't worry. Follow-up on the labor discussion, I mean it sounds like you are comfortable with your ability to get the labor you need and that you are not seeing a lot of inflation now. But, I guess just to be clear if labor inflation were to become double digits would you have the room and flexibility in your L&G contracts to manage that and retain your profitability targets.

Philip Asherman

Yes, we think we have estimated those pretty well based on what we see and what we see. There is a lot of historical data where we have got balance of people working right now. So, we have got, we’re positioned for a lot of that CapEx that we talked about I mean so we are around most of that.

So yes, we have, labor can be an issue. Labor is not just as – it's not really just about overall rates, but certainly the mix of productivity. So our ability to get the right people not just the numbers of people, but the right people is a reason we are focusing so hard on certainly identifying qualified skilled labor that 43,000 people that have applied to us, checking out them and making sure we got the right labor. So that's really important. So its mix is important as certainly the absolute rate. So we can affect that. We can affect that the overall cost of direct labor.

We have said for a long time now, we think we are better controlled there because we are going to direct higher rather than rely on the subcontractors and we’re continuing along that in that line and again we are working real hard on it. So yes, there could be I think whenever you get in the peak demand as we saw back in 4 through 7 we also watch the supply market. Again, carbon steel is maintaining its pricing, we have seen little uptick in stainless, but again those materials or those commodities which affect material pricing particularly when you get to buying your bulk materials that's when you might feel a pinch on that. So, we feel like we know that market pretty well and we have anticipated that. So it's not just contract, it's how you measure jobs. So, we think we are in pretty good shape of this.

Steven Fisher – UBS

Okay and then the last here, the schedule on the nuclear projects lists to be a bit more extended than it was previously, but I think you have got some protections in your contract for that. Can you just maybe clarify what that contract or the project extension time frame means first CB&I’s profitability?

Philip Asherman

Well, the profitability doesn’t change, I think we are talking about the unit two on (inaudible) for example is late 2017, early 2018 and then there is lot of activity to go to get that unit up and running and then we have the second one. But we feel pretty confident that we are going – it really doesn’t affect it. If we have to re-baseline, doing the schedule base line or re-estimating that just moves things to the right and anything like that would be on the back of new regulatory requirements of these projects.

Again I think the important thing, the prism that I think people need to look through on these nuclear jobs is it's really about building the safest and most reliable nuclear projects in the world and that's what we are doing. That always doesn’t lend itself to pass tracking projects but and the quantities haven’t changed much, but certainly the pace is affected by it. So it doesn’t really affect your profitability I guess. And we are well protected in the contract, very prescribed and if there are changes, I mean the contract is very definitive in terms of who is entitled to what.

So, if I am given the opportunity I would sign the same contract tomorrow on a new nuclear facility if given the opportunity.

Steven Fisher – UBS

Hopefully you will get that opportunity. Thanks a lot.

Philip Asherman

I hope so too. Thank you.

Operator

And now we’ve ended the allotted time for questions and answers. I will turn the call back over to Mr. Asherman for closing remarks.

Philip Asherman

Thank you, Holly. Well, first of all let me thank everybody for participating on our call this afternoon. As I said earlier we remain confident in our ability to do over revenue and earnings growth consistent with our expectations for 2014. And convert new awards activity into long term shareholder growth. We continue to be very optimistic about our markets and prospects and it’s shaping up to be another strong year. We appreciate your interest in CB&I and your confidence in our company.

As a reminder we are going to host our annual investor day in New York on November 10 and 11. So please stay with the date and be on the lookout for additional information soon. This concludes our call. Thank you.

Operator

And once again we would like to thank you for your participation on today's CB&I second quarter earnings conference call. You may now disconnect.

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

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

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

Source: Chicago Bridge & Iron's (CBI) CEO on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts