McDermott International's (MDR) CEO David Dickson on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: McDermott International, (MDR)

McDermott International (NYSE:MDR)

Q2 2014 Earnings Conference Call

August 4, 2014 05:00 PM ET

Executives

David Dickson - President and CEO

Steve Oldham - VP, IR

Perry Elders - SVP and CFO

Analysts

Jamie Cook - Credit Suisse

Tahira Afzal - KeyBanc

Andrew Kaplowitz - Barclays

Steven Fisher - UBS

Vishal Shah - Deutsche Bank

Will Gabrielski - Stephens

Marty Malloy - Johnson Rice

John Rogers - D.A. Davidson

Nick Chen - Alembic Global Advisors

Adam Thalhimer - BB&T Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to McDermott International's Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the prepared remark we will conduct a question-and-answer session and instructions will be given at the time.

I would now like to turn the conference over to Mr. David Dickson, President and Chief Executive Officer. Go ahead.

David Dickson

Thank you. So today I’m pleased to announce that we have made significant progress on the turnaround rebuilding of McDermott. We are seeing notable improvements in many areas including our culture, operations and our customer relationships and we believe it puts us on track to build our backlog and sustained profitability.

This quarter, three legacy projects turned to profitability as a result of improved operations and relationships with our customers. We finished and closed out two other legacy projects in the quarter which brings down the number of zero margin projects in our backlog from nine last quarter to four. Just as important, there were no near loss project identified in the second quarter. We still have a long way to go but we are committed to bringing that metric down further.

We also completed recapitalisation of our balance sheet to provide the financial flexibility we need to execute the turnaround. In addition to our efforts to improve our execution, we reorganized the Company’s leadership trials and set the groundwork toward shifting McDermott’s culture to be more externally facing and customer driven. We believe this will be instrumental in building profitable backlog. These actions are designed to build a stronger McDermott for the long run.

One, that has a strong reputation when a contract of choice for our clients. I've said it before there is no quick fix and we are in the early days, but I believe we are doing the right things and with time our results will reflect our efforts. With me on the call today are Perry Elders, our Senior Vice President and Chief Financial Officer; and Steve Oldham, our Vice President, Treasurer, and Investor Relations.

I will first turn the call over to Steve for our disclaimer, and then let Perry discuss the second quarter financial results. Steve?

Steve Oldham

Thank you, David. Good afternoon everyone. We’d like to remind you that we’re recording this call and that a replay will be available on our Web site, where you could also find our second quarter 2014 results press release and the Form 10-Q that would be filed today. We've also posted a presentation that will be available for a limited time on the investor relations section of our Web site that contains supplemental information on our operations and business outlook.

Additionally, our comments have and will include forward-looking statements and estimates. These forward-looking comments are subject to various risks, contingencies and uncertainties and reflect management’s view as of August 4, 2014. Please refer to our filings with the SEC, which are available on our Web site, including our Form 10-K for the year ended December 31, 2013 and subsequent current quarterly reports which provide a discussion of some of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. And please note that, except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statement. Perry?

Perry Elders

Thanks Steve, and good afternoon everyone. I’m pleased to report that our results were in line with our expectations for the period. In an effort to increase transparency in our turnaround, I'll refer to several metrics today which we used to manage the business. As Steve mentioned, we posted a presentation that provides additional details on those metrics which is available on our Web site and which investors may find helpful in understanding our results.

McDermott reported net loss for the second quarter 2014 of $11 million which included gains of asset sales of $46 million, expenses for financing transactions of $28 million and restructuring charges of $1 million. These items net to $17 million both on a pre-tax an after tax basis for $0.07 per diluted share.

Revenues for the quarter were $476 million, down 26% from the second quarter 2013, on lower Marine activity contribution. Second quarter operating income totaled $28 million and included the aforementioned gains on asset sales and restructuring charges. We’re pleased with the progress made in the disposal of our older underutilized assets.

On our subsea vessel utilization, a 51% was well within quarter and this quarter and lower this quarter due to preparation of the Lay Vessel 105 for a charter contract with Petrobras in Brazil. Also, unabsorbed direct operating expenses total $22 million in the second quarter.

We have provided metrics on our asset utilization in the presentation provided on our Web site. Importantly as David mentioned we made good progress on improving the execution of our legacy projects. In addition to operational improvements our commercial teams have been working with our customers to settle change orders and closed out those projects. For example, we recognized the gain in the second quarter on a Caspian project from the recent customer approval of change orders. Our relationship with that customer has improved and we have been able to find common ground on a number of areas. We are pleased that the project has return to profitability this quarter along, with two other jobs that had been previously listed as lost projects. In addition, we recorded project closeout improvements of $30 million on the Wellhead Tension Leg Platform EPCI project for Petrobras which was completed earlier this year.

On the other hand, as we discussed with investors in June, when the platform EPCI project for PEMEX, and it was one that was already in a loss position, and at that time we indicated it was showing signs of further stress. We increased the estimate of the cost to complete by $20 million in the second quarter.

Also in the second quarter, we completed the design and factored current productivity and our New Americas region management team reworked the schedule and execution plan. The project is undergoing a full re-estimation with considerable attention on meeting a delivery schedule that results in physical completion in late 2015. So we closed the quarter with realistic and achievable estimates for this project.

On a subsea project in the Gulf of Mexico for Chevron, which was also in a loss position, we recently experienced vessel downtime that increased our estimated cost to complete by $13 million. However the North Ocean 102 returned to work and completed its portion of that project today. We expect to be operationally complete on the entire project by the end of the month.

Last quarter we indicated that our backlog contained nine projects in a loss position. During the second quarter we returned three of the projects to profitability, completed two and added none. So we enter the second quarter with four loss projects. This objective measure is the representation of progress made on improving our execution performance.

Moving to our contract with INPEX for a subsea development in Australia; fabrication activity at Batam Island, Indonesia yard continue, as we prepare to commence the marine installation phase of the project. We remain on schedule to deliver the fabrication components to Heerema for a load-out and installation window, which is currently scheduled for early fourth-quarter. After Heerema completes their installation scope, we expect to install flexible risers and complete the remaining scope. We are performing well on our contract with INPEX and continue to believe that we will deliver the project successfully and profitably. A large portion of our backlog contains projects characterized by low margins. As previously indicated, until we book new profitable backlog, our legacy projects will continue to weigh on our results. Therefore we expect an operating loss for the second half of this year.

Turning to our revenue pipeline, we reported backlog of approximately $4.1 billion, of which 39% to our offshore operations and 61% related to our subsea operations. However our bids outstanding are heavily weighted towards offshore operations. So over the medium-term we would expect our backlog slightly more weighted towards offshore operations.

Bookings in the second quarter totaled $176 million in line with our expectations for awards, for which customer responses are concentrated in the second half of this year. Our bids and change orders outstanding at the end of the quarter were $8.4 billion compared to $3.5 billion at the end of the first quarter 2014. Approximately 93% of our outstanding bids and change orders related to our offshore operations. The increase in bids outstanding relates to a strong bidding activity and includes the Chevron offshore project for two floating production units in Indonesia, which David will discuss later.

Our list of target projects total $9.8 billion as of June 30. As a reminder, targets of those projects that we intend to bid and are expected to be awarded in the next five quarters. Approximately 65% of the value of our target projects relate to our offshore operations.

As of June 30, 2014, the combination of our backlog, bids and change orders outstanding and target projects, what we call our revenue pipeline totaled $22.3 billion, down from $24.8 billion last quarter. There have been some timing slippage to the right on projects putting them outside our five quarter award window. However, bidding activity remains strong and we see good opportunities in areas where we have strategic advantage through our local content in national oil company markets including Mexico, Saudi Arabia, the UAE, Indonesia and Malaysia.

We have provided additional information on our revenue pipeline in the presentation on our Web site, including the number of projects and various contract value size ranges. So we expect to convert our share of the revenue pipeline into profitable backlog over the second half of 2014. Regardless of the results of the bid with the share run for two floating production units in Indonesia, we would be disappointed if we finished the year with a smaller backlog than we started 2014.

Moving to the balance sheet, at June 31, 2014 we reported $958 million in cash, restricted cash and investments with $904 million in debt outstanding. We completed financing transactions during the quarter, which we expect to provide but with the financial flexibility to execute our turnaround plan and provide the liquidity to support our growth plans, which include the delivery of the construction support vessel, or CSV 108 and the DLV2000 vessels. We have $375 million to $425 million left to spend on the two vessels and related equipment with approximately $100 million of that payable in the second half of this year. We expect total capital expenditures, including the amounts for these two vessels in the second half of the year around $150 million.

Restricted cash increased this quarter as we chose to utilize a portion of our cash for collateralized letters of credits which is currently more cost-effective than placing them under our revolving LC facility. We continue to focus on working capital management.

Our free cash flow metric defined as cash flow from operations less capital expenditures was as we expected for the quarter and supports or belief that the turnaround is on track. I would also like to discuss a few housekeeping items. Interest expense during the quarter totaled $39 million. This included $28 million of expense related to prior financing cost.

Going forward we expect an annualized run rate of about $52 million of interest expense, which includes cash interest and approximately $13 million in annual deferred loan cost amortization, net of approximately $21 million of capitalized interest. Also our basic and diluted share count remained flat last quarter due to the anti-dilutive effect of the TEU shares on a reported loss. Depending on the stock price until the segment of the units, we could include an additional 33 million to 41 million shares.

To summarize, we continue to work through our legacy backlog and closeout our loss projects. We have a number of opportunities to book meaningful new work and continue to execute the turnaround plan for McDermott to deliver improving financial and operational performance.

Now I would like to turn the call back over to David

David Dickson

Thanks Perry. As I mentioned earlier we made significant progress in the first two quarters of the year and we believe our turnaround is on track. With respect to changing our culture, we are seeing signs of success with the new organization. At this point the new organizational structure is in place and all the individuals with changing roles have fully transitioned into the new area of responsibility. We have succeeded at recruiting the initial wave of experienced professionals and our future efforts will focus on filling specific needs.

With everyone in their seats, we have gained traction on advancing the culture change to build a sustainable profitable business. As the dust has settled we have been able to identify areas of excellence, as well as gaps that we are addressing. For example, we identified several gaps on the platform EPCI project for PEMEX, which Perry mentioned and it's still in its early stages.

Both the new leaders of the Americas region and our new project assurance organization have identified issues now that the design has been completed, primarily productivity and schedule concerns. They also identify realistic and achievable mitigation measures, which we believe will reduce the impact to our financials and deliver on schedule to our client.

On the other hand, we have been very satisfied with the progress and quality of workmanship on our contract with INPEX to date. Our fabrication capabilities and performance represent significant differentiators between us and other major contractors, which we believe provide McDermott with a real competitive advantage when building projects with sophisticated subsea fabricated structures.

As I mentioned in prior calls, we have been breaking down the silos in the Company and expanding the areas of excellence around the organization with global processes and procedures. We are identifying those areas of excellence and re-writing processes and procedures based on best practices. Our new leaders have the drive, the desire to improve and the will to learn from others. It’s a clear sign that the culture is changing. The culture is not only changing with respect to internal issues, but the Organization is significantly more externally focused today. An example of our emphasis on building strong customer relationships from the project level to the executive level is our Leader of Strategic Relationships, a new role whose primary responsibility is facilitating communication and building relationships between members of senior management and our key customers.

Beyond customers, we’re working on strengthening our ties to the communities where we operate. We support many jobs in the U.S., Mexico, UAE, India, Malaysia, Australia, China, and Indonesia and it's important to communicate that we want to be a partner in the development of their energy infrastructure and technical talent. Our ability to support local communities and provide local content is a differentiator in the eyes of many of our customers.

For example, we believe that in connection with the energy reform in Mexico, there will be 25% local content requirement on most developments, eventually rising to 35%. We expect our Altamira yard to be a differentiator as Mexico accelerates its development of offshore fields.

We have engaged with our customers on both current projects and future opportunities. This quarter, we resolved many change order issues, especially on our legacy projects. Today we find our customers are much more responsive than they were just a couple of quarters ago.

In addition to our discussions, we have been able to identify particular customer needs on new project opportunities that had not been on our radar, which leads me into an important point. With our execution improving, we must now build profitable backlog for the turnaround to be a success.

In that regard in June, we announced that the McDermott led consortiums bid was selected to engineer, procure and construct the floating production units on a Chevron-operated natural gas development in Indonesia. The total potential contract value, including our consortium profits is large and between $2.5 billion and $3 billion.

If ultimately awarded, we believe this will be another excellent opportunity to showcase the competitive strength of McDermott’s Batam Island fabrication yard. As of today, the contract has not been awarded. There are still various hurdles to clear including government and regulatory approvals, and final investment decision by Chevron, most of which are beyond our control.

We’re busy pursuing other bids and opportunities as well, we are actively adding to our sales force and bringing on talented individuals to build longstanding relationships with our current and potential customers. We have been successful winning small or short-term projects like the recently announced platform installation for Walter Oil & Gas. Our goal is to keep our sales force winning a blend of anchor EPCI projects, other EPCI projects that may not make the headlines and smaller short-term work to keep our assets utilized.

Now taken all this together, it’s encouraging that our execution is improving and we made significant strides in changing the culture to unblock McDermott’s potential. Business acquisition will be a high priority in the second half of this year as we expect most of our bookings to be back-end loaded.

At the same time, we are taking steps to become an attractive competitor and take advantage of what we see a strong long-term demand for offshore and subsea services. Now with that, I’d like to open the line to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Jamie Cook with Credit Suisse. Please proceed.

Jamie Cook - Credit Suisse

I guess just a couple of questions. Given the progress that you’ve made on the problem project that you had and now we only have four, I think in a zero margin position. I mean what gives you, I mean are you more comfortable today or can you say with more confidence that we have the four zero margin projects more in control relative to -- just given the progress you’ve made, do you feel more comfortable that these are more in control. And then just your second comment about backlog with the standing Gendalo, I think you still said you’d be disappointed if backlog wasn’t up at the end of the year. Can you talk about the other sort of projects that are out there in just your line of sight, when we would expect to see orders should Q3 bookings be up or would it be more of a year-end scenario? Thanks.

David Dickson

So on the first question, the answer is you can never be sure you’re actually done yet. But I think what I would say today, the people would be bringing in, the processes and systems that we’ve been implementing, we're starting to see surprise losses. Also still got a long way to go but certainly what we've seen over the last quarter, it would start to generate more confidence that we're moving in the right direction. I think that’s reflected in the fact that we're going from nine then to four projects. So that’s important part. I think I said it on the call before. A big part of the challenge is making sure that we first improve our execution. And I think we're on the right track there. On the second question, I am going to pass it over to Perry.

Perry Elders

Thanks, Jamie. In terms of building profitable backlog, we definitely expect second half bookings to come about and therefore we do expect to build profitable backlog. And what gives us confidence about that as you will see on the Web site is the number of projects that we have -- over 20 projects in the bids outstanding. So it’s not just GG and Indonesia. There is a number of projects that are kind of in the singles and doubles range that we believe that we're particularly well-positioned. For example we think we've got an advantage over the Koreans in Brownfield work.

And so as we look at each of those bits outstanding as well as the target projects you can see enumerated on the revenue pipeline started on the Web site, we think we have a number of very specific situations that will allow us to book work in the second half of this year.

Jamie Cook - Credit Suisse

And then sorry, just a follow-up, I think you said you still expected operating losses in the back half of the year. Anymore color you can provide, because there is lot of noise, like you had the gains in the quarter that I’m assuming you’re not expecting anything in the back half of the year. So should be look at ex-that or any color you could provide, Perry, that would be helpful. And I will get back in queue.

Perry Elders

Yes. Thanks Jamie. Yes is the answer. That’s why we called on those non-recurring items in the second quarter. And as we forecast the second half of the year we're not for guessing any of those in our guidance and so as I mentioned the loss project in our backlog as well as low margin in our backlog is why we're so focused on improving execution and we believe that we'll work through this year and into next year on improving execution. Thanks.

Operator

And your next question comes from the line of Tahira Afzal with KeyBanc. Please proceed.

Tahira Afzal - KeyBanc

I guess first question is just some sort of follow-up on Virginia. If I think all the closeouts you had that you’ve identified in year 10-Q, they roughly add up to around 75 million or so which is obviously a good chunk coming from legacy projects. So congrats on that. And as I really take some of the negative charges and subtract them out and really look at where your profitability net-net ends up, ex of all the positives and negatives, around $5 million or maybe a little higher than that in EBIT ex-restructuring. So I guess, Perry, when you’re talking about the second half losses, what are you including or excluding and am I looking at it the right way in terms of the second quarter.

Perry Elders

As you know we're not giving financial guidance yet and so we're trying to help you understand not only what happened in the second quarter but as we look forward, what the improving execution can deliver for us. And so as I’ve mentioned a few times in the past, these realistic and achievable estimates that we've got on the projects now leave us with some opportunity going forward. I would say bluntly that the second quarter, results we have not drained the balance sheet of those opportunities. We believe there continue to be opportunities to finalize the closeouts on some of the lost projects, including ones that we made progress on this quarter to further assist for the rest of the year. And so we think that level of resolution that we made good progress on this quarter, will continue through the second half of the year notwithstanding that with our fixed cost structure we don't anticipate being able to be in the profit for the back half of the year.

Tahira Afzal - KeyBanc

Got it, okay. And the second question; David, if you could comment a bit on the slippages in terms of your target list, what's driving them and how you see them playing out at this point? And really as you look at your potential backlog, as you exit the year and given your lean fixed cost structure, when should we start to see that sort of EBIT line turn and inflect positively? I know you can't give me guidance for the quarter, but some kind of qualitative guidance in terms of inflection would be helpful.

David Dickson

On the slippage of these projects, obviously the one which is offsetting the market and public demand is what’s happening on GG and we can’t really comment. That’s with their regulatory, it’s with Chevron. So not going comment.

On the other projects that were bided and we haven't seen any significant slippage, these are projects that we have actually started bidding during the second quarter that we'll take into Q3, Q4 before we start to see any results. And as we’ve said many times is that, at the beginning of the year, we had said that our backlog, our success, and when it was always going to be a back loaded for the year. None of that has changed and obviously it's going to be a large part of our focus as we move into the second half of the year.

What I would say though is that we have made significant changes in our, let’s call it our win-it organization with the people internally, McDermott that were promoted and people that were brought in externally to join our win-it teams that certainly gives us a lot more confidence as we look to bit projects in the future and avoid these bid messes that we’ve had in the past.

So I think we’re making a lot of steps. On the second part of that question, when they start to see some of that coming through, well as we've said before, a lot of our low margin backlog has taken us all the way into ’15 and we haven’t given any guidance yet but we’ve always said that 2015 would be a year of transformation and so that’s where we are, that position remains today.

Operator

And your next question comes from the line of Andrew Kaplowitz with Barclays. Please proceed.

Andrew Kaplowitz - Barclays

A lot of good extra disclosure today, thanks for that. So Perry, can you talk a little about cash generation in the quarter? Going forward CapEx looks pretty high in the first half of the year and you did increase the spend on the LV108 and DLV2000 a bit. So maybe you could talk about that and you said it was sort of in line with your expectations, but last quarter was sort of a neutral working capital in this quarter you built a little bit. So maybe talk about what we should expect over the next few quarters going forward?

Perry Elders

So just to be clear, our estimated costs on these two new builds has not increased. There may have been some confusion in the past that we created by the way we disclosed the cost to go because the GAAP disclosure requirement is around kind of what purchase orders you’ve issued and we have been disclosing that number, but the total cost of the projects has not changed from what we have been expecting in the last few years. So our CapEx budget remains very much on target and what we have seen in the first half of 2014 is as expected. So the two numbers I gave in the prepared comments around a 100 million for the remainder this year on those two projects and an additional 15 million for the remainder CapEx is bang on what we are forecasting coming into the year. And the remainder of the spend on those projects principally it will be -- not principally, it will exclusively be the DLV2000 in is 2015 is on forecast. So that’s on the CapEx side.

And then on the working capital side Andy, as you know for the last year, we’ve put a lot of emphasis on our working capital improvement and cash generation. And so I think we’ve made a lot of progress and individual kind of project by project improvements, customer-by-customer and that’s manifested itself in terms of not only being able to collect from customers like the example that David mentioned but also in terms of getting inventory or work-in-process build. And so we are making good progress on that. This is still a very working capital intensive business and so we're not expecting to be cash flow positive as we work our way through these operating losses and the CapEx program.

Andrew Kaplowitz - Barclays

And then maybe shifting gears, David, I hate to ask you sort of the same question in a different way but that’s exactly what I am going do. It looks like you are saying you could book 1 billion or more per quarter over the next two quarters based on Perry’s comments and that’s excluding Chevron’s project. So I know what Perry said, that these bids are outstanding and you had a big conversion that you went from 3.5 to 8.4 in bids outstanding. So maybe you shift as simple as that as you just have a lot more irons in the fire, so you figure that a few of these are really going to hit over next two quarters. But it is a sizeable step up for you and again I think we are all aware that you’ve been talking about this now for two or three quarters. So like do you feel pretty confident? You must and to put these numbers out there because they are pretty big numbers for the second half of the year.

David Dickson

Well firstly Andy, you answered my question, so thank you for that. As we look at we changed how we are bidding work entirely and I’ve said that in the last couple of quarters with some new people that we’ve been bringing and but we’ve also changed how we look at a lot of projects in that what best suits McDermott’s capabilities.

So we know we’re chasing everything. So what we have, the projects we’re bidding today for me, our projects which McDermott is very well -- our capabilities are well suited but also projects where margins would make sense rather than just chasing everything. So we have a lot of activity ongoing. As you know I wasn’t too keen about too much bidding in Q1 because we were in the start of the turnaround we didn’t have whether it was people processes or systems in place.

So we have a lot of activities in the second half. I think we are making strides in terms of customer interaction and I’ve said that a few times today and I'll continue to say that, but we have made a significant efforts in that side and I’m actually starting to see some fruits of that. So moving into the second half, yes we’ve got a lot of work to be done, but I think as a company, we’re in a lot better positioned where we were a six months ago.

Operator

And your next question comes from the line of Steven Fisher with UBS. Please proceed.

Steven Fisher - UBS

Just to follow up on the target lift, how quickly should we expect that that lift can back to say the double-digit billions? Is that something that could take a couple of quarters or might it be as soon as next quarter? I'm just wondering is that commentary on sort of the health of the markets out there?

David Dickson

Steven, thanks. As we think about building profitable backlog and specifically the projects that are in the target list and then as I mentioned, those that have slipped beyond the five quarter into maybe the next quarter, I agree with your comment, the way you asked it that it could be back filled to double digit billion targets next quarter, as soon as next quarter. Obviously we don’t control how quickly the oil companies go to FIDE or they get regulatory approval. But it also is a function of kind of as we’ve developed our North Sea and Africa business unit, that has given us access to new and growing market particularly in Africa and that gives us confidence that that overall market and McDermott’s accessible overall market is growing. And again both in response to your question and Andy’s prior question, you guys may not have had a chance to look at the data we posted to the Web site, and you will find on there, that we have 10 projects in the $50 million to $1.5 billion range in our bids outstanding and we have 35 in our target projects and so that really does give us a lot of confidence about our ability to build this profitable back log.

Steven Fisher - UBS

And then David, you’ve made a lot of progress, obviously. Not to give you a too broader question here, but if you had to summarize, what elements of your turnaround you think still required the most amount of work going forward? Is that really just sort of building backlog at this point or are there other things as well?

David Dickson

Another way to look at as I've gone through my to-do list over the last six months is obviously now we’re moving into an area of building that profitable backlog. As I said, I'm very happy with the people that we've brought into the Company, a lot of people with expertise and relationships that's going to help us in that area and that’s going to be the focus area for a lot we’re doing. Having saying that, obviously we're going to continue to make sure we're focused on improving our execution. As I said, we've still got a long way to go in a couple of those projects. But as I said earlier, in terms of how we bid and how we are pitted in those teams together as a fee that we’ve got the right skill sets in terms of moving forward.

Operator

And your next question comes from the line of Vishal Shah. Please proceed.

Vishal Shah - Deutsche Bank

I just wanted to better understand as a mix comment you made about backlog. Is it function of industry or is it just your focus on building more projects and backlog in the offshore and just as you think about thought softer [indiscernible] backlog, how would you compare them to the bidding environment of the quarter itself.

David Dickson

Vishal we got probably half of that question. So let me try and see if I can maybe answer the first part of that. So if you look at and I think I maybe I've said this earlier, when we look at our backlog today, well firstly our Company we're in a slightly different cycle probably from most other companies because we came in through this turnaround. But if you look at where we are today in terms of our customer base, a large of our customer base is dependent on the national oil companies, Aramco, Petrobras to name two. So obviously the cycle of our customers, the spend on our CapEx is we’re well positioned for some of that. I didn’t pick up, we only picked up maybe about a half or third of your questions. I don’t know if you want to try and repeat that question.

Vishal Shah - Deutsche Bank

The other part of the question was around the profitability of some of the projects, the backlog, the option that you’re looking at, the bidding environment different from what you’ve seen in the past?

David Dickson

The bid environment, that question is a fairly complicated question because it depends on which are and obviously which geographical location. As I said earlier and lot of the areas, one of the things that we’re trying to change in the organization by changing our culture and how we build profitable backlog is we look at how we will bid these projects in the future. So what are the differentiators in McDermott? And that's something which I'm working with the team today. So that’s we’re not going to just bid everything. We’ve got to bid things where we do have something that separates us for the competition.

So things like Saudization [ph] and in Saudi where we're working with Aramco. Using your, -- we've got a great presence and I've said before our yard in Altamira for me is a big differentiator and we will continue to work with PEMEX of how we maximize that facility. So where we have local content, I believe we have a big differentiator and obviously the situation that we have to deal with our consortium and our presence in Indonesia that allows us to participate in this GG tender. So it’s all we have in the team focusing a little bit different, which is all about change in the culture within the company.

Operator

And your next question comes from the line of Will Gabrielski with Stephens. Please proceed.

Will Gabrielski - Stephens

Perry, can you just repeat what you said about interest expenses. I want to make sure I heard you correctly?

Perry Elders

So I think if it Stephen as three elements. Interest expense, there is the cash interest cost that on average is about $60 million a year, there is an amortization of the new deferred loan cost which is an additional $13 million a year and then reduce that by approximately $21 million of capitalized interest and of course that number will vary depending on our CapEx programs over the year and that will get you down to about 20 -- I am sorry $52 million of net interest expense around through the P&L on annualized basis.

Will Gabrielski - Stephens

In the second half of the year, can you talk about revenue pick up by segment to get your full year numbers, just because Q2 was so far below I think really sequentially what I was expecting, but it doesn’t look anything shifted around in terms of total burn-off for the rest of the year exiting Q1? I meant by geography. If I said segment, sorry.

Perry Elders

No, I get it. It’s difficult for me to give you the guidance by geography. Obviously we are not giving it in total, other than what you can see in the Q in terms of the burn off of the backlog for the rest of this year. So I think that’s probably about as specific. I wouldn’t break it down it by geography more than that.

Will Gabrielski - Stephens

One more clarification. Did you say Gendalo slipped out of the five-quarter window?

Perry Elders

No, we did not. I apologize if we were not clear. It’s in our bids outstanding whereas it was in targets last quarter. But it’s not outside the five-quarter period.

Will Gabrielski - Stephens

And then just I guess, maybe just you if you talk about the last 12 months of industry activity from each one of your seats, David; I'm just wondering how you would define the competitive landscape today versus 12 months ago even before you are McDermott. It just seems like there is definitely some competitive language out there right now from some of your peers and I'm wondering how you would describe where you fit into that?

David Dickson

Yes, as I think I said earlier, we are probably in a different cycle from everyone else because we're coming through at turnaround. I would say today that depending on the customer grid, whether it’s the IOCs or the majors or the NOCs, that competitive landscape is changing a lot. The competitive landscape changes based on geography. As I said our focus is well how can we differentiate ourselves from the competition in terms of things such as capabilities, technology, local content. So we're refocusing through our culture change at McDermott how we bid work in the future. Yes, there is a lot of press out there to say that yes, the majors are slowing down on their CapEx programs, but if you look at our backlog, a lot of our backlog actually relates to the work that we're doing with NOCs. But as I said we're in the different cycle. We're just building our organization coming through this turnaround. So it’s a bit different from us compared to our competitors today.

Operator

And you next question comes from the line of Marty Malloy with Johnson Rice. Please proceed.

Marty Malloy - Johnson Rice

Could you maybe talk about market position in the Middle East and relationship with Saudi Aramco and perhaps steps you’ve taken to strengthen that relationship and how that’s going?

David Dickson

Yes, I think that Marty that’s a really good point because we’ve talked about this in the past. So I think today what I would say is that we have made significant strides in terms of our relationship with Aramco. We have changed some of the team, how we interface with Aramco. Senior level has changed, we’re now meeting with the customer at an executive level on a monthly basis. We have no cut off in a lot of the change orders and payments. We're having good dialog with Aramco in terms of Saudization and it’s a relationship that I feel that we are now getting back on track and that’s probably a reflection of maybe -- a lot of that change in the culture that we’ve had and also as we look to improve our execution. So we look forward to longer term in continued relationship with Aramco.

Marty Malloy - Johnson Rice

And then when -- with your yard in Altamira being close to the yard to Keppel that building, can you talk about maybe potential opportunities to work with them in that area?

David Dickson

[Audio Gap] also access to the deep-water market in the U.S., Gulf of Mexico.

Operator

And your next question comes from the line of John Rogers with D.A. Davidson. Please proceed.

John Rogers - D.A. Davidson

A couple of follow-up things. First of all, did you have significant bid preparation costs in the quarter with the jump in bids outstanding?

David Dickson

I wouldn’t say incrementally in this quarter, no John. We have been working on -- the larger bids take quite a number of periods to put together. I would say in the last year or so, yes, but tendering costs are higher, particularly on these kind of larger bids that you will see in that revenue pipeline on our Web site. But this quarter compared to prior, I would not say significantly more.

I would also just maybe have you think about that in terms of the changing culture because we have brought in so many people into the organization, particularly as we bid subsea jobs and we have the additional talent in the subsea organization that we haven’t had before. For example, in the Americas group, we have an individual that's joined the Company in the last six months, that is leading that and his experience, particularly in the subsea market and this geographic markets specifically allows us to get at these bids very quickly and directly. So there is not necessarily a correlation between the bids outstanding and the big costs. Obviously they’re expensive to bid, but the addition of the people as part of our changing culture has mitigated that to some extent.

John Rogers - D.A. Davidson

Okay. Thank you. And then Perry, in terms of the restructuring costs, what's left there?

Perry Elders

It’s interesting, and kind of frustrating for me as a CPA particularly, but we will continue to expanse a portion of our lease costs in Morgan City throughout the remainder of the lease term. Unfortunately GAAP no longer allows us to accrue all of that up front. So we have some of that cost. We have some kind of relocation transition cost to go, and certain advisor costs to go.

So you’ll notice in table, in the 10-Q, we have updated the remaining cost and brought down the forecast of the remaining cost from what we have disclosed in the prior quarters. We think we have made excellent progress as we've been doing this turnaround and focusing on improving the execution of the jobs and completing that turnaround and those restructuring cost within the previous budget. But we do have some cost to go.

John Rogers - D.A. Davidson

Okay. I'll take a look at that. And then just lastly, I know similar questions on the revenue outlook, but at $750 million roughly a quarter yet to burn in your backlog, can you tell us, is that relatively smooth in the second half or does it build substantially into the end of the year? In your backlog?

Perry Elders

John, to make this clear, you’re asking on revenue recognition or booking?

John Rogers - D.A. Davidson

I’m sorry, on revenue.

David Dickson

Yes, I wouldn't give you guidance to expect it higher one quarter versus the other. Doesn't mean it will necessarily be smooth, I wouldn’t use that word, but I think the activity level which is what’s driving our revenues is fairly consistent over the last half the year.

Operator

And your next question comes from the line of Robert Norfleet with Alembic Global Advisors. Please proceed.

Nick Chen - Alembic Global Advisors

This is actually Nick Chen for Rob Norfleet today. We were wondering, looking back at Altamira, can you give us an update in terms of where you are from having the facility fully functional as it relates to expansion activities? And additionally, in terms of integrating any additional Morgan City assets into the yard?

Perry Elders

Thanks Nick, a couple of things there. We have already shifted the equipment out of Morgan City to Altamira. That is expected to go to Altamira. So there is no change in that regard. I would point out as part of the overall improved execution that our Altamira safety record has been outstanding, particularly in the last quarter, and that's a direct result of the cultural change that we’re driving and the shift of resources that we spoke around in the past in terms of two things. One is the individual we put in charge of the global quality health and safety and environment function. It’s helping to drive that change. As well as globalizing our fabrication standards. And we have an individual that has taken this role on from our Middle East organization and has taken this on a global basis. And thirdly, the third individual that's had an impact there is the gentleman that previously ran our Batam Indonesia fabrication yard has relocated to run our Americas fabrication, which is principally Altamira’s. So you know the cultural change in terms of shifting people where they can have more global impact and specifically impact on Altamira yard has, we’ve really benefitted from in terms of getting our arms around the job that we mentioned earlier as well as the safety performance. And that’s part of breaking down silos in the cultural change.

Now one other aspect of your question, was I think related to the numbers in terms of where we are. We spent about a $150 million on that yard so far and we're making good progress in ramping up its capacity. Obviously now it can perform well on producing decks and jackets. We would -- as we move forward, we could see ourselves investing further in that yard and that will be market dependent and it will tie right back to what David said earlier about booking profitable work with PEMEX in terms of taking advantage of our local content that we already have that others do not have to get at least our share if not a better share of the off shore increased work that PEMEX is going to put out.

Steve Oldham

Operator if we could, we’ve got time for one more question please.

Operator

And your next question comes from the line of Adam Thalhimer with BB&T Capital Markets. Please proceed.

Adam Thalhimer - BB&T Capital Markets

I wanted to ask one more question about revenue if I could. Because in the quarter, revenue came in a lot lower but margins were a lot better. And I'm just curious if that’s generally the expectation for the back half of the year or if as John alluded to, they are some projects that are starting up.

Perry Elders

Well, let me just first of all address looking back before we talk about the quarter. In terms of the last quarter, as we mentioned there were several closeouts and resolutions of some previously unapproved revenue with customers and we made excellent progress because of the comments that David mentioned in terms of approving customer relationships. And so those amounts fell through to the bottom line if you will without significantly impacting revenue or certainly not impacting revenue in proportion to kind of a typical margin that you might expect.

Now as move forward to the back half of the year, as I mentioned earlier, we see similar opportunities to further complete and finalize the negotiations in the close out on some of those legacy projects which could likewise contribute disproportionately to the bottom line. So as in the past in our business the margin is not necessarily proportional to the top line.

Adam Thalhimer - BB&T Capital Markets

But then on the top line, are there projects that are starting up in the back half of the year.

Perry Elders

We have -- and I think the most significant one we’ve referenced is our largest project in backlog, the Ichthys project for which we expect to begin the offshore campaign in the early of the fourth quarter. So that’s -- and then we have activity progressing on most of our backlog throughout the third quarter and fourth quarter.

Operator

And with that I would like to turn the call back over to Mr. Dickson for closing remarks.

David Dickson

Thank you. And thank you again everyone for participating today. As I said I'm pleased by our progress today of our turnaround which remains on track. We are improving our execution while building a new McDermott culture and we see exciting opportunities to build profitable backlog in the coming quarters. We look forward to seeing many of you at the upcoming investor conferences, and we hope you would join us for our next conference call, which is scheduled for Wednesday, November 5th. Operator, this concludes our call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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