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McDermott International (NYSE:MDR)

Q1 2011 Earnings Call

May 11, 2011 10:00 am ET

Executives

Perry Elders - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

John Roueche - Vice President of Treasury & Investor Relations

Stephen Johnson - Chairman of the Board, Chief Executive Officer and President

Analysts

Tahira Afzal - KeyBanc Capital Markets Inc.

Stephen Gengaro - Jefferies & Company, Inc.

John Rogers - D.A. Davidson & Co.

Robert Norfleet - BB&T Capital Markets

Jeffrey Spittel - Madison Williams and Company LLC

Andy Kaplowitz - Barclays Capital

Graham Mattison - Lazard Capital Markets LLC

Martin Malloy - Johnson Rice & Company, L.L.C.

Will Gabrielski - Gleacher & Company, Inc.

Jamie Cook - Crédit Suisse AG

Steven Fisher - UBS Investment Bank

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to McDermott International's First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. Jay Roueche, McDermott's Treasurer and Vice President of Investor Relations. Please go ahead.

John Roueche

Thank you, Regina, and good morning, everyone. We appreciate you joining us to discuss McDermott's first quarter 2011 financial results, which we reported yesterday after the markets closed. Joining me on the call this morning are Steve Johnson, McDermott's Chairman, President and Chief Executive Officer; and Perry Elders, our Senior Vice President and Chief Financial Officer.

Before I turn the call over, let me remind you that this event is being recorded, and a replay will be available for a limited time on our website. In addition, some of our comments this morning will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties, and they reflect management's views as of May 11, 2011.

Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including our Form 10-K for the year ended December 31, 2010, and our recently filed 10-Q for a discussion 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 statements.

Also, throughout our comments today, reference to company records, company history or other past comparisons relate to our continuing operations only, which are typically represented by the former Offshore Oil & Gas Construction segment.

With that, I will now turn the call over to Steve Johnson, McDermott's Chairman, President and CEO, for his remarks on the operational and business environment.

Stephen Johnson

Thanks, Jay, and good morning, everyone. We appreciate you for joining us today to discuss the quarter, our business performance and the markets that we serve. In my view, McDermott delivered very solid results for the first quarter of 2011, and we have laid a solid foundation to start the year.

Pretty much across the board, we were pleased with the quarter. Revenues were very strong at nearly $900 million, and quarterly operating income exceeded $100 million for only the fifth time in company history. While taxes were higher than recent periods at nearly 24%, net income of about $69 million or $0.29 per share are still sizable improvements, both sequentially and year-over-year. Additionally, bookings for the quarter exceeded $600 million, which maintains our backlog in a historically high level. Perry will cover the financials in detail, but all in all, it was a very strong performance.

Although we feel very good about the first quarter, I always remind investors not to let 90-day results alone drive their investment decision. As you know, our projects are multi-duration, and we build our projects outside and install them in the water. So both of these activities can be affected by the elements.

We also used percentage-of-completion accounting, and there are usually a number of puts and takes in any given quarter associated with our predominantly fixed price portfolio of contracts. As such, it's always best to take a longer-term view when evaluating McDermott.

Although revenue saw a strong increase, we actually had a decrease in the total number of man hours worked, but this decline was offset by increased marine activity. To be more specific, in our major construction facilities, we worked a total of about 4 million man hours during the quarter. This level is below both the sequential and year-ago quarters, but it is still a full workload on a consolidated basis.

Similar to the geographic split of our backlog, the majority of this activity took place in our Middle East and Asia-Pacific facilities. However, Atlantic facilities, while still underutilized, did see a pickup in man hours as compared to a year ago due to increased work in Mexico.

As has been the case for several quarters now, keeping our construction vessels active remains a challenge for 2011. But we did have more days under contract in 2011 first quarter than either the sequential or comparable year-ago period. Our utilization during the 2011 first quarter was about 60% of standard days, which is an improvement over the 2010 average of 55%. Clearly, as the year progresses, we will be actively pursuing projects to fill up as much excess capacity as economically possible.

We continue to expect a high level of marine activity for 2011 than we did last year. And if we're able to book additional work, that could provide some leverage to our investment income's -- to our income statement. The DB50 arrived at its prairie home in Asia-Pacific market, and we'll see some good work days coming up in the second quarter before entering dry dock for the second half of the year. And we are pleased that the DB16 has recently been awarded enough pipeline work from PEMEX to justify taking it out of cold stack during the second half of this year, which is obviously good news.

Although, we didn't replicate the record level of bookings that we delivered in the fourth quarter of 2010, we're quite pleased with the $620 million of work we did put into backlog in the first quarter. This level of awards kept our backlog at a level near historical highs at $4.8 billion. And although it's down a bit from year end, this level is over 16% higher than the backlog in the first quarter of 2010.

We continue to expect about 1/2 of our backlog to be recognized over the remaining 3 quarters of 2011, which would make the 2011 a record year for revenues. In addition, we also have about $1.8 billion in our backlog that is expected to deliver revenues in 2012, which is another really good position for us to build upon. Clearly, as the year progresses, we will be booked -- we will be looking to add new work, marine work for 2011, and primarily EPCI projects, for the out years.

Now while we customarily talk about expected backlog roll off, I think you all can appreciate that schedules and plans sometimes change which affects the timing of revenue recognition. Often, it can be due to customer or other contractors working on the same project beyond just our own modifications. We have such an example that we can potentially foresee right now which, if it materializes, would cause revenues that are forecasted for 2011 to slip into 2012. Such a schedule change wouldn't materially alter the project's profitability, but it would affect the timing of it.

To give you a little detail, our customer is currently making adjustments to the previously agreed-upon field design, and we need them to complete their modifications and sign off on our installation plan before the work can take place in the second half of the year. While there would be the possibility for change orders if delays occur, there is the potential that about $100 million to $150 million of revenues could be pushed out from 2011 to 2012.

With a book-to-bill ratio of about 0.7 in a quarter, we're near record revenues -- with near-record revenues, we feel good about the new work we signed. Some of the new projects that join our portfolio in the first quarter include a multiyear subsea charter contract for Petrobras, an engineering FEED [Front End Engineering Design] award on the Browse project in conjunction with Fluor, a subsea contract with Chevron to fabricate and install umbilicals on the Jack/St. Malo project, as well as some smaller installation fabrication projects, plus scope increases. Of course, as a project-oriented company, we continue to push more for work.

In that regard, we're recently optimistic that the market will remain strong. At March 31, bids outstanding and change orders in process increased about 28% compared to year-end levels, growing to $2.2 billion. However, beyond bids, our list of target projects at quarter end that we see coming to market over the next 5 quarters is over $11 billion. So if you take our backlog, our bids, our change orders and the target list, this generates a revenue pipeline potential exceeding $18 billion. To be sure, competition remains tough in every market in which we operate, but there appear to be plenty of opportunities available. So we just need to win our fair share.

While like most everyone else, we talk about the size of our backlog. It's more important to win the right projects and the right characteristics of terms and conditions, schedules and profitability. And I can ensure you that McDermott will remain committed to our disciplines.

As I mentioned last quarter, we could certainly improve upon our historic 25% to 35% win rate if we chose to, but we believe our shareholders benefit from our longer-term disciplined approach. The quality of backlog is always more important than just the dollar size in my view.

I spoke last quarter about the underperforming Atlantic segment of our company. And while we have taken steps to improve our performance, our results this quarter haven't reflected those actions yet. We're continuing to make progress, we're winning work. And although we aren't expecting profits this year, over the next several quarters we do expect to see a marked improvement.

One item that we're monitoring at this time is the potential for flooding at our Morgan City fabrication facility, as the high waters from the Midwest work their way down the Mississippi River. We've been in discussions with the appropriate local authorities as well as our customers who have projects in New York. Based on our discussions thus far, it's expected that the waterline will crest around May 23. So it's still a few weeks away. We certainly have developed contingency plans in case we're affected, but we believe we'll be okay due to the nature of our facility and since we did not flood in 1973, which is the last time these same conditions occurred.

Obviously, however, our thoughts and sympathies are with all those individuals and businesses that have been and may be impacted along the river.

I'll turn the call over to Perry now to take you through the quarter's financial results. But to summarize, we're very pleased with the 2011 first quarter and, more importantly, the path that it sets us on for the full year. We have visibility for 2011, but we're still looking to add quality work, both to fill up capacity as well as to position us for the out years. As always, our major focus remains on the excellent execution of the projects that we do have in backlog.

With that, I'll turn the call over to Perry to go over the details of the financial results. Perry?

Perry Elders

Thanks, Steve, and good morning, everyone. Starting at the top, as Steve mentioned, total revenues for 2011 first quarter were nearly $900 million, up about 78% from a year ago and 67% compared to the 2010 fourth quarter. The big driver behind the increased top line was predominantly the higher levels of rain activities in the Asia-Pacific and Middle East segments, in particular, the vessels were working on the pipe lay and installation scope of large EPCI projects.

Our gross margin for the first quarter was 16.9%, down from the 21.9% we recorded in the 2010 fourth quarter and the 24.9% we delivered in the comparable quarter a year ago. The substantial decline is primarily due to lower project close-out income in the 2011 quarter as compared to the other 2 quarters when that type of income was much higher.

SG&A expense held steady for 2010 fourth quarter at $55.4 million, but it was up against the $51.1 million in the comparable quarter a year ago. We do continue to expect SG&A to run closer to $60 million per quarter for 2011. Consolidated operating income of over $100 million this quarter generated an operating margin of 11.2%, which is right in the middle of our guidance range. This level of income far exceeded the $59 million in the 2010 fourth quarter as well as the $73 million we delivered in the 2010 first quarter, a period that benefited from significant cost savings and change orders on certain Middle East projects.

Our results in the 2011 quarter were, again, essentially driven by the Middle East segment with a nice contribution from the Asia-Pacific market as well. As Steve mentioned, the Atlantic region generated a loss, which we'll continue to address.

Below operating income, the other expense, which is primarily interest income, interest expense and foreign currency expense was $5 million, an increase of $3.8 million compared to the first quarter of 2010 due to higher noncash foreign currency expense. A significant change this quarter related to our effective tax rate. During the 2011 first quarter, our tax rate was about 24% at the upper end of our 15% to 25% range we've discussed. This compares to about 11% in 2010 fourth quarter and 17% in the first quarter a year ago.

This quarter's tax rate is a result of increased income from higher tax jurisdictions in Asia-Pacific, such as Australia, combined with losses in the Atlantic region that don't receive a tax benefit. Based on our current backlog, I would expect for the remainder of the year that our effective tax rate will probably remain closer to this level than what we've enjoyed in the past as a result of a higher percentage of income being derived in the Asia-Pacific segment as well as due to legal restructuring of our Saudi Arabian operation. Nonetheless, we do consider our corporate domicile to continue to be a very valuable structure for our share -- for our investors.

Net income attributable to noncontrolling interests, primarily a minority interest partner in Indonesia and the North Ocean 102 entity, was $4 million, up from $2.4 million in the 2010 fourth quarter and down from $8 million in the comparable 2010 first quarter. So at the bottom line, the reported net income attributable to impairment from continuing operations was $68.8 million for the 2011 first quarter or $0.29 per diluted share, a substantial improvement compared to the 2010 first -- fourth quarter as well as 2010 first quarter.

Looking ahead, due to the soft award cycle of 2008 and 2009 that resulted from the -- during the financial crisis and the recent growth in our backlog from $3.6 billion level in the 2010 third quarter, our projects overall are in the earlier phases, or said another way, our average percentage completion is at the lower end. So similar to this quarter, we should benefit from a higher revenue, but there will be less opportunity for change orders, closeouts and harvesting contingencies since we won't have as many projects nearing completion in 2011. As such, we continue to believe that the operating margins in the 10% to 12% range is the level to expect. And as I mentioned earlier, the tax rate for 2011 should be up compared to the year ago.

Nonetheless, I think the first quarter 2011 got off to a good start, and we expect the full year should again be one of McDermott's better ones.

Turning to the balance sheet. Our financial position remains strong. Our cash, cash equivalents and investments ended the quarter at $741 million as expected, and it's down from $140 million from year end. However, looking broader than just cash, our working capital, which is current assets less current liabilities, increased around $420 million at year end to over $480 million at March 31. Total equity as a percentage of total assets grew to about 62% from 58% at year end 2010. In addition, we maintained ample room available under our credit facility, and funded debt was $65 million at March 31, 2011.

To speak briefly to our pension. Last quarter, we discussed the possibility of changing our pension accounting to a mark-to-market approach. However, after completing our analysis, we have decided to leave our accounting as is at this time. We determine the potential for increased volatility in the future year's fourth quarter more than offset any benefit. Our pension funds -- our pension remains well-funded and has been frozen with no new accruals or new entrants. We think we have got our pension, assets and obligations well under control.

Finally, turning to our upcoming investor relations activities, we have a number of items on the calendar. Tomorrow, we'll take part in the CLSA Energy Forum in New York. In early June, we'll participate in the Credit Suisse Energy and Construction Conference also in New York, and then later in the month, we'll participate in Johnson Rice's ENC 101 Conference in Chicago. In addition, we expect, as always, to host a number of office and field visits. With several options to choose from in the coming weeks, we hope to see many of you at one of these venues.

This concludes our prepared comments. But following the Q&A session, if you have additional questions regarding the quarter or the company, I encourage you to call Jay or Robby [Bellamy] in our Investor Relations department. And with that, operator, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Jamie Cook with Credit Suisse.

Jamie Cook - Crédit Suisse AG

A couple of questions. One, is there any way you can quantify in the quarter how much the Atlantic region impacted your results? And I understand we're not expecting for that to get much better this year, but any type of improvement, just so we can think about how that impacts the remaining 9 months? You mentioned you had less opportunities this year and in the quarter for project closeouts. Just a question. I understand that's impacting margins, but how do we think about as-sold margins, how much that's impacting 2011 relative to where we were at prior peak? And then last question, I understand bookings tend to be volatile, but as we look at the remaining 9 months on average, should we expect a book-to-bill over 1?

Stephen Johnson

Jamie, this is Steve. Why won't I kick it off, there's a lot in there. The first question dealt with the Atlantic region for us. Perry, why don't you kind of cite a couple of numbers here as we think about the region from an income standpoint, et cetera. And then, Jamie, I'd like to come right behind Perry and talk about what we're doing in the Atlantic region.

Perry Elders

Okay, just the numbers. The operating loss for Atlantic for the quarter was $17.6 million, again, in the quarter. And as I mentioned, it relates to the tax effect of that. You can take 35% of that, we're not getting that benefit in our tax rate. So that's one of the reasons, as I mentioned, that our tax rate is as high as it is. So those 2 are kind of the direct effects on this quarter. And Steve, do you want to comment going forward?

Stephen Johnson

Yes, I think the things to think about, as you think through the Atlantic region, we're in a position where we've got to do 2 things and we've got to do both of them well in order to, frankly, pull ourselves through this year. And as you cited and as you indicated, we're not going to be profitable this year, but we hope to be in the out quarters here into 2012. The first thing we need to do is to make sure our costs are right and we do that on 2 fronts. It's certainly the G&A and the people associated with the business, and the second is our marine fleet. On the first front, Jamie, we have done quite a lot. We have brought down the costs. We've done what I would call taking it all the way to the bone. We've got a few things that we can do to flex the organization, but the next step is to get the marine fleet working. And as you heard in my prepared comments, we've got some good news with the DB16 in the latter part of the year that we didn't expect. We've got to kind of sell our way out of this problem with the marine fleet, and we're beginning to get some traction with DB16. The DB50 in the second quarter will give us a little help corporately because she'll be -- is and will be working in the second quarter, but then she goes into dry dock. So that's one thing, cost management. And then the second is, frankly, to sell our way out of a problem in total. As you heard us talk about, 2 of the significant -- of the several significant awards in the quarter are for the Atlantic region. The first of which is for the PLSV charter for our Agile for Petrobras, a very significant win for a 5-year term; and then the second is to do some umbilicals for Jack/St. Malo for Chevron. So we're beginning to get some traction. We're talking to customers about moving projects for the pipeline. While not as robust as we would like it to be, we know it will be in the future. So it's about hunkering down and moving forward in the future. You then had a question around project closeouts, Jamie?

Jamie Cook - Crédit Suisse AG

Yes, I mean, it doesn't sound like project closeout opportunities will be substantial this year. But I'm also wondering how much of the margin degradation is sort of driven by lower as-sold margins?

Perry Elders

Yes, so you're right. It's a little of both. If you look back in the first 3 quarters of 2010, we really benefited from completion of work on Middle East projects, principally Qatar, and those drove margins up. As we look at this quarter for Q1 of '11, and as we look at the rest of the year, we just don't see that kind of a benefit coming forward. And we saw that and we've been giving comments to indicate that, and that's why we've been firm on the 10% to 12%. As it relates to as-sold margins, those are interesting. Obviously, we work hard in the bid process to get the work at a profitable level, but we also look at what the opportunity for change is on the job or scope increase. And as we look at the backlog that we expect to burn for the remaining 3 quarters of this year, we just don't see as much opportunity to improve that as we have historically. Now as those projects get more mature and nearer completion, particularly in 2012, that's when we might be able to pick up more of those kind of closed out and kind of near project-end change orders that we experienced. So that's kind of, for the remainder of this year, kind of why we're real strong on the 10% to 12% guidance.

Jamie Cook - Crédit Suisse AG

And then just last, book-to-bill on average for the remaining 9 months, should expect over 1?

Stephen Johnson

Well, it's --

Perry Elders

It's very hard to predict.

Stephen Johnson

It's our hope. And looking at the pipeline of projects, looking at the timing, I can't control the timing. But I can tell you that we're being very aggressive with bidding these projects in terms of telling our story and explaining our capabilities. We are not doing things which would disappoint in the out quarters in terms of how we would price the work, Jamie. So that's all I can tell you at this time. But it's certainly our hope.

Operator

Your next question comes from Andy Kaplowitz with Barclays Capital.

Andy Kaplowitz - Barclays Capital

Perry, I'm going to start with you. I know you're going to give me the answer to this question. Anyway, I'm going to ask you about the 10% to 12% margin guidance. And the way I'm going to ask it to you is that your Atlantic division has been weak for several years now, yet you've had this guidance with the Atlantic division losing tons of money. And so as we go forward over the next year or 2, if you -- I think Steve would say, "We're relatively confident we can fix this division, make it more profitable." Why would you still have the same margin guidance as we go a year or 2 down the pipeline?

Perry Elders

Yes, good question. And as you look at the blend of our projects over the last year or so, as you know, most of it has come from the Middle East with a nice contribution from Asia-Pacific as well. Some of those projects in the Middle East are coming to their conclusion now. And so we're looking at what's replacing them in our backlog, and we'll be burning off over the next year or so. That blended with what we expect to be and are working hard to achieve in terms of reduced losses in Atlantic for the rest of the year, but it's still losses. So it's that blend of the 2. So yes, hopefully, we can reduce the losses in Atlantic and eliminate them in the longer term, but that's blended with the kind of a margin that may not be as high in the other regions going forward.

Stephen Johnson

Could I add to that, Andy. Again, I'm going to be beating the same drum here. But I would tell you that as we fix Atlantic, to just to use that term, and as we begin to grow the company into the growth markets and just put a label on that, that is more deeper water, less conventional or shallow water, we've got to earn our right into those projects. And I wouldn't signal to you or to our competition that we're going to do anything drastic. But we've got to find a way to get into those programs in a way where we may not be as credentialed as some of the competition. And in order to do that, you have to do some things commercially. So there's going to be period of time here that, in addition to what Perry said in terms of roll off of the backlog, whereas as we grow this company into deeper water, which includes the Atlantic basin primarily, we're going to have to do some strategic types of -- make some strategic decisions on how to enter that in a more robust way.

Andy Kaplowitz - Barclays Capital

Steve, that's very fair. If we think big picture though about the Atlantic, you've doubled the backlog in the sequential quarter there, and as we look forward, if you put Morgan City and Altamira together, I think that you're just short of the size of Jebel Ali. And, obviously, you have significant revenue coming out of the region. I know they're marine assets that sort of move the revenue needle, too. But how do we think about the potential sizing of the Atlantic business or how do you think about it as you go over the next year or 2? And can you have margins when things are doing better in that, in the Atlantic, can you margin like the rest of the company in that business?

Stephen Johnson

Yes. The answer is, we hope so. And you said, maybe in the next couple of years, I would steer you longer than that. As we think about the emergence of the programs in the U.S. Gulf of Mexico, and as we look about -- look at even Brazil, timing may be a bit longer than that. So I would say we're talking about 3 to 4 years before this thing really starts humming. We've got to win our fair share of those projects. And as I indicated, we've got to do the right things on the front end in order to win those projects. Now having said that, we're still in the credentialing phases with Altamira. It is going to be, I think, a fabulous facility. But there are ton of issues. There are issues associated with building it out. And it is not ready, frankly, for the types of programs that we hope to build in it in the next 3 to 5 years.

Andy Kaplowitz - Barclays Capital

I understand. Just a couple of quick clarifications. In the Q, you talked about a little more than $3.4 billion of burn if you include the next 1Q plus the next 3 quarters. Does that include the $100 million of the project that you said could get deferred into '12?

Stephen Johnson

Yes, it does.

Andy Kaplowitz - Barclays Capital

And then equity income was positive for the first time that I can remember. What's in equity income?

Perry Elders

It's our FloaTEC...

Andy Kaplowitz - Barclays Capital

Papa Terra?

Perry Elders

No. Well, Papa Terra is in there, but I think, as we talked before, our FloaTEC JV has some G&A cost, and normally that joint venture sells off a small loss to us. We had this quarter a pickup because of an unrelated to Papa Terra technology fee that we gained from another customer. And so it came out the same fee, but it's not related to Papa Terra. And it's wasn't something that we expect to kind of have on a recurring basis.

Andy Kaplowitz - Barclays Capital

So we'll go back to sort of the normal pattern in that business?

Perry Elders

Yes.

Andy Kaplowitz - Barclays Capital

In the equity income.

Operator

Your next question comes from the line of Martin Malloy with Johnson Rice.

Martin Malloy - Johnson Rice & Company, L.L.C.

Could you talk about the outlook for the vessel market in terms of supply and demand when you look out to 2012 and '13 versus what you are expecting here for '11?

Stephen Johnson

Let me start, Marty, and then maybe others would have a comment. My view and my forecast and my hope is that it continues to improve. You've seen some, at least in the first quarter, with a 60% utilization of our fleet, an improvement over 2010. I think that is an indicator for the rest of the year, with the caveat that we've got one of our major work barges going into dry dock, the DB50. I hope we can stay at that level or better throughout the year. In 2012, my belief is that with our EPIC model, we should have the pull-through with the marine fleet that will hopefully improve upon 2011. I can't predict that. If I look at the global construction, marine market and we've done a recent exercise looking at all the vessels that are on the water, I think we're strongly positioned with our capability in conventional water. We're moving into a stronger position with deeper water with the North Ocean 102 working today, and the North Ocean 105 coming out about third quarter next year. So I would have to say, we're delighted with the results with the North Ocean 102. She's been pretty busy ever since she hit the water, and we hope that will be the case with the 105.

Martin Malloy - Johnson Rice & Company, L.L.C.

Okay. And in the Deepwater Gulf of Mexico, could you talk about the potential timing for awards for some of the larger top-side projects that are out there in the news?

Stephen Johnson

Yes. I would say this, we've got a couple of them that are relative, short term that we're pursuing today. And those projects we hope to be awarded in the next 3 quarters, hopefully both of them by the end of the year. We're strongly pursuing those programs. Beyond that, there seems to be an acceleration of the programs. I can't sit here and name all of them, but I think there's an acceleration in 2012. Our focus, frankly, Marty, is to win these 2 that we're pursuing today to give ourselves some self-help with our Atlantic region and then to position, following the refurbishment of the DB50 and get her back into the Atlantic region for more Brazil work with Petrobras and more work with the super majors in the U.S. Gulf of Mexico and with PEMEX. You saw an award with PEMEX. It's a pipeline project this quarter. We hope to look at more of those, and there seems to be a better opportunity for us to win those programs this year.

Operator

Your next question comes from the line of Steven Fisher with UBS.

Steven Fisher - UBS Investment Bank

Just following up on the $3.4 billion of revenues this year, up from $3.1 billion that you expected last quarter. How much of that is better market versus just a change order from last quarter driving a catch-up?

Perry Elders

I think it's more that we know we have clear visibility of our backlog now. So I think it's more of the latter.

Steven Fisher - UBS Investment Bank

Okay. And then, I guess, a broader question. How do you think about the pace of your various markets today versus being at maximum speed. I know kind of where we stand on the Atlantic, but where are we at full speed? Where are we at half speed? Where is somewhere in between? And if we're not at full speed, what has to happen to get them up to full speed? And what I'm really trying to get at here is, is there a market base potential to get a prospect list that's much better than the $11 billion that you have today? Or is it just going to be reliant upon moving into things like deeper water and things that you can do sort of at the company-specific level?

Stephen Johnson

It's an interesting way you pose the question in terms of speed. I guess I'd come at it this way. It's always about demand and supply. As I think about the various customers in Asia-Pacific and the customers in the Middle East and the customers in our Atlantic region, I kind of think about them in that order, as I'm sitting at the end of the first quarter here. Significant opportunity in the Asia-Pacific region. It doesn't seem to signal any slowdown and, as I've said in prior quarters, a significant opportunity in both Southeast Asia and, in particular, in Australia. And I would say, we're very well-matched to that market with our fabrication and our marine capability. And we're matched to that market with our emerging global fleet that can move around the globe to meet these opportunities. I don't know that there's anything that we as a service supplier to that market can do to accelerate that. I think that's a pretty high speed today, if I think about Asia-Pacific, Steven. As I think about the Middle East, there's a shift going on in our customer base. It's a nice shift that is adding the work with ADMA OPCO, as an example, to our good work that we do for Saudi Aramco. The timing of those are always in the hands of the customer and always in the hands of the competitive forces that exist there. There's some very nice light, large projects that are out there, and I would color those more into in the late 2011 to 2012 time frame. If I had to give you one phrase about both of those markets, I'm pleased with them. And if they accelerate more in terms of the bringing forward of projects, it will only serve McDermott well. The Atlantic region, as I indicated earlier and I think you indicated, you understood pretty well, you really got to think 2 years and beyond, maybe 3 to 4 years as you think about a major acceleration. Having said that, we're going to turn this thing around for McDermott in the next several quarters, which does not mean 2011, it means into 2012. And with these new awards and with new management in the Atlantic region, I feel pretty good about our ability to do that and to give the company position for deeper water projects with Altamira and with our burgeoning relationship with Petrobras in Brazil. And I hope that wasn't long of an answer.

Steven Fisher - UBS Investment Bank

That was very good. If I could just -- maybe one other question, maybe what are some of the scenarios that could play out in the event that you do see some flooding at Morgan City?

Stephen Johnson

Thanks for the question and the reason I'm thanking you is, is because there's some people kind of in harm's way here. Here's what I would tell you about that is there's an event that has yet to be decided upon, and it has to do with the opening of the spillway at Morganza. And it is highly likely, if not a foregone conclusion, that, that will occur. But as we started this call, Steven, to my knowledge that decision had that been made by the various authorities, including the corps of engineers in consultation with the Governor. But let's say when that occurs, we have already taken steps to understand the impact of what it could mean to our yard in terms of people, in terms of our equipment and in terms of our customers' facilities. What I would have everyone on the call know is that as to risk of loss, we've taken all the steps that we need to safeguard our plant and the equipment, including the facilities of our customers. I would have you know that for the most part, we don't believe that our customers' work in progress is at significant risk really due to the nature of the facilities, meaning the configuration and the stage of completion of those constructions, as well as the anticipated level of flooding. And furthermore, our contracts with our customers, our various contracts limit in various ways our risk of loss for such type of events. Having said that, look, we've been through this before, and the Morgan City yard has withstood many hurricanes, many floods, many floodgates opening without any significant event at all, and there is some interesting things that we can do as McDermott to help the local community. One of the things that we're planning to do now, if we're given the go-ahead, is to move one of our barges, not a lay barge but a cargo barge, put in place at a particular bayou with some sheet pile that will divert water not only away from our yard, but away from Morgan City itself. And we hope we have the opportunity to help them that way. So the bottom line is, we're concerned, but it's more interesting than it is concerning having been through this before, and we believe we'll come through this fairly well.

Operator

Your next question comes from the line of Will Gabrielski with Gleacher.

Will Gabrielski - Gleacher & Company, Inc.

A couple of questions. On the Aramco long-term agreement, Saipem won a big program last quarter. And I'm just wondering if you have an expectation about their new drilling program and the long-term agreement and potentially extending that, what might your opportunities might look like there?

Stephen Johnson

Yes, good question, and I don't have an answer that would give you enough specifics, I think, to get where you want to go. The announcement of their accelerated drilling program has to portend well for us over the long term, of course, as you think about the offshore program. More drilling activity over the long-term means good things for McDermott. The loss of the Wasit program, I will say once again that while we are always disappointed with losses, especially ones of those size, we simply would not want the project any differently than had we did it. The winner of that program, we wish them great luck. And if we can help them, we certainly will, as they go through that program. My long-term view of Saudi Aramco, well, it will be, for my career at McDermott, always an excellent customer. There are opportunities there for the short term with the LTA. There are more opportunities coming forward in the next several quarters. And you buckle that up with what's going on with other new customers there, including ADMA OPCO, we feel very good about that region.

Will Gabrielski - Gleacher & Company, Inc.

Okay, fair enough. The utilization increase in Q1. I know there's a seasonal factor to your business, but obviously it was up from the average of 2010. How much seasonality versus how much just increase to workflow was it in Q1? And then looking into Q2 and Q3, how much of a step-up can we see in utilization based on what you've already booked?

Perry Elders

It wasn't really a seasonality thing as much as it was just additional work and in compared -- comparative periods, we're particularly low. As we look forward, I think as Steve mentioned, we've got the DB50 in Singapore now, and we think that we're optimistic about what it can do in the second quarter, although we do expect it to go and be in dry dock for most of Q3 and Q4. So that will -- kind of a hardwired reduction in the overall utilization. And, certainly, there won't be any on that vessel. And then that's offset to some extent by a few days that we picked up on the DB16, which are very meaningful, although they're not a long -- it's not a long marine campaign in here on the Gulf of Mexico. So we wouldn't expect net-net the meter to move a lot in marine utilization for the rest of the year, although we kind of got some hardwire baked in reductions offset by some improvements.

Will Gabrielski - Gleacher & Company, Inc.

Okay. When McDermott booked all the change orders -- scope changes, excuse me, in Q4, obviously, those were at pretty good margins. When did that start to roll off? And would that be a potential driver of higher margins through the rest of the year versus Q1?

Perry Elders

Question one, we did book it. We did see some recognition of that in Q1. And I think we also noted earlier that, that was in part due to the downturn in Q4 that we recognized. So we caught up some of that in Q1. Now those change orders are baked in to our overall backlog and the comments we made earlier about the margins and the blend of the margins around the world. So they're already baked into our guidance. So don't expect them to reduce the margins, if you will, kind of above our guidance range.

Will Gabrielski - Gleacher & Company, Inc.

Okay, one last one. LNG in Asia-Pac, Australia, specifically. Historically, you guys have done some work for Woodside, some big work for Woodside, I guess. And I was just wondering, you have the Gorgon modules, but there's a lot of offshore work going on there. You have the Browse FEED. What is that in the bid opportunity number, first of all? Is there any LNG work or in the bid outstanding number? And then going through the rest of the year, what is the competitive environment like? Is it getting better from the fabrication standpoint with all these projects lined up or not?

Stephen Johnson

Yes. Short answer to the question is yes. There are LNG offshore opportunities in our target list. There are some in the bids outstanding as well. My view is that we are very well-positioned with our Batam fab yard for the fabrication side. And as these things are often EPIC programs, we're well-positioned as anybody. Competitive environment, I think across the whole Asia-Pacific region it continues to intensify. And the reason it intensifies is because we've got some North Asian bidders that are still out there and bidding both in the Middle East and Asia-Pacific. But having said that, I think the supply-demand crossover is coming, and I think it's coming with Australia, Southeast Asia and the blend of all of those together. And when that crosses over, I think all of us that are in this business should enjoy some upside, just to put broadly, Will.

Operator

Your next question today comes from the line of Graham Mattison with Lazard Capital Markets.

Graham Mattison - Lazard Capital Markets LLC

Just a question on your cash position, which is quite substantial still. Do you see, obviously you're looking at additional vessels out there, do you see any opportunities to pick some up? And then on the longer-term basis, are you happy with your deepwater exposure with the 102 and 105? Or are you still considering some additional deepwater assets?

Stephen Johnson

I'll take the second one first, because it's real easy. No, we're not happy with our deepwater exposure, but we've got a heck of a good start with the 102 and soon-to-be 105. And these are world-class vessels not only with their capacity, but with their transit speed and, with at least in the case of the 102, the performance of that vessel so far. Back to your first question, are we looking at picking others up? We are constantly looking at what we can do to either buy or build. And frankly, we're accelerating that thinking because we have a much clearer view of the deepwater market than we did maybe even 6 months or a year ago, and it is our intention to be a significant player in that market. Recently, we did what I would call a mini reorganization inside the company to get some focus on those types of things, particularly with the marine fleet but also on the fab side, Graham, we created a venture's organization within the group underneath our CFO to help us get at that whole notion from a strategic standpoint, from a financing standpoint, from a dealmaking standpoint and in order to get the organization geared to move us in the right direction. Now you came at this originally from the cash on the balance sheet question. I would say this, as the CEO of the company, knowing the type of business we're in, with the type of contracts that we have, which are generally fixed price and the risks attendant to that and the lumpy nature of the business, we still plan to be relatively conservative with our balance sheet. But with that as a backdrop, we think that we're equipped to go forward with the right kinds of moves into the deepwater market. And you hit it right. If we're going to make moves, we're going to make moves in fab and marine that will lead us more into deepwater.

Operator

Your next question comes from the line of with Tahira Afzal with KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc.

A couple of questions. Number one, if I recall correctly, and this was a while back, when you were still part of McDermott with B&W, there was a bit of scrubber work being run to the Morgan City fab yard. I know you guys aren't a one company, but if that was the case, would that be a possibility still if environmental work picks up? And number two, could you talk -- I know you've talked a lot about Brazil and Petrobras and PEMEX. But I would like to hear any commentary you have on West Africa, your initiatives, maybe this seem, obviously, from your commentary there, it's not the priority right now, but what your outlook is over there? And if you did you see work in West Africa, would that be run from Morgan City and Altamira as well?

Stephen Johnson

Okay, I think the first one's pretty easy to dispense with, the environmental work in Morgan City. You are right to recall that we did some of that work in Morgan City when we were buckled up, if you will, with B&W. Look, the way I'd say it is the Morgan City yard has 2 very interesting capabilities. One is they can do our standard core business, and they can do a lot of other things, secondarily, in terms of high-spec welding capability. And if we can make a reasonable return, we will do that work in Morgan City. Having said that, I can't tell you that there's anything on the horizon there. Secondarily, your question about West Africa, in general, I think it was the third quarter or fourth quarter of last year, we were awarded a program with Noble, the Noble Alen project. And that work is ongoing now in Morgan City, and it was, what I would consider, a strategic win for us because, a, it's West Africa; and b, it's with Noble. And we are very happy to have that in our backlog and I can report that, that project is going well. The second thing I'll tell you is that as we bring the DB50 out of drydock in Asia, she will be heading to Petrobras for the Papa Terra lift. And we're already in discussions with customers about utilizing her on the way in West Africa to do some what we would call driveby work. Lastly to your question about West Africa, all of the West Africa work falls within what we brand or what we call our Atlantic region. So whether it's U.S. Gulf of Mexico or PEMEX work in Mexico or Brazil or West Africa, it all falls within that Atlantic region. So that's where all the accounting would fall.

Martin Malloy - Johnson Rice & Company, L.L.C.

Great, that was actually exceptional. As a follow-up, I just wanted to check on the competitive environment out there and you've touched a bit on that earlier on. If I look at the recent -- most recent commentary coming from some of the Korean bids out there, and I know those have been aggressive in the past around the E&C chain, the shipbuilding orders are up, for example, for Hyundai Heavy by 27%, 28%. So as you go across and try to gauge to the extent you can, where your competition stands, do you feel the shipyards have started to fill up. But as you've done into maybe the end of this year into next year, that perhaps even your market share could benefit on the fabrication side?

Stephen Johnson

I think the short answer is we hope so. Don't know that I can predict the behaviors of others. I do agree with you that there seems to be some uptick in the shipyards in North Asia. So I would just say to you that as supply and demand moves the direction that we think it is, both on the shipbuilding side and in our core business, we're going to be okay over the long term.

Operator

Your next question comes from the line of Jeff Spittel with Madison Williams.

Jeffrey Spittel - Madison Williams and Company LLC

I guess just following up on the dead horse question with regard to the competitive environment and pricing. Maybe I'll ask in another way. I think last quarter we talked a little bit about where you are in terms of fabrication capacity utilization. Do you get a sense that the North Asian competitors, and I guess whoever is engaging in a little bit more nonsensical pricing, is it a similar level of capacity utilization? And if so, does that portend maybe this doesn't persist much longer than a couple of quarters?

Stephen Johnson

It's hard to gauge. As a project company, Jeff, we just -- we look at this thing as macro as we can, as you and the prior caller have asked about. But I will tell you this. What we really look at it is in terms of every project and every prospect and every outing. In Qatar last year we lost one to a North Asian company that took a project below what we think is our cash cost. On Wasit bid in the first quarter of this year, interestingly enough, the North Asians were involved and they didn't win. They didn't win. And we gave a very fair offering there. So that might be an indication that there's a change. But one in a row doesn't create a pattern. I'd say we're cautious there, Jeff.

Jeffrey Spittel - Madison Williams and Company LLC

Okay, all right. That's fair. And just last one for me on the material cost escalation front. Obviously, steel prices are off the trough. I guess in certain areas, labor might be tightening up as well. Could you just give us a sense to how that fits into the guidance and what do you expect to see some more cost escalation and how do you address that?

Perry Elders

Yes, we do watch that and build that into kind of obviously our bids and we've locked that in as early as we can once we bit. So as it relates to the backlog project, I think we have a pretty good handle on it. As it relates to the stuff that we're bidding and on our target list, I think we can adequately address it through the contract or through initial awards immediately post contracts. So that's on the material side. On the labor side, we recently as part of that change order late last quarter locked things in, in Australia which was a big location where that could have affected us. So we've got that known. But generally speaking, we're able to pass any major changes like that through, either by the way we've structured the contract or as we come to new contracts.

Operator

Your next question comes from the line of John Rogers with D.A. Davidson.

John Rogers - D.A. Davidson & Co.

A couple of things. First of all, just following up on the hedging question, the materials and labor. Are you seeing prices increase there? I realize you've got it hedged, but...

Stephen Johnson

Yes, I'll kick it off, John. The major commodity that McDermott buys these days is steel, but of course, we buy pipe wire, cable, et cetera. We're beginning to see some price move up on the steel side. So we're managing that accordingly. We're very close to the mills. Perry, do you want to add anything?

Perry Elders

No, I think that's right.

John Rogers - D.A. Davidson & Co.

And then secondly, you talked about the various segments, but could you give us a sense or breakout your revenue between fabrication work and marine work and, I don't know, other categories both in terms of revenue, backlog and kind of prospects?

Perry Elders

Yes. Obviously, each project is different. But on a full-scope EPIC project, we might see as much as half of it as procurement, 40%, 60%, depending on the job. We could have the engineering on the front end, again, just depending on whether we're doing the FEED or not, but 10%, 15%, maybe 20%. And in the marine campaign on the tail end could be significant as it is in the case of Papa Terra. So the way we look at EPIC projects is, obviously, across the whole thing. So we don't look at revenues by sector, and we don't look at profitability by sector. We look at the entire arrangement. Now that's on an EPIC project. But we periodically will have marine-only jobs or fab-only jobs. And so the entire blend for the company at a given period depends on whether it's principally EPIC stuff running through and, if so, what phase the project is. So for example, Papa Terra where the marine campaign is, principally, a 2012 campaign. So on the contract, we're really in the fab stage only the right now.

John Roueche

John, I would also direct you to our most recently filed 10-K, and in the back of that, we break down our revenue by 4 or 5 components, offshore operations which is predominantly marine, fabrication, procurement, engineering and project services. And so, at least for 2010, that would give you a pretty breakdown of the components of our revenue.

John Rogers - D.A. Davidson & Co.

Yes, Jay, I've seen that. And I guess what I'm trying to get to it is I don't need exact numbers, but directionally, where we're going from sort of what that split is now to what you think it's going to be, I guess, near-term and then looking at that prospect list?

Stephen Johnson

John, this is Steve. I'd say it this way. Our business model is, of course, as advertised to do as much EPIC work as possible, and as the competitive environment says we should because there are a few of us. That's data point number one. Data point number two is the market dictates. It's the buying behaviors of customers, and it's also the nature of the projects. That might steer you in some regions of the world away from EPIC. And I would cite the U.S. Gulf of Mexico. So you would do it with more of a piecemeal fashion, marine-only or fab-only, et cetera. Third data point I would give you is as you as you move into deeper water and you need the types of marine vessels that we have today with the North Ocean 102 and the 105 and other vessels, you can find in that part of the world probably both EPIC and a blend of other projects. So it's hard to say where it's going long term, but if you think of McDermott moving over the next several years, many years, into more work in Brazil, more work in the U.S. Gulf of Mexico, blended into what we do today in conventional water in the Middle East and midwater and the conventional water in Asia-Pacific, you could see us continue with the EPIC model, trying to push the customers to buy that way. But at the same time, with the unique characteristics of our marine fleet, doing marine-only and trying to capitalize on that as well as doing fab only.

John Rogers - D.A. Davidson & Co.

Okay, because it just seems to me, the more that you can do, more on the EPIC level, I would assume if the marine level, too, offers better returns than just fabrication work, which is. . .

John Roueche

It can.

Operator

Your next question comes from the line of Stephen Gengaro with Jefferies.

Stephen Gengaro - Jefferies & Company, Inc.

I just wanted to follow up on one thing that you said about the bidding process. When you sort of thinking about the deepwater/subsea markets and kind of your competitive position there, how are you thinking about the risks of that environment being, a, kind of new to you; and, b, maybe more difficult at times with the need to maybe be competitive from a bidding process to sort of get your foot in the door?

Stephen Johnson

That's an excellent question and I would come at you with this, Stephen. The first is, I don't consider this company new to the phase of deepwater. And that's just because what I know we've down over the past many years of the existence of this company. We've done quite a bit of surfboard. We've done umbilicals and flow lines in all of those connections. We've done that throughout our history. As things move into deeper water, all of us, and of the competitors, are moving into a space that maybe most of us haven't been in. So with that as a backdrop, and your question was around bidding, we, I think, have a very good insight as to what the risks and opportunities are in any one of these bids. The key is identifying and understanding the risk and the response to that risk to put the appropriate cost in there for the risk and the contingencies associated with an event or the contingencies associated with unforeseen scope change or whatever it might be. I think we're if not best-in-class, where right up there with anybody, including in deepwater. Having said that, we do need to understand that once we identify and cover that risk, we can be aggressive in different ways in those bids. We can be aggressive in how we look at a changed condition. We can be aggressive in terms of how we form and frame the contract terms and conditions, not signaling that we'll take on more risks, signaling that we would rather have the conversation, and then ultimately set the contract. So without disclosing a lot of the means and methods around how we would bid those things, the bottom line is, I think we're very practiced in how we bid these things from a risk identification and risk mitigation standpoint.

Stephen Gengaro - Jefferies & Company, Inc.

That's good color. And then just one follow-up and I know you talked about this already. But why look at the Atlantic region, right? You lost like $17.5 million this quarter. You lost like $90 million last year, full year, in that region. How should we think, I mean without getting too granular, but how should we think about that progression of maybe narrower losses to breakeven over the next several quarters. Is this something you'll be -- that can be breakeven by the end of the year in the fourth quarter? Or is it longer than that? Any sense for how we should sort of think about that, knowing it's sort of baked into your margin guidance.

Stephen Johnson

I would say a very nice try to try pin me down and I just can't be right now, Stephen. The color I'd give us is that I would not expect profitability at all in 2011. I want to be clear about that. But I would say that sometime in 2012, I hope we turn the corner and hopefully that winds up being to at or near profitability in 2012. Having said that, this first quarter, I hope and underscore hope, I hope this first quarter is the bottom, if you will, in terms of the largest loss. But I cannot sit here and tell you that it's exactly the case. But I believe that it should continue to improve for the rest of the year. And into 2012 at some point, we hope to get it turned around.

Operator

Your next question comes from the line of Rob Norfleet with BB&T Capital Markets.

Robert Norfleet - BB&T Capital Markets

Most of my questions have been answered, but just one I wanted to ask. Since you guys announced obviously the win with Papa Terra, we haven't heard of a lot of activity as it relates to the FloaTEC fleet adventure and really what we're seeing in the FPSO market. Can you kind of characterize the progress being made within FloaTEC and the opportunities you see in that market, as well is really the ability to take some of the smaller work you're doing and convert into larger EPC projects?

John Roueche

Yes, I think the first thing, Rob, I would say to you is from the time of the creation of the FloaTEC joint venture to the award of the Papa Terra project was many quarters. It was several years, I think, is the way to categorize that. And it has only been since the first quarter 2010 since we were awarded that project. It is both what FloaTEC has to offer, as well as what the market is flashing up to us. And I would say to you that there are opportunities out there for FloaTEC that will begin to accelerate over the next 2 to 4 years. But I would say also to you that we've got to be very selective about what we pursue. And I believe that our technology that's embedded in FloaTEC for TLPs and floating solutions is second to none. But having said that, we need to pursue those projects with a great deal of selectivity and grow that business. So I know that's kind of a general answer, but my view is that it's a very good joint venture and a joint company. And over the long term, we'll look back on this with Petrobras, Papa Terra as being really the first major among many over the next several years.

Robert Norfleet - BB&T Capital Markets

Okay, great. My last question was just on margins for the quarter. Mid-East margins were around 20%. It seems a little higher than expected. And Asia-Pacific came in at 8%, a little lower than expected. How should we look regionally at margins over the remainder of the year? Should they kind of remain in those ranges or should we see the Asia-Pacific margins kind of normalize back to more traditional levels?

Perry Elders

I'd say this the neighborhood. We don't calculate margins at that kind of the division level, but kind of we didn't see anything -- there were no biggies in the quarter either way in either region. So kind of order magnitude in this neighborhood.

Robert Norfleet - BB&T Capital Markets

Okay, great. Thanks for your time.

Stephen Johnson

Certainly it could be volatile quarter-to-quarter, year-to-year.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of today's event. I'm going to turn the call back over to Jay Roueche for closing remarks.

John Roueche

And thank you all again for your participation and interest today. I want to remind you that the call included some forward-looking statements, and I encourage you to see our SEC filings and press release for more information on these. If you have any follow-up questions or need any clarification, please give us a call and we look forward to seeing many of you over the coming months. And, Regina, this concludes our call.

Operator

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation, and you may now disconnect. Have a great day.

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