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Chicago Bridge & Iron Co. (NYSE:CBI)

F2Q12 Earnings Call

July 21, 2011 17:00 p.m. ET

Executives

Philip K. Asherman - President and CEO

Lasse Petterson - COO

Daniel M. McCarthy - President of Lummus Technology

Ronald A. Ballschmiede - CFO

Analysts

Will Gabrielski – Gleacher & Company

Joe Ritchie -Goldman Sachs

Scott Levine – JP Morgan

Alan Fleming - Barclays Capital

Jamie Cook – Credit Suisse

Rob Norfleet - BB&T Capital Markets

John Rogers - D.A. Davidson

Martin Malloy – Johnson Rice

Chase Jacobson – William Blair

Scott Shireen

Steven Fisher – UBS

Matt Wilson – Lazard Capital Markets

Operator

Before beginning today’s call, the company would like to caution you regarding forward-looking statements. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding the company’s future plans and expected performance are forward-looking statements that are based on assumptions the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized in the company’s press release and the SEC filings. While forward-looking statements represent management’s best current judgment as to what may occur in the future, the actual outcome or results may differ materially from what is expressed or implied in any such statements.

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

Philip Asherman

Good afternoon and thank you for joining our call to review the Company’s performance for the second quarter. With me today are Lasse Petterson, CB&I’s Chief Operating Officer; Dan McCarthy, President of Lummus Technology and Ron Ballschmiede, CB&I’s Chief Financial Officer who will report our financial results for the quarter. Following our remarks, we will open the call for your questions.

But first, let me just briefly say that we’re very pleased with the Company’s performance in the second quarter and with the new awards we announced, its not a best start to Q3. We’ve backlog now over the $10 billion mark. The new awards covered with continuing great performance by our current backlog in each sector, certainly support our confidence in our business model and our ability to continue to drive solid (rains).

Therefore, we are ranging our guidance range for new awards to $6.8 billion to $7.2 billion ranging our earnings per share guidance to the range of $2.35 to $2.45 and maintaining our current outlook on revenue to be in the range of $4.3 billion $4.7 billion for the year.

Now, I’m going to pass here next Lasse and Dan to provide the color around the markets and operations for CB&I Lummus, Steel Plate Structures and Lummus Technology followed by Ron, who will highlight the financial results. So, Lasse I must begin with you.

Lasse Petterson

Okay, good afternoon. I will beginning my comments with new awards for the year and then give a brief update on our main ongoing projects. A second quarter awards total $1.2 billion which include a $300 million gas processing plant in North Eastern US. The plant process natural gas from new shale gas production.

CB&I is providing the process technology for the plant, we’re executing the EPC process work and we’re delivering the plant storage vessels. This award demonstrates the advantage we can deliver to our clients by combining capabilities across our three business sectors. We see more opportunities in this market for similar projects as shale gas production ramps up over the next few years.

Other second quarter awards include a $150 million detailed engineering contract for the top size facilities for an offshore field development in the UK sector of the North Sea for Nexen Petroleum. We also announced storage tanks projects in the Canadian oil sands and in the Bahamas during the second quarter.

Last week we signed a $2.3 billion contract with Chevron for the mechanical, electrical and instrumentation work on the Gorgon LNG project in Australia. As you are aware, we’re already working on the Barrow Island sites as the EPC contractor for the projects to LNG tanks.

The Gorgon project has three LNG trains each designed to produce 5 million tons of LNG per year. The Gorgon (NYSE:MBI) contracts scope of work is to receive, install, hook up and complete the process modules for the Gorgon LNG trains on Barrow Island. The 270,000 tons of process modules are being fabricated at various yards in the region.

Construction of LNG trains has been CB&I’s core business for many years throughout the world and particularly in Australia where we’re currently engaged on the Pluto project and where we have previously completed Woodside trains IV and V.

Our product management personnel in Perth will start immediately to plan and prepare for the execution of the project with the main volume of construction work to be performed between 2012 and 2014.

The 400 process modules will be delivered to the Island starting in 2012. At peak, who will hire some 2,000 people engaged on the project, the majority of the project staff and crafts will come from our current Australia organization with some additional resource coming from (inaudible) of experienced LNG project personnel.

Just a few more facts about the award. We’ve formed a joint venture with Kentz and with CB&I as the leader with a 65% share. This is reimbursable contract with the incentives focused on safety, quality, cost and schedule.

This is a great win for CB&I, we’ve been working in Australia for more than 75 years and this award position us well to continue to be Australia’s leading energy contractor and major participant on future project in Australia’s promising LNG resource developments.

Finally, on new awards, today we announced a $500 million EPC contract for 260,000 cubic meter tanks on another LNG project in Asia Pacific region and a $60 million tank project in Saudi Arabia for Ma’aden Bauxite and Alumina Company. These three contracts will be in the third quarter awards.

So again, it was a good second quarter and a great month. We’ve been saying that we see our markets building momentum and the awards we have received year-to-date are certainly proving that to be the case.

Now, let me provide an update on our major project currently underway. We have two LNG projects on a development for Russia where the FEED engineering work for the Shtokman and Yamal project is ongoing in our London office. Through our joint venture which are on site, we are participating in the field work on the Barrow’s LNG development for Western Australia. The field work is on schedule for completion in the first half for 2012 and it will include the submission of an EPC contract price for the full LNG plan development. We’re also engaged in several studies for LNG like a fashion trains in the US and Africa. All of these studies on FEED projects offer us encouraging opportunities for additional EPC work in 2012 and onwards.

In Papua New Guinea, our two EPC contracts for Esso’s Papua New Guinea LNG project are project are progressing well. For the LNG tanks at the sites on the coast in Port Moresby the excavation work is underway and work on the tanks foundation will begin soon. Prefabrication of structures and equipment for the tanks are ongoing at a yard in (inaudible).

On the Hides gas conditioning plant in Papua New Guinea Islands we’ve mobilized to the sites, engineering is more than 85% complete, procurement or equipment well advanced, however construction progress is somewhat delayed due to local issues and weather.

Turning to South America, the REFICAR refinery project in Cartagena, Columbia is progressing well. This month we installed the 280 foot tall NAFTA hydrotreating tower, which was a major undertaking and a significant milestone. We are also completing about 85% of pilings near 14,000 in all and the current field work on the sites. 80 process modules are being built in our Island for publication facility in Belmont, Texas, in our sites, our manpower currently 2.600 crafts.

In the US, construction is well underway on the 200 million cubic foot per day gas processing plant at Occidental Elk Hills field in California. The engineering is nearly complete and equipment loads are arriving daily at site.

And in Canada, the Kearl oil sands project continues to make steady progress. Three of the six FSU vessels are finished and being installed and the primary separation cell vessel and the storage tanks are on schedule. However, our client has experienced some permitting challenges for transportation of client supplied equipment modules through Idaho and Montana and the potential impact on our schedule is currently being evaluated.

In the Middle East, we are working on Lummus steel plate structure projects. One of our larger projects is the GASCO LPG project in Abu Dhabi where we are constructing eight storage tanks and six hygienic tanks and two NAFTA storage tanks and associated piping and electric and instrumentation systems. The project is ahead of schedule, the construction of all tanks ongoing at various stages of completion.

We are also executing two separate storage tank projects, 90 tanks in all as part of Takreer’s refinery expansion project in Abu Dhabi. Construction and fabrication are well underway and the projects are scheduled to be completed in 2012.

In closing, I’m saying that the market – I’ll close by saying that iron markets are obviously continuing to gain momentum and that’s evidenced by the recent awards. We’re well positioned to capitalize on this positive development. Thank you.

Thank you Lasse. Dan?

Daniel McCarthy

Good afternoon. I’m pleased to report that Lummus Technologies business development is continuing to progress inline with our expectations. During the quarter we enjoyed success in olefins with another methanol-to-olefins award, two ethylene revamps and redesign project.

On the refining side, we had awards in gasoline processing and delayed coking. Our CLG joint venture which is not consolidated benefited from a hydrocracker award, a lube oil expansion and a number of catalyst awards.

Well, the value of the consolidated awards for the second quarter is somewhat lower than the previous two quarters, it is mostly matter of the timing. There were delays in awards of a few larger projects which we believe are on track to be awarded in the second half of 2011.

Market activity remained strong and we project the significant growth in backlog for the year. I think it is also worthwhile to note that CLG’s increase in new business which we reported in the first quarter continues and have now booked more than 50% of their plan in the first half of the year. These awards will drive an increase in earnings on the equity income line as a year progresses.

For the past year or so we have been discussing the potential impact of shale gas on our business. We’ve now seen shift from the planning to the engineering stage. A good example is they recently announced CB&I gas plant award based on a proprietary Lummus Technology processing scheme which Lasse just mentioned. We’re tracking several other similar opportunities as most of these gas reserves contain natural gas liquids and excellent petrochemical FEED stock, we expect the number of ethylene projects to follow.

We recently began working on an expansion of an ethylene plant in the United States and continued to support ethylene producers in a variety of planning studies. We anticipate additional engineering awards for the remainder of 2011 with full EPC contracts being released throughout 2012. They are also increasing opportunities for on-purpose propylene production by our Olefins Conversation Technology and CATOFIN dehydrogenation process.

The refining licensing business has also begun to rebound. This is driven by higher spreads between light and heavy oil, improved refining margins and continued demand growth for the (inaudible). These trends are generating interest in various conversion processes such as hydrocracking and delayed coking. Much of this activity has been centered in high growth regions such as China, Russia, and the Middle East where we’ve had good win rates.

From a regional perspective, we continue to see a strong level of activity in China and in the Middle East, these regions have been important contributors over the last few years. We were also noticing significant growth of new business opportunities in Russia.

In summary, we are very encouraged by the market environment whether it be gas processing or Olefins in North America or refining in petrochemicals in Asia-Pacific, the Middle East or Russia. We believe we have the product, solution and experience to support our customers in achieving their objectives. Thank you.

Philip Asherman

Thank you, Dan. Ron, let’s review the numbers.

Ronald Ballschmiede

Thanks Phil and good afternoon everyone. With that overview of our major activities around the world, let me take you through our solid financial results for the quarter.

Revenue for the second quarter was $1.1 billion up a $170 million or 19% from the second quarter of 2010. The revenue increase reflects the increasing activities of our backlogs as our major projects begin to move towards the construction phase of the work scope. We expect this increased project activity to continue throughout 2011 providing sequential quarterly increase revenue, consistent with what we’ve seen for the last several quarters.

We are also reaffirmed full year revenue guidance of $4.3 to $4.7 billion. Our gross profit for the quarter was a solid $140 million or 12.9% representing the relative contribution of each of our sectors. Up back and discuss the changes in our revenue and operating income by business sector in a moment.

Selling and administrative expenses remained well controlled increasing $2.1 million or 4.6% to $48.5 million for the second quarter. The consolidation of CD tech resulting from the acquisition of it’s residual interest in December 2010 accounted for the majority of this increase. Selling and administrative expenses for the quarter were 4.5% of the revenues compared to 5.1 for the comparable quarter 2010, benefiting from our increased revenue volume. We continue to expect our full year 2011 selling and administrative expenses to be approximately 4.5% of revenues.

Second quarter operating income was $88.4 million or strong 8.1% of revenues compared to $70.9 million or 7.7% of revenues in the second quarter of 2010. Our tax rate for the quarter was 28.8% consistent with our expectations for the full year tax rate. The summation of all of that results in the second quarter net income of $61.9 million or $0.62 per diluted share. Earnings in the quarter and the year-to-date earnings per share of $1.12 reflect a strongest second quarter and first-six months earnings in our history.

EBITDA totaled $105.7 million for the quarter or 9.7% of revenues. Our earnings to-date and our confident to the quality of our backlog have allowed to increase and narrow the range of our earnings per share guidance. As we indicated in our earnings release, our revised 2011 EPS guidance is $2.35 to $2.45 per share.

Now, let me take you through the sector results. Each of our sectors 2011 results were consistent with our expected annual range of operating results, which we discussed previously. Specifically, our performance expectations, our operating income in the range of 7% to 10% for Steel Plate Structures, 3% to 6% for CB&I Lummus, and annual operating income for Lummus Technology of $100 million plus or minus 10%.

Lasse and Dan spoke to our new awards prospect activity, so I’ll provide some overall comments. Our new awards for the second quarter totaled just over $1.2 billion for a book to burn ratio of 112% compared to $916 billion new awards for the 2010 comparable period. Press release rewards totaled approximately $540 million, the largest which was $300 million gas plant which Lasse discussed earlier.

The balance of approximately $680 million represent smaller new awards in project growth, which was spread nicely between our sectors and project types around the world. Our new awards for the first six months, the large third quarter awards announced in last couple of weeks and prospects for the balance of the year enable us to increase our full year 2011 new award guidance to $6.8 billion to $7.2 billion.

Steel Plate Structures reported second quarter 2011 revenue of $456 million, an increase of 27% from the $360 million in 2010. The increase reflects higher activity on our 2009 large awards in the Middle East and Australia, partly offset by lower volumes of Steel Plate Structure work in Americas.

Operating income totaled $47 million or 10.4% of revenues compared to $33 million or 9% revenues in 2010. The increase in operating margin reflects a good mix of storage tank around the world and improved cost recoveries driven by the higher volumes.

CB&I Lummus revenues totaled for $542 million in 2011, an increase of $36 million or 7% from 2010. The revenue increase from our REFICAR refinery, Papua New Guinea gas plant and Kearl oil sands projects certainly fueled – more the growth in that and we are partially offset by lower US and South America LNG work. Both REFICAR and PNG projects are progressing well with higher revenue burn expected for the balance of the year and beyond.

Income from operations totaled $24 million or 4.5% of revenues in the second quarter compared to $25 million or 5% in 2010. Factors contributing to the change in operating margins include an increase level of reimbursable projects and higher pre-contract cost driven by an increase in bid activity.

Finally, Lummus Technology had a strong quarter reporting revenues of $88 million, an increase of $50 million from the second quarter of 2010. This revenue increase was primarily driven by the strength of the global petrochemical market which Dan spoke to earlier and revenue resulting for the sub-consolidation of CD Tech.

Second quarter operating income totaled $16 million, up from $13 million in the comparable quarter of 2010 reflecting the high level of activity during the quarter.

Our balance sheet liquidity remain strong with a cash balance of $376 million. No revolver borrowings and cash net of debt of just under $300 million. During the quarter we returned $57 million to our shareholders through $5 million of dividends and repurchases of $52 million of our shares. For the first two quarter, our share repurchase and dividends totaled just short of $100 million.

In closing, our strong backlog and financial position provides us with the necessary financial flexibility to deliver our projects and take advantage of the energy market demands for our services. We are well positioned for opportunities to grow our company and continue to provide strong returns to our shareholder. Phil?

Philip Asherman

Thank you, Ron. Now we’ll open the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from the line of Will Gabrielski with Gleacher. Please go ahead with your question.

Will Gabrielski – Gleacher & Company

Thanks.

Philip Asherman

Hi, Will.

Will Gabrielski – Gleacher & Company

A couple of questions, first the Lummus Tech margin in the quarter was a little bit lower than last quarter and you are running, I guess, below the midpoint of what, full-year would get – would need to be at for that $100 million plus or minus 10%. Any thoughts on what – how confident you are on the back half of the year and how conservative your EPS guidance would be if that run rate picked up?

Philip Asherman

Yeah, I’ll let Dan respond to that,

Daniel McCarthy

Yeah, I think that the business results for this quarter really sort of a result of mix and timing, and so we think that, you know we have our full year forecast and we don’t see anything that it’s on horizon that prevents us from meeting that range that we put out in the past.

Philip Asherman

Yeah, when we talked about in the first quarter I think we’ve continued to say that, look at business as around $100 million income business with some plus or minus we think, not much variability in there. We’re still confident that’s where we are going to land.

Will Gabrielski – Gleacher & Company

Okay. I’ll just follow up on the Kearl project. Can you remind me and us possibly if that was cost plus a fixed price, you’re scope of work there. And as a second part to that with the consolidation of three phases down to two that Imperial announced. When do you think you could see incremental scope associated with that project?

Philip Asherman

Yeah, I don’t know that we have talked about the contractor terms at Kroll, but I think you can consider that as most major projects more vibrant with, we have long preliminary period which was lot of reimbursable and fixed a lot of pricing towards the last tranche of that. So I mostly – it’s kind of the hybrid. That job again is continuing to be on track with as Lasse said, there are some issues regarding some of the owner supply modules, but those aren’t necessarily our issue, but we’ve been talking about potential expansion hopefully start getting on with that before the end of the year with a very similar scope.

Will Gabrielski – Gleacher & Company

Okay. And then lastly, in terms of the visibility and US gas processing plants, it seems like there is more of that work coming. How well positioned are you and how is the competitive market for that versus some of the other markets you are compete in?

Philip Asherman

Well, I’ll let Dan, expand on, but I think as Dan implied I think we’re very well positioned. Certainly from the technology side to kind of, you know, in a very early look they have been very instrumental in our ability to get – to win the awards on this major expansions as we have seen in (inaudible) last year at LPOs and certainly with this new plant in the North East that we announced at the very end of quarter.

So, we are very well positioned for that work, there is several layers obviously and as far as the infrastructure associated directly with the shale gas, we think we’ve got some proprietary technology and some ways to certainly address that market as well. And then, I think, as Dan talked about the collateral benefits you will – or other benefits as far as what we see the increased activity in the petrochemical markets and infrastructure potential, those seem to beginning pretty good pace and are getting traction. Dan, you want to add anything to that?

Daniel McCarthy

I definitely would, I like to first in terms of how we approach the market I think, we bring a better technical solution that has operating benefits to the end user, recovering more ethane and propane, which is really the value right now out of these wells. And then, secondly, we are finding there is a lot of linkages between projects which on gas processing and olefins. People before they are making a commitment on the olefins plant, they are working with people on the gas processing side. And so, we are actually getting to see where those linkages are and I think that’s the strong benefit for us and then when we wrap around the full scope as we talked earlier that we can do the engineering construction, we can provide the tanks, people like that, I mean gas processes enjoy the fact that they have one person to deal with.

Will Gabrielski – Gleacher & Company

Thank you very much.

Philip Asherman

Yeah, Will. Thank you.

Operator

Our next question is from line of Joe Ritchie with Goldman Sachs. Please go ahead with our question.

Philip Asherman

Hi Joe.

Joe Ritchie -Goldman Sachs

Thank you. Good afternoon, everyone. I think it’s a great quarter.

Philip Asherman

Thank you.

Joe Ritchie -Goldman Sachs

The first question I have is really on the Gorgon project. If we think about that project that’s obviously a huge project for you guys, can you talk a little about two things, one your capacity to do additional mechanical erection work in Australia, given the size and potential constrains of the Gorgon project. And in addition, if you could maybe talk a little about the contract structure to give us a sense for how you’re mitigating the risk of that contract whether it’s a fixed price cost plus hybrid contract that will be very helpful.

Philip Asherman

Let me start and then I’ll let Lasse add some comments and expand on that as well. Bear in mind, we are doing the mechanical erection and electrical work already for Pluto in support that as we concluded the – as we concluded our tank. So, we had existing workforce there already. As you can imagine Joe and I think as you have noted, this – the Gorgon project has had a long cycle time. We’ve had certainly part our obligation and certainly in our discussion with the owner, we had to demonstrate a plan to be able to staff that work adequately from a variety of sources. And of course, the fact that it’s – the majority of the work is being modularized and shift into Australia. Certainly helps to mitigate the risk of labor, not just an absolute cost. But certainly availability, so we started to look at that and we are certainly prepared to respond, and so I don’t know. You want add some more to Lasse? But the cost, as I think as Lasse said, this is going to be cost reimbursement project, it’s from a risk standpoint, it’s certainly – and we have a partner we can choose, well known, world renowned E&I contractors. So we think we mitigate that risk on labor pretty well. Lasse?

Lasse Petterson

Yes. As we said, it’s cost reimbursable contract. We have incentives on quality, schedule, safety, and cost. So from the perspective, I think it’s a – contract suits us very well. And we have a great following in Australia from being present in the country for 70 years. So resourcing will come from existing Australian organization and we will supplement that with personnel from our worldwide organization and we have people coming off projects, such as Peru and so forth. So they will have being made available as required.

Philip Asherman

Yeah, I think also Joe, bear in mind that we are working in a variety of roles or in a variety of places throughout the regions. So it’s not as if we are having parachute a team in for Gorgon. We are at various stages not only in Papua New Guinea, but certainly in other parts of Australia, our tanks and other assignments. So we feel pretty well, pretty prepared to meet the challenges from a labor standpoint on this job. And certainly Chevron agrees.

Joe Ritchie - Goldman Sachs

Okay. That’s really helpful. I guess, even beyond this job, would you guys still think you have opportunity to do this type of work as some of the other projects move to further stages. So for example, with GLNG or QCLNG, as we move further along in the project completion there, would guys be able to step in and do this the same type of mechanical erection work on this project?

Philip Asherman

Well certainly, I mean, that’s been a core competency of our for 75 years in Australia and we certainly think that we can step in if asked to do that. We’ve been doing that for on (inaudible) 25 for at Woodside historically, and we just have to look at it case by case. From what we see in front of us, we think we’re pretty well positioned for that work.

Joe Ritchie - Goldman Sachs

Okay. Great. I guess switching gears on the Lummus Technology, you mentioned that you feel pretty comfortable with our guidance of $100 million in EBIT, plus or minus 10%. Even if you got the, I guess the low end of the range of $90 million for the year, you would still be looking at $25 million in EBIT a quarter. So I just wanted to clarify, the $25 million to $30 million in EBIT over the next couple of quarters is something you still think is very feasible?

Philip Asherman

That’s the way we see it.

Joe Ritchie - Goldman Sachs

Okay, great. Well, that’s all I have. Thank you for – thanks for the time.

Philip Asherman

Okay. Thanks Joe.

Operator

Our next question is from line of Scott Levine with JP Morgan. Please go ahead with your question.

Philip Asherman

Good afternoon, Scott.

Scott Levine – JP Morgan

Good afternoon, Phil. With regard to this bookings, you had a couple of large wins here very recently and some of these are on jobs, as you mentioned that have been ongoing for a while. But I’m wondering like is the year from an order flow standpoint irrespective of the guidance raise is playing out. How is it playing out relative to your expectations when you establish the initial guidance? And are you seeing additional projects, new projects being sanctioned at the pace you would expect? Or have you seen any change in the pace of order activity really since, maybe even since early April we have more volatility in the markets in general.

Philip Asherman

Yeah. Well, we’ve been talking about the potential of upside and the rewards since the last call and I think in other conversations we have or conferences and elsewhere. So we’ve been working towards the possibility of this upside and these new awards. We’re pleased that we are able to and this is only through the hard work of a lot of teams around the world to be able to conclude these contracts and given the reward where we could announce at midpoint as opposed to just, perhaps just talking about a range in our guidance, in our comfort, we’ve actually got these awards. Now, we still got a lot of work to do. I mean we used to get the rest of the year when we get some new awards are still out in front of us. I think as we are reviewing and looking at 2012 and beyond and some of the developments not only continuing LNG, but petrochemical and gas processing, we are very enthusiastic about the potential we see going in the out years so. Not only we feel confident on our range for this year and our new guidance, but certainly what that means for 2012 and beyond.

Scott Levine – JP Morgan

Understand. Maybe as one follow-up on 2012 and beyond. You affirmed your traditional margin range is for the individual segments and the profit outlook for Lummus Technology, but as we think about some of these larger projects that you booked and in the out years, not asking for guidance. How should we think about the margin trajectory going forward, particularly your steel plate kind of poked above the high end of your traditional 7% to 10% range.

Philip Asherman

Yeah. I know we keep – every time we set the range we keep, as you say poking above those, but I think that is where we would suggest that you stay within those brackets that we said. There is a lot of reimbursement work, the mix has changed, I mean we’re going for that 50-50 reimbursable and I think, I don’t have the exact number, but it’s probably looks more like a 60-40 mix now with reimbursable. We got to take some time and analyze how that the burn rate is going in 2012 and look how that impact is relative to these margins, but I don’t see any reasons to change those brackets we’ve given you for any circumstance. Certainly technology is holding course and actually Steel Plate Structures have been performing and outperforming what our original expectation were. And then the EPC side of business, which carries a lot of our cost and pre-contract cost. We need sometime to look at that, but you know, it’s going to be probably similar to last year where we saw this relationship between backlog and revenues, a little bit different than historically. So we are going to have to look at that burn rates and then use the back half of the year to guide you into 2012 to 2013.

Scott Levine – JP Morgan

Thanks. Nice quarter.

Philip Asherman

All right. Thank you.

Operator

Our next question is from the line of Andy Kaplowitz with Barclays Capital. Please go ahead with your question.

Philip Asherman

Hello Andy.

Alan Fleming - Barclays Capital

Hey guys. Good evening. It’s Alan Fleming stepping in for Andy this evening. My first question is around gross margin. You had pretty good gross margin again in the quarter around 13%, it was down sequentially a bit, but I think in the past you have got it to around 10.5% to maybe 12.5%. And it seems like your business is clearly better than that. So I was just kind of wondering, how should we think about our guidance, is it conservative, what should we think about going forward?

Philip Asherman

Alan, as I just told Scott. I think we would then suggest that you stay within those brackets, but we try to guide you towards looking at operating income as the metric that we will suggest to use, simply because of the differences in our three sectors and the commercial characteristics. Ron, do you want to add?.

Ron Ballschmiede

Yeah. Particularly with the growth in Lummus Technology and with its ventures and otherwise it’s very hard to – it’s a lot, lot easier to understand our business with the operating income line. And to Phil’s point on, on even in a new awards that we’ve enjoyed year-to-date, we are certainly selling them that will continue to support the ranges that we have been talking about there. So we don’t see any change in that. So it’s a much better way to get a better model if you will is to focus on the operating income rather than a consolidated GP number.

Alan Fleming - Barclays Capital

Okay. That’s helpful. Thank you. I have a follow up around the Middle East market.

Philip Asherman

Okay.

Alan Fleming - Barclays Capital

You guys have been traditional big in storage there. We saw the $60 million award from Modern, this afternoon, but we have maybe seen a lot of other sizeable projects materializing that region. So can you just talk a little bit about what you are seeing, is it been sluggish there and kind of when are you seeing a pick up in activity?

Philip Asherman

Well, we have seen a good market there for our Steel Plate Structures business. I mean the tank business in the Middle East has been very, very good for us, particularly in Saudi Arabia and through the Emirates. And we need to see that to continue, a lot of comments and questions about the Koreans competitions. Actually, the Koreans have been some of our best customers in the Middle East relative to Steel Plate Structures.

When we get into the downstream of petrochemical business or the chemical business, it gets a little more problematic in terms of, you know, how competitive are we. Can we be and how we are going to approach that market, but right now, we see a pretty good business. Our plan going forward is not really dependent on the Middle East downstream market to tell you the truth. So, we are hopeful that maybe we can find the solution to a situation there, but we are not only dependent on that particular region, except from Steel Plate Structures standpoint. And also technology, our technology business is extremely strong, but EPC, we got a lot of place in the world to capitalize on.

Lasse Petterson

It’s always been a market where we’ve had one or two major storage projects going like the GASCO job we are going now, but a lot of singles and doubles in the region.

Philip Asherman

I think, just – if can add one more comment that there are places in world, such as the Middle East, such as Russia, China, India, where we have a great technology business in some cases our Steel Plate Structures business. And it becomes a different type of market for us if you’re talking about is there infrastructure, but certainly great opportunities for us in both those other sectors.

Alan Fleming - Barclays Capital

Okay. Thanks guys.

Operator

Our next question is from the line Jamie Cook with Credit Suisse. Please go ahead with your question.

Jamie Cook – Credit Suisse

Hi.

Philip Asherman

Hello Jamie.

Jamie Cook – Credit Suisse

Good evening and congratulations. A couple of questions, one, the question was answered earlier and I think by Will, he talked about on sort of the Kearl project and it was a supply unit that, you know, concerns around the suppliers and you said it’s really not your problem. I just want to get a little more color there, and I think you also mentioned, you know, some issues and in Papua New Guinea. And so can you just elaborate more on those and should we take any hit on the quarter? And then my follow-up question, you raised your EPS guidance, the revenue guidance is unchanged. I guess I am surprised by the recent win with Gorgon and some of your other recent wins. So just, especially we do JV partner and Gorgon is saying the project should begin immediately. So, if you could provide color on those, I appreciate it.

Philip Asherman

Okay. So we got Kearl, you got Papua New Guinea and…

Jamie Cook – Credit Suisse

And then your revenue guidance.

Philip Asherman

And the revenue guidance, okay.

Jamie Cook – Credit Suisse

Gorgon.

Philip Asherman

Kearl, normally we wouldn’t get that granular into some of the execution issue, but I think it came out in the newspaper, it has been well publicized that there has been some issues as far as the transportation of modules. And probably a little extreme state, it’s not our problem because it’s – we are in the business of solving problems for our clients, but as far as our contractor and our scope that – you know, other than just having to adjust schedules and certainly – and deliverables that’s where it becomes the project’s challenge. So, I’d probably characterize that little bit differently.

But it’s, you know, we are looking at the next phases or some different ways to execute, a similar scope and we’ll get those things solved. But that’s the reason I want to mention that and Lasse mentioned it because it has been publicized and want to just clarify that. But as far as our plan, there is nothing that would compromise our plan or our forecast that we just gave you.

The Papua New Guinea – and I guess the revenue issued is pretty similar. Of course it’s been well publicized that in Papua New Guinea, they’ve had some challenges on some of the local travel issues and some of the infrastructure that supports the gas conditioning site that we’re working on. Again, it’s not a contract that were at risk as far as our financial plans and we don’t think there is going to be an issue, other than – it makes the burn of our revenue a little more sluggish than what we had originally forecasted, which is why you see we haven’t changed our range.

The second thing, even though, perhaps, someone says that we are going to start immediately on Gorgon. We have started immediately on Gorgon. But that’s been a while and that has a certain mobilization period and ramping up. So, we think if you look at that we’ll clarify that as we get closer till the end of the year. We think in the characteristics in terms of revenue on Gorgon will probably start really getting interesting towards the end of the back half of ‘12 and going into ‘13.

I think the nice thing about these, Jamie, is that we are able to get these kind of results in our current backlog and even though we’ve had a little bit sluggish in some of the reimbursable jobs. What that means for 2012 or 2013 when we start looking at some of those curves and then we keep feeling that the backlog was some work, it gets pretty interesting. So it’s not all bad news, but that’s why we kept the revenue range where it is.

Jamie Cook – Credit Suisse

Okay. Great.

Ronald Ballschmiede

And there has been cost adjustments on those jobs we just talked about.

Philip Asherman

Right.

Ronald Ballschmiede

To answer your earlier question.

Philip Asherman

Well, that’s right. Sorry, I missed it.

Jamie Cook – Credit Suisse

Okay. Didn’t mean to harp on the negative. Congratulations.

Philip Asherman

No, it’s okay. We are not only giddy, I’m just saying that, you know, when we look at that that revenue and I think we kind of caution everyone last quarter that it’s not a – and because and mix of the work is got to change this burn ratio. So, I think last year we went from to about 35% burn I believe. We’ve been talking about 50% maybe the new reality. We’re going to have analyze that going to next year to see how all this – how all these are going to ramp up and what that’s going to be in terms of our outlook.

Jamie Cook – Credit Suisse

Okay.

Lasse Petterson

The magnitude and duration of Gorgon will change that conclusion from what we had in backlog before that.

Philip Asherman

But the good news is got a majority of all this huge backlogs we’ve announced over the last year or so, we still have most of it.

Jamie Cook – Credit Suisse

Thanks. I’ll get back in queue.

Philip Asherman

Sorry Jamie.

Operator

Our next question is from the line of Rob Norfleet with BB&T Capital Markets, please go ahead.

Philip Asherman

Hey Rob.

Rob Norfleet - BB&T Capital Markets

Hey, good afternoon and congratulations on a great quarter.

Philip Asherman

Thank you.

Rob Norfleet - BB&T Capital Markets

Just a couple of follow-on questions, in terms of the margins that CBI, Lummus clearly they improved versus Q1, which we talked about on the last quarter call, but I want to ask Ron, was there still – there is still some modest impact from free construction costs and stock based comp expense and how should that trend over the second half of the year?

Ronald Ballschmiede

Yeah, right now the stock based compensation as I recall it is like $20 million in the first quarter and – but the expectation for full year is above $35 million. So, second, third, and fourth all have about the same load of incentive comps. So, that’s first quarter only phenomena. But the rest of it is, you’re certainly getting some leverage out of S&A, about 60 basis points there from Q1 to Q2 that essentially is allocated down to the units in pro rata to its revenues or some other cost driver, but it’s pretty much pushed down in that way. And then, hopefully though, hopefully the higher bidding activity continues throughout the year but...

Rob Norfleet - BB&T Capital Markets

Okay. And if we were to just to look at the high end of the potential range for this business at 6%, I mean what needs to happen to get there, is it more pricing, is it execution, is it utilization? I’m just trying kind of understand as we kind of see these projects starting to ramp up, and clearly you’re executing well. How we kind of see margin expansion in the Lummus business takes place?

Philip Asherman

You’re trying on the EPC side of the house, right?

Rob Norfleet - BB&T Capital Markets

Correct. I’m sorry.

Philip Asherman

Well, maybe you can speculate and say there could be more – well some opportunities which drives some premiums. There could be contracts which has certain terms if we don’t forecast, but we have until they’re earned. There could be upside that I think if you historically look at the industry, we’re right at towards the top of the range in terms of what this kind of business should be able to generate on this amount of volume.

Ronald Ballschmiede

And there’s still some leverage coming out, some leverage coming out of S&A and in the fixed cost structure that they have. So, as we ramp up the revenues from some of these large jobs we’ve been talking about, we’ll see some improvement coming out of that. But that also all be characterized when we, you know, based on the contracting structure of future awards do with a little bit, but right now, it’s pretty good range.

Philip Asherman

Yeah, but that’s a great point. You need to relate that to a backlog. We’re structured for the work in progress. So as our revenues grow through execution of these projects, it’s not linear calculation as far as our overhead for that work. So, we should get some additional leverage out of that.

Rob Norfleet - BB&T Capital Markets

Okay. That makes sense. And just quickly back to Joe’s question about capacity. I guess to his point, I just wanted to understand. So we obviously just had one – the additional REFICAR you’re doing. That’s three seed works on LNG projects that could get FID in 2012 and that doesn’t even include potentially a (inaudible). So, I guess the question is if you were in a position to win fully BC on these awards, would you have the ability to do this work at your existing facilities?

Philip Asherman

Well, again REFICAR, we’re well on our way. There’s 2,000 people currently on site and over 2,000 we’ve got nearly 300 people or plan to have 300 in our fabrication facility in Texas. We hired over 700 new engineers in Texas for that work. By the way, we’re also ramping up for the engineering work to start on the gas processing project that we just announced.

So, that’s all of their plan. We don’t see any constraints or issues with mobilization on that. I think, what we have to realize is ramping up in mobilizing for these big construction job is something we do, is something we’ve done for decades. And it’s a very, very large jobs. In fact we’re doing in Australia at a place that we know the workforce, we’ve been there for a long time. We have a lot of regional support, if you will on in terms of infrastructure, but direct labor. I mean, that’s what we had to demonstrate to Chevron before obviously we were actually successful there so. It’s not an easy task, but certainly one that we’re well equipped to deal with.

So, it’s – when you talk about the feed work in for Yamal. Again if you look at engineering, there’s only three places in the world for liquefaction you probably want to go. It’s probably Yokohama, in London and Huston. We got joint venture partners for both Yamal and (Browse). So again, there’s a sharing of those resources and we fully realized that above a certain level and above certain size, it compels us to go out and look for joint venture partners that are reliable and can handle part of the scope of the work as we’ve done with Kentz, certainly in Gorgon and certainly as we done with (clubs) on Papua New Guinea as we are doing with (inaudible) and Shipham for both Browse and Yamal.

So, that’s our answer to the resource issue, but it’s going to be a certainly a challenge when you look at all the workout there. If you look at the 100s of billions of dollars that are being spent in LNG and related work and then the number of firms like ours in the world it’s, you know, it’s not a infinite number. So, the challenging cycle – challenges cycle work..

Rob Norfleet - BB&T Capital Markets

It’s a high-class problem to have.

Philip Asherman

Yeah, you’re right. Thank you. That’s a great way to say it.

Rob Norfleet - BB&T Capital Markets

Right. And last question I have and I’ll get back in queue. Just in terms of capital allocation obviously you continued to buyback stock instead of dividend. What are you seeing, you think anything different in the acquisition market, not so much just on pricing and what’s out there within the, you know, in terms of what you’re looking at end markets geographies etcetera?

Philip Asherman

We have talked about this, we think, the best investment is obviously still in the growth of our company although we have certainly got some great returns for our shareholders on the share buyback. But, we look at opportunities out there again our best experience has been with those acquisitions where we can call that assets, we can add assets to our existing workforce that are complementary to our model. And that would be the preferred approach. So, we are looking for that and we think, you know, a company that certainly has the right profile working in similar areas may have the kind of skill sets that would fill some of the geographic gaps that we see in our business would be interesting to us.

But, right now, we think, you know, how we’re deploying our capital and using our capital right now and our conservative approach on our debt is a good place to be and gives a flexibility to address these opportunities when they occur. Ron, do you want to add anything to that.

Ronald Ballschmiede

No. I think that’s right. We certainly look at our liquidity and keep it very precious, I think, we are always evaluating to make sure we now have enough dry powder between our cash balance in our debt to a take advantage of an opportunity that comes up so, we look at that all the time. And then, certainly beyond that for the right transaction we go to the equity markets, but you know, that’s after we would, first choice is cash, second choice is debt probably get up to, comfortably at 25% debt of total cap rate before we would have to do some on the equity side.

So, if you did that map today its about $500 million. The first $500 million would come from most sites and then after that, we would have to do, for the right deal go to our shareholders.

Rob Norfleet – BB&T Capital Markets

Great, well thanks to response and again congratulations on the great quarter.

Philip Asherman

Thanks Rob.

Operator

Our next question is from line of John Rogers with D.A. Davidson, please go ahead with our question.

John Rogers - D.A. Davidson

Hi, good afternoon. Phil just relative to the $10 billion in backlog, and you guys touched on this a little bit, but in terms of the ramp of the work that we’re looking at now and I realize there is hopefully more yet to come. But, are we looking at fully utilization or hitting maximum in terms of your burn rate in 2013, 2014. I mean, if you got visibility to a ramp in 2012, 2013 and 2014 now or does it step up?

Philip Asherman

Well, we will have. I mean, that’s a very important question because you know we’re going to need, we have to do a good job obviously of analyzing and communicating, exactly what you are saying because the backlog, besides of this $10 billion backlog and relationship to revenue and new burn relationships is going to be very important to understand that how models going to work. But yeah, we look at those curves and the exciting thing about these curves is because we’ve got some rare reasons to backlog that we have been ramping up. And then, when you start looking all of these, the characteristics of these projects and awarding all construction so we have to start getting there in terms of revenue faster, but still lot of engineering work we have got to do on, along these jobs, of course, the tank work is pretty quick in terms of getting to the field and generating revenues there. So, they’ve all got different kind of characteristics, but the long duration backlog these are several year projects and so once we hit the top of that curve, latest curve I think we are going to enjoy a pretty good period of stability when you combine all these backlog going out to the ‘12 and ‘13 certainly.

Ronald Ballschmiede

And John, mostly like you saw in Peru and saw the announcement on Gorgon, the trains are four year plus type of contracts, so it will be a new step that comfort going out for the next 3 or 4 years with this kind of backlog.

John Rogers - D.A. Davidson

And Ron, I guess, are we going to see an immediate in 2012 or some point here, a big search in cash then because you guys do pretty job by getting the cash upfront. But you also mentioned that 60-40 split now cost plus to fixed price?

Ronald Ballschmiede

I certainly do like the cash opportunities, but with reimbursable work we’re not quite as beneficial as a lump sum project. So, we’ll certainly generate a lot of cash, but you should look for big down payments on these reimbursable jobs.

John Rogers - D.A. Davidson

Okay. And then…

Ronald Ballschmiede

It still be cash positive, they’re just based on the characteristics of those big front end payment.

Philip Asherman

But, as Ron love to say about non work – these reimbursable jobs, John, I mean they have got the, we’ll make sure that we’re cash positive inline with the old requirements, so we were counting on that. So, we’re going to stay ahead of the curve hopefully on, firstly all this work. So, you will start seeing that flushing out in terms of cash as these jobs develop.

John Rogers - D.A. Davidson

Okay. And just lastly, are we end in environment yet where you’re seeing owners scramble a little bit to place orders and go out further or is it still –?

Philip Asherman

I haven’t seen that John, I mean, these are long cycle John, even though we get to Gorgon, I won’t take how long we’ve been working on that you know, because that’s a huge development and even though if 2.3 billion you know there is a lot of other work going on around by their people so and these are huge developments. So, I don’t think the owners feel compelled to scramble. I think, the owners that we dealt with, they’ve got the long history of how they work with contractors on a long term basis certainly with the advance of our technology upfront. So, I wouldn’t characterize the scramble all, I think these are part of their long term plans and we’re fortunate that we’ve had such good relationships with them. We can plan for that as well. So I don’t think we’ve seen the scramble at all.

John Rogers - D.A. Davidson

Okay, great. Thanks and congratulations.

Philip Asherman

Thanks John

Operator

And we have time for one last question and that question is from the line of Martin Malloy from Johnson Rice. Please go ahead with your question.

Martin Malloy – Johnson Rice

Congratulations on the quarter.

Philip Asherman

Thanks.

Martin Malloy – Johnson Rice

When we look at your new award guidance and the top end the range you gave us $7.2 billion, you’ve announced in the first half of this year the new work tools are about $5 billion. Are there any larger awards out there that put my results in potential upside to revise new awards?

Philip Asherman

Well, I mean we still got to get to that range that we just said Malloy, that’s still lot of work, it’s for the back half of the year. Clearly, that would have to incorporate not only the small which we’ve talked about as part of our $2 billion or so run rate each year, but we still see some opportunities out there, Gorgon arguably is certainly the largest of what we had forecast for this year. But certainly, we see some pretty healthy opportunities, still this year it’s again I think we’re well positioned, timing is always the challenge for us.

Martin Malloy – Johnson Rice

And you mentioned moving from the planning to the engineering phase on several projects related to gas processing, NGO production coming out of the shale. Can you talk a little bit about when these projects might be awarded?

Lasse Petterson

That actually, that’s what I meant is that we have now begun to see some awards and technology on these issue with the gas plant. But we’re at the engineering phase right and so, in some cases customers want to complete FEED package and then go to the second step and commit for the full project. So, talking about the previous question about was the customers are rushing out, I would say the customers are still very deliberate and they’re going through their gate processes. And now they’re really at point where many of them are at the engineering gate as opposed to the planning gate, some of them are making full releases, but most of them will go through some engineering and estimating and then, after the FEED is done release the full EPC project in 2012.

Martin Malloy – Johnson Rice

Is it the timeline for FEED on one of these gas processing plants is normally around a six month process?

Lasse Petterson

I would say that – that can actually for gas plants could be little bit shorter than that. For Olefins plants it’s about six to eight months.

Martin Malloy – Johnson Rice

Thank you.

Lasse Petterson

You’re welcome, Joe.

Philip Asherman

I think, I’ll let you know that we’re going to continue the questions, if you have more, more people in the queue.

Operator

Absolutely, sir. Our next question is from the line of Chase Jacobson with William Blair, please go ahead with your question.

Philip Asherman

Hello, Chase.

Chase Jacobson – William Blair

Hi, good afternoon.

Philip Asherman

Good afternoon.

Chase Jacobson – William Blair

Just a two quick things, you know, you mentioned that you’ve been working on the Gorgon project for, you know, quite sometime trying to get that into backlog, you know, obviously there are some other nice awards that you had. And you kind of touched on this, but I’m just trying to figure out, you know, where the biggest difference was in your new awards guidance compared to last quarter because, you know, it’s pretty big move in three months, or is it one region in particular or is it one market in particular?

Philip Asherman

So, I think we’ve talked about certainly during our last call and certainly and at other meetings we’ve had. But I need to way to look at this, you know, when we talked about, how we put together our new award forecast and where we look at larger opportunities, we never wanted to be overly dependant on any one particularly region, any one particular end market or certainly one customer. So, we do a certain amount of factoring and we talked in the first quarter that we started out with the funnel of somewhere in the neighborhood of, I think it was $37 million and talked through the process of how that gets adopt to our guidance. So, if you assume the probabilities and the factoring in that process. Clearly, you know, its certainly addresses making sure that we can stay within the range, let’s say, we don’t want to provide too much risk on the downside. But if the large jobs like Gorgon is to be awarded, there is clearly more upside. And so that’s why we said that the first quarter, you know, we had certainly some confidence, hopefully we’ll be able to get these projects to the finish line and even if we haven’t by this earnings call, we should be in a position to at least express confidence or updates on where we saw the year should land. Its somewhat unusual to our history because of the timing these new awards tend to be either front or backend loaded, so having these concluded at mid point year was helpful for us, for our planning certainly I think for you as well. So, that’s why you saw the big swing because we were successful and of course we did enjoy the upside against our original guidance. And so, I hope that explains somewhat.

Chase Jacobson – William Blair

And then, can you just talk a little bit about what CB&I is doing to improve the competitive position of the company given that there is still some capacity in the market whether it’s, you know, more partnerships or you know, adding engineering capacity in lower cost region. And then, maybe just how you view the business, you know, where you view your standpoint as in the marketplace compared to several years ago?

Daniel McCarthy

I think, we’ve been very fortunate that we’ve been agile, we’ve been able to grow and adjust to the changing market conditions, which if you look over the past five or so years has shifted from regions, has shifted from end markets, you know, just taking the shale gas questions that we’ve had, that wasn’t even a known factor or variable in our plan about two years ago or so. Then when you look at the other potential that just abundance of the gas in this country is going to shape the opportunities for us in next three years, you know, you just need that kind of a journey, I have to say one of the real competitive advantage we’ve had as a company is we’ve been able to grow and to shift capitalizing our international experience, capitalizing on our focus, on various specific end markets and also how we’ve been able to again focus in our sectors and really take the talent pool that we have in our company and apply them against these LNG, refinery and offshore and again the uniqueness of our model. I have to say in a very short replay that’s how what I see our competitor advantage. And I think, you take that model as very scalable in what we see in terms of the opportunities around the world.

Chase Jacobson – William Blair

All right, thanks.

Philip Asherman

All right, Chase

Operator

And our next question is from line of Richard Roy from Citi, please go ahead with your question.

Philip Asherman

Hi Richard

Scott Shireen

Hi, this is actually Scott Shireen for Richard.

Philip Asherman

Okay.

Scott Shireen

I wanted to ask you question, I know you just touched on it regarding that $37 billion to 40 billion range of addressable opportunities. Can you provide any more color on the geographic breakdown of that opportunity set?

Philip Asherman

Well, I can’t, I think, if you just listed where the opportunities are, you have to put whether the end market or geography is. LNG of Australia is got to be the top of list from just the general backlog and the value of work over there and then Asia-Pacific when you are started incorporating technology and that will include in your – kind of in that regional map for technology. And, I think when you look out in the last years, certainly you got to include now starting to think about North America, not only in terms of the oil sands opportunity that we are currently involved. But again, as Dan and Lasse talked about the gas processing opportunities in Petrochemical and perhaps in LNG export opportunities going forward.

Scott Shireen

Any indication, I know you said you have about 20% of revenues in the US, any expectation of how that might increase over the next several years?

Philip Asherman

I can’t tell you that specifically but we think it could be significant in terms of the overall distribution. It’s a little bit difficult to gauge that now because our international markets are so strong. But, we are very encouraged and planning for certainly an increase in business over the next three to five years certainly in all those areas.

Scott Shireen

Great. Thank you very much.

Philip Asherman

All right. Thank you.

Operator

And our next question is from the line of Steven Fisher with UBS. Please go ahead with your question.

Philip Asherman

Hello Steve.

Steven Fisher – UBS

Good afternoon. Just a follow up on the timing of the Kearl expansion, do you need to have final approval of the projects by the customer in order to get your award or is there is some scope of the contract you get prior to their formal sanctioning?

Philip Asherman

Well, as you recall last year, we reported that as limited releases for a variety of reasons that the owner of one or two awards to scope as the work progressed and that was fine. I think now what we are looking at expansion, we are looking at some replication if you will, some cost wages, I’m hopeful that we are going to be able to consolidate that under one contract. But, we have no idea, we can’t confirm that, yeah, but certainly the work is, and the plant is progressing and hopefully that expansion work should be better defined certainly by the end of the year.

Steven Fisher – UBS

Okay. And then you mentioned in the new Gorgon contract is cost plus, I assume the tanks are fixed price, if it’s not confidential or proprietary, can you just remind us where the labor is coming from for the tank project and then what type of labor agreement you have there?

Philip Asherman

Well, they’re Australian, its all Australian. Remember that the tank jobs don’t require the same level of manpower that, it’s in a hundreds for these tank jobs. The other advantage of these tank jobs is those early release type projects so we certainly have the first, if you will, opportunity to access labor markets also the lay down space of the materials and so forth. So, lot of good advantages to get in these tanks because they are early, but as far as manpower requirements, you are talking in thousands, you’re talking in hundreds.

Steven Fisher – UBS

Union labor in Australia for those?

Philip Asherman

Absolutely, we know the work rules, we’ve been dealing with that for a long, long time and certainly we comply with all the labor requirements in Australia.

Steven Fisher – UBS

Okay. Thanks for answering the questions, I appreciate it.

Philip Asherman

Thank you.

Operator

Our next question is from the line of Graham Mattison with Lazard Capital Markets. Please go ahead with your question.

Philip Asherman

Hi Graham.

Matt Wilson – Lazard Capital Markets

It’s actually Matt Wilson for Graham today and I really appreciate you guys taking some extra questions, it was nice of you. Just real quickly, you know, I think I heard the small to mid size award number of 680 million, which I believe if my memory serves me is a little larger than usual, I think you might have alluded in the past to maybe that being correlated with the people moving and stepping up and moving from a planning stage, you know, into a like project stage, it wasn’t sure if you add any color to offer on that the small and mid size number?

Philip Asherman

Let me clarify that a little bit. We’ve talked about, I mean, we have been awarded so many projects during the course of any one year. And at some point we realize that we need to bundle what we saw as a run rate if you will of new awards per quarter, which were all those kind of projects that we don’t issue press releases on and we set the threshold, the borrowing as $40 million or below $40 million. So, that’s the engineering, that small tank, we’ve got technology awards, that’s a lot of work that’s in that bundle if you will, we’ve been seeing that typically ranges anywhere from half a billion, sometimes a few billion dollars of that and so somewhere in there, but usually as to release we count on about a couple of billion dollars a year or that type of work, very important to us, it was very important certainly when financial situation in the world, the economy in the world, world economy was a little shakier. But, still that’s what we count on so that’s how we characterize that kind of work, so when we did, when we suggest how you look at our business, we guide you too, if you will, looking around 2 billion or so of that kind of work. And that allows us then to spend more time talking with you on potential upside for major projects so like we have announced this very recently.

Ronald Ballschmiede

Sorry go ahead. It’s good that like many parts of our business, there is no such thing as linear number for each quarter which it is always a little bumpy.

Philip Asherman

Yeah.

Ronald Ballschmiede

Even the small ones.

Matt Wilson – Lazard Capital Markets

Sure, well thanks for that verification. And just lastly, if you had any outlook, your outlook on like oil sands work in Canada for second half of the year. And also with you know, if you had some time to adjust the happenings in Japan and if you don’t have any thoughts on that for the back half of the year?

Philip Asherman

Yeah. Well, the oil sands, we’ve been very unfortunate to continue our work with Kearl, we are over half way completed with the initial phase. I think, the owner has been very public about the expansion of plans they have and where we certainly anticipate to having to continue on Kearl for quite a long time to come. We’ve also been worried the couple of very nice tank projects for other owners in oil sands too. So, that’s going to be a part of our mix going forward for quite a few years. As far as Japan, you know, it’s important to us for a lot of reasons, it’s important to us as key suppliers out there, it’s important to us for partners for lot of the work.

So, and it’s important to how they impact the market demands obviously, and we’ve seen certainly some of the curve change relative to LNG, with some of the addition from Australia, some of the acceleration perhaps of some of the conversations around other LNG developments not only in Australia, Russia but now Africa is becoming very important in terms of some of the place. So, we’re seeing that impact from Japan, so that continues to be very important to us from that perspective.

Matt Wilson – Lazard Capital Markets

Thank you very much guys.

Philip Asherman

Thanks.

Operator

And ladies and gentlemen, we have now reached the end of the allotted time for questions and answers. Mr. Asherman, do you have any closing comments today.

Philip Asherman

No. I think, the call probably last long enough time for everyone. So that will conclude our call and we certainly thank everyone for their interest.

Operator

Ladies and gentlemen, this concludes today’s conference call. We would like thank you for your participation. You may now disconnect.

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