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Chicago Bridge & Iron N.V. (NYSE:CBI)

Q3 2011 Earnings Call

October 25, 2011 05:00 am ET

Executives

Philip Asherman - President and CEO of CB&I

Lasse Petterson - Chief Operating Officer

Dan McCarthy - President of Lummus Technology

Ron Ballschmiede - Chief Financial Officer

Analysts

Joe Ritchie - Goldman Sachs

Jamie Cook - Credit Suisse

Andy Kaplowitz - Barclays Capital

Scott Levine - JPMorgan

John Rogers - D.A. Davidson

Steven Fisher - UBS

Avi Fisher - BMO Capital Markets

Robert Norfleet - BB&T 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 third 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.

Following the remarks, we will open the call for your questions.

Now I am going to turn the call over to the team, but first I want to highlight that with nearly $4 billion in new awards this quarter and a backlog tracking just under $10 billion we have every expectation of finishing the year strong.

So as Ron will discuss soon, we are raising the guidance range of earnings per share to $2.40 to $2.50 for the year, and maintain our current outlook on revenue to be in the range of $4.3 billion to $4.7 billion and new awards in the range of $6.6 billion to $7.2 billion for the year.

Now I have some summary remarks after the Q&A, but now I’ll ask Lasse and Dan to provide the detail 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 let’s begin with you.

Lasse Petterson

Thank you, Philip. Good afternoon. Great, and I will begin my comments with new awards this quarter, and then give a brief update on our main ongoing projects. The third quarter awards totaled $3.8 billion which was the highest ever and that brings some backlog to exceed $9 billion. The highlight was signing the $2.3 billion contract with Chevron for their mechanical, electrical and instrumentation construction work on the Gorgon Island -- 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 of each producing 5 million tons per year of LNG. The Gorgon (NYSE:MBI) contract scope of work is to receive, install hook up and complete the process modules for their LNG trains.

The 270,000 tons of process modules are currently 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 are currently engaged on the Pluto project and where we have previously completed Woodside’s train IV and V.

Our product management personnel in Perth is in full swing to plan and prepare for the execution of the project with their main volume of construction work to be performed in 2013 and 2014. At peak, we’ve more than 3,000 people engaged on the project; the majority of the project staff and craft will come from our current Australia organization with some additional resource coming from our deep and worldwide pool of experienced LNG project personnel. Also this quarter, we announced a $500 million EPC contract for LNG storage tanks on a separate project in Australia.

In July, we were selected for the project specification contract for the Arrow LNG Liquefaction Projects in Queensland. Arrow is a 50-50 joint venture between Shell and PetroChina and the project plans to have two trains each with a capacity of 4 million tons per annum. Arrow recently announced that it’s considering expanding on their capacity of each train to as much as 4.6 million metric ton per year.

And let’s say that they will take the final investment decision late in 2013. These contracts have great winds for CB&I. We’ve been on Australia for more than 75 years and these awards precision as well to continue to be Australia’s leading energy contractor and a major participant on future projects in Australia’s promising LNG resource developments such as Gorgon, Browse, Barrow and Yamal.

Other third quarter awards included a $60 million storage tanks contract in Saudi Arabia for their Ma’aden Bauxite and Alumina Company.

So again, it was a good third quarter and with a [backload] now exceeding $9 billion we see our market’s building momentum and these awards that we have received year-to-date have certainly proven that to be the case. Now let me provide an update on our major projects currently underway. Through our joint venture with Chiyoda and Saipem, we are as previously announced participating in the FEED work on the bridge (inaudible) development for Western Australia. The field work is on schedule for completion in the second quarter of 2012. That will include submission of an EPC contract price for the full LNG plant development.

We have two LNG projects under development in our London office for Russia where the field engineering work for the Shtokman and the Yamal projects are on a schedule for completion earlier next year. We anticipate to continue our engagement on these projects preparing for the later execution phases thereafter. We are also in discussions with clients in the US for reversing LNG input terminals to convert them to liquefaction export facilities.

All of these studies and field projects are for us encouraging opportunities for additional EPC work from 2012 and beyond. In Papua New Guinea our two EPC projects were Exxon’s PNG LNG project is progressing well. For the LNG tanks at the site on the coast near Port Moresby work on the tank foundation is ongoing and prefabrication of structures and equipment is ongoing at our yard in Thailand.

And on the Hides gas conditioning plant in the Papua New Guinea highlands we have mobilize to the site. The temporary camp is complete and we are scheduled to start our driving piles for the foundations next month. In UK, the engineering work for Exxon’s two platforms on the Golden Eagle field is on schedule.

We have more than 400 engineers working on this project and the London engineering operation is now upto some 950 engineers in total.

Turning to South America, the REFICAR refinery projects in Cartagena Columbia is progressing well. This quarter we received and installed several large process towers and other equipment. We also completed the majority of the pilings, nearly 14,000 in all and the cuts and the fill work on the site.

84 process modules are being built at our Island Park facility in Beaumont and the first three has been shipped to the site, with another three scheduled for shipment in the next few weeks. And our manpower at the site currently exceeds 3,700.

In the US, construction is well underway on the 200 million static cubic foot gas processing plant at Occidental Elk Hills field in California. Equipment loads are arriving daily at the site and we’ve several hundred constructional workers at the site presently. We’re also building at 200 million static cubic feet gas processing plant for Dominion in West Virginia. The plant will process new shale gas production from the Marcellus field.

CB&I are providing the process technology for the plant. We’re executing the EPC process work and we’re delivering the plant storage vessels. We’ve mobilized to the sites and have started the civil works.

In Canada, the Kearl oil sands projects continue to make steady progress. All of the six FSU vessels are installed and the primary separation vessel and the storage tanks are also complete. However, our client has experienced some permitting challenges for transportation of client supplied equipment modules through Idaho and Montana.

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

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

I close by saying that our end markets are continuing to gain momentum and that's evidenced by the recent awards. We’re well positioned to capitalize on this positive development. Thank you.

Dan McCarthy

Good afternoon. I’m pleased to report a strong quarter for Lummus Technologies. Our new awards for the quarter exceeded a $173 million reflecting exceptional licensing and catalyst orders over this period. Let me elaborate on some of the more significant awards.

In Russia, a subsidiary of Rosneft awarded us an olefins project to be built in [Hatchka] on Russia’s furthermost southeastern point on the Sea of Japan. In addition to ethylene we will also be providing a butadiene extraction unit and some hydrogenation units. This facility will have the capacity to produce 2.25 million tons of olefins and diolefins making it the world’s largest liquid cracker. We have booked the license and basic engineering services associated with this project. The supply of the ethylene heaters has not yet been negotiated.

Another large contract of the catalyst supply order for Pemex which is building a number of gasoline hydrodesulphurization units based on our CDTECH process. This is first of two orders; we expect the other should be placed some time next year.

In addition to these large projects I would also like to cover two strategic awards booked in the quarter. Our Refining Group sold the first license for its new gasoline alkylation process called CDAlky. This technology utilizes an innovative proprietary reactor time to improve the efficiency of sulfuric acid alkylation.

This process produces higher octane product with significantly lower sulfuric acid consumption, so it’s less expensive than the conventional technology we should make it appealing to clients. This plant will be built in China, where new gasoline regulations are creating demand for additional alkylation capacity to produce cleaner burning gasoline.

Another process licensing breakthrough was a license of Diphenyl Carbonate technology, an intermediate for polycarbonate production. This is our first license of this technology which provides a more environmental friendly route to polycarbonate. Polycarbonate is a virtual class that’s for variety of applications from automobile parts to eyeglasses lenses.

During the third quarter we kicked off an olefins expansion project in the United States which is a positive sign the U.S. ethylene capacity will continue to ramp up as a result of shale gas development. Importantly, the rest of the world is also investing in traditional ethylene. The Rosneft project mentioned earlier is one example. Another is a confidential international ethylene expansion project we also launched this quarter.

Let me take a moment to also address the refining market. Although, North American and European refiners continue to struggle with margin issues, Asia enjoys growing demand resulting in increasing investments especially in hydro processing. Our CLG joint venture has enjoyed very solid year-on-year growth and new awards for both catalyst sales and new plant licenses.

To-date, economic uncertainties such as Euro Zone have not had any official impact on our proposal activities. Companies continue to proceed rapidly with project developments and as seen by our strong third quarter bookings, clients are prepared to move forward with their projects.

In conclusion, our offices are fully loaded with new design work. We see this workload continuing for the foreseeable future, so we’re increasing staff especially in India. The quarter saw significant increases and income from operations compared to the previous quarter. This is attributable to progress made on jobs carrying significant licensees. We believe the solid days of works will enable us to hit our income target. Thank you.

Philip Asherman

Thank you, Dan. Ron lets review the numbers.

Ron Ballschmiede

Thanks Phil and good afternoon everyone. With that overview of our sector significant activities and markets around the world, let me take you through our strong financial performance for the quarter.

Revenue for the third quarter was $1.255 billion, up 38% from $909 million in the third quarter of 2010. The year-over-year revenue increase was consistent with our expectations. The revenue increase reflects the increasing activity of our backlog as our major projects move further into the construction phase of the work scope. We expect fourth quarter 2011 revenues to be essentially consistent with the third quarter level and consequently approximate the middle of our reaffirmed full year 2011 revenue guidance of $4.3 billion to $4.7 billion. We expect our record level of backlog and the opportunities in our global marketplace to generate significant revenue growth in 2012 and beyond.

Our gross profit for the quarter was a solid $147 million compared to $120 million for the 2010 quarter. Each of our sectors enjoyed significant revenue growth and each reported higher operating income.

As we have been discussing, we have seen a mix of our backlog shift from fixed price to more cost reimbursable over the past several years. At the beginning of the quarter, the backlog mix was a little less than 40% cost reimbursable. With a major Gorgon MEI and other cost reimbursable awards, the cost reimbursable backlog now exceeds 50% at the end of the third quarter.

The second of the expected changes is the relative revenue volume mix of our three sectors. Each of our sectors enjoyed third quarter revenue growth of over 25%. However, the relative weighting of the dollar amount of that growth has a significant effect on our consolidated margin percentages.

Specifically, over 90% of our third quarter year-over-year revenue growth of almost $350 million came from the combination of Steel Plate Structures and CB&I Lummus, as our large projects accelerated progress. Certainly the impact of this growth is positive for our consolidated earnings.

We continue to believe that the mix of our revenues and contract terms will generate consolidated gross profits in the 10.5% to 12.5% range which we’ve discussed previously. However, we continue to believe that given the ever changing revenue mix and the different sector operating characteristic, analyzing performance at the sector level provides a better understanding of our performance. Consequently, I’ll come back and discuss changes in our revenues and operating income by business sectors in a moment.

Moving on to our income statement, Selling and Administrative expenses remained well controlled at $49.7 million or 4% of revenues for the quarter. The increase of $6.4 million over 2010 reflect the acquisition of the remaining 50% ownership of CD Tech at the end of last year, higher business development costs and global inflation in the low single digits.

The lower equity earnings for the quarter and year-to-date period are also due to consolidation of CD Tech. We do expect to continue improving the equity income line driven by the improved of global refining activities which Dan spoke to earlier.

Third quarter operating income totaled $92.7 million, the second best quarterly operating income in our history. Importantly, over the trailing three-year period, our operating margin has been in the 6% to 9% range and has averaged 7.6% of revenues, reflecting the quality and solid execution of our backlog and the unique combination of our business units.

Our tax rate for the quarter was 24% and 27.3% year-to-date, reflecting a continued favorable geographic mix of our pre-tax income and a net favorable resolution of certain tax positions in the quarter. The resolution on these tax uncertainties reduced our third-quarter tax expense by $3.9 million or just under $0.04 per share.

In addition, we have been accruing interest expense on these issues and with the resolution of the risk, the interest accrual was also reversed resulting in a pre-tax reduction of interest expense in the quarter of $2.4 million or a bit less than $0.02 per share. The combination of the reduction of tax expense and interest expense improved our third quarter, -- improved our quarter net income by between $0.05 and $0.06 per share. We expect our full year tax rate to approximate our 2011 year-to-date rate of 27.3% plus or minus a point or two depending on the final mix of global income.

The summation of all these results in third quarter net income of $72 million, are strongest quarter ever or $0.72 per diluted shares.

EBITDA totaled a $110 million for the third quarter and $308 million year-to-date compared to $95 million and $273 million respectively in 2010. Our earnings to date and our confidence in the quality of our backlog have allowed us to increase the range of our earnings per share guidance.

As we indicated in our press release our revised 2011 EPS guidance is $2.40 to $2.50. Lasse and Dan spoke to our new awards and prospect activity, so I will provide some overall comments.

New awards for the third quarter totaled $3.8 billion and year-to-date new awards are $6 billion. We announced several large new awards during the quarter, which totaled just short of $3 billion. The approximate $800 million remaining balance for the quarter reflect project growth and smaller new awards which were nicely spread between our sectors and project types around the world.

Our new awards for the first nine months and the prospectus for the balance the year enabled us to maintaining our full year 2011 New Award guidance of 6.8 billion to $7.2 billion. Our backlog totaled 9.3 million at the end of the third quarter compared to 6.9 billion at the beginning of the year. While we have had no significant project cancellations, the third quarter strengthening of the US dollar against major global currencies specifically the Australian, Columbian, Canadian and Euro currencies reduced our backlog by approximately $500 million for the quarter.

While the income effect of this currency is minimal going forward, the currency impact is an important metrics to understand our backlog movements period-to-period.

Now let me take you through the sector’s Q3 results. Each four sector’s 2011 results were within our expected annual range of operating results which we have discussed previously. Specifically, our performance expectations, our operating income in the range of 7% to 10% specifically Structures, 3% to 6% at CB&I Lummus and an annual operating income for Lummus Technology of $100 million plus or minus 10%.

Steel Plate Structures reported third quarter 2011 revenue of $511 million compared $349 million in 2010. The increase of $162 million is attributable to the increased activity on our large state projects in the Middle East and Australia.

Operating income totaled $43 million compared to $32 million in 2010. The slight decline in operating margin to 8.5% of revenues for the quarter reflect the impact of a lower margin project mix during the quarter, higher pre-contract expenses and higher business development costs attributable to our robust funnel of opportunities, and finally cost associated with the re-alignment of facilities in the United States.

CB&I Lummus revenues totaled $630 million in 2011, an increase of $159 million from $471 million in 2010. The higher revenues reflect increased activity on our large projects in Columbia, Papua New Guinea, Canada and the two gas processing plants in the United States. These increases were partially offset by the winding down and successful completion of our large LNG projects throughout the world.

Income from operations totaled $23 million compared to $20 million in 2010. Our third quarter 2011 results generally benefited from higher revenue volume and better cost recoveries from increased engineering activities, but were re-impacted by a lower margin project mix and similar to steel plates, higher pre-contract and business development costs. CB&I Lummus also incurred cost in the quarter associated with the realignment facilities in the United States.

Finally our Lummus Technology sector had a strong quarter; revenues totaled $114 million. The increase was driven by the consolidation and subsequent growth in the CD Tech business and increases in petrochemical related revenues.

Operating income increased to $27 million up from $26 million in the comparable quarter of 2010 and up from an average run rate in the first half of 2011 of $20 million per quarter. Dan previously mentioned the relative strength for the petrochemical market demand around the globe and a signs of an improving refining market.

Now let me make a few comments on our balance sheet, cash flow and other financial matters as we have many positive developments in the quarter. Our balance sheet and liquidity remained strong with the cash balance of $540 million, up from $376 million at the beginning of the quarter. This reflects our strong 2011 operating performance. We continue to have no revolver borrowings and net cash of debt of $460 million at a debt-to-capital ratio of 6%.

During the quarter in the first 9 months of the year we returned $16 million and $115 million to our shareholders through cash dividends and a repurchase of shares. Our year-to-date capital expenditure is over $24 million dollars and we expect full-year capital expenditures to be in the range of $40 million. Year-to-date operating free cash flow totaled $196 million compared to $127 million in the comparable period of 2010.

In closing, our strong backlog, prospects and financial position provides us a necessary financial flexibility to continue to grow our company of providing strong returns to our shareholders. Phil

Philip Asherman

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Joe Ritchie of Goldman Sachs

Joe Ritchie - Goldman Sachs

So first question really on I want to touch on the steel plate structure margins. I know that you know Ron you talked a little bit about the higher business development cost this quarter and also the realignment of a facility in the US, but these are the lowest margins we have seen in this business, since really the 2009 timeframe. So, maybe, you can kind of walk us through this, was there anything that as we kind of look forward over the next call it 6 or 12 months where we could expect margins to get back to the call it you know 9% to 10% range.

Ron Ballschmiede

You know, I think, the range, the 7 to 10 is the one you should continue to look forward. We’ve enjoyed a mix of contracts that kept us up on top of that for quite a while. But certainly, in the quarter, between steel plate structure, and the CBI Lummus, we incurred about $6 million of facility consolidation cost. So, that certainly had a bit of drain on it. And the balance is just the mix of projects that we’ve in our backlog at this point in time.

Joe Ritchie - Goldman Sachs

Okay, but the 6 million should be a net benefit going forward, if I am thinking about this correctly and then potentially, is there going to be a drag once you start to see the Gorgon project start to ramp up because it’s cost reimbursable?

Ron Ballschmiede

Now, we’ve a backlog mix right now that should keep us close to where we’re reporting and the facility moves I talked about are finished and done, and you are right, we should enjoy some further returns, you know on a leaner meaner shift here.

Philip Asherman

And, Joe, let me just remind to0 that Gorgon job is primarily labor-base revenue on rates and on reimbursement basis. So, we don’t think that will create much dilution, but as far as the year-over-year performance, if you look at the absolute number from income from operations on steel plate structure, you know going with from 32 to 43. You know, it’s pretty good pace and we certainly hope to keep that pace going forward.

Joe Ritchie - Goldman Sachs

I guess moving on to the awards, obviously, a great quarter, a record awards quarter. You know, as we kind of look over the next 12 months and you know, I guess, specifically in Australia, there is a lot of projects that have moved forward. There is a couple of projects that are expected to move forward at the end of this year, is there a $1 billion to $2 billion project that or potential work that you could be bidding for over the next call it 12 to 18 months in that region?

Philip Asherman

Well without getting specifically into the projects I think we've talked about this in previous calls, we certainly anticipate not just in Australia, but looking at the gas processing work in the United States, the existing backlog and a potential for existing expansion of those projects. We certainly would anticipate another expansion and then the oil sands for Kearl either by the end of this year or certainly early in the first part of next year and with Australia, the big news would be converting to some of those big FEED studies like Browse into EPC work, but whether that will occur late in the year or in early ‘13 is still a question mark. But again when you look out in the next two to three years, it looks very promising for all those end markets.

Joe Ritchie - Goldman Sachs

Okay, I guess and lastly one last question on the singles and doubles, it looks like you had another solid quarter what's the right runrate going forward, you know in the past you mentioned $400 million to $600 million, you are continually beating that over the last few quarters so just out of curiosity is that shifted up.

Philip Asherman

You know I would still just from a guidance standpoint just how to understand the new awards flow, I stick with the $2 billion to $2.5 billion a year. That could vary from quarter to quarter as you could see it’s a pretty lumpy number but I think year-over-year I would stay in that $2 billion to $2.5 billion until we give you another indication as far as just how you see us.

Operator

Your next question comes from the line of Jamie Cook of Credit Suisse.

Jamie Cook - Credit Suisse

A couple of quick questions, one, Ron or Phil I am trying to just understand the guidance for the fourth quarter. I mean I think the fourth quarter EPS guidance implies, I don’t know anywhere from $0.55 to $0.66 for the fourth quarter. So I am just trying to figure why, what we would drive the step function down in earnings, you know to levels that would be sort in the first half given the ramp that you have seen and you know talk about the $6 million in facility consolidation cost going away.

So I am just trying to understand the level of conservatism in your guidance and then my second question, can you, the business development costs in steel plate structures in Lummus, is there any way you can quantify, how big they were and then sort of how soon you think those project specifically with that you know would we see a award fairly in the near term you know based on those development costs?

Philip Asherman

I think the business development costs that impacts the gross margin especially in steel plate structure came on the yields, is already expended if you will on projects like Gorgon specifically where we had to commit early very large groups of people to produce the kind of information we needed for that size of project. And that was fairly unique I think in our history.

When we look forward into next year and beyond we don’t necessarily see that level of expenditure for business development cost, but keep in mind the steel plate structure particularly that is all usable work if you will. We probably spend more in precontract costs in steel plate structure than our competition simply because we didn’t get off the mark a lot quicker in terms of available drawings and planning that we have available to the team. So we typically spend more money. This was just a reflection certainly of some very large projects, particularly Gorgon where we just had spent more money than we normally do on pre-contract costs.

Jamie Cook - Credit Suisse

Would margins have been more comparable to what we saw in the first half of the year in both segments if we adjust it for the costs now?

Philip Asherman

Yeah, I think that will be a fair comment, I mean probably if we sliced out like two or three years and look at those comparisons, again, we might see that this year is somewhat unique.

Jamie Cook - Credit Suisse

Okay. And then Ron, sorry, I had to ask a guidance question.

Philip Asherman

That’s right, that’s okay.

Ron Ballschmiede

Q4, Q4.

Jamie Cook - Credit Suisse

Q4; quite a stepped out function in earnings?

Ron Ballschmiede

Well, one of the reasons I told you about $0.06 is because those are obviously a one-time event that we didn’t anticipate in the quarter or $0.05 or $0.06 between our taxes and the related interest on it. So as we look in the fourth quarter, we think it will look a little bit like the third quarter. Because we’re moving into more of a cost reimbursable, people oriented service business in some of our large jobs, we do have a little bit of seasonality probably for the first time that it’s noticeable where you know, a lot of those big projects diminish our activity right around the holiday.

So that will have a little bit of impact on the revenue burned, but also in the third quarter, we had some great revenues coming from finishing up on projects where we had I would call it turnaround, but certainly pick a little amount of manning to finish the projects and turn it over to the clients and that had another couple of projects. So third quarter revenue was up a bit more than we expect; the fourth quarter revenue will still have nice year-over-year growth, but not the same way as we had in the third.

Philip Asherman

Yeah, the other way I think I look at it to Jamie is, we’re just as conservative this quarter as we were last quarter and when you recount for the additional positive impact that we got from the tax adjustments if you will, we just thought it would be the right thing to do to adjust our outlooks and account for that extra nickel if you were on your guidance. But we are pretty much set on the guidance that we gave before with that tax adjustment and just want to try and keep expectations inline with how we see the business unfolding for the rest of the year.

Jamie Cook - Credit Suisse

Well yeah I guess too on the Lummus Technology are we still targeting plus or minus 10% around the $100 million because that also…

Philip Asherman

I would forget the plus or minus, Dan is going for $100 million and I think he is going to deliver.

Jamie Cook - Credit Suisse

All right, I would look forward to it nicely in next quarter.

Operator

Your next question comes from the line of Andy Kaplowitz of Barclays Capital.

Andy Kaplowitz - Barclays Capital

Phil, if I can press you a bit more on for the backlog outlook; maybe you’re sort of a victim of your own success. You have this huge backlog now and you know we all want more of course and as we look over the next year, I know Joe asked about this little bit, it’s a little pain to us in North America for instance and you know the LNG products are out there but they kind of seem like may be two years from now. So how do you look at ‘12 if you can help us at all with how to look at ‘12 versus backlog?

Philip Asherman

Well, if you just look at the backlog lets just take this year as an example, one case could be may that pressure on backlog release the rate of burn as well as some of the pressure that we saw on revenue resulted perhaps slower than burn rate of some of these major projects like Papua New Guinea and those type of things. But in actuality that wasn’t the case, probably more so as we had anticipated at the beginning of the year some expansion awards and a couple of other new awards that’s slated towards the back-end of this year.

So while we are pretty confident that that will happen and it certainly had an impact on how you evaluated the burn rate this year and which probably made you looking into next year even more as you say, baked in, at. But it’s a lot to do with the mix. For example, if you look at Papua New Guinea, engineering is pretty much completed, but it that was a long way. But obviously they’ve got some owner issues that they have to get resolved to really to have that project crank up to get the high value progress if you will for that revenue.

As Ron was saying, we’ve got Gorgon which is heavily constituted just on labor. So that’s got a different kind of curve. But the $10 million mark, you know I think that’s going to be a pretty good bogey for us going into 2012. I think we’ve got enough, if you will new projects kind of fill the backlog, where $10 million hopefully becomes more than new normal. Plus as Ron described in his comments too, we would probably be at $10 billion or $11 billion for some FX adjustments certainly in the currency. But, we’re going to give you some more visibility before the end of the year and for next year’s backlog, but I think, it looks pretty good to us as far as maintaining the least of that high water mark.

Andy Kaplowitz - Barclays Capital

So you kind of answered two questions in one and it kind of wasn’t my second question about revenue burn as we go forward. I mean, Ron mentioned that this quarter looked pretty good, based on some projects ending. But Ron is it fair to say that you know, we had those issues with revenue burn a year ago. We shouldn’t have as many issues as we go in ‘12 and ’13 you know with these large projects or do you worry about sort of slow burn as we go forward?

Ron Ballschmiede

I don’t worry about slow burn, but you do have to just to appreciate the duration of some of these projects. You know lots I mentioned for instance, the Gorgon having lowered its 2013 and ’14. So these are long jobs and we’re not going to have the olden metrics of two-thirds of our backlog burns in the next year. It will likely be less than 50% just when you take jobs like the size of Gorgon and accept where you have a four-year burn. But that's not bad; it certainly gives us ability to balance our workloads and plan it out pretty well.

Philip Asherman

And I think the slow burn also equates to the highest earnings that we've seen in the history of our company and you know slow burn is necessarily all a negative thing. So it’s really just a matter of anticipating and forecasting the rate of revenue for next year and so we feel pretty confident of what it looks like.

Operator

Your next question comes from the line of Scott Levine of JPMorgan.

Scott Levine - JPMorgan

A question on Australia, so obviously the kind of work you guys are winning and see down there and you know at various stages on various projects how should we think about given the tightness in the market down there and the amount of activity; how do you get comfort around being able to deliver on projects in that environment and how should we also think about any impact that might have on feeds as they flow through or maybe new feeds being awarded given the fact that we still maybe a year out from some of these jobs like Browse and Arrow being sanctioned?

Philip Asherman

That’s a pretty large question, but I’ll try to piece it up. I mean you know clearly there's a lot of different things that we do in Australia in the LNG market with the tanks and jobs like Gorgon and in the Papua New Guinea, but if you look at the primary ways that we look at how we’re going to mitigate that labor risk which I think is a core of your question, there is a few things I want to mention.

The first choice above all is we are going to hire Australia -- where we look at Australian every aspect of our business and that would be our first choice. But obviously when you look at all the development in Australia certainly you’ve got to look where this labor is going to come from both from a project standpoint -- primarily from a direct labor standpoint and certainly project supervision.

One way we used to offset and mitigate that risk obviously is collaboration. Our major joint ventures, the Browse theme work, when that converts to EPC where we’ve got our joint venture with Chiyoda and Saipem, certainly offsets and mitigates some of that risks. We’ve got a joint venture with Kentz on Gorgon where they are going to be having the majority of all mechanical -- the electrical and instrumentation insulation, and then when our joint venture with [Kearl] on Papua New Guinea with a half -- 35% of that responsibility, if you will.

The second – the next item is all the modularization, there are very few, if any major developments begin conceived or being built in Australia now that isn’t considering modules as a primary execution method, and these major modules are coming from very place in Asia. So it’s not only just the labor issues and the management of those issues in Australia, but also the co-ordination and management of the fabrication yards that we’re going to be contract with throughout Asia.

And then third item, I think, when you look at mitigating that risks, it was just on productivity and good recruitment. We’re going to be recruiting from talent pools all over the region including India, Philippines on locations that meet the requirements of our Visa Blocks, 457 blocks where we’ll be getting Australia which allows us to bring in labor that meets certain qualifications.

Now, I guess the old school of thinking was that you go and set up recruitment officers in each one of those key locations around the area. You look at bringing in as many people as you can from the old company, but we have seen a tremendous amount of power come out of using the social network in our staffing and recruiting efforts here.

We have a, as you know, part of our company called Lutech is a staffing and recruitment company that we use to staff many more jobs around the world. We are cutting contact with talent pools throughout all these locations where there have been skilled craftsmen, trained in the Middle-East and other parts of the world for decades, actually, that we can connect now through social media where we might get 75,000 hits, if you will, in one recruiting effort and when you boil that down to qualified workers, it’s changed the whole complexion of how we resource and recruit labor from around the world.

So as you hear our important questions for us (inaudible) labor to the point but that’s kind of thinking we were going through Australia.

Scott Levine - JPMorgan

Yeah. Now that’s really helpful. One follow-up on cash flow, deployment here obviously cash balance starting to come back up. Any new thoughts with regard to M&A? Are you considering buyback and dividends, what are your thoughts on all of the above there?

Philip Asherman

Yes, I mean we’ve talked about cash is building is doing up quite well. Your balance sheet is very healthy. Obviously it gives a lot of flexibility. Ron has told you, I have told you the priority for our cash flow is to grow our company number one as the best return to our shareholders, and also that makes us flexible enough to address any acquisitions or other internal investments we really want to pursue.

Scott Levine - JPMorgan

And one last one, if I may, on the CapEx, looks like that budget is coming down a little bit for this year? Is there a reason for that? Was that coming from a further rate?

Lasse Petterson

No I think it’s just the timing of when we need the projects completed and when we need, in some cases, the equipment delivered through our job sites. We are trying to time that all well perfectly.

Operator

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

John Rogers - D.A. Davidson

I just want to go into the margins a little bit more if we could. Even the back log is 50% cost plus, how does that affect the volatility of margins potentially going forward. Does it reduce it substantially or are there incentives in there that can distort -- I don’t know project margins, just how shall I think about that?

Philip Asherman

You know while we have incentives – half added incentives on some projects, so it not a big factor in our variability. I think what you are seeing come out of our organization in the last three years, this -- it stayed in a pretty narrow bend with operating income 6 to 9, is what we have worked very hard to achieve and we want to keep it there. Certainly that has helped by Lummus’ technology and it’s license -- high margin license business together with its catalyst business, and then a nice make of trying to make sure that we can manage the risks for lump sum work and where it becomes more illogical, take the lower risk and lower margin correctly -- cost for reimbursable side.

So, I’ll think you will see us continue to do what we’ve done for the last 12 quarters now.

Lasse Petterson

I mean, there is variables there, John, as you all know, and Ron alluded to so, it would will be in a higher concentration of labor generated revenues going forward. But that’s a point in time, I mean, if you convert one of these big LNG liquefaction trains, for example, at the end of ’12, then that will curb changes. But they have different characteristics. That certainly would be a variable in terms of how we see it going forward.

Good absolute factor, may not, but it’s still generating more and more earnings of volume because we’re staying within that band as Ron described.

Philip Asherman

And that’s great point, I think, we’re going to try and make sure we focus on that consistent earnings and when you listen to how we focus on cost below their gross profit line, whether that’s S&A or taxes or interest expense, we want that gross profit line remain variable and then continuous control of those other costs and that’s what we’ve had some luck doing and would plan on continuing.

John Rogers - D.A. Davidson

So, I mean, we should then see the variability of margins stay narrow, I guess this is the point?

Philip Asherman

I think that’s a fair comment. Again, we’ve not got overly enthusiastic about penning that, that range that we’ve given you for margins and the way we see our mix in our business, I would still see within that range that Ron has provided you.

John Rogers - D.A. Davidson

Okay. And then just lastly, and then Ron you mentioned seasonality in some of the effects of that, but given the mix of work in the southern hemisphere, I mean, isn’t that somewhat of an offset or….?

Ron Ballschmiede

Yeah. You will see seasonality from a profitability standpoint. You will see a little bit from a revenue standpoint. Another worth perfect example, your cost reimbursable work with some holidays. Will you set margin percentages, it’s just a velocity on which that revenue flows through our income statement.

Philip Asherman

Yeah that question was related not to profitability, but I think to the burn rate that we saw for next year. And again it’s just reflected changing of the mix at least for what we see right now.

Ron Ballschmiede

And as you might guess one of our project is somewhere that’s very cold in the winter. So that will slow down a little bit by design and per our plan. So the combination of those things probably you will see a little bit of it in the revenue burn in the fourth quarter.

Operator

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

Steven Fisher - UBS

I was wondering if you could just talk a little bit about what you are hearing about any financing risk to projects in the marketplace and I guess where within your typical customer mix, does there tend to be more of a reliance on kind of major outside project financing.

Philip Asherman

Well, we do pay a lot of attention there and that has to do with selectivity of our projects. The vast majority of our projects and our prospects are with those clients who finance their work from the balance sheet. Very few of them, we've gone through this analysis I think especially in the backend of ‘09 or where that was a real concern, a point of ‘09 where that was a concern, but very few projects that we are pursuing are vulnerable if you will to the credit risk in the financial markets today.

Steven Fisher - UBS

And are you seeing more broadly other projects out there that maybe you are choosing not to pursue because they do in fact have financing issues and that's becoming more of an issue in the marketplace more broadly.

Philip Asherman

Well, I think as big issue it always has. I mean you always have the certain component of the market that's somewhat dependent on Exxon financing or other type of tranches if you will that are available to in the marketplace, but again those are more one off than I would say mainstream in terms of the major project development we’re seeing as far as project we’re pursuing.

Ron Ballschmiede

It is not unusual to get Exxon financing somewhere down the road after we for say you know live on the owner’s balance sheet for while and they will tend to finance and we try and you know be as much help as we can. But we’re still working under the balance sheet for the majors?

Philip Asherman

I think it’s great as a good point because one of the reasons that you see the list of contractors working on, of these major, major projects being fairly a short list is because we either have to be bankable internally for their owner hurdles and that includes not only the bankability if you will of our resource, of our safety records and then on the, some of the other major developments which may have a third party financing component in it.

Steven Fisher - UBS

And then can you just give us an update of what’s going on with your work on the global and [VC] summer nuclear projects. I thought I had read that you restarted work at the end of July and I am just wondering if that hasn’t been a notable impact on the results yet?

Philip Asherman

We can, there is a Westinghouse had a delay in the project for some realignment if you will of the project teams and scope of work. It was a material impact on us. I mean the scope that we are providing is primarily the material in recon supply, very little labor component. So you wouldn’t see a necessarily show up in the numbers and it is going to back to work and proceeding according to the original plan. Would you agree with that Lasse?

Lasse Petterson

Yeah, that’s correct. They are proceeding on both sides.

Philip Asherman

Yeah.

Lasse Petterson

But then to remember about those projects whilst you know give or take hundreds of millions of backlogs. The duration of those jobs is very long, 5 to 6, maybe even longer as the year is out so and we’ve a relatively small team working on these projects for that duration. So it’s hard to move the needle too much unless we have some change in energy policy here in the United States.

Philip Asherman

We’d just like to see some more Steve.

Operator

Your next question comes from the line of Avi Fisher of BMO Capital Markets.

Avi Fisher - BMO Capital Markets

So first when I was putting the backlog and bookings in revenue number, the booking revenues as I modeled I noticed here’s a bit of a difference between the backlog I calculated and the backlog you reported about $500 million. Is that all of the currency or was there any cancellation?

Philip Asherman

Pretty much.

Ron Ballschmiede

It’s all currency and all in the quarter, year-to-date it’s about $300 million. So we had a little bit of benefit in Q1 and Q2 and then the four currencies I mentioned came back, the dollar came back in some very strong in the quarters. Some of that has already returned and that number will bounce up and down for a while, but it was 500 million and some change for the quarter all by itself.

Philip Asherman

A lot of it was Australian.

Ron Ballschmiede

A lot of it was Australian. Some of it was even on you know we obviously booked the Gorgon project when the day when we received it and there was a substantial move, the Aussie dollar between the end of July and the end of September. In reality it had minimal impact on us. Everything we spent on that project is the same currency we are collecting so, and in the end, it’s not a financial effect for the revenue side.

Avi Fisher - BMO Capital Markets

Can you breakdown kind of in that regards, your backlog by region at all, how much is in say Asia, Pacific or Australia-Pacific, how much in the Middle-East, Europe, U.S.?

Philip Asherman

You know, we just stopped doing that. We’re breaking it down by end markets. It’s I think you have that, don’t you? Yeah, I gave you that number.

Ron Ballschmiede

And put up it as well.

Avi Fisher - BMO Capital Markets

The reason I'm asking is just because on the margin issue, you know, it sounds like you’ve got significant backlog.

Philip Asherman

Let us work on that because it is a great point because as we go forward for you to anticipate any future FX where we concentrated, right.

Avi Fisher - BMO Capital Markets

It’s not just that, but also in Australia where you have a significant amount of backlog you got about 1/12th one week out of twelve where people are going to be on holiday. And it sounds like that’s a big issue on the margins?

Philip Asherman

Might be on the revenue.

Ron Ballschmiede

Not on the margins. All that work in Australia is predominantly cost reimbursable, so the margin percentages remain the same and as we mentioned earlier and particularly in this year the Gorgon work, the big job in town is really just starting, minimal revenues in 2011.

Philip Asherman

There is an adjustment, but I wouldn’t call it an impact. Again go back to the guidance, we feel pretty good about the targets we set for the year and that has some anticipation of certainly FX and other changes in the end markets we’ve seen.

Avi Fisher - BMO Capital Markets

Okay you mentioned on the call, also mentioned something about a bauxite aluminum project in the Middle East. Is there a room for more of these kind of mining refining type projects for you guys?

Lasse Petterson

Yeah we are trying to expand our offering in the steel plate structures, part of our business to also do tanks and steel pipe work for other industries and the one that we have started to expand into is particularly in the mining industry and there is a good market for us both in the Middle East and in Australia in that particular part of the business.

Avi Fisher - BMO Capital Markets

Do you have any estimate how big that market could be for you guys?

Lasse Petterson

Well the mining market is huge for us, we are expanding out from where we have existing operations and try to take additional work in those locations. I don’t have that.

Philip Asherman

No but I mean if you look at those mining jobs, you talk about capital equipment in those projects accounting for 70% of the total investment and when you look at that kind of investment, I mean, they are mining suppliers out there now who are booked solid until 2014. So if you take the tankage and some of the associated labor, associated with that in some parts of the world where we’re very good in mobilizing just labor for some of those projects as well as the tanks, it turns out to be a pretty interesting market with a lot of headwind.

Avi Fisher - BMO Capital Markets

Yes. It sounds like it could be a great opportunity. One last quick question for you, you know, a lot has changed with the markets since August. Has anything changed with, I hate to use the quality of term, but the mood of your clients or the pipeline going forward or quantitatively in add-sell pricing and margins since the markets…

Philip Asherman

Well I think, we’ve talked about some of those in August. Certainly, with the, take Australia for example, the development of those projects down there, there is a lot of confidence, with the demand, especially on the heels of the new demand that will be apparent in Japan and elsewhere.

So you know when the spot of anchors open up to around 20, 30, it adds 15 years if you will, to their projections in terms of their investment and their capital plan. So that was a change if you will in the mood. I was just in Asia Pacific a couple of weeks ago and I have seen a change in the mood if you will from the major owners and their confidence on these projects going forward in there.

I think the other change of mood if you will is the anticipation of some of the new markets or at least continuing markets in the United States, particularly around petrochemical. We’ve talked about some potential for conversion of our imports capacity, the export on LNG and that’s bit of change in the gas process, you know of the Marcellus. So that’s been a change of mood.

And I think just what Dan was describing in terms of the pace of his licensing activity, I think also his proof that there is a change in the mood in parts of the world as far as moving capital investment. You want to handle that Dan?

Daniel McCarthy

Yeah, I think that obviously you are saying since August then stock market economic uncertainties, if that is impacted, if that's really where your question comes from.

Avi Fisher - BMO Capital Markets

Yeah, I mean….

Daniel McCarthy

So the answer to that is that we have not seen any slowdown in our prospects. We have not seen any significant slippage take place and people think this is committed to the projects. I think you are looking at this really more of these projects really to a large extent supply driven and taking advantage of good feedstock pricing and you look at that in the longer-term.

Avi Fisher - BMO Capital Markets

So can you book a $170 million and work every quarter?

Daniel McCarthy

I am always trying.

Philip Asherman

Yeah, that's a great idea.

Operator

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

Robert Norfleet - BB&T Capital Markets

Most of my questions been answered I just had a couple of quick ones; I know you have kind of beaten this margin issue, that that a little bit, but just one I guess sidebar as it relates to that. I mean I understand clearly the focus is really on growing earnings, but when I do look at the CB&I Lummus business at least over the next 12 months given the, as you cited, the increase obviously in cost reimbursable work and more labor hours and really the lack of incentives and contracts.

Is it fair to say that kind of that low end of the range let's say 3.5% to 4% is probably more likely than say what we were back in ‘10 at 2.5% close to 5%. I am just trying to see how we move the needle to get higher unless we start booking obviously as we talked about work into ‘12 only if you see projects in some of the larger LNG work that we’re doing?

Philip Asherman

Yeah, I wouldn’t call that trend necessarily but certainly an outcome of again a lot was kind of restructure; we also incurred a lot of pre-contract cost this past year you know and relative to our fees size and some of our fee work we’re doing and our investment and so that work and you know that has something and do with it.

But I think generally we haven’t seen anything change necessarily in the marketplace in terms of the range of possibility, opportunity there. We don’t for example go after a lot of commoditized business in the Middle East relative to Korea, for example we just don’t play that game. However, we’ve got a lot of great relationships with the Koreans in technology and a lot of our tank business is coming from the Koreans at normal margin ranges. So we’re not – you know we’re again, we are after where the earnings potential of the end-mark is and end-markets and see how we can do that.

But I won’t characterize that as a change in profitability, but certainly we’re going have points in time of the gross margin level which again why Ron constantly has to drum beat while trying to have everyone look at the operating margin level after we – because that’s what we thought to be able to be control in terms of our cost and our cash.

Ron Ballschmiede

The only thing we’ve a seen a few quarters in a row in anticipating couldn’t it continue a little bit is continued higher pays of pre-contract type cost. These large jobs, the odd jobs that we’ve already booked and those going off to late 2010 and 2013 etcetera our long sales cycle so that will continue to be a topic as we move forward on these things.

In reality it doesn’t move, you know we’re only moving 4.5 to 3.6 this quarter, so it doesn’t move it a whole lot and I’ve talked about several things that added back to it. But you know, 10 or 20 basis point is a fair amount of that business.

Robert Norfleet - BB&T Capital Markets

That’s fair and thank you for the response and secondly, I know we don’t take a lot of price risk in terms of when we enter into a contract on Steel Plate Structures with the cost of steel, but in essence, if we are in an environment where steel cost continue to come down as we’ve been seeing over the last month. Does that carry somewhat of an implied benefit to margins in some of these legacy projects and backlog?

Philip Asherman

Well, it certainly would on the current backlog, but obviously the new projects that the market does catch-up, but we don’t go into the Steel Plate Structure job project necessarily major project thinking about the buy downs as much we did on the opportunity to get 60% to 70% of our risk essentially brought-out if you will in the first few percentage of the jobs. So we’re going to continue on that process, but you’re right, I mean lower prices are good for everybody and it certainly helps us on our existing work.

Ron Ballschmiede

And I think we’re improving that – the stability of the margin is what we’re after and in order to not take that risk helps us keep it in that bandwidth of 6% to 9% operating margins in total that we’ve been enjoying for quite a lot.

Operator

That was our final question. I will now turn the conference back over to Mr. Asherman for any closing remarks.

Philip Asherman

Thank you, Tiffany. Well, just in summary as you heard, we remain confident that our end markets have continued with its level of opportunity. We need to continue to grow the company at a double-digit pace. Our business model is proving to be scalable in anticipation of the LNG mega-projects, the diversity of the project size and location of Steel Plate Structure orders and the increasing demand for our licensing catalyst heat transfer equipment and gas processing expertise around the world.

Our balance sheet is very healthy which gives us a flexibility to react to perspective acquisitions or internal investments in our business which will positively impact our future growth.

And before I end the call, I would also like to put a plug-in for our Investor Day which will begin with a reception of the speaker in the evening of November 8th followed earlier next day with a chance to meet our management team’s in each of our business sectors.

It will be at historic The Pierre Hotel in New York City and if you haven’t received your invitation please let our Investor Relations Manager, Christine Thoms as soon as possible. We are getting a great response and we want to accommodate all of our analysts and investors who want to attend. So that will conclude our call. Thank you for your time and interest today.

Operator

This concludes today’s conference call. You may now disconnect.

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